Webcast [Replay] McCullough: How I Built My Wealth Without Huge Drawdowns

hey good morning there this is Darius Stella here senior analyst on the hedge imacro team and I want to thank you guys all for making time to join us this morning for this special hedge eye webinar of a nice process update in the midst of this quad for data an actual storm outside here today so uh well further delay let me just turn things over to keep them cold thanks and good morning just wanted to get you into the process process process so why do we have these views it's based on a repeatable process we want you to be prepared for the next sell-off so again when we get into the quad 4 of it all we want you to fundamentally understand what that means you will not learn from the old wall its media or otherwise what quad 4 is because of course it's our process and again this is based on very obvious rate of change data it's not a political opinion that has nothing to do a chinois whatever you're hearing on TV today so let's just jump into it you know what is the world that you hear about a lot versus the world that we're getting into so this again our process is largely built to get in front of major market moves that are perpetuated by what we call the machine so the machine whether you like it or not is perpetuating a lot of different market moves so on slide four of our process deck you can see you know what the world was which was a bunch of active law only managers seeing money flow out of what they're doing picking stocks using valuation talking about political outcomes wah-wah-wah-wah to the non Charlie Brown version which is on the right side where the money has flowed towards so whether you like ETFs or passives or not the machines do and that's a really important thing is when machines start to acknowledge either changes in momentum style factors factor exposures sub sector exposures that they used to like to they no longer liking those things you better have been prepared for that so again the two biggest components of my process really are one fundamental research to get ahead of those moves and to quantitative signaling which confirms or denies the fundamental research process if you only have one I think it could be okay at this I think I was okay at this if you have both I think you can be a great at this a lot of people what you'll see is that they have either neither or maybe one and one of those things is not updated for the year 2018 so there are things like predictive tracking algorithms machine learning there are plenty of things AI things that we use to apply again to better methodology than the things that you see daily on the old wall now not to be confused with us being angry we want we're very happy about the old wall we want them to be gainfully employed for as long as possible because if we don't have the other side of the trade we have no money to make okay so the number one way that I've made money over the course of my career is not losing money when they do okay when they're all losing money we don't want to be part of that crowd the excuse making crowd the wining the political begging for bailouts etc we want to have capitalized them capitalized on them as what I should have said okay so be happy that they are there don't be upset be quite happy about all of it if you look at slide five us-versus-them so for you a fractal experts up there you'll you'll notice that this is on the left side is a sierpinski gasket which is a great fractal pattern to become aware of a lot of this by the way it has to do with awareness as opposed to ignorance so again you don't want to be ignorant you want to be aware and then once you're aware you're gonna educate yourself to do better so on the left side what we do which is based on history math behavioral psych overlays that are all quantified versus the right side triangle what they do is largely a consensus based on linear economic theory how the market feels I called my friend who thinks that the market could go up or down the chart looks like this or that this time is different etc where I want to focus your eyes next on the math part is the rate of change so the rate of change it's a sine curve if you don't know what that is you definitely got to get up to speed on that we learnt this in the 10th and 11th grade so don't forget second derivatives for our calculus this is what our entire model from a research perspective is built on so when the rate of change slows that's bad and when the rate of change accelerates that's good this is not about anything else that's pretty much it when it's as good as it gets by the way when we had nine consecutive quarters of us growth accelerating you want it to be long growth for example and that's where we had our subscribers for period of time for two and a half years indeed until we started to make the call on quad 4 in q4 it's currently q4 so we want you to be prepared for quad 4 now what is quad for me if you look at the next slide just for those of you that are new to our process it looks a little busy I'm gonna make it simpler by drawing but first just keep that four quadrant model in the back of your mind lots of numbers not that many words and that is a darn good thing you want people that speak mathematically quantitatively not politically or qualitatively ok so I'm gonna go to the board here now and show you what those four quadrants look like with my it's this it's got to be the simplest thing that you take away from this is understanding the methodology and again the measuring and mapping process so if I just draw kind of like the same picture that I just had and I take four quadrants so on the x and the y axis I should have made that black rather on the X and the y-axis we want to be looking at growth and inflation in rate of change terms okay so quad one let's actually make that one let's put a little green on that quad one is good quad two really good so in quad one and two growth is going up okay in quad 3 and quad four three and four growth is going down okay got it you got four scenarios you have two factors okay so our job here is again much like the weather is to be allocated to where the world has to get prepared for certain weather when you go from quad to for example the quad 4 that's been