Outspoken hedge fund manager Mike Taylor joined forces with Hedgeye CEO Keith McCullough for a new Real Conversation this week. No punches were pulled between these two market veterans during their deep-dive discussion filled with actionable investing ideas and insight.
Buckle up. Here's a tiny taste.
"We are crapping all over the market for a very good reason. This is the worst set-up I’ve ever seen coming into stocks. I said it in November coming into 2022 and I’ve said it all year... There's so much money to be made." -Mike Taylor
Below is a brief excerpt transcribed from this 67-minute pro-to-pro conversation. You're going to want to watch more. Register for free access to this entire 67-minute webcast.
Mike Taylor: That’s what I’m looking for in Europe, China and many other places, El Salvador. I expect meaningful off-menu events to happen in the next eight months to 1 year. And maybe sooner, between Energy, Materials, the cost of capital. All of these things are happening at the same time in a global fashion.
The best proxy people put up is 2008. 2008 was a very, very U.S. problem and, believe it or not, it was localized compared to what we have now. There is a lot being broken by the elephant in the China shop right now. Things are going to break badly and painfully.
Keith McCullough: Most people don’t get it right heading into what we call a #Quad4 market crash or recession. Every single market crash is born out the current behavior of this particular cycle. There’s a rhythm and rhyme to every #Quad4 cycle – growth, inflation and corporate profits slowing into a recession at the same time – but there is no similarity between 2008 and the crash that we’re talking about.
This is a Main Street concentric market crash from China, to Europe, to El Salvador – nice call going to crypto guys. And speaking of crypto, retail bought well in excess of $3 trillion in market cap of crypto. This vastly eclipses the Retail buying of the Dot Com bubble and back then you had to pay commissions. Back then you had to pay a commission to get into the bubble.
Taylor: And to play the options market you had to be a baller. Now you can just click a button and boom you’re trading options. That applies to basically every Robinhood client.
We are crapping all over the market for a very good reason. This is the worst set-up I’ve ever seen coming into stocks. I said it in November coming into 2022 and I’ve said it all year.
McCullough: I don’t think that there’s any fundamental debate about global #Quad4. I always say that I think the risk is that we’re not bearish enough. Where we can be wrong in the short-term are these flow issues and the bounces.
Yesterday’s “bounce,” the first up day in seven that we’ve seen, was led by Goldman’s most shorted basket and the worst 12 month loser basket. Can you talk about the flows? I think there are a lot of people out there that think, ‘Holy crap. I’ve got to cover all my shorts because if I didn’t do that in June I’m going to lose it for another 6 weeks.’
Taylor: This is where there’s so much money to be made. There are an ungodly amount of weak hands at the table, from hedge funds to retail.
McCullough: They look like the same thing.
Taylor: I’ve had to modify the way I trade because I’ve been of the mind that everything is going lower. I’ve changed that to trade these inflections. I don’t normally do that but there’s so much money to be made trading both sides. These are ideal conditions to be nimble and active. It’s really because retail is playing such a huge role and hedge funds are on their heels. Hedge funds only know how to make money on the long side so their trigger finger is itchy in taking off all their shorts.
For instance, we just had a rally here, a little one. Yes, you want to short the piss out of Netflix (NFLX) here. But leveraged loans didn’t participate in the rally. High yield was up strong. IG CDS was up strong. And leveraged loans didn’t move at all.
So you have these incredibly dichotomous movements that should be moving together but they’re not. In addition, I’ve been called as of late by debt fund managers and they’re saying, ‘What is going on in stocks? Globally, bonds are selling off and stocks aren’t down remotely as much as they should be?’
When I see models break down like that, even for a short period of time, I step back and say, ‘What is different?’ Well, we don’t have jobless claims up like they should be.
I think it’s the persistent dip buying of Retail that’s causing the disconnect between stocks and bonds here. But the dip buying is getting weaker and weaker and weaker. I think that breaks down when jobless claims start to get soft.
You’re going to have Quantitative Tightening at $90 billion per month, a fracturing credit market globally, an Energy and Consumption crisis in Europe, where the UK will be the worst and jobless claims going up and U.S. consumption falling.
It’s like a #Quad4 cubed event. Hold on. I’m going to get my magic wand for this. And we’re going to have this lag time where the Fed can’t pivot. That’s the problem. They’re going to have to stay on course and we’ll have a period of time with tightening conditions and a very quickly ailing economy.