Transcript: When the Everything Bubble Bursts

Featuring: Keith McCullough

Published Date: March 24th, 2020

Length: 00:57:51

Synopsis: Keith McCullough, founder and CEO of Hedgeye Risk

Management, joins Raoul Pal, CEO and co-founder of Real Vision, to
explore what happens when a biological crisis turns into a financial crisis.
They explain why they both think this liquidity crisis is far from over and
why, as the deleveraging continues, the dollar will continue to reign
supreme. They also examine whether shorting equities is worth the risk, how
much juice is left in the bond trade, and if it’s too early to go into gold.
Filmed on March 20, 2020, over Skype.

Video Link:
https://www.realvision.com/rv/channel/realvision/videos/4c909695083d4e3da4239d60e88ab1bf
The content and use of this transcription is intended for the use of registered users only. The transcription represents the contributor’s personal
views and is for general information only. It is not intended to amount to specific investment advice on which you should rely. We will not be liable to any
user for any loss or damage arising under or in connection with the use or reliance of the transcription.
 The Interview: When the Everything Bubble Bursts

JACK FARLEY: In this interview, Raoul Pal of Real Vision and Keith McCullough of Hedgeye Risk
Management investigate the ongoing liquidity crisis, which they argue is far from over. They explore
whether shorting equities is worth the risk, how much juice there's left in the bond trade, and if it's too early
to get into gold. After the conversation is over, please stay tuned for Real Vision's new segment, The
Intersection, where Raoul gets a bit more personal with Keith. We hope you'll like it.

RAOUL PAL: Good to speak to you. These are ridiculous times. The last time I spoke to you I think we
started with, so what the fuck is going on? I think now, we're really into something quite extraordinary.
Neither of us have lived through anything like this before. It's amazing. What is your sense here now?

KEITH MCCULLOUGH: I guess you have the senseless at this point. You have a lot of people that are
getting whipped around in a lot of different ways. I think a lot of different belief systems, if you will,
particularly on the liquidity front, have been dismembered. You have more of a disbelief that what you
thought could fix it or that it could go down, but it would be fixed. There's so many different things that I
think people were just generally unaware that this could actually happen. Now with all the fixes, even
though you didn't think it could happen, the things that you thought that could fix the damn thing aren't
working either. I think it's a total clusterfuck.

RAOUL PAL: Yeah, it seems that we're completely-- we don't have any ability to respond to this because
the monetary mechanisms just don't work.

KEITH MCCULLOUGH: Again, what is going to work? If you look back historically, and I think you and
I had the similar view on this, it's the cycle stupid. If you knew the cycle was slowing, quite similar, actually,
and no cycle of course is the same, but it's quite similar to 9/11, where you have a tipping point. You have
an economy that was already slowing from its bubble peak back in 2000. You get a shock. It makes it slow
at a faster rate.

That part of this rhymes cyclically obviously, we had the US economy peaked at the end of the third quarter
of 2018 for God's sakes, the global economy peaked a year before that. You end up in a place where,
yeah, the virus made it slow, faster, and no, you don't really know where it stops too slow. I could tell you
one thing, it's certainly not some magical valuation that's going to make the stock market from stop going
down or credit for that matter.

RAOUL PAL: No, I think you and I both, last time we chatted, we were both looking for the cycle to slow.
I was a little bit more than the cycle would slow. Then you changed from your Quad 3 to Quad 4 pretty
early on, as you saw the changes. I think that 9/11 thing is very right, because I remember that well. The
economy was just starting to roll over again after 2001 and things were weakening and then the event
happens and then everything turns to chaos. What do your model starts to say about how severe this is?
Do you get any sense of that?

KEITH MCCULLOUGH: Yeah, we're getting some of the gnarliest probabilities is what I call it. Anything's
possible, Raoul. You end up in a place where now, a lot of theme-based folk are going to start to talk about,
like, what's possible, what could possibly make it stop, but what's probable is quite different. What's

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probable is that we're going to see what we call some of the deepest Quad 4 readings in US economic
history, and I mean that quite literally and mathematically. Quad 4 as you know is when both growth and
inflation are slowing at the same time. When I say it's going to slow to the deepest point in the Quad map,
what that means is you're going to see some of the worst rate of change slowdowns ever.

The biggest problem with this, of course, is that we came from just like the last two cycle peaks, the 2000
peak going into '01, the 9/11 made it happen faster or the '07 going into '08, '08 banking system made
it happen faster. You're coming from full employment cycle peaks and that's there's only three times in the
last 20 years where we've come from there, so when I say deep Quad 4, it not only includes slowing from
an industrial perspective, which we're already in a recession, in a profit perspective where S&P profits were
already at 0% growth, what could possibly go wrong?

Consumption starts to slow at a faster rate now, because jobless claims start to rise at the fastest pace,
again, that it would have to go back unless we're wrong on this and I think that there's more of a consensus
concern about how right we could be as opposed to being wrong at this point, but jobless claims are going
to rip, and the Fed can't control that, a fiscal plan to give you checks, $1000 checks isn't going to stop that.
When you lose your job, you can't even apply for a mortgage. This is the most dire part of a cycle is of
course, when employment turns and that's when you're officially in a recession and you don't know quite
how deep.

RAOUL PAL: Yeah, I get the sense that the rate of change of unemployment is going to be of an order of
magnitude that none of us have ever dealt with. The only parallel I can now draw is 1929 in terms of how
this plays out, because this is a full debt deflation underway. As you say, I don't know what monetary policy
can stop this.

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KEITH MCCULLOUGH: Well, again, I don't know, what the capacity is of the Federal Reserve and what
the scope is from a legal perspective. Let's just start there. Can the Federal Reserve like the Bank of Japan
start buying stocks, or start buying junk bonds for that matter? The answer is no. You're going to have to,
into an election, don't forget, that's the other thing. It's the thing about cycles as you very well know. It gets
the most amount of people in the wrong place at precisely the wrong time. That's where we're at.