our call here since September the end of September we call that a hurricane ok so you want it it's it's a little different than being prepared for just a little rainstorm being prepared for a hurricane ok this is a dramatically different outcome because again in Quad to quantify so you got growth you get an inflation going up at the same time when that's happening everyone's a winner other than people that are long gold term bonds and the doll things like that there are other things but I'm just summarizing on big stuff why because growth and inflation are accelerating the Fed is getting hawkish because the data continues to accelerate they keep raising interest rates so bond yields are going up that's when bonds do poorly that's one goal does poorly the dollar starts going down because people are chasing other people's currencies there's a whole host of things to do when you're in quad - again the last five quarters in US economy you were in quad - the last nine quarters you're in quad one or two if you were wondering or if you didn't know this that nine consecutive quarters in quad one or two is a new USA record the prior record was coming out of the early 1990s that was seventh okay so if you didn't know now you know again go from ignorance to awareness ignorance to awareness is where we want to get you and I'm not trying to insult you I'm trying to make you better okay I certainly want to get better every single day and doing it any other way is not going to make you better if you don't know this you have to get aware once we get to where we can start to get proficient and get better and better and hopefully limit our mistakes so again once you're back and once you go to the fourth quadrant you have both growth and inflation doing what they're going down at the same time in rate-of-change terms okay so back to we go back to slide five that's life 6 rather and you can see that again we have can I draw on that guy's so again this looks busier right once people see numbers that are not mathematically inclined imagine your god god forbid you're listening one of these people on TV that literally have an opinion about everything economically but do not have a model now that's interesting all right that's super interesting that's like you know like if you had a granddaddy or grandpappy or a grandma who just knew where everything was but they didn't quite give you the specific directions well now you have this thing called ways who would you who would you take instructions to to measure and map your way on a route with traffic everything fully loaded would you use grandpappy and his whatever is in his brain that day or are you gonna use some math some predictive tracking up okay so this is what we want to do so getting smarter is good it's good again going from going from ignorance to awareness is good but again if I circle this move when Trump was elected by the way and as soon as you say Trump some of you're like oh my god it's election day I hate the guy or you love the guy I don't care Republican or Democrat this model doesn't care about your political affiliation your religion anything all right q4 of 2016 when Trump was elected incidentally the data went is far into the top right corner where grandma keeps the cookies if you've ever seen a shot in hockey that's where you stick it if you don't want the goalie to get it that's as good as the data could have got in rate of change terms and again it's stayed there up until the third quarter of this year so again nine consecutive quarters you're in one of these two places quad one or two then you go from there quad four hurricane over here okay so this is our dot right here so when people talk about the dots on television they're talking about central bankers Wall Street economists they call blue chip economists that are acting on a lag to what we already know okay you can go back to the beginning of the year hedge I said the global economy is no longer are going to be in a synchronized recovery it is going to slow we said China would slow Europe would slow emerging markets would slow ten months later Wall Street is giving you that news you do not want to be operating on a six to 12 month leg - what is actually happening in publicly available data ok go from ignorance to awareness so you don't lose money when everybody else does so right here in the fourth quarter in the fourth quadrant and incidentally in the fourth quarter it makes quad 4 and q4 really easy to remember you only have to remember to force quad 4 into 4 so again quad 4 is where the most amount of people get plowed ok if you're along the dollar in quad 4 and your long low beta defenses and your short momentum and growth and technology stocks you crush it on slide 70 we've done all the back tests work on this of course it's not it it's not a question as to what happens in quad 4 the question is whether or not we are in quad 4 ok so every day a good day to dependent gets a refresh Shaan that gets an opportunity to update their process update their premise okay was that data quad 4 or was it quad 3 was it quad 2 every data point we've had so far in the fourth quarter is quad 4 ok and the markets already discounted when the S&P 500 goes down 10 percent or the Russell 2000 for that matter which is a broader basket of stocks goes down 15% in six weeks I think mr. markets figuring something else Oh so again not withstanding where the market is right here today when you're staring at a chart or at the futures what you really don't want to do is buy the damn dip if we're remaining in quad 4 so that's important we got the is M numbers earlier in the week we got you know we're gonna have PPI numbers producer prices on Friday which will be more quad 4 numbers quad 4 is a reportable fact or not and if it's not a fact every morning on the macro Shore and our written material will say hey today's data was not quad 4 so again it's not a political opinion or what the market should do or could do it's about what the market and the data is actually doing okay so again that's the way to not lose a ton of money when everybody else is losing a ton of money just to give you the nowcast so the way that this model is built is that with every data point we have a now caster the or the the the actual