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Dear Hedgeye Nation,

Volatile financial markets can make mincemeat of even the sharpest investors.

Game on.

Our modern Macro risk management process is designed to get ahead of bullish and bearish breakouts across asset classes.

Hedgeye CEO Keith McCullough hosted a masterclass on our Macro risk management process today.

This conversation is clearly striking a cord with Hedgeye Nation…

  • “Thank you for today, your desire to help your subscribers is unmatchable.”
  • “Damn awesome presentation.  Thanks!”
  • “In an absolutely insane political and economic world, I’m grateful for you and your team. Thank you to everyone @Hedgeye”

We highly suggest you check out this conversation.

Below we’ve transcribed for you the entire Q&A section with Keith taking questions from our live viewers. There are lots of great insights, like this one…

“There’s a great quote that I used today from Jesse Livermore who’s one of the greatest traders ever. He says, ‘I didn’t ask the tape why when I was 14 and I don’t ask it today at 40 years old.’ He traded the market that he was in. Stop asking yourself why. Don’t start with ‘This should happen because.’ That’s a very dangerous thing.”

Do yourself a favor… Click below to listen to this entire 52-minute free investing discussion.

*  *  *  *

Jones: A question on COVID here. “As Europe moves toward lock-downs and you analyze the top economies regarding the rates of change in this direction, how do we think about incorporating the potential for drawdown related to lock-downs globally?”

Obviously it’s a crazy year for many reasons. We have COVID lurking in the background and that could potentially cause a lot of stimulus. How do we think about prospectively? Cases are percolating, less sever and less fatal but they will impact the economy.

McCullough: I think any reasonable person would agree with that. As opposed to just relying on someone with a brain thinking through an issue, every single day I get a data point that can refute my current market positioning.

The Eurozone in the aggregate is in Quad 4. France and Germany are in Quad 4 at the same time.

Every single day you get a data point that can tell you whether economic depth is falling at a faster rate or if it’s hollowing out.

Then you have the market signal. Again, if you’re not measuring and mapping everything daily you just don’t know what’s happening. You’re just guessing. I’m not smart enough not to know all these numbers before I answer your questions. The German DAX was down -8.6% last week and it’s down -9.4% in a month. German Bund yields have been hammered down towards -62 basis points on the 10-year yield. So the market is constantly evaluating in real-time what’s actually happening.

You don’t have to make it more complicated than that. I think where people get confused is let’s say you’ve been buying Spanish stocks since they peaked back in 2017 because they were cheap. Cheap was getting cheaper because their cheapness wasn’t baking in that Europe was going back into lock-down. So now you’ve got to find the right number which every single day we’re measuring and mapping.

Eventually, it’s not about buying Spain or Germany because you feel COVID is priced in. It’s that their economy is coming out of stagnation.

We measure and map all of these things every day.

ICYMI → McCullough: "Markets Don’t Lie. Politicians Do" - quads1

Jones: This question comes from a person who is 90% in cash. How does that person think about taking that cash and gradually allocating given the high volatility. What would you say to him?

McCullough: I went to 100% cash when we started the firm when we were making a market crash call. I wasn’t nearly as good at this as I am now. I used to think that the only thing you do when you’re bearish is go to cash. Absolutely not. You buy bonds and make a lot more or Gold if it’s Quad 3. I don’t know exactly what that means. Cash is an inflammatory message of fear.

If I just look at the seven largest asset allocation positions I have it’s IVOL, LQD, TIP, GOLD, XLU, Chinese stocks and Japanese stocks. I’m nowhere near 90% cash.

There are a lot of reasons to be scared but you should be looking for a better place for your cash, particularly if it’s US cash. U.S. cash is a very dangerous thing to be holding. Both parties are tasked with burning that, devaluing the currency for political promises. We print the money and spend it fiscally in trillions of dollars at a time. So there’s a lot of risk to owning that.

Why don’t you own, pick a commodity, like Natural Gas. There’s a lot of positions that you could have your cash in.

That’s something that I want people to think about. It may come from a place that is scared of stocks. It’s not just about stocks or your Bitcoin. It’s about your understanding that there’s a better way.

Jones: The last one here is more of an observation. This is from Pete in Austin. “Every day there are so many questions about why. If I understand the Hedgeye process the why is irrelevant. All that matters is the what. What are the U.S. Dollar and Inflation telling you? What are price, volume and volatility telling you?”

This is actually a really important point. You and I have been around a long time but this is what Wall Street is all about, coming up with a narrative that tries to explain something.

Independent from Wall Street and investing everyone is trying to come up with a narrative to create their own facts. That is part of the challenge of investing. People are inventing why things are happening but they’re not actually looking at what is happening.

McCullough: Yes, well they’re human beings. Think of your health and your wealth the same way. Bear with me.

Do I need to know why I have COVID? Or do I need to be a doer and think about coming on the right side of this?

There’s a famous hedge fund manager who has trounced every other person for decades now. Jim Simons of Renaissance Technologies says, “I don’t care about why.”

Thank you for that question. I’ve been citing this book Rainbow’s End because I think the year 2020 look a lot like 1929 in terms of retail participation, people saying stocks only go up.

There’s a great chapter in this book called “Plungers and Politicians.” Politicians tell stories. Markets don’t lie. People do.

There’s a great quote that I used today from Jesse Livermore who’s one of the greatest traders ever. He says, ‘I didn’t ask the tape why when I was 14 and I don’t ask it today at 40 years old.’

He traded the market that he was in.

Stop asking yourself why. Don’t start with ‘This should happen because.’ That’s a very dangerous thing.