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“Does the walker choose the path, or the path the walker?”

-Garth Nix

Not that everyone cares about how personal this journey building Hedgeye has been, but I just wanted to say that it’s been both a pleasure and a privilege to walk down this path of seeking economic and market truths for the last 8 years.

One of the best parts about the trip has been all of the people I’ve met along the way. Before we started the firm, I really didn’t get what other investors did. I didn’t have the time (or get paid) to care. Now I’m overly compensated to learn. That is a blessing.

I couldn’t believe the feedback I had yesterday for simply saying that it was time for me to “take a knee.” So I wanted to thank all of you who reached out to me on that. The path forward will not be easy, but it’ll be less hard knowing that I’m not alone.

The Path Forward - woods

Back to the Global Macro Grind

Understanding where you are on the path matters inasmuch as what it took to get you there does. Did you truly understand the causal factors? Did you overcome the obstacles using the right reasoning? Were you lucky? Or are you still making excuses?

After spending the entire day meeting with Institutional Investors in New York City yesterday (we’ll do Boston today and tomorrow), one obvious observation is that every investor is in a different place on the path.

At the risk of exhausting the metaphor, think of this as a long multi-year race to the top of a performance mountain called Alpha. The path narrows. It steepens. It widens. We’ll all make mistakes traversing it. How long we stay with mistakes keeps us behind.

From my perspective, here are the big macro mistakes I am not willing to make:

  1. Believe that 0% rates = 0% risk
  2. Believe that #Deflation Risk is “transitory”
  3. Believe that US #GrowthSlowing isn’t as big a risk as #Deflation

The most basic reason why I don’t believe these things is because neither the economic data nor real-time market prices do.

Again, think about being on a mountain of colliding non-linear risks (wind, rain, animals, grrrr!). If your belief system (or marketing pitch) assumes perpetual sun and compensation fun, you’re definitely going to get wet – and you might get eaten.

Let’s get back to the path that we are on in Global Equities (as opposed to the one many would like to be on):

  1. JAPAN: Nikkei down another -2.4% overnight, taking its #crash from its July 2015 peak to 23.1%
  2. CHINA: Shanghai Comp Casino ran out of peddled fictions, making lower-lows, -3.2% overnight
  3. SINGAPORE: former “read-through” market, -1.1% overnight taking its crash to -28.4% since April 2015
  4. GERMANY: trying to “bounce” (small), but still in crash mode, -24.1% since peaking in April 2015
  5. RUSSIA: no bounce, down another -2%, crashing within its crash (down -20% in the last month alone)
  6. USA: Russell 2000 and SP500 -22.9% and -12.7% from their all-time #Bubble highs (July of 2015)

For 2016 YTD alone (worst start to a US stock market year ever – and ever remains a long time), the Financials (XLF) are already down -11.9% and that’s primarily because Mr. Macro Market reads crashing long-term interest rate expectations as bearish for growth.

When GDP growth slows from 3% to 2% to less than 1%, #Recession expectations ramp. You’re seeing that now and that’s a big part of climbing the mountain – calibrating and risk managing expectations.

Markets don’t trade on where ideologues or perma bull marketers think they “should be” (from a “multiple” perspective, for example). They rise and fall as the rates of change in future growth and inflation expectations do.

As opposed to thinking about this qualitatively, here are two very basic mathematical considerations:

  1. SPREAD RISK – when it’s widening, that is bad; when it’s compressing, that is good
  2. VOLATILITY – when it’s breaking out, that is bad; when it’s in a bearish TREND, that is good

Bad and good, from the underlying asset price’s perspective, that is.

Forget about those wild #Deflation animals (China and Oil) that have attacked you in your sleeping bags (and eaten some of your friends) for a minute and tell me what the path looks like in the US economy from a Spread Risk and Volatility perspective.

Until either (or neither) of those two things change, I’ll just take a knee and keep watching our macro call that is cascading down the mountain side play out. We’re going to need to be rested for the final ascent.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.95-2.08%



VIX 22.34-29.56
USD 98.35-99.88
Oil (WTI) 27.01-30.80

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

The Path Forward - 01.21.15 EL chart