15 Things Global Macro Investors Should Have Learned from The Great Financial Crisis and Aftermath

The Great Financial Crisis shook a lot of trees and made many economists/investors/traders go back and question first principles—at least it should have.

Here’s a quick list of Things We Should Have Learned by Now:

1. Potential growth in developed economies is lower than it was before the GFC. And policy can’t do as much about it—whatever your policy inclinations—as we’d like to think.
2. The interest rate sensitivity of economic activity is far less than was believed to be the case.
3. Printing money can cause inflation, but doesn’t always. Asking what are the conditions under which it is likely to, and if those conditions obtain, is the smart question.
4. The economic channel of monetary policy and financial channel of monetary policy have to be thought through jointly and separately, and often have very different requirements and equilibrating dynamics.
5. Oil matters less. It didn’t help the consumer as much as forecast when it fell, and didn’t hurt GDP as much as others suggested, either. Oil intensity of GDP or share of consumption basket is far lower than the levels most observers—consciously or unconsciously—had anchored on.
6. The overall commodity intensity of output has declined significantly and will continue to do so. It is in some sense the very definition of technological advancement.
7. Commodity markets (IDK about softs) are driven in the first instance by speculation, which regularly overwhelms fundamentals.
8. Inflation/wage impulse per increment of GDP has been systematically lower than thought. And transitory shocks are often, well, transitory.
9. EM has structurally changed —for the better.
10. Government intervention is a necessary evil in a financial crisis. What’s desirable isn’t always feasible. Path dependency is dominant. And circuit-breaking the self-reinforcing downward spiral of panic is essential.
11. The bond market—in both shape and level—has been telling us very little about US economic prospects/activity. However, short-term changes do inform us as to the prevailing narrative.
12. Economics should be used for diagnostic purposes, not predictive ones.
13. Very few investors/traders can disentangle their political preferences from their economic analyses. Systematic traders, disciplined risk managers, and passive investors have a big advantage in this regard.
14. The Mexican peso is not a petro-currency; Mexico imports more petroleum products than it exports.
15. Brazilian growth is driven primarily by domestic credit, not commodity exports.