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Investors Should Ignore the Macro-Babble

Lawrence Creatura

There really is no such thing as macroeconomics. At least not for most of us who make our living in the stock-picking world. Sure, if you are a central banker or are paid to do the macro chin-wag thing--maybe you're a market strategist or a pundit or a news anchor--then there is a thing called macro. But recognize that macro is mostly just raw material for people who get paid to talk.

We've seen this ad nauseam in recent months, over the buildup to the fiscal cliff, the sequester and the long-term deficit. Do we raise taxes or cut them? Do we just cut spending, or trim some here and increase some there? What happens with Europe's "austerity now" moment as it wrestles with saving the euro. It all makes for entertaining reading--the tug of war, the personalities (does it get any better than Silvio Berlusconi?), the drama--it's reality TV for financial minds. But honestly as an investor, after finishing your equivalent of "The Real Housewives of the Federal Reserve," are you any wiser, better prepared to pick mispriced stocks or in a stronger position to produce returns?

Macro is a very, very young science pioneered in the early 20th century by John Maynard Keynes, the economist behind the large deficit spending of the Great Depression. Prior to that, the term "macroeconomics" didn't even exist. Now it is taught in U.S. universities as if an economic Wizard of Oz can just pull a macro lever anytime anything economically unpalatable occurs. Remember your college macro course? The equations were always assuming something. If government increases spending by X, output would grow by Y, but only if you assume taxes weren't used to support the spending, only if you assume full employment, only if you assume full price elasticity, only if you assume no substitution effect, etc. It is a science that behaves with the certainty of physics, but has the track record of alchemy.

Consider the real-world results of some profound top-down lever pullers: The Smoot-Hawley Tariff Act of 1930, which raised tariffs across of range of U.S. exports, spawning a global trade war that prolonged and deepened the Great Depression. Mao's "Great Leap Forward" movement of agricultural collectivization and rapid industrialization, which caused tens of millions to die from famine in the late 1950s and early 1960s. The Nixon administration's temporary wage-and-price controls, which worked to hold down prices only to see inflation soar as the controls were phased out.

I don't mean to dismiss all things macro, but capturing economic reward by forecasting aggregate economic variables is an investment strategy available to only a select few individuals, and you and I are not among them. The acquisition of material non-public geopolitical information is a prerequisite--think of Britain's Rothschilds capitalizing on early knowledge of the outcome of the Battle of Waterloo thanks to carrier pigeons, or financier George Soros' large, early and correct bet to short the British sterling, or any U.S. senator (OK, just kidding here ... sort of). The ability to know what's going to happen, macro-speaking, doesn't really exist for the rest of us.

But it's even worse than all that. Not only are your odds of successful macro-forecasting low, but the impact of being wrong is large. While micro decisions impact a company, macro decisions cut across your whole portfolio. Get this wrong and, like the Titanic, all of your separate compartments will be breached. Glug, glug, glug.

Think of macro as an ocean, with the tides of opinion rolling in and out. These shifts may take equity prices with them en masse--such as the 2008 global financial crisis, when all equity prices suffered, or the dotcom heyday, when they all rose. It's hard to make money forecasting these tides. You have no competitive advantage, no tides table; you just sort of --pardon--go with the flow. However, you can look at what is left in the sand as the as the water recedes. This is the raw material savvy investors begin with. Look at the individual securities left behind. Amongst them can be mispriced treasures. That's microeconomics, that's business, and you can wrap your head around that.

Lawrence Creatura is co-portfolio manager of the Federated Clover Small Value Fund at Federated Investors. He conducts equity research in the Consumer Discretionary, Consumer Staples and Technology sectors. Lawrence earned a bachelor's degree and an MBA from the University of Rochester in 1987 and 1994, respectively.

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