Your Macro Playbook
Use a process-driven approach to get actionable ideas and a consistent and repeatable way to view markets.
The Problem
The Problem With Typical Macro aka “Big Trade Macro”
Too often traders wade into the macro waters and do what we call “Big Trade Macro” where they’re trying to make a huge call. Maybe they want to be Soros 2.0 or be in the next version of The Big Short, but they don’t have a consistent process; instead they have what amounts to a good sounding hunch.
They then go in and trade with too much size, in a market they don’t know as well as they think, and then dramatically underperform for years; or if they use a lot of leverage, they just “blow up” over the course of a few days to a few months.
We have done more than a few stupid trades as well, but we learned from them, and over time we have built out a macro and trading framework that allows us to benchmark our ideas against what has worked over time. If you can’t define how to measure something, it is hard to disprove it, and therefore hard to make an informed decision. By breaking things down into their components, we can get a better view of both where things are, and where history says they should be.
How We Break Down Markets And The Economy
Our process is built on top of six pillars. While our process doesn’t nail every single move-nothing does-over time it has helped us avoid big drawdowns and to repeatably find good trading opportunities.
Business Cycle Models
Using a mix of business cycle models, recession specific models, and leading indicators, we determine what stage of the cycle we are likely in.
Growth & Inflation Framework
This idea has been around for 45+ years. Several versions have been back tested, demonstrating the value in this model as the basis for a core portfolio. We use leading indicators and momentum to find inflection points to get ahead of shifts in the economic environment.
Market Timing
To some people “market timing” is a four letter word. That is because their understanding of the term is wildly flawed. Using the art and science of market timing has allowed us to dramatically improve performance on a risk-adjusted basis.
Timeless Factors
Value, Carry, Trend, Relative Strength, and Sentiment are factors that can be measured and used both to select trades and to improve the risk/reward characteristics on a trade and portfolio level.
Portfolio & Risk Management
Everything we do uses a risk first approach. Whether you are looking at it on a trade level or portfolio level, managing risk allows you to stay in the game. We look at quantitative and qualitative measures of risk to try and minimize risk, maximize reward, and only take the risks we choose.
Behavioral Finance
All market participants are human or human backed. Because of this, there are some repeatable, if not easy-to-trade, biases that impact markets in ways that can be exploited. In its purest form, all active management is based on this concept.
Process Driven vs Narrative Driven
In a very real way, narrative can drive markets and the economy. At the same time, if you are just buying and selling stories, then you will have a hard time spotting the signals telling you that you should cut a position or even to add to a position. Sentiment is great, but combining it with the technicals and fundamentals is where you can begin to find any consistency in a risk controlled manner.
One great example of where stories hurt investors would be the national debt. If you read books or old Barron’s or other business publications, you will see that people have been calling for the big crash for at least 50 years now. I have read pieces from the 1960s complaining about the Fed. If you let this fear mongering push you into cash, then you missed the greatest bull market in history. Debt matters, but understanding how it works and does not work, matters as well.
Another good story, and one that killed a few famous funds long-term track records, was after the global financial crisis, when people loaded up on gold because they were convinced that the next leg down was imminent and the USD was going to crash. April 2008 was the low for the USD Index and it has mostly gone higher ever since. Gold didn’t really start to move until 10 years later, and it was for completely different reasons.
Stories are great, but data and process is even better.
Unlock Actionable Economic Insights with Process Driven Macro
Find Macro Long/Short Opportunities Across Asset Classes
Some Common Questions
We stick to the four liquid asset classes: stocks, bonds, commodities, and currencies. The groups below are what we look at 90% of the time, but when the right opportunity comes along, we will stray into other areas.
Equities: Global Indices, Sectors, Industry Groups, and Individual Large Caps. We make heavy use of ETFs.
Fixed Income: G10 Government Bonds, US IG, and US HY.
FX: Primarily G10, some G20, and sometimes BTC and ETH.
For the most part, yes. With rare exceptions, we don’t believe in secrets when it comes to markets. We aren’t RenTech, so while we usually add our own touch to it, 90% of what we have built you can already find out in the public domain. You might have to search hard, but most of it is out there.
So we only gatekeep a few models, but even then we don’t hide what goes into them.
We aim for a 3-18 month outlook, and about 75% of the time that is where we are. But depending on what is happening and what we are seeing, it can be shorter or longer.
Our outlook and model portfolio is regularly tilted to our secular outlook, but most of our value add is finding the cyclical shifts. It is also really hard to be all in on a secular move and withstand the massive drawdowns that come with that. So both because of our toolset and our aversion to big drawdowns, we focus on 3-18 months, but of course try and look out farther.
Automatic would be when you program a model or trading system and then adhere 100% to the signals. So a classic systematic macro or LTTF-Long Term Trend Follower fund builds its systems with entry/exit rules, position-sizing rules, and execution rules and then follows what the machine says. Sure they built it, and they can adjust it as they see fit, but they sell the idea that they adhere to their system.
Process Driven on the other hand is where you have a consistent way in which you look at things and an order in which you go through them, but you still exercise discretion. Sometimes a lot of it.
So Process Driven is more akin to a checklist of things to go over and follow and less a “buy/sell” signal. We are fans of both and have built out our own LTTF models, but we fall into the Discretionary Macro side and NOT the Systematic Macro side.
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