Macros 2.0: Economy-Markets-Cycles, and Actionables?

Edit: Macro Understanding has been a typically weak area at VP, as in the initial days we made our mark from bottoms-up stock-picking. But as we mature as investors, we come to the realisation quickly that basic awareness/appreciation of Macro-Economic drivers and Market Cycles are an equally important part of our Investor Learning Curve. Probably the one last hurdle, that always keeps us humble! (as we strive to keep getting better & better at the investing game).

Emphasis will be to lay out a Map first - especially for novices like me - then, increasingly on drawing our attention to Thematic changes underway, medium to longer term indisputable trends/data-points, that we can hope to CATCH ON early, and validate through our independent and VP-wide pan India Scuttlebutts

I have thought and pondered over a behavioural aspect in some friends who have seen several market cycles, and survived through them with hands & limbs intact, and actually lived to flourish. Also proactively moved to Cash, this time! But still, frozen, unable to respond to my fervent appeals/calls to action for help! For Post Covid…post 2-3 years…Opportunity Mapping… if you will!

Just because something like this has not happened in our lifetimes, or in the lifetimes of anyone we know, does not mean that we can not attempt to first acknowledge and accept the current situation. And then probably attempt to understand deep-rooted underlying causes for this Deep a Reset!

Yes, I am acknowledging a back-to-basics deep reset this is - individually for me and you on how to reorganise and value personal life and intimacy, value personal hygiene and health and interest in nurturing and inspiring each others life within the family, and among our influence circle. It is deep reset for politicians to value Nature and Sustainability and re-prioritise de-scale back activities that led to pollution to global warming to other man-made ills! It’s a deep reset for Businesses too - I wonder if that reset is for the final push - for appreciating sustainable models that create, deliver, and capture value for all stakeholders without depleting the natural, economic, and social capital it relies on. And finally a deep reset it is for Economists/Central Bankers/Governments to realise that the one-solution-fit-all money-printing days are finally over!!

It’s deep reset and time for a new economic & geo-political world order to emerge. It probably has to. All the signs are there!!

This is as fascinating a read as a student of History and Markets can hope for, in current times. From my favourite eMentor Ray Dalio. I am hooked, and reading and re-reading for the past week. Cant help quoting in a bid to draw everyone in!!

I was seeing the confluence of 1) high levels of indebtedness and extremely low interest rates, which limits central banks’ powers to stimulate the economy, 2) large wealth gaps and political divisions within countries, which leads to increased social and political conflicts, and 3) a rising world power (China) challenging the overextended existing world power (the US), which causes external conflict. The most recent analogous time was the period from 1930 to 1945.

The country that gets to print the world’s primary currency (now the US) is in a very privileged and powerful position, and debt that is denominated in the world’s reserve currency (i.e., US dollar-denominated debt) is the most fundamental building block for the world’s capital markets and the world’s economies. It is also the case that all reserve currencies in the past have ceased to be reserve currencies, often coming to traumatic ends for the countries that enjoyed this special privilege.

I looked at the rises and declines of all the major empires and their currencies over the last 500 years, focusing most closely on the three biggest ones: the US empire and the US dollar which are most important now, the British Empire and the British pound which were most important before that, and the Dutch Empire and the Dutch guilder before that.

So please understand that while this study will provide you with my very top-down, big-picture perspective on what I’ve learned and my very low-confidence outlook for the future, you should approach my conclusions as theories rather than facts. But please keep in mind that even with all of this, I have been wrong more times than I can remember, which is why I value diversification of my bets above all else. So, whenever I provide you with what I think, as I’m doing in this study, please realise that I’m just doing the best I can to openly convey to you my thinking.

Hope you give this a patient read and feel as compelled as me, to move on to the original article. No need to agree or disagree. We should just take it in as another strong perspective to absorb and assimilate in our cumulative stock-taking of current approaches/viewpoints.

**Edit: **
This is a (relatively) shorter summary made available now which will make for quicker big-picture understanding :slight_smile:


Really good stuff posted on twitter , basically a collection of articles on following topics

Economic consequences of pandemics
Political ramification of economic crisis
What happens after a crash , this paper is an excellent guide for what investors can broadly expect to occur in markets moving forward.

The economic impact of Black Death
Regulators changes and its impact after market crash


Taking inspiration from some of the stuff Ray Dalio has been warning us about - there is an urgent need for us to (skip this corona crisis period) and leap forward to the next decade. What will be the big changes/themes for 2020-2030.

