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Crescat Capital 3Q20 Commentary: Global Synchronized Debasement

Crescat Capital 3Q20 Commentary: Global Synchronized Debasement



gold and silver mining companies

Crescat Capital commentary for the third quarter ended September 2020, in which they discuss buying undervalued gold and silver mining companies.

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Q3 2020 hedge fund letters, conferences and more

Dear Investors:

History does not exactly repeat, but it often rhymes. The art and science of macro investing is comparing past business cycles with the present across a mosaic of different indicators and time frames to determine the most probable path forward for markets. Throughout time, financial markets and the economy have been intimately linked to cycles of expansion and contraction of money and credit. The Federal Reserve was created by bankers and enacted by Congress in 1913 to provide a more flexible and stable monetary and financial system, but by no means did the Fed repeal the business cycle. In fact, the central bank has often played a role in amplifying booms and busts. For example, after introducing large-scale purchases of government securities to stem the recession of 1923, the Fed continued to expand the money supply and suppress interest rates through the remainder of the 1920s. Such monetary policy fanned the flames of historic stock market speculation which culminated in the stock market crash of 1929 to 1932 and the Great Depression. The macro set-up today is eerily similar as we will explain below.

The Fed operates under the premise that it is making the financial system safer by attempting to stabilize the credit cycle, but since the Global Financial Crisis, monetary policy has served less like a temporary, elastic tool to smooth the business cycle and more like an addictive drug that requires a bigger and bigger dose to have the same effect while at the same time making its subject more imbalanced and prone to crash.

At Crescat, our composite of eight fundamental stock market valuations measures shows that we have the most euphorically over-valued US stock market in history, higher than 1929 and higher than 2000. As prudent investors and fiduciaries, we are forced to devise strategies to protect against the combined risks of the most overvalued US stock market and the largest global debt-to-GDP imbalance ever. The historic blueprint for the unwinding of such twin manias is the reason why we are such big proponents of the “buy gold and sell stocks” theme at Crescat today.

Buying Undervalued Gold And Silver Mining Companies

There are three useful case studies to understand why investors need to seriously consider a hedged strategy of shorting the most over-valued US equities and buying undervalued gold and silver mining companies in an attempt to capitalize on (rather than be run over by) the likely unwinding of today’s stock market and credit imbalances. Only one side needs to play out for this spread trade to work, but what is so interesting now is that history shows that both sides can win substantially under the macro setup like we have today:

1. The Deflationary Great Depression

The chart below illustrates how stocks were decimated in the credit deflationary bust of the Great Depression, but at essentially the same time, gold mining companies acted in counter cyclical fashion to create wealth during the downturn. Homestake Mining, the biggest gold producer of the time, increased seven-fold from 1930 to 1936 a period during which the US dollar was devalued from .048 ounces of gold to .026. Currency devaluation relative to gold was necessary then just as it is likely to be today to counter the deflationary impact of record debt-to-GDP imbalances combined with a stock market and economic collapse.

2. The 1973-74 Stagflationary Recession

Late 1972 was another macro set-up comparable to today in our analysis. Then, institutional investors were crowding into a narrow group of large cap growth stocks dubbed the Nifty Fifty driving them to extraordinarily high price-to-earnings valuations. By 1972, S&P 500 Index’s P/E was a then lofty 19, but the Nifty Fifty’s average P/E was more than twice that at 42. Among the richest valuations were Polaroid with a P/E of 91; McDonald’s, 86; Walt Disney, 82; and Avon Products, 65. The parallel to these stocks today are large cap growth oriented FAANG and software-as-a-service technology stocks. These stocks are owned by cabals of hedge fund whales and Robinhood traders alike. In the stock market collapse of 1973-74, S&P 500 Index was cut in half in just two years. From their respective highs, Xerox fell 71 percent, Avon 86 percent and Polaroid 91 percent. But over the same time, the Barron’s Gold Mining Index increased 5-fold! Meanwhile, just like in the Great Depression, the US dollar was being devalued relative to gold. This time, it was the end of the Bretton Woods monetary system and the US dollar gold standard. Surprise inflation was also arriving on the scene with the first of the 1970’s oil crises. 

