Wednesday, June 20, 2012

Dynamic Hedge - Fundamental Top-Down Macro for the Brain Damaged

Fundamentals have nothing to do with the market, brah.
Interior decorating is rock hard science compared to economics practiced by amateurs.- Antonin Scalia (never actually said this)
Macro economic analysis can be pretty frustrating.  Many economists justify an attractive annual salary by coinciding, smoothing, and transforming the public into mass confusion.  The sheer number of data releases issued over the course of a year is rivaled only by the number of opinions as to the sensitivity of the economy to each data point.  This makes it nearly impossible for the casual observer or even market professionals to get on top of.  Most investors simply agree with the pundit that makes the most short declarative sentences.  The good news is that most of us already posses the most important skill set of macro economic analysis: the ability to squint.
That’s right, close your eyes.  Now open them up just enough to make out shapes and colors.  This is the correct way to look at any chart originating from a government agency or academic institution.  The data is always of questionable integrity and almost always subject to revision.  Not to mention the host of other statistical problems continuously pointed out and debated by super smart people on the internet.  The point is that you’re never going to see the whole picture in any one report.  All you care about is the general direction.  Most importantly, the general direction you can make out when squinting and glancing at a chart for no more than 3 seconds is the correct one.
I subscribe to the 80-20 principle which states that 80% of the results come from 20% of the causes.  This means that you can safely disregard most of the economic data published and just focus on the important stuff.  As far as I can tell most of the sentiment of the economy is captured in the metrics below (in no particular order).  Most of the data moves so slowly that the trend changes are obvious.
If you’re looking for quick trades and short-term actionable ideas, this stuff probably won’t interest you.  Macro analysis is the long-con.
Read it at Dynamic Hedge
Fundamental Top-Down Macro for the Brain Damaged

If you’re reading this post there is a good chance that, like me, you follow a number blogs and try to keep up with as much news as possible related to the financial markets. With a constant stream of information flowing through social media sites/apps 24 hours a day, 7 days a week, it is often hard to step back for a moment and glance at the big picture. Posts, such as this one, are a good reminder for those of us concerned primarily with the macro picture.

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