Guo Lei: “Macro Research Methods” -- What exactly is the macroscopic study of financial markets?

Summary of this issue

Macro research on financial markets ultimately focuses more on factual reality

What exactly is macroeconomic research in financial markets? We would like to describe this matter in three points

Macro research pitfalls

Importance: Almost half of the researchers have left the nature and main line of research

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Keep it simple. I believe a good martial arts secret is definitely not as thick as a brick. Similarly, a good macro-research methodology must also be very simple, so I'll try to be as brief and clear as possible here.

First, let's discuss a question. What is macroscopic research on the financial market?

We know that there are three types of people doing macro research in this world. One category of people comes from universities and research institutes, the other type of people come from policy consulting agencies, and the third category is people like us from financial institutions.

The first two types of macroeconomic researchers actually pay more attention to the adaptability of the world, that is, what the world should look like; in the end, macroeconomic research in financial markets focuses more on realism, which means what the world will actually look like.

The difference between these two is actually huge. Just like my hairstyle today, it's relatively natural in my mind, but the stylist told me I should separate it and be younger, so I followed her line of thought. Similarly, when we think about some issues, such as housing price issues, we subconsciously all have an idealized standard, such as the ratio of housing price to income, the ratio of housing price to rent. Of course, if the housing price actually matches the price to income ratio, it is indeed the best state; it is called spending the full moon.

But in reality, in reality, we have to consider the problem along the constraints and walk along the entire set of constraints. If we ignore this, it can easily lead to the “publicization” of research, that is, the polymerization of public knowledge. In my opinion, this is one of the biggest pitfalls of macroeconomic analysis, and it can easily cause macroeconomic analysis to fall into thorough discussion. The term Qing dynasty originated in the Eastern Han Dynasty and Wei Jin. As a habit of Chinese intellectuals, one of its benefits is that it is easy to make topics serious. For example, famous people from Wei Jin talk about philosophy and the Seven Sages of Bamboo Forest talk about metaphysics, but it still seems like it's true thrill.

However, this kind of research method sometimes causes us to deviate from the usefulness of some issues. Especially after the media became popular, we saw that it was easy for people to exaggerate some issues, such as the biggest inflection point in 50 years, the biggest inflection point in 500 years, and the biggest inflection point in 5,000 years. However, in reality, some of these perspectives can easily deviate from the essence of asset pricing, and macroeconomic research in financial markets is, after all, studying asset pricing.

Here's a word for everyone, called grand storytelling. Carl Pope, one of the founders of modern philosophy of science, once said, “We should never use big words. The arrogance of undereducated people — in short, is exaggerating and pretending to have intelligence we don't have.

Its trick is synonymous with repetition and triviality plus contradictory nonsense. Another trick is to write down exaggerated words that are almost incomprehensible, adding trivia from time to time. It will be loved by some readers because they are happy to find in such an 'esoteric' book some thoughts are in line with their own.” This is the style of grand storytelling. The framework is very grand, and the narrative is very grand, but it lacks empirical nature.

Going back to the original topic, what exactly is macroeconomic research in financial markets? We would like to describe this matter in three points.

First, macroeconomic research on financial markets studies trend issues under established conditions. This established constraint is very important. We make any judgment. For example, if we say that the stock market is going to rise, housing prices are going to fall, or that he still loves you, we will face a constraint, all of which are conditionally established. Therefore, any judgment we make should be carried out within such a conditional framework. This is the first point we need to do a financial market research study.

Second, macroeconomic research on financial markets mainly provides a sense of position for investment.

Looking out the window, maybe a leaf is falling, so everyone knows that the weather is cool, but does this cool weather actually correspond to a long winter after the beginning of autumn, or is the whole winter about to pass, or is spring coming soon? Macro analysis is to provide such a time coordinate, and the purpose of macro research is to provide a sense of position in each cycle. We can't say the weather is cold in general, because the Arctic also has spring, summer, autumn, and winter.

The chart below shows changes in the economic growth rate of the OECD (Organization for Economic Cooperation and Development) countries over the past 50 years. As you can see, the growth rate of the entire OECD country has basically fluctuated and declined continuously over the past 50 years. We can't generally say that the economy is poor, so stocks have no opportunities; or the economy is poor, so interest rates will fall. We need to recognize the position of each period in each round of small cycles. This is also a value that macroeconomic research can provide to the investment framework.

If I had to take an example, I'd rather compare macroscopic research to an experiment. It's actually the same as doing experiments. It's all a cold process. All the rules exist very cold. We just find some objective rules in the real world very cold. We look for such rules in the data, find some signs and signs, and we get excited. We know that it will bring endless value to the entire investment. Macro research is such a framework. From framework to law, from rule to data, from data to verification, from verification to conclusion, including what I want to share with you later, it is actually mainly based on this biased empirical methodology.

This is the first part of what we want to share with you — what macroeconomic research on financial markets does. This topic sounds boring, but I personally think it's a very critical thing. Almost half of the researchers have left the essence of this kind of research and the main line of research.

That's what we're about for this section. Thank you all, I'm Guo Lei.

Explanation of terms in this episode

Housing price to income ratio: refers to the ratio of housing prices to the annual income of urban households. It is generally believed that the value range for a reasonable housing price-to-income ratio is 4-6. If the calculated housing price ratio is higher than this range, then it is assumed that the housing price is too high. The higher it is, the greater the possibility of a bubble, and the bigger the bubble.

Price-to-rent ratio: refers to the ratio between the housing price per square meter and the monthly rent per square meter, which roughly reflects the return on investment obtained by renting a house. Generally, to meet the investment return requirement of 5% to 6%, the ratio of housing price to rent is 200-240. If the ratio of housing price to rent exceeds 300, it means that the real estate investment value in the region is smaller, and housing prices are overvalued, which means that the real estate bubble is serious; if it is below 200, it indicates that the region has great potential for real estate investment and the housing price bubble is not big.

Clear discussion: refers to the cultural phenomenon that during Wei Jin's time, inheriting the culture of the Eastern Han and Qing discussions, they analyzed difficult questions, and debated over and over again on some mystical issues. Since polite conversation developed from metaphysics, it is inevitable that it will fall into emptiness.

Grand narrative: The original intention is a “complete story”, that is, an all-encompassing narrative.

That is the content of this course, thank you all.

Speaker: Guo Lei, Ph.D., Economics, Peking University, Chief Economist and Managing Director of GF Securities. 2017-2020 New Wealth Macro Analyst No. 1, Crystal Ball Macro Analyst No. 1.
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