McCullough: An Investment Playbook for Global Stagflation



the afternoon I'm Darryl Jones director of research and edge I welcome to the special webcast an investment playbook for global stagflation I'm joined here obviously with edge I CEO Keith McCullough before Keith gets into it I just wanted to flag that you can put questions into the comment section of the webcast so when when Keith's done going through the presentation we'll run through your questions and with that off to Keith thanks DJ and good afternoon I wanted to get into global stagflation give you a both a webinar and a playbook so that you can handle it so you can absorb it so that you can understand it with a process okay so that's what we do again with the intro we had some nice graphics with all the different countries that are going to experience some version of stagflation or deflation or already doing so so again there's plenty to do on the long short side of equities credit currencies commodities etc on that so let's first this joke jump right into the process first slide in the deck this is hedge high style rate of change so again we're talking about effectively measuring and mapping the data both growth and inflation and again for those of you that don't know it's stagflation is I'll get into it in a second but as opposed to the old wall and all that they do which they drive their conclusions based on valuation and feel and what markets should be doing because they're too expensive or too cheap or whatever this time is always different etc what we're doing is just simply measuring and mapping facts again as opposed to opinions the rate of change of the data is flek xual so again when it's trending its factual so when it's rising and accelerating that's what it's doing when it's decelerating it's decelerating it's not good or bad it's whether it's getting better or worse next slide you get into this and start to think about this within our framework and again this is not just for nerds like us but at the end of the day this is the Revenge of the Nerds if you will you have a macro opinion god forbid that's based on the rate of change of the data not based on your politics your emotions your opinion your charts this is what it is so again we have these four quadrants you have two factors I hope everybody can follow me this is not this should not be complicated but we've reduced the old wall to some pretty basic stuff at this point again rate of change second derivative math two factors growth and inflation we are currently tracking in the US and globally towards the third and fourth quadrant the third quadrant is where you have inflation rising and real growth slowing again on a trending basis so that's called stagflation whereas when both are slowing at the same time growth and inflation are slowing at the same time we call that deflation as soon as the Fed or the ECB or the BOJ any central planning agency that was put on this earth according to them to save us from us all they will then devalue the currency create more inflation this is happening in Argentina it's happening in Turkey this is what's happening okay so as soon as they see the rate of change slow down they start to devalue the currency and all they get is more inflation which perversely perpetuates the growth slowdown on a real basis for the better part of their population faster okay it's a measure and map that cycle we do that area every day and hedge high if you don't subscribe to it you should why does the second derivative matter you have to take my word for it a lot of data there again it predicts the rate of change and returns across asset classes and sub sector exposures slide 7a easier playbook if you're not into the numbers then you just want to read the words you can do that too but again there's a big pivot when you go from quad one to quad to quadriplegic so we like energy stocks commodities that's the being long the flay ssin part of stagflation and then you start to go underweight certainly certain equity markets and credits next slide let's just give you an update on where our us forecast is and again this is a global presentation I'll get into the global stagflation forecasts momentarily but first we're at the peak of the cycle in fact we're looking backwards at the peak of the cycle that was the 2.9 percent euro GDP number that is staring you right in the face looking backwards all the black bars or reported facts you've had seven consecutive quarters from the one point two percent number in q2 to q2 16 all the way to 2.9 percent currently and now we're rolling off the top and again our projection there the blue bars that are going to continue to fall for the next four quarters so again that's our call we're sticking to it however Wall Street gets to their call that's up to them we're quite thankful that they have their own forecasts that are variant from ours next slide what's the what does that look like in terms of headline growth Wall Street the Atlanta Fed in particular is right out to lunch four point oh seven percent they're still thinking here they actually even added higher most recently we're down at two point seven nine percent so that's the now cast on headline GDP as opposed to looking to that Atlanta fed forecast which is completely useless it as an inch or quarter tracking error of two hundred forty basis points we suggest you stay with our forecast and if you don't get them you got to pay for those two headline CPI forecasts again this is the point we're gonna have an inflation spike here in the second quarter that's the court actually our quarterly forecast just jump that's stale as of a couple days ago that's actually up to two point seven and change and then it's gonna go to two point eight and then after two point eight you can have a three handles so again at some point in the summer right that's the real flashin part that I'm long of and want to try to keep making money on you've got to be you can be long inflation don't forget that that's the great story of Wall Street according to them is that as