At Crescat, we remain steadfast in our net short US and global equities position in our hedge funds. We are driven by our macro fundamental modeling and themes.
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Three historically extreme macro imbalances in global financial markets today pose significant risks to investors at large today, including:
Record US equity valuations;
Historic global debt-to-GDP; and an
Unprecedented China currency and credit bubble.
The imbalances in and of themselves do not help with the timing of the financial market downturn and economic contraction that would correspond with their unwinding. The lopsidedness has existed for several years already and only become more extreme. For the timing of the unwinding, we need to look at macro signals that have been reliable forecasting tools ahead of prior downturns. At Crescat, never have we seen the timing indicators more abundant nor more aligned than they are today:
Bearish late-cycle Fed pause;
Global dollar-based liquidity squeeze;
Global M2 and central bank assets have contracted;
Record rate-of-change in Fed interest rate hikes + quantitative tightening;
Multiple bearish US Treasury yield curve inversions;
Falling 2-year Treasury yield;
US versus world yield curve inversions;
US versus world same-term yield spread extremes and reversals;
Consumer confidence faltering from cyclical contrarian peak;
Declining pace of labor gains from contrarian unemployment low;
US earnings growth massive deceleration;
Global economic surprise downward trend;
Global PMI declining trend;
Record late-cycle dollar volume of IPOs and busted IPOs;
Corporate credit spreads recently near-record tight, starting to slip;
Utility stocks starting to diverge from US treasuries; and
Breakout in the gold-to-S&P 500 ratio from a multi-year resistance line.
To see Crescat’s macro charts on these, please refer to our recent quarterly and monthly letters, macro decks, website, and social media all accessible through our website.
One unique aspect of this cycle with respect to the extension of the US stock market has been the US administrations’ relentless hype of a US-China trade deal that has kept the market aloft. As we have been saying, any material trade deal remains highly unlikely. We laid out all the reasons in our last quarterly letter. Last Friday, it became clear to us that there is no imminent trade deal with China. It should soon become clear to everyone. We believe the US and China are firmly embroiled in a trade war if not a new cold war. It is yet another bearish macro timing signal that draws its closest parallel to 1930 when the US Congress passed the Smoot-Hawley Tariff Act, one of the catalysts for the Great Depression.
Crescat relies first and foremost on macro fundamentals, as opposed to technical analysis, to time the business cycle and position our portfolios. Nonetheless, we can’t help but point out the bearish triple top pattern on the S&P 500 with a broken trendline. This could be the technical signature of a historic market top.
According to Stanford PhD money manager, John Hussman, who correctly timed the bear markets …read more