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

“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%.