long as you're long inflation and Main Street doesn't know they're getting it you're getting paid while they're paying for it okay asset price inflation think about it in terms of rent your long real estate they're paying the rent okay so again at the end of the day you understand this of course you do because Main Street is much smarter in the aggregate than the old wall economists cuz the old wall economist views don't fit with Main Street so again we're looking for that spike you know I would not be surprised whatsoever that just because the monthly forecast that we have we're gonna see a monthly headline number of three percent inflation headline inflation that is and we're gonna continue to see rising wage inflation here throughout the summer time so again the Fed will be hawkish in kind on that next point just to show you like now in terms of we don't just run a US model that would be quite myopic and and and unpleasant and really unworthy of having a macro opinion if you don't have pinpoint forecast now casting for growth and inflation across the world's economies you really shouldn't be doing macro if you want to please compete with us we would love to see that because again we're not gonna get everything right but we know that those who do not have accurate forecasts will get it a heck of a lot more wrong so again we want to compete with that even though we're not gonna be right a hundred percent of the time we're high conviction that if you use this model you'll do better than them again you could see that the world really last year looking backwards ones and twos quad one and two that being those are very good quadrants to be in economically the world these are the top twenty countries by GDP actually we got more in there this time but we use forty six different countries at the end of the day that we model closely and we can get up to 50 and 55 if you want us to at the end of the day what's happened is that the world's gone from quad one and two growths accelerating in both quadrants to quad three and four we're growth in rate of change terms has peaked and start to roll over that's why we get the 3s and the four squad three Quad four stagflation and deflation okay so that's the main point again as long as you're still with me here draw a sine curve where are we we're going on the back side of the curve that's what we're doing on the real growth front don't forget that the higher oil goes the more likely our probable forecast becomes readily apparent so again cuz that will continue to kick inflation higher the other big thing that's happening currently is in emerging markets you're seeing a flare up in the currency risk which is a direct function of our call on the US dollar bottoming which also hit on and now breaking out which has been a cool one to be with trade Trent tail just so that you know we're talking about from a process perspective here trades are three weeks or less trends or three months or more and tails are three years or less we don't purport to have any opinion beyond three years other than I'll be getting heavier and not getting tolerant okay so we're pretty sure about that one but anybody trying to sell you what's going to happen in the next I don't know three five ten years maybe they just want to have that certainty on you giving them a fee to money to manage their money but I didn't say that you didn't hear that from me a bullish formation which you currently have in WTI commodities across the board agriculture cocoa rubber prices you pick it lumber prices there and what we call a bullish formation so that's what again the the key leading indicators on inflation that we use they just mentioned a bunch of them including wage inflation they're all in what we call a bullish formation so no matter what duration or frame of time you're looking at it you're seeing that it's going this way up okay so if it's in a bearish formation which looks like Turkey's stock market or Turkish lira or the Argentine peso that's everyone short-term intermediate term long-term investors trade trend tail are seeing it go down in context they're all getting nervous at the same time you want to be long of bullish and bullish formations and short of bearish formations in real time terms don't change anything after you say that slide 13 all right price volume volatility do you just look at the market surface like the price like the 50-day moving monkey did you did you just mute the CNBC after hearing whatever they talk about at that at that hour and were they talking about the 50-day the 200-day completely useless believe me if it if it worked I'd use it but again we're talking about the volatility of volatility realize volatility versus implied volatility I'm not gonna geek out on that but again that is our process slide 14 what some what's really you know flaring and glaring in this process here if you look at 30-day implied vol what we're seeing is a variety of discounts versus what's already been realized that means that the market is quite complacent in terms of its future expectations a lot of people think that the correction that we had is over we obviously don't think that that is the case so again if you're looking for something that doesn't have an implied volatility discount that we like you can go to the Russell in particular IWM that's a much cleaner way to play being long US growth late cycle u.s. growth again we think US growth is going to slow from its cycle peak but it's not going to slow nearly as fast is what we're seeing already in China Europe and Japan as of last night themes where we came from and where we're going this is why people pay Darryl Jones the big bucks to be a director of research at hedge I this is what our clients institutionally pay for us to tell you at the beginning of every quarter so again this is what we said at the beginning of the year just to have a strap on the accountability pants you know what I mean just be accountable make a call time stamp it your clients will again hold you to account if you're on TV nobody hold you