Keith McCullough doesn’t care what you think of him.

He gets that attitude in large part from his father, a firefighter, and one of his grandfathers, who was one of 19 children from Quebec, and became a successful, serial entrepreneur despite a limited education and often being told he wouldn’t succeed.

McCullough loves to hear he’s not good enough. He heard it growing up in Thunder Bay playing hockey, which culminated in him captaining the Yale hockey team to a championship.

And McCullough still hears it as the founder and CEO of Hedgeye Risk Management, a firm he launched in 2008 as a disruptive competitor to the “Old Wall” Street ways of doing business.

It’s why the guy they call the “Mucker” is driven to wake up early every day to play the hedge fund research game out loud, and grind out he and his team’s proprietary Hedgeye macro research for thousands of subscribers large and small.

They also produce a steady supply of free media content, much of it educational, that’s of value to investors.

Watch and listen to this wide-ranging conversation with McCullough in which he has ample latitude to express himself in ways he hasn’t before about:

  • Why he started Hedgeye after 10 years working at Wall Street firms – 0:01


  • The “explosive” growth of Hedgeye and subscriber feedback – 1:13


  • Why “Old Wall” Street still pisses him off especially post-crash in 2020 – 2:30


  • The Hedgeye macro risk management process (rates of change, Quads 1-4) – 3:53


  • Phase transition to Quad 3, fractal math, thermodynamics – 6:50


  • Price, volume, volatility, volatility of volatility, Ray Dalio, Benoit Mandelbrot – 8:20


  • Why valuation is not a catalyst and price-to-earnings ratios don’t matter – 10:02


  • Playing on the edge, confidence, thriving on being antagonized – 11:25


  • What McCullough’s cocksure question to a Lehman executive during an interview tells us about his personality – 12:32


  • Wanting to play every day against Wall Street’s limiting factors – 14:18


  • What’s inherently wrong with CNBC and “Old Wall” – 14:48


  • Why Hedgeye’s culture is like a hockey team – 16:21


  • What does Hedgeye look like in 20 years and what’s the end game – 17:37


See below for a transcript of the interview.


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Interview transcript:

Mark Bunting (MB): Keith, you started Hedgeye in 2008, with the idea that you wanted to democratize hedge fund research, with the idea as well, that you wanted it to be transparent and accountable, and to do it with trust. But prior to that, you were working for Wall Street firms for about 10 years. What was it about the way Wall Street was operating that you felt was inherently wrong and you wanted to change?

Keith McCullough (KM): Well, I mean, Wall Street by definition is opaque, right?

I mean, it’s the opposite of how we define both the vision and the mission where you can’t look inside of a hedge fund, never mind inside of an investment bank, and all of its tentacles and all of its conflicts of interest.

So I think that most people knew what they didn’t trust. They just couldn’t see what the alternative was. And I didn’t either just to put it on the table. Hedgeye has been a great adventure.

Many days where it’s just this constant evolution and creation of, if I could show you what a world-class hedge fund does every day, then the words “hedge fund” don’t become bad words or dark words or evil words.

They become trustworthy, you know? Hedgeye, that’s why I thought of it that way, I put an eye or transparency on top of that word that not everybody could understand or had the opportunity to see.

MB: Now, fast forward to today, you’ve got 40 plus analysts, more than 25 research products. You’ve got subscribers in close to 100 countries. So, clearly people are paying attention and it’s working. What do subscribers say to you in terms of Hedgeye’s research being useful to them, or different or unique?

KM: Mark, that’s interesting because you get the whole continuum because we have, what we’re really providing people is an education on how to play the game, the hedge fund game at the highest level, or now, an entire full investing cycle, global asset allocation fully loaded.

So this is not for somebody who just walks into the game with no skates on, to use a hockey analogy. So we have beginners that we do have to tell them one skate on, here are the laces, and here’s how you do it.

So the feedback we get there is that it’s an education that takes time, and the intermediate to higher level players will often say, I can’t believe what I did before I met Hedgeye.

And that’s precisely what I love to hear the most is that I want you to get rid of all that baggage, that “Old Wall”, all those bad practices, everything down to using 50-day moving monkeys to play and get to the highest level, or at least trying.

We also have power users that are, I tell them, I hope they’re better than me at this. And I mean that quite literally in terms of performance.

MB: One of your big victories was anticipating the 2020 crash. And you said after the fact that “Old Wall”, as you call it, Old Wall Street has not evolved at all. And it pisses you off because they are leading investors astray, and investors are losing a lot of money. So why has Wall Street not evolved, and why are more firms not using your macro process or something like it?

KM: I think, quite simply, it’s because they don’t have it. They don’t have our process. They don’t have our players that play within the process. It’s not unlike any other profession where you find a certain team plays the game differently.

