Macro Investing Explained

[@anthonycheung6138]

Many thanks to Mike for his excellent breakdown! Any questions at all please feel free to leave a comment below and either Mike or myself can respond. Thanks for watching!

[@AKapital]

What does the divergence at 26:10 mean? No clear trend in all markets?

[@kevinlaffey9310]

​@@AKapital You've got 10 Year T-Note Yields rising, which in the context of the copper/gold and small cap/large cap ratios, would historically suggest stronger growth and translate to rising ratios for each of copper/gold and small caps/large caps. Instead, what we've got is steeply falling small cap/large cap ratio and sideways copper/gold ratio. That's the divergence. Now, as Michael pointed out, the results of backtesting should not be consumed in a vacuum. Meaning, context counts and one must dig deeper to understand. In this case, the markets have been discounting a scenario which the visible historical relationships on the chart do not show - that is stagflation. Stagflation is characterised by lower growth and higher inflation. It is only one step better than the worst situation of deflation, which Japan has been mired in for arguably 22 years (and still digging out by doubling/tripling down on the same tactics to reverse it - that's why the BOJ Is 'OK' for now with the plummeting Yen. They are an import-intensive economy and the BOJ hopes the weaker purchasing power of the Yen currency will help ignite a little much-wished-for inflation. Perhaps they should be careful what they wish for against the current global backdrop - we'll see). I digress. Anyway, the markets are discounting this stagflation and for good reason after the Fed led the world's central banks with the most profligate stimulus on record (in policy response to the Pandemic), causing first, demand pull inflation. Then, inflation was shocked yet higher by developments on the supply side with the central banker of commodities (Russia) invading Ukraine and the subsequent self-imposed embargo on Russian exports by the West. That's known as cost-push inflation. To add yet more fuel to the fire, the US Employment Cost Index read hotter still in its latest print, exacerbating fears of a wage-price spiral within the context of a record high US job openings to unemployed ratio. Inflation being the single most important factor used by longer maturity bond investors to discount the value of their future cash flows on principal lent, yields are rising this time not necessarily because of market expectation for growth but rather of higher inflation and a Fed who's largely lost credibility or at least is suffering from reduced confidence in its ability to follow through with tough tightening measures to contain and tamp back down inflation towards its target of 2%pa. As Michael explained and one must understand as a macro player, those higher yields/rates are used to discount the future cash flows of other assets, such as stocks - especially the high-growth small cap stocks. The longer duration the cash flows of the asset (think: the higher the growthiness and the smaller the cappiness), the more the higher discount rate is going to result in price declines for those assets. This same dynamic is restraining the copper/gold ratio to sideways pattern as the upwards pull of gold as a stagflation hedge is being offset by the downwards pull of copper as an economic bellweather industrial metal. Had Michael had a longer-term chart of these ratios and the 10-Yr, perhaps going back to the 1960s, we'd probably see the current divergence is not without precedent. It's just that for many of those trading markets and managing money nowadays, these current conditions have not occurred in their professional careers. Hope this was helpful. But you might want to ask Anthony to check me. He's among the sharpest, most on-point analyst/traders I've come across in macro futures. Michael's presentation was fabulous I thought; terrific for newbies but also a great refresher for those longer in the tooth. Michael's also obviously in the sharp/on-point camp! Thank Anthony for bringing him on for this video. Truly great stuff, very valuable.

[@kevinlaffey9310]

I should add to this that supply chain issues necessarily arising from the global economic policy response to the pandemic were fanning supply-side/cost-push inflation pressures alongside the stimulus-driven demand pull inflation before the Russia-Ukraine situation really caused a supply shock. Some politicians who shall remain names like to refer to the inflation, esp at the petrol pump as 'Putin's price hike', but we know this is clearly not the case. The foundations were dug by hyper-stimulative monetary and fiscal policies, but the home's frame and siding is being nailed together by the Russia-Ukraine supply shock.

[@learnmathswAaryan]

Hi. Excellent video. I’ve got a few questions for Mike: 1) if you look for validation from markets, then how do you help clients make money? Is that from being ahead of the market ie timing? Or is it from seeing which markets are the odd one out and then taking a position in that?

[@learnmathswAaryan]

2) you talk about markets discounting on the basis on future economic trends, and I think you said that that time horizon is 1 month. Are you saying that the investment horizon for a global macro investor is typically 1 month? Related to that, how should an investor with a longer term horizon such as a retirement portfolio manager , tailor your paradigm to incorporate into their overall process?

[@A2Cap]

so underrated this information is so useful. thank you so much!!!

[@ivancastro6226]

This was extremely insightful, great introduction video. I know for a fact I will be an Invictus Research student!! Thank you Anthony and Mike for sharing!!

[@invictusresearchllc6574]

Our pleasure! Feel free to check out our suite here: invictus-research.com/products/research-combo-deal

[@kevinlaffey9310]

This was a tremendous presentation of great value and insight. Thank you Michael so much. And thank you Anthony for bringing Michael on and for the intelligent questions. The Invictus research process is fortress and Michael is highly competent and qualified. Definitely am going to investigate adding to my information mix. I front-ran Michael or Anthony in answering a question to Aleks, below, on the divergence on the 10Yr vs copper/gold vs small caps/large caps chart from the presentation. Think I got it right but maybe one of you might want to check me. Really appreciate what you produce Anthony. Thanks again both of you.

[@taurusneil]

This was an amazing session. Thanks Mike!