Tradable economics offers enormous potential in a world where fiscal and monetary imbalances permeate global markets and will continue to do so for years to come. Policymakers and corporate executives are making decisions in reaction to the Coronavirus pandemic at warp speed. We will look back on some of these decisions as good, sound and balanced ones for our communities, while others will have been wasteful and inefficient, further contributing to large fiscal imbalances weighing on growth for decades. In the meantime, these decisions will directly and indirectly affect the global economy. Tradable economics technology efficiently detects patterns in macroeconomic data and anticipates movements in global asset prices.
While tradable economics is in its infancy today, it is highly scalable across the asset management industry with a positive impact on aggregate returns.
Today many popular trading strategies are zero sum games that require traders or trading systems to outsmart others. This preference is not surprising. Experienced traders know each other and the financial industry better than they know the economy at large. All strategies that are based on market positioning, market flows or anticipated algorithmic rebalancing belong to that category. Even some types of trend-following strategies are partially based on exploiting and exacerbating market distress. In these cases, investor returns are created by one financial institution at the expense of another. The aggregate alpha that is generated by the asset management industry through such trading strategies does not principally increase with technological advances.
For example, a trading style based on under or over positioning of the market is a form of legitimate “front-running”. It will turn a profit if one manager’s judgement or insight is better than that of others. That profit does, however, come at the expense of higher position entry or exit costs for other managers.
This is different for tradable economics. The principal value generation in tradable economics arises from efficiency gains that come with a better alignment of market prices and economic conditions. Economic alignment creates two benefits for the overall financial system. The first is more efficient allocation of resources – prices become more meaningful and guide flows of goods, services and investment based on better information. Put differently, economic alignment of market prices reduces the risk of severe and enduring misallocation and hence of major economic and financial crises. The second benefit is faster and more reliable feedback on actions taken by policymakers or management of public and private companies. Harmful decisions are more easily discovered and more quickly reversed.
For example, macro traders that figure out early that economic growth is declining in a country would – in a simple case – receive rates (long bonds) and short the currency of that country until a plausible adjustment to the new economic position has been reached. Less well-informed portfolio managers may or may not benefit from this adjustment, but they do not necessarily incur a systematic loss because of the activity of the informed manager as the adjustment would ultimately have taken place anyway. The positive returns of a tradable economics strategy are effectively derived from the economic gain of most economic agents that benefit from the market price adjustment and can be regarded as a payment for expediting the adjustment.
Since tradable economics is not a zero-sum game, it is a highly scalable technology for the investment management industry overall. Technological advances in tradable economics can increase the performance of the asset management industry (and ultimately their individual investors) and, in particular, the performance of active management vis-à-vis passive investment vehicles.