The Future of the Global Economy: One Step (ahem, Year) Ahead

Who can tell the future? 

Most people are not that good at predicting the future of the economy and the stock market, but there are quite a few pretty talented people who are. Most importantly, they are willing to bet their money (and a whole lot of it) on their vision of the future, instead of just yapping about it on television with no real consequences to themselves (think Ben Stein or Jim Cramer). These people are hedge fund managers, especially those who follow directional global economy based strategies.

Hedge funds are run by smart guys. They strive to generate attractive risk-and-return patterns for their investors through a wide variety of investment strategies. Broadly speaking, these strategies could be classified as “search for alpha” (e.g. “equity market neutral”) and “bets on beta” (e.g. “global macro”). Alpha strategies aim at generating returns patterns that are not related to the market or any known economic risk factors. Beta active strategies, on the other hand, generate returns by taking positions driven by underlying economic factors. The best beta active hedge fund managers are pretty good as a group in anticipating which of the economic factors would deliver superior performance in the future. If we could only see these positions, we would’ve been able to peek into the future (as perceived by a group of really smart hedge fund managers)…

Read the rest of this entry »


Pyramid Leverage

It is commonly accepted that “true” economic growth is the growth driven by technological innovation, and it is roughly approximated by a country’s GDP per capita growth. However, as I argued in an earlier post, short-term economic growth numbers could be distorted by monetary and fiscal policy choices. For example, a government may boost short-term GDP numbers by borrowing money through the sale of its long-term debt (say, twenty year bonds). By doing so, it employs the fundamental “time machine” feature of finance, which allows for the exchange of an uncertain future payoff for a certain payoff today. Ultimately, the repayment of the long-term government debt would be driven by the overall economy twenty years from now, i.e. people working, producing, consuming, and paying taxes then. Some of these people may not even be born today – how can we know for sure the number of workers and how productive they will be twenty years from now?

Read the rest of this entry »

Effective Investments

The most effective investments … are investments in politics.

– Boris Berezovsky

Am I seriously quoting the late Russian oligarch about investments in politics? After all, Berezovky brazenly manipulated political outcomes in Russia for personal gain.  Am I implying that investors do the same? Not exactly… While it is certainly not possible for a typical investor to manipulate the political landscape on such a grand scale, it is possible to achieve superior returns by taking the time to understand politics in order to anticipate developments that affect all financial markets.

Read the rest of this entry »

True Economic Growth vs. a Pyramid Scheme

Once you start thinking about economic growth, it’s hard to think about anything else.

– Robert E. Lucas

Q: What is the difference between maintaining sound fiscal policy and running a pyramid scheme with respect to government debt?

A: It all depends on the economy’s predicted growth rate.

What is economic growth, where does it come from, and how do we measure it? These are simple questions, but it is fundamentally important to get them right in order to understand what is ahead for the U.S. economy, and how its growth relates to government fiscal policy. Here I would like to take a look at how we measure economic growth, and argue that sometimes true economic growth may not be what it seems, at least in the short term.

Read the rest of this entry »

An Economic Expansion That Wasn’t

In recent days my friends have been asking me the same questions that we hear on TV many times a day… What is happening to the financial markets, and is it the beginning of the end for America? Below is just my personal view on the situation.

America as a nation has enjoyed vigorous economic growth for a very long period of time, going back to the 18th century. As the economy grew, Americans got wealthier, and now we enjoy one of the highest standards of living, as compared to the rest of the world. But what drives the underlying economic growth that makes us all richer in the end? It is the process of innovation and progress that drives economic growth. It is people coming up with new discoveries and technologies that provide more “bang for the buck”, and ultimately make our lives easier and more productive. America historically has been an innovator, with inventors like Edison, Westinghouse, and Ford revolutionizing technologies that made our lives better. It is the process of innovation that lies at the core of any economic expansion. That was then…

Read the rest of this entry »