can't believe me I've been there and I wasn't even allowed to hold people to account I was supposed to be nice that was pretty nice reflections are all over we had that between January and March that ended there now we're on inflation accelerating but again this goes back to the very beginning of the year we're calling for global divergences and for you to go underweight emerging markets or e/m for the first time we've made that call in a couple years I think that those calls have been just fantasy role to the six five five six months later slightly the next slide shows you where our current themes are this is q2 again identifying peak cycle in the US which I already discussed briefly reiterating the global divergences that's so much more clear today than it was when we made the call it was clear to us it wasn't clear to consensus I think to consensus it's becoming clearer dollar bottoming yep that's bottom and now it's breaking out so again that was not clear to many people when we made that call at the beginning of April time-stamped again this is not a slide deck that I can hide from and again we're not just true or not we're not trying to be Nostradamus here what we're trying to do is tell you what is becoming probable what is becoming more and more probable based on the most recent reported data okay while Wall Street thinks it's improper so that's that's why we make some hay here even when the Sun doesn't shine I mean that people need that you need to know what data is changing and you need to know what is going to be affected by that changing data this again has nothing to do with a Republican or the Democrat Party I'm Canadian green card holder and I don't appreciate either party because I'm not I'm not political I am talking about the data it's mathematical so let's stay with that as opposed to our emotions or our charts or politics for that matter I hope you don't mind that but since this one's free I can say that let's get into it USA Peak cycle all three we're gonna hit on them and then we're gonna take some questions all right u.s. Peak cycle now by the way just again accountability central over here you want to have some radical transparency on who made what calls when we've been making this call for a year and a half that the US was gonna accelerate and we kept making it and making it and making it now look at what happened okay next slide you can see for seven consecutive quarters seven-county if you can see those bars this has only happened one other time in US history where US growth is accelerated for seven consecutive quarters okay and that was coming out of the early 1990s recession so again we're coming out of a pretty gnarly place at the end of the Obama administration okay I wouldn't blame him entirely again it's just what the cycle was doing and then you get a massive acceleration so that's where you you are you know what is the likelihood that this continues to go higher unlikely it would be our point because the recent data is slowing rate of change terms now if you overlay that with this thing called volatility which not a lot of people understand or respect for that matter and moreover don't have a process to measure and map it which probably most important fine you can see when you overlay volatility with the consecutive 'no sun you've never been out here before no no no no you've never been out here before this is like the Empire Strikes Back you're out there okay you're way out there and you know what happens when you're out there and anything slows or accelerates contra to consensus expectations primarily growth and inflation stuff starts to blow up oK you've seen that this year already big time we've already reviewed a bunch of things that have blown up both to the upside in to the downside so you don't really have any money managers out there that can tell you that they know how to navigate this specific point in time because the thing about volatility in particular is it and it happens slowly and then it happens all at once okay so beware of the incoming data beware indeed that's what by the way start blowing up the market to begin with I would say blowing it up but it stopped it from going up any more from the all-time high after we hit 28 72 and the S&P 500 what happened the jobs report was reported in early February it was a 2.9 percent wage growth number the biggest number we've seen against something that had been happening slowly and then boom all once and then the market will down it's like that I learned that in school just hey see that it matters it mattered track that data like you're tracking a bear or that bear will track you okay and if you want to try that don't try that as an amateur without a guide what else do I got let's go into the US cycle is a cycle peak or not okay even something the reason why I picked this chart out of the macro deck I'm only picking I don't know a third of the deck by the way just trying to cherry pick some some some thought-provoking charts you know is this the peak of the cycle for capex which we were ragingly bullish on last year well the recent data says that the site that component of capital capex is actually not accelerating anymore now that's crazy but it's true okay so a lot of people want to be long capex me fully loaded but it just wait until they have to compare against the fourth quarter of last year when capex was going vertical okay that's when we were on the right side of that on the long side so again I think that something's changing there late cycle pricing in the core this is gonna again we think it's going to shock people so again maybe not shock the market yesterday you saw 308 on the 10-year why because oil hits 72 and if you have 72 in the hedge I predictive tracking algorithm against the upcoming comparisons which include the wireless wars and healthcare deflation of last year you're all but surely mathematically speaking going to see something on the order of 3% headline inflation so if you're buddies with the dude who runs the San Francisco fed please tell him that that's