🔴The Keys to Understanding Macro Risk (w/ Keith McCullough & Raoul Pal) | Real Vision Classics

🔴The Keys to Understanding Macro Risk (w/ Keith McCullough & Raoul Pal) | Real Vision Classics


KEITH MCCULLOUGH: I just
fundamentally couldn’t
understand why people weren’t
applying a repeatable process
from a macro perspective to
signal, what is the dollar
impact going to
be– again, to use
an example– what is
the dollar impact going
to be on Nike’s quarter?
What is the global
growth rate decelerating
going to do to Nike’s
European business?
So it was just the
logical conclusion
that you should get to
having a rate-of-change macro
process as an overlay
to bottom-up companies.
A lot of people say, this is
what the data should look like,
or could look like, or the
outlook could or should
look like.
Whereas we have built
plenty of mathematical tools
that are more
modern than anything
you might have seen before,
in terms of macro hedge fund
managers and whatnot,
predictive tracking algorithms.
You can know day to day.
It’s not a guess anymore.
And this is where people,
rightfully so, think I’m nuts.
Because they think I’ll
change my mind whenever.
And that is absolutely true.
There is no playbook to say
that you should stay in one
quadrant for x period of time.
That’s not linear.

RAOUL PAL: I joined Twitter–
I think it was in 2014.
And I joined that financial
Twitter community.
And in that was a
larger-than-life character
called Keith McCullough.
And Keith is one of the first
people I started following.
And I followed him
because not only was
he prolific in his tweeting
and he had a unique style,
but I realized that he was
doing some interesting things.
He was disrupting Wall
Street in a different way
than Real Vision was.
He was going at the
research process, saying,
there’s a better
way of doing this.
And I followed Keith over the
period of time since then.
And many people have
tried to introduce us.
And eventually, today, we
managed to get together.
And it was a really
interesting conversation
to see how far he’d gone as a
business, his story and journey
through his investing life,
and where they’ve got to now,
and then uncovering some of
the real interesting parts
of what he thinks is
happening right now
in the global business
cycle, what it might lead to,
and some of the
opportunities that lie ahead.
Keith, great to finally get
you here at Real Vision.
We’ve had so many people try to
introduce us, get us together.
And I’ve always been
following you– well,
I’ve followed you for
a long time on Twitter
and other things,
thinking, this is a guy
we need to get on Real Vision.
So finally, thank you
for coming to join us.
KEITH MCCULLOUGH: No, thanks.
Thanks for having me,
and for making it work.
Your studio is far
nicer than mine.

RAOUL PAL: Thank you.
So look, tell
people a little bit
about the background of what
you do now, and then more
importantly, how you
came into the business,
and a little bit of your story.
KEITH MCCULLOUGH: So now
I have a company called
Hedgeye that’s 10 years old.
But I started as any other
analyst on Wall Street.
Got a job as a
hedge fund analyst,
didn’t know what I was
doing, started to figure that
out a little bit.
I worked with a guy named John
Dawson as he was breaking up
with a guy named Art
Samberg, which you probably
call Pequot Capital.
RAOUL PAL: Yeah, Art’s
been on Real Vision.
KEITH MCCULLOUGH:
Yeah, oh, OK, cool.
And so we were right
there on Pequot Avenue–
that’s why it’s called Pequot–
in Southport, Connecticut.
And I cut my chops as
a buy-side analyst.
Then they gave me my own
book, probably too early.

