“Energy, like money, does not disappear; it must be accounted for.”
-Robert Coram
That’s a quote from Coram’s book about Boyd – The Fighter Pilot Who Changed The Art of War. The chapter titled Thermo, Entropy, and the Breakthrough, is one of the best cross-disciplinary ones applying to my #process that I’ve ever read.
“Thermodynamics encompasses but then goes beyond Newtonian mechanics. A big part of Thermo is the mathematical relationship between the amount of energy that goes into a substance and the resulting change in the properties of that substance.” (pg 127)
Try to think about entropy in markets that way. What happens when the ROC (rate of change) undergoes a Phase Transition from an #acceleration to a #deceleration? What happens to your Asset Allocations, Sector Styles, and Factor Exposures?
Back to the Global Macro Grind…
I don’t know how everyone else does it, but I know how I do it. From studying history (long-term cycles) to measuring and mapping intermediate-term cycles (@Hedgeye TRENDs) using the non-linear principles of fractal math…
To always questioning (immediate-term TRADEs) whether I’m about to get something more right or wrong and why…
That’s what I do. If my competition wants to wake up hostage to headlines and whatever politicized and/or qualitative narrative that is thrown at their screen that day, so be it.
As Sun Tzu taught us in The Art of War (Boyd’s fav strategist), never interrupt the enemy while they’re making mistakes.
Setting aside all of the #timestamped mistakes I’ve made in the last 10 days, the biggest mistake that our competition has made in the last 10 months is failing to recognize that The Cycle #peaked in the USA.
That critical failure in their #process was what gave birth to the most contrarian asset allocation pivot we made since going outright bullish on US #GrowthAccelerating in the back half of 2016.
While our competition was shorting both Treasury Bonds and their Equity (Bond) Proxies at 2.5 year lows, it allowed us to fortify key competitive positions in:
- Treasuries (across the curve)
- Utilities (XLU)
- REITS (VNQ)
- Housing (ITB)
- Gold (GLD)
All 5 of those CORE Asset Allocations were for sale yesterday, so I’d appreciate it if you don’t forward this strategy note to our competition as you, once again, buy-the-damn-dip.
Isn’t it awesome that the Old Wall and its perma-bull media has taught the unaware who watch CNBC to “buy stocks” under any ROC (rate of change) condition, but rarely talk about buying bonds and their #GrowthSlowing Proxies?
I absolutely love that.
And I don’t mean the kind of love that I have for my wife and 4 children. This kind of love that I am feeling is cyclical love. When The Cycle turns back to Quad 2, I will divorce all 5 of those LONGS and make them core SHORTS!
You see, I don’t have to fall in love with a stock or a marketing pitch about an investing style. Unlike the execs selling their stock into you and/or the many strategies that have commensurate compensation structures that go one-way…
I only get paid if I get the Full Investing Cycle right.
‘Oh but if you were as good as I think I am at this Keith, you’d be like me and run a fund. You’d have skin in the game.’ Haha, after 11 years of me writing to you, I sincerely hope my competition still thinks that way.
To all the big-timers out there who haven’t taken the time to understand my motivations or process, they’ll be happy to know that I made $27,300 in base salary in my 2nd year of building Hedgeye (2009).
And that year was awesome!
Why? Because it was the 2nd time in my career that I made The Cycle turn call (1st one was going from bearish to bullish on The Cycle in 2002) and went whole hog bullish on US Growth in April of 2009. #timestamped
In 2009, I chose to pay my people (in salary) over paying myself. That was an easy call to make because I was getting paid in both Equity Market (my PA) and in Private Equity (I funded Hedgeye myself) terms.
Again, unlike many of my competitors who were on their bloody knees begging for bank and portfolio bailouts in 2008-2009, I only got paid the big picture money for getting the Full Investing Cycle right.
*Note: this note isn’t about boasting – it’s about being transparent, accountable, and trustworthy.
When I get it wrong, I’ll be equally open and honest about all of it. When I think it’s a good spot to get it really right for the right reasons again (like buying Utes, REITS, and Housing on yesterday’s immediate-term TRADE #oversold signals) I will.
Our immediate-term Global Macro Risk Ranges (with intermediate-term term TREND signals in brackets) are:
UST 10yr Yield 1.98-2.12% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
Utilities (XLU) 59.12-61.43 (bullish)
REITS (VNQ) 86.57-92.19 (bullish)
VIX 14.21-18.50 (neutral)
USD 95.00-96.69 (neutral)
USD/YEN 106.65-108.63 (bearish)
Oil (WTI) 50.63-60.15 (bearish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