The setup for that is that they’re constrained at the core to not be able to do that, anyway. But what pissed me off about it was that I want to compete with somebody.

Like I want to play against somebody out there that actually plays the game the way we do and what you you know, Mark, and most people know, is that all those people are still on the buyside.

They’re all still inside of a place that you can’t see. So I was, I still, on an ongoing basis, am quite surprised that I’m still playing against the same old product, the same stale content, the same conflicts of interest.

It’s never been worse. And if anything, with social media now, more of those types of, I guess, are having an opinion and an opinion that people still pay attention to, which is very dangerous, and I try to help people risk manage, or mitigate their exposure to that.

MB: Now let’s get to the Hedgeye process. And for our viewers, I urge them to go to the Hedgeye website and Hedgeye University where it’s all laid out there. You’re going to give us some broad strokes here, starting with the rates of change that your analysts are looking at in terms of economic metrics in 50 different countries. And you’re also having them measure and map, and incorporating what you call GIP. Growth, inflation, and government policy. So, sum that up for us if you could.

KM: So that’s essentially the core in our proprietary process. So that’s one of the many reasons why we really haven’t had somebody redo or remake what we do because they’d have to have the keys to the castle and all the codes within our predictive tracking algorithms.

But when we say at the very basic level, the rate of change, so what I care about are not levels of things, valuations of things.

Of course, they’ll come into tangential analysis, but really, what matters is the rate of change or the secret to the universe.

We learn this in Canadian calculus when I was a younger boy and in the 11th grade. And you still learn today how powerful that is as a modelling force if you’re applying it within our process.

So I care about the rates of change, again, accelerations or decelerations, in both growth and inflation, GDP growth and inflation. If we’re looking at companies, we look at the rates of change instead of GDP we look at revenue.

And instead of inflation, we actually look more so at cash flows or earnings.

So that’s what we care about. If we get the rate of change, the pending rate of change, what’s going to happen next, particularly when the rates of change change on a trending basis, then we’ll get a lot of things right: asset allocation, sector styles, market exposures.

So we call those the four quads, because there are four scenarios, because you have a two by two model. So you have growth and inflation, and when both are accelerating, for example, that’s called quad two.

We have quad one, quad two, quad three. Quad one is Goldilocks. Quad two is the roaring, what we call again, quad two, growth and inflation accelerating at the same time.

When you have too much of that, and the inflation starts to seep into the cost structures of humans and their consumption patterns and companies and their margins, that’s called quad three or stagflation.

And then when the real poop hits the fan, which we tend to have a reputation for this because we invented it, of course, but quad four is when both growth and inflation slow at the same time, and quite literally, all the risk on assets get smoked.

And we made that call many times since the beginning. We actually started Hedgeye with a quad four call in 2008, with the market crash call. And then we went obviously to quad two in April of ’09.

So, that’s why it’s agnostic. I don’t care what quad we’re in, you know? Preferably we’re not in quad four because the economic destruction and market carnage is nasty, and I don’t wish that upon people.

I just wish for myself and our subscribers and anyone who understands how to manage risks, not to be run over by that quad four like the crowd, the CNBC
crowd certainly always is.

MB: Ah, CNBC. Okay, well, we’ll get to that in a while. So just to be clear, we’re in quad three, is that correct?

KM: Well, we’re phase transitioning to Quad three, and again, we’re using, we’re standing on the shoulders of giants.

A lot of these things, and maybe we’ll get into it, are things that I’ve learned from polymaths or different types that don’t think of it the way that the Old Wall does, or certainly CNBC does.

If you asked CNBC to model something fractally what would you get other than a deer in headlights? So when we talk about phase transitions, anybody who knows anything about science knows what that is.

They know what the first law of thermodynamics is. It’s not that complicated. Or the second law, which is entropy. Entropy is a phase transition.

When you, a frog doesn’t know if he’s going to have a phase transition when he’s boiling in a pot up until it’s too late, but humans can.

So a phase transition, we’re currently going from quad two in the USA to quad three. That’s a phase transition from as good as it gets to something that’s good for certain things, but bad for other things.

That’s quad three stagflation. And then we have other countries that are already in the wrong, different quads.

We have Japan in quad four, which is deflation. We’ve had China in quad three stagflation going back to the month of March.

So, different countries, to your point on the 50 countries at the same time, looking at all of it. And that’s why you see those flags that I tweet in the morning, you know, country flags.

Not every country is in the same quad, or phase transition into the other quad.

MB: Now, when you’re looking at a stock, for example, you’re also using price, volume and volatility, and then the volatility of volatility. Why is that so important on the volatility side, and what don’t investors get about that do you think?

