One of the themes I’ve written about consistently over the last 5 years is how macroeconomics and, more generally, macro perspectives (top down perspectives) are coming to dominate our financial world. I was reminded of this by this good piece by Noah Smith who defends modern macroeconomics and its response to the crisis. While Noah defends the field of macroeconomics specifically, I think he is downplaying the role of macro outside of just economics and how important it is becoming to market practitioners.
As a market practitioner and not an economist, I think macro is coming to dominate the way we think about modern finance and that means that the importance of economists studying macro is likely to become MORE important, not LESS in the coming decades. I call this the trend the “new macroeconomy” and the people who are going to thrive in the future will be the one’s best armed to engage in this changing global macro world. As this new “big picture” view comes to dominate our financial lives economists will have no choice but to “defend” macroeconomics. If they don’t learn it or adapt with it it they will likely be at a substantial competitive disadvantage in the new macro world.
The evidence of growing interest in macro finance is obvious to anyone in the field. The news is dominated by top down stories these days. Whether it’s Ukraine, Europe, emerging markets, the Fed, macro indicators, etc. These are the stories that are increasingly driving asset prices and markets. After all, we don’t live in localized economies any longer. The S&P 500 and most global markets are macro markets now. Understanding your domestic economy simply doesn’t give you the full picture. And this is not unique to the equity markets. Commodities, futures, bonds and just about all markets are becoming increasingly global in nature which means that the big picture matters more than it ever has.
Perhaps the biggest macro trend in finance is the move towards ETFs and asset allocation style strategies. I know these strategies often like to sell themselves as “forecast free” approaches or strategies that don’t require a macroeconomic outlook, but that’s just nonsense. As I’ve discussed before, any long only index fund approach is based on a very specific macroeconomic outlook. It just so happens to be a permanently bullish forecast. And ETF and index fund firms are gobbling up assets as investors pour funds into this style of macro investing.
So I’d say Noah is downplaying macro to a large degree. The field of macroeconomics as practiced by macro economists is just a small slice of the macro landscape. Macro finance is growing by leaps and bounds and becoming increasingly important. And as macro becomes more important to the world of practitioners macro economists are being forced to adapt and apply models and understandings that become more useful to practitioners and policymakers. As of now, most of the models and understandings that macroeconomists are using aren’t terribly useful to market practitioners. That will change because the field will force it to change. And the economists who don’t change/adapt will be left behind….