Global Macro Strategy

The Macro Playbook: Position for the Regime, Not the Stock

You pick the perfect stock. Great fundamentals, strong chart, analyst upgrades.

Then the macro regime changes:

Late-cycle slowdown → Your growth stock drops 40% (regime shifted defensive)
Fed pivots dovish → Your defensive utility goes nowhere while tech rips +60%
Recession hits → Your cyclical gets cut in half while treasuries soar

Stock picking doesn't matter if you're in the wrong asset class for the regime.

This is global macro strategy—positioning your entire portfolio based on business cycle stage, Fed policy, inflation regime, and global liquidity. Hedge funds don't pick stocks. They pick REGIMES, then allocate accordingly.

You can be mediocre at stock picking and crush the market if you nail the macro regime. You can be great at stock picking and underperform if you fight the macro tide.

What You'll Learn

Regime Framework: 4 macro regimes (early cycle, mid, late, recession) and exact positioning for each
Sector Rotation: Which sectors outperform when (early: +12% small caps, late: +8% defensives)
Risk-On/Off Indicators: VIX, HY spreads, EM flows—how to measure market risk appetite
Commodity Super-Cycles: When to buy (early expansion), when to avoid (recession)
Currency Carry Trades: Funding currencies, risk management, when carry works
Real Examples: Early cycle 2020-2021 (+94% small caps), Late cycle 2018, Recession 2022

The Four Macro Regimes

Regime 1: Early Expansion (Recovery)

Characteristics:

GDP accelerating from trough
Unemployment falling but still elevated
Fed highly accommodative (low rates, QE often)
Corporate earnings recovering from recession lows
Credit spreads tightening (default risk falling)
Sentiment improving but not euphoric yet

Optimal Positioning:

Asset Class	Allocation	Why
Small Caps (IWM)	OVERWEIGHT (20-25%)	+12% avg outperformance vs large caps in first 12 months
Cyclicals (XLI, XLB, XLF)	OVERWEIGHT (30%)	Benefit most from economic acceleration
High Beta Stocks	OVERWEIGHT (25%)	Maximum sensitivity to recovery (aggressive risk-on)
Commodities (DBC)	OVERWEIGHT (10-15%)	Demand rising, supply constrained post-recession
Bonds (TLT)	UNDERWEIGHT (5-10%)	Yields rising as growth accelerates
Defensives (XLP, XLU)	UNDERWEIGHT (5%)	Underperform in risk-on environment

Real Example: Early Cycle 2020-2021

Setup (April 2020):

COVID crash bottomed March 23, 2020
Fed UNLIMITED QE announced (balance sheet $4T → $9T)
Fiscal stimulus ($2.2T CARES Act)
GDP recovering from -31% Q2 2020 contraction

Performance (April 2020 - March 2021):

Russell 2000 (small caps): +94% from lows
Cyclical sectors: Industrials +62%, Materials +71%, Financials +89%
High beta stocks: ARK Innovation +153%, clean energy +180%
Commodities: Copper +75%, Crude oil +350% (from crash lows)
Underperformers: Utilities +16%, Consumer Staples +23%

The Lesson: Early cycle = max risk-on. Small caps, cyclicals, high beta crushed it. Defensive positioning LOST relative to benchmark.

Regime 2: Mid-Expansion (Goldilocks)

Characteristics:

Steady GDP growth (2-4% real)
Full employment (< 4.5% unemployment)
Moderate inflation (2-3%)
Fed neutral (not hiking aggressively, not cutting)
Corporate profit margins at peak
Broad market participation (all sectors positive)

Optimal Positioning:

Asset Class	Allocation	Why
Equities (Broad)	OVERWEIGHT (70-80%)	Best risk-adjusted returns across all regimes
Growth Stocks	MARKET WEIGHT (30%)	Stable growth environment supports multiples
Real Estate (VNQ)	MARKET WEIGHT (10%)	Benefits from stable rates, economic growth
Bonds	MARKET WEIGHT (20%)	Diversification benefit, normal correlation
Cash	UNDERWEIGHT (5%)	Opportunity cost high (equities outperforming)

Real Example: Mid-Expansion 2017

SPY: +19.4% (steady gains all year)
Sector performance: 10 of 11 sectors positive (broad rally)
Tech (XLK): +38% (growth outperformed)
Volatility: VIX averaged 11 (low fear)
Credit spreads: 360 bps avg (healthy)
Fed: Hiked 3 times, but gradual (25bps each, market handled fine)

The Lesson: Mid-cycle = STAY LONG. Market climbs wall of worry. Broad exposure wins.

