Applied Financial Macroeconomics and Investment Strategy: A Practitioner's Guide to Tactical Asset

270 Pages·2015·1.61 MB·English

Global Financial Markets series
Global Financial Markets is a series of practical guides to the latest financial market
tools, techniques and strategies. Written for practitioners across a range of disciplines it
provides comprehensive but practical coverage of key topics in finance covering strat-
egy, markets, financial products, tools and techniques and their implementation. This
series will appeal to a broad readership, from new entrants to experienced practitioners
across the financial services industry, including areas such as institutional investment,
financial derivatives, investment strategy, private banking, risk management, corporate
finance and M&A, financial accounting and governance, and many more.
Titles include:
Erik Banks
DARK POOLS, 2nd Edition
Off-Exchange Liquidity in an Era of High Frequency, Program, and
Algorithmic Trading
Erik Banks
LIQUIDITY RISK, 2nd Edition
Managing Funding and Asset Risk
Daniel Capocci
THE COMPLETE GUIDE TO HEDGE FUNDS AND HEDGE FUND STRATEGIES
Sandy Chen
INTEGRATED BANK ANALYSIS AND VALUATION
A Practical Guide to the ROIC Methodology
Frances Cowell
RISK-BASED INVESTMENT MANAGEMENT IN PRACTICE, 2nd Edition
Jawwad Farid
MODELS AT WORK
A Practitioner’s Guide to Risk Management
Guy Fraser-Sampson
INTELLIGENT INVESTING
A Guide to the Practical and Behavioural Aspects of Investment Strategy
Michael Hünseler
CREDIT PORTFOLIO MANAGEMENT
A Practitioner’s Guide to the Active Management of Credit Risks
Felix Lessambo
THE INTERNATIONAL CORPORATE GOVERNANCE SYSTEM
Audit Roles and Board Oversight
Ross K. McGill
US WITHHOLDING TAX
Practical Implications of QI and FATCA
David Murphy
OTC DERIVATIVES, BILATERAL TRADING AND CENTRAL CLEARING
An Introduction to Regulatory Policy, Trading Impact and Systemic Risk
Gianluca Oricchio
PRIVATE COMPANY VALUATION
How Credit Risk Reshaped Equity Markets and Corporate Finance Valuation Tools
Andrew Sutherland and Jason Court
THE FRONT OFFICE MANUAL
The Definitive Guide to Trading, Structuring and Sales
Michael C. S. Wong and Wilson F. C. Chan (editors)
INVESTING IN ASIAN OFFSHORE CURRENCY MARKETS
The Shift from Dollars to Renminbi
Cyril Demaria
PRIVATE EQUITY FUND INVESTMENTS
New Insights on Alignment of Interests, Governance, Returns and Forecasting
Roger Leeds
PRIVATE EQUITY INVESTING IN EMERGING MARKETS
Opportunities for Value Creation
Jawwad Farid
AN OPTION GREEKS PRIMER
Building Intuition with Delta Hedging and Monte Carlo Simulation using Excel
Robert T. McGee
APPLIED FINANCIAL MACROECONOMICS AND INVESTMENT STRATEGY
A Practitioner’s Guide to Tactical Asset Allocation
Applied Financial
Macroeconomics and
Investment Strategy
A Practitioner’s Guide to Tactical
Asset Allocation
Robert T. McGee
applied financial macroeconomics and investment strategy
Copyright © Robert T. McGee, 2015.
All rights reserved.
First published in 2015 by
PALGRAVE MACMILLAN®
in the United States—a division of St. Martin’s Press LLC,
175 Fifth Avenue, New York, NY 10010.
Where this book is distributed in the UK, Europe and the rest of the world,
this is by Palgrave Macmillan, a division of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills,
Basingstoke, Hampshire RG21 6XS.
Palgrave Macmillan is the global academic imprint of the above companies
and has companies and representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries.
ISBN: 978–1–137–42839–4
Library of Congress Cataloging-in-Publication Data
McGee, Robert T.
Applied fnancial macroeconomics & investment strategy :
a practitioner’s guide to tactical asset allocation / Robert T. McGee.
pages cm
Includes bibliographical references and index.
ISBN 978–1–137–42839–4
ISBN 1–137–42839–2
1. Investments. 2. Business cycles. 3. Asset allocation. 4. Monetary
policy. 5. Investment analysis. I. Title. II. Title: Applied fnancial
macroeconomics and investment strategy.
HG4521.M224 2015
332.6—dc23 2014039839
A catalogue record of the book is available from the British Library.
Design by Newgen Knowledge Works (P) Ltd., Chennai, India.
First edition: April 2015
10 9 8 7 6 5 4 3 2 1

Printed in the United States of America.
To Alice and Phil
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Contents
List of Exhibits ix
Preface xiii
Acknowledgments xvii
1 C ycles and Trends: History Does Not Repeat Itself,
but It Does Rhyme 1
2 The Business Cycle 15
3 Monetary Policy 53
4 Bonds and Credit 95
5 Equities and Profits 129
6 Commodities and Tangible Assets 175
7 I nvesting for Long-Term Change: Challenging the
Conventional Wisdom 193
8 Lessons Learned from the Financial Crisis 229
Bibliography 245
Index 247
vii
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List of Exhibits
1.1 Round-Trip Back to Normal 3
1.2 What Do You See? 10
1.3 E mployment Gains Are Cyclical but Anchored by
Labor Force Growth 13
2.1 US Business Cycle Much Milder since World War II 17
2.2 US Business Cycle Much Milder since World War II 17
2.3 Industrial Production Declines with Recessions 25
2.4 Inverted Yield Curve Leads Recessions 26
2.5 A verage Unemployment Duration Peaks after
Recessions 27
2.6 R ising Backlog of Unfilled Orders Signaled Growing
Economic Momentum in 2013 30
2.7 B ig Variation in Housing Cycles but Permits Start
Falling ahead of Recessions 34
2.8 R esidential Investment Averages Just Around 5 percent
of GDP but Is Very Cyclical 35
2.9 E xpectations Tend to Lag Current Conditions Going
into Recession 39
2.10 I nflation Pressures Pick Up with Wages. Tapering
Substitutes for Initial Rate Hikes 41
2.11 Expansions End With High-Capacity Utilization 42
2.12 Credit Conditions Deteriorate before Recessions 44
2.13 Rebalancing Trade Key in New Global Business Cycle 51
3.1 F ed Policies Have Helped United States Move Out of
Deflationary Danger Zone 56
3.2 U nited States Transitioning from Credit Bubble to
Equity Bubble? 57
3.3 U nconventional Monetary Policy Kept Money
Growth Stable . . . 58
3.4 . . . By Flooding Banks with Reserves . . . 59
3.5 . . . Sufficient to Offset the Collapse of the Money
Multiplier 59
3.6 H oarding of Liquidity Has Collapsed Velocity of
Money 61
ix