My Macro Obsession
I have a problem that I think a lot of investors have: I love macroeconomics.
There are few things more fascinating to me than trying to predict the economic cycle. I want to know if we’re going to have a recession or if we’re going to have a boom. I want to know if inflation and interest rates will roar back to life. I like to look back in history and analyze the twists and turns and hope that can shed light on what will happen next.
It’s a fun exercise, but it’s largely a waste of time.
The trouble with my macro-obsession is that it has led to poor investing decisions and outcomes. I failed to buy a number of stocks that were attractively priced in March because I was convinced that the United States was headed for a second Great Depression. I looked at the overvaluation of mega-cap stocks and used that as a reason to avoid other, more attractively priced, stocks that were outside of that universe.
I was completely wrong and blew it, as did many others in the market. At least I admit it.
Getting that wrong was a humbling experience for me.
I could have doubled down — I wasn’t wrong, the Fed is merely compounding their errors! I wasn’t wrong, the collapse was simply delayed! I’m not wrong; the government is lying about the unemployment and inflation statistics!
Do those responses seem like a rational explanation, or are they an example of bargaining and an attempt to rationalize an error?
Instead, my experience has led me to a different conclusion: macroeconomics is really hard and a waste of time. I want to have a portfolio that is prepared for different macroeconomic outcomes — but I’m not going to bet on a single one of them unfolding.
Some might say that macro prediction is worthwhile. I might have been a dummy about it, but they’re not dummies and they can do it!
Well, the question I ask of them: How many people can you name off the top of your head that became rich with their macroeconomic predictions?
If you go through the Forbes 400, there aren’t any macroeconomists. In other words, no one who has devoted themselves to a study of what makes the world’s economy tick have been able to get rich by predicting economic cycles, currencies, or interest rates.
The most famous macroeconomist in history is John Maynard Keynes. What is most interesting about Keynes is that he started out investing by trying to predict the economic cycle. He tried to predict recessions, currency movements, and the prices of commodities.
In the early 1930’s, he lost 80% of his money. He failed at attempting to predict macro-economics. This caused him to move on from top-down economic analysis to a focus on value investing: buying individual businesses at a discount to their intrinsic value.
If Keynes can’t do it, what makes you think that you can?
Within the Forbes 400, there are only two people who have used macro-economic predictions to consistently make money: George Soros and Ray Dalio.
For those two individuals, it’s also important to note that they don’t bet everything on a single outcome, and they are frequently wrong.
Dalio successfully predicted the financial crisis of 2007–09, but he has also been saying that we are in a situation similar to 1937 for most of the last decade. The 1937-style market decline has never materialized. He also proclaimed that “cash is trash” in early 2020 shortly before the COVID crash, when many hoped that they had more cash in their portfolio.
Dalio isn’t the only one who can get macro wrong.
There are plenty of other gurus who got things wrong.
Here is a macro prediction from Seth Klarman:
“By holding interest rates at zero, the government is basically tricking the population into going long on just about every kind of security except cash, at the price of almost certainly not getting an adequate return for the risks they are running. People can’t stand earning 0% on their money, so the government is forcing everyone in the investing public to speculate.”
This was not from April 2020. It was from May 2010. If you invested $10,000 on the day that this prediction was made, you would now have $35,000. Klarman got it wrong.
It’s also worth noting that Klarman isn’t rich because of macro predictions: he’s rich because he shrewdly buys assets when they are at a sharp discount to his estimate of intrinsic value, which he is quite skilled at calculating.
George Soros is famous for a successful bet against the British pound in 1992. He has become a billionaire by making outsized macro bets. But he’s hardly foolproof.
In 1987, he argued that the world’s reliance on the dollar would lead to: “financial turmoil, beggar-thy-neighbor policies leading to world-wide depression and perhaps even war.”
It didn’t happen.
In 1998, he made similar predictions in his book “The Crisis of Global Capitalism” and those predictions did not materialize.
If Soros frequently gets it wrong, then how is he successful as a macro trader?
The thing is: he’s a trader and he acknowledges errors and corrects positions when they’re wrong. He never bets everything on a single prediction. Soros makes many bets and never bets the ranch on a single outcome. He’s flexible and will move out of positions when he is wrong. Soros himself has said: “I’m only rich because I know when I’m wrong.”
In 2010, a who’s-who of the financial world wrote a letter in the Wall Street Journal imploring the Federal Reserve to stop their quantitative easing program. In their words, they believed that quantitative easing would risk “currency debasement and inflation.”
