Crispin Odey: "It Feels Lonely Being Bearish"

Tyler Durden's picture

In Crispin Odey's latest letter to investors, the billionaire hedge fund manager laments "how quickly everything has changed", notes that "without the reflation fireworks, equity markets feel vulnerable", and concludes that while a year ago it was easy to be bearish - China was slowing, world trade was creaking, Europe was not recovering and the oil price was hitting new lows - "a year later to be bearish feels lonely, despite the fact that the reflationary story of the past year looks difficult to sustain and auto loan lending has joined a long list of risks along with Trump and Brexit."

 And yet, unlike Horseman, he is not throwing in the towel just yet: "Money creation alone has taken markets to all-time highs but what strong arms take, strong arms must defend. Valuations demand that they do."

And while Odey's trenchant appeal that "when we look back at this madness, some people will feel ashamed" is accurate however, considering his YTD P&L of -4.9%, following a 1 year drop of 33.7% (and more than half over the past 3 years), Odey may not be among those looking back.

Full letter below:

Look how quickly everything has changed. Trump, defeated over the Obama Healthcare reform has, as it were, retreated into an aggressive foreign policy which is almost the opposite to the Monroe doctrine which he was adopting earlier. Bannon is on the back foot. In the absence of a corporate tax cut or any kind of VAT tax reform, the US economy is succumbing to an overvalued dollar and a growing crisis in subprime lending, centred on the second hand car market. The government bonds have already guessed Yellen’s mind. No more rate rises. We are now just waiting for the Fed to set up a lending business, loaning 5 year old cars to people who can neither drive nor borrow. That is what they need to do to stop the subprime losses ballooning.

 

Last year what bailed everyone out after the bad first quarter was China and the oil price. Despite China pumping in 40% of GNP in new lending, the statistics are revealing. The economy grew nominally 7½%. Consumption of steel grew by 2%, despite steel prices rising 60%, and the auto market started to weaken (by 2.5%) in the new year after being driven up by the size of the support exercise. For this year, it is going to be difficult for China to even continue its recovery. The chances have to be high that we have just witnessed a giant rally in a bear market for commodities. Where is Trump’s massive infrastructure boom?

Without the fireworks, equity markets feel vulnerable. The Great Reflation was responsible for a re-rating of stock markets. If all we have left is the Central Bank’s bond bubbles, that may not generate enough growth to support prices.

 

Whilst undoubtedly bonds were in bubble territory last year as evidenced by the fact that the only way a buyer could possibly make money was by selling the loss making asset to a bigger fool, the equity market did become compliant in the game. Companies learnt to pay out dividends with borrowed money and became very adept at using shares as dividends – so called scrip. Very popular with corporates.

 

Several of our favourite shorts have shown a tremendous appetite for scrip. Intu Properties, the largest shopping mall owners in the UK are valued at £8bn EV, not surprisingly when they received £447m in net rent and £408m in EBITDA in 2016. They paid out £240m on interest and hedging costs (year end LTV of 44%), needed to spend £121m in capex to keep the tenants happy and so shareholders got £183 million in dividend of which £29m was in scrip (£73m in scrip the year before). The problem with scrip is people are starting to find that it is not worth the paper it is written on. Intu this year say they will  spend not £121m but £297m to keep tenants happy. In a world where scrip is no longer being appreciated that leaves a £300m shortfall after £230m interest payable, capex and dividend. Whoops!

 

With the subprime problem emerging in the used car market, remember that this is nothing but a can (car) kicked down the track some years ago. In 2012, with the compliance of the Fed, leases on cars were extended from 3 years to 5 years with a residual value of 20% of the new at the end of the 5 years seeming reasonable given that cars last 10 years. The result was a 30% increase in demand for new cars on the back of a 30% decline in cash costs. Five years later, with subprime in the USA some 2.3x larger than it was in 2008/9, these second hand cars are not attracting bids at or above the residual prices built into the leases. At present, prices are just 7½% below the expected price. Dangerous but not critical. What frightens everyone is who is going to buy so many second hand cars for cash over the next few years? A change to the new leasing price now needs to be made. Just when sales have already been weakening.

 

Another inadvertent child of QE has been the rise of disruptive technologies – Amazon, Uber, Tesla, Artificial Intelligence, ViaSat. All promise to undermine incumbents and most importantly the current assets employed by the incumbents, lent against by the banks and the corporate bond market. Paradoxically it is also the reason that productivity is falling – losing income earners are not easily found, equally well paid jobs. It is putting pressure on property prices in much the same way as it is hitting second hand car prices.

 

Unless we are happy to see the Fed and other central banks extend their remits drastically these new developments must have repercussions in the capital markets. The unwillingness of investors to discount this, has made stock markets both so resilient and so difficult to read.

