MAX WIETHE: Hello, everyone, and welcome to Real Vision Live. For Real Vision, I'm Max Wiethe. Today, we're joined by Tavi Costa, the partner and portfolio manager at Crescat Capital. Tavi, thank you for joining us today.
TAVI COSTA: Max, thanks for having me. Appreciate it.
MAX WIETHE: All right. It's great to have a Brazilian on. I took a little bit in college, and I'm very rusty, but every now and then, I like to break it out. It's just so much fun to speak. It's all in the cheek. And I honestly think it sounds like Russians sometimes.
TAVI COSTA: Really.
MAX WIETHE: When you hear-- I had a few professors who were from, like, Angola, and it was crazy trying to understand that accent. But thank you for joining us. And I know you're down in Florida, trapped in the heart of the coronavirus pandemic right now. So thank you for joining us. Before we get started, I'd love to just open the floor for you to talk a little bit about Crescat Capital, what you do there, and a little bit about your firm.
TAVI COSTA: Sure. So I'm a co-portfolio manager of Crescat Capital with Kevin Smith. We're a global macro hedge fund. We manage four strategies right now. So it's a global macro hedge fund and a long/short hedge fund, and then we also have two other separate managed accounts, a large cap and a precious metals only separate managed account, too. We're going to be launching another hedge fund at the end of the month, actually, which will be only focused in precious metals, as well. But we mostly focus on building a lot of systematic macro and fundamental equity models at Crescat.
And I'm involved in most of those, and creating a lot of the macro themes that ends up actually guiding us on building and developing a lot of the macro themes that we have in the portfolio. And today, we have, I would say, three major or high-conviction themes in the portfolio, which is the China credit and currency bubble. We have also the global economic downturn in the business cycle that we've been also positioned and also the precious metals side, which is almost like what used to be the big short. In our view, this is the big long.
MAX WIETHE: Awesome. Well, I know we have some great charts looking at all of that today. But before we get into the charts, I'd like to talk a little bit more holistically about how you're seeing the market, and what it is maybe on the sentiment side that is guiding some of your views.
TAVI COSTA: Yeah, so I think the sentiment is mostly euphoric in my views. And I think there has been a lot of bears capitulating recently. We've had the Robin Hood traders sort of trashing a lot of the in-depth research from 10ks and 10qs, mocking Warren Buffett, investors bidding essentially all the bankrupt companies, and saying fundamentals don't matter, the stocks only go up, at the same time as you have profit margins falling apart. We don't see any capex estimates really improving and catching up recently. So the macro environment seems severely impaired, in my view. I think most people would agree with that.
And I think most of the bull case on liquidity from the Federal Reserve, and the fiscal stimulus. But in my view, I think that Powell has unlimited power, and most people know that, but it's also painted into a corner. And by that, I mean I think he can keep printing money and have precious metals, gold, silver, and miners surge, which has been happening recently, or he can just stop it all and let the whole market collapse. So we are big proponents of the idea of buying gold and selling stocks, especially if he can buy gold versus the most overvalued currencies in the world, which would be the Chinese currency, in our view, and the Hong Kong dollar.
But going back to your question, I think the biggest point here is are we going to see a revamp of economic growth going forward, at least in the following months. And in our view, we're not seeing that, according to the data. So we're continuing to position ourselves into thinking that we're probably going to be seeing further monetary stimulus, and therefore gold, silver, and precious metals will continue to move higher. And at some point, we believe there is a business cycle, and equity markets at record valuations look quite appealing on the short side.
MAX WIETHE: OK. So you talked about monetary stimulus. We do have some big deadlines coming up in terms of fiscal stimulus here in the US, with the CARES Act kind of coming to an end, and there really isn't anything that looks like it's going to be passed anytime soon. I think right before I came on the call, I was scrolling through Twitter, and Mark Cuban was saying call your senators because this stimulus is about to run out. How much of a focus is your firm placing on the fiscal stimulus relative to the monetary stimulus? Because it's definitely taken a bigger role than it has in previous crises.
TAVI COSTA: Yes, it's certainly a more direct way of intervening in the markets, in my view, especially, I would say, in the economy, not even in the markets. The Federal Reserve has been certainly funding a lot of the fiscal stimulus. I think most people would probably agree with that. In our view, what we're seeing is that we draw of liquidity. We just had close to $700 billion in the last month of July, I would say, of government borrowings.
And when you look at that, also we also had the Federal Reserve actually withdrawing liquidity from the markets, as well. In the last four weeks-- or actually last week, not this one-- the Federal Reserve actually, the balance sheet declined by its largest amount in history of it. And it's quite interesting, along with the borrowings that we're seeing. So certainly, we're on the side where we believe there is the liquidity we draw, and it's difficult to even justify valuations and the record leverage situation we are today in the markets.
