Paradigm shifts in the global macro-economy
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Written by Qiao Wang
I’ve always believed that, when it comes to understanding macroeconomics, the only people worth listening to are successful macro traders. Not central bankers, media, or armchair economists on Twitter.
The macro trader’s incentive is to maximize their P&L. They have gained real insights after getting #rekt time and time again. The academic or hobbyist’s incentive is often to cherry-pick data to support a preferred narrative. They are only there to entertain.
That’s why I can’t recommend enough this monster piece by hedge fund titan Ray Dalio, where he discusses what the coming macro paradigm shift will look like.
It’s long, so let me summarize (and apply it) for you.
Paradigms are long periods of time, usually about ten years, in which certain market dynamics tend to persist.
For instance, central banks’ efforts to revive the economy from the 2008 financial crisis marked the beginning of the most recent paradigm shift towards easy money policies. Even though growth has been relatively slow since the financial crisis, equities have experienced one of the longest bull markets in history. As inflation remained low, commodities underperformed the previous decade. Meanwhile, widening wealth and income gaps contributed to the global rise of populism.
Those are symptoms, not underlying forces, of the current paradigm. And symptoms will often persist long enough for people to believe they will never end. The driving forces, though, tend to be unsustainable. It’s merely a matter of time before each paradigm ends.
Driving Forces of the Current paradigm
As such, forecasting a paradigm shift boils down to identifying driving forces of the paradigm and examining wh...