forecasts on where we think growth and inflation can go updates in real time so if you go to slide 13 Josefin you can see that after nine straight quarters can I do - on that one I'm doing a lot of doodling for these guys go back to well before I do it'll just take my word for it try to get good at following numbers in fact get good at knowing the numbers know the numbers expect to know the numbers be better at this the days of depending on somebody's advice or opinion are so far gone they started to leave us when the internet came okay knowledge knowledge is the opposite of ignorance so again you should notice this if you dare invest your own money or god forbid you're investing other people's money and you don't know this that would be a bigger problem and by the way I've seen a lot of people that to fit those shoes and they don't like me at all cuz of course I call him out why you know just like if I went into an airplane and the pilot was right hammered snorting cocaine I would call him up and I'd have fair premise to do so right if you don't know right here q3 q2 16 that was the low okay again you don't even have to be able to do math to know that the slope of this line is pointing upward every single quarter for nine quarters in a row it went up and effectively our nowcast is at 276 okay that's a as of the ISF services report and the is M number its 276 if it goes to 273 will tell you on the macro show that it went to 273 if it went to 279 obviously that would happen in kind now what's really interesting about this is that most people don't know this to begin with certainly people you compete with again keeping gainfully employed want that that's good stuff next slide the way that Wall Street reads the headline GDP number is is called this quarter of a quarter seasonally an annualized number which is this oubli got but the Trumpster Trumpets the four right and by the way just for credibility snake for five quarters last five quarters week we had the highest omit on Wall Street and we did quite well with that we kept saying hey the GDP numbers would be better than you think I don't care if you like Trump don't like Trump trades whatever true tariffs whatever you're whining complaining about macro tourists okay now if we're right on the queue for number look at this sucker that should be you get oh I think you don't want to look at that maybe we should take that off let's let's not talk about that okay cuz if you go from GDP headlines from four to three and a half to one oh now mr. market has himself a data point to be thinking about and he is where it's a she I don't know so at the end of the day that's a big data point that's the main part on growth and the the final point here on our now cast is an inflation is finally peaked and it's starting to roll over this is of course augmented our view being the blue line the old wall being the red line the red bars in the versus the blue bars we're at 175 so that's a full 100 basis points of slowdown on a quarterly basis of headline inflation by the end of the first quarter of 2019 so again back to what you would do in that scenario in Quad four you buy dollars you buy low beta defensives utilities consumer staple for example you also buy Treasury bonds so the last thing that we haven't been right on this year yet and we just turned bullish on Treasury bonds at the end of September so maybe you give me a little bit of time here if you don't then don't I'll give myself time because again I'm buying the thing that nobody wants to buy and that's when you make the most amount of money when you're long the thing that nobody's long when it starts to work because they have to buy what starts to work okay so that's the other thing you don't want to lose money when everybody else is and you want to start to buy the things that they're eventually gonna have to buy not like five years early I'm talking like two to three hopefully if you can nail it great on time every time you'd be behind bars and Bernie Madoff but at least over time like I've been doing this for 20 years you want to start to get these big moves right before other people do so again one inflation's following the blue the blue bars if we're right on that then the ten-year bond yield tracks that almost like a glove over time so you got to get inflation right to get the ten-year bond yield right so to get the long-term bonds on the long side right after being bearish on bonds for the last two and a half to three years that's where we're thinking about that so maybe a good spot I think that's an initial roundup maybe I'll just a final to finalize a summary site on some of the things that we're coming out of my mouth slide 70 if we can get that up guys because I wanted to do like 15 minutes and then take your questions slide 70 is telling you the worst place to be when you go into quad 4 is momentum so that's the worst return historically these are the quarterly returns by asset class sub sector exposure and factor exposure again if you don't know what any are all three of those are you have to educate yourself ignorance is not acceptable listening to somebody who is also ignorant that's selling you what to do is doubly ignorant so that's doubly unacceptable alright there's probably a power loss associated with this if you keep listening to it it gets worse and worse and worse when they get more wrong all at the same time but what you don't want to be when you go from quad two to quad 4 is long momentum high beta tech or the Russell growth what you want to be long which you can see is low beta stocks dividend yielding stocks healthcare stocks consumer staples stocks except so that's what our subscribers have been long in short we're again if you can't short stocks don't get mad at me it's not a bad thing to do you just sell in my 401 K in my RIAA and my purse accounts I was long technology consumer discretionary stocks Fang just sold and bought the other stuff utilities consumer staples dollars US dollars my biggest position that's how you don't lose money over time what you want and maybe this is the last point that I want to make cuz I always make this point with people your net wealth should look like this some people kind of like this I guess let's take this get it out of check it over