Also, I think the support is tremendous. And it has to continue in the markets, and therefore why I think the precious metals will continue to rise. And from that, I'm talking about mostly the corporate bond market. I mean, look at the corporate bond market. Corporate yields today, the bond yields are at record lows right now. And it makes no sense. That is just rising at an unprecedented level right now. And the only reason for that is really the Federal Reserve support that continues to give a lot of those yields support to continue to move lower.
At some point, I don't think that they can't actually allow this market to move in a normal way. So I think we're going to continue to see this support from the government and from the Federal Reserve. And therefore, I think gold will continue to move higher in that scenario. But I think, yes, I think especially the unemployment packages I think will be critical for the equity markets going forward. And we have elections coming up, too. We just have the corporate taxes and net receipts declined by somewhere close to 90%. I just put out a chart on that. It's incredible. So what's happening here is that there's no even support from the tax revenue side, from corporations and consumers.
So the government is broke. I think most people would agree with that, as well. And so the Federal Reserve has to continue to be the last buyer of last resorts here in terms of the treasuries and the markets. And it has been doing that. And it suppresses long-term rates and expands the monetary base. And I think this is only the beginning of those types of policies.
MAX WIETHE: Well, you said the government is broke. And you could argue that there are very few governments around the world that aren't broke. And that tends to play itself out in the currency market, which is I think why you mentioned owning gold versus the most overvalued currencies, and specifically the Chinese yuan. Could you talk a little bit about the mechanics of buying gold in not just yuan, but a currency that is not your home currency? What is that like? Who has access to that? Is that something that, say, a retail investor could do, or do you really have to be a professional to buy gold in, say, the yuan?
TAVI COSTA: I wouldn't say so much as a professional, but certainly you need a certain amount of capital in order to put the trade on, especially CNH and the HKDs are a little bit easier. You need ISDA Agreement, number one, in order to be navigating into that space for the CNHes and CNYs-- in other words, the Chinese currencies. So I just believe we're in an economic conundrum not just in the US, but globally. And certainly, I think we're in the race to the bottom for fiat currencies. And the dollar looks fundamentally better than any other currency that I can think of.
It's quite interesting what's happening, for instance, when you look at balance sheets all over the world. The Federal Reserve balance sheet has been surging to the upside in terms of assets. But if you look at the PBOC's balance sheet, it hasn't been growing at the same level. And that's because, in my view, there is a sort of limited position for a lot of foreign central banks to print money in the same degree that we're seeing here in the US. So I'm a big believer of the idea that we have a dollar shortage problem outside of the US because of the debt-denominated liabilities that have accumulated over the years. And I think that that will continue to create a problem, especially with emerging markets.
So I think China is kind of in the center of a lot of the crediting balances we have in the world today. And so there's enough reasons for you to be short the Chinese currency, in my view. But answering your question why we like gold in Renminbi terms especially, I believe it's because, when you do empirical analysis in terms of what happens when you have a credit bust, especially in emerging markets, what tends to happen is sometimes you have equity markets rising, sometimes you have the currencies collapsing, like in Brazil, actually, in 1994. So when the currency, the real, has started to collapse, we actually had equity markets in local currency terms rising significantly. So if you short the equity market in local currencies, you lost a lot of money.
Now, one thing that is a pattern that we found in a lot of emerging markets' credit bubbles that burst in the past is that gold in local currency terms tends to rise. And I agree 100% with a lot of people is that gold hasn't really worked, especially as you would expect, for the last decade or so. More recently, yes, here in the US. But when you look at places like Brazil, Turkey, even China, gold has been rising significantly for the last years or so. So that is an important part.
Also, when you look at for the last five years of the major currencies in the world today, and you look at the performance relative to the dollar, actually the Chinese currency has been one of the worst ones. I believe last time I checked, in the last five years, it was the second worst one. And not a lot of people know that, but the Chinese currency has been devaluing for some time now. It just hasn't happened all at once, the way we thought it would. And I still think there is a really high probability we could see a major devaluation of the yuan in the next two to three years.
MAX WIETHE: OK. So we actually got two questions here related to that from Patrick Bateman. So I'm assuming that that's a pseudonym for somebody stealing that from the American Psycho. But what would be the trigger for a devaluation in the yuan? Do you think it's going to be one of those things where we wake up and it's at eight, or something like that, or is this going to be a slow grind? And then, as well, Patrick asked a question about do you think gold denominated in yuan will outperform gold denominated in dollars. I think, obviously, since your firm is actively putting on that trade, I would say the answer is yes.
