“Gambling is investing simplified.”
If Ed Thorp didn’t have one of the best track records in the history of the hedge fund community, you might not pay as much attention to why he was good at both Black Jack and beating the market.
The aforementioned quote was his opening volley in an awesome chapter in A Man For All Markets titled “Wall Street: The Greatest Casino On Earth.”
“Both gambling and investing can be analyzed using mathematics, statistics, and computers. Each requires money management, choosing the proper balance between risk and return. Betting too much can be ruinous.” (pg 145)
Back to the Global Macro Grind…
When I was running my long/short book at Magnetar Capital back in 2006, one of the founders of the firm (Alec Litowitz) would talk to me about sizing my “bets” with an understanding of the Factor Exposures implied in those bets.
At that point in my career, I had no idea what he was talking about. But that’s why I joined the math guy from MIT – I wanted to learn what I didn’t know about the quantitative risk management of a portfolio.
I am forever grateful to the guys from Chicago for opening my mind to what The Machine was going to become.
Today, since almost 90% of daily US Equity trading is what we call “systematic”, we have at least $2 TRILLION in assets under management that is betting on purely quantitative strategies … and at least another $1 TRILLION behind that running “net neutral”, constantly using options and ETFs to delta-hedge portfolios in real-time.
What does that do to The Machine? It makes it go faster.
Especially on the most critical Factor Exposure in The Machine (price MOMENTUM)… and on the most critical duration (1 MONTH)… rules-based execution pushes prices up/down faster than ever before.
You can either fight that or try to understand that.
Especially if you’re not a day-trader or someone whose career is judged on monthly P&L and… God forbid… you can invest your bets over an intermediate-term and TRENDING time-frame (3 months or more), this is great news. You can capitalize on it.
Why? Because you can use The Machine’s short-term TRADE (3 weeks or less) moves to size up your best bets!
What are the 3 most causal FUNDAMENTAL research FACTORS that determine the TREND’s path?
- ROC (rate of change) of GROWTH
- ROC (rate of change) of INFLATION
- ROC (rate of change) of PROFITS
That’s why almost 100% of my research team’s time is focused on measuring and mapping The Cycles of those 3 things.
If you don’t have a research team doing that for you both globally and daily, you aren’t even gambling with a basic level of awareness of either the odds or the probabilities changing as you see cards come out of the deck – you’re just guessing.
What’s the real-time update on Global GROWTH?
Global Growth Slowed To A New Low In January: The advent of the JAN Composite PMI data confirmed our bearish outlook for global growth here in 1Q19E. Specifically, 76% of the 38 economies we track showcased trending deceleration in January, up from 71% in December. Country specific commentary:
Sure, AFTER The Machine moves like it has in the last 4-6 weeks (in US Equities in particular), you’ll get a lot of qualitative people with Perma Bull biases hoping that all of the aforementioned data was “priced in” on December 24th, 2018. But that’s not a probability – that’s an opinion.
The way I evaluate my US Equity performance and asset allocation decisions is point to point from the timing of the 4 Quadrant TREND decisions I make. The SP500 was up +35% from the time we went outright Bullish on US #GrowthAccelerating in 2016 to when we got out of those exposures in Q3 of 2018.
Fully loaded with this non-TRENDING bounce in 2019, the SP500 and Russell 2000 (which I re-shorted yesterday via IWM) are still down -6.0% and -11.4%, respectively from when I got out of pro-growth US Equity exposures and re-allocated my net wealth to Treasuries, REITS, Housing stocks, Brunello, etc.
Currently, I’m staying with that long book (in addition to things like Gold) and definitely NOT betting on either GLOBAL or US GROWTH not slowing. Compounding your net wealth starts with not losing a lot of money when everyone else does and staying with your asset allocations until GROWTH and/or INFLATION changes.
Our immediate-term Global Macro Risk Ranges (wiith intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.60-2.74% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
REITS (VNQ) 81.47-84.82 (bullish)
Housing (ITB) 32.66-35.63 (bullish)
DAX 101 (bearish)
VIX 15.11-20.16 (bullish)
USD 95.11-97.30 (bullish)
USD/YEN 109.10-111.13 (bearish)
Gold 1 (bullish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer