Crescat Capital June letter to investors – warns on China especially with regards to Anbang

]The Federal Reserve is tightening credit late in the business cycle. The Fed is taking the punch bowl away, but financial markets are still partying. Financial asset bubbles in equities and risky credit abound globally. The lesson of history is that financial bubbles burst. In our analysis, the Fed always hikes the economy into a recession when it is late in the business cycle. The Fed has never engineered a soft landing by tightening credit late in the business cycle. This time should prove no different.
Chinese Banks Continue To Reduce Debt As Policymakers Clamp Down

Jim Chanos
The stability of the global financial system today is particularly precarious, because China looks like one of the largest macro bubbles ever. Like the Fed, the Chinese central bank has also been tightening credit late in the business cycle. The problem is that China cannot handle a credit tightening. China’s opaque $33-trillion-in-assets banking system appears to us to be a Ponzi scheme that is destined to unravel badly. China’s banking system assets are 2.1 times larger than the US banking system, but China’s economy is only 59 percent the size of the US in terms of gross domestic product. Due to the sheer size and excessive leverage, the coming blow-up in China’s banking system poses far greater risks to the global financial system than US banks did at the height of the housing bubble in 2007.
Chinese Banks Continue To Reduce Debt As Policymakers Clamp Down
China just had its first big stumble last week and it should not be overlooked. Anbang Insurance Group, China’s second largest insurance company with almost $300 billion in assets, was effectively seized by the Chinese government and its chairman arrested on corruption charges. Anbang’s fate is in limbo. Banks were ordered to cease doing business with it. According to the Financial Times, Anbang was the number-one issuer of wealth management products to Chinese savers in the insurance market. Anbang should be viewed as China’s Lehman or AIG moment, but it’s a private company and the markets haven’t yet figured out what to make of it. Corruption scandals like these tend to erupt during economic downturns. Brazil’s recent corruption scandals for instance accompanied its worst recession in history, eight consecutive quarters of contraction. Anbang is likely the canary in the coal mine for the bursting of the Chinese credit bubble. We see the unraveling of the Chinese credit bubble as the primary driver of a pending global economic recession.
China’s Banking System Now World’s Largest, But Not All Chinese Leaders Happy
So, do the markets get it or not? In the US, the Treasury bond market gets it. Treasury bonds and notes have been rallying since the Fed starting hiking again last December, a sign of impending recession. The oil market gets it. The depressed oil market has been trading like we are already in a global recession similar to copper and iron ore. The gold also market gets it. Gold bottomed in December 2015 after the first Fed hike. Gold is a safe-haven asset, one that will ultimately benefit from new rounds of quantitative easing necessary to mop up after the current global credit bubble bursts.
Deutsche Bank: Chinese Banks Not At “Tipping Point” … Yet, But Risks Are Growing
Equity and junk credit markets are still oblivious to the impending China bust. They continue marching upward. They are losing steam in our opinion. We believe we are in the price in and time vicinity of significant market top.

At Crescat, we aim to protect and grow capital by positioning for and capitalizing on the upcoming downturn in the global/economic business cycle. We believe THE TIME IS NOW  for investors to consider allocating to, or adding to strategies that can protect and preserve-strategies like those of Crescat Capital. Additionally, please use the links below to download the May performance reports for all three strategies. Thank you for your continued support.

CLCC-Report-2017-05

CLSC-Report-2017-05

CGMC-Report-2017-05

Anbang
By Hennem08 (Own work) [GFDL or CC BY-SA 3.0], via Wikimedia Commons