Does Economics Matter?

S

ShoeshineBoy

One poster on another thread basically stated that it was "madness" to study all things economic, i.e. it's gambling pure and simple to go with macro strategies. In fact, he/she stated that macro stuff should be "just fun", i.e. don't use it with your money.

Do you agree? Disagree?

I'll start by saying that I disagree. And here's why: a lot of people on this board have saved some significant dollars over the years and have it invested. Not all of them, including myself, want to put their entire life savings on the line with trading and therefore trade with a portion only.

And if you're investing, you have to make some macro decisions. It's inevitable. You may not think of it that way, but it is the truth. For example, someone who invests 100% in US Stocks is making a macro decision - actually a host of macro decisions that I'll briefly discuss below.

While I agree that picking one large market direction is dang near impossible, that is somewhat of a moot point for most investors I would guess since investment is often not done any more on merely one sector, i.e. the success of the Harvard and Yale endowments. They have generated incredible returns year after year through a variety of markets by diversifying across a variety of assets including essentially private equity, commodities, equities, fixed income and I think real estate if I remember right.

And now, with the US economy in a mess, the rest of the world growing much faster and the dollar in a long term downtrend, any US investor has to decide how he feels about this new financial world. We are now in a new paradigm and any investor has to decide if he wants to ignore the new stats or change/tweak/overhaul his strategy.

And so, while I think macro stuff if fun, it really does matter.

Btw, macro stuff should imo affect your trading. Long strategies genally benefit, for example, in an environment with a tail wind. So are you going to just ignore the tail winds and thus generate less return than you could have?

So, all you armchair economists and mega macro men, would you/do you put your money where your mouth is?
 
Let's talk about degrees of "macroness" and "microness". Let's say there is an obvious trend looking at annual bar interval charts... does that affect trading intraday?? [it's rhetorical, the answer is no]... how about an obvious trend on daily bars, does that affect intraday.. I'd say not enough to bother with it... an obvious trend on hourly bars probably is worth looking at if I'm trading 15 minute bars perhaps, worth looking into maybe since I don't trade multi timeframes really... for sake of discussion let's make an assumption that the relationship of the macro bar interval to the traded bar interval has to be less than 10 to 1 before it really tells us much of anything... in that case, economists are usually looking at quarterly stuff through the rear view mirror of a half year back... If my exit horizon was a month out their views just might be getting on my radar but it seems more likely I could know more by looking at a chart... Warren Buffet has to know something about economics, most traders should not be into it imo...
 
Quote from maxpi:

Let's talk about degrees of "macroness" and "microness". Let's say there is an obvious trend looking at annual bar interval charts... does that affect trading intraday?? [it's rhetorical, the answer is no]... how about an obvious trend on daily bars, does that affect intraday.. I'd say not enough to bother with it... an obvious trend on hourly bars probably is worth looking at if I'm trading 15 minute bars perhaps, worth looking into maybe since I don't trade multi timeframes really... for sake of discussion let's make an assumption that the relationship of the macro bar interval to the traded bar interval has to be less than 10 to 1 before it really tells us much of anything... in that case, economists are usually looking at quarterly stuff through the rear view mirror of a half year back... If my exit horizon was a month out their views just might be getting on my radar but it seems more likely I could know more by looking at a chart... Warren Buffet has to know something about economics, most traders should not be into it imo...
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Sorry, I was thinking from my "worldview". I only swing trade and imo month and even half year trends do make a difference in my environment.
 
Yes, recognizing tendencies in the macro econ can make a difference. I use the word 'tendencies' to mean those potentials developing out of contradiction between, say, real economy conditions on one side and financial on the other.

Place yourself, for example, in late 1995 into 1996 and notice the collapsing economic profits among a number of S. Korea's chaebols, then take closer looks at companies in other E. Asian countries while at the same time considering the flow of hot money into many of those markets. It was clear that a crisis was on the way well before it actually erupted.

'Seeing' this in advance was at least useful for those with money in emerging markets, which is only to say that it served for caution not precise timing.

Somewhat the same with the U.S. markets as, from 3Q97, nonfinancial corp profits began falling off even as earnings did not while share prices, accompanied by louder and louder 'new economy' rhetoric, began their upwards - and increasingly baseless - boom. Exiting U.S. markets in '98 would have been a mistake yet it became ever more evident not only that they would break down but why.

Finally, and from a different angle, it sometimes helps to pay close attention to the political. Brazil, having earlier been wracked by crisis, was clearly going to elect 'Lula' da Silva who, here in the U.S., was being labeled a left wing former trade union radical, further depressing prices on the Bovespa.

Those who had paid some attention knew that over the prior 8-10 years 'Lula' had been shifting into the political center and would not act as portrayed.

In association, closer reading of 2001-02 economic data from Southern Cone nations indicated the growing potential for recoveries.

