2019 August CAD

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-1.34% MTD
5.51% YTD

Dear Partners,

The Caravel Capital Fund Ltd was –1.34% for the month of August.

Typically, we write about what we we’re doing over the month. We tell you we’ve exited some positions and have

found some new ones to replace them. Then we tell you about how these decisions have affected the value of your investment with us. Instead, this month we are going to tell you what keeps us up at night...literally.

First, some background that some of you may already know. For the past 100 years Central Banks of the G7 have employed monetary policy in various forms to set short-term interest rates. Since 2009, these Central Banks expanded their interest rate influence by purchasing $12 trillion (with a T) in total of their government’s Treasury Bonds (debt with maturities from 2 to 30 years) to lower the longer-term cost of money for individuals and corporations.

How much is $12 Trillion? Take a look at the 3 biggest Central banks’ current ownership of their respective countries long term debt (2 years and longer):

The Bank of Japan owns 50% of ALL JAPANESE LONG-TERM DEBT.
The European Central Bank owns 30% OF ALL EURO LONG-TERM DEBT.
The U.S. Federal Reserve owns 20% OF US FEDERAL PUBLIC LONG TERM DEBT.

If you add up all G7 nations central banks’ holdings, they amount to 25% of their Countries’ $48 Trillion of Debt. With 10-year interest rates between –0.60% (Germany) and 1.50% (United States), and $17 trillion of the $48 trillion

yielding less than 0.00% (YOU PAY the borrower...yup), we ask these Central banks: what the hell are you doing?

Just like TD Bank has shareholders, the US Central Bank, European and Japanese Central Banks have shareholders. Each are 100% owned by their respective Governments. From 2009 to 2019, the US Federal Reserve made $960 billion dollars in profit for the US government, compared to about $140 billion over the previous 10 years. The rest of the central banks are no dummies either. Since 2009, Central banks worldwide have borrowed money overnight for 0.0% (that’s finance for free) and bought $30 TRILLION dollars’ worth of their Government Debt, which paid interest between 3% and 6% (quite a bit has matured and they have bought more). Nice work kids, that’s what hedge funds do. The central banks did this in 2009 to provide individuals with access to cheaper longer-term money. It made a lot of sense THEN. It was WIN-WIN; Governments got to borrow piles of money cheaper, Central banks made boat loads for their governments, and individuals and companies got to borrow at lower costs. Everybody got to BORROW CHEAP. Brilliant? No such thing as “everyone wins”.... There is always a loser.

How much are your savings making? How much are your retirement accounts earning on the bonds you hold. How are the Boomers doing as they are being told it’s time to hold more bonds and less stock. You don’t own 70% stocks and 30% bonds after 60 - more like the inverse.

Seventeen trillion worth of G7 Bonds are paying nothing in savings and retirement accounts worldwide. Shake your head if you think your pension is your safety net. Your pension fund is screwed. It needs 6-7% annually to stay solvent and it isn’t getting there with 0.50% bond yields. The value of your whole life insurance policy has been dropping for the past 5 years. It won’t be a source of savings in 10 years - in fact you will have to start paying into it again. The secure portion of your portfolio is dramatically reducing your portfolio’s return. Bonds moving from 5% to 1% have generated great capital gains over the past 10 years. At 1% yield or less, that is OVER. This is the losing side of the win-win scenario. We apologize; this isn’t intended to sound like Barron’s, Wall Street Journal, or Financial Times alarmism. This is the Caravel partners’ current reality.

We said we would share with you “what keeps us up at night,” – it’s knowing what our clients are facing. It’s realizing that we are part of the garrison charged to make up the difference in the return on your portfolio. When we say at the end of every letter “We thank you for your confidence and capital”, we truly understand that responsibility. The task has become more challenging but we are resourceful, creative and determined.

We are aligned with you, we feel your pain and thank you for your patience.

Caravel Capital

Monthly Performance (net of all fees)

JanFebMarAprMayJunJulAugSepOctNovDec YTD

Risk vs. Return Comparisons Across Indexes

Month Return YTD Return Volatility Sharpe Sortino Beta Best Month Worst Month Annualized
S&P 500-1.58%18.34%12.19%0.951.160.118.01%-9.03%12.69%

Growth of $1000 since inception

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