Macro investors distill the big forces flowing across economies into a collection of investments. This process is a bit like painting a picture of what the future might bring. However, unlike painting, whose veracity is often only seen clearly many years later, an investor can test the accuracy of their theory daily, the same way an athlete can check their prowess in competition.
Over many years trying to learn the art of macro, I found it is a field that rewards oddballs. All known information is already embedded in the price. If you buy a share of Apple, the person selling it to you already knows Apple makes cool products, that there is a new, faster iMac out, etc. To do the trade, you must see something ahead for Apple that the seller doesn’t yet perceive.
Regarding uncorrelated people, this week on the Things I Didn’t Learn in School Podcast I aired a conversation (click link) with Lois Letchford, author of Reversed. She describes raising a son who struggled so much in elementary school the teachers asserted he was low IQ. Lois, through a circuitous journey, was able to unlock her son’s talents, who went on to earn a PhD from Oxford. Despite his success, recalling those first years at school when he was an outcast is still painful to him, a reminder the social group tends to embrace oddballs when they succeed, not amidst their inevitable struggle.
With that preamble, here are the big macro forces I see.
1. Innovation.
2. A Fiscal Push.
3. Climate Change.
4. US-China clash.
I’ll first define the themes and then scratch the surface regarding investment implications, following up with another post. These themes are all intricate, inter-related and each has their army of experts.
Innovation. If you look at a chart of productivity, it is flat for hundreds of years and then begins turning up sharply in the 18th century. We now live with all those inventions––electricity, clean water, cars, computers. These seem commonplace in retrospect but were all wildly disruptive. What did it feel like to be a master saddle-maker when car production exploded? We are in the midst of another innovation wave now linked to a nexus of technology and biology. Little hints of what is to come are already here––food that looks like meat but isn’t, 3-D printing, watches that tell time and monitor our health and vaccines delivered at a speed and precision that is unprecedented. Much more is to come.
Fiscal push. The Biden fiscal spending plans are so large they are difficult to contextualize. Passed and intended future plans amount to something like $10T. The entire output of the US economy, 330 million people strong, is around $20T. Typically, stimulus occurs when the economy is weak (which is what happened over the last year). Biden wants to keep spending when the economy has recovered. The logic is political as much as it is economic. The simplest explanation for Trumpism is exasperation over flat wages. A multi-cultural society is easier to engineer if living standards are rising as opposed to, as they were for a third of Americans, flat or falling. Given that mid-term elections are 18 months away, Biden has a window of time to change the expectations of those who are predisposed to dislike him and a massive fiscal push to rectify chronic domestic under-investment makes sense.
Climate change. This has gone from Gore’s inconvenient truth to an obvious truth. The more volatile weather shifts Gore predicted 15 years ago are now a fact of life, like the tornado that touched down in my New England town. Among the more shocking elements of climate change, a less discussed one is one Spencer Glendon from Probably Futures introduced me to: climate refugees. When it becomes too hot to live in parts of Africa and central America, people need to move. What will happen to the places they move to?
US-China. Armed conflict between large countries with significant militaries hasn’t happened in almost 100 years. It is now an increasing possibility. While there are lots of way this could happen (like Russian and US planes colliding) the most likely known unknown comes down to the calculus of one person, President Xi, about the relative importance and status of a single island, Taiwan. Beijing’s response to Hong Kong has hardened opposition to Xi inside Taiwan, according to Pew, and fomented bi-partisan American mistrust of China’s government. Yet, most of Xi’s actions are consistent with imminent reunification.
The investment implications of the above require more room. The cliff notes follow. I am avoiding stock market indexes altogether. Instead, I am utilizing specialists who I think have the best chance of buying the companies that will benefit from the tech shifts and selling the companies that will get hurt by them. I am doing the same myself. The Biden fiscal push will either a) drive stocks up a lot or b) drive real (inflation adjusted) interest rates up or c) some combo. If real interest rates rise enough, however, stocks will fall a lot. As a result, I am significantly short US medium-term bonds (attentive readers might note I went from short to flat to short again). I am avoiding investing in some parts of the world altogether, particularly Europe, which is a climate loser. I haven’t decided what to do about the US-China issue and so far am doing nothing. One possibility is shorting the Taiwan dollar, another would be shorting TSMC, which is the Taiwanese chip manufacturer.
Shameless plugs: spread the word about Raising a Thief and these posts. If you like the podcast Things I Didn’t Learn in School, rate it on Apple. If you know of good guests to interview, send them my way. If you have any feedback, send it my way as well. Don’t take any of the above as investment advice.
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Best,
Paul
Very related to your first two, I’m curious to hear your take on the macro impact of the pandemic — drop in consumption and surge in savings, disruption of supply chains, followed by the coming surge in productivity and consumption. Add in the never before seen stimulus you reference and it’s easy to see why economists predict near double digit GDP growth. For me, I feel this in skyrocketing renovation costs and the six month wait on a new bike. Perhaps fodder for your next article.