Macro Minute: Week of October 21, 2024
I want to explore and contrast the difference between micro and macro in investing and economics. To begin let’s look at micro. This can be either a single company, industry, or individual. This can also be your individual household, city, or state when examining economics. These situations are extremely important. These micro tendencies are where big opportunities are found in investing, and more importantly this is where decisions and life happen. This is where we as people make the decision where to live and work.
When studying the micro, it can get messy. People can decide to do all sorts of things for noneconomic reasons. Someone may move to a city that has high taxes, minimum job opportunities, and bad education all in order to be closer to a sick family member. On the surface that makes little economic sense, but makes perfect sense to that individual that wants to maximize the time left with a precious family member. The opposite can also be true. Someone might find a small business that has a local monopoly on an area and is extremely profitable. A person may start a business and it create tons of wealth over a career.
Moving on to macro, this is where we add up all of the micro facts to create a whole. This is where governments, central banks, and large investors analyze. They look at things in the aggregate, like aggregate housing demand, aggregate supply, aggregate demand. This is where the tools of interest rate changes and fiscal policies look to make changes. Central banks and politicians have tools to make impacts on the whole and not always the individual. This is why sometimes they are accused of caring only for the large companies and not the individual. This can sometimes be a fair critique, but they are charged with keeping things running smoothly on the whole.
When investing it is important to keep in mind the macro backdrop even when looking for the opportunities in the micro. The last month or so I have been laying out my thoughts on the macro. Stimulative fiscal policy, accommodating central bank policy, stable inflation, and a relatively strong jobs market. This is what I see as the macro backdrop. There are micro trends that can be overwhelmed by the macro. This happens quite often in investing. You can find a company that is growing above peers with good management and industry transitions that will create growth for years to come. None of that will matter if inflation runs out of control and the central bank raises rates excessively.
The way I think about it is like this. Micro is where the opportunities for outsized returns are but sometimes the macro will overwhelm them.
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