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*A must-listen to podcast 

In the 21st episode of In the Arena Senior Macro analyst Darius Dale joins Daryl Jones for a deep-dive conversation into our macro process and addresses some of the most frequently asked questions we receive from subscribers.

The dynamic duo hit on a number of vital components to our modeling of financial markets including:

  • Hedgeye's Growth Inflation Policy (GIP) Model: How to use our 4 quadrant regime to maximize investing profits and minimize losses
  • Hedgeye's Risk Ranges: How Hedgeye CEO Keith McCullough developed this model and how to use it 
  • Improving and evolving our process: An in-depth look at our forecasting framework

Our macro team's process is designed to be a weather report helping to dress your portfolio for the appropriate market conditions.

Jones: In a nutshell, what we think we've created is a very good sort of framework or roadmap or weather gauge for what's happening and the intention more so than anything else is to make sure you don't blow yourself up to some extent. Right?

Dale: "Absolutely. You hit the nail on the head. I think risk management, Keith would certainly agree with this because I've learned this from him - risk management is not about loading up on the long side... Risk management is about not being long the stuff that goes down. And if you sort of layer on exactly how we think about risk management in terms of tying the economy back to the financial markets, it's some of these macro economic impulses are proactively predictable and historically some of these proactively predictable macroeconomic impulses have created a lot of volatility in certain asset classes. So if we can use this forecasting tool to sidestep those bouts of volatility in particular asset classes we can grow our net worth, grow the net asset value of our portfolios in a much more risk reduced manner..."

Below is a sneak peak of Darius discussing "rate of change" and why it is a key component to our process.

The percentage change on a year over year basis - is that accelerating i.e. getting bigger or smaller on a period to period sequential basis? For example, if growth is 1% in the first quarter and it's 2% in the second quarter, it accelerated by a hundred basis points over the duration of that interval. We're keenly focused on predicting and projecting not only the direction but also the magnitude of those accelerations and decelerations. Because that's where all the financial market price action occurs in the pricing in of these changes.

Here Darius describes how our team thinks about calling recessions and when they tend to occur as it relates to out 4 quadrant model.

"What you've seen historically is the preponderance of real big draw downs as it relates to equities and credit have historically come in and around Quad 4 either the market pricing in Quad 4 ahead of time or the market pricing in Quad 4 while it's ongoing.

If you think about the broader business cycle, taking a step back, because again these are quarterly sort of regime oriented projections that we're trying to nail every single quarter to identify exactly what might change on the margin with respect to trending asset market performance. But taking a step back to the broader business cycle, what you see is heading into a recession, at least over the last few recessions here in the U.S., is that cycles tend to peak out in Quad 3.

Again, you get tight labor markets, you're starting to roll down the hill in terms of employment growth and wage inflation, which is a very late cycle indicator in terms of when it peaks relative to the cycle. Then you slow into Quad 4 and that persistence of Quad 4 - Quad 4 after Quad 4, that is how recessions occur in respect to rate of change and respect to these regimes.

As it relates to our process, we don't necessarily care about calling forward an NBER business cycle type recessions because if we're set up for the asset allocations that the history would suggest you should be in in Quad 4 and Quad 3 as well, then you don't necessarily have to make the recession call because you're already in the right types of assets that do well."