here we might have to come back to that by the way your net wealth should look something like this if you start at time zero let's just use time zero and you start to make by the way I'm a son of a firefighter my mom was a teacher I didn't have anything when I came to this country other than debt okay student loans so I was kind of like down in here negative net wealth then all of a sudden you start to make a little scratch you save a little bit let's make this line green there it's just to make it all you start to go I guess it'd be nice if your net wealth did this and over time maybe it says something like that but over time you want the line to kind of look like that what you don't want over the course of the 20 years that I've been on Wall Street by the way the market this US stock market has crashed two times two times I didn't forget either and I didn't crash either time so again I was on the right side of both you might say oh my god I can't believe you said it I did is it okay there aren't many places that are built on that foundation what they do there their net wealth looks more like this okay I'd have to use the the other colors but they start going along line is like stocks for the long run stocks are longer yeah oh my god buy stocks okay it takes me a couple you know five to ten years and get back to break it okay I'm so over there and we're like you don't want that that does that does not like you don't want that that's not what you want the the way Mo's the big whammo is in this chart these things quad for lot for why I don't know why you don't learn this in school I don't know because I'm not going back to school to write a white paper on what I already know I'm gonna try to help you if if you believe me great if you don't believe me question me I'm gonna help you believe it and then over time yeah be good friends or maybe just we'll know each other through this communication channel now really appreciate your audience and I certainly appreciate your questions because your questions I'm accountable to them the old wall is not let's go do it absolutely let's get there then do think you know this day and age of a white and electronic whiteboard might suffice as opposed to a white paper yeah that's a pretty obvious for work like that all right let's keep it moving here first question here from Jonah thanks for joining us says how much does the role of post midterm seasonality and stock buybacks play in your near-term outlook not a lot not a lot I think a lot of these things are what are macro tourist topics so and no offense I mean you've been taught these bad habits by the old wall for a long period of time that's why these cable channels are essentially free but again the midterm election they can give you stats and what happens during midterm elections or after midterm elections or perform in term elections but unless they're there the precondition is what quadrant you're in during an election or any event for that matter tariffs I don't care your muscle every day you get new data points we have 30 data points per month 90 data points per quarter if tariffs are impacted in the numbers we're gonna know if they're not impacting the numbers which they haven't been impacting the numbers you're gonna know isn't it interesting on that topic in particular Trump had a trade war with my country Canada Europe Mexico China and all the numbers did we get better they accelerated to record highs okay now the Trump has eliminated his trade war with Trudeau Canada Mexico Europe and he says he's had some great conversation with the Chinese wouldn't it be ironic but not surprising if with all the trade wars over the date is slows see how there's there many traps political traps of course don't forget that every time you clip click on their garbage whatever it is or turn on their channels they get paid you don't okay it's political or it's topical or headline we jump from time series to time series not headline to headline is a simple way to put it mm-hmm awesome a few questions on sort of just trading and general process points so let's hit on them quickly when you address trade sizing do look at the futures positions in terms of your own trade sizing yeah I look at it mean we look at everything so we look at a lot of a lot of data so for example on futures and options positioning Josephine if you can if you can show it right now a glaring glaringly obvious net long position is actually the S&P 500 so the biggest net long position on a rate-of-change basis that people have gotten interestingly maybe not surprisingly because everyone thinks that the sell-off is over it's you can see that in small print but on the left side it's almost the biggest net long position in the last three years in the S&P 500 so now I'm much more confident making short sales once we get to the top end of the range so again I didn't spend any time on the quantitative side of this I said on the quantitative signaling side of this spend most of it on the fundamental research process measuring and mapping that data growth and inflation did is it accelerating or decelerating on the quantitative signal what I like to do is buy things when they're at the low end of the range and volatility is not breaking out to the upside for example that's one simple rule making short sales I want to get to the top end of the wrist range which currently for the S&P 500 is 2767 so you don't see me short the S&P 500 yet at 2767 you likely will especially now that we have a big consensus net long position in the market yep yep absolutely all right in terms of shorting would you ever press a short in case asking of course yeah I mean we so we have 40 people on our research team if I see a fraud for example which we've called a couple against Jimbo Kramer wind energy to name one big boy that that was one you press every time it's up you know I like to press on bounces if your question is you press or lean on it on the way down if you're if you adhere to my process you don't have to sell it on the way down because you've got bigger on the bounces I much prefer to sell on green and to buy on red whether I'm short selling or I'm you know just buying something on the long side I like to buy it at the loan of the range this is kind of in this