Macro analysis should be used with utmost caution, and only affect your investment conclusions when the data series are at there most extreme levels

Macro is a sport for extremophiles

Macro analysis is particularly valuable and helpful during the most extreme situations in history. In practice, extreme macro situations (top or bottom decile) only happen about one year per decade. Sometimes, several of the most important variables are at their extreme levels at the same time, due to the procyclical nature of economics. On those rare occasions, it makes sense to adapt one’s investment decisions to the macro environment – somewhat.

Macro analysis in a nutshell

The most important macro variables, and their cycles, to consider are: GDP growth, market interest rates, central bank policy rates, Purchasing Manager Index surveys [PMI], inflation, money growth [M, MZM, M2], unemployment, private debt growth (and level) etc.

The aim of the macro analysis is to increase the likelihood of making correct forecasts for both fundamentals and valuations. Will a significant change in, e.g., unemployment or mortgage rates, help or hinder your company’s path to a certain profit and profit multiple? For example, profit multiples have less difficulty to rise during a declining interest rates period. And at the same time you could expect a higher growth rate for the company’s earnings. In a period of high or rising interest rates, you probably should prepare for lower than normal sales and earnings growth, as well as lower than average valuation multiples. At such times you can consider the macro situation somewhat of a headwind, but not more than that.

However, don’t take your macro research and analysis too far. Very few people, such as Soros and Druckenmiller, have managed to consistently profit from macro analysis, while for example Munger and Buffett have always emphasized the uselessness and dangers of macro based investing.

Focus on micro (company data and margin of safety) over macro

While TA tries to analyze and estimate likely price patterns, the study of macroeconomics aims to forecast national economic data like GDP growth, interest rates, inflation, total private debt, overall stock market valuation level, international trade/geopolitical tension, and hundreds of other gauges of production & consumption in an economy. The macro forecasts are used for making better predictions of the likely levels for company sales and earnings growth, cost of debt, and not least probable valuation multiples.

However, I can’t stress enough how rarely the average investor, or even the most astute and experienced investor, should  pay any serious attention at all to macro data when making an investment decision. The real value in investing lies in the valuation of companies, not trying to forecast interest rates, inflation or GDP growth rates.

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