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Takeaway: This edition of The Macro Show aired on Friday 2/28.

Our LARGEST audience ever just tuned into watch this remarkable discussion between Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale.

Make no mistake, the investing insights and implications shared on this edition of The Macro Show are critical for investors trying to navigate this incredibly volatile market environment.

Here’s a key quote from CEO Keith McCullough:

“When you look at volatility regimes, once you get above 31 on the VIX you have an uninvestable environment… There’s no valuation as a catalyst. It’s the prevailing conditions of growth, inflation and the market signal. If my market signal doesn’t give up greater than 31 on the VIX I’m not buying a damn thing on this ‘dip’ because it’s not a ‘dip.’”

Not exactly an all-clear sign.

We are in the business of preparing people for what comes next. Below we’ve transcribed key takeaways (and included charts) from this webcast. Click below to watch this entire edition of The Macro Show.


Keith McCullough: Good morning. Thank you to all of you who are joining us for the first time. It’s important for us to be open and transparent, particularly on days like today when we can help.

A lot of people, in moments like this, are not transparent and accountable. We have a process. It’s not always right. But when it’s right, it’s right for the right reasons.

This morning I’m going to talk about volatility, the 10-year yield (which is hitting an all-time low) and stock market crashes, which have begun (not surprisingly) with volatility where it is.

We call this uninvestable volatility.

A lot of people look at moving averages. That doesn’t work. That’s just the surface area of price – a one factor model. What we do when we look at a particular asset is look at the price, volume and volatility all together across multiple durations and multiple factors.

When you look at volatility regimes, once you get above 31 on the VIX you have an uninvestable environment.

This type of environment hurts not only the things that go down anyway in Quad 4, which include Tech (XLK), Financials (XLF), Industrials and Energy (XLE), you also get the things that generally go up in Quad 4 that fall as well.

You get a broadening of equity beta selling off, which includes things like REITS (VNQ), Utilities (XLU) and Consumer Staples (XLP). These are things that our model likes in Quad 4, but we like it a lot less with greater than 31 volatility.

There’s no valuation as a catalyst. It’s the prevailing conditions of growth, inflation and the market signal. If my market signal doesn’t give up greater than 31 on the VIX, I’m not buying a damn thing on this “dip” because it’s not a “dip.”

Implied volatility just blew out to a 65% premium. When we told you to get out, it was between Valentine’s Day and February 18 when the S&P 500 was at an implied volatility discount of almost -10% for SPY and -11% for Technology (XLK). What’s that tell you? In mid-February, we saw an epic amount of complacency and capitulation. 

ICYMI → An Investing Road Map for the Global Selloff - vol1

McCullough: Next, the 10-year Treasury yield hit an all-time low. This started developing pre-coronavirus.

What did the bond market tell you to do? Stay with the cycle, stupid. Yesterday’s Durable Goods data, which again, is pre-coronavirus data, was very bad in rate of change terms. Durable Goods were down -3.9% on a year-over-year basis versus -3.2% in the prior period.

The Industrial and Durable Goods recession continues.

This morning’s PCE numbers on the consumption economy slowed by -0.56%. These are two of the most important numbers pre-virus.

The bond market nailed it. The bond market has been nailing the peak of the economic cycle going all the way back to Q3 of 2018, when we went bullish on Treasuries, REITS, Utilities and Gold. Back then, the 10-year was around 3.25%. All the while, Bond Kings and Queens told you yields were going higher.

At the all-time lows in bonds what do you do? Do you buy here? Absolutely not. You book some gains. The top end of the yield is 1.46%. So that’s where you think about buying. At the low end of the range you sell some.

ICYMI → An Investing Road Map for the Global Selloff - vol2

McCullough: Let’s move on to crashes.

The Russell 2000 is down -14% from where it peaked at the end of Q3 2018 alongside the cycle. Gold, notwithstanding, is up over 30% and Utilities too. You’d have to be up over +16% to get back to breakeven if one of your core asset allocations was in Small Caps. That doesn’t work. Small Caps are going to move toward crash mode.