day and age is it's somewhat unique with so many people chasing charts people buy on green sell freak out on red I mean I again thankfully and hopefully and hopes not a risk management process for the but again hopefully they stay gainfully employed doing what they're doing because we want to take advantage of that emotion and again people chasing charts yeah absolutely absolutely and then lastly on their selling process Francis is accent when you close the position in real-time alerts can we assume you completely covered and/or sold it or do you just use six and profits now anytime I make a move from a compliance perspective I have to you know issue a signal that I made a move so I'm not gonna tell you what I'm doing with all my personal accounts but directionally that's exactly what I'm doing so I'm not allowed to trade stocks that we have recommendations on I can only make changes in my personal account in in macro positions because my analysts can't affect those positions so I'm sure you can understand the compliance issues associated with hey I wrote we write a negative report on Tesla and I'm shorting the stock on the back door in my own account I'm not allowed to do that and I set up those rules as well and be transparent accountable trustworthy okay those three things that's not Wall Street but you get it here and that's that's that's how we think about cool gotcha all right cool let's get back into the meet position thank you for those processed questions because we're big on process here too had a bees asking is the data unique or extreme in this transition to Quad four after being in quads one and two for nine consecutive quarters as opposed to previous bullish to bearish transitions in the past the data is unique but it's not extreme data doesn't have to be extreme and some people quibbled with that of course at the end of says the last week of September that we made this call we said no don't like mean again look at slide 13 we're going from 3.0 percent your rear GDP growth to basically 25 basis points less of that so you'd say that's not extreme that's not extreme Keith I'm not selling okay if you didn't sell I was a major mistake but it is unique because it's the first quarter in the last 10 there are three months in every quarter again 30 months it's the first month that the direction is down instead of accelerating so it's unique and unique is where the payoff was yeah you might get a lot of questions on this you know well Wall Street is taught use it let me give you a security blanket let me tell you the super duper multiple that the market should trade out whether it's a fair multiple where it's an attractive multiple you don't hear that for me all you'll hear is that a mark market that is quote-unquote falling will fall further if the data continues to yes sir we'll be a bottoming point but the bottoming point is going to be when growth stops slowing and you get an acceleration and we go both ways we wouldn't start the firm in 2008 being uber bearish went bullish in April of oh nine okay when super bullish and as I pointed out in 2016 and when the data points really started to ring true coming out of October and September of 2016 so again it's not my job to be bullish or bearish it's my job to be right yeah absolutely all right let's keep moving here Bill's asking can you run through an example of volatility being episodic and clustering which if it happens to markets when we get a cluster about to it well I mean that's that's what volatility is so you don't just need one example I mean if you want to read the most important book at least foundational book on why volatility is episodic and clustering until eventually trends benoît mandelbrot the misbehaviour markets by far and away the most cited book and all of my work and so again that's there and actually in that book there are many examples he started his first observation I believe was using Big Blue's machine up in New York Town Heights where he was observing cotton prices okay so he know he goes through extensively stock charts you know different commodity charts in the case of cotton of course to show you and improve empirically that volatility is going to catch a lot of people offsides many many times but what catches you way offsides is if you're buying the damn dip on something that is clustering and episodic episodic becomes training so training ball is the worst thing for a price of something so that's what we want to avoid if you think about that in terms of our process I think it's on slide 22 guys again a lot of a lot of people who are watching this or either trying to understand what we're doing or improve their process I do appreciate that slide 22 my three factor model as opposed to looking at a 50-day moving monkey or something nonsensical like that is price volume and volatility but what essentially we're over waiting volatility because predicting the volatility of volatility or whether or not volatility goes from non trending to trending that's the most important thing if you pick off all those moves which you won't but you pick up pick off enough of them once again you will not lose money when everybody else is losing money in that asset class yeah absolutely Ray Dalio argues he's built one of the biggest asset management firms on the planet just basically observing volatility rule of nature within what he calls it is all whether month we call her a four quadrant model he calls it is all whether model no I'm not trying to be arrogant and saying I'm Ray Dalio I'm just trying to help you understand that there's somebody who's got 1,400 people on his research team that have empirically proven the exact same thing that I've proven which is growth and inflation are the two most causal factors when it comes to the returns in your portfolio either asset class sub sector exposure or factor exposure I think on slide 7 the team can show you the data on that while we go to the next question yeah well I mean just real quickly I mean there were 90 percent of daily trading and daily volume and the market being systemic you know everyone is either implicitly or explicitly you know sort of employing some sort of all targeting regime you know whether it be an asset allocation level where be at the risk management