Who are you and what’s your story?
I was born and raised in New York, in the suburbs outside of the city. I decided to stay in New York and attended New York University to study economics and was a life-long New York resident until moving to Connecticut during the pandemic.
I am a macroeconomic investor, focusing on how economic cycles impact broad asset classes and specific sectors. I do not invest in specific companies or stocks but rather major assets such as stock indices/sectors, Treasury bonds, precious metals, and commodities.
Investments in stock indices/sectors include US and broad international indexes as well as domestic sectors and style factors such as value vs. growth, small cap vs. large cap and cyclical vs. defensive.
Fixed income investments are mainly concentrated in the Treasury bond market with a varying duration depending on the cyclical direction of economic growth. While the economy is accelerating, Treasury investments favor the front-end of the curve while the long-end of the curve is the preference during economic decelerations.
I was interested in investing from a very early age as my father was in the financial industry. I read books on Warren Buffett and would spend hours calculating “fair value” for a list of dozens of stocks and played around with paper trading accounts online. As I moved into high school and then college, my passion for economics grew as I developed a strong belief that economics and economic cycles were the driving force behind the largest moves in asset prices. When the 2008 market turmoil sent all stocks lower regardless of fundamentals or fair value, I then decided that understanding these larger trends was the most critical force in investing, and the fundamentals came second.
During my years in school, I devoted my free time to studying long-term economic trends, including debt crises, debt-deflation, demographics, and more. After college, I spent a couple of years working at a quantitative hedge fund in midtown, slightly different from the economics I had been studying. I learned many skills, including statistical analysis techniques and some computer programming basics, by working with some brilliant people. I also realized that the investment management industry did not lend itself to long-term secular trends when performance has to be marked monthly or quarterly.
I was looking for a way to bridge this gap between long-term economic trends that are highly predictable and the most influential force in investing and the need for frequent performance statistics. I continued my study of economics and augmented the long-term focus with an in-depth study of the business cycle “leading indicators,” which provide clarity on the direction of economic growth and inflation over the next several quarters instead of the next several years.
This unique blend of long-term (secular) economic trends with an overlay of short-term (cyclical) leading indicators was not provided to the investment community, which led me to start EPB Macro Research in late 2016.
Walk us through your process of identifying and executing on investment opportunities?
I start with an in-depth understanding of the two factors that comprise an economy’s trend economic growth potential. These two factors are demographics and productivity or, in other words, how many people are working and how productive are those people?
The beauty of demographic trends is that they are very slow-moving and have a high predictive capability. Also, if you have a 20 or 30-year time horizon, demographics are the most critical factor in determining future economic performance.
Productivity is a bit harder to model, but an abundance of academic research points towards debt as the driving force behind productivity. Higher levels of indebtedness tend to reduce overall productivity.
Thus, a combination of demographic trend analysis and a study of relative indebtedness provides a very high conviction cocktail for what the multi-year future holds in terms of economic performance.
Within a 10-year or 20-year secular trend, the economy can have many 2-3 year ups and downs which we call “cyclical” trends. There are various ways using what are called “leading indicators” that we can gain confidence in the next several quarters of economic activity. For example, building permits must be issued before new construction begins. Therefore, data on residential building permits predictably lead the number of employees in the residential construction market. Moreover, the manufacturing industry, despite its smaller relative size, is highly cyclical.
Using a basket of these leading indicators provides a high conviction outlook on the direction of economic growth and inflation over the next several quarters. Anything shorter than several quarters wonders into the realm of short-term trading, which is not predictable with a high level of consistency in my view.
Moving forward with a decisive view on the long-term economic trends and the short-term economic trends puts you in a powerful position to decide which of the major asset classes will likely perform the best.
When growth and inflation are expected to trend higher, stocks and commodities generally perform the best compared to safe Treasury bonds and gold. When economic growth is trending lower, Treasury bonds and gold vastly outperform stocks and commodities. Using this macro approach allows you to hold risk assets when the financial risks are lowest and shift into safe assets when economic risks are increasing.
I make these shifts into the appropriate asset classes depending on the economic trends and hold the investment as long as the leading indicators do not change direction. When there is an inflection in the leading cyclical indicators, which I track on a weekly and monthly basis, I change my primary asset holdings.
The most useful skill in this type of strategy is patience, confidence in the economic process and data, and keeping your ego at bay by not predicting the leading indicators. Let the leading indicators do the work and trust the process.