We’re short small caps.

You can see what we wanted you to be short, and this is not just across sectors, but also across factors like Momentum and Secular Growers. This is all the stuff that we liked in Quad 3 back in October. The flip is material. You should have a process that goes both ways. You should be able to take your longs and short them alongside being able to take your previous shorts and go buy them.

ICYMI → An Investing Road Map for the Global Selloff - vol3

McCullough: We’re seeing crashes in Russia, Greece and Asia.

We were long commodities and Russia, from October to January. These exposures started to break down. We told you to get rid of it and short them. We’ve shorted Oil, Commodities and the Russian stock market since. Russian stocks are down -22% since where it peaked in January.

By the way, the peak in inflation in our model was in January. So inflation peaked and Oil peaked at the same time. Guess what the biggest component is of inflation? Oil. Guess what moves with Oil? Russia.

That’s the really important point. Who gets you out? Who gets you out of exposures before they crash?

Don’t forget our ”Risk Management A | B Test.” We have two signals we care about:

  1. Our Growth, Inflation, Policy model which tells us what quadrant we’re in. That’s signaling Quad 4.
  2. My market signal’s Risk Ranges tells you what the market is actually signaling across price, volume and volatility. What that shows you is that equity markets globally are going bearish and it’s broadening.

Our daily Risk Ranges include new bearish signals in Google (GOOGL), which has been bulletproof. Apple (AAPL) went to bearish trend. Bitcoin is teetering on bearish trend. Almost everything.

So you’ve got you’re “A | B Test” and what else? The setup in markets. Don’t forget that Wall Street got to its most gross long position last week. Gross hedge fund exposure was in the 95th percentile of 1-year readings. Right at the top.

Google missed the quarter. Revenue is slowing because they’re tied to advertising. Advertising is cyclical. But Wall Street likes to call the company a “secular grower.”

A lot of people have ignored the very basic relationship between credit and the earnings cycle. It’s terrible. We’re almost at the end of earnings season. 480 companies have reported and the earnings growth rate was 0.69%. The growth rate on Consumer Discretionary stocks and Industrials are negative. Those are widely held sectors. This is fourth quarter data. That’s pre-virus.

Darius Dale: Look at the bottom left of that chart. As of last night, Bloomberg consensus is still up at 11% growth for Q4 2020 earnings growth.

McCullough: This chart is your favorite.

Dale: This chart is asinine. Just take your numbers down.

McCulloughThese are completely unrealistic expectations. They’re expecting rainbows and puppy dogs as far as the eye can see.

So just look at what Wall Street actually did in January. They went and shorted the U.S Dollar and shorted Treasuries and bought Small Caps and Oil. Wall Street royally screwed this up. They were expecting earnings to recover.

ICYMI → An Investing Road Map for the Global Selloff - vol4

ICYMI → An Investing Road Map for the Global Selloff - vol5

Dale: This is important. When people are really afraid of a recession investors start to dump everything.

McCullough: That’s not an inconsequential point to make right here.

The yield curve is actually steepening this morning. Why would it steepen? You steepen into a recession. The market is front-running the Fed cutting rates. The short-end of the curve goes down faster. That’s what happens all the time into recessionary expectations.

We have our recession watch indicators. All the long-term ones have been triggered. The medium-term ones have been mostly triggered. The shorter-term ones include basically your job and confidence which are usually one and the same thing with the stock market. Confidence goes down when you lose your job.

Dale: On this steepening, the short-end is getting pancaked in a way that we haven’t seen since the last cycle. We were at 1.57% on the 3-year. Now we’re at 1.28%.

ICYMI → An Investing Road Map for the Global Selloff - vol6

CLICK HERE to access today's slides.

CLICK HERE to listen to the audio-only replay.