Crispin Odey is having a tough year.
His UK-based hedge fund is down about 35% this year through August, according to an investor letter. The firm manages around $US8.9 billion.
And Odey is blaming central bankers, and in particular low interest rates, for creating an unsustainable economy.
“It would certainly be simpler to follow the market,” he wrote. “But then we would be ignoring the fundamental data.”
His explanation for his fund’s terrible performance, while quite macro-focused, is coherent and compelling. Here’s what he had to say:
The world got too expensive.
“As individuals gained access to leverage in a world that was globalising, individuals became richer (thanks to asset price inflation) even if their incomes were constrained by growing international competition. However, by 2005 asset price inflation and the expansion of the balance sheet had created a world in which wage earners could no longer afford the asset prices. The reaction of the authorities since then has been to lower interest rates so as to support asset prices and intervene via QE where appropriate.”
The response has been ineffective.
“Productivity in the west has now fallen to almost negative rates, investment has stalled and individuals have turned against globalisation. This is a long answer as to why Brexit was always likely to be popular in the UK. It also lies behind Trump’s possible success later this year. Without productivity growth, capitalism becomes unpopular, globalisation becomes unpopular and politicians become unpopular.”
Fighting the Fed is a losing bet.
“It is always dangerous to fight the Fed and that is what we have been doing this year. The world economic growth continues to disappoint despite the benefit of lower energy costs. Corporate earnings in most parts of the world have continued to fall and now the USA is experiencing falling earnings. My thinking this year was that stock markets would follow earnings. What we did not expect was that markets would re-rate massively into an earnings downturn. Moreover, it still seems to be a re-rating which is not supported by hopes that earning will soon recover but only by the monetising undertaken by central banks.”
The search for yield is driving everything.
“The quest for yield explains 100% of this year’s performance. Quite apart from the pain that this policy is bringing to pension funds, insurance companies and banks, it has ensured that individuals have been buyers of dividend streams which are not underwritten by earnings streams. There is nothing sustainable about the current status quo.”
Equities are overvalued.
“Since 2011 the earnings for the FTSE 100 companies have fallen from 500 to 119 currently or nearly 80%, whilst the stock market has risen by around 10%. That would be ok if we were at the beginning of an upcycle but indications point to a peaking in demand for most production. This peaking is coinciding with new capacity coming on stream. No wonder sentiment is a little off colour.”
Money is headed toward risky destinations.
“Keynes wrote in the thirties that ‘people should travel, goods should travel but savings should never travel.’ I never understood that remark until now. The developed world has always had a surplus of savings because on the whole capital is protected and labour is not. In the developing world they are always chronically short of capital because labour is protected and capital not. Sadly savings, thanks to QE, are going into a place where the odds of their survival are slim. Who is responsible for these irresponsible policies?”
ValueWalk reported earlier about the note.
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