This page has been archived and commenting is disabled.
"This Shorting Opportunity Is As Great As 2007-2009", Billionaire Crispin Odey Warns
The last two times Crispin Odey, billionaire hedge fund owner and manager of Odey Asset Management spoke, he handed out extra generous portions of fire and brimstone, saying that in due course "equities will be devastated" and that the looming recession will be "remembered for 100 years."
While the bulk of Odey's warnings are very familiar to all regular readers, here is the punchline:
... 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.
For those who have failed Chapter 11 (or 7) 101, a quick reminder: when you wipe away debt, you also wipe away equity.
Which brings us to Odey's chilling observations:
We have seen though some strange things, with economics 101 turned on its head. We’ve seen that falling prices produce more supply, as the biggest producers see that they can take market share and use the opportunity by reducing average costs through excess production. We’ve seen that in the oil, minerals and iron ore industries. We have also seen in the last couple of years that as bond yields fall, governments are able to issue more debt.
But this time round the problem we have as well is that politics will start to rear its head and we are left to deal with politicians who are increasingly critical of the capitalist system’s ability to allocate capital and provide for society.
For me the shorting opportunity looks as great as it was in 07/09, if only because people are still looking at what is happening and believe that each event is an individual, isolated event. Whether it’s the oil price fall or the Swiss franc move, they’re seen as exceptions.
...
This down cycle is likely to be remembered in a hundred years, when we hope it won’t be rated for “How good it looks for its age!”. Sadly this down cycle will cause a great deal of damage, precisely because it will happen despite the efforts of the central banks to thwart it.
Will he be right, or will central banks find yet another pocket of credit money to create out of thin air, and delude the momentum-chasing algos that all is well, if only for another month or so as the cycle repeats itself again, until finally central banks admit they are out of "tools?"
Considering the recent parabolic blow off top in the Nasdaq, and S&P P/E Multiples coupled with plunging earnings forecasts, the answer may be just around the corner.
Full letter from Crispin Odey:
Manager's Report
The themes I have been outlining since the second quarter of 2014 are now establishing themselves:
- A faltering Chinese economy with growth ultimately slowing down to 3%.
- A hard landing for those countries plugged into China’s growth - especially Australia, South Africa and Brazil.
- A fall in commodity prices bringing with it pain to those heavily exposed.
For oil this is the Middle East, Venezuela, Argentina, mid-west USA, Canada, Norway and Scotland.
No one forecast how fast and how far those commodity markets would fall. However, the same people who singly failed to see this coming are the first to say that the benefits of falling prices will outweigh the costs. My problem with such a hopeful outcome is that, in my experience, those that lose out from a fall in their income are quicker to adjust than those that benefit. In that intertemporal space lurks a recession.
For me, the slowdown/recession finds a secondary downturn thanks to the immediate closing down of any discretionary capital expenditure in the affected industries and countries, something we are only just seeing. This obviously has knockon effects for incomes and employment. At that time the exchange rate is likely to be falling to give some support. In my world this slowdown in the commodity producer’s economy is felt via falling exports back in the beneficiary’s economy, which finds external markets weaken. Again, if I am right on timing, the effect can be great because it is not yet affected by a pickup in spending in the beneficiary’s economy.
As always, that is the theory and markets will show whether it works in practice. In my world, this hit to the world economy is the first experience of a business cycle since 2008. Most investors do not believe we can experience such a downturn. They rely upon Central bankers who they think have solved the problem.
However, let’s also deal with three counters that I currently have to field:
- "How long dare you be wrong?"
- The opposite. "Do you think after a good quarter, this is all in the price?"
- "But isn’t a downturn in the world economy leading to massive counter-measures in terms of liquidity, as envisaged by Draghi and the ECB, which will push markets and assets higher?"
My answers are as follows:
- The performance of the fund since I decided that the world would end differently to my previous thinking, which was in March/April 2014, reflects that I have not been especially early in this call. It would have been rather nice to get the fall in oil spot on, but we didn’t.
- No change in cycle lasts for nine months. This down cycle is likely to be remembered in a hundred years, when we hope it won’t be rated for “How good it looks for its age!”. Sadly this down cycle will cause a great deal of damage, precisely because it will happen despite the efforts of the central banks to thwart it.
- We need to go back to 2008. We had seen reckless spending and reckless borrowing, fraudulently obtained credit advances and overvalued housing. And yet, despite the banks losing a great deal of money and house prices in the USA tanking, we hardly saw a recession in 2009. Why? Because when the Anglo-Saxon central banks lowered interest rates from 5.25% to effectively zero, they put the equivalent of 30% of net income into the hands of the overborrowed. There were other QE measures taken but this was the important one.