level in terms of trying to run market neutral etc etc so volatility is increasingly become a very important sort of part to risk manage and understand for investors to get their their you know security selection and asset allocation right what we noticed in what is a huge opportunity the market is that not a lot of investors can predict the direction of volatility with any degree of reasonable accuracy and a lot of that has to do with not having accurate forecasts for the things that actually ultimately impact falls dead which is growth inflation exact so what they do and says they look for the thing it's called recency bias I mean they'll look for the thing that's most near to them okay so today it's a midterm next week it won't be the midterms it you can understand how jumping from macro tourist site to tourist site makes you a tourist okay I want to be the poor bastard sitting on a park bench at the Eiffel Tower baby poor bean County measuring and mapping every single thing that happens on that tourist site every single day you know anything that changes on the margin should get my attention if it changes and it's trending there could be something bad that's going to happen I want to be the first I don't care that I'm disliked or smelly or whatever I am over there be the bean counter don't be the tourist yeah absolutely so good and we appreciate the nature of these questions by the way is fantastic I think a lot of folks really understand the Koala phone calls a lot more process in terms of its well we're in Kansas City all day yesterday with institutional 90% of our business by the way is with big money managers institutional money managers and we were Kansas City all day yesterday that so what we do is we we we present these slide decks over 100 slides it says quad 4 and Q 4 to people that have seen everyone else's argument in opinion and by the way have their own process so we are battle tested you know we don't have to go up against some clown on TV and by the way you saw how that went for me I just couldn't stand it nothing worse than people without models telling you their forecasts it's great Steve Liesman on CNBC is not that being an English major or a banjo player matters but I mean that's not the guy that I want to know quad for is God or not cuz he doesn't know he doesn't know it's nothing against the guy it just does there's nothing personal tailgate it I think they take it personally I bet I don't know who's gonna win the House and Senate but that's why I'm not telling anybody it's okay to not know just don't tell anybody yeah all right so going back to these process question because these are pretty good JB's asking how do you go about balancing logs and sharks in a portfolio and then as a follow-up question do you scale in the positions based on conviction yeah yeah all the conviction parts easy you mean once the most conviction I can actually maybe oh I'll do a quick lesson on this guys tell me if I don't know just like come over and smack me upside the head if this is too much detail but there's a lot of people really care about hedging they don't they've learned that in that prior chart where you get lose half your money a couple times the last twenty years you don't want to do that especially if you can make money during those periods I made a ton of money in a way I mean it's not I'm not gonna become famous for it but I don't care about being famous get them the bean counter on the bench okay so what I want it like if you want to talk about like sizing the portfolio the way that I do you got your Long's and you got your shorts this is God I got to change us to a different color so that just we have so you got your lungs and you got your shorts okay now one real simple way to think about it is if your max position you got to decide what's your max position now what a lot of individual investors do is that they have no idea what their max position is they'll try to buy a stock under ten bucks of Motley Fool gave them and that's it bad experience alright over time if you keep doing that but again for me the way that I would set up a portfolio let's say they got six is my max long max long six percent of my capital six percent I'm just gonna you know give you a scenario my medium position is gonna be something like three my starter position small it's gonna get the toe in the water this year you got to pay attention to position once it's in your this is the whole point like my training on Wall Street is two feet into the water the other sink or swim and you had to put positions in my boss's book and then I had my own book my own portfolio so six three one as your conviction rises you bring it to six as you get to the low into the range and your convictions rising I should have said you go towards six you want to buy low and you want to sell some higher if it's the price goes to the top end of the range and a six percent position becomes a seven and a half percent position because it went up the price went up so through appreciation then why don't you sell half of it take it down to a three percent position that's how I'd run my money okay how you run your money that's up to you you can make these ten five to whatever you want to do make a rule okay kind of like two socks underwear pair of underwear that's a good one it's a good rule two socks and a pair of underwear very good especially for a middle-aged man I would say that these are critical items now shorts very critical for a minute all right of my age because when the tide rolls out you don't have those on all right that's a bad problem so let's just say that this would be three to one how's that so now my my biggest short position is about a medium size long position don't forget that you can get hurt a lot more in shorts than you do in loss okay you only learn that by doing so for anyone who just makes everything even by the way then you have take this thing called beta and adjust the positions for their babies so if you have a one-percent Sherpas there's one percent one position but the one percent position on the long side is a two beta then you got to make that position smaller in dollar terms if I just last you study really important concept beta adjusting the size of your portfolio oh yeah absolutely when