The only things I care about in Macro
Macro forecasts always sound smart
Occasionally macro investing makes headlines. Usually around interest rates rising, the dollar, oil, copper, gold, a war and on and on. There’s always some reason for it to break headlines.
The second Trump term has brought an onslaught of these. It will crash the dollar and empty U.S. capital markets. No! It will cause the dollar to rise, breaking the global capital markets. blah blah.
Macro always SOUNDS smart, but since I’ve first come across these forecasts in 2015, I can’t recall a single time that I’d have made money listening to them.
Except for one trend: capital flows. In this article I want to explore the basic bear case I’ve been hearing and present the only macro trend I really track and hold by.
The bear case
I won’t spend much time on the bear case, but it goes something like this: Trump’s geopolitical decoupling from the world is expected to hurt the U.S. economy, causing outflows as people repatriate funds to Asia and Europe. Additionally, the bond market will be challenged due to the deficit, causing rates to rise and potentially spooking investors. Consequently, there will be less flow into the U.S. market, with fewer buyers of ETFs, and without that tailwind, the market will decline.
This bear case misses a few things that I’ll address below. But first, what do I care about in Macro?
The only macro that matters
The only macro that truly matters to equity prices is liquidity inflows into capital markets. It’s made up of two things:
Flow of funds into U.S. equities: This includes global flow of funds and the dynamic between active and passive vehicles.
Monetary debasement and liquidity backdrop: Money printing, lower rates and TINA all are important backdrops to market prices and capital inflows.
Everything in macro is connected, but these two aspects are the most important to keep in mind.
Flow of funds
The flow of funds is crucial; if there are more buyers than sellers, prices go up. As long as the money coming into the market from U.S. workers and overseas exceeds the money going out (whether to pensioners, spending, or flowing back overseas) the market will rise. The prevalence of passive buy-and-hold strategies over active mutual fund trading adds to the market's inelasticity. Michael Green has done significant work on this, and my opinion is based on following him for the past nine years.
So what about the bear case that money will flow out of the US on a comparative basis? The argument misses a few key factors:
Where will this money go? Investment decisions are not made in a vacuum. They’re made on a comparative basis. Will European investors choose the Euro, which faces a host of challenges, or the British pound? Both economies are languishing, struggle with high debt to GDP ratios, and aging demographics. American companies are generally more resilient and include the world's growth leaders like NVIDIA, Microsoft, Facebook, and Google. While there are good companies globally, most of the high-quality growth companies are in the U.S.A.
The best capital markets in the world are still in the United States. Despite Trump's presidency, the rule of law is strong and the government is more about deregulation than regulation. Capitalistic principles of wealth creation are more at play than in Europe. Even with market volatility, the U.S. remains the dominant global power in capital markets, and trade is still conducted in U.S. dollars and over the SWIFT system.
While some may choose to repatriate funds to Europe or Asia, large money flows simply cannot find a home in Europe or Asia. China, while a global super power, is not a viable alternative for those who distrust its government and communist party. Ultimately, the United States remains one of the only real markets available and offers a better comparative option than the rest of the world.
I don't believe the flow of funds will change dramatically. As a money manager, I see no advantage in moving away from the U.S.A.
What else affects flow of funds into U.S equities? The workforce and passive investing.
As long as the U.S. economy remains resilient, people are working, contributing to their 401(k)s and IRAs, primarily through passive ETF flows, resulting in a net increase in buyers, not sellers.
As Michael Green explains about inflows to ETFs like the SPY, these aren’t actually passive vehicles - they’re algorithmic ETFs that have a very simple algorithm: “If I received money, then buy.” No matter the price, or underlying holdings. Work he presents show that the markets are becoming less elastic, especially around the largest capitalization names that make up the majority of the indexes. Practically, what this means is that as longs as money is flowing into these vehicles, from Europe, Asia or American workers, markets will rise, and on an exponential curve.
This macro trend indicates that as long as the money flow equation holds, markets will continue to rise, and we will see a higher price-to-earnings (PE) multiple for longer. This is due to the increasing number of passive holders who maintain their investments longer than ever before.
I highly recommend you watch this 20 minute talk from Michael Green at this year’s Berkshire Hathaway ASM.
Monetary debasement
The second main trend, which I credit to Raoul Pal for flagging and explaining so well, is the global debasement of money. The growing liquidity and debasement of the U.S. dollar and other currencies show that asset prices reflect this debasement. This debasement is unlikely to change in the near future. As global banks print more money and the global debt-to-GDP ratio worsens, the only way out is to print more money, leading to further debasement and liquidity.
The only assets that have outperformed at the pace of debasement we've seen are Bitcoin and the NASDAQ 100. This trend of debt-to-GDP is a combination of an aging population and poor fiscal responsibility, and these trends are not changing anytime soon.
Two trends = rising equities
Together, these two trends mean that when we zoom out to the macro MACRO level, beyond specific currency pairs or interest rates, as long as the flow of funds and global liquidity are positive, equity investors should expect returns. This is the macro backdrop I follow, and it is what I believe matters.
Macro doom narratives make great podcasts, but portfolios compound on math: persistent inflows + structurally loose money > periodic political drama. Until the plumbing changes, abandoning U.S. equities