World's "Most Bearish Hedge Fund" Suffers Worst Month In History, Refuses To Capitulate

Tyler Durden's picture

“In my view, the Trump election has made a large Chinese devaluation more likely. Mainland Chinese investors are desperately trying to get out of the Yuan, and the People’s Bank of China is trying to defend the value of the Yuan. They are doing this by selling treasuries.”

       - Russell Clark, Horseman Global

Having successfully avoided a calamity for most of 2016 despite being massively net short, somewhere to the tune of around -90%, at times rising as high as -105%, Horseman Global finally had a bad month, in fact, having lost -12.80% in November, the hedge fund which we previously dubbed "the world's most bearish hedge fund", just suffered its worst month in history as "the short book, the bond book and the forex book lost money."

The November loss brought its YTD performance to -17.6%, a return that would make only 2009 a worse year in the history of the hedge fund, assuming no further losses.

So has the recent debacle prompted Horseman CIO Russell Clark to shift strategy? Not at all, in fact as Clark writes in his latest letter to client, the market rally since the Trump election has only made his more confident in his macro bearish thesis that a China crash is now even more inevitable, to wit: "the macro model that I have been using to think about markets still looks valid, despite recent moves. The model indicates that it is impossible for countries that have engaged in QE to then normalise interest rates without causing financial crises with their trade partners. Since 2013, we have had the taper tantrum, devaluations in India, Russia, and Brazil, which all helped to drive long dated treasuries to new lows. Now the market is thinking the US will normalise rates, and the second biggest economy in the world is struggling. A rerun of 2007/8 is looking likely to me."

That would be the financial crisis, for those hedge fund managers who are too young to remember.

He continues:

When the fund went net short in 2012, we spent many years all alone in our positions and worldview. This is how I prefer to be. In January and again after Brexit, the market has come much closer to our positioning, and returns have been poor as a result. In the month since the US election, I again feel all alone in our positions and ideas, while at the same time the macro indicators in China, as well as the increasing desperation of the authorities there to reduce capital outflow means we are getting close to the devaluation and crisis that I have long expected.

Perhaps he is right, but a similar self-assessment was made several months ago by Crispin Odey, and the outcome was very unpleasant for the British billionaire, who is facing his worst ever loss as his hedge fund has plunged 48% so far in 2016 according to recent HSBC performance data.

While there is little new for those who have followed Odey's macro thinking, and negative bets on China in particular, here is his latest letter to investors:

Your fund lost 12.80% net this month. The short book, the bond book and the forex book lost money.

 

Since the election, the market narrative is that tax cuts and fiscal spending by the Trump administration will drive growth in the US, and this will drive inflation. The upshot of this has been for investors to sell bonds, buy USD, buy equities, and buy industrial commodities such as copper and oil.

 

The problem I have with this narrative is the way that Asian currencies have traded since the Trump election. They have been particularly weak. This is very unusual. Asia is the source of most global demand for commodities, while also a huge supplier of goods into the US. Asian currencies (as proxied by ADXY Index) have followed US bond yields higher and lower since the 1990s, as well as followed commodity prices higher and lower over that time. There has been one time when this relationship has broken down. In 2007 and 2008. At that time, as stresses in the US financial system became apparent, US bonds yields fell, and US investors became desperate to get out of the US, buying commodities and emerging markets. At that time, we saw Asian currencies rally, at the same time as US bond yields fell. And for a few months, this continued, but in the back half of 2008, the relationship reasserted itself and investors that had bought EM and commodities to avoid problems in US, lost more money than those who remained in US equities.

 

Today we are seeing the reverse, I believe. The Chinese financial system is showing signs of stress. Corporate bond yields are rising, the Chinese Yuan is weakening, and outflows are continuing. In my view, the Trump election has made a large Chinese devaluation more likely. Mainland Chinese investors are desperately trying to get out of the Yuan, and the People’s Bank of China is trying to defend the value of the Yuan. They are doing this by selling treasuries. The problem with this is that the more treasuries the PBOC sells, the more yields are likely to rise, putting more pressure on the Yuan. It seems to me that the PBOC is stuck in a doom loop. But as I noted in my market view, the PBOC is running out of options.

 

The rise in commodity prices, I think, is driven by increasing capital controls in China. Mainland investors are finding it harder to get money out of China, and so we are seeing Chinese investors putting more money in to real assets such as iron ore and copper, with a view to preserving some value. This view, which is wildly different to the prevailing view in the market, implies that bonds are weak, not because growth will be strong, but that the PBOC is desperately selling bonds to maintain an exchange rate. This implies that if China either institutes capital controls, or devalues enough to offset devaluation pressure bonds should rally. It also means that commodities are strong only on fund flow basis, not on a demand basis.