KM: The very basic premise that the volatility of asset prices generate either positive returns or massive drawdowns and crashes, okay?

So when volatility breaks out to the upside, human beings can’t handle it, and certainly the risk management systems that Wall Street has today can’t handle it.

So what they do is they, on a breakdown, they force sell and they puke low. So, volatility breakouts are the number one thing. I look at the basic three-factor model, which is, to your point: price, volume, and volatility.

And it’s really how they all go together. So when you look at something fractally, when you look at the world, for example, you’re trying to study or measure and map the probability rising or falling of an avalanche.

Well, there are emergent properties that start to go a certain way at the same time. And those three are the big ones in my market signal. And that took a while to build.

I continue to refine it each and every day, it’s really designed to front run the machine or the broader market. And I run that becauseit front runs my quads.

So I have the signal, which is, again, is real important to understand volatility and phase transitions.

Others do that, by the way. Ray Dalio does that. And when you put it together, and again, my process isn’t about specific ingredients that Ray Dalio has, or somebody else might have, Benoit Mandelbrot, the things that he taught me, it’s not the ingredients: it’s the recipe.

It’s putting those tools together, so that you have a multi-factor model and can make good decisions with high probability bets.

MB: You’ve said that you say a lot of things that trigger people, and one of them is that valuation is not a catalyst, and that price earnings don’t matter to you. And that is anathema to Wall Street because price earnings over there for years have been paramount. So how do you justify that and reconcile that?

KM: Valuation is not a catalyst. Clearly, if you back test markets, that’s a fact. Again, the rates of change of things are facts. Things are either accelerating or decelerating and you look back and back
test it, and you can see that.

So if growth is accelerating in quad two, expensive stocks get more expensive. That’s a lesson that everybody should know before they even transact in the market.

Not everybody’s Warren Buffet and gets to buy Coca-Cola at his price.

Of course everyone would love to buy something that’s cheap. I prefer something that’s cheap that has a catalyst that is in acceleration.

So an acceleration in economic growth, an acceleration in revenue growth, a commensurate acceleration in earnings growth. That’s a catalyst. Valuation on its own is not a catalyst.

You can sit there and watch a cheap stock remain cheap. A bargain that remains a bargain is no bargain. So a lot of what I say has to do with best practices of people who have played at the highest level.

And that’s where I want to get. I want people to understand that they can do so much better than the garbage and the idioms and, really, the dogmas, like to use moving monkeys is a very simple example that people use, or PE ratios, for that matter.

MB: You’ve described yourself, Keith, as macro aware, data dependent, which you’ve been referring to, and apolitical. And when you make an investment or a trade, you feel nothing. Your emotions are out of it. But I’m wondering, does ego play in? Do you have to subjugate your ego or do you need your ego to be a successful investor? How does that work?

KM: If you don’t have conviction what do you have in your process, what do you have? I’ve never seen somebody, let’s use a hockey player example, which I’ll use all the time.

I mean, does Connor McDavid look un-confident when he’s approaching the neutral zone at full speed, or does he look confident?

I play the game confidently within my process. I know what my edges are. I know how to play on my edges. I do have to play on the edge, and I get that. My dad’s always taught me that way back to my days growing up playing hockey in Thunder Bay.

It’s not like you wouldn’t find me close to the top of the penalty minutes list alongside the points, and that’s just who I am. So I have to be antagonized. I have to be told I’m not good enough. I have to, that’s who I am.

So I think it worked well. It certainly works for me. It may not work for how everybody perceives me to be, but, sometimes I actually don’t turn out to who they want me to be, which is a little different.

MB: That’s a perfect segue to looking more at Keith, the man and the persona. So, grew up in Thunder Bay, your nickname’s Mucker, Yale hockey captain, you win a championship there, you’re a self-described chirper. And in your book, “Diary of a Hedge Fund Manager”, I think that one of the better stories that really sort of indicates your personality is you’re being interviewed by a Lehman executive, and you kind of cockily said, “Do you have a ball?” And he was perplexed. Could you take us through that story?

KM: It was just this, I mean, be who you are in life. Let’s just start with that.

What I like to, what I’m learning, actually, through the Macro Show every morning as I’m coaching in as much, the process of investing across the full investing cycle, is I’m teaching at least my process of teaching myself, and improving myself in life.

So when you walk into a situation that’s unfamiliar to you and also sounds unreasonable, you should say something. I think I did. I didn’t mean to be Mr. Big Time.

And when I walked into my Wall Street interviews I knew very little relative to a lot of these polished prep school kids that had much higher, I had the lowest SAT score at Yale, I think you know that, in my class. On paper, I was terrible.

And I walked into a room and this guy, he’s talking to me like I’m a two-year-old. And, I just, when he asked me what differentiated you competitively, because my resume didn’t have all these bells and whistles.