gonna happen because he still has no idea that it's gonna happen I think last night he was giving a speech saying sit it's not inflation's not taking off well he'll tell you after it took off that's that's kind of the way that Wall Street does it after it happens they tell you exactly what happened okay so again we want to be a little bit better than that and as Americans many of your Americans Canadians anyone in the world you want to be you want to be great at what you do you don't want to be good you never definitely don't want to be bad that's just bad forecasting by those Federal Reserve guys and you know that too so I 22 the best thing that's been going on so far in this cycle has been earnings okay so we're highlighting the technology spike in earnings that started last year at this time really in April in the first quarter now we're comping the comps you had a huge quarter here printing 30% earnings growth up against a twenty one point seven if you go from the fourth row from one two three four one two yeah four rows from the bottom I'm highlighting in yellow so that you can focus your eyes on the acceleration that's not forever in fact the best might be behind us as of earnings season ending next week so be careful with that one cuz you won't have the same bullish catalyst that hedge highs had for a year and a half to be buying tech stocks we still like tech stocks but I'm quite nervous about what I like I hope you are sometimes do again because we're getting really late in the cycle late in the GP cycle late in the us Inflation cycle which will be spiky definitely late in the earnings cycle and super late from a margin perspective look at this chart come on I mean this is the third time in my career 20 years I've been doing this damn job 20/20 ears you know does that make me special I mean now all I've done that's made me special is I haven't blown up when the economy's rolled over this this is why we built hedges it's the only endearing quality I have I think is that I've called every single cyclical rollover from a cycle top okay so we'll see if we get it right this time but this is a pretty dangerous place for Wall Street to be betting on margin expansion this is the third time that we've hit this level and if the dollar is going up and wages are going up we don't think that that has a mathematical possibility of going up moreover one theme number two is happening it's very unlikely so this is when you have what we call global divergences this is one one things not doing the same thing as the other thing so if US growth is chugging along I'll be at a lesser rate but Europe is slowing a little faster than what people thought not us we made that call nine months ago that Europe was about to slow from its cycle peak China slowing Europe slowing you know look at the Bongo board this is really straight forward look at this on slide 25 again not an opinion these are rate-of-change facts and and I do believe I do believe even if the old wall and all of its followers and all of its subscribers and all the people that get paid by that conflict of interest even if they don't get it you're gonna get it okay you're I hope we have the future generation of investors in global macro risk managers listening to us today because this is who that's for this is this deals in factual space okay so if you draw a line to q1 18 you see even if well I guess if you know colorblind I know that we do have some subscribers that are I'm not going to speak negatively or anything about that but just from a pure visual perspective you can see that the emergence of yellow lights and red lights starts as of the fourth quarter fourth quarter first quarter and guess what we're in the second quarter okay so there's a lot of yellow lights and this if anything did I draw on that let me draw on this all right I'm just gonna highlight this just so that your eyes see what I see I want at least one pundit out there who you know we don't get a lot of fanfare because we chirp the old wall but come on just give us a break hear me just tell the world that we're in q2 and there's a bunch of threes in here okay threes are yellow lights threes are also stagflation that's why we called this call global stagflation how to risk manage that why that's happening where is the data to support it this is all based on real-time data don't forget it's not based on my opinion okay so at the end of the day that's much more valuable than my opinion I'm giving you a process to contextualize the data which has become my opinion because it's based on facts so again that's that's a super important point I think when people talk about macro you hear a lot of hot air you know there's just a lot of like flabbergasting and a lot of wah wah-wah-wah-wah do you think that these people that you listen to if God forbid you still do have any idea which quadrant the economy is on in in any country nevermind all of them big difference right there's a robustness to that I think you need I think you need it but again that that that's the data then I just I just circled it then look at it now oh there's more red and yellow damn it when we made this call I was saying then okay then was going back to January now of course it's it's I shouldn't say of course but again it's its facts its facts as facts volatility coming off all-time lows this strawberry already showed it in a different way but I want to that's not a it's not a type of this chart having nothing on the left side we're coming off the 0th percentile of all historical volatility readings don't forget and that's price that's a big reason why their returns this year next chart show you across equity markets are materially different than where they were at this time last year at this time last year we were both bullish on growth accelerating we called that quad one and quad two and look at the returns associated with that now growth slowing and I'm using actually after the bounce returns I mean the returns from a year-to-date perspective episodically have been very read and they're