Editor's Note: Below is a transcribed excerpt from Hedgeye CEO Keith McCullough's recent interview on Macro Voices hosted by hedge fund manager Erik Townsend.
In the excerpt below, Keith describes our disagreement with Jeff Gundlach's recent market calls, what's next for the U.S. economy and Tech stocks. Click here for a very special deal we offered to all listeners. To listen to the entire conversation, click the podcast player below or visit the Macro Voices website.
Erik: Let's move back to the bond market from there Keith. You know Jeff Gundlach got a lot of attention last year with this big call saying, OK, 1.35% that's it. The bottom is in forever in 10-year Treasury yields.
We've had quite a few guests opposing that view. Where do you see this going in terms of the big picture? It seems like there is a lot of reason to think that our economy is long in the tooth and maybe at some point we get a recession. Do we eventually see a new secular low or do you agree with Jeff Gundlach? I don't think you ever agree with Jeff Gundlach, do you?
Keith: We agree sometimes. We definitely haven't agreed this year. I mean, he's been fighting the stock market move to the upside on valuation. That's not how I roll. When it comes to relative value I think that's the biggest difference between how Jeff articulates his process and how I do. Valuation to me just doesn't matter.
If anything, expensive gets more expensive. It's a macro exposure. When growth is accelerating, expensive gets more expensive. Think about it. You could have shorted the stock market in 1996, '97 and '98 on valuation but by the time it was '99 you're out of money. Remember in 1996, '97 the stock market was already at 20 times earnings. For God's sakes, history tells us you can go all the way to 35 times earnings.
Now, you can take that valuation lesson and turn it upside down in bond yield terms. Interestingly, but maybe not surprising, last year, Gundlach and I had the exact same view that bond yields would surprise to the downside at the beginning of the year. We had been making this call for the five quarters before that and I'm not trying to pump my own tires, it's just the call we made. We said U.S. growth was going to slow, the Fed was going to have to pivot back to dovish, which they did multiple times in particular in March and May, and then you finally had that pile driver move in June in bond yields to the lows that you identify largely because it was the worst U.S. jobs report since the crisis. That had Obama's name on it and obviously not a lot of political pundits talk about that.
You had this super low level of growth in Q2 of 2016, when the year over year growth rate bottomed in GDP terms. It was at 1.3%. So if I showed you a sine curve of GDP growth, it came down from 3.3% in Q1 of 2015 to 1.3% in Q2 2016. Everyone who does macro should know where GDP is on the sine curve. GDP went down 200 basis points across five quarters and bond yields went straight down. Bonds were the best exposure you could have on the long side. That's why you have a lot of people that are forever long long-term bonds because it was such a fantastic position with no volatility.
You know, from here, growth is accelerating so I don't think you're going back to the all-time low, certainly not now. But once we start to see a slowdown that's when I'll start to be talking about lower bond yields. And it's not Jeff Gundlach that can tell you what the level is. The way I do it is wake up every morning and put two feet on the floor again, God willing, and I measure and map the price, volume and volatility of the market. If we start getting to a place where I can see a lower low, I’ll make that call. Currently I'm not seeing anything remotely close to a lower low. I can't even get below 2.05% on the ten year.
So, that's the call we have. That's the call we're sticking with. I don't think that the bond market has any really super interesting things to do right now. We’re long municipal bonds for example because we thought rates would come down into the Fed making a dovish hike. I think the more exciting stuff is clearly to be long the Nasdaq and that's where I've been very vocal and not uncomfortably so I kind of have fun with it.
Erik: Since you brought that up again let's go back to your long view on tech stocks. You know I was fascinated that so many people outright panicked on Friday saying 'Oh my God we had a crash, an outright crash,' where everything went down by 2.5%. It's amazing to me that that's a crash.
Now, oil went down from a hundred bucks a couple of years ago, but everybody is used to that one now. It's not newsworthy anymore. So, do you worry at all? I mean some people would say that what happened on Friday was maybe the first sign of weakness, the first – what's the analogy – the finger in the dike or something and it's all about to fall apart from here and another Nasdaq crash like we had in 2000 is just around the corner just you wait. How would you respond to that kind of viewpoint?
Keith: I think a lot of people in this country are very well aware of the mainstream media and that they are being lied to. I mean not lied to outright but they're just being painted a partisan version of the story. If you go to our world, financial media has not only more mediocre minds but far less accurate and competent reporting of what is actually going on in the macro market.
But when it comes to our world it is laughable. To your point, the mainstream media whether it be Bloomberg or CNBC or whatever, I mean they're talking about a tech rout. A rout is what was happening in Pakistan, Russia and to your point in oil. Oil is down 19% this year. I mean that's a rout.
And of course when you get these Tech 'routs' you get tremendous buying opportunities. I'm a huge fan of sand pile theory, complexity theory, however you want to define it. There’s always grains of sand that will knock that sand pile down. When everybody and their brother in the mainstream financial press, or as I call it Old Wall Media, is telling you that that's it, it's probably not it.
What I'm really looking for is data to support that. For me to change my mind on what's been a parabolic move in being long Tech stocks and big cap stocks you have to tell me how growth is going to stop accelerating. We run a predictive tracking algorithm with 30 data points per month, 90 data points for a quarter. I think it's as accurate as anything you can find buying side or selling side. I don’t want it to come across the wrong way, but I have worked on it for years and we have a lot of pride in that process.
For now, I'm going to buy every dip and we have. And thank God I have. So until you can show me how growth slows, I just don't see it ending. Like in 2000 coming out of the 1999 bubble, it was a clean cut deep deceleration in the economy in the first half of 2000. We currently have a clean acceleration in the economy in the first part of 2017. That's what I think the best economist in the market has right and I’m aligned with him. His name is Mr. Market.
