Tradable economics offers enormous potential in a world where fiscal and monetary imbalances exist across global economies. Policymakers and corporate executives are making decisions with important implications. In time, some of these decisions will be seen as good, sound and balanced ones for our communities, while others will have been wasteful and inefficient, further contributing to large fiscal imbalances to weigh on growth for decades. In the meantime, these decisions will have direct and indirect effects on the global economy. Tradable economics technology efficiently detects patterns in macroeconomic data and anticipates movements in global asset prices.
While tradable economics is in its relative infancy today, it is highly scalable across the asset management industry with a positive impact on aggregate returns.
Many popular trading strategies are zero sum games that require traders or trading systems to outsmart each other. This preference is not surprising. Experienced traders know each other and the financial industry better than they know the economy at large. All strategies that are based on market positioning, market flows or anticipated algorithmic rebalancing belong to this category. Some trend-following strategies are partially based on exploiting and exacerbating market distress. In these cases, investor returns are created by one financial institution at the expense of another. The aggregate alpha that is generated by the asset management industry through such trading strategies does not principally increase with technological advances.
The principal value generation in tradable economics arises from efficiency gains that come with a better alignment of market prices and economic conditions. Economic alignment creates two benefits for the overall financial system. The first is a more efficient allocation of resources where prices become more meaningful and guide flows of goods, services and investment based on better information. Put differently, economic alignment of market prices reduces the riskof severe and enduring misallocation and hence of major economic and financial crises. The second benefit is faster and more reliable feedback on actions taken by policymakers or management of public and private companies. Harmful decisions are more easily discovered and more quickly reversed.
Since tradable economics is not a zero-sum game, it is a highly scalable technology for the investment management industry overall. Technological advances in tradable economics can increase the performance of the asset management industry and the performance of active management vis-à-vis passive investment vehicles.