getting redder in emerging markets on a relative basis anyway so again important I think though actually the only strategists who agrees with me that I could see that agrees and that was bullish last year by the you had to get both parts is mr. market mr. market is the man remains the man there's nobody better stay with them okay last point the thing that nobody wanted to listen to when we introduced it in the first week April the dollar was bottoming indeed dear sirs and Madam's you can see it in the cartoon look at it what if you're that bull who's bullish on the euro oh boy if you're bullish on the pound at that point oh boy big big big losses okay Turkish lira do I have any Argentine peso how about reals and we're talking about pretty dramatic moves in the currency market all of a sudden again the number one reason why the dollar bottoms and starts to go up is what next chart drum roll global divergences the number one loser when the world's in a globally synchronised recovery when you have ones and twos around the world is the dollar when that turns to dollar bottoms and goes up so that was the number one reason why we called for that I don't know why anybody else didn't I mean the math is pretty straightforward so is the backtest on slide 31 we're just showing you that the expected value of the dollar and as you go from one quadrant to the next from quad one and two to the third and fourth it goes up I mean it goes up a lot and that's all you needed to know really sometimes we like to just keep it that simple now it wasn't simple for people who are along the Euro at 125 look at the next chart we're coming off a level the all-time high I think that's a pretty consequential level for the Euro given that you know people were super net long of Europe in currency terms against the dollar there that's getting clocked okay consensus has a central tendency to get clocked when the causal factors growth and inflation change now there are a lot of people who are getting upset right now because they think the dollar should go down because they don't like Trump and the deficits going up post tax reform okay well again check your politics at the door both Reagan and Clinton had fiscal expansion so expanding deficits you can see that all right the red line and they add rising dollar they also both at tight monetary policy what is Trump at it's not about Trump it's about what we have we have fiscal expansion monetary tightness and relative growth accelerating in the US so again those three things together actually provide for an insulate a very strong dollar environment if they were to continue so again check the politics check your premise important to study history last slide before I take questions the positions you want the tickers you need we timestamp these every day okay people we wouldn't have a I can't actually I can tell you we've had over a hundred million dollars in revenue since we started the firm we have thousands and thousands of subscribers they care because we put our names on things we change our mind we're accountable to mistakes we do expect to win we win more than we lose and hopefully this process that I just walked you through gave you some insights into that trades again shorter term intermediate term calls which are the calls we tend to stay with you can see that that's long consumer along energy along the dollar shorts are a lot our short industrial short consumer staples and as I just pointed out short the euro so maybe a DJ 25 minutes in enough ranting just a reminder in the comments section of the presentation you can put questions in there and I'll try to get get to all them first one Keitha what interest rate does the tenure have to get to in order to be a problem for our country's debt it will the Fed reverse course as interest payments on our debt get crazy I don't think it's about a level I think it's about the rate of change okay so a lot of people will actually give you an answer to that I mean I can tell you at five and six percent it's a major problem on that metric but again it's all about in our model it's all about rate of change I'm not trying to say that your questions are relevant I'm trying to tell you that what matters more to me is the rate of change so it's about the rate of change or the acceleration of interest rates and you've seen this over and over again when interest rates are just trading range bound with an upward bias to markets fine when in the economy is fine when it starts to shock people like it did yesterday you had a 1 percent drop in a New York minute why because the rate of change in the 10-year bond yield went up faster than what people thought and so did the price of oil so again it's about the pace from here it's not about the level Keith thanks for doing these free webcasts it's the US dollar bottoming the biggest risk to markets right now well they're not free by the way is as free market capitalist you do have a things you could be doing with your time but I do I do I do appreciate it it's it's it's humbling actually the audience that we have is humbling and I appreciate you having an open mind to just a different perspective and process to me to me it's it's why I'm doing it it's why I've always built this firm I think that there needs to be a better path forward Wall Street certainly has not helped you at the times you've needed them the most coming off market highs going back to 20 years at least that I've been right in the thick of this old wall that is what was the question oh is the US dollar bottoming the biggest risk to global markets well it has been I mean certainly biggest risk to bond proxies and emerging markets for example so again it's it's the biggest tilt that people weren't prepared for if they were they wouldn't have been long the Argentine peso the Turkish lira all of FX I mean FX was just a it's a disaster if you have the short dollar bet on against literally anything your year all of a sudden has turned into a certified disaster okay so I do think that that's the biggest risk still I think the