The Fourth Turning

This note was originally published at 8am on June 25, 2014 for Hedgeye subscribers.

“That which hath been is now; and that which is to be, hath already been”



That’s the opening volley in one of the most recommended books Institutional Investors have offered up to me in the last year: The Fourth TurningWhat Cycles of History Tell Us About America’s Next Rendezvous with Destiny. I’m finally reading it on my family vacation this week in the homeland.


The Fourth Turning - flag


Back to the Global Macro Grind


One of the best ways to insure yourself against groupthink is not anchoring on a confirmation bias that “it’s different this time.” That’s why so many thoughtful buy-siders like The Fourth Turning. Its main premise is pretty much the only protection against long-term risk – mean reversion.


In order to contextualize mean reversion risk, I think you need to:


  1. Study #History (so that you can contextualize where you are)
  2. Understand #Math (2nd derivative moves and how they are a leading indicator for mean reversions)
  3. Embrace Uncertainty (from a #Behavioral perspective, accept that risks happen fast, and slow)


Or at least that’s what my ongoing studies (which started with being immersed in linear-supply/demand Keynesian Economics @Yale in 1995) and risk management experience in real-time markets has led me to believe, so far…


If it is indeed, “different this time” (as the Ben Bernanke’s and Mohammed El-Erian’s of the world would lead you to believe), I’ll be dead wrong on my fundamental #history #math #behavioral framework. But none of us will know that until I’m long gone anyway.


That’s one of the most humbling points William Strauss and Neil Howe make in The Fourth Turning about cycles. They are long. And by the time you read enough #history to know that you just happen to be alive within one of them, you’ll wish you had read more, sooner.


What was America like 80 years ago?


We were proud as people, but modest as individuals…” –Strauss/Howe


How important are you, personally, to this world today?


Fewer than two people in ten said yes when asked around WWII… Today, more than six in ten say yes. Where we once thought ourselves collectively strong, we now regard ourselves as individually entitled.” –Strauss/Howe


That’s page 1 of the book. Since it was written in 1997, I’m betting that 7, 8, or 9 in ten central planners think of themselves as the epicenter of the universe today. How else could someone at the Federal Reserve wake up every morning fundamentally believing that they can bend economic gravity?


Gravity? How do Strauss/Howe define cycles?


Each cycle spans the length of a long human life, roughly eighty to one hundred years, a unit of time the ancients called the saeculum. Together, the four turnings of the saeculum comprise history’s seasonal rhythm of growth, maturation, entropy, and destruction:


  1. The First Turning is a High
  2. The Second Turning is an Awakening
  3. The Third Turning is an Unraveling
  4.  The Fourth Turning is a Crisis


The good news is that after a decade of Bush/Obama inflation policies slowing real-consumption growth and perpetuating “inequality”, we’re already solidly in The Fourth Turning in America.


You’ll get the updated US GDP report for Q114 to remind you of that today. Inclusive of the central-planners making up that US inflation is only running in the “low 1%” range, real (inflation-adjusted) GDP growth will be revised to negative, yet again.


The only way out is time.


Eventually, time runs out on broken policies. Sometimes this happens slowly; sometimes it happens all at once.


Now that US equity volatility (VIX) has made another all-time-higher-low at 10.61 (June 18th, 2014), we’ll see if it really is different this time – or if the crisis phase of US growth being infected by Federal Reserve Policies to Inflate is to be what it hath already been.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now:


UST 10yr Yield 2.46-2.64% (bearish)

SPX 1925-1962 (bullish)

RUT 1155-1195 (neutral)

India’s BSE Sensex 24801-25716 (bullish)

USD 80.17-80.51 (bearish)

Pound 1.69-1.71 (bullish)

WTIC Oil 105.71-107.28 (bullish)

Gold 1295-1338 (bullish)


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


The Fourth Turning - Chart of the Day


Client Talking Points


+16.1% in a straight line in 2-days after bouncing off a generationally low level of complacency (front month VIX has never held, sustainably, below 10 – and we don’t think it’s different this time). The risk range is now 10.32-12.69.  


The RUSSELL 2000 is down -3% in 2 days back to almost flat year-to-date after failing right at the same spot it stopped going up in March. We don’t think portfolio managers who were long U.S. domestic momentum are allowed to live through another March-May, but we’ll see.