Today we get excited about what Draghi is going to with his QE plans for Europe. However, buying government bonds yielding 1.2% does not move the dial for European borrowers. Moreover it is almost impossible with negative short rates of 0.2%, because why would anyone sell a bond to the government, even if the yield is only 0.4%, to get a –0.2% yield on their cash? It looks like Draghi’s measures will disappoint markets. Faced with a deflationary bust, monetary policy will prove to be but “pushing on a string”.
There will be a strong temptation for individual countries to act independently of each other to soften the downturn. In this regard the story looks like it is only half way through. Russia will necessarily have to introduce exchange controls, and that really quite soon. Australia, where the average wage is over $70,000, while the USA is creating jobs at $28,000, will have to allow the currency to fall further. Japan has shown, under Abe, how it intends to react. ‘Everyman for himself’ puts enormous stress on a world trading system which has watched world trade rise from 12% to 32% of world GNP in little over 20 years.
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 and high yield investors looking for higher yields and better covenants than high yield bonds.
- Commodity-related sectors look unappealing and dangerous.
- International consumer companies look overexposed to EMs.
- Fund management companies look overexposed to the wrong assets, especially EMs.
- 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.
We have seen though some strange things, with economics 101 turned on its head. We’ve seen that falling prices produce more supply, as the biggest producers see that they can take market share and use the opportunity by reducing average costs through excess production. We’ve seen that in the oil, minerals and iron ore industries. We have also seen in the last couple of years that as bond yields fall, governments are able to issue more debt.
But this time round the problem we have as well is that politics will start to rear its head and we are left to deal with politicians who are increasingly critical of the capitalist system’s ability to allocate capital and provide for society.
For me the shorting opportunity looks as great as it was in 07/09, if only because people are still looking at what is hap-pening and believe that each event is an individual, isolated event. Whether it’s the oil price fall or the Swiss franc move, they’re seen as exceptions.
After the 1987 crash, a friend of mine, then a young Director of Sotheby’s, was sent to consult an old Partner who had been at Sotheby’s during the 1930s and was still alive, albeit in a nursing home. My friend asked the question “What was it like in the 30s?” and the man replied “It was like being bitten by a tarantula.” My friend didn’t really understand that, but later on in the conversation the old Partner said "A spasm of activity followed by a death.”
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.
We already have volatility across asset classes and as I say, equities are the residual. There is a precious little earnings growth ex-Japanese exporters and we have now reduced our US cyclical exposure as we expect the commodity-induced recession in the mid-west to effect the resilience of the greater US economy. In Europe, we are half way through the write-off process, having written off half as much as the US. Draghi will disappoint and this may cause the first Euro rally given the fall from €1.25 to €1.15 in a month.
We are in the first stage of this 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.
- 67311 reads
- Printer-friendly version
- Send to friend
- advertisements -


yeah, riddle me this sherlock... I would like to know how that's possible as well
SIR TYLER, WHERE IS THE ROTHSCHILD VS ROTHSCHILD STORY, AND WHY WOULD IT BE CENSORED?
WHAT WAS SAID THERE TO CAUSE THIS DISTURBANCE IN THE FORCE?
IF INDEED THIS TURNS OUT TO BE A CENSORSHIP OF FREE SPEECH HERE ON ZH, THEN THIS HEART FEELS SAD TO THINK SO, AND THUSLY THAR BE NO INSPIRATION TO POST HERE ANY MOAR. THE JOB OF PLANTING TRUTH SEEDS HERE CAN ONLY BE SUCCUMBED BY BABYLONIAN SATANIC ROTHSCHILD ZIONIST CENSORSHIP.
PLEASE TYLER, SAY IT AIN'T SO. PLEASE TELL THE LISTENING AUDIENCE THAT YOU ARE NOT CENSORING THE TRUTH IN THE STORY OF ROTHSCHILD, VS ROTHSCHILD.
MIGHT BE BACK SOME DAY IF YOU REPOST THIS VITALLY IMPORTANT AND TRUTH REVEALING STORY.
SELAH!
get a life jerk
it wasn't even a great article, just a headline for click bait
Why is he a jerk for asking?
I too, wonder why an entire article would be removed without explanation.
You're right. It has been removed...
http://www.zerohedge.com/news/2015-02-20/rothschild-vs-rothschild
I wonder why? I actually had a pretty good comment on that story...Why would they remove the whole thing like that?
Strange.
Originally a guest post from Eric Sprott of Sprott Money, now pulled from ZeroHedge.
Article is not accesible on Sprott Money and link is also dead at @SprottMoney.
"To learn who rules over you, simply find out who you are not allowed to criticize" - Voltaire
he sounds kinda desperate
"As soon as China and Russia surrender to NATO, the Pentagon will allow the DOW to fall to 6000."
Let me fix that....
As soon as the US and Europe surrender to Russia and China, the Chinese and Russians will allow the DOW to fall to 6000.
