The Game of Investing, Vol. 18
We’re continuing our journey down the macro rabbit hole. Last time, we looked at the macro data that matters most for investors.
Now, Jamie McDonald, a former hedge fund trader turned markets educator, is your guide to using that knowledge to form your own macro strategy in these constantly evolving markets.
- “Global macro can be intimidating at first glance, but it tends to be the framework used by some of the best minds on Real Vision,” says Jamie. “Let’s try to understand why.”
In this issue, we’ll cover 3 things:
- How a global macro strategy differs from other techniques.
- The key to forming your macro investing strategy.
- How macro traders “express” their views.
Let’s get started.
Welcome to the Game
Welcome to The Game of Investing, a bi-weekly newsletter bringing you “aha” moments and actionable lessons from Real Vision experts. No matter your level of expertise, markets are tough — which is why we all have to put in the work. Ultimately, the game of investing is a competition with yourself. Our mission is to help you navigate the path to success. Prepare to level up.
Let’s get started.
LEVEL 1 — A Top-Down Approach
A global macro strategy uses a “top-down” approach to markets that is vastly different from other popular investing strategies.
Other frameworks — like growth investing or long-short equities trading — take a “bottom-up” approach that looks at corporate profitability above all else.
Global macro, meanwhile, focuses on broad economic trends to identify opportunities across asset classes.
- The “top-down” approach involves analyzing economic themes from a bird’s-eye view and predicting what will happen next.
A few examples of some famous macro investors are George Soros, Ray Dalio, Stanley Druckenmiller… and our very own Raoul Pal.
- Back in 2018, Mr. Druckenmiller joined Real Vision to explain his approach to markets — Real Vision members can watch that video right here.
LEVEL 2 — The Key to Macro
The key to successful global macro investing is being able to spot trends and identify inflection points.
- “Think of macro investing like the different oceans around the world,” says Jamie. “They all have different geographies and tides, but they’re interconnected — and they all influence each other.”
To keep that analogy going, macro traders tend to either look at the tide turning over the long-term, or the waves crashing over the short-term.
- Translation: you can use global macro for both long-term investments and short-term tactical trades.
Depending on your preferred trading style and time horizon, you’ll need to focus on secular, cyclical, or tactical trends. You can read more about how to identify those 3 unique market trends right here.
Level 3 — Macro Expression
Macro traders look for opportunities offering the highest possible reward with the least possible risk. That’s often something driven by a primary trend, rather than the trend itself. Many traders refer to these tangential moves as “knock-on effects.”
Here’s an example:
- You believe the Federal Reserve will continue hiking interest rates, and you have decided that will further strengthen the U.S. dollar.
- You could simply buy the U.S. Dollar Index ETF ($DXY) — but that might only offer 10% upside with the potential for 5% risk.
- Instead, a seasoned macro trader might short the Emerging Market Bond ETF ($EMB) because they realize that a strong dollar will have volatile knock-on effects in debt-laden emerging markets.
“A macro trader’s job is far from over once they have an idea,” says Jamie. “The most crucial step is to find the best risk-reward opportunity available to express it.”
🔑 Macro traders often trade the knock-on effects of a trend as a way to capture the most upside. Plus, major market trends typically have more than one knock-on effect, so mastering global macro opens the door to many new opportunities for investors who can crack the code.
For more insights and tools that will help you grow as an investor, consider joining us as a Real Vision member. You can learn all about our various membership packages and current special discounts at this link right here.
Thanks for reading. In our next issue, we’ll highlight the difference between systematic and discretionary investing — and how it can fit into your trading framework.
See you then.
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