They were wrong! The reality is that the 2010’s witnessed some of the lowest inflation on record. The US Dollar actually strengthened after quantitative easing.
Of course, perma-bears and Fed critics will scoff at this. They’ll say that if you actually measure inflation by their metrics — inflation is actually higher than the government’s lies!
Another argument is that inflation hasn’t come through actual increases in the prices of goods — the entire stock market boom of the last 10 years has been inflationary.
Another argument would be that the only reason that the USD has strengthened is because other central banks have ramped up their “money printing” more than the rest.
Does this sound to you like sound reasoning, or does it sound like bargaining and attempt to rationalize a prediction that was wrong?
They never seem to consider the possibility that they just got it wrong. What’s more likely? That they were wrong 10 years ago, or that government statistics are lies and the debasement occurred anyway?
As for the “it didn’t affect prices of goods, just assets” — well, if all of this “money printing” was going to cause asset inflation, then why didn’t these people buy financial assets? Why weren’t they able to predict that it would cause a decade long bull market and successfully position for it?
Hindsight is 20/20. No one likes to admit that they’re wrong, so they invent excuses instead of facing the possibility that they might have just been wrong.
The reality is this: no one can predict the macro-economy. The two people on the Forbes 400 that were actually able to predict macro are error prone. When they do make errors, they own up to them and quickly correct their position. This is a sharp contrast to the macro guru’s that you’ll find on Twitter.
If there aren’t any rich macroeconomists — if there aren’t any rich financiers who did it by predicting the macro economy — if the only two people that got rich from macro make errors — then what makes you think that you can do it? What makes you think that your favorite Twitter guru can do it?
Be Wary of Gurus Bearing Predictions
There are a many gurus in the financial world. They make their proclamations on Twitter, on podcasts, or on TV. They sell books proclaiming their predictions. They exude total confidence.
My question is simple: if they can predict what’s going to happen, then why aren’t they already rich from it? What makes them better than George Soros, Ray Dalio, or John Maynard Keynes?
This is the reality that I wish I absorbed earlier. I suppose it’s something I had to learn via experience.
The reality is that nobody knows what is going to happen.
Most of the people confidently proclaiming financial predictions are selling something. Always approach their predictions through that prism. What are they selling? How do their proclamations tie into what they are selling?
They are attempting to sell books. They want higher ratings on podcasts. They want you to subscribe to their videos or sell ads.
Saying something like: “Have a balanced portfolio prepared for different outcomes” does not generate clicks and ratings. Proclaiming our imminent doom does generate ratings and clicks.
They have an agenda and it’s important that you realize that before consuming that content.
This doesn’t mean that macroeconomics is a total waste of time or should be ignored. I simply think that it is folly to imagine that any of us can predict the next turn in currencies, inflation, interest rates, or the economic cycle.
It does make sense to imagine how a portfolio would react in different situations. There should a plan for different outcomes. I think it makes sense to hold a diversified portfolio of assets that will deliver a return in different macro environments.
This is what Harry Browne tried to do with the Permanent Portfolio, which is a better template to think about these matters than trying to find the guru with the right crystal ball. The Permanent Portfolio is prepared for different macroeconomic outcomes. I have my own spin on this with the Weird Portfolio.
Whatever the mix, it doesn’t matter. The key is to acknowledge that macro prediction is really hard and likely a waste of time.
While it makes sense to have plans for different outcomes, it doesn’t make sense to think that you can actually predict the twists and turns of the macroeconomic landscape. Prediction is a fool’s errand and I’m a fool for attempting. I was a fool for trying to do this. At least I own up to it.
Will the Doomers eventually be right and will we have inflation? Well, I own some gold in case that happens. Will we have another deflationary bust? I own long term treasuries if that happens. I have some cash in an emergency fund. Will the US be replaced as a superpower? I have assets in other countries in case my country falls behind.
Will civilization collapse? Well, then it won’t matter how a portfolio is positioned, anyway. Guns and canned goods will carry more value than gold bars, puts on the S&P 500, or Bitcoin. (I have guns and canned goods, too, because I’m a bit paranoid!)
If you find yourself totally absorbed in a single macroeconomic thesis, I would caution strongly against it. The greatest names in Finance frequently fail at that game. There aren’t any rich macroeconomists.
Be careful out there and be wary of gurus peddling predictions.
PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings. Read the full disclaimer.