Ah, Crispin, the man with the world's most expensive ($200,000) chicken coop:
http://www.dailymail.co.uk/news/article-2210265/Why-130-000-hen-house-ch...
http://www.theguardian.com/commentisfree/2012/sep/26/fowl-extravagance-c...
The caption under the picture of the chicken does say: "Pampered: The lavish hen house has been designed by Odey who has confessed he doesn't know what to do with his riches"
To which the only honest reply is: "You can't have everything. Where would you put it?" - Steven Wright
It won't crash until the shorts capitulate. That means all of us on zerohedge give up and join the Bulls.
99% of perma-bears already have capitulated. The only holdouts are on Zerohedge and select few. Only shorts out there are ones expecting a correction in a 'bull' market. Lots of metrics out there to show this. But manias are not easy to predict where they end, although this one has been going far longer than anyone expected, which is why no mainstream analyst believes the market could crash now.
This is no Bull Market, this is no Mania, it is Central Bankers rigging and engineering "the market" 24/7.... It truly is different this time.
Uncharted waters, for sure.
Crispin's words are like the taste of a cold cider on a hot summer day. I'm getting the lawn chairs ready for a front row seat to the end of modern bubble finance.
Let me see your book, Crisp.
Every single bet you have on the short. Until then your words are as empty as a spinster's womb.
I gave up shorting us markets for now and am long RUSS, which is the 3x etf short russia. I see what's coming from the us and it's going to be more relentless than ever. Barclays just downgraded russia today.I'll puke and profit but i know what's coming.RUSS back to $60 mother fuckers!!!!!!
http://www.themoscowtimes.com/business/article/barclays-axes-russian-for...
good man. shit or bust.
I just woke up. My butt hole is stretched and in severe pain. Can someone please tell me WTF happened?
You've been signed up for Obamacare.
Good read. There is a time to accumulate a short positions in overvavlued stocks.
Read more about few possibl good shorts here:
http://prudentvalueinvestor.blogspot.com/2015/02/linkedin-corporation-ln...
What's this putz talking about ? Small and Mids are hitting new highs. They are not in a bear market. I think he wrote this in late Q3 2014. Was this the same guy that said he was "Selling everything that wasn't nailed down" about two years ago ?
Just sayin -
What happens to the shorts when they devalue the currency????
if the dollar loses enough value between noe and 3/31 the earnings of the s%p will spike and send the market to the moon.
Still waiting for the motherload "short" payout!
(2) shares left and deep in debt...think i'll be ok?
another short shiitin' in his pants taking his book. there have been 1000s before him since 2009. he is right. one day he will be right but not yet.
To short this market is to participate in this market. No thanks.
I'll wait until we have a real market with true price discovery again, which by the way things are headed will be things like ammo, cleaned and butchered game and the re-emergence of dowries.
I've been thinking this was the case since 2011-2012 and thought, this madness couldn't go on, but yet, it has. Eventually this shitpile of a PONZI will implode dramatically, but I don't think anyone is going to catch it when it does, and it won't matter anyway because money won't mean a thing when it does blow up......
Just think we will get to see 1929, 1987 and 2007 all wrapped into one with the next deficit bomb. The level of manipulation and leverage is going to unravel like almost nothing before. China, Japan, USA, Europe all up to their eyeballs in debt fighting each other to the bottom
Never take investment advice from someone that looks like a real life version of Pedo Bear, especially if he's a billionaire.
Still think we are in a deflationary period and that will eventually come to the forefront.The Fed is out of Ammo if we enter another recession and that is quite possible with our high debt and slow growth.
Greed and Debt are the two criterea for an empire topping out and it looks history is about to repeat itself.
This "Market" has been a great short for about three years now, it keeps getting better too.... Short and hold Bitchez, if you can last and last and last. Only energizer Bears need apply.
I admit that I went significantly short (relative to my net worth) when the DOW went over 14k years ago. Made some nice cash in DXD and QID back then, but I'm sure it elevated my blood pressure as I rode that sucker down.
There is no way in hell I would short today's fully manipulated "market". On the other hand, there's no way I'd be long in this "market" either. The house of cards will fail (not just fall) at some point. The system as we knew it died in 2009 in my book. It will NEVER EVER be the same.
Is it possible .... Malmgreen and Greenspin or Snowedin .... come clean .... when they are out of power .... or in trouble ... or this guy .... after they have suffered huge losses ? Just askin' ! (Admit it .... you are hooked .... on my malinformed impertinence !)
I had no idea .... zilch, zero, nada, nichts, nuts .... of the extent of food spatter .... until I got a computer screen .... and could monitor .... and graph it !
These fucking hedge fund guys, ripping people off for years, becoming billionaires while bilking the public mercilessly, and then just before a crash they come out with "warnings" of doom and gloom. Fuck you, Crispin.
There may be a few more triumphant and short lived gasps left in this market, but in the end all will realize:
Sometimes the juice isn't worth the squeeze.
this speaks for itself.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
good luck.