Regime 3: Late Expansion (Peak/Slowdown)

Characteristics:

GDP decelerating (but still positive)
Inflation elevated or accelerating (Fed tightening)
Yield curve flattening or inverting
Corporate earnings growth slowing
Credit spreads widening (default risk rising)
Leading indicators rolling over (ISM, LEI falling)

Optimal Positioning (DEFENSIVE SHIFT):

Asset Class	Allocation	Why
Defensives (XLP, XLU, XLV)	OVERWEIGHT (40%)	+8% avg outperformance in 12-18 months pre-recession
Quality Stocks (Low debt, stable earnings)	OVERWEIGHT (30%)	Survive recession better (if it comes)
Short-Duration Bonds (SHY)	OVERWEIGHT (15%)	Less interest rate risk than long bonds
Cash/T-Bills	OVERWEIGHT (10-15%)	Build dry powder for recession opportunities
High Beta Stocks	UNDERWEIGHT (0-5%)	-15% avg underperformance late cycle
Cyclicals	UNDERWEIGHT (5-10%)	Earnings peaked, downside risk elevated

Real Example: Late Cycle 2018

Setup (H2 2018):

Fed hiking aggressively (2.25% → 2.50% in Dec)
QT shrinking balance sheet $50B/month
Yield curve flattening (10y-2y: 50bps → 10bps)
ISM Manufacturing: 60 → 54 (slowing growth)

Performance (Q4 2018):

SPY: -13.5% (Oct-Dec selloff)
Tech (XLK): -17.5% (growth crushed)
High beta: Russell 2000 -20.5% (worst performer)
Defensives outperformed: Healthcare +8.4%, Utilities +3.9%, Staples +1.4%
Treasuries (TLT): +1.2% (flight to safety)

The Lesson: Late cycle = rotate to defensives EARLY. Those who stayed risk-on got crushed Q4 2018.

Regime 4: Contraction (Recession)

Characteristics:

Negative GDP (2 consecutive quarters)
Rising unemployment (layoffs accelerating)
Fed cutting rates aggressively (crisis response)
Credit spreads WIDE (> 600 bps = default risk)
Corporate earnings collapsing
VIX spiking (fear dominates)

Optimal Positioning (CAPITAL PRESERVATION):

Asset Class	Allocation	Why
Cash/T-Bills	OVERWEIGHT (40-50%)	Preserve capital, buy the bottom later
Treasuries (TLT)	OVERWEIGHT (20-30%)	Flight to safety, Fed cutting = yields down = bonds up
Defensive Equities (Healthcare, Staples, Utils)	UNDERWEIGHT (15-20%)	+8% relative outperformance (but still down absolute)
Gold (GLD)	TACTICAL (5-10%)	IF Fed easing + real yields negative (crisis hedge)
Equities (Broad)	UNDERWEIGHT (10-20%)	-25% avg recession drawdown—avoid most exposure
Cyclicals/Growth	AVOID (0%)	-40-60% typical drawdowns (catastrophic)

Real Example: Recession 2022 (Technical Recession)

Setup (2022):

GDP negative Q1 (-1.6%) and Q2 (-0.6%)
Fed hiking most aggressively since 1980s (0% → 4.5%)
Inflation 9.1% peak (June 2022)
Yield curve inverted (recession signal)

Performance (2022 Full Year):

SPY: -19.4% (painful for equity holders)
Nasdaq (QQQ): -33.1% (tech annihilated)
Bonds (TLT): -31% (UNUSUAL—Fed hiking killed bonds too)
ONLY winners: Energy +50% (inflation hedge), Cash +1.5% (T-bills)

Optimal 2022 Portfolio (Hindsight):

40% Cash (T-bills yielding 4%+)
30% Energy (XLE)
20% Commodities (DBC)
10% I-Bonds (inflation-protected)
Result: +15-20% vs SPY -19% (34-39% outperformance)

The Lesson: Recession = CASH IS KING. Don't be afraid of 0% cash returns if equities are losing -20-30%.

