Macro for investors

Every valuation model contains a discount rate, every discount rate contains the price of money, and the price of money is macro: you can ignore it, your portfolio cannot, and it is surprises against expectations that move markets, not the prints themselves.

Every valuation model contains a discount rate, every discount rate contains the price of money, and the price of money is macro. You can ignore macro; your portfolio cannot. This doc is the minimum working model: what the big variables are, how each transmits into asset prices, and the discipline that separates macro awareness from macro gambling.

Interest rates: the gravity of finance

The risk-free rate is the denominator of every valuation, so when it moves, everything reprices mechanically, before any change in the businesses themselves. And the burden falls unevenly: assets whose cash flows sit far in the future (growth stocks, long bonds, anything priced on 2035) are the long-duration assets, and they swing hardest when rates move. 2022 was this sentence enacted: the same rate shock crushed 30-year bonds and profitless tech together, which is also why "diversified" 60/40 portfolios found their two halves falling as one.

Inflation, and the rate that actually matters

The decomposition professionals watch

nominal yield = real yield + expected inflation (breakeven)

real yield: read directly from inflation-protected bonds (TIPS)
breakeven:  nominal minus TIPS: the bond market's inflation forecast

assets care differently: gold and long-duration equities trade off the
REAL yield; breakevens price the inflation-hedging assets

Inflation is the variable that changes the rules: in low, stable inflation, bonds hedge stocks (bad growth news means rate cuts, bonds rally); in high inflation, the correlation flips, because bad news IS inflation and rates must rise into weakness. Which regime you are in decides whether your diversification exists.

The cycle: where are we?

Phase	Growth / inflation	What has historically led
Early recovery	Growth rising, inflation low	Cyclicals, small caps, credit
Mid expansion	Both moderate	Broad equities; carry everywhere
Late cycle	Growth slowing, inflation high	Energy, commodities, quality
Contraction	Both falling	Government bonds, cash, defensives

The quadrant map is real but the clock has no hands: phases run years or months, and the turns are only obvious afterward. The professional use is not prediction but positioning honesty: knowing WHICH regime a portfolio is built for, so its owner is not surprised to learn it, and watching the handful of leading gauges (the yield curve, credit spreads, PMIs, unemployment claims) that historically turn before the coincident data does.

Central banks: the reaction function

Central banks set the short rate and steer expectations for its path, and the skill in reading them is not parsing adjectives but learning the reaction function: what data makes THIS committee move? A bank staring at services inflation will shrug at a soft factory print that would have moved it in 2015. Markets price the expected path continuously (visible in futures), which produces the central discipline of macro trading:

Surprises move markets, not news

Prices carry the forecast, so the tradable event is the gap between the print and what was priced. A hot inflation number the market expected does nothing; a mild one it did not expect is a rally. Before any macro release, the professional question is never "what will the number be?" but "what is priced, and which side of it hurts more positioning?" This is also why being right about the economy and losing money is the most common macro outcome: right, but already priced.

Liquidity: the tide under everything

Beyond the rate itself is the quantity of money and collateral sloshing through the system: central bank balance sheets, bank credit, fiscal deficits. Rising liquidity lifts asset prices with little regard for fundamentals; draining liquidity finds every over-levered structure. Most "everything rallies" and "everything sells" episodes are liquidity events, which is why professionals track it even when trading single stocks: it is the tide your stock-picking swims in.

Using macro without becoming a macro fund

Know your portfolio's macro shape. Sum the exposures: how much is long-duration? What happens at 5% rates, at 8% inflation, in a funding squeeze? The factor regression of macro.
Let macro set sizes, not names. The common professional pattern: security selection picks the positions, the macro view scales gross exposure and hedges.
Respect the regime in every model. A DCF discount rate, a comp set's multiples, a backtest's sample: all carry a regime assumption someone should have chosen consciously.
Forecast humbly. The macro record of professional forecasters is poor, and the honest edge is usually recognizing the CURRENT regime slightly early, not predicting the next one.

Glossary for this guide

Risk-free rate: The yield on the safest asset in the currency of the cash flows, in practice a long-term government bond. It is the floor every other required return builds on.
Duration (asset sense): A bond's price sensitivity to interest rates: duration 7 means roughly a 7% price fall per one-point yield rise. The dial bond managers use to set how much rate risk a portfolio carries.
Real interest rates: Nominal rates minus expected inflation: the true price of money. The main driver of gold (the opportunity cost of a yieldless asset) and, in liquidity-driven regimes, of most risk assets.
Breakeven inflation: The bond market's inflation forecast: the nominal government yield minus the inflation-protected (TIPS) yield of the same maturity. What inflation-hedging assets are priced against.
Stock-bond correlation: In low-inflation regimes bonds hedge stocks (bad growth news brings rate cuts); in high inflation the correlation flips positive and the classic 60/40 loses both halves at once, as 2022 demonstrated. Which regime you are in decides whether your diversification exists.
Business cycle: The economy's repeating sequence of expansion and contraction, mapped by growth and inflation into quadrants that different assets historically lead. Real as a map, useless as a clock.
Leading indicators: The gauges that historically turn before the economy does: the yield curve, credit spreads, purchasing manager surveys, unemployment claims. Watched not to predict but to notice the regime changing slightly early.
Reaction function: What data makes a central bank move, and how much. The skill in reading central banks is learning theirs, not parsing adjectives in statements.
Priced in: Already reflected in the price. Markets move on the gap between events and expectations, never on events alone, which is why being right about the economy and losing money is the most common macro outcome.
Liquidity (macro): The quantity of money and collateral flowing through the system: central bank balance sheets, bank credit, deficits. The tide under all asset prices; most everything-rallies and everything-sells episodes are liquidity events.
Yield curve: Government yields plotted against maturity. Upward-sloping is the normal state; its shape is the bond market's forecast of growth, inflation and policy.
Credit spread: The extra yield a borrower pays over the government rate: the market's live price of default risk plus illiquidity. Spreads widening is markets losing faith, sector by sector or all at once.