Back then, we didn’t have
factor exposures, or limits,
or hedges.
RAOUL PAL: Which year was this?
KEITH MCCULLOUGH: This
is back in– well,
I started as an
analyst back in 2000.
RAOUL PAL: Right, OK.
KEITH MCCULLOUGH: Yeah,
graduated from college in ’99.
As a Canadian, you’re about
35 years old at that point.
So then I rolled into your
traditional Wall Street
investment banking program.
Couldn’t stand that after a
year, and went to the buy side.
And then eventually became
a portfolio manager,
had my own fund, and–
RAOUL PAL: And you were running
tech-type portfolio, or–
KEITH MCCULLOUGH: Consumer–
global consumer, with the big–
and that’s how I got
into global macro,
was I got tired of modeling
companies that couldn’t tell me
what the forward outlook was
from a macro perspective.
Because that’s, of course, what
they would always get wrong,
so I would get wrong.
And I didn’t like being wrong.
So I started to build
a global macro overlay
to actually analyzing companies
from a bottom-up perspective,
which is easier with
global companies like Nike,
for example, or
some of the big ones
that I started to
understand better, earlier.
But it all started with
just being an analyst.
I started as an analyst.
And now, today, I guess
I moonlight as a macro
strategist, but all
of my macro calls
are borne out of that
same analytical process.
We’re almost 20 years later.
But I’ve really
just applied most
of my fundamental learnings
as a bottom-up analyst
to my top-down view.
And that’s certainly
not a qualitative one.
That’s how I quantify it, this
whole rate-of-change process
that we’ve built
and whatnot, but–
RAOUL PAL: So that
process of bottoms
up and top down was kind of
the Tiger Management approach,
people like that.
Some people have
done it really well.
Because there’s a lot
of top-down information
in the granular data in
the bottoms-up stuff,
if you know what I mean.
And a lot of people don’t
look at it that way.
So is that what you did?
You kind of tried to
marry the two together.
KEITH MCCULLOUGH: Yeah,
in the beginning, I–
again, you always
start with, you
don’t know what you’re
doing, and you’re
trying to refine a better path
of getting it more accurate,
more often.
And I just
fundamentally couldn’t
understand why people weren’t
applying a repeatable process
from a macro perspective to
signal, what is the dollar
impact going to
be– again, to use
an example– what is
the dollar impact going
to be on Nike’s quarter?
What is the global
growth rate decelerating
going to do to Nike’s
European business?
So it was just the
logical conclusion
that you should get to having a
rate-of-change macro processes
and overlay at the
bottom-up companies.
Then I started working with
many more bottom-up analysts.
I let them do that.
Because that’s a full-time job.
I mean, there’s plenty
of hedge funds today
that believe that’s
all you have to do.
And it’s been a great
learning experience, starting
to see what everybody else
does, being in the other team’s
dressing room, so to speak.
Because now I’m the
sell-side guy, or whatever
you want to call me.
And I get to learn
what they’re doing,
and try to help them augment
their process with mine.
And it’s been a great
voyage in that regard.
You learn so much
faster when you
see what other people are
doing, and you can back-test it.
Because my goal, of
course, is to be right.
And I have no problem borrowing
other people’s best practices.
There’s plenty of
them out there.
RAOUL PAL: Yes, so one of things
I found that was my epiphany
moment was back
in the late ’90s,
where I suddenly
realized that if you
look at the chart of
GDP, it goes up and down.
It’s cyclical.
And when you look at
every single analyst,
they assume linear
demand, let’s call it.
In which case they don’t
ever look at the macro–
how will the global
demand situation
driven by the
business cycle change
the performance of
Nike, or the dollar,
or interest rates that companies
borrow at, or anything.
And I had the same epiphany.
It’s like, really?
I This is, really, 80% of all
returns come out of macro.
KEITH MCCULLOUGH: Yeah,
particularly at the turns.
RAOUL PAL: Yeah, at
the turns especially.
KEITH MCCULLOUGH: So
I like to just think
of it as one gigantic sine curve
that can have the amplitude
and longevity of anything.
There’s no fixed point.
RAOUL PAL: Correct.
KEITH MCCULLOUGH: But people who
are modeling things bottom-up
don’t quite like that.
They want it to be linear.
So that’s the
opportunity, is really
in understanding and having–
I’d like to think
that if you have
an apolitical and
data-driven view,
you can really be
data-dependent.
The answer is staring you
right there in the face.
And a lot of people,
when they do macro,
they do it in one of
many ways– now obviously
there are many
different strategies.
But the big difference
I see is a lot of people
say, this is what the
data should look like,
or could look like, or the
outlook could or should
look like.
Whereas we’ve built a
plenty of mathematical tools
that are more
modern than anything
you might have seen before
in terms of macro hedge fund
managers and whatnot,
predictive tracking algorithms.
You can know day to day.
It’s not a guess anymore.
You can nowcast what the
market is telling you
about what is right there.
So trade what’s
in front of you as
opposed to what you might
ordinarily want to see.
And I think that was
a great learning.
As opposed to certainly trying
to tell the macro market what
to do, just listen to it.
And again–
RAOUL PAL: Well, people do
try to tell it what to do.
It’s like, it’s not
doing the right thing.
It’s like, well, maybe
you’re too early, or wrong.
KEITH MCCULLOUGH: Yeah.
I think most of what I do is
a function of all my mistakes.
I mean, I’ve tried a
lot of different things.
RAOUL PAL: Anybody who
says you can’t approach
this business without humility.
Because I always say,
every time you’re think
your shit smells
of roses, you’re
going to get your
face rubbed in it.
And it’s true.
KEITH MCCULLOUGH: Yeah.
It’s absolutely true.
RAOUL PAL: It is
all about failing.
People– anybody who doesn’t
understand that repeated
failure, but losing less
than you make in the upside,
is the whole investing game.
And learning from
why you’re failing
is the icing on the cake.
So once you started
figuring this out,
what made you leave kind
of traditional Wall Street,
and set up your own shop?
Talk me through
that whole process.
KEITH MCCULLOUGH: Well,
first I got fired.
That’s the best way to start.
RAOUL PAL: OK, that’s
a good place to start.
KEITH MCCULLOUGH: So you
start from a real safe place
of not being able to go
back and do your job.
I was at Carlyle.
So as I walk
through it briefly–
I had my own hedge fund
probably at too early of an age.
Effectively went to
Magnetar Capital,
and rolled that into
a big book there,
and started to learn, well,
what are these factor exposures?
Magnetar had this
proprietary system that
was very early in it’s days.
And I give them a lot
of credit for that.
And I had no idea what it was
that they were doing until I
finally lived inside of that.
Carlyle asked me to come,
basically, run long-short
for them.
That imploded within what was
the fastest loss of capital,
certainly, that I’ve ever seen.
We completely blew up
Carlyle’s initial hedge fund.
And it wasn’t me.
Our credit team lost a
significant amount of capital
in a short period of time.
So effectively–
RAOUL PAL: Was that with Ralph
Reynolds and Rick Goldsmith?
KEITH MCCULLOUGH:
Yeah, that was.
RAOUL PAL: Because they were
my old bosses from years ago.
KEITH MCCULLOUGH: Oh, they were?
RAOUL PAL: Yeah, at NWest.
KEITH MCCULLOUGH: And
so I was with them
for a very brief period of time.
It’s kind of a
classic– like you said,
you think it would
smell like rose–
when I got hired by
Carlyle, I thought,
this is the best job possible.
You’re a young partner,
managing whatever director
title at one of the biggest
private equity firms on earth
that’s going to fund
their first hedge fund.
RAOUL PAL: It’s a no-brainer.
KEITH MCCULLOUGH: Yeah.
And then six months
later, I’m carrying a box
with my notebooks.
And my son’s going to be
born the week after that–
my first son.
So it was a pretty
jarring experience.
The number one reason
why I started my own firm
is that I had a non-compete.
So I couldn’t go back.
And the second reason is
that, after a couple of weeks,
I was like, I kind of like not
working for anybody but myself.
And that’s when I started
to think through, OK,
what is it that I could do
that could actually change
the world a little bit more than
me just having another big P&L?
RAOUL PAL: What year was this?
KEITH MCCULLOUGH:
This was in late 2007.
And I had an explicit market
view that was much different
than Wall Street’s.
And that was the beginning of
making an early and big bear
market call to start.
That’s effectively what
I started the firm with,
was a call that people
would be paying attention
to– not for the sake
of making the call,
it was the same process
I’d use for the first part
of my career, and
what I was seeing
at that point in my career.
So I saw a big
opportunity in being
in print, or as I like
to say, time-stamped,
with accountability,
using modern technologies.
And don’t forget,
a lot of the things
that came to be over that
period of time were new.
I used to call it
YouTubing the street.
Or tweeting, obviously,
was shortly thereafter.
There’s so many
ways to communicate
why things were happening a
certain way while other people
were saying, that’s
not happening,
this can’t be happening,
this should not
be happening– all the
way down, obviously,
to Warren Buffett
in October of 2008.
RAOUL PAL: Yeah.
One of the reasons– and we’ll
go into this a little bit
later.
But one of the reasons
we started Real Vision
was for exactly these reasons.

There is no such
thing as the truth.
There’s somewhere
closer to the reality,
and somewhere
that’s non-reality.
And we just looked at what was
going on in the media business,
and what was going on on
Wall Street, and thought,
this is not reality,
and it’s not fair.
People forget it’s
people’s life savings.
And the bullshit that
they get fed so often–
it’s just not fair on people.
So we were all driven
by the same realization
that we had to do
something about it.
I always felt like we always
had a bit of a moral obligation
to do something about
changing how the system was.
KEITH MCCULLOUGH: Yeah,
I agree with that 100%.
RAOUL PAL: And even the
part you walked into was–
in terms of the
research business,
the independent
research business,
yeah, there’s a lot of great
independent researchers,
but then there’s this behemoth
that makes a billion a year–
which I won’t
mention their name–
out of newsletters built on
sensationalism, and starting
newsletters, and burning them,
and all of this kind of stuff.
And again, not really caring
about the individuals.
And I saw what you guys done,
I thought, OK, this is good,
because someone’s actually
doing this properly,
trying to build a proper
business out of it,
but using kind of modern
techniques of doing it,
and not just the old way.
KEITH MCCULLOUGH: And
back to your point,
like, there are different ways
that people express their edge
in the market.
There are different processes.
But God forbid you have your
own, and you’ve built it,
and you refine it,
and you evolve it,
you learn from its
mistakes, its failures.
It’s always evolving
and changing.
So what I’ve realized
pretty quickly,
I’m very comfortable being
transparent and accountable
to what it is that I’m
doing, and what I thought
something should
have done, and when
it’s right, an when it’s wrong.
It was the perfect forum for me.
And not only was it
fun, but you could
change the world doing that
because a lot of people
can learn from you.
Don’t forget that there
are a lot of people–
like Hedgeye, the whole
concept was to put an eye,
or put some transparency.
If you could look inside–
like if we could look
inside of this conversation,
would I want to hear
what we’re talking about?
Of course you would.
RAOUL PAL: And that’s we
used “Real Vision,” exactly
the same idea.
KEITH MCCULLOUGH: And
people want it to be real.
RAOUL PAL: That’s right.
KEITH MCCULLOUGH: If I could
look inside of a world class
hedge fund– not in
terms of its reputation,
in terms of its process.
Because I still think that
there’s a huge opportunity
there.
And looking at
hedge fund returns,
I’m more convinced
today than ever before
that that is the case.
A lot of people have made a
lot of excuses over the years
of why they can’t make money.
And I’ve not had–
God willing, I’m not going to
have that problem at the point
where I think it’s
a structural one.
If I’m wrong, I’m
going to be wrong.
But what the real opportunity
is, in showing people, look,
here’s our process.
You tell me why
this is wrong, I’ll
tell you why I’m doing this.
I want to vet it at
the highest level.
100% of our revenues,
in the beginning,
were with who I think are some
of the most sophisticated hedge
fund managers, that had good
numbers, that were willing
and really having an open
mind to listen to what it
is that I was thinking and why.
And then bringing
it to the masses.
Because if I can validate
it with plenty of names
that you’ve had conversations
with out in the open,
then I could surely do better
than somebody like Jim Cramer.
That’s just almost like an
insult when you think about it.
The bar is so low
in the mass market
relative to the
institutional market,
but both are very
wide-open nets in terms
of the educational opportunity.
I think that that’s
a big part of,
when I think of Hedgeye
and its media presence,
I think that that’s the
most important thing, how
to try to educate
both our audience,
and then get the feedback, where
I get educated where I’m wrong.
If you tell me where
I’m wrong, and I
validate that as a good reason,
it’s not my job to stay wrong.
And that’s a great thing
to have that feedback, both
from the mass-market
audience, rich people, people
that want to be rich, people
that do well on their own,
or institutional money managers,
which there are many of them.
RAOUL PAL: So coming off
2007-’08, you called it
brilliantly.
You set yourself
up into business.
So where do you then
make the mistake?
Because I had a terrible year
in 2009 by getting absolutely
amazingly right in 2005, ’06,
’07, ’08, and then ’09, I got
it dead wrong.
Where did you then have
the dead-wrong moment,
where you realized that, even
though you might have the right
process–
I’m very process-driven myself–
sometimes, A, you
ignore the process,
which is a genius thing
to do, because you always
get it wrong when you
do, or it was just
one of the probabilities
that you didn’t foresee.
So where did you get
it wrong after 2008?
KEITH MCCULLOUGH:
2011– mid-to-late-2011.
2009 was great.
We went bullish in April of ’09.
RAOUL PAL: Fantastic.
KEITH MCCULLOUGH:
So that’s where I–
my wife didn’t know,
but I go both ways.
And that’s how–

–it started getting– people
were like, I thought you were–
what?
I thought you were the
Hedgeye hedge fund guy.
And this is where it
changes a little bit.
RAOUL PAL: You could be bearish.
KEITH MCCULLOUGH: But going
back to the dark side,
or back to bearish
properly, in late 2010,
overstaying my welcome through
2011, that’s where I made–
when Bernanke decided
to twist the curve,
and the “whatever it takes”
took over the narrative,
I just did not believe
that that could
change the economic gravity
back to delta-positive.
Because I thought this was it.
This was part two of the
great financial crisis.
And if you go back and
read anything that I wrote,
or listen to anything that I
said, it’s all timestamped.
It’s all there.
I was pigheaded.
I was not data-driven to
the extent that I am today.
So a lot of the
mistakes, I think, that–
I like to think that
when you make a mistake,
it’s a big opportunity to
make your process better.
That was a big one.
I mean, if I was running
big money back then,
that would have been
a nasty year for me
in the back part of ’11.
And then finally
went bullish in 2012,
and stayed bullish through 2013.
But that was easily it.
RAOUL PAL: That period, I think
I was relatively lucky with.
2009 was where I just
ignored my own process.
Because I just thought the
smaller-probability outcome is
going to be the
one that happens,
which is a dumb
thing to do, right,
betting on the really
small probability.
But that’s what I did,
and I screwed it up.

