Crescat Capital July update to investors
In our last quarterly letter, we showed five macro imbalances that were setting the Chinese yuan up for a substantial and imminent devaluation. Since then, our yuan devaluation theme has indeed started to play out again, like what began in 2015. Crescat’s hedge funds profited nicely in June, particularly from our two China themes. See the profit attribution table below for Crescat Global Macro Fund for June.
We strongly believe there is much more to play out with respect to China and all of our themes. Since 2008, China has contributed to over 50% of global GDP growth while its on-balance-sheet banking assets have quadrupled to over USD 38 trillion dollars, near 300% of its nominal GDP. This makes China arguably the biggest global credit bubble of all time. The bubble started to unwind in 2015; it has now resumed. Our extensive analysis of warning signs on the history of credit and currency crises makes us believe that a Minsky moment for China and its implications for the global economy are now upon us.
Over the long term, Crescat has delivered strong absolute and risk-adjusted net performance with low correlation compared to both passive benchmarks and other active managers. We have delivered this across all Crescat strategies. Macro themes are market inefficiencies that Crescat has proven its ability to exploit over multiple business cycles. Capitalizing on global macro themes is Crescat’s niche, and the results can be seen in the chart and table of our net performance below.
We have many bearish themes in the portfolios today given where we believe we are in the overriding global macroeconomic cycle and with US equity valuations at truly record levels. It’s all happening at a time when the Federal Reserve, the arbiter of the global reserve currency, is tightening credit late in an extended US business cycle.
At Crescat, we apply value and quant investing principles to develop and express macro themes across all of our strategies. We believe there is substantial value to be extracted from our investment process in the years to come.