Our Approach

Decoding the Signals

Our approach mixes qualitative and quantitative analysis. By applying economics, history, political science and quantitative methods to the analysis of the global economy. RGE works extensively on developed, emerging and frontier markets, using analytical frameworks once reserved exclusively for emerging markets to other economies.

This approach is in RGE’s DNA. In 2006, our chairman, Dr. Nouriel Roubini "looked at the United States and, in many respects…realized it looked and acted at the time like a big emerging market, doing unsustainable things. " As such, the foundation of our approach is a systematic, analytical framework to explore the existence of balance sheet weaknesses-which can contribute to the onset of financial crisis-and investigate policy responses and the possibility of balance sheet repair. Traditional analysis focuses primarily on flow variables, and we track a number of these variables for key economies. We study correlations and interconnections between macroeconomic variables, economies, markets, asset classes and policies. We also monitor the build-up of asset mispricing, vulnerabilities and imbalances.

What sets us apart is our examination of stock variables in a country’s balance sheet. Enormous insight can be gleaned from studying the assets and liabilities of various sectors including the government, financial, non-financial, private and finally the external sector—claims on and obligations to the rest of the world. Our national balance sheet approach provides an indispensable and lucid view of risk for those who need to understand what’s really going on and why.

Our work is based on three types of balance sheet analysis:

• Maturity mismatches: gaps between short-term liabilities and liquid assets. Widespread in the "shadow banking system," these gaps open the door to fierce emerging market-style bank runs.
• Currency mismatches: exposure to exchange rate risk, like the subprime folly in Central and Eastern European countries.
• Capital structure problems: excessive reliance on debt versus equity financing.

While balance sheet vulnerabilities can persist for years without precipitating a crisis, monitoring balance sheet mismatches across economies and sectors allows us to understand the transmission potential of a shock that might appear contained at first glance. As the subprime crisis showed, such problems can pose a systemic threat well beyond their local effects. This approach also sheds light on the speed limit of recovery after a crisis while balance sheets are repaired and the vulnerabilities are ironed out. At a time when intervention ranks as a common tool of policy makers, our balance sheet approach—spanning both flows and stocks—allows RGE to gauge the true impact of events on global economic dynamics.

Turning Signals into Actionable Insight

Our macro strategy team draws from a wealth of experience in leading global investment institutions, top hedge funds, pension funds and endowments, where they practiced in the trenches of financial research and portfolio management. RGE strategists build on the work of the macroeconomic research team and incorporate market dynamics, answering crucial questions and generating actionable investment recommendations. Roubini Market Strategy focuses on several questions:

• Are macro imbalances, geopolitical risks, structural and secular changes causing bubbles or busts, and are these risks priced in?
• How can actions by policy makers and multilaterals affect these outcomes? What are the right policies, the wrong ones and the most likely ones?
• Is this time different? Understanding the answer requires a deep knowledge of Crisis Economics, from utter failures and collapses to resolutions and rebounds.

Depth and Rigor: RGE's strategists complement the insights of the RGE economists by projecting their analysis and forecasts onto each asset class we cover. They assess whether expectations and their associated risks are priced in, with an emphasis on unsustainable imbalances and structural breaks outside of consensus and conventional wisdom.

Top-Down, Disciplined Investment Approach: Our expertise in each individual asset class means we are aware of the fundamental, bottom-up drivers and technical factors as well as how those inputs are affected by macroeconomic changes. RGE strategists develop frameworks to measure what is priced in, what target levels to expect under our base-case scenarios and where trades based on that analysis offer the best reward-to-risk ratio. These recommendations are explained transparently, and performance is tracked until a trade reaches its target or is exited. We won’t be right 100% of the time, but we have the macro "edge" and the discipline to put on trades only where conviction is high and the pricing is right.

Cross-Team Dialogue: Our strategists form their views as a team, exchanging ideas and challenging correlations across regions and asset classes. The result is a holistic asset allocation product informed by the input of our macro economists. We reject dogma and explore a range of probabilities and paths, mapping those economic conclusions with a variety of models to evaluate how asset prices would behave under each scenario and what current price would fairly reflect that probability-weighted "expected value."

White Swans: RGE is not afraid to consider regime breakdowns, and our extensive experience with emerging markets tempers our reliance on quantitative methods as systemic breakdowns defy conventional analysis. They are subject to multiple equilibria and overshooting, and they may cause political repercussions and structural shifts, all of which are ill-suited to backward-looking, econometric approaches. At RGE, we view such events as part of the global economy, not an exception to normality. Crises, as Nouriel Roubini has said, "are white swans, not black." As consensus lapses back toward cheerleading mode, RGE stays independent and unbiased.

Quant Unbound: Modern Portfolio Theory and the Capital Asset Pricing Model are not useless, but incomplete, stylized models lack any value during periods of stress or structural change. The Great Recession has definitively proved the need to grapple with crises before they start. RGE views these dangers as identifiable and even manageable. From a strategy point of view, they are sources of investment opportunity, and even those not focused on macro investing now know the price of ignoring their "macro blind spot."