So now, talk to me–
so now you’ve
developed your process.
So you’ve learned from
the big mistake, 2011.
You’re now moving forwards.
How’s your business evolving?
How has your process,
more importantly,
evolved, maybe to where it got
to in the last couple of years?
What is your process now,
and how does that look like?
KEITH MCCULLOUGH: Yeah, the two
big components of my process
have never been more robust.
So I have the fundamental
research process,
which we call our GIP model, or
Growth Inflation Policy model.
Effectively, get the rates
of change, and growth,
and inflation right,
and you’re going
to get the forward behavior
of the policymaker right.
If my outlook is–
in Q4, we said “Quad 4 in Q4.”
It’s our four-quadrant model.
Quad 4 is when you have
growth and inflation slowing
at the same time.
I said, if that turns
out to be accurate,
and the data continues
to rinse and repeat,
negative rate of change,
growth, and inflation, the Fed
will not only not be
raising interest rates,
the last rate hike will
be into a slowdown.
And then we’ll be talking
about falling interest rates.
So it’s a good example of–
that’s the model that we use.
We call it our
four-quadrant model.
So you might see–
when we say, Quad 4, or #Quad4–
RAOUL PAL: So it’s a business
cycle model, essentially.
KEITH MCCULLOUGH: Yes.
And it’s fundamental
in that it’s using–
like Dalio might– rate of
change of growth and inflation
as the two most causal
factors, for not only asset
allocation, but sector
exposures, factor exposures.
We’ve got that down now.
That, I have a roadmap.
The process is repeatable.
It’s literally
impossible for me to have
style drift relative to
that component of the model.
Where I have the most, I guess,
opportunity is in the signal.
So my market signal that I’ve
built over the years, trying,
back-testing
everything that I can–
some people get upset
when I say that they’re
using moving monkeys.
And it’s because I
used to be a monkey.
I am a monkey.
I mean, we’re all
monkeys to some degree.
But if a 50-day and 200-day
moving monkey worked,
I would use it.
So I have a market signal that
is basically price, volume,
and volatility-driven.
But with volatility being– or
the “vol evol,” as Mandelbrot
would have taught anybody
who has studied it,
is the most important
thing to look
for– a cluster of volatility
that’s non-trending
that becomes trending.
Now that market signal is
going to instruct my model.
So I know that the market’s
trying to front-run me.
That’s the best strategist.
And those two things
are as refined, I think,
as they’ve ever been.
They get better with
computing power–
both of them.
They get better
with more people who
understand the computing power.
We’re using advanced
Excel, Python.
We’re not using what I would
have used historically.
We have predictive
tracking algorithms
that are getting closer
and closer to the numbers.
RAOUL PAL: So you’re
moving towards– because I
was going to ask you that.
It sounds like you’re moving
towards a full algo model,
right?
KEITH MCCULLOUGH:
Well, you use it
to nowcast growth and
inflation because they’re
trivial numbers.
They have components and they
have dynamic re-weightings.
So we can do that.
You couldn’t do that as
quickly as you can do it today.
And now I can–
RAOUL PAL: But remember,
again, the nowcast numbers
aren’t particularly
consistent, as we’ve
seen between different
variations of nowcasting.
KEITH MCCULLOUGH: Yes.
Oh, yeah.
It’s– as Picasso would say,
“it’s not we’re looking at it.
It’s what you see.”
If you’re looking at
the Atlanta Fed nowcast,
you’re looking at some
version of a disaster.
RAOUL PAL: It was great at
first, then it has been–
KEITH MCCULLOUGH: And it’s great
because it’s what wasn’t there,
and it’s what people
ideally would want.
Of course you
would want to know.
RAOUL PAL: But why
don’t they just use ISN?
KEITH MCCULLOUGH:
They’d actually
do better with a rate-of-change
model that’s one-factor-driven,
which I would never do.
But that would be better.
The interquarter tracking error
that we have on our nowcast
for US GDP is 20 basis
points right now.
The Atlanta Fed is
240 basis points,
on a number that can be
300 basis points wide.
That’s not God-awful,
that’s beyond that,
if that is what you’re
using as an assumption.
The value in that–
the Atlanta Fed model and
the New York Fed model–
is that you can fade it.
If the street
believes that that’s
where GDP was,
which they thought,
for example, at the beginning
of the fourth quarter,
you’d be around 4%.
Oh, boy.
I mean, our number’s at 1.54%.
So that’s where you
can really use–
And I also think the evolution
of macro tourism on Wall Street
is a huge backboard to play
against in that regard.
If everyone thinks that it
could be 3%, 4%, 5% GDP,
and you got a 1 in
front of your number,
well now we have an opportunity.
RAOUL PAL: Talking
about macro tourists,
I think one of the
largest macro tourist
positions I’ve
seen in a long time
was everybody
shorting bonds in Q4.
KEITH MCCULLOUGH:
Well, you see there’s
a lot of Treasury issuance.
Did you hear about the–
RAOUL PAL: Yeah, oh, it’s
all about the issuance.
[LAUGHTER]
It drives me nuts.
Because people–
KEITH MCCULLOUGH: Oh,
and the twin deficits.
Did you know?
And did you hear about Trump?
RAOUL PAL: No, that’s–
it surprised me all
the way through.
And again, my argument–
I’ve just written a piece about
this in Global Macro Investor–
is, the one thing when I step
back and say, why did everybody
get that cold wrong?
KEITH MCCULLOUGH: Literally.
RAOUL PAL: The more
interesting thing
is, why did they get it wrong?
Now, even if we both had
the same view about where
inflation and growth was
going, and I gave it to people,
and many people would
say, but it’s not.
It’s the deficit, or
something like that.
What they forgot to
look at was demand.
The demand for
treasuries was the fact
that there was the largest short
position in recorded history,
all point of the curve.
And then the pension system
was record underweight,
the household sector was record
underweight, and still is.
The amount of buying up
treasuries that can come
is in the trillions.
So it’s almost
impossible for them
to issue enough treasuries
to create a problem.
And all you needed
was that one bit
of kindling, which
the slowing economy,
and it started the stampede.
KEITH MCCULLOUGH: Stampede?
Now they’re begging on
their knees for more.
And they will continue to,
until you get the final cowbell,
and the market doesn’t
respond to that.
I mean, this is the
beginning of that.
Any great call in macro starts
with exactly what you just
said.
The street has to be on
the other side of you.
RAOUL PAL: Always.
KEITH MCCULLOUGH: It was
the biggest– to your point,
we measure and map this
weekly, because it comes out,
and CFTC futures and options
data comes out weekly.
And it was the biggest net
short position in the history
of 2’s, 5’s, 10’s.
RAOUL PAL: [INAUDIBLE]
futures, the whole lot.
KEITH MCCULLOUGH: And my map,
Quad 4 says, number one asset
allocation pivot is buy that,
all of that, across the curve.
Once in my life,
that might happen–
that’s cool.
But you know what
most macro people do?
They make that call, and then
that’s their call for 30 years.
What we know is that when
growth and inflation slow
at the same time, bond
yields are going down.
Because people need treasuries.
RAOUL PAL: So we’ve got the
[INAUDIBLE],, you nailed it.
So as you and I know, macro is–
there’s a core view.
And the bond view probably works
for quite a long time further,
depending on what
your models start
saying about whether we’re going
to go into recession or not.
We can guess, but
we don’t know yet.
What’s your view on that first?
KEITH MCCULLOUGH: First of
all, you don’t need a recession
to lose half your money.
RAOUL PAL: In the stock market?
KEITH MCCULLOUGH: Or in credit.
Both.
The two biggest
things that happen
as you go from what we
call Quad 4 to Quad 3.
So let’s just, for
argument’s sake,
let’s just say that the
outlook continues to be right.
If the outlook’s right, you’re
going to have more cowbell.
You’re going to have
more Fed easing.
The next thing’s
going to be rate cuts.
What you’re going to get
is economic stagflation.
You’re not going to get a
real economic growth breakout.
We already had that.
We had nine consecutive quarters
of year-over-year GDP growth
accelerating.
That’s never happened in
the history of the US.
To get an acceleration,
what do you need?
Easy comparisons.
A recession usually will do it.
You can accelerate out
of easy comparisons.
We not only had easy
comparisons coming out
of the 2016 slowdown, we
had the Chinese stimulae
like they never had before, the
biggest stimulus in the history
of China, as you know.
You had the Fed basically
easing alongside them,
as Janet saw the numbers,
dot plots falling.
And then you get post-Trump
election tax reform.
Fully-loaded, Germany’s
in the 94th percentile
of historical readings
on GDP, and everyone
thinks that globally
synchronized
recovery is something that’s
going to go rainbows and puppy
dogs, up and to
the right forever.
It’s the uncompable
comp, actually.
So the slowdown part is easy.
The amount of stagflation
you get via Fed easing
is not easy,
because that’s based
on the pace of their awareness.
RAOUL PAL: Do you
get stagflation?
See, I don’t think that’s the
case, for my personal opinion.
My view is that, having traded
both the 2000 and the 2007 rate
cuts, all I know is what
happens is, as soon as the more
cowbell starts ringing,
the equity market goes, oh,
isn’t this brilliant?
And they try and go to new
highs, and they don’t make it.
And then every time the Fed
cut again, it’s like, oh,
it’s brilliant,
it’s going to be OK,
forgetting that it takes like
six or eight rate cuts in 18
months before it feeds through.
And then everyone
goes, oh, shit.
And the market then collapses.
And then you have to go
through the whole thing.
And then you bottom out
whenever you bottom out.
And so I’m not sure that there
is any reflation or any sign
of stagflation within that.
Unemployment’s going to stay low
because the aging population.
If you look at the
Japanese unemployment rate,
it doesn’t move as
much as it used to.
So that’s kind of what
I’m thinking about this.
But what do you
think about– so–
KEITH MCCULLOUGH:
It’s a shorter-term–
and I’m quite
precise about this.
So when you go from Quad
4 to Quad 3, all you need,
literally, is 10 basis points
of your rear inflation.
We’re not talking about
1970s-style stagflation.
That could happen down the line.
But all I’m talking
about when you
go from one economic scenario,
which is– right now,
you have growth and inflation
are slowing at the same time.
The Fed’s job is
to try to arrest
that, which arguably they did.
I mean, oil down 41%, but
then it can bounce materially.
That’s a hybrid reflation
in a very short-term period.
It doesn’t mean that that’ll
be my call from here until–
I literally changed my–
I had four different outcomes–
Quad 1, 2, 3, and 4.
When I say stagflation,
there’s a knife’s edge–
literally– between
stagflation and deflation.
Because if the cowbell is
not working, to your point–
RAOUL PAL: And you can move
through one into the other.
KEITH MCCULLOUGH: Bingo.
RAOUL PAL: And now, and
suddenly, your rates change,
you were talking short
summaries change as opposed
to the full cycle.
KEITH MCCULLOUGH: Right.
And this is where people,
rightfully so, think I’m nuts.
Because they think I’ll
change my mind whenever.
And that is absolutely true.
There is no playbook to say
that you should stay in one
quadrant for x period of time.
That’s not linear.
But there is one–
RAOUL PAL: And how long do
these quadrants last, generally,
for you?
KEITH MCCULLOUGH: There is
nothing typical about it.
Emerging markets, for example–
it was in Quad 1 or 2 for
eight consecutive quarters–
never happened in the
history of emerging
markets in the aggregate.
That’s wonderful,
because as long
as you’re in position for Quad 1
for the first part of the move,
you just stay with it
until the data changes.
But oh boy, when we went–
the numbers were called
at the beginning of
last year, I thought
that was a better
call than most calls,
because if you think people were
short treasuries as consensus,
I mean, long the emerging
markets and emerging market
credit, at the
beginning of last year,
was straight up
no-no in my model.
Because Q1 of ’18 was Quad 4.
So it’s more– when you go
from Quad 1, pro-growth,
everything’s great, buy
pro cyclical credits,
buy the Argentine
peso, for God’s sakes.
People would buy
anything at that point.
Brazilian credit
was a big long trade
for the hedge fund community.
Then boom, you hit Quad 4
very quickly in Argentina,
and then you’re in a
recession two quarters later.
So parting the heavens
and smoothing the seas
is not my job.
It’s reading– much
more like a weather
forecaster is– what the data is
doing against the base effects.
If the base effects
are steepening
and the data is flowing, I’m
going to be calling for slope.
RAOUL PAL: So coming out of
this Quad 4, as you call it,
moving to Quad 3–
what’s that?
That’s a rally in equities
and a rally in credit?
KEITH MCCULLOUGH:
It’s just a rally
in the things that got blown
up the most in equities.
Oil and energy are the number
1 and 2 pivots off the lows.
RAOUL PAL: Is that what we’re
seeing now– part of that?
KEITH MCCULLOUGH: Yeah,
I think, effectively,
at some point, that’s
what we’ll see in Q2.
If the Fed goes from, oh,
no more rate hikes, to,
next move’s a cut, it’d be
very hard with correlations
where they are–
15, 30-day, I’m talking about
tight correlations inverse
to the dollar, it’d be very hard
for me to not see big moves,
up and down, in oil.
But again, you want to
not be short that move.
We’ve been bearish in
commodities for a long time.
And we’re at the beginning
of the market giving you
a peek at that.
RAOUL PAL: What does
fixed income do in that?
KEITH MCCULLOUGH: Well, you
want to be long duration,
you want to be long–
your portfolio wants to
be, basically, minimum vol,
long duration.
RAOUL PAL: But the yield
curve should be steepening
at this point, right?
KEITH MCCULLOUGH: At some–
RAOUL PAL: Because when
they start cutting,
it’s steepening, right?
KEITH MCCULLOUGH: Steepening
off it’s inverted point.
That’s where I
think the Fed will
be more aggressive,
in actually saying,
we will cut interest rates.
But you’re only 15,
20 basis points.
RAOUL PAL: I’m not sure–
my thought is, is
the curve inverted
if adjusted for low rates?
So if you look at Japan,
it never inverted again.
KEITH MCCULLOUGH:
Yeah, good point.
RAOUL PAL: Europe
didn’t either, right?
KEITH MCCULLOUGH: No,
you don’t have that.
RAOUL PAL: Europe’s never
invested again, and has
had two recessions since.
So maybe it’s inverted.
It’s low, regardless.
It’s kind of the
steepening, is what
I’m kind of thinking about.
KEITH MCCULLOUGH: Yeah, and
steepening is easy to get
if 2-year yields go
from 2.50% to 1%.
That’s actually one of
my favorite positions,
even though it’s the most
boring thing to most people.
RAOUL PAL: It’s the best
trade, is the short end.
KEITH MCCULLOUGH:
It’s like, here’s
one way to not lose
your net wealth–
don’t have massive
drawdowns, and take
positions that carry wealth.
Like in the case of 2-year
bonds, I bought them at 3%.
It’s timestamped, it’s there,
never done it in my life, ever.
This was really exciting if
people are short treasuries.
But that thing can go
from 3%, to 2%, to 1%,
and you will get
your steepening.
RAOUL PAL: Short that–
yeah, long 2-years, or
short yields, euro dollars,
5-years, 10-years,
the whole thing.
KEITH MCCULLOUGH: Not everybody
believes in this, obviously.
I mean, this is
why it’s working.
RAOUL PAL: No, they don’t–
and certainly not
the short end, right?
KEITH MCCULLOUGH: And then,
if you look at the long end–
if you have a global
macro perspective,
it’s so much easier to
understand the downside.
Because as equally
fervent as the “I’m short
treasuries because of
supply, and the US deficit,
and their political
view,” I’m Canadian.
I’m not a Republican
or a Democrat.
And I don’t have a
political view on it.
But if they have it, great.
If you have all
three, that’s where
you’re going to find
your hawks on treasuries.
If you look at global
yields, Swiss 10s at minus 23
beeps, and German boon
yields at 20 basis points?
What is that telling you
about slower for longer?
And by the way, what’s
it also telling you
about the relative
attractiveness of people
that actually have to buy
long-dated fixed-income
securities?
They’re going to buy treasuries.
They’re not going to
buy Chinese bonds.
RAOUL PAL: So that brings
me to the currency question.
Where does currency
fit in for you?
I’m currently neutral.
I was very long dollars.
Been neutral for a while now.
I’m personally waiting to
get back in long dollars.
Because I’m waiting to see
the positioning wash out.
KEITH MCCULLOUGH: Mm-hmm.
Because I know people have
done net long dollars.
RAOUL PAL: What’s your view?
How does it fit into your model?
Because I find it– currency
is the hardest 2-model.
I do think there’s the
dollar smile, where
if things are really good,
particularly in the US,
the dollar does well.
If it is really bad
globally, it does well.
And the dollar
usually gets smashed
when the world’s
doing quite fine,
and you can allocate money to
Thailand, or India, or Europe.
KEITH MCCULLOUGH: So
this fits perfectly
within the back-test of
the four-quadrant model.
When the world– we went bullish
on the US dollar in April
of last year, and that’s when
the world was entering Quad 4
outright–
Quad 4 in Europe, Quad 4
in EM, Quad 4 in China.
So to your point, the reason why
the world’s reserve currency,
even though crypto
experts and everybody else
don’t like that it’s the
world’s reserve currency,
unfortunately, it still is.
And that flow trade is what
gets you paid initially.
Because you have to get
the heck out of everything
you’re speculating on in
EM, Europe, et cetera.
So Quad 4 is where the
dollar bull gets paid.
That back-test plays out.
I could show you the
expected value of the dollar
by the four quadrants.
The number 1 is–
actually, the dollar doesn’t
have a higher expected value
even close than when
the world’s in Quad 4,
growth and inflation
is slowing globally.
So that’s really the
catalyst for the dollar.
And once the US
joins that, that’s
the beginning of the end of the
topping process of the dollar.
So what I’m concerned
about here is– which,
I’ve started to talk about
the topping process of the US
dollar.
What that means in quad speak
is that we’re going from Quad 4
to Quad 3.
The dollar’s expected
value falls in Quad 3,
primarily because now the Fed
is in a competitive currency war
to try to devalue it’s–
RAOUL PAL: But then aren’t
you making the assumption
that that Quad 3 is
a permanent change,
as opposed to a
temporary phase before,
let’s say, more of Quad 4.
So as this often goes, in your
terminology, Quad 4, Quad 3,
Quad 4–
if you’ve got a full recession.
KEITH MCCULLOUGH: Exactly.
RAOUL PAL: If you haven’t,
you’re Quad 4, Quad 3,
then, I guess, Quad 2.
KEITH MCCULLOUGH: The most
important thing is that when
you go from one quad to
the next quad, you have–
and positioning is, on one side,
in this case, net long dollar–
you have a quick
move to the downside
that I’m not willing to bear.
If we’re talking six months
ago– or really throughout Q2,
Q3, and Q4, of ’18, I’d be like,
my number one position wasn’t
treasuries, it was dollars.
Because we were still hawkish
on growth accelerating.
But I’m concerned–
maybe overly concerned–
about this transition
to Fed rate cuts,
and the dollar’s topping
process that happens anyway,
even if we only tip into Quad
3 for a three-to-six-month
period.
But that’s how
I’m dealing with–
the currency market is starting
to get far more confusing
than it has been.
There’s been breakouts in the
Swiss Franc against the dollar.
There was a breakout
in the Japanese yen
against the dollar, on
the quantitative signal.
And those are quite
interesting as well.
There was a big
breakout in gold–
which I’m very bullish on gold
for the first time in a while.
And those things
are not telling me
that the world ends in
rainbows and puppy dogs.
That’s down interest
rates, that’s
what that’s telling you–
and potentially, down dollar
for some period of time, too.
RAOUL PAL: Yeah, it’s
not consistent yet,
the dollar with
the macro picture.
It’s interesting, because
I’ve noticed the same thing.
I’m thinking, how fat and
sharp can the dollar correction
be if it is a correction?
Or is it this topping process?
I don’t think it is,
but there’s certainly
a reasonable probability.
KEITH MCCULLOUGH: Yep.
What you’ll see is dollar–
there’ll be Quad 4 days
for the dollar, where
the dollar is awesome.
And if the market starts
to trade on cowbell,
those are not good dollar days.
So I’m OK with that.
It’s not–
RAOUL PAL: That’s fine, but
it’s just not an easy bet.
What’s relatively
easy is fixed income.
Because the cowbell days
all work in your favor.
KEITH MCCULLOUGH: Right.
Now, the gold trade becomes
easy if the dollar trade becomes
easier on the negative side.
RAOUL PAL: Correct.
If not, it’s a fight.
KEITH MCCULLOUGH: Yeah,
it’s a knife fight.
It actually is just
the inverse of what’s
going on with the dollar.
But if you back-test
gold, all the way back,
the biggest call you got
to make, for gold bulls,
is negative call on real yields.
And we’re coming off the
cycle high on real yields,
and I think gold’s
figured that out.
RAOUL PAL: Yeah.
And so you’ve got
a bunch of analysts
who are also looking at sector
stuff and across the board.
What are they picking up
that maybe the markets
aren’t seeing yet?
KEITH MCCULLOUGH: Well, they
know what Quad 4 is now.