 

The Bank of England, under Carney, have taken this further than most, presiding over personal savings rates falling from 12% in 2008 to 3.5%. At a time of uncertainty of trade terms, the UK is reliant on credit equal to 5% of GNP. With inflation rising thanks to the fall in ster-ling towards 4% and short rates at 0.25% and 10 year bonds yielding 1%, prices are not that tempting. No wonder that foreign investors have been selling down their gilts. The optimist will tell you that sterling is 25% too cheap ‘on the Big Mac Index’ and is due a bounce. But a bounce presupposes that individuals will start to save again. With all interest rates negative they seem intent on borrowing and spending. When we look back at this madness, some people will feel ashamed. Twisted facts and twisted logic may be met in the quiet of the night by reality.

 

A year ago it was easy to be bearish. China was slowing, world trade was creaking, Europe was not recovering and the oil price was hitting new lows. A year later to be bearish feels lonely, despite the fact that the reflationary story of the past year looks difficult to sustain and auto loan lending has joined a long list of risks along with Trump and Brexit. Money creation alone has taken markets to all-time highs but what strong arms take, strong arms must defend. Valuations demand that they do.

* * *

Finally, as per his position breakdown, we may have identified one of the biggest cable shorts. In light of recent events, it appears that Odey's losses are set to continue.

Finally, here are his top 10 holdings:

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DogeCoin's picture

All the other bears are dead or hibernating. Long live the bears!

HRClinton's picture

The Bear Market will begin when the vast majority of Stackers have had to sell their shiny coins and bars, out of financial desperation. 

No one gets out of this Casino rich, without the blessings of its owners.

froze25's picture

Feels lonely being Bearish, well come join the fun here at Zerohedge. We got a Yuge bearish crowd.

Urban Roman's picture

The bear market will begin when Crispin throws in the towel and goes all-in on $SNAP

Squid Viscous's picture

But sir - it's just a waffer thin mint...

jamesmmu's picture

The bears are coming back to market since 1-2 wks ago. They are just slowing placing their bets, very closely and carefully. VIX is steadily up, tho down a few days, but trend is indeed reversing. 

agstacks's picture

"We are now just waiting for the Fed to set up a lending business, loaning 5 year old cars to people who can neither drive nor borrow."

 

"Mr. Odey, please report to the Eccles War room.  We would like a full presentation."  

 


E.F. Mutton's picture

Crispin Odey.  Sounds like a professor at Hogwart's that makes money disappear.

HRClinton's picture

All part of the Odey Yinon plan.

rsi1's picture

And  now he is 100% NAV short GBP! oh well, what is another 2-3% loss..

buzzsaw99's picture

Burke: ...So I made a decision and it was... wrong. It was a bad call, Ripley. It was a bad call.

Ripley: Bad call?  These people are *dead*, Burke! Don't you have any idea what you have done here? Well, I'm gonna make sure they nail you right to the wall for this! You're not gonna sleaze your way out of this one! Right to the wall!

Bam_Man's picture

Looks like his investors (-33.7% last year) have been burned to a crisp.

Soul Glow's picture

I respect fighting the Fed, but might as well buy bullion and stfu.

Silver Savior's picture

Not quite sure what the STFU is but I agree to chase the bullion.

Lord Peter Pipsqueak's picture

When are these highly intelligent, highly educated people going to learn that you cannot bet against central banks that can generate infinite amounts of money out of thin air to keep the present insanity and all future versions of it going?

They know this and still they persist!This madness will only end when those self same bankers decide it is going to end, and not until, and they won't be telling any Joe Schmoe when either.

Silver Savior's picture

It's because central banks are completely irrational and disconnected from the reality of the great poverty that exists. So why would an investor figure that stocks should keep going up? Common sense keeps me bearish.

Lord Peter Pipsqueak's picture

Good for you,but by being bearish I hope you mean staying out rather than shorting this totally rigged farce, this could go on for decades yet.

Blankfuck's picture

Market is run by buying the bullshit in CNBC. MARKETWATCH, ANALYST UPGRADE PUPPETS. all speak thus blindfolded people invest.  All lies change day to day week to week month to month. The mouthpieces run the show until people wake up once again after much $$$$ losses. WHO THE FUCK HAS THE RIGHT TO SAY A STOCK IS CHEAP, OR A HOUSE IS WORTH ETC? WHY S THE DOW JONES INDUSTRIAL JOKE OVER 20,000?----- MEDIA!

Snaffew's picture

I never watch any network news of any kind.  Turn that shit off and eliminate the noise.

