What "The World's Most Bearish Hedge Fund" Thinks Of The Trump Presidency?

October was not a good month for the "world's most bearish hedge fund" Horseman Global Management, which suffered another steep drop, losing 5% in the month, and down 5.5% YTD. Absent a rebound in the last two months of the year, Horseman is set to have its worst year since 2009. Alas, with Horseman's net exposure a whopping -84% (if fractionally more bullish than the -100% recorded in early 2016) as a result of an equity short and a bond long, November does not appear overly promising for the fund's investors. Unless, of course, the market swoons as both yields and the dollar continue surging (as DB warned), and Horseman does have the final laugh.

That, however, would be surprising considering that some of the most prominent billionaire mega-bears, such as Carl Icahn and Stanley Druckenmiller, both quickly flopped to bullish in the aftermath of Trump's election, on just one catalyst: more debt resulting in more stimulus, and (hope) for more growth.

Yet Horseman refuses to change its thesis. Why? Instead of guessing, here is the answer straight from the "Horse's mouth" - the following excerpt from the latest letter to investors by CIO Russell Clark lays out what the gloomy hedge fund believes will be the outcome from a Trump presidency.

Your fund fell 4.96% last month. Losses came from the bond book, the forex book and the short book. The long book made money.

First Brexit and now the Trump triumph has left many supporters of open liberal economies despairing. They feel that the world is turning in on itself and that perhaps a darker less safe world is emerging. And perhaps they are right.

But in many ways, the great western democracies of the world, the UK and the US are working as they should. It is plainly obvious that large parts of the population in both the UK and the US feel that the system has not worked for them, and they have voted for change. And those voters have had their voices heard and change is on the way.

Undemocratic regimes in the rest of the world look on in either horror or bemusement at the changes in the UK and US and congratulate themselves that their system is so safe and stable. And yet, the reality is that if the political system cannot provide the change that people seek, then eventually and inevitably, revolution becomes the only option for change. And revolution always extracts a very high price on those that have been in power.

When thinking about a possible Trump victory, I perceived that the USD could be very weak, and that this weakness would lead to treasuries also being weak as foreign investors dumped their holdings. What has happened is that domestic US investors have reappraised their views of US domestic growth upwards, and have dumped treasuries to buy equities, and the US dollar has been very strong.

While the stated aims of the Trump administration are very pro-growth, to me the actual effects seem likely to disappoint. Plans to allow more drilling will be dependent on a much higher oil and gas price. Scrapping car emission standards whilst good for SUV makers, will unlikely reverse the falling demand for cars due to high levels of auto debt. Lower taxes and more infrastructure spending may well be bullish for growth, but need to be balanced against the sell-off in the long end of bonds, which will have a negative effect on housing and with DR Horton reporting weak numbers makes, I feel growth will disappoint in the short term.

The more apparent of the negative aspects is that higher bond yields are starting to cause some financial pressure in Hong Kong and Chinese interest rates. If a trade war, becomes more likely, then a large Chinese devaluation also becomes more likely. Furthermore, the Trump win makes the break up of the Eurozone far more likely in my mind.

After Brexit, being short equities and long bonds was a fantastic trade for a week or two, but then reversed quickly after, causing severe pain for those that had reacted to the market quickly. I think the Trump win has seen many investors sell defensive positions and buy cyclical positions. I suspect they will come to regret that. Your fund remains long bonds and short equities.

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Stepping away from Trump, here is Clark's asset allocation and sector breakdown, and what appears to be a wager that Trump is about to end the record wave of industry consolidation in a move straight out of Teddy Roosevelt's playbook:

Finally, here are Horseman's Top 10 long positions as of this moment. Alas, the far more useful, top 10 shorts, are not public.