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Global Macro Investing

In my previous article, I wrote about different investment methodologies. In this article, I want to focus more on one particular type of investing which has become a new craze – global macro investing. I strongly feel that an understanding of this style of investing will help one become a more disciplined investor, regardless of the type of investment methodology one follows.

The British Empire was the world’s first global empire. It was able to integrate the capital markets of its colonies with that of Britain itself. An investor had as much protection and rights on his investment in the colonies as he had if he had invested within Britain. This made international trade, capital investment and economic growth across the colonies possible. British labour, expertise and capital flowed to its colonies, bringing with it economic growth to the colonies. Trade tariffs were not prohibitive – they were more for revenue generation than trade restriction. Capital, goods and labour flowed freely from Britain to the colonies and vice-versa. This was the era of trade which gave rise to the first international investors.

During this time, the macroeconomic environment was considerably more stable. Trade was settled in multiple currencies, but all these currencies were linked to gold or silver making valuation simple. A merchant could always calculate his profits in gold or silver and price his goods in currencies accordingly. Banks, insurance companies and stock exchanges were enablers of trade. Investors put their money to work across the globe, but the risks they took were more related to trade than to the underlying macroeconomic environment.

Fast forward to today.

The Russian Ruble fell 46% over 2014. The Brazilian Real hit its lowest value in 10 years in December ’14. The Indian Rupee has fared slightly better, having fallen to its all-time low in August ’13 and then recovering somewhat. The South African Rand hit a six-year low in December ’14. Brazil.. Russia.. India.. South Africa. Anything missing? China! They haven’t had any currency problems. In fact, their currency has been steadily gaining in value against the dollar.

I write this to merely illustrate the difference between international investing then and now. Earlier, one didn’t have to worry about the currency in which the balance sheet was denominated. That currency was stable, or if not, could easily be substituted with gold or silver which remained a stable base. Now, with the values of currencies fluctuating, opportunities have opened up for a new class of investors.

One can borrow dollars, convert it into (say) Japanese yen, invest it in the Japanese stock market, and make (or lose) money from both the performance of the stock market and the performance of the currency. The performance of both was in control of Japan’s central bank, the Bank of Japan.

The idea behind global macro investing is that by watching the actions of the central banks of the various countries, it is possible to spot macroeconomic trends, predict their impact on various markets, and position oneself to make money as the trend works itself out.

In an ideal world, that’s not how it should work, but in the real world that’s how it does. Those who have fought the central banks have long since been removed from the game. We’re all Fed watchers now.

To me, the global macro investing thesis is:

  1. Central banks control markets

  2. The nature of risk associated with an investment has changed

  3. Positioning ahead of a central bank action is profitable

  4. It is possible to predict the performance of an asset class due to central bank action

  5. There are opportunities available for individual investors to make money doing this

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