Fed tightening has been a reliable catalyst for the bursting of asset bubbles globally, says Crescat Capital.
Crescat Capital's First Quarter Review suggests now is a good time to be short equities and long gold.
While many global equity markets have bounced off their February and March lows, we strongly believe it's a bull trap. We think February was only the beginning of a bear market that has much more to play out in our favor on the short side.
The almost-certain biggest asset bubble in the world today, the rhino in the room, is the Chinese credit market, and the yuan by extension. The US stock market is also in an historic valuation bubble. We have thoroughly documented the extent of these bubbles in our past several quarterly letters.
Fed tightening has been a reliable catalyst for the bursting of asset bubbles globally as the chart above illustrates. This time will almost certainly be no different. Thus, we remain net short global equities in our hedge funds.
We must consider a wide range of possible macro environments playing out. The current late cycle overheating risks point to rising inflation, with "cost push" forces becoming more apparent. If history repeats itself, the Fed is likely to tighten until asset bubbles burst (stocks, corporate credit, real estate perhaps). Then we have to be concerned about deflationary pressures emerging. If they do, the Fed should and would likely move substantially and quickly back to QE, shifting our concerns back to rising inflation. Under this situation worries of stagflation arise, or even hyperinflation at the extreme. Those kind of macro markets are real but have been left for dead for some time. They could easily re-emerge to surprise the vast majority of investors since that is what highly imbalanced markets tend to do at major inflection points. Somewhere along that spectrum is a 1973-74 kind of bear market with rising inflation, declining bonds, and plunging stocks.