Jim Shoesesta's picture

A lot of these morons here, and on zerohedge have been bearish since 2009. Its not a bear market until it is. Enjoy morons. 

Silver Savior's picture

Well it's like me I can't believe anyone is spending anything right now even if they do have it to blow. They are going to need it. Completely bearish and hunkering down. 

Silver Savior's picture

The dip buyers should be rushing in at any moment. They for some reason want this shit. It helps my retirement so it's all good. 

innertrader's picture

YOU TELL ME how much debt the FED is going to create over the next 4 years and I'll tell you what the market is going to do!  The stock market no longer has reality!!!

Forget "fixed" markets, go back to basic Demand and Supply markets.  Markets that make sense and has a relationship with Reality!!!

 

TRIUMPH with TRUMP!!!

Blankfuck's picture

Fed Reserve Fuckers keep lining the pockets of CEO GREEDY Fuckers-------------Keeping the ponzi going!--------Fed Reserve Fuckers keep lining the pockets of CEO GREEDY Fuckers-------------Keeping the ponzi going!--------Fed Reserve Fuckers keep lining the pockets of CEO GREEDY Fuckers-------------Keeping the ponzi going!--------Fed Reserve Fuckers keep lining the pockets of CEO GREEDY Fuckers-------------Keeping the ponzi going!--------Fed Reserve Fuckers keep lining the pockets of CEO GREEDY Fuckers-------------Keeping the ponzi going!--------Fed Reserve Fuckers keep lining the pockets of CEO GREEDY Fuckers-------------Keeping the ponzi going!--------Fed Reserve Fuckers keep lining the pockets of CEO GREEDY Fuckers-------------Keeping the ponzi going!--------

Snaffew's picture

brutal onslaught of buy side volume mid day

Grandad Grumps's picture

First the controllers picked off the middle class traders. Now they are picking off hedge funds. Then, when the markets finally dump, the banks will be holding everything and they just write it off. Money from nothing goes back to nothing.

Griffin's picture

The world is changing quite a bit and there might be some quakes in the near future related to this.

I am not a financial expert or a genius of any sort. I am a blue collar guy that has seen all kinds of economists and experts be dead wrong about practically everything and i suspect that bubbles in general are often quite fragile.

They are designed to explode, and usually when the time draws closer, there is a effort to draw in more simpletons.

Just for the big bang. its more fun that way.

 

Mike Masr's picture

Sell it all Mortimer!!

Griffin's picture

I guess clever investors are cautious.

Only buy what they understand, and never bet the farm.

Something like that.

Mike Masr's picture

Being bullish today goes something like this. Being bullish on your family when you suspect your sexy wife is cheating on you because you are catching her in lies. Your son's grades are falling and you know he is hanging out with boys you suspect of being gang bangers. Your daughter tells you she is quitting school at Harvard to marry a grocery store manager in Dearborn named, Mohammed. And you are bullish on your family.

All it will take is one major event, maybe N. Korea, accident over Syria, the ME, Ukraine, or in the South China Sea and watch stocks mega-crash 3-5 days or more. The algo systems will trigger and swooosh.....flush....

 

Bear's picture

I've been so lonely since 03/15/2009

exartizo's picture

Dear Little Crispin,

...there are plenty of Fun Bear Sandboxes to play in.. but they're all in Europe.

Don't even think about it in the U.S. until after the Euro crashes.

Sincerely,

A ZH Reader

gdpetti's picture

Remember how the 2000-2001 market ran... compress the two and see where we are today... we had the final blowoff and since we've enjoyed the continuous Fed induced blowjobs to keep the market up and looking 'good'... to keep the herd aligned in the pen where the PTB want them, and then the positions change and starts to drop, ala 2001.... and the ilusion is burst, the pattern reverses as fear sets in.... as the PTB live off fear.... there are black swans all over the place.. a flock of them that will be affected... all the central banks club members have been playing their part to keep the sinking boat called Titanic afloat just a little longer.... keep the herd distracted a little longer.... until it's time to pull the rug out.

Question is will they pull it before Mother Nature arrives? First the brown dwarf crosses the ecliptic plane and discharges.... later the main body comet cluster arrives.. in full force due to that brown dwarf punching through the Oort CLoud... then the real show begins... until then, this market dynamic is mirrored in our entire civilization's breakdown as well.... the internals look awful... the externals are pumped up in a puppet propaganda show to distract the herd... same on the market... the herd remains asleep... Soros type false marches and protests act as agents of chaos.... as the intel types run false flag ops in all active theatres using our mercanaries/aka terrorists to spread the control dynamic of fear... same on the markets... the duo dynamic of the teeter-totter... same pattern is found everywhere as the disequalibrium keeps increasing... not if but when... on all fronts...