Everything that sits underneath the monthly reports — how the economy is measured, which indicators lead and which merely confirm, what actually moves a currency, how sovereign debt turns into a crisis, and the two ways to value a company. This is the reference I work from.
GDP = Personal consumption + Private investment + Government consumption + (Exports − Imports)
Two things follow from that equation that most commentary ignores. First, roughly 66% of US GDP is consumer spending — so any analysis that starts with corporate earnings or government policy is starting in the wrong place. Watch the consumer, and watch what determines whether the consumer feels able to spend: employment and real wages.
Second, always use real GDP, not nominal. Nominal GDP rises when prices rise, which means an economy can post healthy nominal growth while producing less. The difference between the two is the deflator:
Inflation ≈ (Nominal − Real) / Nominal × 100
A technical recession is two consecutive quarters of negative real GDP growth. But GDP is published quarterly and heavily revised, which makes it a lagging series — by the time it confirms a recession, markets have usually finished pricing one. That is precisely why the rest of this framework exists.
Not all data is equal. The single most useful discipline in macro is knowing which bucket a release belongs to before you react to it.
| Class | Indicators | Use |
|---|---|---|
| Leading | Building permits, new & pending home sales, NAHB housing index, ISM new orders, consumer expectations | Position ahead of the turn |
| Coincident | Industrial production, capacity utilisation, factory orders, durable goods, business inventories, non-farm payrolls | Confirm the turn is real |
| Lagging | GDP, unemployment rate, CPI, corporate profits | Explain what already happened |
| Release | Timing | Why it matters |
|---|---|---|
| ISM Manufacturing PMI | 1st business day | Diffusion index — above 50 expansion, below 50 contraction. Leads GDP. |
| ISM Services PMI | 3rd business day | The larger share of the economy; confirms whether strength is broad. |
| Non-farm payrolls | First Friday | Jobs drive spending, spending drives 66% of GDP. |
| CPI | Mid-month | Basket of goods and services. Note the basket changes over time. |
| PCE | Monthly, BEA | The Fed's preferred inflation measure — watch this over CPI for policy. |
| Housing starts / permits | Mid-month | The leading indicator above all others. |
A note on surprise. Markets price expectations, not levels. What moves an asset is the gap between the print and the consensus — which is why an economic surprise index is often more informative than the data itself. A run of positive surprises tells you the consensus is too pessimistic, regardless of whether growth is objectively good.
About $5 trillion changes hands daily in FX, and the largest share — roughly 45% — is financial investors buying securities denominated in another currency, not companies buying goods. That ordering matters: capital flows dominate trade flows in the short run.
Three things move a currency pair, and in each case it is the surprise that moves it, not the level:
If Japan's TOPIX rises 20% but the yen falls 20% against the dollar, a dollar investor has made nothing. Worse — the causation often runs the other way: a weaker yen makes Japanese cars cheaper abroad, which lifts exporter earnings, which lifts the index. The currency move caused part of the equity move. Any international position is two bets, whether you intended it or not.
Tools for managing it: forward outrights (lock a rate today for a future date), options (pay a premium for the upside), and swaps. For estimating the risk, a distribution of likely future rates — one standard deviation covering roughly 68% of outcomes — tells you the probability of finishing beyond your break-even, which is the number that actually matters to a hedging decision.
A worked example. A German firm has costs in euros and sells machinery for $100,000. At 1.36 $/€ that converts to €73,500 — against €71,500 of cost, a €2,000 profit. If the dollar weakens to 1.40, the same sale converts to €71,428 and the profit is gone. Nothing about the business changed; the currency did.
A government that spends more than it collects fills the gap by issuing bonds. That works until buyers question repayment — and the questions are answerable with public data.
| Metric | What it tells you |
|---|---|
| Debt to GDP | The total burden relative to the economy servicing it |
| Deficit to GDP | How fast new debt is accumulating — the funding gap the bond market must fill each year |
| Repayment schedule | Whether maturities are bunched. A wall of refinancing in a bad year is how solvency problems become liquidity problems. |
| Ownership | Domestic vs foreign holders. Foreign creditors sell faster and care about your currency. |
| Credit rating | Roughly 7.5% of BBB issuers defaulted within 7 years; over 90% of CCC-or-lower within 10. The letters encode real base rates. |
The same logic runs through equities via the discount rate. The 10-year yield is the risk-free anchor beneath every valuation on this site. When it rises, the WACC rises, and every future cash flow is worth less today — which is why the rates section is the first thing I check.
Five mechanical steps, then one act of judgement:
Steps one to five are arithmetic. The judgement is in the long-term growth assumption, and there is one discipline that prevents most disasters: no company can grow faster than nominal GDP forever. Nominal GDP averages roughly 5%; a typical WACC is around 8%. Over a long enough horizon, that gap grinds terminal value down — which is exactly as it should be.
Cost of equity, step by step:
Then weight cost of equity and cost of debt by their share of the capital structure. A worked example: cost of equity 11.4% at 52.6% weight, cost of debt 4.9% at 47.4% weight → 6.0% + 2.3% = 8.3% WACC.
Absolute valuation asks what a company is worth. Relative valuation asks whether it is priced sensibly next to something else. Two steps: pick a metric, then choose a comparison.
Compare against three things, and the order is deliberate:
Price = Earnings × (P/E multiple)
So a share price rises for exactly two reasons: E grows, or the multiple expands. Investors pay a higher multiple when they expect future growth to be large — Apple through its run of new product categories being the textbook case. The danger is symmetrical and underappreciated: when growth disappoints, both can fall together. Earnings decline and the multiple contracts at the same time, which is why growth de-ratings are so violent.
Earnings yield is simply the P/E inverted — a higher earnings yield is a lower P/E. Expressing it as a yield makes it directly comparable to a bond yield, which is a more honest comparison than most equity investors make.
The pieces are one chain. Leading indicators flag the turn before GDP confirms it. Rates respond to growth and inflation, and set the risk-free anchor. That anchor drives the WACC, which drives every discounted valuation. Currencies reprice international exposure on top of it. And relative valuation is the cross-check that stops a single model's assumptions running away with you.
The monthly regime score is this framework compressed into one number, scored mechanically so I can't argue myself out of it. Fundamental Stock Analysis is sections 4 and 5 made interactive.
For educational purposes only. This describes how I analyse markets; it is not investment advice, and no framework removes the possibility of being wrong.