A contrary line of argument to the usual first order response - things will get back to business as usual normals after this crisis/lockdown effect is negotiated through with some degree of pain, may be for 6months to a year.

What if it does not?
For many things have fundamentally changed. Geo-politics has permanently changed (whether we see active ganging up against China, or not). Globalisation is getting replaced with more “localisation” in every country and the pace of this will pick up post Corona. The US will no more be the main market opportunity for most businesses - RoW Markets will probably drive more business. QE/and its effect is ending - there is practically no room for further monetary policy measures manoeuvre with interest rates at their lowest in most countries; and is proving less and less effective. If we can pause, and try to observe what is clearly happening around us and probably destined to pick up more pace, post Corona - More of “Populism” measures is a reality in every country - during and post Corona. More and more taxing the Rich is a reality. (The widest gulf between the haves and the have-nots in both developed and developing world drives this current reality, and as Ray Dalio instructs us, this theme is getting accelerated post Corona.)

I have been actively hunting for more Mental Models on this train of argument line - because this seems much more grounded in reality to me than opinions of everything returning to normal in 1 or 2 years. (Being an eternal optimist) I would sincerely like to believe this line of quick return to business as usual - but the data-points are pointing me in a different direction altogether.

So guess my delight when a friend pointed me to this picture tonight.

I now had the foundation to pen down on the troubling scenarios building up in my mind - guided by Ray Dalio’s outstanding piece. Please give this a good close look-in - focus on the big thematic changes established. It might just change your perspective from that of the optimistic bull to a cautious realistic (on the bleak outlook before us).

If you have a positive-mindset during this crash (having structured your personal situation well) then this probably has all the Mental Models one needs to get going. Should provide us more energy to work hard with renewed vigour to identify the next set of probable winners - after such a big crash, and more coming (as Mr D has articulated so effectively, effect of Lockdown NOT yet priced in) - sectoral leadership has to CHANGE - so the Gurus/market veterans always maintain.

For those intrigued, here’s a link to this outstanding work BofAML_Transforming_World_The_2020s.


@Donald Dada, before you go overboard with Ray Dalio, please also check his track record over many years (recent track record is pathetic but even over the last 30 years is pretty ordinary). Talk is cheap. It makes good headlines but does not make money. Macro forecasting is a mine field with too many moving parts and I have never seen or known anyone who has got it consistently right (including the bosses of the bosses like George Soros and Stan Druckenmiller). And then we have the added complexity of extracting actionables from the macro thesis, because end of the day, we cannot invest in macro indicators.

Corona itself will make some changes, but some of the trends you have mentioned, like localisation, was already happening.

We need to take a sector-by-sector view and keep our ear to the ground to see what is happening and what could be happening.

I will give you an example. Today, schools and colleges across the world are shut down. All teaching is going online. Why would it not be a permanent feature? Now if I take away the geographical boundary, why can’t there be an outsourcing boom for teaching staff from places like India?


What you are referring to here is Thucydides Trap. It is referred to when a rising power causes fear in an established power which escalates toward war. Thucydides wrote: “What made war inevitable was the growth of Athenian power and the fear which this caused in Sparta.” In today’s day and age, war could be actual military or based on trade. The trade war between US and China have already started and will continue. COrona will change the contours of it to an extent but too early to make any guesses. End of the day, corporations will migrate to where they will make the most profits.

Not really. This is more of availability bias. All new age businesses are still global. Everyone uses facebook, twitter, Uber etc. There is hardly any data which supports increased localisation.

Come on… US GDP is $20 trillion. China is at $14. Japan, Germany are in the $4-$5 tr bracket. The world total GDP is around $90 tr. You think US market will go away anytime soon? Again, you are getting swayed by narrative fallacy and not by data and logic.

QE has its limitations. And there will be an impact on currencies. I don’t know how. A lot of cash floating around for a long time is unnatural and so is negative interest rates. Something will have to give. We just don’t know what and when. Japan has been doing QE for 30 years now. Has been ineffective but still going on. 12 years of QE and people thinking its over may not be correct. But this one is too tough and not enough data points for me to formulate an opinion.

Again, trend started post-2008 and gaining ground now. UBI (universal basic income) experiments have been ongoing in some countries in test conditions. Automation and joblessness would drive that. Corona or no Corona. Personal income tax going up could be a possibility but there is huge pushback as well across the world against it. The biggest move in taxation nowadays is how to tax global companies and eliminate tax havens. India, for example, has instituted one recently (equalisation levy) for global tech companies. Already talks are on at UN levels for formalising and US is opposing for obvious reasons as US companies stand to lose the most.


