(Please note that I am trying to finish my first report, which is tentatively titled "Understanding Government Finance". This work has meant that I have not had time to think about the personal finance section of my web site. I may write a few articles about the publishing process, as it provides an insight how I intend to make some money, and thus fits within the personal finance sphere. At some point, I expect to write reports on personal finance topics, and the initial research will show up in this section of the web site.)
Why Passive Macro?I call what I do "passive macro" as "macro" investing is typically associated with fairly active trading across asset classes all over the world. This style of investing is reasonable if you are running a hedge fund, but running your personal finances like a hedge fund does not appear to make a whole lot of sense.
I want to position my portfolio in a way that takes advantage of trends in the macro-economy, but I want to be able to sit in the position for a long time. I want to be able to take a holiday for a few weeks and not worry about my portfolio blowing up when I am away. This eliminates active option strategies, or buying junk equities that happen to be in a bubble.
As I note in the article, this also means that I do not waste time trying to pick individual stocks. I may have done OK on average, but the success was solely because I was clustered in a few industries. Now that there is a wide variety of exchange-traded funds (ETF's) to choose from, I could achieve the same type of industry exposure without delving into company financials.
(As an aside, I cringed somewhat at the sentence "Mr. Romanchuk was once a stock picker." Although this was true for my personal portfolio, but when I worked in finance, I was pretty much the exact opposite of a stock picker - I was a macro-driven rates analyst.)
Canadian Dollar Example
The article referred to my buying U.S. stocks and bonds, which was a great idea - up until the article was published. (How's that for timing?) I had largely moved my bond holdings into U.S. Treasury ETFs back when the Canadian dollar was trading roughly at par with the U.S. dollar. (In the chart above shows the number of Canadian dollars needed to purchase U.S. $1; and so a higher number means a weaker Canadian dollar.)
When the article came out, I has been in the process of getting out of that U.S. dollar position; I should have finished the job, as the Canadian dollar gained about 5% since then.
But the thought process was simple - the Canadian dollar was heavily overvalued, and the Canadian economy will be under pressure as the housing bubble deflates. Bond yields between the two countries are likely to remain close to each other, so U.S. Treasurys were going to outperform in the long term as the U.S. dollar would have a strengthening trend. The position was entirely reasonable on its own merits, and so I had the capacity to sit and wait for the Canadian dollar weakness to occur.
This gave me a way to enhance the returns of the bond portion of my portfolio, without using the standard strategy: buying lower-quality corporate bonds. Buying corporate bonds will normally enhance returns, but you will pay the price when the inevitable recession hits. By taking currency risk instead of credit risk, I did not have to worry about timing the onset of the next recession.
In summary, it gave me what I wanted: I could passively sit and wait in the position while I wait for trends to move into my favour.
(c) Brian Romanchuk 2015
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