How I classify macro regimes
Brief insight on how I classified macro regimes in my allocation model
In my previous article, I argued that allocation built upon short-term prediction is structurally fragile. If that is true, the natural question is: what replaces prediction?
The answer is regime classification. It isn’t a label, nor is it a narrative. But instead it is a structural process that can be repeated indefinitely. This article will outline how I think about macro regimes, conceptually and operationally, without reducing them to headlines.
A macro regime is not defined by a single variable. It is the interaction between growth momentum, inflation dynamics, liquidity conditions and policy stance. None of these forces operate independently. Their interaction determines cross-asset behavior.
For example, growth accelerating with contained inflation behaves differently from growth accelerating with rising inflation pressures.
Regime classification begins with observing how these forces interact over time.
A major common error in macro interpretation is overemphasis on levels. Investors often fixate on whether inflation is 3% or 4%, or growth is 2% or 2.5%.
Levels matter to a certain extent, but regime shifts are better defined by stable trends and directional persistence.
Instead, the better questions are:
Is growth momentum improving over multiple months?
Is inflation broadening or compressing?
In my model, I focus less on individual data and more on directional changes. Regimes do not shift because of one unforeseen change or circumstance, but rather when structural forces show persistence and trends.
The specific indicators that I use will remain internal in my framework, but the structure follows a consistent hierarchy.
Step 1: Growth Assessment
Leading vs Coincident indicators
Momentum vs Deceleration
Span across sectors
The framework does not ask whether growth is “strong”, looks at whether it is improving, deteriorating or stabilising.
Step 2: Inflation Structure
Goods vs service pressures
Headline vs core dispersion
The goal isn’t to understand if inflation exceeded expectations, but rather if the pressure is broadening or compressing.
Step 3: Liquidity & Policy Overlay
Financial conditions direction
Real rate environment
Liquidity usually determines how aggressive markets respond to growth and inflation shifts.
The framework is updated monthly and applied consistently, without discretionary override.
Regime classification does not exist in isolation from markets. Cross asset behavior builds upon this, further reinforcing the regime.
Regimes do not change overnight, they transition.
Acceleration becomes deceleration, expansion becomes fragility, disinflation becomes pressure. Classification must also allow for transitional states. Instead of adopting binary thinking, structural thinking allows the possibility of gradation.
It also is important to note what regime classification isn’t.
It is not:
A forecast of next month’s data
A guarantee of asset performance
A tool for eliminating drawdowns
It is a framework for maintaining discipline as macro forces evolve and change. Misclassification of regimes will occur. Drawdowns will occur. The ultimate objective is not perfection, it is structural consistency.
A regime framework must be deterministic. Otherwise it becomes narrative.
Macro environments are complex. Forecasting precision is fragile. Narratives change quickly.
A disciplined framework must be grounded in structural observation rather than event prediction.
For me, regime classification is that process.
Not because it eliminates uncertainty, but because it reduces structural fragility.