Fundamental Analysis: The Foundation of Global Macro

As legendary macro investor Stanley Druckenmiller once said, "The only way to make money is to find something when it's mispriced." Fundamental analysis is our tool for uncovering these mispricings and translating them into profitable trade ideas.

Navigating the Global Macro Landscape

Our fundamental analysis is all about understanding the big picture. We dive deep into the complex web of economic, political, and social forces that shape the global financial markets. This means poring over a wide range of macro-level data: GDP reports, inflation indicators, central bank policy statements, geopolitical developments, and more. Each data point is like a piece of a vast, interconnected puzzle.

Our job is to fit those pieces together, to identify the overarching themes and narratives that are driving market sentiment and asset prices. It's not just about reacting to individual headlines, but understanding how they impact the larger system.

Information Discounting: Looking Behind the Curtain

One of the core tenets of our analytical approach is the concept of information discounting. Simply put, this means that the market is constantly trying to price in its expectations about the future based on the information available today. As renowned trader Ed Seykota quipped, "Fundamentals that you read about typically are useless as the market has already discounted the price, and I call them 'funny-mentals.'However, if you catch on early, before others believe, then you might have valuable 'surprise-a-mentals.'"

The implication is clear: to generate alpha, we can't just react to the headlines everyone else is reading. We have to dig deeper, look further ahead, and think more creatively to identify the data points and insights that aren't yet fully appreciated by the consensus. This is what Soros means when he says he always assumes the market is wrong - not that prices are random, but that they often reflect a flawed or incomplete interpretation of reality.

At Mercor, we make this contrarian perspective a cornerstone of our process. We constantly ask ourselves: what is the market missing? What critical variables are being mispriced or overlooked? What alternative scenarios could unfold that would catch investors off guard? By staying attuned to these potential surprises, we give ourselves an edge in positioning for major inflection points ahead of the crowd.

The Mercor Method: A Three-Step Framework

So how do we put these principles into practice? At Mercor, we've distilled our fundamental analysis process into a simple three-step framework that guides our idea generation and risk management.

1. Establish the Baseline

The first step is to get a clear read on the market's current expectations and consensus view - what we call the "baseline." This involves taking the pulse of sentiment across a wide range of indicators and data sources. Some key questions we ask:

• What's priced into current valuations?

• How are different assets and sectors positioned?

• What's the prevailing narrative around key macro themes like growth, inflation, policy, etc.?

The goal here is to build a kind of "heat map" of the market's embedded assumptions so that we can start to identify potential points of vulnerability or complacency. As the old saying goes, "you can't know where you're going until you know where you are." The baseline gives us our starting point.

2. Identify the Surprise

With the baseline established, the next step is to map out the scenarios that could challenge or upend the consensus view - what we call the "surprise" factors. This is where our contrarian instincts really come into play as we look for the underappreciated or counterintuitive data points that could spark a sentiment shift. Some key questions:

• What are the risks that the market is underestimating?

• What potential upside surprises are being discounted?

• What signposts or trigger events should we be watching for?

Importantly, we focus on surprises that are material and plausible enough to move the needle if they come to pass. There's no point betting on black swan events that are extremely unlikely, even if they'd be very impactful. The goal is to find that sweet spot where we have a variant perception and an asymmetric payoff profile - heads we win big, tails we don't lose much.

3. Gauge the Bigger Picture

The final step is to game out how our surprise scenarios, if realized, would reshape the bigger picture. In other words, if our thesis plays out, what are the broader implications and ripple effects across markets and the macro landscape? Key questions include:

• Would this development represent a durable regime shift or a temporary aberration?

• How would different assets reprice to reflect a new set of embedded expectations?

• What new trends or themes could emerge as second-order consequences?

The answers to these questions help us determine our conviction level, position sizing, and time horizon for a given trade idea. If we think a particular surprise would drive a major and lasting sentiment shift, we'll likely express that view with a larger, longer-term position. If the impact seems more fleeting or localized, a more tactical approach may be warranted.

The key point is that our fundamental analysis process isn't static - it's a continuous feedback loop of observation, interpretation, and adaptation. As Druckenmiller puts it, "You have to be able to change your mind very quickly. It's not about brilliance, or intuition, or whatever. It's about the ability to shift on a dime.”