Career Focus

This course is intended for students whose career ambitions involve exposure to and/or participation in global financial markets across a broad set of asset classes. Building on material introduced in RC BGIE, it discusses the sources and consequences of macro risks arising from economic and geo-political developments, focusing on how the implied opportunities and risks can be exploited and managed. In particular, it develops a framework for assessing the interaction among macroeconomic shocks, financial market structures and policy responses, with the goal of identifying where trading opportunities lie.

Educational Objectives

The proposed course is intended to focus on the character of macroeconomic and geopolitical risks, their potential impact on financial markets and business opportunities, and how the design of financial structures and policy institutions shapes the resulting opportunities and threats.

Macro risk is distinctive in several directions. Notably, macro risk is unavoidably Knightian in nature, given the strategic interactions that play out among and between market participants and policy makers. The course would seek to explain how such risk can affect economic behaviour and shape the behaviour of markets in ‘uninsurable’ ways, implying an important role for macroeconomic policies and institutions in stabilising the economy.

The course seeks to develop a simple macroeconomic framework capturing the essence of how policy makers think about the economy and their influence upon it, which incorporates the Knightian aspects of macro risk. On this basis, a number of market episodes are explored to develop an understanding of how the strategic interactions between policy makers and markets create market opportunities. These lessons are then applied to contemporary events.

Course Content

The opening module of the course introduces the concept of macro risk and explores its relationship with the macroeconomic, geopolitical and policy environment. More concretely, the Mexican “tequila crisis” of 1994 is used as a vehicle to explore “boom-and-bust” cycles characteristic of economic liberalisation programmes, where financial markets support self-sustaining but ultimately unsustainable surges in economic growth and financial activity.

The second module of the course seeks to develop an insight into the standard macroeconomic framework, in a deeper and more structured manner than is possible in BGIE, using cases that explore some of the seminal macroeconomic events of the past two centuries of macroeconomics, drawing heavily on experience outside the US. Given the shortcomings revealed in this standard framework in recent years (notably by the global financial crisis and its aftermath), the course would then offer an opportunity to critique the ‘conventional wisdom’ that prevailed in the late 1990s / early 2000s, which essentially assumed that many macroeconomic problems had been solved. Recent financial crises and the fall-out from COVID-19 have (in different ways) put paid to this complacency.

Having developed this macro / market framework, the course then explores various recent financial / macroeconomic crises, with a focus on where the market opportunities they presented lay and how these opportunities were exploited. In short, the key question will be “what is the trade?” Beyond the global financial crisis of 2008-09, episodes covered include the European exchange rate crisis, the Asian financial crisis, etc. The final module of the course will take a forward-looking view of current macro market tensions and opportunities, interacting with guests from both the financial markets and the policy making community. Anticipated guests include the chief equity strategist of Goldman Sachs, the chief strategist of PIMCO, the chief economist of Wellington Asset Management and former policy makers from the Fed, ECB and Bank of England.

Note on format

Case discussions on Zoom will be complemented by discussions with case protagonists and/or market participants with relevant experience or insight. In parallel with the regular class discussion of case material, students would (1) define a ‘macro trade’ towards the start of the class and monitor its performance through the course of the class; and (2) as a final written assignment, prepare a ‘trade recommendation’ including the macro thesis on which the trade is based and a discussion of how that thesis should be implemented in the structure of the trade.

Grading will be based 50% on class participation and 50% on the written submission of a trade recommendation.

Copyright © 2021 President & Fellows of Harvard College. All Rights Reserved.