rising dollar is deflationary by definition for all those things that were denominated in u.s. dollars including emerging market debt if you're Jerome Powell which you're not what would you be saying to your colleagues right now about what the Fed should be doing from a policy perspective well I'm not a policymaker I never want to be if you can't tell so again at the end of the day I don't really think about that question if I was if I was somebody trying to give you an opinion based on economic outcomes I would use the hedge I process that's what I would use I'd use a media term data I'd have a predictive tracking algorithm that's modern I've used nothing that remotely resembles the old wall by the way this morning in the early look note this wasn't that wasn't a softball question by the way that came from you I cited this point remember build remember when everything blew up remember that no that's the second or the third time Greenspan what did Greenspan see the model this is out of Ray dahlias principles okay that's a great book I don't agree with everything in the book but I don't agree that any book but there are some great things in this book from from a risk managers perspective remember Alan Greenspan said the models failed at a time when one meter the most okay bill Dudley head of the New York Fed I think there's a fundamental problem in terms of how Macker economists look at the economic outlook growth and inflation bill they didn't change what they do its 2018 nothing's changed okay so my advice to these guys is actually not going to be clean-cut I want them to keep doing what they're doing because then we get to keep doing what we're doing and save and make money off of it not good for the economy but and Keith do you guys act with positioning in advance of what you see as market front runs quad four or what signs you need to see to pivot from consumer discretionary etc to bond proxies low volatility for Quad four great question it's an important one because we're trying to what I'm using is I have the fundamental research process they spend a lot of time on I also spent some time on the quantitative risk management process which includes the trade trend tail model price long volatility that's what I'm really paying attention to there in terms of market timing I know where I'm going it's just a question on one I want to leave ok think about it planning a trip you know and you have a wide open schedule do you have to leave tomorrow you have to leave next week does it matter why wouldn't you leave one year you could get a better deal when the conditions are best that's what I want to use the market signal for so again that's why people pay us every day to tune into the macro show or read my early look because every day I'm writing about what I'm thinking about on the margin what's changed on the margin that's the thing about macro and from our perspective is that I used to run money I had my own hedge fund I'm talking about life in markets from a practitioners perspective not from an ideologues or a pilot politicians perspective or god forbid an economist who's never run a business or a book in their life you got to listen to that market signal and that's really what's going to decide when I flip from quad to and quad three exposures in the u.s. to quad four by the way in Quad four we got to Quad four everywhere else in the world and I have nothing to do I mean by the way we don't own any of these markets emerging markets was the best call I thought we made just by being right on time and I waited again being right on time is a really good thing in life beyond time alright this is sort of a follow-on to that what do you think the biggest differentiation between the hedge I processes and the hedge fund universe that's it's interesting one I mean I think a lot of hedge funds are value driven I think that's important and and we internally a lot of hedge should go take it take a big step back if you look at your traditional long short hedge fund they're not you know macro risk managers okay they are picking stocks and a lot of them have a value bias or they have a super high end growth bias but again my process doesn't have a value or growth bias at all what I have is rate of change momentum in economic data and macro okay we have analysts by the way the picture stocks long and the short side of course we'd like to short an expensive stock if the top line is going to slow we'd love to buy a value stock if we thought the top line or revenues are going to accelerate so again we do all that I think we do a lot of would hit modern hedge funds do but we also do uniquely do what nobody else does which is we provide variant or non consensus forecasts when you're in a phase transition or when you're about to see something that's been going up start to roll over and go down that's what we do we don't chase charts we don't you know run around telling markets what they should do as opposed to what they're doing we're very respectful of what the market is actually doing and now casting what the date is doing not telling of what to do thanks for the focus talk quickly about high-yield into stagflation short in June or wait a bit I mean honey should start shorting I yield one particularly when we started to see stagflation emerge or at least got out before everybody else has had to start to get up so I mean at the end of the day just I yield to me it looks like the S&P 500 it's done making new highs okay so you can get out whenever you want with growth inflation data disappointing in Europe wire bond yields increasing Winnipeg add who knows I mean maybe people finally caught up to the idea that the Europeans could make a policy mistake I mean European bond yields have been trading pretty much in sync with inflation going back to the cycle peak and inflation which is last year by the way for the Europeans and most recently we're only talking about I think when a pig head is is picking up on what happened in the last couple days actually really in the last three to four weeks you've