Darius joined our friend Tony Sablan on the Unscripted Arena podcast to discuss Darius’ unique background, the 42 Macro risk management process, overcoming cognitive biases in investing, and more.
If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:
1. Stop Relying On Predictions If You Want To Make Money In Financial Markets
Making money in asset markets is not about predicting future developments in the economy. It is impossible to generate consistently accurate forecasts for every relevant growth, inflation, and policy catalyst, across economic cycles. Moreover, any investor who believes they can accurately forecast the future with enough precision to position for each meaningful surprise in the data relative to consensus expectations is either a newsletter-writing charlatan or someone who has succumbed to the Illusion of Validity.
Instead, making and saving money in asset markets is about positioning yourself on the right side of market risk, which equates to being long assets that are trending higher and short or out of assets that are trending lower.
An overwhelming focus on predicting the future will only hinder your ability to respond to critical inflections in momentum with enough speed and confidence to manage risk consistently and effectively. You don’t have to predict things like “liquidity”, “flows”, etc. to benefit from trends and inflections in those cycles, just as long as you remain disciplined about your risk management process.
2. Investors Should Position According To The Current Market Regime
The 42 Macro Risk Management Process simplifies complex market dynamics into a clear and straightforward three-step approach:
- Identify and position for the Market Regime
- Prepare for regime change using quantitative signals with our Macro Weather Model
- Prepare for regime change using qualitative signals via our fundamental research
Since mid-November, we have remained in a risk-on Market Regime, currently REFLATION. That means you should have been overweight risk assets like stocks, credit, commodities, and crypto and underweight defensive assets like Treasury bonds and the US dollar every day since.
As an institutional investor, you should also understand the key portfolio construction considerations for each Market Regime. If you need help understanding these critical factor tilts, we are here to help.
3. Our Macro Weather Model Systematically Nowcasts Momentum Across The Principal Components of Macro
The Macro Weather Model is our process for analyzing several principal components of macro and translating those components into a 3-month outlook for major asset classes, including stocks, bonds, the dollar, commodities, and Bitcoin.
This model monitors indicators that reflect both the real economy cycles and financial economy cycles:
- Real economy cycles: growth, inflation, employment, corporate profits, and fiscal policy
- Financial economy cycles: liquidity, credit, interest rates, and market sentiment indicators ‘fear’ and ‘greed.’
Currently, the Macro Weather Model suggests a bearish three-month outlook for stocks and bonds, a neutral three-month outlook for commodities and Bitcoin, and a bullish three-month outlook for the US dollar. In totality, our Macro Weather Model currently suggests the Market Regime has a moderate risk of experiencing a RORO phase transition (i.e., risk-on to risk-off, or vice versa) to a risk-off Market Regime within three months.
That’s a wrap!
If you found this blog post helpful, explore our research for exclusive, hedge-fund-caliber investment insights you can act on today.
