Shortly after Deutsche became the latest bank to warn that “markets seem to have entered frothy territory”, going so far as to utter the dreaded “bubble” word, and suggesting that this time it will be different as “unlike 2016, the Fed does not appear to have enough patience anymore to postpone the rate hikes” and adding that “unfortunately, the Fed’s resolution to raise rates this time seems to be firmer than in 2015 because of their assessment that US economy has almost reached full employment”, one of the market’s biggest bears, Crispin Odey’s is on the verge of a premature victory lap (with his YTD performance rebounding to a loss of just -2.7%, after returning 6% in May and 2% in June, he may finally be due).
In his latest Manager’s Report to investors, Odey looks at the increasingly precarious situation in the UK, where he metaphorically summarizes the domestic economic situation saying that “The chances of car crashes everywhere are rising”, it was his comments on the US economy, and the hawkish Fed that were more interesting. Discussing the Fed’s dilemma, Odey says that “with employment growth annualising at around 200,000 per month, suddenly the Fed can no longer just keep the credit cycle moving with QE.” The implication for a world which is only used to credit expansion and has forgotten all thoughts of business cycles “this new tough Fed is unthinkable. However to my mind, we have finally globally hit the peak of the cycle. A peak we hit in 1979, 1989, 1999, 2008 and now. Can you see it? The auto industry is already going into a recession. Inventories are 30% too high because sales have fallen by 10% from where they were.“
Which brings us to his latest view on the global economic cycle, where he says that there is evidence that this slowdown “is more widespread, happening as it is across the commodity, industrial and retail sectors.” Only this time is indeed different:
“in every previous such down cycle for the last ten years, central banks have responded by printing money. But this time they are doing the reverse, which must, one thinks, exacerbate this trend. All this sits very uncomfortably with the fun being felt in the stock markets. But there, when I look at the move up since Trump’s election as President, I detect the walk of a drunken man.”
Finally, it may all be up to Apple: “Take Apple Inc. Profits peaked in 2015, but the multiple has expanded by 50% since then. Everything is riding on the 8x phone but if that replacement cycle proves weak this autumn, watch out!”
Having predicted market collapse on many occasions in the past two years, Will Odey’s gloomy prognosis be accurate this time? For the sake of his long-suffering investors who rode the wave high, only to crash and catch up with the broader market…
… we certainly hope so.
His full letter is below.
There was a photograph of our retired Governor of the Bank of England, Mervyn (Lord) King enjoying a day at Wimbledon. Incentive is everything. Our current Governor will return to Canada and so his interest in the ultimate outcome for the UK is decidedly less involved. Interest rates averaging 0.25% and ten year bond yields driven down by Bank buying to around 1%, do not encourage the country to save. Instead we are dependent upon foreign investors to lend us money knowing that at present they are losing 2% in real terms thanks to inflation. When on top of that, members of the government start suggesting that the 1% pay cap for public sector workers should be relaxed, you have the potential situation that core inflation could rise from 2% to 4% and then the cat is well and truly out of the bag.
For retailers in the UK, given that they are having to cope with internet shopping already representing 23% of consumer spending as against 11% in the USA and 6% on the continent, the fall in sterling is so dangerous. They are effectively three times leveraged to the FOREX movement. A 20% fall in sterling ensures not only that Debenham’s inventory becomes £120m more expensive at the point of purchase but that, given the normal inventory / sales ratios, sales need to rise by nearly £350m on £2.5 billion. The chances of car crashes everywhere are rising.
Most interestingly, globally, is that in the USA, the Fed is faced with a growing shortage of potential employees. With around 400,000 unemployed and employment growth annualising at around 200,000 per month, suddenly the Fed can no longer just keep the credit cycle moving with QE but must take account of the looming leeward coastline, which will stop growth anyway.
In a world which is only used to credit expansion and has forgotten all thoughts of business cycles, this new tough Fed is unthinkable. However to my mind, we have finally globally hit the peak of the cycle. A peak we hit in 1979, 1989, 1999, 2008 and now. Can you see it? The auto industry is already going into a recession. Inventories are 30% too high because sales have fallen by 10% from where they were. Only Europe is experiencing rising sales.
There is evidence that this is more widespread, happening as it is across the commodity, industrial and retail sectors. In every previous such down cycle for the last ten years, central banks have responded by printing money. But this time they are doing the reverse, which must, one thinks, exacerbate this trend.
All this sits very uncomfortably with the fun being felt in the stock markets. But there, when I look at the move up since Trump’s election as President, I detect the walk of a drunken man. Take Apple Inc. Profits peaked in 2015, but the multiple has expanded by 50% since then. Everything is riding on the 8x phone but if that replacement cycle proves weak this autumn, watch out!
Enjoy the hot summer.
Finally, his top ten positions as of June 30:
via http://ift.tt/2u1cHSa Tyler Durden