Macro Strategy Flashcards
What is the point of Macro Strategies
Identify imbalances based on assessment of macro conditions vs monetary and fiscal policies. Anticipate future events and take positions accordingly.
How to develop Macro Strategies
Perform the same analysis for each economic bloc. Interconnect different regions to get a broad picture and develop an expectation of returns for each asset class.
Steps to a Macro Strategy:
- Assess macro environment vs macroeconomic policies
- Choose events that are: more predictable (trends), and have biased outcomes (not properly discounted)
- Select efficient instruments to implement trades
What is the Reflexivity Theory?
A model created by George Soros to help identify imbalances and ongoing trends.
What is the thesis behind Reflexivity Theory?
Feedback loops pull markets away from equilibrium.
Four steps of Reflexivity Theory:
- Reality
- Perception
- Reaction
- (new) Reality
What is George Soros saying?
“Don’t fight trends”
What is Reality step in Reflexivity Theory?
Get the necessary data to understand the reality of the market
What is the Perception step in Reflexivity Theory
Understand the current perception of the market on what is going on
What is the Reaction step in Reflexivity theory
How will the market react to the current perception of events
What is the (new) Reality step in Reflexivity Theory?
How will reality look like after investors react to their perception of market conditions
What do we mean by Trend in macro trading
Deviation from equilibrium / economic logic
Explain the Taylor Rule for valuing ST interest rates
Target s. t. rates = (inflation + target real rate) + (inflation - target inflation) / 2 + (gdp - potential gdp)/2
What are the 3 expectations that affect long term rates?
Expected inflation
Expected growth
Perceived risks
Explain the Maurice Allais’ model to value LT interest rates
ST rate / 2 + LT GDP Nominal (doesnt account for inflation) / 2
