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“The way to build long-term returns is through preservation of capital and home runs.”

-Stanley Druckenmiller

I had the pleasure and privilege of speaking at the Duquesne Club in Pittsburg, PA last night. Founded in 1873 by real American Capitalists, I was humbled by both my surroundings and the sobriety of the Q&A session.

You see, this wasn’t a NYC “idea dinner.” These were really wealthy people who run real manufacturing, industrial, and cyclical businesses. They get it. We are in a cyclical #Recession, and their 1st rule of investing remains what Buffett used to preach – don’t lose money.

When Druckenmiller ran Duquesne Capital, he was one of the all-time greats. He understood that if you don’t preserve capital during market declines, you’re always trying to get back to breakeven. Soros taught him how to take small losses before they became big ones.

Preservation of Capital - recession cartoon 12.22.2015

Back to the Global Macro Grind

Hitting home runs is fun too. But don’t forget that, for a long-only investor, being completely out of an asset class that crashes is the equivalent of a hedge fund all-star like Stan hitting one out of the park from the short-side.

“I’ve learned many things from him (George Soros), but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” -Druckenmiller

With the Russell 2000 (66% of stocks you could be long or short) moving into crash mode yesterday (down -20% from its July 2015 closing high), there are a lot of people losing a lot of money out there right now.

Been there, done that.

It’s what we do when we’re losing money that is the most important part. Do we ride losers? Do we double and triple down on them? What happens when we’re “right” on a company’s revenues and earnings, but the market makes that stock a loser too?

This, effectively, is where markets are at right now. And it’s no laughing matter.

How does it end? I don’t know. All I could tell American Industrialists last night was that my highest probability bet is that this is, as Churchill called it, “the end of the beginning.”

The end of the bull market in FX, Commodities, Emerging Markets, etc. is as obvious as the sun rising in the East at this point. That’s not new. What has really started to end in the last 6 months is an epic bull market in US stocks.

When bull markets are ending, my job is to help you risk manage and preserve capital.

They can end slowly, or all at once. And that’s why I said I’d have the arrogance of a perma-bull to suggest that I know precisely when and where this bear market ends. All I can do in the meantime is map and measure the economic and profit cycles for clues.

It’s not just US stocks that are entering bear market mode, btw:

  1. Spain’s stock market (IBEX) is in crash mode -24.2% from its April 2015 peak
  2. Germany’s stock market (DAX) is toying with crash mode -19.1% from its April 2015 peak
  3. Japan’s stock market (Nikkei) dropped another -2.7% overnight and is -17.4% from its July 2015 peak

Yep. Japanese stocks peaked, literally, in the same week that both the SP500 and the Russell 2000 closed at all-time highs. Much like I did in November 2007, trust me, I wrote down every closing price at those all-time #bubble highs in July 2015.

They aren’t leaving my notebook.

In other news, the Federal Reserve’s Lockhart (voting member of the FOMC this year) said yesterday that the US economy is “strong enough to justify more rate hikes.”


Lockhart, don’t forget, runs the Atlanta Fed – as in the entity that continues to cut its US “GDP Now” (updated for real-time data) forecast – so his comment on rates is as contradictory as some Chinese dude from officialdom telling you China’s GDP is still 7.0%.

If the Fed continues to both cherry pick the data and tighten into an obvious cyclical #Recession and consumption slow-down, they will probably be the catalyst to invert the Yield Curve.

By the time the Yield Curve is inverted (2yr yield is higher than the 10yr), you better have preserved a lot of capital. Because you’re in a recession. And you’re going to need capital. No one hits home-runs from the long-side without a bat.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.09-2.23%

RUT 1028-1071

VIX 20.85-28.09
Oil (WTI) 31.68-35.01

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Preservation of Capital - 01.12.16 EL chart