My simple overall rebuttal to every forceful counterpoint.

We are talking about Thematic changes for the decade. Some of these things to play out will take 3-4-5-7 years or more, I thought I made it clear it’s NOT tomorrow’s picture I am pointing to…Its a decade picture looking ahead. You CANT be DEFINITIVE …about something that far away…either way :wink:

Let’s try and be “open” to catching the message! Not shoot the Messenger. I remember some folks were equally belligerent about attacking everything @deepinsight brought to the table (very very insightful, and very early to catch on), only to scamper away 3-4 weeks later and take a reverse position, a tad bit late?

Let’s not try to intelligently rebut every point …avoid when not necessary…especially lets look to be relevant to context… e.g. New age businesses are global; We are talking primarily about implications for India, it’s quite sometime before we will see a global new age business from India. I am keenly waiting for a PhonePe, or a Ola to debut on our bourses though.

Also let none of us hide behind fancy jargons …x bias and y bias…while making a pithy point. It may sound good and erudite, but unnecessarily complicates the discussion, and obfuscates finer nuances. Lets all talk in simple readily understandable language. Be humble …be open…be kind…remember Mr D’s homily’s for success in this very uncertain, complex environment.

Again we can certainly take the message, while working our way bottoms up, sector by sector, aided by domain professionals, management interviews and VP pan-India scuttlebutts. VP (cumulatively) is very weak on Market Cycles, let’s be humble and open and acknowledge that first.

So finally, if we are good enough to acknowledge that, let’s all GET OUT of our comfort zones and/or definitive positions, and TALK to market cycle veterans who have seen 3-4 different cycles and are professing cluelessness, saying we don’t know, in a bid to be better informed …on all sides of the argument. Everyone I have spoken to is clearly saying “Leadership” may decisively change not tomorrow, progressively. If we watch out for those signs, we may be able to catch these early; else we may be caught playing blind.

I will try to bring to VP excerpts of my interviews progressively during the week, IF they are willing to be quoted in public. Not everyone is, for obvious reasons. We can legitimately have “our own position” in private, but when it comes to a “public position”, we all need to be careful NOT to be definitive. That’s certainly not the right response to a very complex situation…progressively unfolding … before us.

Welcome alternative viewpoints/line of argument from everyone, with your own original justifications, with humility, and openness! Please try and capture back here at VP, your discussions with folks smarter, and more experienced than us.


Most large businesses once in 5 years do "next 10 / 20 " years crystal gazing …

They invite experts from all kind of fields to give their respective gyan and then make teams of senior management do what if analysis …

In Public market Investing unfortunately this exercise is under appreciated … but in private equity investing this is often practiced …

Now to take on all the points you have raised there is beautiful tool called PEST Analysis .

PEST Analysis (political, economic, social and technological) is a management method whereby an organization can assess major external factors that influence its operation in order to become more competitive in the market

We can discuss all the points raised by you in this thread or a new thread using PEST framework


Wonderful Shailesh (@kb_snn).
That is the exact intention to let discerning VP Members mull over the broad points a bit, before branching off to a thread dedicated to examining these issues - more closely, for those interested.

Excited to learn more on PEST Analysis Identifying “Big Picture Opportunities and Threats” with your help/others interested!

Am also talking to a Market Veteran of 25 years from an Institutional set up in next half-hour …who said it will be a pleasure to talk …the BofAML Thematic Change Map resonated well with him.They are a boutique, highly specialised firm, but in his own words …a keen observer of Market Cycles!

For others self-professed only on bottoms-up investigation…Sector by Sector issue Maps…better pull your socks up…and present your current thoughts/progress on a few Structured Maps, asap (non-narrative/not opinion led). Let that important aspect not get neglected, right?


PEST Analysis is good place to start with basic gyan on this tool

Besides this to learn more about the tool there are lot of literature … A sample analysis on Toy Industry is enclosed for basic understanding

For individual investor the best way to use this tool is by mapping Annual Report - “Management and Discussion” section with PEST tool

This will throw which part of PEST is more critical for that respective industry/ sector in next 10 years …

Say for Tobacco industry Political ( P) and Social (S) will be more important than E and T

while for Mobile Industry (T) Technological may be more important

Post PEST analysis … Next step is to do SWOT Analysis on PEST analysis output … to see which firm in that sector can leverage emerging developments …


A post was merged into an existing topic: Macro 2.0 Articles of Interest

The important question to ask is that why would things change now. If debt has been increasing over the last 40 years and the US economy has continued to do well, what is changing now due to Corona?