RAOUL PAL: So are you having
to teach them the macro?
KEITH MCCULLOUGH: Ah, it depends
on the age of the analyst.
If it’s your first
cycle, yeah, you
might learn something new
in a very violent way.
And we all do, as analysts.
And then we have the
older guys on the team
that have been with me
since we started the firm–
not their first rodeo.
And they understand
it quite well.
So if you take something
cyclical, like lodging,
like our gaming, lodging,
and leisure analyst,
there’s no way on
this side of the sun
that he’s going to
not be short hotel
stocks at this stage of
the cycle, given the Quad
4 to Quad 3–
the lateness of the business
cycle is crystal clear.
I actually think,
for our analysts,
the biggest risk is
that the companies they
like because they’re
good companies
are going to meet
their maker, called
the “rate of change
of earnings slowing.”
So as much as I always talk
about the rate of change
of growth and inflation slowing,
the third leg of the stool,
for any analyst–
and it takes me
all the way back to
where I started–
was the rate of change
of revenues and profits.
And we’re about to hit
the toughest comparisons
on a one and a two-year basis
for the S&P 500 earnings
rate of change, going
all the way back to 2000.
And the S&P 500 got body-bagged.
Your earnings growth went
from 21% to basically flat.
Here, you got to come from
26%, which is the new high.
And that comparison’s
all the way out into Q3.
So this is the thing that
I think a bottom-up analyst
team is going to be
really helpful in trying
to help you contextualize
the timing when it comes
to both equity multiple
compression and credit spread
breakouts.
Because really, the easiest
thing to do in Quad 3
is to be short
credit, because they
have an opinion on the
forward-looking cash flow.
So you could have just a
run-of-the-mill slowdown
in corporate profits, or
you can have a disaster.