 

In my view, the macro model that I have been using to think about markets still looks valid, despite recent moves. The model indicates that it is impossible for countries that have engaged in QE to then normalise interest rates without causing financial crises with their trade partners. Since 2013, we have had the taper tantrum, devaluations in India, Russia, and Brazil, which all helped to drive long dated treasuries to new lows. Now the market is thinking the US will normalise rates, and the second biggest economy in the world is struggling. A rerun of 2007/8 is looking likely to me.

 

When the fund went net short in 2012, we spent many years all alone in our positions and worldview. This is how I prefer to be. In January and again after Brexit, the market has come much closer to our positioning, and returns have been poor as a result. In the month since the US election, I again feel all alone in our positions and ideas, while at the same time the macro indicators in China, as well as the increasing desperation of the authorities there to reduce capital outflow means we are getting close to the devaluation and crisis that I have long expected.

 

Your fund remains short equities and long bonds.

And yes, for those wondering, it means Horseman just got even more bearish, with his latest net exposure back in the negative triple digits, down to a new all time lows of -106%.

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balz's picture

Hubris. Failure.

WakeUpPeeeeeople's picture

It typically doexn't go well when betting against the Fed.

AlexCharting's picture

Gotta be flexible and evidence-based. 

whatamaroon's picture

I guess he didn't ask Gartman/Goldman their opinions.

FreedomGuy's picture

Elections have consequences. With Hillary I was bearish everything. With Trump at least anything is possible.

rex-lacrymarum's picture

In principle, you are correct, but there is one problem with that idea - at least in terms of the stock market. Unless Trump has a time machine and divine powers of intervention (he has neither), he cannot alter the fact that this is one of the most overvalued markets in history. He can also not alter the fact that the amount of money in the US economy has increased from $5.3 trillion at the beginning of 2008 to $12.43 trillion today. This vast money supply increase makes it apodictically certain that the economy has suffered enormous structural distortions that can only be rectified by a bust. 

So even if he takes positive action, it may only become noticeable in the long term. I do agree though that Hillary would have been unequivocally bearish. Her socialist economic program didn't contain a single positive aspect and would have wasted scarce economic resources both directly and indirectly. 

King Tut's picture
King Tut (not verified) Dec 12, 2016 8:27 PM

There were a lot of guys that went broke shorting the housing market too early as well

GRDguy's picture

Seems to me a commentary like this is like putting a bulls-eye target on your back for all the other Wall Street gunslingers.

Kirk2NCC1701's picture

Not surprised. These funds are as much Sales & Marketing organizations, as they are investors.

If they cater to the bearish crowd (Libertarians, Doomers and Doom Porn types), then their Asset Allocation / Misallocation is predictable. As are their brief periods of great success (during actual downturns), followed by lengthy periods of failure (during market booms).

I'd imagine that all the PM shills are losing their shirts, and are compensating by going into full Sales mode, to find new Suckers.

Binx's picture

Yeah, but did you look at this guy's returns over the years? Really excellent for a hedge fund in an endless false bull.

rex-lacrymarum's picture

Actually, precious metals shares are still up by 80% since the beginning of this year (HUI), in spite of suffering a big correction in the second half. Pretty much the by far best performing market sector this year. 

Clock Crasher's picture

I also will never capitulate

I will also never "invest" my USD in ANYTHING electronic on the stock market side going forward.  I will hold onto my existing vix longs and miner longs until they either go to zero or show profits.  I have mentally priced in them going to zero.  The money masters have a perfect track record of burying themselves alive.  never a good idea to run a ponzi scheme up against a running clock.

Phyz USD/Metals or goldmoney

ArthurDaley-OldieTimeTrader's picture

Clockcrasher I'm with you. I got two emails this weekend telling me that being like Crispin Odey & Horseman Global (bearish of most stocks & thus  long silver and gold miners) is an absolute folly. To which I said "Poppycock"..

I will massacre and borrow a quote from Margaret Thatcher "This man is not for turning" https://en.wikipedia.org/wiki/The_lady's_not_for_turning .. Long gold / Silver miners, for the last three years so why change now when the fun is going to turn up. 

