Worlds collide as Hedgeye Nation meets the tribe of Acid Capitalism. Iconoclastic investor Hugh Hendry welcomes Hedgeye Founder/CEO Keith McCullough to his Acid Capitalist webcast in this thoroughly interesting, actionable and insightful conversation.
Below is the entire video. Also below are key excerpts we've transcribed from the interview.
https://youtu.be/aua7q8_paXE?t=1
Keith McCullough: When people screw up in Macro it’s because they’re focused on the valuation or their narrative. There are particular points that matter for your positioning. And there are particular points in the Cycle where the central bank can really screw up. In the scenario where the Fed continues the good fight on inflation, the yield curve is -100 to -125 basis points inverted.
I think it’s too obvious. The Fed told us they’re engineering “demand destruction.” We call this “Fed Operation Break Shit.” They’re going to continue to break shit.
We’re seeing the cracks already, from Blackstone’s BREIT to funding problems for Elon Musk. Is Elon going to make the next funding paying on Twitter? I don’t know. I don’t care.
Hugh Hendry: Did I see that Microsoft is laying off 10,000 employees? It tells you something about how bad things are. This is the last thing you want to do as a corporation. You’ve got good workers acquired at great expense. You want to hang on. The last thing you want to do is get rid of 10,000 employees.
McCullough: That’s the reason Steve Ballmer isn’t well liked. He took over during the Dot Com recession and the stock sucked. It’s all about the Cycle.
Hendry: I have a really intelligent friend who asked me recently, ‘How many intelligent people do you have in your life?’ We demand people in positions of power – a judge, lawyers, your boss, central bankers, hedge fund managers – that they be intelligent. Or we think they are.
There’s just a paucity of intelligent people. When you get into the walls of power you find that you’ve overexaggerated the amount of intelligence and wisdom of these people.
How many people in your life are really intelligent?
McCullough: It depends on what we’re talking about. I have a buddy from back home in Canada, Luc, who’s a plumber and contractor. He texted me a picture yesterday of this unbelievably disgusting bathroom covered with mold that he was working on. Now he’s a smart person. So I texted him, ‘What are the odds of me being able to fix that? Zero.’ He pings me back, ‘What are the odds I could send out a short call on a stock? Zero.’
The definition of intelligence is important here.
When it comes to shortselling, I don’t think of it as intelligence. I don’t consider myself very bright. A lot of people have heard me say this but I had the lowest SAT score at Yale. But when it comes to shortselling it’s about being a practitioner. It’s about experience and understanding the game within the game. It’s street smarts. The community of fundamentalist long-short managers, on that score, is thin and thinning, especially the results I saw on the short side last year.
Hendry: Is that the community you associate with? Is that your superpower? Shortselling?
McCullough: It’s just the one thing I haven’t screwed up. On the short side I’ve never missed calling a major market crash in the last 23 years.
Hendry: So take me back. Some people might not like this and say, ‘Oh this is yesterday’s news’ or whatever. But it’s about the journey in life and in this business. What was the journey like for you personally in early 2007 to end of 2008? What words come into mind?
McCullough: That was the best of times and the worst of times. Coming into 2007, I was made partner at Carlyle. What could be better? I was 33 years old, recently married and my first child was born in November 2007. I’ll come back to the worst of times aspect of this in a second.
So I started in 2007 and got bearish. I don’t know why I’d get bearish, our whole credit team was blowing up, Lehman Brothers was happening. Crazy, right?
But I got bearish too early. I got fired on November 2, 2007, sent home with a box, and my son was born 5 days later.
Hendry: That’s quite a story.
McCullough: It was a formative moment. First child on the way and I’m married. To me I said I wasn’t going to be hostage to some bozo anymore. I’m going to live or die by the views I have and the positions I take.
So I said ‘Fu&k it. I’m not going to get paid for two years’ and I took my little pile and invested it into my own company and 15 years later here we are.
Now I can’t get fired, I just think and execute while staying with these longer-term cycles. That’s helped me a lot.
It also helps that I get a lot of feedback immediately. In my old seat in the hedge fund business, nobody was going to give you edge on the buyside – that’s their edge. So all you get is sell-side bulls#!t, which perpetuates more bulls#!t.
But in this seat, I have buysiders, pension funds, mutual funds, large asset allocators, short-term traders, intermediate-term investors providing me feedback and hoping I take their side of the trade. And that is the most important thing I got in this format. What better than an open and honest group of people telling you how wrong you might be? You get better faster in that environment.
It wasn’t always this way. In 2005, I was short Reebok and I was at Bandon Dunes, and after smoking two cigars the night prior that really did a number on a younger man. So my boss calls the front desk to wake me up because he ‘needed me on the phone.’ And he’s just yelling at me because Reebok had just been taken out by Adidas.
That was a mistake.
Now, it’s my Macro process and, it’s much different from trading Reebok, but that tells me whether I’m making a mistake or not. It’s my multi-factor, multi-duration Risk Range and the Quads. I know when to stop myself out because it’s embedded in my process. If I’m stopping myself out of a position it’s because the process is telling me the Cycle is changing and I need to change my position.