Tuesday, January 13, 2009


Macro Man is clever and funny, and typically pretty insightful with his economic observations.  Today he is on about the collapse in world trade, and how to profit by it.  You'll have to read the post for the graphs and data, but it will come as no surprise that global trade has stopped, full stop. 

But the two trading ideas MM is using to play this theme illustrate the impossibility (at least most of the time) of profiting off your macro views, even if you get the economics correct -- in this case, he's short the Singaporean and Australian dollars.  Talk about a bank-shot.

To me, the only macro trades that make sense are the ones that would fall under the heading of mis-priced insurance.  The ABX trade last year qualified.  You might find some commodity producing companies or some commercial real estate or retail debt this year that qualify.  The basic insight is that the difficulty of isolating a particular macro variable requires you to find not only a situation where the downside and upside are asymmetrical (which they arguably are with the two MM trades at issue) but in addition, one where the downside is limited.  This is not the case with Gold, shorting equity, or the Australian dollar.  Interestingly, it seems like it might be the case with shorting treasuries, or any other AAA rated credits.  After all, have you ever heard of a AAA credit being upgraded?

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