Rock solid amidst U.S. domestic growth style factors going haywire. Gold is up another +0.3% this morning to +10% year-to-date. We’ll walk through why Down Dollar, Up Gold remains one of our better Macro ideas on Friday’s third quarter Macro Themes Call.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


COMMODITIES: inflation, as an investment style, continues to beat growth in 2014.

@Keith McCullough


“Never confuse a single defeat with a final defeat.”

-F. Scott Fitzgerald


Brazil’s 7-1 loss against Germany in the World Cup yesterday matched Brazil’s worst ever international defeat in its celebrated history, and marked its first loss on home soil in 63 competitive matches.

July 9, 2014

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Early Look

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CHART OF THE DAY: Expensive Beta

Takeaway: Don’t be average. Fade beta.


CHART OF THE DAY: Expensive Beta - Chart of the Day

Crushed Spirits

“A cheerful heart is good medicine, but a crushed spirit dries up the bones.”

-Proverbs 17:22


Four goals in 400 seconds for Germany, and all of Brazil was #crushed. Sometimes risk happens slowly, then all at once.




Back to the Global Macro Grind


Whether it was the Russell 2000 (-3% in 2 days) or Biotech (IBB) stocks (-5% in 2 days) … or whatever all-time-bubble-high mo mo stock that started blowing up in March that’s re-blowing-itself-up this week, you do not want to be the guy in this game who got crushed.


Been there, done that. If you’ve never been crushed, you will be. This is what people on the buy-side actually talk about. The not so subtle secret about this profession is that almost everyone I know on the buy-side talks about everyone else’s performance.


I had a fair amount of feedback by simply citing AQR’s contention that hedge fund correlation is high right now. To be fair, calling it high isn’t fair though. It’s at all-time highs!


In our Q3 Macro Themes presentation on Friday (11AM EST, ping for access), we’ll show you a lot more than just hedge fund historical performance correlations – we’ll show you Volatility’s Asymmetry, across all of Global Macro including:


  1. Fixed Income Volatility at generational lows
  2. Foreign Currency Volatility at all-time lows
  3. Commodity Volatility at cycle-lows


Yep. Somewhere in between the generational low and the all-time low, I think we’ll all agree is pretty low. But not everyone will agree that it’s not different this time (that’s where we differ!).


Not surprisingly, as volatility dries up so does volume. You can ask you friends who work on the Old Wall what trading volumes are like in either FICC or Equities right now. I’m sure their day-to-day flow isn’t going to make you want to run out and build a broker dealer.


The Fed, of course, is who you can blame for this. The Policy to Inflate asset bubbles to all-time-highs (and never call them bubbles) is in and of itself a bubble. At the same time that they’re trying to ban economic gravity, they’ve all but eviscerated volatility (for now).


In an interview Cliff Asness (he runs AQR Capital Management and did the hedge fund beta piece) had with Morningstar a few weeks ago, he made a very simple summary point about all of this: “The average still can’t beat the average.”


So, don’t be average. Fade beta.


#FadingBeta is a very profitable risk management strategy, especially at the immediate-term momentum turns.


We’ve built our own models to signal when those phase transitions are most likely to take place. And I think, across big macro asset classes, we have done a better than bad job at calling lots of big macro turns since 2008.


What is the turn?


  1. When our immediate-term TRADE momentum signal exhausts itself to the upside…
  2. Then you get a sharp move off that high, on accelerating volume and rising volatility…
  3. Then the asset price makes a series of lower-highs, and snaps its intermediate-term TREND


Metaphorically, I call this the #waterfall. In my risk management model, when something does all 3 of the aforementioned things AND I have the research team support the why (as in why it can continue, with catalysts), we have ourselves what we call a short idea.


You can call it #FadingBeta, short selling momentum, or just not being the guy who bought Go-Pro (GPRO) at $48 last week. There are many ways to use this weaponry so that you don’t get crushed.


I’m not saying that being a levered long momentum investor doesn’t work. I’m just reminding you that A) it’s not a new strategy B) lots of funds are using it and C) when it unwinds from it’s all time high in AUM, it gets crushed (see March-May 2014 for details).


