watch the replay below
Click here to access the associated presentation.
Check out this completely free webcast featuring Hedgeye CEO Keith McCullough. Keith discusses our current market outlook and provide investing implications.
Below are key takeaways (and important charts) we transcribed from the webcast hosted by McCullough and Senior Macro analyst Darius Dale.
* * * *
Darius Dale: Good afternoon everyone. This is Darius Dale, Senior Analyst on the Hedgeye Macro team. We’d like to welcome you to our live webcast titled “Risks Rising: Where to Invest Right Now. I'm joined in the studio today by Hedgeye CEO and Head of Macro Keith McCullough. We thank you for joining us take it away Keith.
Keith McCullough: Thank you Darius. As Darius likes to say, “Today is the best day ever to improve your position in markets.” Every day you get a new chance. And we have a process for that.
First, we’re going to go through our process.
Why do we do what we do? The investment landscape has changed tremendously, so we evolved alongside it. It's pretty simple. We're no longer running the 60/40 stocks versus bonds. We're trying to front run “The Machine” with two very causal factors, which are Growth and Inflation in rate of change terms.
It's just the basic sine curve. You start with that.
What are the data telling you in terms of growth and inflation? Is the data accelerating or decelerating in second derivative terms? That's what we care about. We don't think it matters when anybody on Old Wall TV says, “Valuations are attractive.” That has absolutely nothing to do with what we do.
Markets chase flows. Flows chase the accelerations or decelerations of growth and inflation. From there what we come up with when we look at the world, as opposed to the Old Wall way, is we get a four Quadrant map.
We call it a map because every day we get a new data point that changes the complexion of this map. It provides a clearer, more accurate picture of reality. So we're measuring and mapping.
What you see there is Quad 1 and Quad 2 are pro-growth. So that's where you have the rate of change of growth accelerating. And then you have Quad 3, which is growth is decelerating with inflation accelerating. That's called stagflation. Quad 4 is the deep, dark Black Hole, where growth and inflation are both decelerating.
When you go into Quad 4 bad things really happen and even the Federal Reserve figures that out – you remember the Quad 4 episode we called in 4Q 2018 and the worst December in the history of Decembers for the stock market.
McCullough: What happens in Quad 4 is the Fed goes dovish and tries to drive the economy into a better Quad. But what they naturally end up with is not what they asked for. Much of the time when the U.S. economy hits Quad 4 and the Fed goes dovish you end up in Quad 3. Quad 3 is not good for working Americans. It's good for rich people who own financial assets. But really it’s just the illusion of growth – because growth is still slowing but inflation rises. The inequality gap is largely a function of that.
Which brings us to today.
We're no longer in Quad 4 in the U.S. we’re in Quad 3 here in the fourth quarter. If you jump ahead we’ll show you our nowcast for predicting the future path of growth. We're tracking 30 data points per month, 90 per quarter, measuring and mapping them and inputting those data points into our predictive tracking algorithm.
This is not about the moving monkey average or story stocks. We’re not CNBC telling you to ‘Buy stocks’ at every all-time high. No. We apply our process to the entire edifice of global macro asset allocations, which includes fixed income, currencies and commodities, all the different things that an actual investor should consider to compound wealth.
Now we do like certain stocks and certain sectors of stocks in each quadrant based on our historical back-testing of the Quads and my Risk Range process. So, currently we’re in the third Quadrant and we've pivoted Quad 4. A good example of a recent pivot we made from Quad 4 to Quad 3 is we were short, underweight or out of Energy (XLE) and are now long of Energy because in Quad 3 that's what the playbook says to do.
So that's what we do. The process is rules-based.
So if you look at our Nowcast you know to get excited about company revenues accelerating, when U.S. growth is accelerating. That’s what happened to our call from the middle of 2016 to Q3 of 2018 because those black bars were accelerating.
Then in Q3 of 2018 came our Quad 4 call. It wasn’t a call on a recession. You could have lost 25-30% of your money in stocks over a three-month period when Quad 4 happened. And that's precisely the point. You don't have to have a recession to lose a lot of money.
Our current Nowcasts on U.S. GDP growth on a year over year basis are below 2% for the first time. On a headline quarter-over-quarter basis, which is the way the Old Wall reads it, has U.S. GDP growth 0.5%. That's not a typo.
McCullough: We're trying to help you not be long things that get smoked in this market environment. It's about the high probability bet when the Street's on the wrong side of that bet.
Here’s an important point.
On slide 33, you can see the U.S. Dollar on the left side at a 20-year high. A strong dollar is a really bad thing for the Chinese. The Chinese don't like that because the Chinese are short of dollars effectively. China has gone from a secular and cyclical accelerating growth story and from a current account surplus to developing current account deficits.
If you have a deficit at home, what are you funded with? The Chinese are borrowing U.S. Dollar denominated credit debt. That’s why the Chinese have been cutting interest rates and nothing's happening. They're stimulating to offset Dollar strength but ineffectively. Shadow financing and total loans in China are obviously on the lows. So China needs U.S. Dollar weakness to stimulate.
McCullough: The big joke here is that the Fed doesn't get this yet. Now this shouldn't surprise you entirely, but just to review history, in order for Beijing to bail us out with stimulus the Fed has to capitulate and cut rates.
And what we mean by that is that those dots, those beautifully inaccurate Fed forecasted dots, which are wrong about 70% of the time, is now at the widest gap relative to market expectations of the future path for interest rates. Fed fund futures (i.e. market expectations) are at their widest gap versus the Fed’s forecasts.
So if the Fed doesn't figure this out soon and go whole hog dovish, and I mean cut by 25-50 basis points at a time, this could get unruly quickly.