marking the 11th hour - corona associates capital management - year end investment letter - december...

8/18/2019 Marking the 11th Hour - Corona Associates Capital Management - Year End Investment Letter - December 24th 20…

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Marking the 11th Hour 2015 Year End Letter to Investors

Dear Friends and Investment Partners,

I wanted to take this opportunity to comment on the performance, investment strategy,

and outlook for our Fund Partnership. 2015 has been an incredibly challenging year and onethat has produced volatile results both up and down in our Fund during a period marked by

fundamentals that held consistent to our macro views, but one in which investor perceptions

held opposite to those views. I call it a continued “Alice in Wonderland” market in which what

was “down” was seen as “up” and what was “bad” was seen as “good”. Market perceptions and

opinions do matter, but they are always eventually outweighed by facts and fundamentals;

while we have our own opinions and views, our investment strategy has been rooted in facts

and fundamentals. Although our investment results marked to the present have been

disappointing when weighed against these investor perceptions, our strategies have been

supported by the facts and fundamentals that have unfolded throughout the year. These

include the view that the US and global economies have not been getting better, and that the

current Central Bank strategy of holding down interest rates, while enabling an ever greater

proliferation of debt ultimately imperils this debt, the paper instruments comprising it, and the

illusory wealth built through it. Events of 2015 have strengthened our conviction of the

increasing and ultimate value of physical gold and of the ultimate demise of many financial

assets such as sovereign debt, currencies, and equity instruments built on artificially contrived

conditions and beliefs. Within this period marked by complacency and lack of awareness of risk,

lies profound asymmetric opportunities. I wanted to communicate both my conviction in this

belief, and the timeliness of an epic unfolding of positive developments for our investment


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when the global financial crisis reared its ugly head, interest rates in the US were at 5% - they

were at zero prior to this miniscule rate hike, with virtually no room to be reduced further in

response to this now unfolding global economic crash.

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The Fed is now boxed in with nowhere to go and with no ammunition to deal with what is

coming next. Seven years of zero interest rates, $ 7 Trillion dollars of freshly printed money

globally, and more than $7 Trillion dollars of new debt acquired by the US Government through

fiscally stimulative deficit spending and the economy has failed to achieve so called “escape

velocity”3. The global GDP engine is now sputtering in reverse and the implications of this on an

all-time heightened debt saturated world is ominous.

2 www.federalreserve.gov 3 Sources: St. Louis Fed FRED Database; US Department of the Treasury: Bureau of the Fiscal Service;research.stlouisfed.org


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As you know, the long side of our investment portfolio has been primarily geared towards

physical gold, and gold mining equities. We also have significant exposure to non-dollar

instruments through positions in foreign equities and currencies such as Russia and Brazil as

well as long oil related equities, and derivatives. In addition we have “short US equities market”

exposure through leveraged derivatives in the S+P Volatility Index, and short positions in

various ‘momentum’ oriented, revenue challenged and balance sheet impaired technology

related equities and NASDAQ derivatives; our portfolio has also added to short positions in

interest rate sensitive fixed income, government, and junk debt securities. All of this means we

are positioned to benefit from any increase in gold values, any weakness in the US dollar, any

fragility in the US equities markets, and any increase in volatility. While the latter half of this

year showed many of these categories working against us, we expect our investment themes

to come roaring back with a vengeance starting now, as widely perceived “Goldilocks”

perceptions that “everything is awesome” gives way to the cruel reality that everything is not

so sanguine in world economies, and subsequently, financial markets.

Facts versus Perception

Interest rates were not at zero through natural circumstances. They have been rigged to that

level by Central Banks. This in turn distorts all asset prices from stocks to bonds to real estate.

These asset price levels that investors have become accepting of and complacent of only persist

through continued successful Central Bank interest rate rigging which in turn depends upon

continued faith in the judgement of these same Central Banks. The physical gold portion of our

portfolio is a hedge against this continued state of affairs and the likelihood that rigged markets

cannot stay rigged.