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now:


UST 10yr Yield 2.49-2.60% (bearish = bullish on bonds)

SPX 1 (bullish)

RUT 1167-1190 (bearish)

BSE Sensex 259 (bullish)

VIX 10.32-12.69 (neutral)

USD 79.73-80.37 (bearish)

Pound 1.70-1.72 (bullish)

WTIC Oil 102.63-104.99 (bullish)

Natural Gas 4.17-4.39 (bearish)

Gold 1 (bullish)

Copper 3.20-3.30 (bullish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Crushed Spirits - Chart of the Day


TODAY’S S&P 500 SET-UP – July 9, 2014

As we look at today's setup for the S&P 500, the range is 36 points or 0.75% downside to 1949 and 1.08% upside to 1985.                           













  • YIELD CURVE: 2.06 from 2.05
  • VIX closed at 11.98 1 day percent change of 5.74%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, July 4 (prior -0.2%)
  • 10:30am: DOE Energy Inventories
  • 2pm: Fed releases minutes from June 17-18 FOMC meeting
  • 2:30pm: ECB’s Draghi speaks in London



    • President Obama delivers remarks on the economy in Denver’s Cheesman Park; meets with Texas Gov. Rick Perry to discuss crisis on border
    • Treasury Sec. Jack Lew, Sec. of State John Kerry participate in sixth round of U.S.-China Strategic and Economic Dialogue in Beijing
    • 9:45am: Senate Foreign Relations Cmte hearing on Russia and developments in Ukraine
    • 10am: Senate Homeland Security Cmte hearing on issues at Mexico border, including unaccompanied children arriving from Central America
    • 2:30pm: Senate Commerce Cmte hearing on student athletes



  • AbbVie seen raising Shire offer fifth time to win tax break
  • AbbVie says it hasn’t got written support for Shire offer
  • Salix to move to Ireland in Cosmo Pharma tax inversion deal
  • Citigroup said near mortgage accord as NYT cites $7b deal
  • Citigroup distressed-debt head Balkan said to join Silver Point
  • Alcoa profit beats estimates as aluminum smelting unit recovers
  • SEC’s high-speed trader plan embraced by funds incl. Invesco
  • Allergan said to plan expanded cost cuts amid Valeant defense
  • American Airlines said to near $2.6b CFM jet-engine order
  • Amazon offers authors all e-book proceeds amid Hachette dispute
  • Calpers may not get special protection in bankruptcy: judge
  • America Movil to break up Mexico unit amid regulator demands
  • Big question for Brazil mkts post-cup concerns protests: SocGen
  • Media moguls gather at Allen & Co. conference in Sun Valley
  • Wallenberg family’s EQT in hunt for Swedish fiber riches
  • Pfizer wins bid to have Celebrex investor suits dismissed
  • Short selling falls to lowest point since before crisis: FT
  • Finra sending “sweep letters” on retail broker routing: WSJ
  • China producer prices fall at slowest pace in 2 years
  • Gaza rockets reach Tel Aviv, Jerusalem amid troops build-up
  • Fed watcher’s guide to minutes: rate increase date, jobs outlook



    • Cogeco Cable (CCA CN) Aft-mkt, C$1.23 - Preview
    • Helen of Troy (HELE) 4:01pm, $0.93
    • MSC Industrial (MSM) 7:30am, $1.07
    • WD-40 (WDFC) 4pm, $0.72



  • Corn Falls Near Four-Year Low on Outlook for Record U.S. Harvest
  • Gold Gains in London as Palladium Trades Near 13-Year High
  • Russia Loans Shrink as Sanctions Spur Bank Retreat: Commodities
  • Brent Crude Trades Near One-Month Low With WTI Oil on Supplies
  • Ukraine Risk Premium Fading for EU Gas on Ballooning Inventories
  • Gold Bulls Run as Holdings in Biggest ETP Erase Decline in 2014
  • Aluminum Touches One-Year High as Alcoa Projects Larger Deficit
  • Libya Plans Gradual Oil Exports Increase to Avoid Disrupting Mkt
  • Steel Rebar in Shanghai Falls as China Factory-Gate Prices Drop
  • Rubber Falls to 3-Week Low Amid Concerns China May Cut Imports
  • Copper Bulls Returned on LME in Marex Spectron Analysis
  • Japan Buys 33,395 Tons of Feed Barley in Tender Today
  • Copper Seen by Goldman Grinding Lower as Demand in China Wanes
  • Buzzard Share in Forties Crude Drops to 5-Mth low Last Week: BP


























The Hedgeye Macro Team
















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