Systems: GILPTS Framework for Macro Analysis

Growth, Inflation, Liquidity, Policy, Technical and Sentiment.

Hello MetaMacro readers,

I have been working on a broad macro analysis report, but I thought about writing on my macro analysis system/model before publishing any macro insights/analysis.

On a high level, my approach to determining investment positioning ideas is through a top-down and most times a bottom-up approach. Top-down, being macroeconomic variables analysis down to the technical analysis and quantifying investment signals, and bottom-up being technical analysis to macroeconomic variables - there is no right or wrong way to this.

It is also important that while this article reference GILPTS framework to Macro Analysis, I practically apply this same framework to any asset class as long as the analyst have a solid understanding of the market microstructure of the specific asset class.

What is GILPTS?

GILPTS stands for Growth, Inflation, Liquidity, Policy, Technical and Sentiment.

The combination of GILPTS influences how market sentiment fluctuates, which in-turn affect asset pricing and thus investment positioning.

This article, will limit the analysis of GILPTS to an economy. In future publications, I will breakdown my approach to utilizing this framework in examining specific assets. However, some assets are a subset of an economy as a whole or subset of the interactions between multiple economy, and being able to develop your thesis view on the position of the economy will aid immensely in speculating and investing in its assets.

Alright, let’s examine each of these variables.

Growth

The growth variable in GILPTS accounts for the factors that affect the growth of an economy. When assessing the growth variables, we analyze economic indicators such as GDP and Labor data.

The key to analyzing the growth component of an economy is to assess and build a narrative on the weak and strong component of the economy and of course, the driving force. Analysis of such economic indicators could provide insights into the performance of such country, which also translates to performance in its Currency, Stock and Bond market.

In addition to analyzing the key growth variables there are two sub-segments that I categorize under the growth variables, which are:

• Consumer Activity

• Business Activity

As part of assessing growth on a continuum basis, assessing consumer and business activity is a fundamental component to growth outlook, which in economics term can be categorized as the demand and supply side.

Consumer activity variables such as Consumer Confidence, Retail Sales, Consumer Spending, Personal Income and Spending and the Bank Lending Rate. These variables basically provide insights on the spending power of the consumer, and it serves as a leading indicator to growth expectations in an economy.

On other hand, Business activity variables such as Business Confidence, Producer Manufacturing Index, Industrial Production and other proxy indicator are vital for assessing business performance within the economy.

Inflation

Inflation generally refers to the rate of change in the general level of prices of goods and services. Inflation affects both consumers and producers, and it also affects asset prices. Generally, inflationary periods are regimes to long commodities related asset such as Wheat, Grains, Oil and other commodities.

Under inflation, we are analyzing inflation related variables such as Consumer price index, Producers Price, Housing market prices, Core Personal Consumption Expenditures and other inflation related data.

Recall that the idea is to build a narrative and link it to specific asset class based on each of the GILPTS variable.

Liquidity

Textbook definition of Liquidity refers to the ease with which assets can be converted into cash or cash equivalents without losing much value. However, the textbook definition of liquidity is valid, but that isn’t what I am referring to in this context.

In the context of macro analysis, I view liquidity from the lens of the amount of liquidity(money) flowing within the financial system - in and out; and assessing whether liquidity is expanding or tightening.

In some less developed or emerging markets, estimating liquidity within the system or systemic liquidity might be quite simple, while in other developed markets due to the complexity of advanced markets, it might not be that simple. In the case of Nigeria, there is a variable called Systemic liquidity which measures the amount of money flowing in and out of the financial system, and this liquidity affects the bond and money market rates, and inversely the price.

For example, in Nigeria, when systemic liquidity increase, bond prices go up and rate on money market instruments decreases and vice versa.

Tracking system liquidity helps in providing context to the bonds market of an economy, performance of the financial system and anticipating decisions of the central bank. Variables such as Open Market Operations, Interbank Rates, Bank Reserves, Money Supply, Treasury Bills Yields, Credit Spreads, Repo Market activity and Movement in Assets and Liabilities of Commercial Banks provide insights on system liquidity.

Policy

The policy component of GILPTS refers to the monetary policy and fiscal policy activity of the economy. More specifically, the monetary policy is what I pay attention to, that is not to disregard the importance of fiscal policy.

On the monetary policy front, the analyst is poised to engage in central bank watching, where the focus is aligned towards the central bank view of the economic activity, economic outlook, risks inherent to the economy, balance sheet policies and interest rate decisions.

The activities of the central banks impacts all asset class as a whole, maybe not to a large extent for commodity markets assets.

Technical and Sentiment

While different investors have different timeframe to investment positioning, I restrict my timeframe to a maximum of three months (a Quarter). Essentially, I make investment decisions with a timeframe period of less than three months, but I make exceptions for certain asset class (the fixed income market).

Technical analysis is quite useful in aligning macro narrative with the current price behavior of the asset. The end goal is to align macro thesis/narrative with technical analysis to execute positions when the market aligns with such narrative.

Additionally, within the component of technical analysis is the broad market sentiment about the asset class. There is no one way cookie-cutter approach to analyzing sentiment in the market. I could utilize the VIX index or rely on broad market opinion by scrolling through Fintwits on Twitter.

In future publications, I will provide the GILPTS framework for specific asset class and a research on the macro analysis of select economy.

Cheers.