Da Collapse, Macro Investing, McCollough
Been looking at Keith McCollough’s rate-of-change paradigm. He uses two general macro variables, inflation, growth, for investing. The reason: rate of change, that is change of change (the second derivative) of these two variables is highly correlated with market returns. Know your ROC, know where / how to invest.
KM looks at YoY GDP growth (comparing Jan of 2018 to Jan of 2017), which gives the first derivative, another difference is the second derivative. Same is applied to inflation.
So we can have one variable accelerating, the other decelerating, both accelerating, etc. (very important, not simply increase, ‘accelerate’ meaning increase of the increase). The combination gives 4 different outcomes which KM maps to “Quads” - Quad 1, Quad 2, so forth.
Quad1 is good, and Quad2 is really good. In both growth is going up. In Quad2 growth and inf going up at the same time. Everyone wins except golds, bonds, and dollar.
In Quad4 growth and inflation go down at the same time. In Quad4 you want to be
long dollar
long low beta defensives, utilities, consumer staples
long bonds
short momentum
short growth
short technology
Quad 3 is stagflation, that’s what central bankers do when they realize they are in Quad 4. They devalue currency, create asset price inflation. That’s what Chinese did on 2018 when they realized they were in Quad 4. They devalued yuan by 4%, they tried to create illusion of growth through asset price inflation, but what they get is economic stagflation.
US is now in Quad 4.
Some interesting take-aways:
The excerpt above suggests asset price inflation is part of the cycle. In fact KM is non-committant on “the collapse of the dollar” “gold will rule again”, scenario, the major clusterf–k. That colapse can happen in two years, or much later, in the meantime man’s gotta eat, and his investing style allows him to do that. This is how he was able to bet on 10-yr yields falling (in Quad 4 inflation would be falling, and the 10yr follows that like a glove), whereas “some others” were getting everyone worked up on Apocalypse Now which would result in yields shooting through the roof. That did not happen. US is slowing in Quad 4, it has nothing to do with the China trade deal.
Since these two variables have the utmost importance, for future determination KM and his company take great care trying to predict them. Their prediction method is within 20 basis points of the real GDP and inflation. As a point of reference, FED’s success rate is 200 basis points. Yes the Federal Reserve.
I was able to replicate historical quads, code, graph. Took a stab on prediction as well (same doc), looks like there is a pattern. For more, follow Hedgeye.
Oh but you can’t time the market - yes you can. This is precisely what these guys are doing. “Not timing the market”, relying on other signals, as it turns out, is just another approach, technique.
In terms of politics, growth slowing gives Rep oppo a slight chance whereas with 3% growth there was no chance. Now with econ slowing and sufficiently strong message that carries a contrast (other than crimes, innuendo, blowjob, i.e. staples for centrist Democrats) in terms of policy. Combined with Dubya level campaigning a progressive can make it into the White House.
Links
https://www.youtube.com/watch?v=hS-JOXZrcdU
https://www.youtube.com/watch?v=2NvNGAIvcb0
https://www.youtube.com/watch?v=V-uoyDj0tKs
https://www.youtube.com/watch?v=27SQ5mYf38k
Volatility
https://youtube.com/watch?v=FwpckOfUyRk