Sector Rotation: The Timing Playbook

The Classic Sector Rotation Model

Cycle Stage	Best Sectors	Worst Sectors	Avg Outperformance
Early Expansion	Financials, Industrials, Materials, Small Caps	Utilities, Staples, Healthcare	+12-18%
Mid Expansion	Technology, Consumer Discretionary, Industrials	Energy, Utilities	+8-12%
Late Expansion	Energy, Materials, Healthcare, Staples	Financials, Real Estate, Tech (growth)	+8-10%
Recession	Healthcare, Staples, Utilities, Treasuries	Financials, Industrials, Discretionary, Energy	+15-25% (relative)

How to Identify Regime Transitions

Checklist for Regime Changes:

Indicator	Early → Mid	Mid → Late	Late → Recession
GDP Growth	Accelerating > 3%	Decelerating to 1-2%	Negative (2 qtrs)
Unemployment	Falling rapidly	At lows (< 4%)	Rising (> 0.5% in 3 mo)
Fed Policy	Easing/QE	Neutral → Hiking	Cutting aggressively
Yield Curve	Steepening	Flattening	Inverted → Un-inverting
Credit Spreads	Tightening (600 → 400)	Stable (350-450)	Widening (> 600)
VIX	Falling (30 → 15)	Low & stable (10-15)	Spiking (> 25)
Sector Leadership	Cyclicals leading	Growth/Tech leading	Defensives leading

Action: When 4+ indicators flip, ROTATE your portfolio to next regime allocation.

Risk-On vs Risk-Off Framework

The Risk-On/Risk-Off Indicators

Indicator	Risk-On Signal	Risk-Off Signal
VIX (Volatility Index)	< 15 (complacency)	> 25 (fear)
HY Credit Spreads	< 400 bps	> 600 bps
Emerging Markets (EEM)	Outperforming SPY	Underperforming SPY
Small Caps (IWM vs SPY)	IWM/SPY ratio rising	IWM/SPY ratio falling
Copper/Gold Ratio	Rising (growth > fear)	Falling (fear > growth)
Bond Yields	Rising (selling bonds for stocks)	Falling (flight to safety)
Dollar (DXY)	Weakening (capital flowing abroad)	Strengthening (safe haven bid)

Decision Framework

MAXIMUM RISK-ON (80-90% Equities):

✅ VIX < 15
✅ HY spreads < 400 bps
✅ Small caps outperforming
✅ EM outperforming
✅ Copper/gold rising
✅ Dollar weak
Positioning: Growth, small caps, cyclicals, EM, high beta

MODERATE RISK (60% Equities / 40% Bonds+Cash):

Mixed signals (some risk-on, some risk-off)
Positioning: Balanced, quality bias, normal diversification

MAXIMUM RISK-OFF (30-40% Equities):

❌ VIX > 25 (sustained)
❌ HY spreads > 600 bps
❌ Small caps underperforming badly
❌ EM collapsing
❌ Copper/gold plunging
❌ Dollar surging
Positioning: Cash, Treasuries, defensives only, gold if Fed easing

Commodity Super-Cycles

Understanding Commodity Cycles

Commodity super-cycles last 10-20 years:

1971-1980: Oil embargo, inflation → Oil/Gold up 10-20x
2000-2011: China boom, emerging market growth → Commodities up 400%
2020-2024?: QE, supply chain collapse, green energy transition → Commodities +100%

When to Own Commodities

Bullish for Commodities:

Early expansion: Demand recovering, supply constrained post-recession
High inflation: Commodities = inflation hedge (real assets)
Weak dollar: Commodities priced in USD, weak dollar = higher commodity prices
Fed QE: Liquidity flood = asset inflation (including commodities)
Supply shocks: Ukraine war (oil/wheat), China reopening (demand surge)