3. The Tech Bust

The tech bust is the third comparable set-up to today, precipitated by another time of record stock over-valuation and low precious metals prices relative to money supply. From 2000 to 2002, the tech heavy Nasdaq composite declined 78%. 2000 also marked the bottom of a gold stock bear market. The Philadelphia Stock Exchange Gold and Silver Index would go on to increase five-fold from 2000 to 2008. Tech stock over-valuation is even more egregious today than it was in the dotcom bubble. Meanwhile, in our view, gold and silver stocks, particularly smaller cap exploration focused names that we favor at Crescat today, have only just started to rise off the depths of a ten-year bear market.

The Largest Supply/Demand Mismatch

We are now at the onset of a major global synchronized debasement. Today’s historically depressed macro environment has hamstrung central banks to pursue a suicide mission set to severely devalue fiat currencies in coordinated fashion. It’s inevitable and unavoidable. The combination of long-term debt imbalances and unprecedented levels of fiscal and monetary imprudence have likely reached an inflection point in the world economy to such a degree that we have the IMF conspicuously telegraphing the idea of a “New Bretton Woods Moment”.

As investors feel the urge to seek capital protection, this is soon to be one of the largest supply/demand mismatches we have ever seen in the gold market. For decades, the rise of popularity in risk parity strategies has abolished the use of monetary assets as part of conventional portfolio construction. The current macro set up, however, will likely reverse this trend. The fixed income and equity markets are both trading at record valuations and risk is now mispriced. With a long history of serving as a resilient hedge against monetary debasement, precious metals will likely become a key alternative for asset allocators.

The supply side of the market is arguably even more extreme. There were zero gold discoveries above 2 million ounces in the last 3 years. That’s right, zero. For the first time in history, precious metals companies are reluctant to spend capital even though gold prices have recently reached all-time highs. It’s the result of drastic capital conservatism imposed after a decade long bear market in the mining industry. This declining trend in exploration investments and the rising geological challenges to find and extract gold will likely ensure an incredibly constrained supply for the metal in the following years.

The Tech Reckoning

The debt overhang problem on such a severely impaired global economy inhibits the efficiency of stimulative polices to restore growth and to justify the historic valuations we currently see in equity markets. In our view, today’s mass of indolent market participants with unrealistic investment expectations is on the verge of facing the cold hard truth of a natural downturn in the business cycle.

Artificially low interest rates and the idea that the Fed has “got your back” has forced investors to move up the risk curve creating a crowded stock market environment. In particular, the tech sector is priced for perfection. The aggregate market cap of info tech companies now represents a record 43% of US GDP. This ratio is now over 26% higher than the internet bubble peak levels we reached in March 2000! We urge investors to be mindful of such important historical precedent. Equity markets are running on fumes. Sadly, most people refuse to learn from history.

The New Growth Stocks

Policy makers have no choice but to continue diluting the value of fiat currencies to enable a levered financial system to withstand such extreme macro imbalances. If past is prologue, large central bank interventionism leads to the appreciation of monetary assets and, in our view, precious metals will be the real beneficiaries of a global synchronized debasement trend that now seems irreversible. Therewith, gold and silver mining companies should be the largest beneficiaries of this environment. They look fundamentally stronger than any other industry in equity markets today. In fact, free cash flow among the top 20 miners have grown by 132% year over year in their latest report. Despite all its reputation of being capital destroyers, this industry is finally proving the contrary and becoming financially prudent. In aggregate, gold and silver miners did the second least amount of equity dilution in history while also paying down debt last quarter. As we pointed out in prior letters, if the precious metals industry were a sector, it would have the cleanest balance sheet of them all. Against all the odds of such a challenging business model, we believe gold and silver stocks are poised to become the new growth stocks of the next years.

Pedal to the Metal

Even though almost every economic indicator has somewhat bounced since the pandemic lows, fiscal deficits remain with the pedal floored to World War II levels. The speed of which the US government debt is now rising is unmatched to any other period since the break of the gold standard. Monetary and fiscal disorder have perhaps gone too far this time around and significant monetary debasement is, in our view, inevitable.

Global Synchronized Debasement

More is more. Jerome Powell, president and chairman of the Federal Reserve, recently made some truly remarkable statements when expressing his views about the potential size of further fiscal and monetary stimulus to fight the current recessionary forces:

The expansion is still far from complete. At this early stage, I would argue that the risks of policy intervention are still asymmetric. Too little support would lead to a weak recovery, creating unnecessary hardship. Even if policy actions ultimately prove to be greater than needed, they will not go to waste

Central banks are indeed hamstrung. The severity of the underlying problems in the global economy while asset prices remain completely detached from depressed fundamentals ensures the need for further monetary and fiscal response to prevent the stop of this rolling snowball. We are likely to see a continuation of extreme accommodative policies globally. As a result, it is no surprise that gold is already rising versus all fiat currencies in the monetary system. We think this is a trend that is poised to continue if not accelerate. We call this global synchronized debasement.