You're also ahead of an election, are you allowed to have a massive social faculty socialist bailout program
of stocks and junk bonds? I think absolutely not. Those are the things that I guess as I'm still short junk bonds,
short bank loans, levered loans, small cap, leveraged stocks, you give me any flavor of what tried to express
the end of the cycle, which is you short leverage high beta illiquid instruments or investment vehicles, private
equity, I'm short that. Unless you're going to tell me how the Federal Reserve is going to bail that out ahead
of an election, I think that that's just going to end the way that all those cycles do which they end in distress.

RAOUL PAL: How do you deal with the fact that bonds are really not working now? Because that's been-
- you and I, that was a core trade for us, and it's now becoming more problematic. It becomes you have to
assume more risk because you have to stop shorting equities and these other things and that's okay because
it feels like we're getting rewarded for that, but it's hard when the bond market doesn't work any longer.

KEITH MCCULLOUGH: Yeah. Treasury bonds, I'm assuming what you mean. Because obviously, some
crappy credit is gone. No bid with no liquidity, but if you look at the-- and this is something that we can
spend and probably should, we could spend hours or days on this, Raoul, because this drives people
completely squirrel. This is not like 9/11, this is actually more like 2008. What happened in 2008 was that
the Fed just like this Fed panics quickly and the Fed was chasing the bond market. In other words, bond
yields started to collapse into the early part of '08 and then they priced in that the Fed was going to have
to panic.

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Then bond yields stopped going down, gold stopped going up and that happened obviously in March of
'08. From that point on, gold I believe is down 25% or 26% until October of '08 and bond yields went up
until October of '08. Choppy up, but not down was the point and then they finally collapsed again in
October of '08. The 10-year yield did in the US. What happens in between there is actually just bond
market volatility and I think a lot of people really screw this up because they don't deal in vol space or they
don't measure, map markets in terms of the volatility, the volatility as I quite often talk about or at least that's
what Mandelbrot taught us which is you need to understand when you're in a different regime of volatility
or going through a phase transition into that new regime of volatility.

In this case, the treasury bond vol index or the move index moves out and fully loaded with my Canadian
accent, it moves out, bond yield vol, Treasury bond vol moves up at the same time that high yield spreads
are moving out and equity volatility is moving up, and so does gold volatility. All that together, to me, just
says that the world just doesn't know what's next. What is the great central banking plan to solve for this?
Mathematically, what it's saying, of course, is that the standard deviations of outcomes on something like
the 10-year yield just widens.

When something widens like that, you don't know where it could go next. Is the 10-year yield going to go
to 1.5%? Is it going to go to point 5%? Is it going to race up and down in between? That chops people up
and all of a sudden, you have days where the stock market is actually being led by the Treasury market
and the gold price. We've actually already had a day like that or more than a couple days actually at this
point. I think it's just a leading indicator for confusion and more of the same, which is cross asset class
volatility rising at the same time.

RAOUL PAL: How do you deal with that in the portfolio then? How when you were advising your clients,
bonds are a core part of Quad 4, but we dealt with a situation where that worked in the way or for periods
of time that they should work? How do you deal with that?

KEITH MCCULLOUGH: I try to deal with it like anything that starts to pick up a new regime or a new
bucket of volatility as I like to think of it. There are three buckets for volatility for an asset class. There's the
one where a certified monkey can make money. When the volatility is low, there's the chop bucket where
you can get paid to trade the volatility and make a lot of money doing that, but it's generally volatility is
coming off its lows. It's undergoing a phase transition, but it's tradable. It's investable volatility, as I like to
call it.

Then you get into what I'll just affectionately call the fuck bucket where you get into a space of volatility
where you're absolutely unable to as a human being, or as an investor or otherwise, invest in that asset
class until you get out of the fuck bucket. It's basically it. In Quad 4, all the things that you would have
owned in Quad 4, which include gold, treasuries and utilities to name three different asset classes with those
three things, they all actually become uninvestable at the same time.

What I do is I take down my gross exposure, buy dollars, and that's actually what the market just did. The
market agreed with that view, which is now the dollar-- and that's a different discussion, but it's all part of

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the same answer when you're looking at that's when you actually go to cash is when you can't buy anything
else because the volatility of those asset classes is not allowing you to have the patience to be what a patient
investor looks like when you're in the right bucket of volatility.

RAOUL PAL: Interestingly, we both look at business cycle, we come from different angles, I did exactly
that. I closed almost every single position to collapse the risk even though it's still negative, but the risk what
becomes difficult over a shorter period of time. Over the long period of time, sure, it still all works. I just
want US dollars. Talk me through your dollar view because that's I don't think many people get the dollar
thing.

KEITH MCCULLOUGH: More than that, the dollar thing, first of all, let's just start with it's the most boring
thing. There's nobody on the old Wall or otherwise it's going to get paid a broker commission or banking
fee to tell you to buy dollars. It's absolutely misunderstood because it's paid to be neglected or willfully
ignored. There's a lot of reasons for that but in Quad 4, don't forget, when you get into the deepest part of
Quad 4, the dollar has its highest back tested, realized gains, and that makes a lot of sense.

It's the world's reserve currency. If you have to sell Argentine pesos or you have to sell bitcoins, you have
to sell whatever it is that you're taking down, the gold, you sell that position, and it goes back into dollars.
As a functional matter, that's why Quad 4 is literally, quite literally the only of the four quadrants so one of
the four, I would buy dollars. Every other Quad and I'd be shorting the dollar so that's where my playbook
says to be. It just happens at a faster pace.

It's an interesting thing that you did there. I'm curious as to how you thought about it, but you have epic
gains. You, in particular, I think you've literally taught at least the Hedgeye and Real Vision world how to
buy Eurodollars. People are like what the hell is that? The gains were like epic. If you buy treasury bonds,
gold, Eurodollars, utilities, we're talking about 40%, 80% gains going back a year and a half.

The other big thing is like, book the damn gain, and what do you do when you book a gain? You raise
cash. I think that's the other thing that I'm curious as to how you actually functionally made that decision
because I made it because that's what the playbook says to do but behaviorally, I think that's the way people
make it anyway.

