Editor's Note: Below is a complimentary Early Look (daily market strategy note) written by Hedgeye CEO Keith McCullough on September 19, 2018. McCullough explains why our Macro process led us to short China, Europe and Emerging Markets in January ahead of consensus, along with U.S. equity momentum, high beta, and growth stocks in September ahead of October's selloff.
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As we outline on slide 6 of our current Macro Themes deck, this measuring and mapping macro trick is best done by “Sequencing Time Series, Not CNBC Headlines.” Don’t allow your stress levels and/or emotional connections to politics get in the way of that.
This is, of course, a dynamic process whereby the data can and will surprise you to both the upside and the downside. But, since it’s Bayesian, it allows you the mental flexibility to be dispassionate about the data and apolitical all at the same time.
So… that’s why we’ve been meeting with so many “new” prospective Institutional Investor clients this year…
Not surprisingly, serious people in this profession are looking to evolve their investment and risk management #process, with new tools and technologies that they never had access to before.
Yes, getting big things right like China, Europe, and EM #Slowing has helped move us along but we’re sincerely humbled by CIO’s, PM’s, etc. having such an open-mind to learning how we do macro vs. what they’re used to seeing from establishment econs.
Our job is to help you simplify the complex. There’s a lot of work and computing capacity that goes into trivializing the world’s economies into a 4 Quadrant “map”, if you will. But once you have that macro map, there are some really simple macro tricks:
- Don’t be long duration (long-term bonds) in Quad 2
- Don’t be long “risk” in Quad 4
Since the USA has been in Quad 2 for 8 of the last 9 quarters (USA was in Quad 1 in Q217), that’s why the long-end of the Treasury curve has gone from its all-time low in 2016 to something just north of 3%.
The upside down of that A/B macro trick is:
- In Quad 2 don’t be short Momentum, High Beta, and Growth
- In Quad 4 don’t forget to short Momentum, High Beta, and Growth
I know. I know. It’s so hard to wait and watch on epic US Growth exposures like FAANG, Biotech, Consumer Discretionary. But don’t be mad about it bro. Use the map.
I also know that the hardest economic and portfolio outcome for you to believe right now is that the USA is going to be in Quad 4 in Q4. But that’s cool with us. As Darius Dale said in to me walking down the street in Dallas, Texas yesterday,
“People won’t believe that quadrant until it hits them in the P and L.” #Truth
In sharp contrast to the Macro Tourist consensus opinion of a “globally synchronized recovery” at the start of 2018, the economic truth is that the following countries moved into Quad 4 in Q1 of 2018:
- South Africa
- United Kingdom
That’s just looking at the Top 20 countries of the world by GDP. So that means that 45% of the world’s Top 20 were contributing to A) a non-globally-synchronized recovery (we called it #GlobalDivergences) and B) some nasty equity market underperformance.
Some other Quad 4 risk management tricks to be fundamentally aware of:
- China entered Quad 4 in Q2 of 2018
- Canada, France, Japan, and the USA are about to enter Quad 4 in Q4 of 2018
Is that why 3 of the 5 FAAANG components (FB, GOOGL, and NFLX) of broken bad to Bearish @Hedgeye TREND? Is that why our friend Elon @Tesla is starting to struggle with stress levels and an emotional connection to Hedgeye research?
All I know is that if, God forbid, our map for Q4 is as right as it has been for the last few years, we’re going to have to start watching what we buy, sell, eat, smoke, and drink as the world enters a globally synchronized slow-down.