If I tell you what I
think could happen,
then I get into trouble.
Just stay with what
the data is doing.
It’s trivial.
Every day, you’re going
to see the rate of change
of earnings growth, every
single earnings quarter.
And it could be nasty,
or it could be benign.
RAOUL PAL: And
credit’s the thing
I’ve been watching very,
very closely as well.
Because there’s a whole other
bunch of setups within that,
like General Electric
being downgraded to junk.
That’s a shitshow for the
whole junk bond market.
Because what you’re going to
do is tip out all the most
illiquid junk bond credits
to make way for it.
And then we got Ford and
General Motors within that.
And somewhere down the track,
I’m very nervous about AT&T.
So you’ve got this
enormous amount of debt
I’m slightly worried about.
And if I look at
the credit market,
it feels– the credit market
just doesn’t feel good.
It’s the point in
the cycle where,
as you said, that it
follows corporate earnings.
The business cycle–
the whole lot
tend to go at the same time.
So I think it’s an interesting–
KEITH MCCULLOUGH: It’s
an interesting thing.
Like I go– today’s door-to-door
with institutional clients,
especially those that think
that treasuries are shorts
and interest rates
are going higher–
ask them about the size of
the corporate credit market.
If you thought treasury issuance
was a big supply problem.
You can’t say both things and
come up with the same answer.
I mean, literally, there’s
a pretty simple x and y-axis
that I can show you, the
volatility of the bond
market versus credit spreads.
And we are in the very first
to second inning of that.
And the size– calibrate
the size of corporate credit
relative to GDP across
every other year
in the history of credit,
and it’s the biggest dot
in terms of size.
So we have the most
credit relative to GDP,
and we’re at the most
complacent point, whether you’re
looking at bond market
volatility, MOVE index,
for example, or
credit spread risk.
400-over on high-yield OAS?
It could be 500, 600, 800 wide.
And I think that’s
the moment where–
when the Fed’s providing
cowbell, and people see that,
they look around and they–
RAOUL PAL: And that’s
exactly my view.
And I come at it from
a different angle.
I’m a business cycle analyst.
I look at it in terms
of the probability
of where we are in the cycle,
how long the cycle will last.
Because it goes up
and down, you just
don’t know big the peak and
trough is, and the distance.
But you kind of
know, once it starts,
it usually keeps
playing through.
KEITH MCCULLOUGH:
Which side you’re on.
RAOUL PAL: And so you
look at the probabilities
of that, and credit
is that thing I just–
as you say, I don’t think
anybody is really understanding
what could happen within
this credit market,
and the knock-on effects
of everything else.
KEITH MCCULLOUGH: Nobody knows.
There is not one person that can
tell you the pace of a credit
event, and how it’s
going to work out
with some linear model.
What it can tell you
is that a lot of people
run credit-levered
long-only funds.
And it’s the–
RAOUL PAL: And as you know,
the door into a position
is much bigger than the door
coming out of a position.
KEITH MCCULLOUGH: Again, I was
at Carlyle when we literally–
and actually, the one that
traded publicly in the UK, it’s
a very well-documented bagel.
If you are a pro-cyclical buyer
of credit at the very beginning
of the end of the credit cycle–
disaster.
And as much as you’re
a genius, if you’re
the first buyer of distress at
the right time– like Howard
Marks’ recent book,
Mastering Market Cycles,
I think it’s called.
He started in 1988.
He tells you– and
we should all be
very humble about
this very basic fact,
it’s where you start in
the game that matters.
RAOUL PAL: Always, right?
So here’s a question for you.
It’s something that I’ve
been thinking through.
You’re very process-driven.
You’re talking about–
and we’ve talked
a little about
algorithms, and basically
applying some sort
of AI to the process.
Because if it’s replicatable,
you can get machines
do a lot of it.
There’s some element,
maybe, use discretion.
But then what was fascinating,
you were talking hotels.
So here’s the thing that
I found out recently.
Companies like Two Sigma are
pinging hotel websites up
to a million times a day,
everywhere around the world,
using both the kind
of conglomeration
sites and the individual sites.
So they can check real-time–
because when you ping a website
and ask for a price, it
moves the price sometimes.
It’s basically market-making.
So you can tell–
because if you know roughly what
the algorithm is at their end,
you can tell the occupancy
rate of the hotel.
So you can tell, anywhere,
in real time, in the world,
in any city, what the
total occupancy is like.
So you have a real-time
economic indicator.
It makes it very difficult
to be a hotel analyst.
Because the same thing that
you talk about in macro,
you can actually see
the data in real-time.
KEITH MCCULLOUGH:
So if you look–
we’ve talked about
macro, but if you go back
to my first job, which is
being Mr. Fundamental Captain
Stock-picker Guy.
And I have to have a view
on my sector and my stocks.
That is the research
room that I’ve built.
I have 40 analysts on the team.
Only six of us do macro.
The other group– every
day, month, quarter,
they’re gravitating to more–
we call them DCTs,
Data Collection Tools–
to things that are smarter
than they’ll ever be,
and, by the way, a lot faster.
So sitting beside me–
I’m not going to name his name,
but he doesn’t even know–
I wouldn’t say he doesn’t
know what the companies do,
but he’s never going to
pick a stock in his life.
He’s a data scientist.
He sits there all day
long and bangs code.
That’s who sits beside me.
And we don’t talk.
There’s no discussion.
There’s nothing to talk about.
That’s what he’s doing.
And there’s going to be
legions of those people that
are to augment people like
me and people like you.
And what they do if–
they do have data
at the core of their process.
RAOUL PAL: Fascinating.
So here’s an interesting one.
So JP Morgan, from
what I’ve heard,
have this same data
collection business,
based on every one of
their bank accounts.
So in real-time,
they can see use
of credit cards, cash
transactions, all transactions
in real-time.
So they basically have probably
the best real-time read
on the US economy–
I mean, it makes the Federal
Reserve, all of that, nonsense.
All of the–
KEITH MCCULLOUGH: They
should start a real prop desk
with that again.
RAOUL PAL: Yeah,
maybe they should.