RAOUL PAL: I'm no short-term trading genius. I generally discount my abilities in that. It's basically the
same implied thing in my head is what you have as a process, which is when the vol of vol, when everything
starts moving in ways that now become unpredictable. For example, treasury bonds. The problem is if I
think the yield goes to zero, let's say, but if they go from 60 basis points to 160, back then that's not a good
quality trade for me. I can find other risk allocations, even though it will still work. I know it will work, you
now it will work, we know where yields are going but the allocation of risk at that point, it's not good for
exactly the reason you say volatile, or just volatility in general makes it very difficult.

Then I looked at, okay, how can I distill the entire theme into something that nobody really understands
properly, and nobody understands foreign exchange and what is this going to mean? It means that, as you
said, it feels like Eurodollars. Because when I say to people, oh, buy dollars, they go what? What's the ETF?

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How do I do it? While you can trade the UUP ETF whatever, basically the foreign exchange market is the
deepest most liquid market in the world and so that is going to attract more capital than anything else. It is
also a lot lower volatility than anything else but as you say, at this point in the cycle, the dollar tends to do
extremely well because everybody short dollars.

That was the reasoning, thinking, trying to think ahead of everybody to say, okay, what is the next phase
and as you said, everyone just throws their hands in the air because fuck this, I can't do this any longer. It's
spreading all over the place, while the dollar suddenly starts in a stealthy bull market and then the way it
rejected the higher the Euro with the lower dollar, yen and stuff like that. I'm like, wow, that was super
interesting, because it violently rejected that moment. That made me think, okay, this is the time. Nobody's
in this trade, nobody really understands it. The general public doesn't understand how to trade currencies,
so I just thought this is the one.

KEITH MCCULLOUGH: It's amazing too, Raoul, that you make those decisions. To make that decision,
you and I had to buy that or buy dollars with it not looking good from a "technical" perspective. This is also
why so many people miss the move because you have so many trend followers or moving monkeys as I like
to affectionately call them that they'll only buy something if it's above a simple moving average which to, I
think that's bat soup, or batshit crazy however you want to think about it.

There's no protection in just knowing something's above a simple moving average. Obviously, if you bought
the dollar, if you bought it, if you rotate it out of treasuries and into gold and into the dollar, it looked
horribly from any technician's perspective. How do you think about that like when you go through it,
because you talk to a lot of people. A lot of people do have a technical language in which they speak.

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RAOUL PAL: I use technicals, but I don't use trend following. I'm always looking for what is the price
starting to tell me that the market is not? Where are the probabilities wrong? That's what I always look at it
from. I do look at the long-term chart pattern of the dollar/yen. I think, using my macro framework, and
this is my single most unpopular view. I use my framework, can I think, well, the Japanese got to be handed
the biggest recession of all time and we know that they love the printing press, and that they will have to do
anything to stop that debt being realized. They've got too much debt and their economy so the highest
probability chance is they're going to do the only thing that they know is to buy more bonds, and they will
[indiscernible] everything else.

Now, the problem is they already own like 60% of the ETF market there and about 60% something of the
bond market. If I look at the forward probabilities, what is the probability in the worst recession any of us
ever lived through that they own all of their bond market? I would say, well, it's certainly not zero. In which
case, where is dollar/yen if that's the case? Dollar/yen's probably at 200. Well, everybody else thinks that
dollar/yen, the rent is a risk off, not a situation like this, where you basically can destroy a currency. That
becomes, to me, a really interesting bet, because everyone thinks I'm crazy. I may well be, but it's not priced
so you can make tremendous rewards from a bet like that.

KEITH MCCULLOUGH: Yeah, up until it underwent a phase transition and these things happen slowly
and then all at once, I like to say with risk or volatility, this is what Mandelbrot taught us, which is yeah, a
lot of the time, volatility is just like Brownian motion. It's just doing nothing, but when you have a cluster of
volatility, that actually means something that is about to signal that it's going to be non-episodic, it's going
to be trending volatility, then that asset class behaves literally the opposite way that it had been behaving.

Of course, you're going to have people that don't like that view of yours because the end looked bullish on
every moving monkey chart for quite some time. Now all of a sudden, it looks horrendous. It's a great
example of answering the question in a way that I wouldn't have thought they can answer.

RAOUL PAL: The other key thing in this game, and you do it implicitly from the way you look at stuff and
I do the same is you don't trade the now. It's irrelevant, because the data that release, that comes out now,
so the COVID cases now or whatever it is, is in the market for everybody. That is a non-quality return that
you're trying to capture.

What you try and do is capture where is the trend going over time? Whether it's the economic trend,
because that puts all of the asset trends in your favor once you understand that. I'm always looking ahead,
trying to say okay, where's this going to? I saw it really quick, probably about once the Chinese shut down,
I went fuck, everyone is going to have to do this. Of course, I knew that I was so far ahead of the panic,
that I could make very quick decisions.

Now we're hitting peak fear and now, nothing's working and everyone's not going to make any money.
I'm like, no, you have the opportunity was to be ahead. I think the dollar is ahead. Gold will come back
into play again and bonds will come back into play again, as you said, it gets a period of time where it
does work, and it should work.

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KEITH MCCULLOUGH: Well, bonds and gold could work by the way, but they work within a different
band and a different set of investment outcomes. When the bond market told you right on the timeline that
you said, which gets a bit of a bee in my bonnet because people were like, oh, you got lucky with the
coronavirus. Well, that's total bullshit. The returns on treasuries across the curve going into January for the
prior 15 months were manifest.

All you really did there was the virus said oh, wow, I'm going to really the fattest part of my full cycle
investing return. That's what I think that you and I have in common. I think that that's what a lot of people
really, they don't actually-- people generally just from what I can see and it's no disrespect to anybody, a
lot of people actually that I have a tremendous amount of respect for in macro just got crushed and I still
can't believe it because if you were truly a full cycle investor and you understood that the US economic cycle
peaked at the end of the third quarter of 2018.

