The basic role of macroeconomics in investing

There are three main macroeconomic variables that really matter to any serious investor (almost irrespective of investment style).

1. The growth of the economy (GDP)
2. The purchasing power of the currency of that economy (inflation)
3. The cost of borrowing/lending money in that currency (interest rates)

Usually economic growth is very cyclical, where the cost of borrowing plays an important role in influencing the growth rate, as does the inflation rate (which often determines the cost of money). We tabulate this simple statement below and create 6 simple stages to a normal cyclical economy:-


We note that currently many developed economies are stuck in stage 5.

It is as if the cycle will not turn anymore.

The high debt burden these economies have accumulated have muted the role of interest rates to stimulate growth. The debt load itself is now the key variable!

This is not a normal cycle. Structural change is required.

This means changes to variables that determine GDP, interest rates and inflation.

1. Such as the structure of economies (i.e. the role of imports and exports)

2. How various economic participants allocate capital (i.e. households save more, governments spend less, corporates invest more in their country of origin if they become more competitive)

3. Floating currency exchange rates to incentivise the flow of capital internationally

4. Increasing productivity by increasing the knowledge of workers to help generate innovative soutions that can be sold internationally

5. Compensating workers for their productivity not their existence


Reactions to the halt of the economic cycle have included massive money printing by DM authorities. However, much of these funds channel their way to regions that experience strong growth and have low debt burdens - emerging markets.

As a result these countries are experiencing strong inflation which may be exported to DM. Hence DM may experience no growth, no change in interest rates but increasing inflation. This reduces the demand to hold the cash and bonds of these economies. Hence we see weakness in currencies such as the USD and GBP. This is positive for the equity markets of these regions.

However such action is increasing the need for CURRENCY DIVERSIFICATION (especially for simple cash holdings) and exposure to REAL ASSETS.

Hence more investors are becoming MACRO ECONOMIC INVESTORS.

It is normal. There are big macroeconomimc problems and they cannot be ignored.

This is made all the more difficult because in DM interest rates are zero. Hence bonds offer very little. It is cash or equities.

Since cash could be diluted by imported inflation and many investors are worried by growth (hence worried by equities)- FX and COMMODITY investments are becoming ever more popular.

I understand.

In the end, by investing in FX and COMMODITY products you are investing in an area where the cyclical properties still seem exist (hence you feel it is more predictable), so feel more comfortable than being somewhere where the cycle seems to have stopped and you don´t know what could happen (the great uncertainty we keep hearing about).

Many also invest in EM because they do not see a structural change there but a simple cyclical one, which again they feel more comfortable with.

However one needs to be very careful with price when buying anything cyclical.

This is made all the more difficult when commodities do not generate any cash output, it is simple attempting to guess what it is worth tomorrow. Many assume the dilution of cash from money printing and the belief that demand in the future will not be less than today will protect them against a capital loss. A bout of deflation from debt destruction by a number of economies to reduce their debt load would destory that idea and lead to many an unhappy customer. Furthermore, in this scenario demand in the future would then be more likely to be less, not more than today for quite some time.

FX. I don´t know. I just dont have enough knowledge in every economy in the world to make judgements about them.

But, don´t forget that high quality companies in the right market structure with a mis priced valuation and a strong management team also offer a good opportunity for investing - and are more stable in the long term, unlike FX or commoodity investments. Managements can react, a piece of metal can´t.

One more point.

Oil is the key to globalisation.

Items are connected to different regions by transporting them there.

Oil is mainly used to transport physical items.

If you think globalisation will continue, be long OIL in the long run.