I looked him in the eye an said, “Are you an athlete?” And he said, “Yeah.” I said, “Do you have a ball?” And the person who’s interviewing beside him, they’re like, it was a he and a she, and they were sitting there and she was looking at him like, “Is he really saying this to you?”

Because this guy’s a big time football player.

And I said, “Do you have a ball?” If you have a ball, I’ll show you who can compete. Let’s lock the door and let’s put everybody out there in this room, and let’s see who comes out with the ball.

MB: You touched on being told a lot of times, either in business, or in life, or in hockey, that you’re not good enough, you’re not going to make it. Your grandfather Alphonse, who was an entrepreneur, often heard the same thing, and he loved being told he couldn’t do something. So what drives you when you get up in the morning in terms of wanting to be being right?

KM: On Wall Street, you’re competing with people whose limiting factors are their egos, their perceived intellect, their lack of process, their dogma, their conflicts of interest. Now that’s a game I want to play everyday.


So, that’s real important. That’s who I am, I unapologetically state it that way. And I haven’t really had an opportunity to say it like that, but I appreciate you giving me an opportunity to do so.

MB: I know you like to mix it up on Twitter. You like to mix it up with the mainstream financial media, especially CNBC, which you’ve mentioned a couple of times, and used to go on there as a guest. But what is it about CNBC specifically? Is it that their hosts and the pundits on there are always pushing narratives and stories, and you think that they lead investors astray when the markets go south and investors lose a lot of money? Is that it, or is it more than that?

KM: Oh, that’s a lot to start, that’s a pretty bad thing to start with, right? If that is like something that people have perceived to be a major problem.

I think the biggest problem (with CNBC), having been there and worked with their people, is their culture and their principles.

That’s something I can say about a lot of places. Picking on CNBC would be unfair, really.

Like when we talk about Wall Street, Wall Street has a lot of issues that if they were brought to the forefront, that everyone could look inside of it, like they look inside of everyday, it’d make you cringe. It really would, you know?

So I think there are principled people. They are honest and truthful. They want to learn. They know when they screw up.

They don’t have this fantasy island view that everybody makes money all the time when the market goes up, and nothing happens on the way down.

So I really, to me, it’s all, I sometimes think of it like an IBM versus Mac punching bag. We’re Mac, they’re IBM. And it’s really easy to punch that bag, so why not do it?

MB: Now, you’ve mentioned hockey a couple of times, and I have as well. It runs through your personal life and runs through your business life, as well. So how is running Hedgeye like running a hockey team?

KM: Well a hockey team’s unique in that everybody sits in a room, that’s pre-game and post-game, that has four walls, and everyone faces each other.

So that’s what we do here. If you walked in here you would see there are no walls. There are walls, but they’re glass.

So right down to the screws, transparency, accountability, and trust. We’ve had players, and we’re just 13 years into this adventure, Mark. We’ve got players on our team from Ye Old Wall that we’ve hired.

In fact, we try to hire the top 10% of them in talent, but the ones that don’t make it here, we… It’s my problem, because I do the final interview.

I didn’t see their lack of principle on their ability to have principles that are transparency, accountability, trust when things get tough.

And that’s what really works here. So your level of compete matters and your resilience when you face adversity.  And this is the language we speak.

We don’t allow cockroaches. We don’t allow somebody who produces at a high level but lacks principles.

These are the things that work on a hockey team. They’re going to work until the end of time on a hockey team, and I think they’re working here.

MB: You’ve said the next 20 years at Hedgeye are going to be interesting as your process evolves. What’s the end game for you? When are you satisfied? What does Hedgeye look like in, say, 20 years?

KM: 20 is a long time, Mark. Like, God willing, I’m on the right side of the grass for that long. If I am, I’ll be doing this. I would have nothing else to do and be royally bored in the morning just playing golf.

So, this is what I do.This is who I am.  A lot of people have asked me, and at this point, knock on wood,  due to our success, we could have come public through a SPAC or whatever.

It’s like, no way, we’re going do it our way, and I’m not doing it for the money.

I’m doing it, to your point at the very beginning, to democratize the access that the people have to saving the money they’ve made, compounding returns on top of that capital, and not having the drawdowns.

And at the same time, knowing that it’s okay to be people of principle, and not have to be in the shadows and cheating and inside information, everything else that goes on on Wall Street.

Like for me, I don’t know what the top is on that, but I know it’s a damn good American or Canadian-American story that a lot of people or an increasing amount of people want to be associated with.

And I don’t try to put a cap on it. I’ve used the number of 250,000 people investing this way.

That would be a very small percentage of people in the world, but would be a huge accomplishment for my teammates and I here at Hedgeye.


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