You didn't realize that Q4 in '18 drawdown in equities, you started to reallocate to gold and treasuries
there, utility is there, housing stock's there, and then you wonder on all the way out until the first quarter of
2020 and your gains, your full cycle investing gains have differentiated over the same period, the Russell
2000 for example, over the same time period, the gold was up 40%, the Russell was down 40%. I have a
hard time understanding how people are missing I guess the cycle without just assuming that not everybody
sees the most, to me, the most plainly obvious thing is where the cycle is today and where it could be when
the other side of the cycle has played out in full.

RAOUL PAL: What you said was really interesting. We don't know how the gains come. Sometimes, the
capital gains come superfast. The virus did that to the bull market. We made a super normal returns in a
short period of time. In a normal cycle, let's say like 1990, that gain would have taken time, but it came
really fast. Once I saw that happening, that triggered me to short equities because I stayed well for equities,
but I saw that there was limited capital gains left in bonds, so the market was going to break, and the equity
market is going to break next.

Now, we're doing the same thing, both of us, with the dollar side of the equation. The capital gains in
equities happens in two weeks. Obviously, I think there's more to be had but now as the vol of vol has gone
so high, it becomes untradable for a period of time, and then suddenly, eventually you'll get another
opportunity I think.

KEITH MCCULLOUGH: The other opportunity, the other side some people, a lot of institutional clients
that I have this discussion with me, I've been in this and I wonder how your week's gone, man, it's just been
I've been locked in my office with like no teammates, because they're of course all at home but I want it to
be like you've been and how Real Vision and Hedgeye was built to be, which is be there like be John Taylor
the other day. I don't know if you saw parts of my interview with him, but he's like, you got to be bolted in
the chair. The problem with Dalio is that he's a grazer. He was not in the chair like and I'm like, well, I'm
sitting at the fucking chair. This is pretty, but it's part of it.

You sit here, and you watch all this and all of a sudden, everybody who missed it is now the expert on how
we come out to the other side. Like to me, there's nothing worse than trying to listen to that. I try to tune it

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out but when we get to the other side, it's going to be the other side of the cycle. When you're coming out
of a recession, that's how you come out the other side. I don't know how people are going to be looking at
COVID charts and everything else as their leading indicator, when you should just keep watching the cycle,
do the cycle. That, to me, is the only thing that's why I'm bolted to my chair. I agree with John Taylor. That's
exactly what I'm doing.

RAOUL PAL: I totally agree. The question is here, and this is the one I'm struggling with is the tail risk
here in terms of how bad this cycle could be and how long it could be is troubling. Because, as you said,
people already say, well six weeks, it's all over. Everything I look at suggests that this is not a six-week
issue. This is a, as you and I know, the downcycle is usually 18 months, sometimes 24 months, sometimes
even longer. The 1930 was 36 months I think. What's your view on about that with the cycle, because it
obviously shot fast so far.

KEITH MCCULLOUGH: Well, the reason for that is because the last of the Mohicans within any economic
cycle, and you could take the most consensus economists would even agree with this, but it's the employment
piece. Once jobs turn, once people actually get fired, they don't immediately get rehired. The whole
consumption bit has a tail. What's interesting about this one is that at least as a free market capitalist in this
country, of those of us that remain, I think you're still there yourself. We're in this little community right now,
but we're starting to learn how to run our businesses with less.

That's something too that, I think, in this, everyone thought that everything was going to be abundant.
Productivity gains, technological gains, we're going to have these massive sales forces selling software as
far as the eye can see, everything. It's like you have these massive consumption economies. Now, everyone's
sitting there thinking wow, what do I do in a world of scarcity? If I don't have dollars, and I don't have cash
flows in dollars, then I need to change how my business model works.

I think that, to me, that's the biggest, like, if I were to glow like full revenant bear like fully wrapped in the
bear's face just willing to be eaten effectively, that's what I'm really think about is reversing, which again is
endemic to cycles is that when you reverse prior behaviors, you don't know-- it's a nonlinear reaction. You
don't know how long it can take to nevermind, go back to your prior behavior, but assume a new behavior
and that I think is beyond my paygrade in terms of time, but I do know that most investors want it to end
now. That's why Mnuchin says what he says.

RAOUL PAL: This is why I listen to your colleague, Neil Howe, because I have a feeling that it's the
business cycle and it's the secular cycle, and I feel like this is the end of them both. I thought most of us
thought 2008 was the end of the secular cycle, but it wasn't. It feels that this is probably it. I think Neil's
been great, and you having Neil on your side has been an amazing thing because it gives people an
understanding of the societal change that something like this could do. This is going to change the
psychology of people.

KEITH MCCULLOUGH: 100%. 100%. If only because it's going to remind the people that forgot about
what the hell happened to them last time. Don't forget, just on the destruction of wealth alone. Again, this
isn't a call anymore that the market could crash, the market crashed. Let's start there. That's where Neil's

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work, you're triggering at least that one small part of my brain, which is again, you have an entire
generation, baby boomers, who have now lost 30% to 50%, in some cases, 100% of their capital for the
third time in 20 years. That's really, really unfortunate. It's demoralizing. That's why I'm up every day trying
to help the people that I can to keep the money that they still have, or the money that they kept.

That's how America works and how these generational transitions go is that a new generation assumes the
leadership and us Gen X guys, by the way, this is the third time I've seen shit hit the fan in a meaningful
way and seen a lot of my friends get fired. For millennials, interestingly, it's the first time that they'll see their
friends lose their job. It's an interesting thing when you think about a generationally, but it's also one that's
rather abrupt like I don't know how you thought about it, but when I saw the Robin Hoodists go down, like
that, to me was, oh, wow, Tesla is not going down, if you look worldwide, this stock is going down, Tesla's
not going down.

Well, because the 10 million people that bought-- 10 million accounts that chased Tesla couldn't get out of
it, because the Robin Hood accounts were closed. Then they opened the accounts and this freaking stock
started going straight down again. You have that generation of people that chase story stocks that are now
pissed off and I guess that's the point is that Neil says, ends in this very unfortunately, from an emotional
behavioral perspective, a very dark place.

