Don't be a step behind with economic indicators
I used to think that macro analysis isn't important if you are investing in companies. Increasingly I think they are important given that governments and central bankers are interfering with the markets more than ever before.
We saw firsthand how the US stock market bull run was fuelled by Quantitative Easing 1-4. Using this indicator alone and just buy stocks whenever there is a huge QE would already yield good returns.
Before you set to become a macro analyst, I need to warn that most economic indicators aren't useful because they are lagging indicators.
For example, investors are concerned with inflation now and have been watching the Consumer Price Index (CPI) closely. But understand that the CPI is measuring the past month's prices and it tells us nothing about what's coming next.
There's a saying that the stock market leads the economy. I find this to be true. So the answer lies in what the market is telling us. We need to listen. Like a doctor using a stethoscope.
Right now, the market is telling us that the inflation has likely peaked because commodity prices have crashed 20-30% from their highs. We started to see petrol prices falling at the pump too, albeit slowly.
The delayed CPI should come down in the coming months.
Of course this is dynamic and if there is any major incident that upset the supply and demand of commodities dramatically, prices will move again.
Another concern is recession. For this, many look at the GDP numbers at each quarter. Again, this is a lagging indicator.
The leading indicator is to look at the yield curve inversion. The bond yields are determined by the markets and hence they are forward looking.
The yield curve has already inverted and the chances of negative GDP growth in the coming quarters are high.
In summary, what the market is saying right now is that we are likely to see inflation numbers stabilising (not coming down significantly yet) and a recession is looming.
We saw firsthand how the US stock market bull run was fuelled by Quantitative Easing 1-4. Using this indicator alone and just buy stocks whenever there is a huge QE would already yield good returns.
Before you set to become a macro analyst, I need to warn that most economic indicators aren't useful because they are lagging indicators.
For example, investors are concerned with inflation now and have been watching the Consumer Price Index (CPI) closely. But understand that the CPI is measuring the past month's prices and it tells us nothing about what's coming next.
There's a saying that the stock market leads the economy. I find this to be true. So the answer lies in what the market is telling us. We need to listen. Like a doctor using a stethoscope.
Right now, the market is telling us that the inflation has likely peaked because commodity prices have crashed 20-30% from their highs. We started to see petrol prices falling at the pump too, albeit slowly.
The delayed CPI should come down in the coming months.
Of course this is dynamic and if there is any major incident that upset the supply and demand of commodities dramatically, prices will move again.
Another concern is recession. For this, many look at the GDP numbers at each quarter. Again, this is a lagging indicator.
The leading indicator is to look at the yield curve inversion. The bond yields are determined by the markets and hence they are forward looking.
The yield curve has already inverted and the chances of negative GDP growth in the coming quarters are high.
In summary, what the market is saying right now is that we are likely to see inflation numbers stabilising (not coming down significantly yet) and a recession is looming.
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CarilonCapital : The interesting thing is that although price hikes will soften slightly in coming months, supply will keep falling with demand broadly as we enter a very extreme recession, so prices won’t materially decline… stagnation is here to stay - unless the federal reserve is ready to put the us economy through the worst depression and sovereign debt default