TAVI COSTA: Yes. The second question I would answer as yes. The first question, I think the premise of our thesis in China started with the credit scenario. I think it could happen all at once. If you ask me, I think the probability is higher that something like that would happen than a gradual devaluation, which is something that we have seen for the last five years. So going forward, I believe that being positioned for a big move all of a sudden, I think that that's a smart position. It's something that we've been doing at Crescat.
Actually, our position today in terms of Chinese renminbi and the Hong Kong dollar shorts, it's somewhere close to 900% of our NAV. And a lot of that is because we can get a very risk, very low premium amount through option markets in the currency markets. And because of the low implied volatility, it allows you to get a bigger exposure in the nominal terms.
But the premise of the whole thesis really is because of the credit situation. We've done a lot of work, especially on the property developers that look a lot like the property developers of the homebuilders of the US here. We calculated just the free cash flow accumulated amount since the global financial crisis, and we saw somewhere close to losses of $300 billion in the property developers in China at the same time as they accumulated close to $650 billion of net debt. So that's not a usual development in the property, especially markets in general, real estate market.
And also, just the banking system. The size of the banking system certainly looks alarming relative to the size of a very inflated GDP, in our view, somewhere close to $45 trillion of assets on balance sheet today in China. It's absurd relative to an economy that we highly doubt has anywhere close to $15 trillion of GDP today. There's no way. And especially since the global financial crisis, China was responsible for somewhere close to 60% of global GDP. At the same time, China was the largest buyer of commodities. And why in the world commodities had one of its worst decades in history.
So a lot of things don't match. And I don't think that I'm telling you any surprise here. I think a lot of people agree with me on that. But the current account problem is another issue that we've pointed out. I even had a chart a long time ago on that, which shows the net decline of current accounts relative to-- also the link between that and the depreciation of currencies over time. One of them would be Argentina that lost somewhere close to 90 or so percent of its value of its currency since the global financial crisis, at the same time as the current account of Argentina shrank significantly.
There are so many other examples like that. And the ones that have been shrinking in terms of current account certainly is-- China is a huge part of that. And Saudi Arabia would be another one. And most of the companies that fall into this quadrant would be economies that actually have pegged currencies. Anyways, it's another leg of our portfolio, and I think it gives another level of asymmetry to the trade of being long gold, and why not be long gold versus the most overvalued currencies in the world. So I think China is a big proponent of BiMBA and Hong Kong, as well. And as I said, it's relatively cheap to add that to a portfolio today.
MAX WIETHE: OK, so I have actually-- I can't claim this thought process as my own, but we had somebody who wrote in to us, saw that you were coming on, and has been following you for a while. And they had a question about-- it's a question you've actually been asked on Real Vision recently, which is why now for the Chinese credit bubble. Is there anything specific about this that has you to believe that it's going to be a problem sooner rather than later? Because this isn't a new story.
It's been around for a while. We've heard these theses before, and it hasn't really played. Out the Chinese government has been willing to back these, you know, ghost cities. And then as well, assuming it does play out, do you think there is a potential for imported deflation into the rest of the world, as prices fall in China and the prices of our goods fall with it?
TAVI COSTA: Well, I would slightly disagree that it hasn't really played out. I think it has been playing out slowly, especially in terms of the currency. As I've pointed out, it depreciated more than a lot of other developed economies that have other major currencies out there. And what I think is important here is looking at the cost of capital of China when.
You build such a level of a debt imbalance in a country, which is the case in China, I think it's important to be looking for especially corporate defaults was something that was especially rising a few months ago. It's still rising. But food inflation is being at levels that we haven't seen in a long time. It's right now close to-- food CPI in China, last time I checked, was somewhere close to 11% year over year. And also, you have pork prices are still up about 80% year over year. So I think all those things could certainly derail into more of a bursting scenario.
As you were pointing it out, we've had the issues with Australia recently. I think Australia and Canada have a lot of links to China, number one. And you're starting to see some signs, especially in the Australian housing market, in terms of credit growth is starting to contract, which is a housing market that depends on capital outflows that have been exacerbating a lot of the real estate prices in those markets.
Now, in terms of why now, I believe that the situation has to do a little bit with the virus situation and the relations between not just China and US, but China relative to the entire world. I think that the virus spread, regardless how you call it, China virus, COVID, whatever that is, it's certainly unmasked, in my view, a lot of the truth about the CCP, or the China Communist Party, has been coming out to the world recently.
So I think that when you look at the fundamentals in the macro environment in China, we're not seeing freight traffic, for instance, rising at all. It's actually still negative on a year-over-year basis. We see personal mortgages still declining. It's not picking up at all in China. We see imports is still down in double digits type of numbers. Iron ore imports are heading south again. They're not rising. So there's quite a lot of reasons in terms of the macro indicators that we look at China that are not confirming a revamp of growth.
Another part that is important, I think, about China