U.S. growth is slowing. Most investors are unprepared for this developing reality.
Financial markets have been telling you this for some time now.
- The Russell 2000 is down -16.3% from its August 2018 high
- Five of 11 S&P sectors entered an earnings recession in the second quarter
- Virtually every single major equity market around the global is bearish trend
Meanwhile… according to our Macro team, the worst U.S. economic data hasn’t even been reported yet.
We want you and your portfolio to be prepared.
On that note, Hedgeye CEO Keith McCullough hosted a special, complimentary edition of The Macro Show yesterday. We transcribed some of the key excerpts below. Watch the video replay above from this free edition of The Macro Show hosted by Hedgeye CEO Keith McCullough. (CLICK HERE to access this episode's slide presentation.)
* * * *
Keith McCullough: Good morning and welcome everyone who’s watching this freemium edition of The Macro Show. I’ll give you a free tip today. Don’t do what CNBC has told you to do for the last year. Now if you just bought stocks, no wonder you have feelings. I would feel a lot of bad feelings too. The Russell 2000 after yesterday’s close made a lower low versus the lows it saw in May.
Remember when people got body slammed in May? Or in Q4 of last year when the cycle peaked and all of this started? So the Russell 2000 made a lower low. That’s really bad, mathematically, euphemistically or otherwise. And now it’s down -16.3% versus the peak in August when you could have chased the chart and technicians said it looked fantastic.
At the end of the day you’d have to be up almost 18% to get back to break-even from that peak. And if you shorted the Russell 2000 and other style factors outside of small cap stocks like high beta stocks you’re crushing it on the short side with those core Quad 4 exposures.
McCullough: We’re seeing Quad 4 globally as well. The German DAX is getting hit by Quad 4 in Europe. Remember all the people telling you to buy cheap European bank stocks back at the end of 2017 when we were actually still long of Europe. Then we went bearish on European stocks at the end of 2017.
Look at this chart of the DAX. It’s a pretty broadly relevant stock market. Who tells you to get out? Not one of our subscribers has been long Germany unless they’re long German Bunds. We liked the 10-year Bund at 30 basis points. We liked them at zero basis points. We liked them at -71 basis points. You buy German Bunds when you’re going into Quad 4. A recession pays the bond holder in sovereign bond terms.
It doesn’t matter what the price is. God didn’t call with the relative value model. No, no, no, no, no.
That’s why you bought Treasuries. You bought Bunds.
Who on CNBC or on the Old Wall told you to ever buy Japanese government bonds? Who told you to buy the greatest security in the history of the world securities? Japanese government bonds just go up and have no volatility. Everyone says, ‘They’re expensive. Zero interest rate policy.’ And again, if you have a view of slower for longer or that the economy is heading into Quad 4 (an environment of slowing growth and inflation) you buy the sovereign debt.
McCullough: Autodesk (ADSK) is going to get a lot of chit chat today, and I’ll be damned! Autodesk surprised the Old Wall and all its followers last night because they reported a ‘Great quarter, guys’ but then they guided down in Q3.
I wonder why?
CapEx is now negative on a year over year basis. This is an IT spending company that was a recipient of tax reform when U.S. growth was accelerating and we were bullish for two whole years.
Now Autodesk is guiding down because CapEx is negative. I’ll be damned. The stock is down 25% from where you could’ve chased the chart back in early April.
And yet everyone still wants to talk about “Oh but you don’t have a view on a recession!” If you bought Autodesk at its peak that’s a recession in your portfolio. Don’t do that. Negative CapEx is a major risk. You want to be on the other side of the CapEx cycle. We haven’t even lapped the most difficult comparisons for the U.S. economy yet.
Christian Drake: A subscriber is asking about our view on the British Pound here.
McCullough: To get the pound right, you get the Quads right. We’ve been bearish on the Pound against the Dollar since the middle of 2018. I don't have a political opinion on Boris Johnson this morning to know why we’re bearish on the pound. What I care about is where the UK is in Q3. So I scroll down this table (see below) and the mean and mode for the world economy is Quad 4. So you're slowing towards a Black Hole of risk around the world.
But again, scroll down the table and see that the U.K. is in Quad 4. That sucks. You’ll notice on this table a lot of countries transitioning out of Quad 4 after Q3. So you're into the finishing part of the move here on the Pound going down against the Dollar. And conversely, the Dollar has a central tendency to rise in Quad 4 because people are pulling their money out of other speculative currencies. Again, that’s the back test.
So while you’ll see that the global growth outlook is improving after this quarter, be patient. There’s still significant risk to manage ahead of that.
Here’s the point. Try to open your mind.
I know for a lot of you this process is new. I know we do it differently. But I think that’s a good thing. I don’t think anyone would accuse Wall Street of nailing it at every single economic cycle turn for the last 20 years and that’s precisely why I built this place. I was just sick and tired of watching investors get obliterated by people that are completely full of shit on TV or pushing their own way to get compensated which is even worse.
We want you to engage, learn and empower yourself to do this on your own.