seen the arrest of the decline and Italian bond yields for example in German bond yields but again we're just talking off the lows we'll have to see how that plays out I think interesting it could be suggesting that the Europeans do don't forget what they did in 2011 which is they make a policy mistake and they stay too tight during a slowdown and again that's the problem with the world as we've set it up where we have allowed all these people to do in the so-called free market system we've allowed an unbelievable amount of power to be put in very small hands with very inept foraging processes so that you know that that obviously kind of sounds a little North Korean right you put a lot of power into a little fat guys hands I mean all of a sudden now what makes you a little nervous right all right they see a little skinny guy saying no no no I'm kind of like medium this is for America I manage money and I have no idea what I'm doing can you help then Eric actually got a response from the next viewer whose name is Snoop Dogg and he said Eric below have you tried marijuana stocks okay that's great we're Bitcoin if you're bullish dollars you know Bitcoin like some of the top Bitcoin guys Agora read digital gold like they're you know you do to rant Silk Road in they actually pretty pretty cool guys you know like you know that didn't know what they're doing and then all sudden but they they knew what they wanted it to be and then all the sudden they started doing all these bad things and then they realized that the FBI in the case of the Silk Road guy I didn't want that to happen so they're a lot of things that people think about out there if you're bullish dollar shouldn't commodities be rolling over no no there's no play but I mean if you're looking at short term correlations you might think that but Josephine I don't know if you have the if you have the current correlation matrix that we look at every day I mean this is a dashboard it's just like the color of the traffic lights I mean there's nothing about dollar correlations that are perpetual so perpetuity czar things that you should expect to happen all the time and at the end of the day that's not the case in fact you can see a positive correlation is in green so there's actually a positive correlation on a 15 day 30 day 90 day basis between the dollar and oil there's an inverse correlation between gold in the dollar so that's actually one of the only big I guess you can call gold a commodity you can call it a currency I call it the currency commodity but at the end of the day you know our big call to a short gold or go bearish on gold was that we were bullish on the dollar there was absolutely no data to support being short other commodities from that perspective and again when you look at it from one perspective please look at it from all the other perspectives this is the fractal approach to measuring and mapping macro and we've had old wall types pundits say oh yeah negative the dracto thing I mean no it's not no it's not it's exactly what we do environmentally we look at all the factors in macro across all markets all the time and we measure and map them and we have the humility unlike some of those pundits to turn around and say hey look there's some risk occurring here or something's developing here that hasn't developed that way before okay then all of a sudden you start to see some rules and relationships develop this is the classic fractal okay so at the end of the day to me the gold call is representative of the inverse correlation you should be considering versus the dollar and the commodities one if that comes back we'll let you know volatility what does hedge highs best way to play rising volatility when the time comes rising ball cell calls yeah I mean what would you can you can sell calls you can buy puts you know you want to be in the options market you can do plenty plenty to protect yourself you short stocks you in short currencies you get sure you can buy ball there's there's a lot to do out there obviously why long Nikkei if you're short global divergences Japanese GB GDP slowing inflation etc is this just a leveraged currency trade on the US dollar again yeah that's I mean the biggest correlation next to gold versus dollar is Nikkei versus the dollar or the upside down at the end so that's one reason by the way it's a good point I did sell my Japanese equity exposure at the top end of the restraint somebody who doesn't pay for us might say well I know you didn't make that calls I got you didn't pay to go to the game I can't you can't say you didn't see the base hit okay so we did sell actually Japanese equities last week at the top end of the wrist range in the hedge I real-time alert product and we subsequent to that to your questions point we got Japanese GDP data slow last night so I didn't know that the Japanese data was gonna be that bad I thought it would be like men but it was Matt I mean it was the worst number I think in nine quarters it was a contraction in sequential GDP in Japan so that's terrible so does that wake me up this morning ready to go buy some Japanese equities absolutely not why would I do that I have the ability to change my mind in as much as anyone else does given that I have a new data point would you change what you're doing if you're playing a game of poker if you get the next card no really bad poker player I mean would you change anything that you do or would you like this gigantic game to be this beautiful Tiffany box where everything and nothing changes all at the same time no matter what the cards are you're gonna be long stocks for the long term I mean you know there's so much so much we need to break in terms of bad behavior again we understand that and we're gonna try to break those behaviors we have we're readily and and and willing to change our mind even if we have a fundamental view that disagrees with the quantitative view well we really like to have is fundamental views agree with quantitative outlooks and and those types of things are hard to find but that's