I start doing some seminar stuff this is a seminar is a webinar oh it's a weapon it's a webinar appreciate the audience cool awesome awesome alright WP is asking based on your experience might we ever go through two quarters of Quad four without ever having shortness spot nope I would love to shorts by but I mean I shorting spies isn't as exciting as shorting tech momentum high beta so again go back to slide 70 the the playbook says the other stuffs tastier so what you see me dude instead of shorting spies is shorting semiconductors so as you know semiconductors got they were down like 15 to 18 percent since March whereas the S&P 500's dry down was maybe 10 percent so you want a good like I like to go to the wood you know what the wood is your bring it all right you have a process you make the call Nate silver and whatever he's doing with his political predictions painting both sides of the fence now but you know what he's not really paying to be a percent accurate anymore he already hit that bid what I do is I make a call and when you make a call you go to the best parts of the call so that's why utilities is my biggest equity position in my portfolio biggest notional position is u.s. dollar biggest equity position and actually the second biggest notional position is utilities followed by consumer staples then it's Treasuries so some people oh but you got this big Colin Treasuries nobody else has a Colin treasure should be your biggest position you think I'm that stupid it's my call the trend signal on Treasuries isn't yet bullish so again when you go back to going to max long your signal has to confirm your fundamental view and and let until and I do think it's a trap door 3 or 4 percent 3.04 percent on the tenure by the way I think that's a big reason why you're ripped from 304 to 324 is that you went from bearish trend on the 10-year yield which is bullish for bonds to the opposite zoom all the way to 324 when we break 304 I think 250 no problem okay so what I got to do in between is I got to buy bonds when we're at the top end of the daily range well what's you got one of those yeah I got a daily range to today's range today on the SP is 303 to 322 today yeah so at 322 I said buy some bonds a couple weeks ago the tenure went to 306 I sold some bonds you actively managed a position until and then you make it big when both your fundamental research view is aligned with your quantitative signal cool gotcha speaking of exciting it's like writing my old hitch one yeah this is exciting this is this is great you know investors love learning and I think we have an audience that appreciates learning appreciates you teaching so this is actually quite instructive I don't know if I'm a good teacher but I can definitely rant about what I do all right keep moving here he's asking thanks for your work what just question on the dollar potentially losing its reserve currency status they've been big in the media yeah recently yeah what are your thoughts about this naughty personal protecting it against the wealth you built up against this factor this guy well I don't I don't III think I'm as equipped and I read a book every ten days anything that comes out that's new on foreign currencies macro markets a fractal modelling which is much more important which would give me the signal to get out of the dollar which would then start to confirm that it's losing its status as the world's reserve currency which of course has been you know poppycock so again I don't believe that neither does the signal so why would I act on it you know if one day the dollar by the way if they were to go down 10 percent tomorrow we're all dead so I'm not gonna say that I'm not gonna die that day but nobody else is gonna win to you yeah the there is no such thing is that trapdoor the world's reserve currency doesn't change as a non world's reserve currency tomorrow morning that's not gonna happen okay and I've been bearish on the dollar plenty of times I could augment that by writing a book saying well only it should lose the status of the world because the proxy basket was built on the u.s. hegemony both militarily and economically and now that isn't longer the case as you move forward to 2025 the Chinese will have more GDP and have more economic power maybe not military power therefore their share of the world's reserve currency basket should be larger you go get it buddy you know that's awesome I agree but I don't have to have that position on the most important thing when you listen to all these super smart people out there far smarter than I real important point I had the lowest SAT score at Yale so I know people that are way smarter than me and I can tell you I can kick their bloody you-know-what in markets because they think they're smarter than the market I at least acknowledge my capacity of my intellect okay so the market is the smartest one out there it's not some person it's not some process the process is designed to pick up on what mr. market is trying to price in and give you plenty of clues on okay and one of them has not been certainly this year if I miss this move in the dollar I mean my biggest position since April really April in May has been long dollars I could have scared myself into that position five thousand times reading zero edge and and said well you know that was just not smart actually that's maybe that should register is the lowest SAT score position at Yale ya know so SAT doesn't translate to market returns we know that paradigm do you H is asking can you talk a bit on how volume plays into your quantitative models outside of confirming and/or disconfirming price moves yeah what it does is really know any that's a real important question as well so if you again battle test your process make your process much more scientific okay what do I mean by that in scientific process if if then equations okay so again if that's true and this is true then one not if the Republicans win the election and I'm a Republican I'm happy therefore should buy stocks that that is ridiculous okay or vice versa if I'm a Democrat and Democrats you know take more seats in or what if not then that's bad for stocks and I should sell stock this is not what we're trying to do here we're trying to use price for example back to