For anyone who is following Odey & Horseman Global, I have a thought. In the "Big Short" Dr Michael Burry faced an investor revolt just as Odey has this year. Burry in the film (and real life) managed to keep his clients in their positions. At the end of his 2004-2008 trade, his fund was liquidated with a 489% profit. Chew on that Goldman Sachs

g'kar's picture

All aboard the Zimbabwe Express. (Brought to you by the friendly folks at the Global Central Banking Mafia)

Wild Theories's picture

problem is, is a devaluation a real devaluation if the dollar rises against all other currencies?

for a meaningful Chinese devaluation, China would need to devalue more than others against the dollar, so unless tensions escalate substantially between China and the incoming Trump administration, or things materially worsen inside China, that's unlikely to happen.

and if that does happens, well, that just means even more UST selling from China, both by need and by design, but will more UST selling from China put a positive bid under bond and gold?

so how does one short that and profit from it if bonds and/or gold are your longs?

 

you'd need a shooting war level escalation to drive enough fear into people to lift bond/gold again

daveO's picture

Chinese capital controls=bond rally & gold price fall.

Lizardking's picture

Horseman Global is going down, will be forced to liquidate holdings. This will be the first in a series of liquidations from bearish hedge funds. How could anyone fight the trend with a fed fund rate under 1. Yellen has repeatedly stated rates will normalize at a gradual rate. Basically setting stage for a fed induced bubble to allow the slow unwinding of fed assets. While there will be sharp pullbacks from time to time overall trend is bullish and DOW will continue to hit new highs over next 4-8 years. Take a look at DOW 30 and tell me which stock is due for a large correction. I can't find any except for maybe CVX, XOM. I see room for gains in top three weighted DOW stocks along with a lot of others.

in4mayshun's picture

The reason that the central banks have taken so many unprecedented actions is because they know the next stock crash IS THE BIG ONE! It's obvious that the blatant and rampant fraud on Wall Street and at every level of Government and Big Business is because they all know that the game is ending and right now its " get yours while you can" time. The next crash will wipe out retirement accounts, pension funds, real estate values, and nearly every person's "normal" life. I look at every level of socialized society, and not in one single instance do I see a situation that is tenable. From Washington down to my local County, every organization is bloated with bureaucracy and overpaid schmucks spending money they don't have. They've been stealing from our immense pool of wealth for decades and the pool is now a puddle. I'm not saying that this thing ends next year; who knows, it could continue for awhile. What I'm saying is, when it goes, most Americans will be financially ruined, and there will not be enough people who are stable enough to sustain a recovery. And finally, the globalists will get their new, and very tyrannical, monetary system.

It's not fear porn friends...its just math.

King Tut's picture
King Tut (not verified) in4mayshun Dec 12, 2016 10:30 PM

There was a good article on CNBC (strange that)  about how many people are still not back in the stock market-  not because they can't afford it- but they still think it is a fool's errand since everything since 2008 has been Fed-induced BS

Made in Occupied America's picture

They should convince Gartman to go long stocks.

Dr.Carl's picture

This is actually a very good article. I am a retired financial advisor after 45 years.

 

The only analsyt I have learned to trust is www.shepwave.com

 

Here is a chart they posted to their FB account for proof.

 

FB post…showing QQQ chart from Dec 2nd

 

 

https://www.facebook.com/166578775325/photos/a.10153488951800326.1073741827.166578775325/10154303985890326/?type=3  

wisetrader224's picture
wisetrader224 (not verified) Dr.Carl Dec 12, 2016 10:58 PM

True. shepwave's predictions have been dead on. I have never seen any anlayst give such precise targets and then they get hit. 

short screwed's picture

I feel for the guy. Back in 2010 I was convinced we were going to retest the 2009 lows. It never happened and I lost a boatload of money as the market kept grinding higher. Hence I chose this username.

TheVoicesInYourHead's picture

The SNB and BOJ are printing unlimited money as fast as possible and using it to buy USA stocks with the only objective being to manipulte their currencies lower.

When/if they ever stop the print&buy scam, this house of cards will implode.

Eventually we will start hearing about the central banks owning more than 10% of various equity floats. Thats when the SEC may take notice and ban central banks from buying public floats.

rickowens's picture

nigga the BOJ has owned 60% of the Nikkei's ETF market since JUNE. 

we've lived in a corporate fascist state

but everyone's too fucking retarded to realize it, or just doesn't care

https://www.bloomberg.com/news/articles/2016-08-14/the-tokyo-whale-s-uns...

mikkip's picture

yuan is stronger since trump... so invalidates his argument

Dangerclose's picture

What chart are you looking at? USD/CNH has gone from 6.76 to 6.93 since the election.

webmatex's picture

All hell will break lose on the new year opening. 2017 will not arrive quietly. My bear.

katagorikal's picture

So we are one Horseman short of an Apocalypse.