Friday, August 22, 2014
The natural rate and global macro investing
You have to have a view about what is the natural rate of interest if you want to be an effective global macro investor. Where you place the natural rate is key to asset class exposure not only for bonds but also for valuation of stocks. If you believe that the natural rate of interest is close to zero or may be negative, there is no reason to rid yourself of your bond portfolio. You are also likely to accept the fact that the discount factor for other assets will be lower forcing valuations higher all else equal. You will also see that Fed policy should hold rates lower longer to get below the natural rate.
The problem is that there is little agreement on the natural rate except that interest rates should be close to the long-tern growth rate in the economy. Low growth means low rates but the natural rate has to account for the stock of savings and the demand for investments.
Asking abut the natural rate is not the same as asking about what is the direction of rates in the next 3-6 months. The natural rate is a long-term concept. The forecast over the next three months is a cyclical concept. Macro managers should know the difference. If you tell be the natural rate, I should be able to tell you where are the tilts in the well-structured macro portfolio