the old model volume volatility if price is going down I'm talking more about the risk set up but I mean it's all the same if price is going down and volume is going up and volatility is going up that's bad okay that's confirming the bearish quantitative signal in my model if price is going down but volume is is going down and volatility isn't breaking out then that's it that's actually what was happening in August the down days were small the volume on the down days was light we measure mapped this every day by the way Josephine you could show that every single day we measure map volume versus the prior day versus the one month average on a multi duration model okay that's how you should measure map everything it's not enough just to use a ruler you have to have an ability to extend your measuring and mapping process across durations so again conversely if I have price going our call for almost three years on the US stock market particularly the growth your components that we liked is that when prices going up and volumes going up and volatility is doing one going down then that's super bulge okay any monkey and you did see many can love their charts buy the damn dip when you have that set up price on up volume with falling volatility again that's where you saw a lot of people actually most people and I challenge you to send me a list because we would love to promote people with good prices people that were bullish on growth momentum high beta technology Fang everything for the last two and a half years who said in the middle of September to the end of September now's the time to take all of your lungs and short them and buy all of your shorts I want to know who those technicians are because technicals will only get you so far good technicals which are more quantitative machine learning that's better than most technicians by the way but if you only do that a lot of those people got run over what you want to have is both you want to have a good quantitative signaling process you want to have a good measuring a mapping process on the research side if you have both I think I want to know about these since I want to talk to these people I don't want to spend mine I want those other people too stinky fully employed by themselves hanging out there crowd of the bet they back slap each other all the time you know let them do that I want to get these people in here so please send them send them send us their names we pull them out on edge ITV we'd love to have a real conversation of them is what I really wanted to get into the screws on is how they built it give me all the components your process and let's help other people help their process by learning yours totally absolutely yeah we learn a lot as well all right a couple more before we wrap up here Messi is asking how would a China trade deal change or their impacts reviews Oh a change everything I would just give up on the process immediately the Trump tweet there's something like that for sure no I mean the data is how they're gonna change what the data is not gonna change okay so what happens in the very measured moment of Trump tweeting I had a really nice conversation with the Chinese believe me if your whole process hinges on that that's not a process that's just reacting to a tweet okay if the Chinese were actually to sign a new deal by the way we don't even have an anti deal with them that's really impact in their numbers what's impacting their numbers is that they're trying to compare against the biggest stimulus in the history of China okay Josephine go to slide 115 on this deck this is what's really going on in China is it the Chinese had to stimulate because we had a big deflationary force in motion and at the end of 2015 and into 2016 that forced the Chinese and the Fed to do this on the left side that's the feds dot plot they're basically going dovish devaluing the dogger is that the dollar and and or whatever if your dollar or your daughter owns in dollars and and on the right is the Chinese with the biggest stimulus in the history of China okay this right here is the biggest stimulus in the history of China I think for any of you read Chinese history again back from ignorance to awareness that's a really long time okay so again this is why markets had massive stimuli now if you go forward you know it's all about the comparisons the Chinese have to compare against that okay next slide Jose maybe we can show that actually two slides up one more those are the rate of change charts this equated to can I draw this one this stimulus of secondary industries empty cities etc heavy industries these numbers are reported by the Chinese they can't make them up equated to almost 50 percent of Chinese GDP growth and then the guy gets elected for life you think that a trade deal after having an on trade deal or whatever you think you're hearing on the television set is going to change that they have to compare against those growth rates yeah I again I hate to and I'm not trying to insult your intelligence I would I would bet that whoever just asked that question did not know what I just showed you that's educating yourself it's going from ignorant to aware and then starting ask the questions so you should always start from hey Keith I realize the Chinese stimulated their brain zone I realize at the same time the Janet Yellen devalue the dollar it's called the Shanghai Accord is it mathematically possible well every data point that you're getting whether it be Chinese or US related in q4 slowing is it mathematically possible for any tweet by any human being to change that that would be a much better way to answer the question cuz you start from a position of what's in my head because what's in my head is based on the time series of what's already been reported awesome that's a that's a great place to wrap up any parting thoughts cool no thank you very much for listening I appreciate it again focus on if you don't like my style focus on the results indie awesome thanks thanks for charlie's

Channel: Hedgeye

Views: 45,762

Keywords: finance, wall street, markets, stocks, trading, macroeconomics, hedgeye, keith mccullough, bloomberg, options, day, webcast, investing

Id: hS-JOXZrcdU

Length: 47min 2sec (2822 seconds)

Published: Tue Nov 06 2018