The Federal Reserve added about $3 trillion of assets to its balance sheet since late February when the pandemic began to noticeably hit the US while stocks started selling off. Other central banks didn’t perform quite the same amount but are now catching up fast. The Bank of Canada is a great example. Even though it’s coming off a lower base, the BoC has just taken its balance sheet assets from 7% to close to 30% of nominal GDP in one year. Of note, the Canadian economy has suffered significantly from its oil exposure and its historically leveraged housing market that requires an incredible amount of monetary support.

A Debt Trap

There have been critical unintended consequences of this prolonged period of cheap money. The US corporate bond market, for instance, has become one the most central bank dependent parts of financial markets today. Even though the Federal Reserve has purchased a less significant amount of these assets, its extreme accommodative policies allowed corporations to access the debt market at record low interest rates despite having the most leveraged balance sheets in history. How do we ever get out of this debt trap? The Fed has created its own monster and has no option other than to keep printing money to counter a deflationary debt implosion.

gold silver mining companies

Late Cycle Signs

The lack of investor skepticism after long-years of great excesses in equity markets only validates how late we are in the investment cycle. Demand for stocks has been insatiable and undiscerning. 2020 has already set the record for the largest dollar volume of IPOs. With still two months to go, we are already 36% higher than the full year 2000, the year the tech bubble peaked. Bear in mind that only 9% of all 2020’s IPOs were actually profitable, not unlike the tech bubble.

gold silver mining companies

Small caps are a big testament for the real shape of the economy. While overall stocks remain near record levels, the Russell 2000 peaked over two years ago. They have been trending with lower highs since then. Consequentially, the ratio of Russell 2000 to Nasdaq just reached near all-time lows and is about to retest tech bubble levels.

gold silver mining companies

Global Macro Fund Net Profit Attribution: Q3 2020

Below see Crescat’s performance by theme for our flagship global macro fund in the last quarter.

gold silver mining companies



Kevin C. Smith, CFA

Founder & CIO

Tavi Costa

Partner & Portfolio Manager

The post Crescat Capital 3Q20 Commentary: Global Synchronized Debasement appeared first on ValueWalk.

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Four burning questions about the future of the $16.5B Novo-Catalent deal

To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.
Beyond spending billions of dollars to expand…



To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.

Beyond spending billions of dollars to expand its own production capacity for its weight loss drugs, the Danish drugmaker said Monday it will pay $11 billion to acquire three manufacturing plants from Catalent. It’s part of a broader $16.5 billion deal with Novo Holdings, the investment arm of the pharma’s parent group, which agreed to acquire the contract manufacturer and take it private.

It’s a big deal for all parties, with potential ripple effects across the biotech ecosystem. Here’s a look at some of the most pressing questions to watch after Monday’s announcement.

Why did Novo do this?

Novo Holdings isn’t the most obvious buyer for Catalent, particularly after last year’s on-and-off M&A interest from the serial acquirer Danaher. But the deal could benefit both Novo Holdings and Novo Nordisk.

Novo Nordisk’s biggest challenge has been simply making enough of the weight loss drug Wegovy and diabetes therapy Ozempic. On last week’s earnings call, Novo Nordisk CEO Lars Fruergaard Jørgensen said the company isn’t constrained by capital in its efforts to boost manufacturing. Rather, the main challenge is the limited amount of capabilities out there, he said.

“Most pharmaceutical companies in the world would be shopping among the same manufacturers,” he said. “There’s not an unlimited amount of machinery and people to build it.”

While Novo was already one of Catalent’s major customers, the manufacturer has been hamstrung by its own balance sheet. With roughly $5 billion in debt on its books, it’s had to juggle paying down debt with sufficiently investing in its facilities. That’s been particularly challenging in keeping pace with soaring demand for GLP-1 drugs.

Novo, on the other hand, has the balance sheet to funnel as much money as needed into the plants in Italy, Belgium, and Indiana. It’s also struggled to make enough of its popular GLP-1 drugs to meet their soaring demand, with documented shortages of both Ozempic and Wegovy.