In the Corona situation, all countries are more or less equally impacted with economic slowdown or recession. Every country will bring in large doses of liquidity from their central banks. Central bank balance sheets will go up 2-5x times for most countries.

Central banks have learnt this lesson of QE during 2008 and that is why they were so quick off the block this time in announcing liquidity measures. Everyone is kicking the can down the road.

In such a scenario, looking at absolute debt levels is meaningless in my opinion.


Liquidity doesn’t equal debt. If anything, it’s the opposite.

As for other countries doing it, they can only do it without political upheaval if that liquidity (aka money printing) doesn’t bring in inflation. Which would be the case in the near term, but 2-3 years down the line, one can’t say.

Europe, Japan and maybe Korea and such can get away with it. China has different issues, it’s for all intents and purposes insolvent … and all it’s hopes that after 2020 a new president will come and let it devalue, just went up in smoke with the virus.

But Indian govt. can’t print and have a good propability of getting away with it before 2022 general elections, so most probably it won’t. An easier way to stimulate the economy is to hold the value of USDINR - which can be done by selling having central bank reserves in Gold instead of USD, but that brings with it another set of problems, namely sanctions and tariffs (thankfully not deliverance of freedom).

What needs to be watched for is inflation? Last QE programs didnt increase inflation but caused an asset price bubble to be seen what will happen next.


Hold your horses, a bit.
There are better ways to establish the difference between MMT and Mainstream Economics.

And May I request a modicum of humility in us all. Anyone can have a different viewpoint than ours - which we might very strongly believe in - that’s the reality. It’s just another viewpoint! Our time is better spent by focusing on taking the discussion forward.

Please chill, and allow me establish the arguments on both sides, with clarity - by quoting folks smarter than us, and certainly more knowledgable than us!
{Deleted the slightly acromonius, non-value-additive exchanges between two members}

A post was merged into an existing topic: Macro 2.0 Articles of Interest

Could Modern Monetary Theory rescue us from the Covid-19 economic crisis?

The crisis has led to the usual discussion on whether one should use monetary policy or fiscal policy to ease it.

Amol Agrawal

One of my favourite economics columnists, Niranjan Rajadhyaksha, recently quoted the Russian revolutionary leader Vladimir Lenin: “There are decades where nothing happens and there are weeks where decades happen.” If Lenin saw what was happening in the last few weeks, he might rephrase his famous quote to… “there are weeks where centuries happen!” The outbreak of Covid19 is being compared to the outbreak of Spanish flu 100 years back in 1918, several European countries are calling this the worst crisis since the World Wars and other such dire comparisons.

The Covid19 crisis which started with public health concerns has quickly spread to become a major economic crisis. The crisis has led to the usual discussion on whether one should use monetary policy or fiscal policy to ease it. One has so far seen sharp and quick reactions from most central banks around the world. There are also pressures on the government to loosen their purses and pass a large fiscal stimulus. Someone on Twitter objected to the use of the word stimulus and said we should instead call it support, which I think is the right approach given the scale of the crisis.

Central bank support has been cheered by a few and questioned by others. Those who support it say the deep demand crisis needed a central bank response and actually argue for more such interventions. Those who question say the crisis is more of a supply shock and in such cases central bank policies are futile. The efforts should be made to boost aggregate supply by increasing productivity, technology and so on.

Amidst all the confusion, one is again seeing a sudden interest in looking at Modern Monetary Theory (MMT) for a possible solution (see my earlier piece on basics of MMT). The mainstream economics narrative is that all governments have a budget constraint and thus it can only spend based on the constraint, which is usually taxes. The proponents of MMT refute this claim and argue that a country which issues its own sovereign currency does not have to worry about deficits for pushing public investment into a useful programme. The government can always pay for the programme by issuing its currency. The constraint here is governance and the ability of government to conduct these programmes.

The MMTers go further and say the governments create money by spending which then comes back to them as taxes. Unlike the usual belief that central banks are independent of the governments, MMTers say governments and central banks create money in tango. The government issues bonds and these are used by central banks to create money in the markets by simple pressing of computer keys.