RAOUL PAL: I think so. I think we know that society feels like it's ready for change. If there's something
going to happen that will come out of this. We know we're crossing the Rubicon now when you're giving
away $1000 checks to people, and when's the $1000 check become a $5,000 check. Then you go into
the other question that I was going to ask you is, so does this lead into the fiat money, the collapse of fiat
money and the rise of a different type of inflation, i.e. the value of purchasing power of money goes. I just
look at this and I think, I don't know how much money the government or the Federal Reserve can spend
here to solve this situation. It's just not solvable.

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KEITH MCCULLOUGH: They've tried early. They're already as of today, it's 4.7 trillion is the Fed's
balance sheet. That's a new record, and they got they're in a hurry, and to your point, the Steve Mnuchin,
he's talking about checks, big checks, like it sounds like I'm listening to like a Goldman broker in the '80s,
which I think he was. It's just that too I think is going to where-- you remember Geithner making the promises
early and then it was begging, and then it was pleading, it's just like watching the five stages of grief.

By the time they got to October with Hank Paulson in the bazooka, it was just people were pissed and none
of the promises made any sense. Again, into an election, it's going to be a real tough one. Bailing people
out and writing checks, you're already seeing it. Obviously, you're seeing people get pissed off about that.
This still is America, by the way.

RAOUL PAL: Share buybacks. Super interesting that people are actually going after that, because that
was just criminal what was being done. The outrage of the car companies and Boeing, all these people,
having share buybacks and then saying, oh, can you bail me out? They're like, they should be no. Sorry,
because all of that capitalism do its job.

KEITH MCCULLOUGH: Well, that's the thing. That's the thing too about the fourth turning, as Neil Howe
calls it is that there needs to be a leveling of prior behaviors and the bad behavior that is, I'm going to lever
myself up, reduce my share count because I get paid in earnings per share. I'm going to be the CEO of an
S&P 500 company, the average tenure is four years at this point, and then they just leave. The accountability
of a generation really pillaging corporate balance sheets at precisely the wrong time, somebody needs to
be held to account for that, or this is not going to be America. It's going to be zombified in this place that
might look a little bit more like Japan, actually social harmony, as some people call it at this point, but they
had to go through some version of hell to get there.

RAOUL PAL: Yeah, that's the problem and the rich/poor divide, it doesn't look good when you've got so
many people who've been struggling through this, then as you identified something that I've talked a lot
about it, we both talked about is this retirement crisis. You've now, Wall Street's forced people to buy stocks
at all-time highs with crazy valuations into their retirement so they can get that magic number to retire on.
They're all fucked. I've been screaming from the rooftops about this saying this is wrong. This is wrong.
Now, there's a whole generation who believed in the system, and they've been screwed by it.

KEITH MCCULLOUGH: Yeah, you can't get it back. It's the saddest thing to watch and it's why it can
certainly, as I'm sure you've seen, it can certainly get me going on Twitter when somebody is like you guys,
you and Raoul and actually, the list is pretty short to people. You guys, you're capitalizing on the virus,
blah, blah, blah, blah, blah. It's like, absolutely not. Absolutely not. Two feet on the floor, willing 4:30 every
morning tweeting so that people don't lose the money they have left.

I don't know how many more times I could say that. If you're about to lose your job, you need to protect
your nest egg. You cannot afford to lose, like I said 30% to 50% at a minimum of that and wait another two
to three years for the cycle to come back to recapture half of the losses. That's again, the mental math that
people have when they watch TV is a little different than the real-life math. Obviously, if you lose 50% of

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your money, you got to be up 100% from here to get back to break even. That, to me, is the human part of
this, Raoul, that like I can't believe I'm watching. It's the same clown show that I watch on CNBC. They're
just different clowns.

RAOUL PAL: Well, it makes me and you angry. It just makes me angry. There's no reason that people
shouldn't have better quality information, better quality fiduciary advice, but for some reason, the odds are
stacked against the average guy. Then meanwhile, as you say, everybody else just buys their stock options
with debt and gets richer and richer. That's it, that whole situation will change.

KEITH MCCULLOUGH: Or an asset manager, a registered investment via an unreformed broker or both,
putting people in high yield, that pie chart with the high yield component at the all-time high as US corporate
profits were slowing to 0% and in many cases, negative, pre-virus like that. Like if you're a doctor, that
would be malpractice at the highest level. You have like, that's how people are losing their money. Because
people, the brokers and the networks, and the people creating asset management products and getting
paid ad dollars on those as a management products, they're all part of the same thing. They took the wrong
risk at precisely the wrong time.

RAOUL PAL: What is your thought on how bad this credit cycles going to be? Considering the excesses
and what's been going on, how bad you think it could be?

KEITH MCCULLOUGH: Well, I just have to look at how bad it got just now. We've seen two windows of
Quad 4 where credit in Q4 of 2018, when the cycle I mean. At that point, we talked about it before that,
throughout that, I said wow, isn't it amazing that there are no imbalances according to Wall Street, but
credit just stopped trading in December of 2018? Now, distress credit, we're in Quad 4 again, and a deep
quad for it that and distress credit just doubled in two weeks. Two weeks, your I think 500 billion in distress,
I'm just defining the stresses, your bonds are trading 10 points above treasuries or your bonds are at 80
cents or less and falling. That's just part one of the movie. To me, that's the last flaming dumpster that people
are going to be able to go out and say, hey, look I'm going to put you back into that.

RAOUL PAL: With basically, only a month into the credit move, as far as I'm aware, the credit cycle goes
on for two years, but generally even after the cycle has turned, you're cleaning out the credit shit.

KEITH MCCULLOUGH: Now, the credit cycle. The credit cycle, the cash flow cycle, they're the same
thing. They sleep together every night. That's where the cash flows being negative until we don't know like
the thing with the corporate stew and I wonder how many-- because you guys do so many illuminating, you
have so many illuminating discussions with real people that run real businesses that are running real risks.
The man of cash flows on drawdowns that we know of today, if you actually have-- when a company tells
you, a public company says, we don't know, we withdraw guidance. Well, that that means they know and
it's really fucking bad.

