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“Simplifying as much as possible is crucial to success.”

-Jocko Willink

I hope everyone had a nice long weekend. Two weeks into this 2016 bear market battle, I’m sure everyone needed a break. I spent my weekend coaching at a hockey tournament down in Bethlehem, Pennsylvania. The kids (and parents) had a blast keeping life simple.

“Simple: the principle isn’t limited to the battlefield. In the business world, and in life, there are inherent complexities. It is critical to keep plans and communication simple. Following this rule is crucial to the success of any team.” (Extreme Ownership, pg 140)

At Hedgeye, our team takes our core principles of Transparency, Accountability, & Trust very seriously. While they are simple principles – executing on them across our entire business requires a commitment to put the team ahead of individuals. Simple is not easy.

Back to the Global Macro Grind

Nope. Simple is not easy. In fact, simplifying the complex nature of a Global Macroeconomic System is very hard to do. That’s why, as a base layer, we use Chaos Theory. That way we can embrace both the non-linear nature of the system and all of its uncertainties.

Simplifying The Complex - Slow growth cartoon 09.11.2015 copy

After we’ve done all of our research, we try to “boil it down” into three Global Macro Themes. While our quarterly themes may vary in terms of their “creative” hashtags, they’ve simplified two of the most basic things an investor should have prepared for in the last 6 months:

  1. GROWTH slowing
  2. INFLATION deflating

If you missed it, that happens. Don’t keep missing it. “Should have, could have, would have” are the kinds of excuses we don’t let players on our team get away with. However many mistakes we make, it’s always about learning, evolving, and moving forward.

When things go wrong, and they inevitably do go wrong, complexity compounds issues that can spiral out of control into total disaster. Plans and orders must be communicated in a manner that is simple, clear, and concise.” (Extreme Ownership, pg 140)

When things go right for the right reasons, your team builds confidence that you’ve helped them simplify the complex.

Look at what drove the SP500 down another -2.2% on Friday to -8.0% YTD and -11.7% from its July 2015 #Bubble high:

  1. US Industrial Production “growth” for DEC slowed another -0.4% month-over-month to -1.8% year-over-year
  2. US Producer Prices (PPI) for DEC slowed another -0.2% month-over-month to -1.0% year-over-year
  3. US Retail Sales growth (“control group” used to calculate GDP) slowed -0.3% month-over-month to +2.4% year-over-year

And while a consensus growth bull might call Retail Sales “not bad”, we continue to remind you that absolutes don’t matter in macro – rate of change does. Put simply: good or bad doesn’t matter; it’s all about things getting better or worse.

To be clear, there is a large (consensus) community of investors who thought things couldn’t get any “worse” than they looked in SEP of 2015. They saw the impressive counter-TREND bounce in everything “reflation” as a signal that all the bad was “priced in.” Not so much.

Last week’s macro market moves simplified that both #Deflation and #GrowthSlowing are bearish TRENDs where you can be LONG:

  1. USD: US Dollar Index up another +0.4% on the week to $98.95
  2. Long-term Bonds: US 10yr Treasury Yield down another 8 basis points on the week to 2.03%
  3. Utilities (XLU) up +0.7% on the week to +0.3% YTD

While the Utes Long Bond Cash Is King position worked, not all “yield chasing” or “growth in a slow-growth environment” did:

  1. MLP’s got smoked for another -10.7% weekly loss and are already -18.6% YTD on the Alerian MLP ETF
  2. Financials (XLF) underperformed the SP500 (again) losing another -3.1% on the week to -10.1% YTD
  3. High Beta (as a US Equity Style Factor) got crushed for another -6.3% weekly loss to -15.3% YTD

Put more simply: High Beta Small Cap Leverage = not good.

So is Mr. Macro Market pricing in a recession or a depression at this point? In asset price inflation terms, I think that’s a more reasonable question than trying to debate whether or not US and Global GDP growth is going to be +3-4%.

I can assure you that where I was in Pennsylvania this weekend, the cyclical/industrial #Recession is very much on. Check in with a farmer in Des Moines, Iowa or a real-estate agent in Houston, Texas and they’ll simplify the same. It’s not that complicated.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.00-2.13%

SPX 1
RUT

DAX 9

VIX 18.89-29.88
Oil (WTI) 28.51-32.38

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer

Simplifying The Complex - 01.19.16 chart image