But it’s extraordinary the
power of data that they have,
versus what the Federal
Reserve are even using.
OK, so it makes a mockery
of how our current system is
constructed almost.
KEITH MCCULLOUGH: Oh, boy.
Don’t get me started on that.
The first time I presented at
the New York Federal Reserve–
I couldn’t make
this up if I tried–
I was showing, like
I always do, a series
of rate-of-change charts.
And one of the Federal
Reserve analysts
got really into this one
data series that was showing,
rate-of-change charts.
He said, where did
you get this data?
I said, dude, it’s your data.
It’s Federal-Reserve-produced
data.
The guy didn’t know.
The rate of change–
just having rate of change
at the core of your process–
this might sound like
the most basic thing.
And in some cases,
it actually insults
your traditional economists.
It can’t be that easy.
It can’t be base effects
plus rate of change.
I would have thought of that.
And that’s how they think.
Using a stochastic
model, like we use–
Bayesian process,
it’s data-driven,
every data point should
change your opinion–
versus a deterministic
model that the Fed uses,
or some regression,
that doesn’t work.
It’s like, you don’t want
them to figure it out, though.
How else would you make money?
You have to have that
institutional established–
or the establishment
has to have these views
and these effectively
useless processes in terms
of being actually accurate.
I want them to be gainfully
employed as long as possible.
RAOUL PAL: So your
analysts are picking out–
what are the surprises?
What else fits in
with your macro view
that they’re picking up that
the market’s not seeing?
Because some of these are
more obvious now to people.
They’re starting to see the
slowdown of housing, cars, bits
and pieces.
Is there anywhere where
your guys are saying,
hey, listen, here’s
something new here
that people aren’t
figuring it out?
KEITH MCCULLOUGH:
In health care,
there’s a tremendous
amount going on.
So like the pricing
disconnects in health care,
some health care
deflation that’s
non-obvious that is becoming
more obvious at the company
level.
So if you’re building
data collection tools that
is looking for specific
things within health care,
you’re going to find a lot of
new and interesting things.
Health care is ripe for
this because there’s so much
publicly-available data.
I think that’s another
thing that a lot of people–
they’re fascinated
with big data,
but there’s so much
data that’s useless.
There’s certain data
that’s absolutely critical.
So I think that
that’s probably where
we’re doing the most
amount of our work,
and committing the
most of our resources.
Because it does take–
you still need
humans to run Python.
There’s a tremendous
amount of data
they can grab and show you.
And I’m telling you, you
take a Python analyst,
our data scientists,
you put them
beside a very-well-compensated,
10-years-in, buy-side-type
hedge fund analyst,
who I’d like to think
is– who’s my analyst in
this case, in health care,
and his boss had been doing it
for 25 years, health care PM.
We actually used to
work together at Dawson.
But this guy, the
data scientist,
will blow their mind routinely.
It’s like everything that
they– it’s almost like they
have these moments.
So there’s so many different
answers to that question.
It’s what they thought their
whole career, in some cases,
just isn’t true.
Or it’s not useful at all.
RAOUL PAL: So talk
to me about this.
Because this is a
recurrent theme.
On Twitter, you’ll be
talking about old Wall.
KEITH MCCULLOUGH: I’ve never–
what is that?

RAOUL PAL: What do
you mean by that?
Because clearly you’re doing
something that’s very–
for a research firm, it’s
not common what you’re doing,
which is blending
process-driven macro
fundamentals plus data science.
And this is a new world.
Talk me through the old
world as you see it,
and what this whole
old Wall is to you.
KEITH MCCULLOUGH: Well, old
Wall is an easy metaphor,
because people
can grab on to it.
It’s like Mac versus PC.
One’s cool, one’s not.
One works, one doesn’t.
Eventually, PC has to
fix what they are doing,
and maybe now it works better.
But in the beginning,
just go back
to what you used to do, and
just criticize it objectively.
What I used to do doesn’t work.
Or if I was doing it, and I was
really at the top of my game,
Captain Stockpicker’s
really killing it,
gets lucky on some of the macro.
It’s not what you want to be.
The old Wall is a metaphor
for broken, established best
practices that people thought
made things go up and down.
A lot of people start
their day saying, well,
this stock’s cheap.
It should go up.
This one’s expensive.
It should go down.
That is actually a
borderline-asinine assumption,
but it’s an old Wall one.
There was a day when, if
you talked about valuation,
it would make you sound
reasonably intelligent.
Pre-the-internet, for sure.
Now I’ve got four kids.
I’d say at least my
five-year-old could tell you
what the PE is on any stock
if I give him the letters.
That’s got no value.
So valuation is not a catalyst.
The rates of change of
growth and inflation are.
They drive multiples up,
they drive them down.
So when I talk
about the old Wall,
I talk about it in
two different ways.
I think of old Wall
analytics, and how
you’re coming to
your conclusions,
where strategists are, where
sell-side analysts are.
This is the epicenter
of brokenness,
Not to mention their–
RAOUL PAL: If you go
to the asset management
industry, how many people
are using asset allocation
models that are not a million
miles from what you’re doing.
KEITH MCCULLOUGH: No, no.
From what I understand,
without him slapping
his predictive tracking
algos and outcomes right
on my desktop, Bridgewater
has sufficiently conquered
the world in asset
allocation space.
They don’t nail it every
time, but they’re certainly
better than some
dude at an RIA who
doesn’t have any
computer or any view,
but he’s like 60-40
stocks versus bonds.
That’s old Wall.
Old Wall, I was going
to say, the other piece
is actually that piece.
Now, it blows my mind.
How many people
in the world think
that Wall Street is a
regurgitation of people
that are on TV?
Their basically
regurgitating the calls
of the day from the
old Wall itself.
Old Wall media is actually
far worse than the old Wall.
At least the old wall
has a spreadsheet.
It might not be the right
way to do it anymore.
But imagine the journalist
and the reform whatevers that
are out there,
brokers and whatnot,
they’re telling you what your
asset allocation should be?
That, to me, is a
phenomenal opportunity.
It’s just to educate people
that you just don’t do that.
Please don’t do that.
And the Treasury call this year
is a great example of that.
How many people that
should have been
allocating to that massive–
asset allocation
should always be
part of what they’re doing at
certain points in their life.
It was the best time that you’re
going to have in a long time.
RAOUL PAL: Yeah, I agree.
I just think the whole
way the financial media is
set up– and again, in
the financial media,
I’m not talking about the FT
and The Economist and stuff,
because that’s different.
But really I’m talking
about television media.
And one of the
reasons we started
this was because
of how shit it is.
It’s just three-minute
soundbites.
What are you going
to get out of it?
They going to get Keith on there
for three minutes, saying what?
I think treasuries are going up.
OK, great.
Where’s the value in that?
That’s an opinion.
KEITH MCCULLOUGH:
Yeah, absolutely.
RAOUL PAL: People will
now sit and say, oh,
Keith has an opinion,
and it’s based on this.
From a Real Vision
interview, they’ll
know very clearly what
your opinion is based on.
There has to be some
respect for people’s money,
and not just throwing them
an idea, and saying, well,
this is what it’s all about
as a sensationalist headline.
It just doesn’t make sense.
KEITH MCCULLOUGH: It’s the old
adage, you teach a man to fish
or you just give him one.
The education process is the
opportunity in the media.
Because to your point,
people are asking people
on TV for their picks.
They’re not asking
them for their process.
They’re going to come up
with the dumbest quotient
that you could possibly find,
to interrogate you, talk over
you, give you absolutely no
time at all to your process.
Do you think Joe Kernan knows
anything about my process?
He knows where the
Dow is in points.

