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Monday, September 5, 2016

Book Review: How To Make Money With Global Macro

Javier Gonzalez has published How to Make Money with Global Macro. The book offers an overview of a global macro framework. It is commodity and currency focused -- which is a popular viewpoint amongst many market participants -- but one might question the applicability of some of the ideas to modern developed economies.

Book Overview

The book offers a viewpoint of macroeconomics that is market-focused; that is, how do I make money off macroeconomic trends? This necessitates empiricism, and ignoring the academic and ideological struggles of economics.

The book is divided into two main parts -- an introduction to Gonzalez' brand of global macro, which includes a history of the main market environments since the 1970s (roughly corresponding to the decades). Charts of the main financial markets are given, which could be a useful reference.

The second part is a discussion of topics in global macro, which includes:
  • The War Effect
  • Of Crashes and Crises
  • Commodities
  • Fallacies and the Chairman Cycle
  • Macro and Power
  • Dollar Stability
  • The Gray Swan ("known unknowns," such as the effect of global warming).
One thing to keep in mind is that the book offers an overview, and not a detailed set of directions to generate profits. From my viewpoint, the title of the book ("How to Make Money...") could be taken to implying that it describes an "investment system" that one could mechanically apply to generate profits.

As a disclaimer, I received a review copy of the book in ebook (Kindle) format.


The introductory chapters points out that global markets have created bubbles/extreme bull markets on a continuous basis. He outlines a hypothetical series of investments that are a rotation from bubble to bubble (for example, being long gold from 1971-1981, and then rotating into the NASDAQ in 1981-1985, and so forth). This sequence of investments would have returned (in U.S. dollar terms) just over 30% per annum from 1971-2015.

Of course, any sequence of winning trades is going to generate extremely high returns. The underlying point is that if an investor could at least capture a portion of the bull markets, he or she would generate returns that heavily outperform passive investing returns. The implication being that if one can identify such opportunities early, one can add value without resorting to individual security selection.

Gonzalez advocates a fairly eclectic approach to macro analysis, not being beholden to any theoretical viewpoint. He cites at length the viewpoints of George Soros, Jim Rogers, Warren Buffet, and Nassim Taleb.

The key to his viewpoint is the core-periphery viewpoint; that monetary and fiscal policy in the United States (he attaches great importance to reserve currency status) drives conditions in the periphery. The trends in the U.S. dollar help define business cycles, and turning points are associated with crises.

As he notes, the behaviour he describes does not fit into the world view of many mainstream finance and economics academics. The amount of useful research in these areas is somewhat limited; although I believe that post-Keynesian research would provide more insight than he credits. (He only makes limited and negative comments about post-Keynesian research.)

He then illustrates his views by discussing the major investing trends since the 1970s. This is interesting, but we need to keep in mind that it is straightforward to come up with an explanation for historical events; the trick is being able to forecast. However, this background would be useful for newcomers to the area. As I discuss below, I have a different theoretical viewpoint, so I would have a different interpretation of some of this history.

Global Macro Topics

As the list given above illustrates, Gonzalez covers a wide variety of topics. His coverage is brief, and that is probably the area where more material could be added to the book. (The book is relatively short, which is probably attractive to many people working in finance who do not wish to have lengthy background material. I have kept my own reports short for that reason.)

Some topics, such as the effects of war, are obviously special events that generally cannot be forecast. However, it would have been useful to have more detailed discussions of key questions, such as how to diagnose when a crisis will erupt. For example, it was clear to most sensible observers that there was a bubble in technology equities in the late 1990s. However, it was extremely difficult to determine what would bring the uptrend in prices to an end. Shorting the market too early was a career-limiting decision, while if you were long, you needed to know when to exit the market. Many tech speculators who believed the hype wiped out their previous gains by holding on for too long. Meanwhile, if investors who were too cautious would have closed out their positions years before the peak during the periodic "corrections" that hit the market.

Those tactical decisions are the main difficulty associated with the investment strategy of trying to ride bubbles to high returns.

The other concern I see with the book is that much of it revolves around crises that have been induced by attempts to manage currency levels. Attacking currency pegs was historically a great way to generate returns for old school macro investors. However, currency peg systems have largely disappeared (and the euro is not easily speculated against), and so it is unclear how useful looking at that history will be for investors going forward.

Viewpoint Disagreements

As I noted earlier, Gonzalez follows the macro thinking of George Soros and Jim Rogers, and attaches great significance to commodity price movements, and the level of the U.S. dollar. Conversely, I cannot think of anything those investors have stated over the past five years that I have agreed with (admittedly, I do not really care what they think, so I probably missed most of their pronouncements), and I see very little significance in the movements in the U.S. dollar and commodity prices in the post-1990 environment.

A commodity/currency-centric view of macro worked in the developed world in the 1970s, and for many emerging markets. However, they would have led to disastrous trading results in the JGB and Treasury market in the post-1990 era. However, investors who are trying to get outsize returns are well advised to avoid the Treasury and JGB markets, and so that particular weakness may not particularly matter.

My feeling is that investors who invest in commodities and currencies tend to have views much more similar to Gonzalez than myself, and so the thought processes he describes might better explain some market reactions than mine. (Why did oil go to $150/barrel when the U.S. economy was already in recession, and the global financial system had already started to freeze up?) Moreover, his views are echoed by policy makers in the developing world, who invariably blame all of their economic problems upon Federal Reserve policy. (First there was an alleged "currency war" in which the Fed is driving down the dollar, which flipped into a panic about alleged Fed tightening. The possibility that problems in the involved countries are self-induced is studiously ignored.)

Gonzalez argues that dollar stability should be an objective of policy. This seems to ignore the history of currency crises -- that he outlines in his history -- created by attempts to manage the value of the dollar. Once the United States embraced a free-floating dollar, there has not been anything resembling a currency "crisis" in the developed countries; and in the developing countries, currency problems have largely disappeared once all of the existing peg systems failed. I view the tendency of the U.S. dollar to begin strengthening when a crisis hits is just a reaction to capital flows, and it is not a causal force.

Concluding Remarks

The book is interesting, and gives a market-oriented view to the topics of interest. I hold differing theoretical views, but at the minimum, it offers an explanation of how many investors look at the world. 

(c) Brian Romanchuk 2016


  1. This comment has been removed by a blog administrator.

  2. "and I see very little significance in the movements in the U.S. dollar and commodity prices in the post-1990 environment."

    Perhaps you could expand this and demonstrate via some graphs....not sure I agree...

    1. The simplest graph is core inflation since 1992 - flat near 2% for decades,despite whatever the dollar and commodities did.


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