Glossary
Terms are added as chapters are written. Each heading is linkable, e.g. /Macro-Investing-Textbook/glossary/#basis-point.
Anything you can put money into that holds or produces value: cash, bonds, stocks, property, commodities or currencies.
Asymmetric bet
Section titled “Asymmetric bet”A trade where the potential gain is much larger than the potential loss. For example, risking $1 to possibly make $5.
Automatic stabilisers
Section titled “Automatic stabilisers”Parts of the budget that cushion a downturn without any new decision. When incomes fall, tax revenue drops and benefit payments such as unemployment insurance rise, which props up spending.
Basis point
Section titled “Basis point”One hundredth of one percent (0.01%). A rate rising from 4.00% to 4.25% is a 25 basis point (25 bps) rise.
Business cycle
Section titled “Business cycle”The repeating pattern of expansion, peak, contraction (recession) and trough that economies move through. Each phase has a typical mix of growth, inflation and unemployment.
Core inflation
Section titled “Core inflation”Inflation excluding food and energy prices, which swing with weather, harvests and wars. It shows the underlying trend. Core CPI and core PCE are the two main versions.
CPI (Consumer Price Index)
Section titled “CPI (Consumer Price Index)”A measure of the price of a typical household’s basket of goods and services, published monthly in the US by the Bureau of Labor Statistics. “CPI inflation” is its change over the past 12 months.
Credit
Section titled “Credit”Borrowed money: spending power received now in exchange for a promise to repay later, with interest.
Debt service ratio
Section titled “Debt service ratio”The share of income that goes to debt repayments (interest plus principal). When it gets too high, borrowers cut spending or default.
Deficit
Section titled “Deficit”What a government borrows in one year, when it spends more than it collects in taxes. The opposite is a surplus.
Deleveraging
Section titled “Deleveraging”The phase of a credit cycle when debt shrinks relative to income, through repayment, defaults or inflation.
Forward guidance
Section titled “Forward guidance”When a central bank tells the public where interest rates are likely to go. Because markets act on expectations, the signal can move long-term rates today.
GDP (Gross Domestic Product)
Section titled “GDP (Gross Domestic Product)”The total value of everything produced in an economy over a period. Investors focus on how fast real GDP is growing.
Global macro
Section titled “Global macro”An investing style that bets on big economic forces (growth, inflation, interest rates, currencies and government policy) across markets worldwide, rather than on individual companies.
Hedge fund
Section titled “Hedge fund”A lightly regulated investment fund for wealthy individuals and institutions. Hedge funds can bet on prices falling as well as rising and often use leverage. Global macro is one hedge fund strategy.
HICP (Harmonised Index of Consumer Prices)
Section titled “HICP (Harmonised Index of Consumer Prices)”The consumer price index the European Central Bank uses to measure inflation. It is built with the same method in every EU country, so prices can be compared across them.
Independence (central bank)
Section titled “Independence (central bank)”A central bank’s freedom to set interest rates without approval from the government. It guards against pressure to cut rates for political reasons.
Inflation
Section titled “Inflation”The rate at which prices in general are rising. Most central banks aim for about 2% a year.
Institutional investor
Section titled “Institutional investor”An organization that invests large pools of money, usually on behalf of others, such as a pension fund, insurer, asset manager, endowment or sovereign wealth fund.
Interest rate
Section titled “Interest rate”The price of borrowing money, expressed as a percentage of the loan per year.
Investment
Section titled “Investment”Money put into an asset today in the expectation of getting more back later, through growth, interest, dividends or rent.
Leverage
Section titled “Leverage”Using borrowed money, or contracts that behave like it, to take a bigger position than your own capital allows. Leverage magnifies both gains and losses.
Loan prime rate (LPR)
Section titled “Loan prime rate (LPR)”China’s benchmark lending rate, published monthly by the People’s Bank of China. Banks price loans and mortgages off it, and it moves when the central bank changes its policy rate.
Macroeconomics
Section titled “Macroeconomics”The study of the economy as a whole: growth, inflation, unemployment, interest rates and government policy. Its opposite, microeconomics, studies individual households and firms.
Money supply
Section titled “Money supply”The total amount of money in an economy, mostly bank deposits. It grows when banks lend and shrinks when loans are repaid.
National debt
Section titled “National debt”The total a government owes: the pile built up by all past deficits, minus surpluses. It is usually measured as a share of GDP.
Nominal vs real
Section titled “Nominal vs real”Nominal figures are measured in today’s money, price rises included. Real figures strip out inflation, so they only rise when the underlying quantity actually grows.
PCE (Personal Consumption Expenditures price index)
Section titled “PCE (Personal Consumption Expenditures price index)”A measure of consumer prices published monthly by the Bureau of Economic Analysis. It covers more spending than CPI and adjusts as people switch between products. The Federal Reserve’s 2% inflation target is defined using PCE.
Peg (currency peg)
Section titled “Peg (currency peg)”A promise by a government or central bank to hold its currency at a fixed value, or within a narrow band, against another currency. Pegs can break when markets bet they are unsustainable, as with the pound in 1992.
Pension fund
Section titled “Pension fund”A fund that invests workers’ retirement savings so it can pay pensions in the future. Pension funds are among the most patient, long-term investors.
Policy rate
Section titled “Policy rate”The main interest rate a central bank sets to steer the economy, such as the federal funds rate in the US or the deposit facility rate in the euro area. Other rates in the economy tend to follow it.
Primary deficit
Section titled “Primary deficit”A government’s deficit before interest payments. Together with the interest rate and growth, it decides whether debt as a share of GDP rises or falls.
QE and QT (quantitative easing and tightening)
Section titled “QE and QT (quantitative easing and tightening)”QE is when a central bank buys large amounts of bonds to push longer-term interest rates down, usually when its main rate is already near zero. QT is the reverse: the bank lets bonds mature without replacing them, so its balance sheet shrinks.
Recession
Section titled “Recession”A significant, broad decline in economic activity, visible across output, jobs, income and spending. In the US, recessions are officially dated by the NBER.
Repo rate
Section titled “Repo rate”In India, the policy rate: the rate at which the Reserve Bank of India lends money to banks against government securities.
Retail investor
Section titled “Retail investor”An individual investing their own money, for example through a brokerage account or retirement plan.
Return
Section titled “Return”What an investment earns, usually expressed as a percentage per year.
The chance that an investment does worse than expected, including losing money. Higher potential return usually comes with higher risk.
Sovereign wealth fund
Section titled “Sovereign wealth fund”A government-owned fund that invests a country’s savings, often built from oil or other resource revenue.
Unemployment rate
Section titled “Unemployment rate”The share of people who want a job and are actively looking for one but don’t have one.