RAOUL PAL: And how many
points it’s gone up every day,
and how many points
it goes down,
which is the most ludicrous,
useless thing ever.
KEITH MCCULLOUGH:
That’s old Wall.
That is the old Wall.
RAOUL PAL: That really is
the most fundamental thing.
When something goes, the
Dow is down 1,000 points,
it is the most meaningless
thing you can say.

It drives me utterly to despair.
KEITH MCCULLOUGH:
Yeah, it’s interesting.
And one of the better books
that was written last year,
I think– but
practitioners get it,
people that have made a
lot of money in markets,
and have had good processes
and great track records–
Ed Thorpe’s book.
And I don’t know if you read it.
RAOUL PAL: Yeah, yeah, yeah.
KEITH MCCULLOUGH: If
you could get him–
RAOUL PAL: We’ve been
trying to get him.
KEITH MCCULLOUGH: The book’s
called A Man for All Markets,
because he wrote
Beat the Dealer,
and then it’s Beat the Market.
He’s one of the original quants.
He’s a math genius from
California, or at least
that’s where he had his
job before he decided
to take on the real stuff.
This guy starts his
book by actually
saying exactly what you said.
He’s like, it’s a joke.
Like if you know, when
you’re driving down the road,
and somebody tells you that
the market’s down a lot–
400 points– and has no
perspective on percentage moves
or anything, that you should
just turn it off and listen
to some good music.
It’s actually kind of
funny that this is still
a debate as to why
people watch that stuff.
I guess they don’t
have an alternative.
RAOUL PAL: And this is what
appealed to me– because I’ve
been following you for a while.
What appealed to me
of what you were doing
is you were doing similar things
in a different area to us.
You were just saying,
listen, whatever’s
going on over here
that used to go on,
there’s something
deeply wrong with that.
And there is a
different way, and we’re
going to try and show
you the different way.
And we won’t be
right all the time.
We’ll do our best
to guide people.
And we did the same thing.
We said, look, something
over here is deeply wrong.
We’ll try our best,
but we have no idea.
We’ve never been a
media company before,
but we’re going to
try and do this.
And I just always thought
there was some kindred elements
of understanding, OK,
the world has changed,
and people deserve better.
Because in the
end, we’re dealing
with people’s life savings.
And I keep saying
that to people.
And when I tell people that who
were in the old-school media
business or even in the
asset management business,
they don’t really
understand that.
But when you get a bit closer to
the incline, which you do and I
do, you kind of
know how important
it is to the doctor in Ohio who
spent his whole life busting
his balls to do this.
And you take a
fiduciary responsibility
for the kind of
information you give him.
Everyone else seems to have
lost that responsibility.
KEITH MCCULLOUGH: It’s
easy to lose touch
with what you don’t touch.
We touch real people every day.
I tweet with real
people every day.
I don’t care what they
make, or how smart
they’re supposed to be.
You engage with your
audience, and you’ll start
to feel what they really want.
And what they really
want is that education.
They know it’s broken.
They’ve just never
had somebody come out
and say, hey, look,
I hear you, and I’m
going to try to create
products and services that
can help what it is that
you want to help yourself.
My dad’s a firefighter–
retired firefighter.
I get it.
You’re not allowed,
in his world,
to work your whole life, 38
years in the fire department,
and lose 40% of it
at a time, twice,
if you were lucky, being fully
allocated to stocks at the top.
No, you can’t do that to people.
How many people do hedge fund
managers, mutual fund managers
touch– individuals–
touch, in the market
during the real market day?
Zero.
You’re not allowed to.
So just think about that.
There’s a different forum
to translate your knowledge
and your process.
And it’s media.
And to me, it’s actually
the reason why I’ve never
gone back to running money.
The basic question
people will always
ask– well, if
you’re good at this,
why don’t you just go run money?
And it’s like, that’s so
boring compared to this.
You and I wake up
in the morning-
correct me if I’m wrong–
we actually believe that
we can change the world.
RAOUL PAL: Yeah, it’s true.
KEITH MCCULLOUGH: And we don’t
have conflicts of interest,
so we’re not compromised.
RAOUL PAL: And it’s not hubris.
We’re actually trying
to do something.
We’re actually trying
to do something
good for as many people
as we possibly can.
And that’s a good thing.
Keith, brilliant to me
you, finally get you here.
We’ll have to get
you back a few times.
And we’ll get a few
other Hedgeye people on,
because I think it’ll
be super-interesting.
KEITH MCCULLOUGH:
Thanks for having me.
It’s a great conversation.
It felt like it was
only 10 minutes.
RAOUL PAL: Yeah, I know.
Well, we’ll get you back soon.
KEITH MCCULLOUGH:
Appreciate it, thanks.
RAOUL PAL: What I
love about Keith
is his spirit of rebellion.
At the heart of
all of this, even
though he worked on Wall Street
for some respected hedge funds
and large, respected firms, it’s
all about rebellion– rebellion
based out of the purity of
doing something different
and doing something right.
And I think he’s
really onto something
with his data-driven
asset allocation modeling,
and also how he’s building his
whole group of researchers,
but mixing them with
data scientists.
I think it’s fascinating.
Let’s see how the
world develops.
And Keith’s certainly
been very right recently.
And we’ll follow his
story as we go along
to see whether he
changes his mind
and offers us some
sort of idea of where
things are going in the future.

21 thoughts on “🔴The Keys to Understanding Macro Risk (w/ Keith McCullough & Raoul Pal) | Real Vision Classics”

  1. Real Vision Classics are the best videos from our premium subscription service released free, often a few months after the original air date. The original air date is in the top left corner as the video starts. Film date is located in the description.

  2. I generally dont let Macro issues cloud my judgement on individual stocks unless they r invariably connected like mayb a FedEx

  3. Interesting that within the interview, the main driver of todays economy into tomorrow was the most misundsrstood as to what it will do to everything. Being the Debt. This then has to also encompase the now liabilities along with future daoly liabilites from every day it isnt dealt with ,being also in essence due, so also debt. Combined we are talking hundreds and hundreds of trillion globaly and an estimated $160 Trillion in the USA, being today. More timorrow.

  4. Short rates going a lot higher was a daily meme for 12 years! After dec. 2018 the higher short rates meme vanished. Just as yield curve gets steamrolled?

  5. The federal reserve could space-x the yield curve by continuing Q.T. And jawbone continued rate cuts? The federal reserve is eating the cheese until the snap and can't cut lower?

  6. I'm starting to wonder when investors are going to start buying up all the cheap low P/E stocks? Could sub 5 P/E stocks get sold off with all the high P/E equity market leaders or will the Old Wall valuation strategies make a come back to hide from a massive market sell off? I'm excited to watch and see.

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