I discovered the Crescat Capital investor letters, because their “Q3 2017” letter is featured in Meb Faber’s book “The Best Investment Writing Volume 2”. It’s interesting to read their latest letter.
Investment Outlook Summary
September 20, 2018 should mark the closing high for the S&P 500 to end the second longest bull market in US history. It should also mark the top of the “everything bubble”, a term coined by investment newsletter writer Jesse Felder to describe historic valuations in every major asset class, commodities being the one exception. The everything bubble was courtesy of experimental global central bank policies in the wake of the Great Recession. We think it is only the beginning of the asset bubble bursting process brought on by the sheer extent of the bubbles themselves. In other words, we are likely to face the real-life playing out of economist Hyman Minsky’s “financial instability hypothesis” which portends much more unwinding still to come. There is a natural economic cycle, including a natural business, market, liquidity, and credit cycle which are all intertwined. While no one can predict the lengths and inflection points of these cycles with perfect precision, our goal is to time them as best we can to be prudent stewards of our clients’ capital and grow and protect it over the long term.
Our macro model is telling us that the bull market has finally topped out for this cycle and that the economy will soon follow. The central bank liquidity tide is going out while equities, fixed income, real estate, and illiquid private assets have all recently reached historic high valuations. We strongly believe there is still ample opportunity to capitalize on the everything bubble meltdown in 2019 through select short positions and “proper” defensive longs. The extreme macro imbalances have only just begun to unwind based on:
- Record global leverage compared to GDP;
- Only-recent record US equity valuations across eight comprehensive measures;
- Recent record financial asset valuations relative to GDP in the US;
- A record currency and credit bubble in China;
- Historic housing bubbles in Canada and Australia;
- Record cheap valuations for precious metals and related mining stocks;
- The second longest economic expansion and second longest bull market in US history;
- Recently historic US market-top indicator levels on Crescat’s 16-factor macro model; and
- Lack of widely recognized global recession with corresponding low equity market valuations, investor despondency, and capitulation necessary to signal a cyclical market bottom.
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