3 Macro Money-Making Opportunities

John Brynjolfsson: Historically, investing has been all about identifying segments that would benefit from consumer demand or industrial investment and the management teams that were doing things right and investing in those and profiting from good insights. After 2008, the environment has been much more characterized by forecasting and predicting what the government, regulators, bailouts, international coalitions, the Fed and currency policy would do to various sectors of financial markets. Certain skills are needed for that -- they're a little different than other investing skills.

The challenge is that most of these variables we now feel or now observe are being driven by just one variable. The term that market participants have used is called risk on, risk off. So, when a major policy decision is made that is perceived by the market as being helpful, in terms of the more liquidity or some developments that suggest that investors are gaining confidence, what happens is all of these global markets trade together.

So, you can see this in the correlation data. For example, the correlation between an individual company in the S&P 500 and the S&P 500 Index (INDEX: ^GSPC) as a whole historically has been between 40 and 60 percent. In recent years, over the past three years or four years, since 2008, that correlation has climbed very high, sometimes as high as 90 percent [see the graph below for the S&P 500's Implied Correlation Index in 2008.] And generally that correlation is higher. But it's not just higher between one company and the S&P 500. It's also higher between, let's say, commodities and equities.

As an investor, we're looking for asymmetric risks. In Europe, I think we have a terrific investment opportunity created by an environment of denial. And the best way to create asymmetrical returns is if you identity a large group of policy makers and a large group of investors that are in denial.

We don't think the European policy makers are willing to acknowledge the huge dichotomy between reality and their vision of the world. The local politics in Europe is, universally, much more nationalistic and locally oriented than the bureaucrats and, in many cases, unelected leaders of the European Union. So the unelected leaders of the European Union, and the senior executives of the banks are convinced that their vision for a unified Europe is what all of the local people want. And they're plowing ahead with that vision.

Whereas, both in Germany, which is seen as the core, or the funding nation for Europe, and the periphery, which is generally the borrowers in Europe, both in the core and the periphery, there is a feeling that, "Hey, we're willing to be a part of a unified continent, if it serves our interests. And we're willing to stick it out, as long as it feels good. But when it stops feeling good, we're going to vote to go a different path."

In the case of slowing China, problems in Europe and some of the scenarios in the U.S., you generally profit by forecasting that interest rates will tend to fall in that environment. Inflation will tend to be on the low side; obviously, demand will not exceed projections, and that tends to be disinflationary, so we profit by positioning for a fall in interest rates.

To some extent, all the currencies look miserable, because all central banks around the world are trying to create liquidity to offset the deleveraging and the disinflation. We can profit from that by seeing which countries are the most vulnerable, in terms of being forced to monetize and debase -- we think that would be Europe. [We can also profit] by looking at alternative currencies, like gold. We're not in love with gold right now, but, in any case, precious metals are an alternative to currency.

Obviously, we can short [risk assets]. For people who aren't in a hedge fund, you can buy put options. Buying options makes sense when implied volatilities are low. We think implied volatilities, like on the VIX Index (INDEX: ^VIX) currently, are relatively low, so that means that you can buy put options at a relatively attractive price.