The impact won’t be immediate. The parties expect the deal to close near the end of 2024. Novo Nordisk said it expects the three new sites to “gradually increase Novo Nordisk’s filling capacity from 2026 and onwards.”

As for the rest of Catalent — nearly 50 other sites employing thousands of workers — Novo Holdings will take control. The group previously acquired Altasciences in 2021 and Ritedose in 2022, so the Catalent deal builds on a core investing interest in biopharma services, Novo Holdings CEO Kasim Kutay told Endpoints News.

Kasim Kutay

When asked about possible site closures or layoffs, Kutay said the team hasn’t thought about that.

“That’s not our track record. Our track record is to invest in quality businesses and help them grow,” he said. “There’s always stuff to do with any asset you own, but we haven’t bought this company to do some of the stuff you’re talking about.”

What does it mean for Catalent’s customers? 

Until the deal closes, Catalent will operate as a standalone business. After it closes, Novo Nordisk said it will honor its customer obligations at the three sites, a spokesperson said. But they didn’t answer a question about what happens when those contracts expire.

The wrinkle is the long-term future of the three plants that Novo Nordisk is paying for. Those sites don’t exclusively pump out Wegovy, but that could be the logical long-term aim for the Danish drugmaker.

The ideal scenario is that pricing and timelines remain the same for customers, said Nicole Paulk, CEO of the gene therapy startup Siren Biotechnology.

Nicole Paulk

“The name of the group that you’re going to send your check to is now going to be Novo Holdings instead of Catalent, but otherwise everything remains the same,” Paulk told Endpoints. “That’s the best-case scenario.”

In a worst case, Paulk said she feared the new owners could wind up closing sites or laying off Catalent groups. That could create some uncertainty for customers looking for a long-term manufacturing partner.

Are shareholders and regulators happy? 

The pandemic was a wild ride for Catalent’s stock, with shares surging from about $40 to $140 and then crashing back to earth. The $63.50 share price for the takeover is a happy ending depending on the investor.

On that point, the investing giant Elliott Investment Management is satisfied. Marc Steinberg, a partner at Elliott, called the agreement “an outstanding outcome” that “clearly maximizes value for Catalent stockholders” in a statement.

Elliott helped kick off a strategic review last August that culminated in the sale agreement. Compared to Catalent’s stock price before that review started, the deal pays a nearly 40% premium.

Alessandro Maselli

But this is hardly a victory lap for CEO Alessandro Maselli, who took over in July 2022 when Catalent’s stock price was north of $100. Novo’s takeover is a tacit acknowledgment that Maselli could never fully right the ship, as operational problems plagued the company throughout 2023 while it was limited by its debt.

Additional regulatory filings in the next few weeks could give insight into just how competitive the sale process was. William Blair analysts said they don’t expect a competing bidder “given the organic investments already being pursued at other leading CDMOs and the breadth and scale of Catalent’s operations.”

The Blair analysts also noted the companies likely “expect to spend some time educating relevant government agencies” about the deal, given the lengthy closing timeline. Given Novo Nordisk’s ascent — it’s now one of Europe’s most valuable companies — paired with the limited number of large contract manufacturers, antitrust regulators could be interested in taking a close look.

Are Catalent’s problems finally a thing of the past?

Catalent ran into a mix of financial and operational problems over the past year that played no small part in attracting the interest of an activist like Elliott.

Now with a deal in place, how quickly can Novo rectify those problems? Some of the challenges were driven by the demands of being a publicly traded company, like failing to meet investors’ revenue expectations or even filing earnings reports on time.

But Catalent also struggled with its business at times, with a range of manufacturing delays, inspection reports and occasionally writing down acquisitions that didn’t pan out. Novo’s deep pockets will go a long way to a turnaround, but only the future will tell if all these issues are fixed.

Kutay said his team is excited by the opportunity and was satisfied with the due diligence it did on the company.

“We believe we’re buying a strong company with a good management team and good prospects,” Kutay said. “If that wasn’t the case, I don’t think we’d be here.”

Amber Tong and Reynald Castañeda contributed reporting.

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Petrina Kamya, Ph.D., Head of AI Platforms at Insilico Medicine, presents at BIO CEO & Investor Conference

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb….



Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

Credit: Insilico Medicine

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

The session will look at how the latest artificial intelligence (AI) tools – including generative AI and large language models – are currently being used to advance the discovery and design of new drugs, and which technologies are still in development. 

The BIO CEO & Investor Conference brings together over 1,000 attendees and more than 700 companies across industry and institutional investment to discuss the future investment landscape of biotechnology. Sessions focus on topics such as therapeutic advancements, market outlook, and policy priorities.

Insilico Medicine is a leading, clinical stage AI-driven drug discovery company that has raised over $400m in investments since it was founded in 2014. Dr. Kamya leads the development of the Company’s end-to-end generative AI platform, Pharma.AI from Insilico’s AI R&D Center in Montreal. Using modern machine learning techniques in the context of chemistry and biology, the platform has driven the discovery and design of 30+ new therapies, with five in clinical stages – for cancer, fibrosis, inflammatory bowel disease (IBD), and COVID-19. The Company’s lead drug, for the chronic, rare lung condition idiopathic pulmonary fibrosis, is the first AI-designed drug for an AI-discovered target to reach Phase II clinical trials with patients. Nine of the top 20 pharmaceutical companies have used Insilico’s AI platform to advance their programs, and the Company has a number of major strategic licensing deals around its AI-designed therapeutic assets, including with Sanofi, Exelixis and Menarini. 


About Insilico Medicine

Insilico Medicine, a global clinical stage biotechnology company powered by generative AI, is connecting biology, chemistry, and clinical trials analysis using next-generation AI systems. The company has developed AI platforms that utilize deep generative models, reinforcement learning, transformers, and other modern machine learning techniques for novel target discovery and the generation of novel molecular structures with desired properties. Insilico Medicine is developing breakthrough solutions to discover and develop innovative drugs for cancer, fibrosis, immunity, central nervous system diseases, infectious diseases, autoimmune diseases, and aging-related diseases. 

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Another country is getting ready to launch a visa for digital nomads

Early reports are saying Japan will soon have a digital nomad visa for high-earning foreigners.



Over the last decade, the explosion of remote work that came as a result of improved technology and the pandemic has allowed an increasing number of people to become digital nomads. 

When looked at more broadly as anyone not required to come into a fixed office but instead moves between different locations such as the home and the coffee shop, the latest estimate shows that there were more than 35 million such workers in the world by the end of 2023 while over half of those come from the United States.

Related: There is a new list of cities that are best for digital nomads

While remote work has also allowed many to move to cheaper places and travel around the world while still bringing in income, working outside of one's home country requires either dual citizenship or work authorization — the global shift toward remote work has pushed many countries to launch specific digital nomad visas to boost their economies and bring in new residents.

Japan is a very popular destination for U.S. tourists. 


This popular vacation destination will soon have a nomad visa

Spain, Portugal, Indonesia, Malaysia, Costa Rica, Brazil, Latvia and Malta are some of the countries currently offering specific visas for foreigners who want to live there while bringing in income from abroad.

More Travel:

With the exception of a few, Asian countries generally have stricter immigration laws and were much slower to launch these types of visas that some of the countries with weaker economies had as far back as 2015. As first reported by the Japan Times, the country's Immigration Services Agency ended up making the leap toward a visa for those who can earn more than ¥10 million ($68,300 USD) with income from another country.

The Japanese government has not yet worked out the specifics of how long the visa will be valid for or how much it will cost — public comment on the proposal is being accepted throughout next week. 

That said, early reports say the visa will be shorter than the typical digital nomad option that allows foreigners to live in a country for several years. The visa will reportedly be valid for six months or slightly longer but still no more than a year — along with the ability to work, this allows some to stay beyond the 90-day tourist period typically afforded to those from countries with visa-free agreements.

'Not be given a residence card of residence certificate'

While one will be able to reapply for the visa after the time runs out, this can only be done by exiting the country and being away for six months before coming back again — becoming a permanent resident on the pathway to citizenship is an entirely different process with much more strict requirements.

"Those living in Japan with the digital nomad visa will not be given a residence card or a residence certificate, which provide access to certain government benefits," reports the news outlet. "The visa cannot be renewed and must be reapplied for, with this only possible six months after leaving the countr

The visa will reportedly start in March and also allow holders to bring their spouses and families with them. To start using the visa, holders will also need to purchase private health insurance from their home country while taxes on any money one earns will also need to be paid through one's home country.

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