why we move around from time to time is there anything in your process that could be a head-fake at this point in the cycle you have plenty of things I mean you could have at this point you could have I don't know picket anything in change absolutely anything that's actually the easiest answer is that we as human beings have no idea what's gonna change what we should do is read and react to what it's changing how high do you think the dollar can go I think it could go a lot higher me you can go to 95 96 than the u.s. dollar index I don't forget that the quarterly average of the US dollar we might have that actually in the current macro deck at the very back the quarterly average of the US dollar I mean in the last two quarters has been around 90 on the US dollar index so it would be a material change relative to where we've been I think Josephine if you have it ready the weak dollar tail wind peaking chart on slide 98 that's that's the deck I'm drawing all these slides from by the way we do a lot of research right I mean I mean it's just like pulling this out of thin air obviously but here's the quarterly average this is another way to think about the risk management of a currency relative to say somebody's earnings so if you get a company big company like Nike that has big dollar currency risks when their earnings reports you've got to really think this through what was the quarterly average price of the US dollar I mean it got down to like 90 so currently we're at 93 and rising I think anywhere between 93 and 96 is going to impose material risks to both FX markets emerging FX markets in particular and earnings translation dollar-based earnings translate translation inverse relationship Dax Italy versus dollar shark the dax consistent with dollar long or global divergence so I guess should you know should you be shorting Italy based on the correlation of the dollar no actually what what Italy and what European equities are doing it's a subtle correlation it's not one I bet the farm on is they like down euro up dollar so up dollars actually and not surprisingly it's helped the Nikkei it's helped the Australian stock market it's helped the footsie pound down equals footsie up and it's helped european stocks come off the lows so it's the opposite of what you said I think all right speaking of Dalio thoughts on his comments recently about holders of cash are going to be sorry well I've never been sorry to have cash I actually ray I got a ton of respect for Ray but great I don't have any money I gotta have some I gotta learn something I'm not gonna be sorry a lot of my house too I gotta hold on to my family and hold on to my firm I think people should hold on whatever they damn well please make some happy and safe and sound I mean the Megane statements like that you know ray you didn't mean it that way obviously but I mean at the end of the day ray you know I say yeah you own which makes you happy in life and then your risk management according your process how about how about that that's a lot better I think that's much better indeed and and by the way the alternative to being invested in u.s. dollar cash and all that other cash ray that you could have been long and I certainly hope you weren't was a disaster that that that might be keeping you up at night if that in fact I'm not high happen to him alright last question when can we expect a hedge I'd mutual fund or ETF product not going to do it I'm not interested I'm work built we're building our own path you know why get into their business when we're eating their lunch every other way we don't need to do that we don't want to do that we want to do what we're doing we want to work with you we want to have no conflicts of interest we don't want to be the old wall we don't have a brokerage we don't want to have some damn ETF I mean how many more ETF's do you need all these things that you ask by the way they're oversupply they're over supplied I don't like I there aren't many hedge eyes I want to compete hopefully there's some more that pop up here and there but I want to compete where there's less competition less supply issues big opportunities great clients great new friends just yeah that's that's the way that we've that's the way we've done it we're gonna keep doing that great thanks everybody for tuning in if you have any questions about any of our products you can email Matt Moran at M Moran mm o ra n at hwedge.com talk to you soon you you

11 thoughts on “McCullough: An Investment Playbook for Global Stagflation”

  1. Thanks Keith, I'm buying what you're selling and i'm believing the 2nd derivative gospel. Thanks much. Enjoy your evening.

  2. Quite fascinating. The day this was published was the day commodities collapsed from yearly highs: lumber, copper, ag…

  3. The Hedgeye forecasts for UK and particularly Spain, seem to be good, or am I reading the charts wrong, opinions please. Thanks

  4. Great video! Very informative. Thank you. This lesson about macros and data is worth a lot.
    Could you devote one of the future updates to midstream companies, pipelines? They are beaten up to shreds, while energy is doing good.

  5. So grateful that you made your 4 economic quadrants (2:05min mark) public. This was an awesome webcast. I do have questions about the GIP Mode Asset Allocation Chart (3:40min mark). I admit my ignorance, but I think there might be some parts of Quad 1 and Quad 3 that are mixed up with each other. Quad 1 (rising GDP falling CPI) states to underweight Fixed income, but if Inflation is falling, bonds should go up. And Quad 1 also states to short utilities and dividend stocks, but I thought in a disinflationary state, people will yield chase. Then in Quad 3 (Stagflation) it says to overweight fixed income, RE, and utilities–but all of these will get crushed by inflation. So are my assertions wrong, are parts of that slide wrong, or are you buying low and selling high? To me that slide is confusing without clarification.
    Thanks so much.

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