Bearish for Commodities:

Recession: Demand collapses (avg -40-50% commodity drawdown)
Strong dollar: DXY up 10%+ = commodity pressure
Fed tightening: Reduces liquidity, slows growth
Deflationary environment: Falling prices globally

Real Example: 2020-2022 Commodity Boom

Setup:

March 2020: COVID crashes commodities (oil briefly negative!)
Fed response: Unlimited QE, 0% rates
Supply chains broken (production halted)
2021: Demand surges (reopening), supply still constrained

Performance (March 2020 - June 2022):

Crude Oil (WTI): -$37 → $122 (from negative to $122 = ∞%)
Copper: +140% (electric vehicle demand, supply shortage)
Lumber: +377% (housing boom, sawmill shutdowns)
Wheat: +80% (Ukraine war, supply disruption)
DBC (commodity ETF): +110%

Playbook (2020-2021):

Own commodities EARLY (Q2 2020 when Fed announced QE)
Ride the boom through 2021 (inflation accelerating)
EXIT mid-2022 when Fed started hiking aggressively (demand destruction coming)

Currency Carry Trades

What is Carry?

Definition: Borrow in low-yielding currency, invest in high-yielding currency, pocket the interest rate differential.

Example (Classic JPY Carry):

Borrow Japanese Yen (0% interest rate)
Convert to Australian Dollar (4% interest rate)
Invest in Aussie bonds yielding 4%
Profit: 4% carry (interest differential) + any AUD appreciation vs JPY

When Carry Works

Ideal Conditions:

Low volatility: VIX < 15 (stable markets)
Risk-on environment: Investors seeking yield
Stable funding currency: JPY, EUR, CHF (low rates, stable)
Strong target currency: High-yield EM or commodity currencies (AUD, NZD, BRL)

Historical Returns:

Avg carry trade return: 5-8% annually (in calm periods)
Sharpe ratio: 0.4-0.6 (decent risk-adjusted, but vulnerable to crashes)

When Carry Blows Up

The Unwind (Risk-Off Event):

Crisis hits (2008, 2020 COVID)
Investors panic, unwind carry trades
Funding currencies SURGE (JPY, CHF spike as everyone buys to repay loans)
Target currencies COLLAPSE (EM, commodity currencies crash)
Leverage amplifies losses (margin calls, forced selling)

Real Example: 2008 Carry Trade Unwind

Pre-crisis (2007): JPY carry trade extremely popular (borrow yen @ 0.5%, invest in AUD @ 6.5%)
Sept-Oct 2008: Lehman collapse, global panic
JPY: +25% in 8 weeks (violent surge as carry unwinds)
AUD: -30% vs USD (commodity currency crushed)
Result: Carry traders lost 30-40% in weeks (despite earning 6% carry for years)

Risk Management for Carry

Position size: Max 10-15% of portfolio (blowup risk)
Monitor VIX: Exit if VIX > 20 (risk-off building)
Hedge tail risk: Buy out-of-money puts on target currency
Avoid leverage: Carry crashes are VIOLENT (leverage = death)
Diversify funding/target currencies: Don't concentrate in one pair

The Complete Macro Portfolio

Regime-Based Allocation Table

Asset Class	Early Expansion	Mid Expansion	Late Expansion	Recession
Equities (Total)	85%	75%	50%	20%
- Large Cap Growth	20%	35%	10%	5%
- Small Caps	25%	15%	5%	0%
- Cyclicals	30%	20%	10%	0%
- Defensives	10%	5%	25%	15%
Bonds	5%	15%	20%	30%
Commodities	10%	5%	10%	0%
Cash	0%	5%	15%	45%
Gold	0%	0%	5%	5%

Rebalancing Triggers

Rotate to next regime when:

4+ regime indicators flip (GDP, unemployment, Fed, yield curve, spreads, VIX, sector leadership)
Lead time: Rotate 3-6 months BEFORE full regime change (early movers win)
Don't wait for confirmation (by then, market has already moved)

Key Takeaways