The Guest Blog

McCullough: Self-Control is Needed in This Market

Keith R. McCullough |CEO, Hedgeye Risk Management

“The conclusion is straightforward: self-control requires attention and effort.” -Daniel Kahneman

That’s a very simple quote from a very important chapter in “Thinking, Fast and Slow ” titled The Lazy Controller. I personally have a lot of work to do on this front. As an athlete, I was much better at this than I am as an investor – control what you can control.

It required some attention and effort to sell into the stock and commodity market inflations inspired by The Bernanke Tax last week. With the S&P futures trading at 1305 this morning, are down over -2% from Thursday morning’s intraday 2012 high of 1333.

With China coming back from the holiday closing down -1.5% overnight, it looks like I should have sold that too (I sold everything else). The Chinese do not appreciate US policies to inflate because food and energy inflation slows Chinese growth.

Back to the Global Macro Grind…

I make a lot of mistakes.

The biggest ones tend to occur when I either get influenced by someone else’s process and/or when I don’t let the market stop me out of my own.

Thinking fast about the immediate-term while thinking slow about the long-term is the holy grail of being at what Kahneman calls “cognitive ease.” I can’t work any harder – so for me, at this stage of my career, my goal is to work smarter.

I think Kahneman nails my own issues to the boards in saying that, sometimes, “too much concern about how well one is doing in a task sometimes disrupts performance by loading short-term memory with pointless anxious thoughts.” (page 41)

But, most of the time, that’s our over-supplied profession’s short-term cross to bear more than it is my own – and we can turn that regressive energy into positive P&L by coming to the most straightforward conclusion, fast.

As a reminder, our primary conclusions about Big Government Interventions in markets for the last 4 years has been:

1. They Shorten Economic Cycles

2. They Amplify Market Volatility

This is the #1 reason why I am such a bull on stabilizing/strengthening the #1 factor in my Global Macro Model that drives short-termism in global market prices/volatilities – the US Dollar Index.

Last week’s price action doesn’t lie, Keynesian policy makers do. With the US Dollar down -1.6% week-over-week, here’s what the big stuff did:

1. CRB Index (18 commodities) Inflation = straight up +1.6%

2. US Stocks = flat (Dow down -0.5%; SP500 up +0.1%)

3. US Treasuries = 10-year yields dropped -6.4% to 1.89%


1. Inflation Expectations were rising

2. Growth Expectations were falling

And, again, that’s how my risk management model rolls:

1. Policy drives currency

2. Currency debauchery drives inflation expectations

3. Inflation expectations drive growth (and margin) expectations

If you go back and analyze every single big investment mistake I have made in the last 13 years (I have), unless there’s something like a take-out in one of my short positions (I was short Reebok when Adidas bought them), almost all of the time I was long something where Growth Slowed and Margins Compressed.

That’s why I think, fast and slow, about Countries/Economies this way. Ultimately, on the margins of Growth and Inflation, they act like companies.

I know there’s a lot of controversy around my macro views. I know there’s a lot of emotion in what we do. I know I should have been long Gold last week. I know what I know.

What I don’t know is what really matters to me. That’s why I need the Self-Control to Embrace Uncertainty and let the market tell me what to do next.

My immediate-term support and resistance ranges for Gold, Oil (Brent) Oil (Brent, EUR/USD, Shanghai Composite, German DAX, and the SP500 SP500 are now $1682-1739, $110.12-112.06, $1.29-1.31, 2221-2351, 6440-6503, and 1297-1326, respectively.

Prior to founding Hedgeye Risk Management , McCullough built a track record as a successful hedge fund manager at the Carlyle-blue Wave Partners hedge fund, Magnetar Capital, Falconhenge Partners, and Dawson-Herman Capital Management. He is a Contributing Editor to CNBC TV, Fortune Magazine and author of Diary of a Hedge Fund Manager (Wiley 2010).