MMT has met with severe criticism, with detractors saying excessive government expenditure leads to high inflation. MMTers response is that the high inflation in some of these economies is because of governance (think Germany in 1920s, Zimbabwe today). If one sees some of the most highly indebted countries of today, such as Japan, US and so on, the problem there is of low inflation. Infact, MMTers turn the entire debate of public investment upside down. They argue that economists should not focus on an economy’s debt levels but instead focus on using the money to achieve economic objectives such as full employment, eradicate poverty and so on.

Going by MMT, what could be a better government programme than a solution against Covid19 and easing the sharp economic crisis? Households are cutting down on consumption and businesses on investments. If the government worries about its budget constraint and does not spend, we are headed for a severe recession. And a recession will lead to higher deficits eventually, due to a slowdown in economic activity and lower tax revenues.

Some of the leading MMTers have grabbed this opportunity to suggest policy measures. L. Randall Wray and Yeva Nersisyan wrote an article proposing a universal health programme to reduce the economic uncertainties. They suggested the programme should cover 1) all medical costs associated with testing and treatment of COVID-19, 2) mandated paid sick leave and full coverage of associated costs, 3) debt relief for families and 4) and swift deployment of testing and treatment facilities to underserved communities. We have seen China and South Korea practicing similar policies.

Prof Stephanie Kelton in an article (21/Mar/2020) said that the government should use this opportunity to fix the American healthcare system. It should accept the widening deficits calmly as there is no fear of the US going bankrupt as it prints the most powerful currency in the world. All the government needs to do is to send an instruction to the Federal Reserve (which it anyway does) to back the programme. In a series of blog posts, another proponent Bill Mitchell argues that the government should give a job guarantee to all those who have lost jobs/likely to lose jobs given the slowdown. Pavlina Tcherneva in another article said we should do exactly as Franklin Roosevelt did to resolve the crisis during the Great Depression: disburse cash to all households and also implement a federal job guarantee and other programmes such as a Green New Deal.

The Danish government has announced a programme under which it would pay 75 percent of their employees’ salaries to avoid mass layoffs, which will amount to 13 percent of GDP. The US has announced a programme but it has to be seen whether the Senate will approve it. Denmark has a debt to GDP ratio of 32 percent whereas in the US debt is 108 percent of GDP, telling us why it such a programme is easier in the former and difficult in the latter.

I had argued in my earlier piece that if one looks at the overall principles, the MMT ones are not very different from those proposed by mainstream economists such as Olivier Blanchard and Larry Summers. The duo advocate that the US Government should not worry about deficits when interest rates are so low and should spend liberally to reduce deficits in public policy areas. The difference is just that, for mainstream economists, interest rates are the constraint whereas MMTers do not believe there is any constraint for sovereign currency nations. But MMT will not apply to much of Europe which has become the centre of Covid19 as the sovereign nations there have given up their currency for a common currency Euro.

After being ignored (and humiliated), is this the MMTers moment in the sun? Will their ideas get a hearing? One would say that we should keep all options open and not be bound by the shibboleths of economics. The speed at which the pandemic has shifted gears and become an economic crisis needs all possible policies which need to be executed at even faster speed. My gut feel is most of the economies will eventually be implementing ideas from MMT without calling it so. The Governments are being pressed to introduce fiscal support and will be calling their central banks to finance the support. MMTers might not mind their not being given due recognition. First they are used to being ignored. Second, they may well think that as long as humanity benefits, a rose by any other name would smell as sweet.

Amol Agrawal is faculty at Ahmedabad University. Views are personal.

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Some great articles on QE and its affects:

Please kindly, do not post doctoral thesises on a forum where people are discussing things, especially things they’re not fully conversant with. Most will skip the articles. Either post something your own or atleast sumamarise the articles.

I’m conversant with the subject, and have actually read Amol Agarwal’s many articles, but there are better writers on the subject. (kevin muir) is hilarious. Alas he got himself into paid subscription mode a month ago (at the right time), but if you have followed him, you would’ve made boatloads (short CAD & AUD for eg.).

Also macrovoices is another podcast which touches on the subject very well. Especially podcasts on Eurodollar University & Anatomy of the US Dollar Endgame.

PS: When RBI injects liquidity in the system, it does that by buying it’s bonds which it had issued earlier. The opposite happens when it sucks liquidity from the system. It’s normal day to day things that RBI (and all central banks) do on a daily basis, just more so during crises.

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