Dear Hedgeye Subscribers,
What are you trading on right now? The Old Wall’s narratives? Or are you following the #process and trading the market signals?
January 6th saw an unprecedented protest break into the Capitol building. But as always, we continued to follow our data-driven Marco process and trade based on what the numbers told us, not what the Wall Street mouthpieces say on TV.
Following these events, Hedgeye CEO Keith McCullough hosted a free edition of “The Macro Show.” Keith discussed how to invest as a full cycle investor; what signals to look for, and how to position your portfolio to take full advantage of the macroeconomic backdrop.
That’s not to say what happened in DC doesn’t have ramifications; Keith invited demographer and Hedgeye analyst Neil Howe, author of The Fourth Turning, to join him on The Macro Show. Keith and Neil discuss how these events may have a broader impact on society, politics and even markets in the weeks, months and years to come.
Below we’ve transcribed key excerpts from today’s Macro Show. Watch the rest of the nearly 40-minute special edition with Keith McCullough below.
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Keith McCullough: Good morning everyone. The top three things we’ll be starting off with today are Asia, the bond market, and tech.
Notably, not included in our top three are the protesters taking selfies in Nancy Pelosi’s office, Georgia, or whatever else the Old Wall is talking about on TV. Again, check your politics at the door. And if you don’t want to, you can try to trade on them, and fail miserably across cycle – we’ll stick to the data.
Number one today is Asia. What did they think about the protests at the Capitol? They didn’t give a sh*t – a technical term for the market going straight up and to the right. Japan (which we continue to be long) was up 1.6% overnight, close to a new cycle high. The last few days I’ve been telling our subscribers to buy Japan on the dip, because that’s what you do in #Quad2.
Another market we continue to like is South Korea, as it rips the faces off the short sellers out there. Dr. $KOPSI was up 2.1%, and it’s not like it’s gone up a little bit in the last month, it’s up 10.5%! People want to short the market on, Georgia? Really? The lights out there are green.
McCullough: I get accused sometimes of not seeing all the green lights, of being a value investor, a trader, whatever; but what I really am, is a full cycle investor.
Full cycle investors understand the difference between interest rates falling and rising. Because if you get the cycle right, you get the Dollar right, you get rates right, and you get all the big stuff right. We started shorting the 10-year Treasury back in November... and since November, it has been green lights all the way. The Russell 2000 was up 4% yesterday, FOUR PERCENT! That's a new all-time high.
And I go both long and short gold. Back in August, we saw red lights – Gold topped at 2100. All it has done is made lower-highs since then, and if you bought at the top your now down -9%. The 10yr yield bottomed when Gold topped... that's not a magic trick.
This has nothing to do with your belief systems, your dogmas, or anything - it's just getting the cycle right. If you get the cycle right, you won't have to have all these BS debates about value vs. growth (by the way, we're long both).
McCullough: Next up, tech. Tech gave you an opportunity yesterday – the Old Wall narrative is that you sell tech because interest rates are going up… WRONG. Are you really selling tech on the low end of the risk range, especially when there’s a big fat volatility premium? 92% is the implied volatility premium on XLK… when something gets to the low end of the range and develops a big implied volatility premium, those are green lights, and you buy.
That’s it, you don’t need anything else. The daily dose of Wall Street talking points is all about narrative, looking backwards at what already happened. What we’re doing is getting you to where we’ll be in 3-6 months. When we have 3% inflation in 3-6 months it’ll be breaking news, but you’ve already have been positioning for that. Our full cycle investors bought inflation commodities in June 2020, and they’re up 42% since then. You dirty little traders you.
McCullough: To contextualize what happened yesterday, we have with us Neil Howe, author of the The Fourth Turning. Now the “Fourth Turning” is what happens when sh*t hits the fan, and I think it’s safe to say that’s what happened yesterday.
Neil Howe: Yeah that was a mess, wasn’t it. We haven’t seen anything like this since Jackson voters stormed the White House back in 1828, and they were drunk. Now the impacts of yesterday’s events have two time horizons – short term and long term.
Short term, this is positive for markets. We’ll have more deficit spending, rising inflation, and rising rates, of course against the backdrop of #Quad2. My theory is that for many years, people said the market liked divided government. We want gridlock so the market can flourish. I think after this pandemic crisis and just the general mood in America, the market now wants a unified government. Overnight, the market rallied on news that the Dems won in Georgia. We aren’t talking about your political views, we are talking about the market reaction. Think about it, how long did we haggle over the second round of stimulus? That was ridiculous, and people are tired of that.
McCullough: For a long time, the Fed has struggled to hit 2% inflation. Now, we forecast it hitting 3.08% in the next 3-6 months. So with this undivided government we will be spending and printing as far as the eye can see, and with the proliferation of the $15 minimum wage across America, we’ll see a weakening Dollar, and then a higher cost of living for those who are already struggling to afford it. The Fourth Turning is a long term thing; if the Democrats can continue on this path for at least the next few years, what does this spell for the Fourth Turning, is it the beginning of the end?
Howe: It can go one of two ways. One is a regeneration of civic trust, and the Democratic party working for the middle, passing popular policies. Look, $15 minimum wage is extremely popular. It was popular pre-pandemic, and now even moreso. In Florida, with two Republican senators, a Republican governor, and a +3% swing towards Trump, voted for a $15 minimum wage by 61%. It is coming.
On the other hand, we have a large share of Americans who are disaffected by the Democratic party, and they aren’t going to go away either. Will fringe politics continue to play out, or will a new middle form? This is all part of the Fourth Turning; it plays out every 80-90 years in America, and it’s here today.
