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- Kevin Smith, founder and CEO at Crescat Capital, and Tavi Costa, partner and portfolio manager at the firm, think the coronavirus has put one of their biggest trade ideas into hyperdrive.
- The duo note a slew of economic imbalances stemming from China that are coming to a head under the coronavirus.
- "What you have is the potential for the collapse of an entire country or economic system," said Smith.
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At Crescat Capital, Kevin Smith and Tavi Costa let the data do the talking. Their goal is simple: Look where others aren't and find economic imbalances throughout the globe to exploit with timely trades.
Today, the coronavirus has put one of the firm's largest ideas into hyperdrive, resulting in a juicy opportunity that's among the most appealing they've ever seen.
"The macro trade of the century really started by looking at - again - what is at the center of most of the imbalances we see in the world today," Costa, partner and portfolio manager at the firm, said on the "ValueWalk" podcast. "And what we found was that China really was a problem. "
By studying the data stemming from China, Smith - the firm's founder and CEO - and Costa uncovered a collection of economic disparities. A real-estate bubble, an infrastructure bubble, strong capital outflows, and a massive debt load all were top of mind after the analysis.
The trade the duo employed - which we'll get to shortly - was already playing out as expected, however, the coronavirus put the pedal to the metal.
"The timing for this investment thesis to play out has never been greater in our view," Costa said. "The virus outbreak - there's never a great time and a great place for that to happen, obviously that's an awful thing for the world - but if there was a bad time and a bad place for that to happen, it's China."
But that's not all.
Costa notes increasing food prices, a halted production/consumption, and political unrest in China that are adding fuel to an already unstable situation.
"What you have is the potential for the collapse of an entire country or economic system," Smith added. "It's almost as if the coronavirus was an excuse to put everyone on furlough temporarily."
With all of that under consideration, Smith and Costa relay their trade of the century.
"Being long gold in renminbi terms, and being short global stocks," Costa said. "The room for growth in that trade is incredible still. I mean, it's just the beginning."
In short, Smith and Costa think that the Chinese currency will depreciate rapidly against the price of gold due to a slowing economy and massive debt pile. The duo also notes the historically high valuations from which stock indices were pegged at before the dominos started to fall.
"It's nonsense when you have such absurd valuations," Smith added.
In addition, spillover effects from the unwind have the potential to upend the countries and banks that have executed deals with China at a time when they're increasingly vulnerable.
Although Smith and Costa are expressing their trade of the century in terms that are more granular and complex than above, the idea remains the same.
"It still looks incredibly attractive to us as a trade in general," Costa concluded.
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