Combining the political and economic, the probability of strong market rebounds stood out, with the 2002 Brazilian presidential election being what I thought of as a marker, which turned out very well although exiting in 2005 has proven early.

In short, a top down macro view can be very helpful unless one is involved strictly in ST trades.
 
Quote from ShoeshineBoy:

So are you going to just ignore the tail winds and thus generate less return than you could have?

So, all you armchair economists and mega macro men, would you/do you put your money where your mouth is?
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Ask Jim Rogers if a macro outlook bears fruit. His entire fortune was built on it.

Short term speculating holds far more opportunity than long term investing.

The path to successful speculation is also much easier, relative to fundamental-based investing.

Further, the market routinely ignores any fundamental bias thus demanding deep pockets for macro picks alone. ie 'the market can remain irrational longer than you can stay solvent' etc.

That said, fundamentals guide the ship. But are poor for timing turns. Technicals perform much better on the short term.

Its for these reasons (and more), most pros take an eclectic approach to market direction/timing. Personally, I trade technicals intraday but always (try to) follow fundamentals.

In practice, my personal philosophy - size up in the direction of a fundamental bias (say 1.5 x or 2 x normal trade size), but remain directional neutral.

Even that type of strategy may be unnecessary, as any decent spec would have the skills and wherewithal to be short during a crash.
 
Firstly, I'll state that I trade intraday on Price and Volume action alone.

Whether Macro matters depends largely on the strategy used to trade particular products over particular timeframes. For a typical trade with a life expectancy of under an hour (e.g. a punt on the front month YM), the Macro doesnt matter.

But I make these trades daily, and I do hold Macro views and take them into consideration when I'm at my desk. Furthermore, I'll distinguish the two types of Macro view I take and how they affect my trade decisions:

*My trading hours are structured around the economic calendar (and, when in comes to the US futures markets, lunch). With regard to Economic data - the market expectations, the actual figure, and a long-term macro view all combine to provide a framework that my 5min price action trades are made in. I dont trade the news, in fact I trade around it - but I do like to know what exactly is going on and the way the markets "feel" about it. Whilst on a very short time frame, this does (in my mind) constitute a "top down" macro view.

*In addition to this "top-down" view, I also use a "left-to-right" view before, during and after a trade. For example, I won't make a YM trade without looking at the 10yr first. A long trade may have a profit target just below previous resistance or fib level... but the best time to exit may well be just after the 10yr bounces off support.

To Surmise; What I think the US$ will be doing Q1 '08 doesn't effect the conditions of trades I'll make intraday. But I do continue to take a (relative) "top-down" and "left-to-right" look around the markets, and I think it helps.
 
Most of the money I have comes from making macro trades.
I got out completely in the spring of '99, when I had a choice between buying a house and keeping the money in the market and renting. I did some projections, looked around at what was happening, and figured that in a couple of years at most, I'd have more money if I took everything out and parked it in a money market than I would if I continued to keep it in the stock market.
So, I bought the house, which turned out to be a very good trade.
In the summer of 2000, when I got back in, I accumulated shares in a gold mutual fund, exclusively. At that time, I was the only person I knew who thought that the swoon wasn't a correction, but a full-blown bear.
In the spring of '03, I got back in to the rest of the stock market. Two years seemed like long enough for a bear to play out. I also went into the Russell 2000, knowing that small stocks had lagged badly in the latter half of the nineties. Figured it was time for them to catch up. That was another macro trade.
In my smaller short-term account, I went flat at the end of July, when I figured it was looking like '98 and LTCM all over again. I'm gradually getting back in, but the ETFC debacle shows we're not totally out of the woods on this panic yet, so I'm being cautious how I play this, since most stat-based models, which is what I use, will fail in this environment. I wouldn't be surprised if some quant fund or three had serious trouble again just recently. Another illustration of a macro outlook helping out with trading strategy. I figure you should know what your system's weakness is, and be smart enough not to try to push it when the macro conditions show that you could get killed trying to outsmart your own system.

*Swing. I'm actually very good at intraday, but the wife won't let me stay home and do it. Can't argue, as we have some large financial obligations, and so need the secure income of a steady job. Besides, if I tried depending on intraday for most of my income, I'd probably just get nervous, and we all know what happens to nervous traders.
 
Quote from achilles28:


Its for these reasons (and more), most pros take an eclectic approach to market direction/timing. Personally, I trade technicals intraday but always (try to) follow fundamentals.

In practice, my personal philosophy - size up in the direction of a fundamental bias (say 1.5 x or 2 x normal trade size), but remain directional neutral.
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This is exactly what I was getting at. I think you should everything to your advantage including the fundamentals of the company itself if you are trading stocks.

Some believe that charts/technicals reveal the underlying fundamentals and I can't really argue with that. I can only say that backtesting and experience have shown that fundamentals, i.e. getting those tailwinds, can make a significant difference.
 
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