Thread by @crescatkevin

Valuation extremes combined with macro inflection signals provide generational opportunities to position opposite the crowd for potentially large gains.

A🧵👇 👇👇

As the chart above shows, analysts’ estimates for Microsoft and Apple’s free cash flow have been trending down for two years, but their stock prices have grossly diverged to the upside.

The current quarter could mark the transition from YoY growth to a decline in free cash flow at the world’s two largest market-cap companies. It's a drop of 16.1% at Microsoft and 30.6% at Apple, and no one is paying attention.

Artificial intelligence mania has caused stock prices to diverge from underlying fundamentals. Investors who have created much wealth in richly valued index funds and mega-cap tech stocks should consider preserving it now by significantly reducing that exposure.

I believe we are on the cusp of a rare macroeconomic shift, like in 1972 and 2000, where a monumental investment setup exists on both the long and short sides of the market.

The years mentioned above immediately preceded the onset of roaring new secular bull markets in commodities coincident with the bursting of bubbles in crowded megacap growth stocks. The analogous scenario exists today.

I believe a major stock market correction and stagflationary recession is ripe to unfold and it should soon be the best multi-year stretch to own precious metals and mining stocks since the US dollar was de-pegged from gold in 1971.

The hype over AI is just like the Internet frenzy in 2000. The innovation was real then, just like it is now, but the faith placed in tech companies via inflated valuations to be able to capitalize on it was, and is once again, overblown.

Then it was a Y2K upgrade cycle that crested and crashed. Now it's an AI processor craze, a burst of demand that has led to extraordinary growth and profitability for the industry leader, Nvidia, along with a surge relative to the market in the Philadelphia Semiconductor Index.

Nvidia has inflated the prices of its GPUs and is enjoying the windfall for now, a much-deserved capitalist monetization. But future chip supply runs deep. Intense competition from Intel, Advanced Micro Devices, and others looms.

Prices go up and down in the highly cyclical semiconductor industry. I am confident that there will be a spending hangover by the many companies that binged on Nvidia’s GPUs last year, paying up in a FOMO rage without a viable plan to achieve a good return on that investment.

This is just like the Y2K bubble. As a result, I believe the S&P 500 is in the vicinity of a major top ahead of an oncoming recession. Greed turning to fear and panic is the catalyst as people finally wake up to the truth of the underlying fundamental and macro dynamic at play.

The mining industry has been in a capital-starved depression for more than a decade as technology investing has dominated risk capital flows. My firm has been taking advantage of this distressed environment.

For the past three and a half years, we have been funding the drilling and discovery of many large, commercial-scale, highly economic metal deposits in viable mining jurisdictions around the world.

We have built activist stakes while helping create the world’s leading gold, silver, and copper mining exploration companies.

Our companies include San Cristobal Mining, Snowline Gold Corp., Hercules Silver, Goliath Resources, Barksdale Resources, Blackjack Silver, Brixton Metals, Western Alaska, Tectonic Metals, Eloro Resources, Falcon Butte, Eskay Mining, Core Assets, Altamira Gold, and many more.

At the median, our funds now own more than 13% of 74 mining companies on a partially diluted basis including warrants. Our private placement investments in these public and private companies, together with our activist-directed use of proceeds toward prime drill targets.

It has all been orchestrated by one of the industry’s leading exploration geologists and mining executives, Quinton Henning, PhD, Crescat’s geologic and technical director.

The intrinsic value of the likely future supply of metal that our activist-funded companies have already created, based on our geologic and economic modeling, is manyfold of what is currently reflected in the depressed market prices of our portfolio.

We have quietly acquired these deeply undervalued stakes, while momentum-chasing mobs have been focused on cryptocurrencies and megacap tech stocks.

We have done this while our imbalanced government continues to stuff the world with its debt that is impossible to pay back without devaluation through money printing and taxation by inflation.

The inflation writing is on the wall for US Treasuries and the dollar. Foreign central banks have already recognized this and have been accumulating gold to hedge their US Treasury foreign reserve risk.

On average, when a major mining company has acquired an explorer, they have done so at 22% of the resource value. Our portfolio today is trading for less than 1% of Quinton’s estimated resource potential. We believe it is extraordinarily undervalued.

Read more of Crescat's investment letter here:
crescat.net/a-macro-shift-…