It's because of course companies know what their numbers are day to day, what else would they know?
That's when I have discussions with people that run real businesses, which are really the people that
subscribe to Real Vision, the people that subscribe to Hedgeye, I talked to a franchisee of a major-- he has

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11 different stores of a major fast food franchise that you know. This week, and he's not even in a place
where they've shut down the community. This week, his same store sales were down 50%, 5-0% on a year
over year basis. He's going to fire x percentage of his flex labor and that's just to start. This is not going to
stop so it's a really Interesting thing that you can't really take this cycle and shutting down the consumption
and service industry of America, and you can't say well, this is like this and I got to put that multiple on that.
There's just absolutely no way and when it comes to credit, I think that that'll be the last thing that people
are allowed to buy with other people's money.

RAOUL PAL: Yeah, I think possibly, it's just stock trading so people can't really understand the scale of it.
Because it's only been four weeks or even less really, this shit show, none of the actual negative cashflow
has started to be realized people's ability to not be able to pay their debt. That's coming. Because everyone
now, all the cute V-shapers are like well, if you look at where the HYG is, it's implying X number of
bankruptcies, that's not going to happen. I'm like, we've only just started, you have no idea how this cycle
is going to be. You've stopped the entire world, stopped it. The biggest economic event of our entire lifetimes,
maybe of all modern history, and you're trying to tell me you know what the default rate is.

KEITH MCCULLOUGH: It's only people on Wall Street that are going to come up with some equation on
what is priced in. Okay, I'm the guy, here I am. I'm calling you from Old Wall Inc. and I used to work with
the Mnuch, he and I are wonderful friends, it's all going to be fine as long as we write some checks. The V,
which I was not prepared for the risk to go down the backside of the V, I'm going to tell you precisely where
we're at in the V, and what's priced in at the bottom of the V. No, no, it's not the way it works. In fact,
you're going to go down the wrong side of the V, you're going to do like 8000 W's, and then you're going
to find new lows at the bottom end of the ultimate V. That's the way a cycle works.

I'm not going to sit here and like put up with that. I think you're being polite if you're entertaining people
in real discussions about that, because it's the same monkey math that's saying I know that valuation is a
catalyst to stop stocks or credits from going down. Never at the end of a cycle is that the case. Evaluation
is not catalysts, the rate of change of growth and inflation is and in particular, in this case, the bleeding out
of profits absolutely is. That's how I think about that. I think anybody selling you what that is in the business
of selling some theory.

RAOUL PAL: Also, we also have the fact that all of these retirees are hitting 65, 70, they're now going to
panic. If they're not panicked yet, they will start to panic and think I need to secure my nest egg. All of the
credit, and all of the equities are owned by those guys. The buybacks just stopped. There's no buyer of any
of this stuff. When you talk about valuation, the ability for this to be, total valuation destruction beyond what
we've seen before. The S&P doesn't go down to 15, it goes down to eight or seven is possible. I'm not
saying it's definite, I don't know. I'm just saying it's possible and people are just too busy trying to pick the
low thinking out it'll just go back up because they think the roadmap is Q4 2018. That's what they still think.

KEITH MCCULLOUGH: Yeah, that's nonsense. I think they'd have to fully not understand what a full
investing cycle is and not understand what a full and proper employment cycle peak is within the lens of a
consumption curve, corporate profits, corporate credit, et cetera. This is not very hard, actually, for people.
What's hard is really coming to grips with the fact that a lot of people in our business again, to get back to

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like the malpractice of a doctor or anyone else in this world, you have to have a base level of knowledge
to start making these recommendations.

I'd say that the cycle is probably the most basic level of knowledge. There's absolutely no probability,
possibility or otherwise right now that the employment cycle isn't going the wrong way and staying the
wrong way for enough time where you could lose a lot more money.

RAOUL PAL: Just to wrap up, we've talked a lot of things, let's break people out to three different
categories. The average guy, he's got some money invested in the market, his 401k, what are you telling
him? What should the average person do?

KEITH MCCULLOUGH: Well, so for us because we have a full asset allocation for each quad, we've said
the gains have been awesome. You didn't have to chase the highs in Tesla to realize literally your highest
net worth of your life because you basically own treasuries into the most epic, I don't know if you want to
call it whatever you want to call it but everything that you owned, book gains, put it in dollars and wait and
watch like that's what I do. I don't know.

RAOUL PAL: The [indiscernible] let's say, so the [indiscernible] is not a risk taker, so let's go to the next
bucket. The person who wants to take some more risks, they want to profit from this opportunity, but also
not swinging for the fences. They won't do the macro hedge fund trade, but they just want to know what it
is. What are your suggestions currently? You talk to me.

KEITH MCCULLOUGH: In terms of like if you don't want to just take down your gross exposure to all
markets and raise cash?

RAOUL PAL: Yeah, so if you actually want to participate in this downcycle, you're going to make a bit of
money out of it because you're sophisticated enough to figure some stuff. What would it be?

KEITH MCCULLOUGH: Short selling. It's actually I think this is a new dawn and it's quite seriously.
Especially, if you're saying your average gal or your average guy, i.e., they're not running institutional
money, there has never been an opportunity like this because there are zero commissions. You pay zero to
transact, that's never happened before. You can sit there and you can learn how to short stocks, again with
your own ammo and again, I'd suggest you start with a couple light rounds as opposed to going heavy
duty here but if you follow like for example, like in real time alerts, it's silly how many gains in a row that
we've signaled like even intraday moves for people to capitalize on.

Again, you can be long volatility, you can be long different instruments that are obviously going to get you
there, or you can be short stocks. What I think and what I've been doing for the last week, the more shoot
the fish in the barrel game has been to shoot tech stocks, com stocks and consumption stocks, like the story
stocks, because that's where people have not taken down their gross exposure yet. Those are my happy
hunting grounds, if you will.

RAOUL PAL: Yeah, they're still hiding that. Sure. I think.