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We believe the debt saturated world is already bankrupt. The US government is already

incapable of ever repaying its massive debt structure even while it adds hourly to its existing

debt stock. The integrity of said debt structure rests solely on the ability of the US Government

to borrow enormous quantities of fresh capital and to roll over existing debt indefinitely. This

will not happen. The physical gold portion of our portfolio is a hedge against these continued

outcomes.

World economies including the US are not growing and in fact are tipping into a recession. A

problem (2008 Global Financial Crisis) which is inherently a debt problem cannot be cured by

additional debt. The physical gold portion of our portfolio is a hedge against this failed debt

outcome.

Above all else the existing global financial system depends upon debt being saved (paid) at

all costs: Default on said debt is not an option (witness Greece and the US banks in 2008). Our

physical gold is a hedge against all possible failed debt outcomes from default, to

hyperinflation, and debasement of the currency.

The world financial system needs a massive new infusion of equity capital sufficiently large

enough to exceed or extinguish crippling global debt. The only way this can be achieved is

through a massive upward revaluation of the gold stocks held by world governments, and

Central Bank balance sheets4. This day is coming soon as all other options of default,

debasement, and stagnant economic growth fail.

Welcome to our Brave New World.

4 World Gold Council. www.gold.org


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Why This Will End and End Badly

1) Our analysis has led to the conclusion Fed is trapped. In 2008, in response to the debt

crisis, interest rates were lowered nearly 500 basis points. No such room to lower exists

today. Starting in 2008 the Fed and other global Central Banks also began to inflate the

currency through money printing – approximately $3.5 Trillion in the US and almost $10Trillion globally, and by some estimates even more5. All the stops were pulled. In

addition governments engaged in massive fiscal deficit spending whereby global

government debt increased 40-50% since 2008 and even more so in the US where

government debt grew from approx. 10 Trillion to $19 Trillion6. In other words, all of

these extraordinary actions were taken to save failing debt in hopes to achieve so called

“escape velocity” for the global economy.

Where are we now? On the heels of the first Fed rate hike in nearly a decade, global

economies are now rolling over into significant recessionary conditions. Brazil, Canada,

Australia and many emerging market economies are already in full blown recessions

with the US, Europe, and China following close at hand. This once again imperils debt

structures globally and it has already showed up in the US, with junk bond markets

imploding where High Yield CCC rated bonds have risen in yields from 8% to 17%, rates

not seen for these junk bonds since 2008.

5 “China’s Money Supply Growth, Dwarfs the Rest of the World.” By Steve Johnson. September 2015.www.ft.com 6 “Debt and (Not Much) Deleveraging.” By Richard Dobbs, Susan Lund, Jonathan Woetzel, and MinaMutafchieva. McKinsey Global Institute. 2015.

http://www.ft.com/http://www.ft.com/http://www.ft.com/


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7 Sources: BofA Merrill Lynch; St. Louis Fed

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

2009-07-06 2010-11-18 2012-04-01 2013-08-14 2014-12-27 2016-05-10

Frequency: Daily, Close BofA Merrill Lynch USHigh Yield CCC or Below Option Adjusted Spread

%


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Soon to follow will be the student loan securitized markets and subprime auto loan markets

which exceed $2 Trillion. As poorly timed as most recent Fed actions have been, this past

week’s rate hike promises to be an epic policy blunder for the Fed.

2) Here is what we believe follows: We have entered the very beginning stages of a swift

and far reaching equity bear market that will ravage broad indexes like the S+P down by

50% or more quickly. We are positioned for this through volatility derivatives, short

positions, and gold and gold related equity investments. Having boxed themselves in

with a rate hike blunder it will take months before the Fed will act to reverse course in a

vain attempt to stabilize markets with additional monetary madness/stimulus such as

quantitative easing, or negative interest rates. During this time plenty of market

mayhem will ensue and gold will catch a major bid from investors and fiduciaries

seeking safe haven refuge in volatile markets. Our Fund’s portfolio is highly and

positively correlated to this expected event.

