British hedge fund manager Crispin Odey thinks we’ve entered an economic downturn that is “likely to be remembered in a hundred years,” and central banks won’t be able to stop it.
In his Odey Asset Management investor letter dated Dec. 31, 2014, Odey writes that the shorting opportunity “looks as great as it was in 07/09.”
“My point is that we used all our monetary firepower to avoid the first downturn in 2007-09, so we are really at a dangerous point to try to counter the effects of a slowing China, falling commodities and EM incomes, and the ultimate First World Effects. This is the heart of the message. If economic activity far from picks up, but falters, then there will be a painful round of debt default,” he writes.
Odey also writes that he thinks “equity markets will get devastated.”
Here’s an excerpt:
“So, where am I placing my money?
- “Firstly, I think equity markets will get devastated. Unannounced business cycles ensured Japan’s stock market rating fell by two thirds over 20 years.
- “Equities are priced for perfection, pushed up by SWF [sovereign wealth funds] and high yield investors looking for higher yields and better covenants that high yield bonds.
- “Commodity-related sectors look unappealing and dangerous.
- “International consumer companies look overexposed to EMs [Emerging Markets].
- “Volatility is rising. Not every trade will work.
- “Australia is still to see rates down to 0.5% at the short end, 1.5% at the long end, down from 2.5% currently.
- “Currency trading is still to make the money. It made money last year as it was where the ‘tyres hit the road’ — equities are just the residual.
- “Equity markets will struggle to understand the quarterly translation and transaction effects of these currency moves on corporate profits, starting with Q1 2015.”
Right now, Odey believes that we are in the first stage of the downturn.
“It is too early to see what will happen — a change of this magnitude means the darkness and mist is very great. We will make some mistakes but with our thinking we won’t make the major mistakes. The problem is where you stand — I am amazed to see so many are fully invested given that equities are already fighting the downtrend. Mid and smallcaps have moved into bear markets and much relies on large caps to keep the whole thing going and they are very exposed to international trade.”
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