It was over half a year ago that many predicted, this site included, that Crispin Odey’s double down, all in bet on central bank failure would be his “make it or break it” swan song, which if incorrect would also lead to the shuttering of his hedge fund. Well, rumors of Odey’s demise appear to have been greatly exaggerated again, because despite being down 9.9% YTD and down 31.1% LTM in his Odey Mac fund, not only is Crispin Odey still around, but he is bearish as ever, as he explains in his latest April letter to clients.
His full letter:
Manager’s Report
This last quarter saw the first synchronised upturn in global economic growth for three years. Stock markets also, in profits terms, had the wind behind them because 1Q 2017 was being compared to 1Q 2016 when the world looked like it was falling apart. Ever since central banks pushed credit through the system a year ago, with China leading the way, asset prices, commodity prices and eventually consumer confidence have lifted up towards the sky.
So why do I remain stubbornly bearish?
Firstly because what got the developed world into its crisis in 2008 was “large widespread borrowing by individuals who could not repay their debts” and now what has got us out of our crisis, is luckily, “large widespread borrowing by individuals who could not repay their debts.”
In 1942 when Hitler’s Germany was at the gates of Kiev as well as Moscow, and Britain was on its own just surviving, Todt, Hitler’s Minister of Supply, startled Hitler by saying that the German war effort would stall. For his prescience he disappeared a week later when his plane fell to earth unexpectedly. But what he could see was that the lines of supply were at breaking point. Success was the necessary ingredient of failure.
The US economy is now operating above its operating capacity. Free capacity in the workforce is less than 3 months of growth. This is why Yellen and the Fed are keen to raise rates in June. The UK already has a gross savings rate of 6% against a necessary investment rate of 11% of GNP. Such a shortfall should call for higher interest rates to encourage savings to grow but no. With the Bank of England’s encouragement, consumer debt is rising at 8% per annum whilst wages are only rising by 2%. How long this madness? Japan will start in the second half of this year to eat its savings – whether sushi or tempura – as spending is financed by asset sales.
Subprime lending both facilitates and is driven by employment. Lend the man the loan for his car and the demand induced gives him the job that keeps the payments current. When that goes into reverse, and from a position of full employment it can only go one way, the consequences are easy to see.
At the same time, whilst the Chinese have been enjoying 10.6% consumer spending growth and 7.6% economic growth, it came because they pushed 40% of GNP in new credit into the economy last year. An attempt to rein in this misallocated credit since March has immediately impacted economic growth and spending by 1% of GNP, to say nothing of the 20% falls in Chinese involved commodity prices. All of these instances of slowdown since March are threatening the reflation trade which has driven stock markets up and bond markets lower.
What if we are not in a normalising cycle? What if last year was a rally in a bear market? What if China can no longer be the font of growth? What if the USA is not going to experience the economic boom attendant with tax cuts for the corporates, which rerated that market since November?
So far political worries have made no dent upon markets. Nothing has. But QE is now due to end over the next two years.
Venezuela signifies all that I think about today’s markets. The country is rightly enveloped in riots and misery. Individuals were forced to import $30 billion less in an economy of $150 billion of GNP. So individuals took a 20% hit to their already low living standards. This year they are forced to hand over $10 billion of precious dollars to both service their $110 billion of external debt and repay some. So where does the 135/8% of August 2018’s trade? I would have expected in the low-30’s. No, it trades in the mid-80’s. Remember that the only important lodestones for the investor have been: Is credit growing faster than nominal GNP? Is productivity growth accelerating or slowing? Is productivity growth at or around 2.5%? Because otherwise politicians are in trouble? Well, on all these measures the world is not getting out of its problems.
And then when it comes to markets, we have to watch for ‘the Minsky moment’. Minsky argued that periods of low volatility, presaged crises because they encouraged excessive risk taking. Well, we are into the risk taking. But this fund truly does not demand that the end of the world comes tomorrow. The Chairman of EOG inc. in the USA said that 10 years ago it was necessary to invest $48 billion to extract a million barrels a day. Today it can be done with under $7 billion. Ten years ago it costs $55m to build a 15 megawatt solar plant. Today it costs $15m and it produces 40% more electricity. Disruptive technologies are everywhere. Anyone who built their plants 10 years ago using debt is in trouble. A bull market in equities has hidden the scale of that trouble. It will not just be subprime that undermines this cycle, disruptive technologies will do their bit too.
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And here for those curious, is Odey’s latest exposure and Top 10 long holdings:
via http://ift.tt/2qQOWKb Tyler Durden