The Dollar and Gold

We believe the current fragility of the financial system and global economies is all rooted

in a foundation of unsustainable debt. This started as a debt problem, remains a debt problem,

and will end as a debt problem. This end will also imperil the US dollar and the use of the dollar

as a reserve asset, likely in terminal fashion. The debt which was a problem 7 years ago has not

gone away, it has only grown 50 – 100% larger, and this is why there is no benign outcome for

this debt and the dollar. The dollar is based on this very debt and also backed by it, so as this

debt goes bad, the dollar withers and dies. There is no other outcome and since the world is


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now tipping into a recession, the debt is toppling over into default so things will change rapidly

from here.

How gold fits in: Gold is the only asset owned by key government actors that can

extinguish this debt. At the point of “no return “officially held gold will be deployed to

extinguish this debt burden. So the question becomes what level will gold need to be “re-

valued” to achieve this end? (Remember: Default or money printing are not ultimate solutions

to the debt dilemma as default destroys the world’s banking system and money printing on the

scale required destroys the currencies.)

An Examination of the US Debt

The United States is de-facto bankrupt. This is not an opinion; this is an unstated fact.

As discussed earlier, total official US Government debt is approximately $19 Trillion (up

from $10 Trillion in 2008 and rising by more than $1 Trillion per annum). This debt level alone

explains why we have had to live with engineered zero interest rates for so long. Doing the

math…. @ 6% interest rates the interest expense on current US debt would exceed all the tax

revenues collected by the US Government annually. That means the US is bankrupt. How much

is $19 Trillion? If the US population is comprised of four person family units…. $19 Trillion

means each family owes approx. $250,000.


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- Over 13% of all asset managers have never worked during a rising interest rate

environment16.

- Most of all current Wall St professionals have never held a gold coin in their hand.

- Most of all current Wall St professionals have never worked through an inflationary

economic cycle.

2016 – What I Expect To See

Based on our analysis of the current global macro environment we expect to see the following

occur in 2016:

- Stock Market – A decline of 50% or more in US Markets during 2016.

- FED – After several months of dithering amidst market volatility, deteriorating macro-

economic conditions and rising unemployment a “walk-back” of this recent symbolic rate hike,

and a resumption of large scale money printing, aka, QE4.

- Dollar - A broad and deep decline in the DXY Dollar Index of 10 or more points, (i.e.

DXY below 90 from present levels of 99).

16 “How Will Newbie Fund Managers Handle Their First Rate Hike?” Eric Chemi. CNBC.com


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- Gold - A minimum increase in the Dollar price of Gold of 50% by the end of 2016.

In conclusion we anticipate 2016 to be a year of global macro risks, and market volatility that

few anticipate, and fewer still are prepared to capitalize on. We believe our investment thesis

and portfolio are well positioned to benefit from this changing landscape.

Thank you for your continued confidence and support, and the very best wishes for the

Holidays and New Year.

John Scurci December 24th, 2015

17

Partner and Portfolio Manager, Corona Associates Capital Management,LLC

Antilles Capital Master Fund LP

Antilles Capital BVI

Dorado Capital Partners LP

17 Attention: The information contained herein is confidential and is intended solely for the use of the intended recipient. Access,copying, distribution or re-use of this letter by any other person is not authorized. If you are not the intended recipient please advisethe sender immediately and destroy all copies of this letter. Nothing presented herein should be deemed to constitute arecommendation or an offer to sell any investment product. This letter contains forward looking statements, as defined by SECRegulation D, and the Investment Act of 1940, which are the original ideas and best judgments of the authors. The conclusionsexpressed herein are not guaranteed, and past performance is not predictive of future results. Circular 230 Notice: Any writtenadvice provided herein (and in any attachments) is not intended or written to be used, and cannot be used, to avoid any penaltyunder the Internal Revenue Code or to promote, market, or recommend to anyone, a transaction or matter addressed herein.

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