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 The Interview: When the Everything Bubble Bursts

KEITH MCCULLOUGH: What could possibly go wrong? There's a software, I actually just shorted two
more but again, like intraday, you can make 5% to 10% intraday in these things. I'm shorting stocks that
are trading at 15 times revenues, and they just came down from 18 times revenues. I'm shorting companies
that will never earn $1 in cash flow and could go away. I had one friend actually who I'd say probably fits
the profile because you said somebody who's sophisticated enough to know you hit the button in your online
trading account says sell short and there you go.

He literally, I couldn't believe this, and I had to believe it because he snagged his account like a picture of
the balance in his account and he told me at the end of February it was just after Valentine's day he goes,
I hear you man. This is the cheapest spot to be buying protection because that's when implied vol discounts
were blooming really in SPYs even and he showed me back then he said, I'm going to put $100,000 like if
I could go back and play '08 again, I would just bet at least $100,000 that the shit's going to hit the fan.
In many different ways he bought puts just to simplify that.

Yesterday, his account was $6.7 million. It changed his life. It changed his life. This guy makes probably
whatever, 250 grand a year. He's my age so he's been doing grinding for-- he's got $100,000 is to him
in his trading account wasn't a crazy amount of money, but it was enough to make it matter. There's your
fourth turning. There's your new generation of people that are like, I'm not going to sit here and listen to
Jim Cramer tell me when to buy stocks, I'm going to make money on this.

RAOUL PAL: I'm going to go to the third bucket. The aggressive risk taker, the hedge fund, what is the
single bet that you think is the best one now? Whatever time period you want to-- I'm not going to define
your time period. We were very clear on bonds before. You and I were very aligned. We've been pretty
aligned on short stocks, but right now, what do you think is the best aggressive risk-taking strategy to
capitalize on this opportunity?

KEITH MCCULLOUGH: I think it's shorting tech stocks. Now, you want to take it to the next level at the
hedge fund side and again, we have plenty of clients that are actually doing quite well. I was just talking to
one of our-- it's not about being a sharper or a dollar client, it's like what are your numbers and he said
he was up 14.5% for the year to date but he was willing to go 20%, 40% net short. That's the other thing,
it's not just shorting the stocks that I want to be shorting which is what everybody hasn't sold yet. Again,
reminder for anybody who's not traded successfully through this, people sell what they have to and then
they go eventually and have to sell to get liquid and to raise some cash in the things that have been working.

That community, that's why I picked those stocks, the story stocks, the tech stocks, communication stocks,
but for a hedge fund to actually strap it on, Raoul, like I'm like strap it on. Once you go net, once you run
net short, enough of this neutral bullshit. Run net short and run net short on every bounce. You've only had
six bounces in the last three weeks but if you shorted them, if you went 20% to 40% net short on all those
bounces, you're going to be up more than 14.5%.

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RAOUL PAL: Yeah. I tend to agree. I'm a little bit nervous still, I think your idea is great, is does the catch
up to be played from the darling stocks, those tech darlings because nobody wants to sell them? Apple is
still a great company at half the price.

KEITH MCCULLOUGH: It's the other part of like, we've seen that movie before. Last I checked in 2001,
2002, or in '07 to '08, Google or Apple did what they did, they're still the same. Maybe their companies
that went through cyclical realities. I think that that's a big one though. Like when you take just boil it down,
like if you take even with the hedge fund community, which basically became, there are many people that
run net short anymore, by the way. That's how I was taught in this business. I was as biocide analyst in
2000 so obviously, to survive the first two years and not lose my job, I had to be adept on the short side.
Maybe that's my bias, or it's my skill set, whatever you want to call it.

The reality is that people just like they called things secular growers. The entire edifice of the mutual fund
community and hedge fund community, those were their longs. Now, those are cyclical slowers so again,
whether it's Facebook or Google, we have models on both. The street is way out to lunch on where their
revenue growth is going to be in the next two quarters. Those are the things that I'm interested in. You got
low short interest stocks that have barely corrected if you look back long term, and again, I know that that's
going to be an unpopular thing, but you asked for the most aggressive move. Well, why don't we just go
short what everybody's long?

RAOUL PAL: Yeah, I hadn't even started thinking about those but you're right. Google and Facebook are
advertising companies, they're media companies, well, advertising companies. In a world where everyone's
cash flow goes, advertising gets pulled, but it's a huge and brutal cycle, the advertising cycle, everything's
that tech stops, they're not. They only get the money from advertising, basically. Really interesting on those
and the other one for me, and we talked about at the beginning. I think the dollar I think, on the pro
perspective, I think those are both great bets, being short those darling names, people are dead for our
game because they think it's a V shape and I don't want to get rid of those. I just think that the US dollar is
just a phenomenal trade still.

KEITH MCCULLOUGH: Yeah, the US and particularly if you're running long short. Now, like if you just
go back to a couple days ago, and you had that position on like, I'm long a ton of dollars and short a ton
of tech stocks. That pays out huge and that's why if you look at the Sharpe ratios on days like that, which
really differentiates under the most adverse conditions, which is basically like an OODA loop when you're
in that most intense point of combat, we're talking about US military combat, John Boyd type OODA loop,
what do you do and what did you do? Because if you don't do the thing, you get hosed.

If you're long dollars, and stocks, bonds, and gold all go down on the same day, your Sharpe ratio blows
through the roof. That's another thing I think right now. We've lost a lot of hedge fund managers. A lot of
them are just old and retired, and some that weren't retired are going to have to retire into a family office
now. We've seen some pretty bad numbers. If you're like, think about the opportunity for a millennial or
even-- I don't think I'm that old yet to really like to perform as a hedge fund was built to perform during
adverse conditions in this type of an OODA loop, I think that that's a tremendous opportunity right now.

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RAOUL PAL: Yeah, I think you're right. This is where hedge funds prove themselves that if people
understand that a hedge fund should be net short, or net long, and you should be indifferent because it's
been in ground to people about chasing a benchmark in a secular bull market, they don't get it. This is
going to really change this industry where people are going to prove exactly what it takes and to take the
risk, just to turn your mind upside down, which is like, well, I could have loved Google for five years. Now,
I hates him. I can write both their cycles up and down. That's okay. I don't need to be married to anything
in my book, I need to be married to the cycle.