The market is not always efficient, and large investment opportunities always arise when there is an inflection point in the leading economic data.
Since you first started, what have you learned that has had the biggest impact on your success and the growth of your portfolio?
The biggest challenge in investing is translating a macroeconomic view or a fundamental view into a portfolio strategy. If you like Disney stock and have done great fundamental work on the company, that is only half the battle. How do you translate that idea into a portfolio? How is the position sized? Is there an offsetting hedge? When do you declare the idea and winner or a loser?
The more predetermined rules that govern your investment strategy, the more long-run success you tend to have.
For me, this means having a set asset allocation strategy as your baseline or “home-base.”
This can be any asset allocation that fits your investment needs. It can be a 60/40 portfolio, the Permanent Portfolio, the All-Weather portfolio, or any of the dozens of well-researched and well-supported diversified asset allocations.
Research the asset allocation mix that works well for you and that becomes your home base. If you approach the world without any idea regarding what the future holds or you find yourself overwhelmed with confusion, simply go to your home base allocation.
Now when you overlay the long-term secular economic trends and short-term cyclical trends on top of your baseline allocation, you are in a solid position to have long-term, repeatable success rather than one-off lucky trades.
Let’s say you have a baseline portfolio of 60% stocks and 40% Treasury bonds, and you set 20% guardrails around this allocation.
When economic trends are pointing higher, you know you have to shift to 80% stocks and 20% bonds. Conversely, when economic trends are pointing lower, you change to 40% stocks and 60% bonds.
The more rules and guardrails you place around your investment strategy, the better your chances of repeatable and consistent success will be. If you operate with no set strategy, rules, or guardrails, you’ll find it very hard to stick with one core philosophy and struggle to resist the temptation to gravitate towards the hottest asset or idea of the day.
I have learned to have more rules and guidelines as the best way to increase success. Just like in life, if you come to a situation that doesn’t have a rule, you have to think about it, research it, analyze the problem and create a rule so that particular situation is taken care of in the future. Over time you’ll always add rules and guidelines, and this way, you’ll continually improve as an investor and continue achieving higher levels of repeatable success.
What books, platforms or resources have you found useful?
I have used most of the popular research and data platforms, including Bloomberg, YCharts, FRED, and more. They are all great and highly useful, depending on your price point.
For long-term economic research, most data can be sourced for free using FRED or source documents from government agencies and companies like the Institute for Supply Management “ISM.”
I keep a running list of some books that have helped with my research process, investment strategy outlook, and investing emotional side.
In particular, I’d highlight Manias, Panics, and Crashes, originally by Charles Kindleberger, as the single best roadmap to understanding the anatomy of bubbles and market cycles.
This book contains lessons that transcend time and should be on the reading list of every investor interested in how bubbles form and end.
What advice would you give to someone who’s just starting?
Today, there are new challenges that were not around when I started investing, namely the noise around social media, forums, and blogs.
My strongest advice to someone starting about would be to read non-stop, think long-term, and focus on personal skills to handle the emotions of investing just as much as investment strategy itself.
Social media is great, Twitter has an amazing community of investors, and a lot can be learned by engaging with others in the finance domain. However, the noise and overly short-term nature of most discussions can be distracting and detract from a long-term investment goal.
What investment opportunities are you excited about at the moment?
Sizeable fiscal stimulus colliding with a radical shift in consumer spending patterns due to forced lockdowns are causing distortions across markets, including commodity prices. These dynamics are leading to a rapid increase in inflation expectations, but ultimately, these forces should prove transitory in nature.
I am excited about the opportunities presented by these distortions, specifically in the interest rate market, as there will be another side to this fiscal stimulus story and the supply chain bottlenecks, namely the disinflationary hangover effect that is not being appreciated by markets currently.
Can you share a story about an investment opportunity that you passed on and went on to grow beyond your expectations?
My brother has been involved in the tech industry for many years and was adamant about Amazon as a long-term investment when the share price was around $300.
At around $3,000 today, it is safe to say I missed that investment. I shared in the gains passively through S&P 500 index funds but certainly not as a direct investment.
I didn’t appreciate the growth story nor the story around data collection, and also it was slightly out of my macro-centric investment style.
While it is true and important to only invest in what you know and understand, sometimes, it is valuable to learn about new industries and opportunities. This goes back to my earlier point about reading often, always learn and think long-term.