KEITH MCCULLOUGH: That's a super important point. I am the most promiscuous person away from
my wife in asset markets, I will absolutely short my longs and again, I turn around and buy my shorts. I
think that if you could just start doing it that way, you might start to feel like the thing that doesn't feel
anything at all, which is the machine. The machine is rules-based, it understands the quads, it understands
cash flows, and it makes objective decisions that are partisan, they're certainly not emotional.

I think that if the closer you can get to that you're going to be one of the performers because so many people
for so long have depended on their big brains. Those big brains are quite emotional and there are a lot of
visceral reactions, at least too many for me and to go back to that way, I think that way is broken, and I
thought that for quite some time.

RAOUL PAL: Brilliant. Gee, look, fantastic to catch up. I think there was a ton for people to take from that.
It's super interesting times. We've never been through this. It's feels a bit like 9/11, 1998 Asia Crisis, 2008
and 1929 all rolled into one. It's like, it's a lot to deal with but let's hope we'll keep doing our thing. You
and me, keep pushing it trying to help as many people as we can. If we stay true to that, we'll do well.

Okay, first question. Is there one person living or dead you'd want to interview more than anyone else? If
so, who and why?

KEITH MCCULLOUGH: Benoit Mandelbrot. He's gone from this world but again, he's the forefather of
fractal math. I would love to absolutely get him looking at our processes, looking at the machines that we
built, the predictive tracking algorithms fully loaded, because again, when he figured it out, as I
fundamentally believe, he was sitting there, I believe in Yorktown Heights, New York, with Big Blue, the
machine and he's measuring and n mapping cotton prices and commodity prices and trying to figure it out,
and he came up with a lot of the things that I fundamentally built our business center process on.

RAOUL PAL: Fantastic. Next question, what is the book of books that change how you view the world,
and how so? Also, what you're reading right now?

KEITH MCCULLOUGH: Well, they'll go right back to the woods. My Bible if you will, and I am a Roman
Catholic Irishman, so I'm not afraid to remind people that, I think they probably figured that out. The
Misbehavior of Markets is literally my Bible. That's Benoit Mandelbrot's book. That's the number one book.
It's a nice b yellow book, which is not my favorite color, but it is my favorite book. I've read that book over
and over and reread parts of it. The rescaled range, for example, for people who are looking for hints on

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how my calculations are for the Hedgeye risk ranges, which are so valuable in times like this, that'd be
number one.

Then on the behavioral side, I think Thinking Fast and Slow has got to be right at the top of the list. That's
a super important book, if only because it reminds you that we can't just sit there and be visceral and
emotional and big brain, we have to have something that checks our cognitive biases at the door.

RAOUL PAL: As an individual and a leader in your field, how do you stay engaged and relevant in a
world that's moving so quickly?

KEITH MCCULLOUGH: On Twitter. To me, that's the best place to engage. That's where all the love and
all the hate is and somewhere in between, I think I used to say my lovers and haters never meet. I think that
that's actually a great place to figure out if you're on to something new. You can flesh out ideas. It's a place
where we test a lot of different new products, for example, or new services within the Hedgeye user base.
A lot of them are on Twitter, so I think that's a great place to get out there as Teddy Roosevelt would. The
man in their arena sometimes I feel like that and that's a lovely place to play.

RAOUL PAL: Some of our guests can tie their success to one key breakthrough. Did you experience a
tipping point in your career?

KEITH MCCULLOUGH: Yeah, getting fired in 2007 on November, not that I would remember the date.
November 2nd, 2007, getting fired there was a tipping point for me. I think that if everybody could, at some
point you would get fired, you're going to learn a lot about yourself. Most importantly, you learn, in my
case, that's what turned the lights on in terms of creating what I think is just a better way as opposed to
running-- running a hedge fund's great. We're partnered with one now and it's doing quite well as it should
in an environment like this, but to create a better way. For me, that was when the lights went on. I want to
create a hedge fund research platform that actually isn't stressed out running the money, that can help
everyone else run theirs. That absolutely was the catalyst back then in November.

RAOUL PAL: On that same question, can you identify a failure that had the most significant impacts in
your career? What do you do to overcome it?

KEITH MCCULLOUGH: Well, that was that. I think that failure to me was on November the 2nd, I'll never
forget it. I left the building with a box, with all my stuff in it, I got on the train. My wife was about to give
birth to our first child, my son Jack, five days later. Again, this is a terrible thing. I just I felt shame in every
possible way. I was raised by a firefighter so in our house, if you don't have a job, you really should be
shamed and trying to support your family. That to me was the lowest point but little did I know, that was
going to be my V bottom to find the brighter side.

RAOUL PAL: Who was a person you admire and not Benoit Mandelbrot, and why?

KEITH MCCULLOUGH: If I look at anybody, a lot of athletes I actually have a tremendous amount of
respect for, but a lot of coaches. I think that if you look at different coaches like Vince Lombardi, for example,

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different coaches have different styles. John Wooden's another coach that comes to mind because I think
for me at this point of my career, the most important inspirations are people that can coach a process.
Whether, obviously, I was an athlete, I wasn't a professional one. Maybe that's another failure in my life
but the reality is that I always love being a coach. I think that those are the named two, Wooden and
Lombardi would be two very inspirational coaches in very different ways. I also think that the other thing
you need to not try to be them, but you need to take their principles and be yourself.

RAOUL PAL: Here's a gift of a question for you. This is the final question. What view do you hold that is
most controversial in your professional life?

KEITH MCCULLOUGH: Wow, I guess it would have to be the old Wall actually exists. I think that that's
still is a big controversy out there. The conflicts of interest, again, the compromises, everything that is the
old Wall whether it'd be banking, brokerage, ad dollars, I still to this day, I believe that we're fighting the
good fight, you and I on that, Raoul, but again, the old Wall is certainly still big controversy and I think it
will be till I'm on the wrong side of the grass.

RAOUL PAL: Keith, brilliant. Thank you for everything.

KEITH MCCULLOUGH: Yeah, thank you.

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