After earlier in the year exposing "the greatest shorting opportunity since 2007-2009" [11]and trading it profitably through September with "front row seats to an imminent market shock," [12] Billionaire Crispin Odey's flagshipfund has suffered recently. As Bloomberg reports, [13] the fund plunged 16.8% in the first 16 days of October, after the fund profited in August and September from Odey’s negative view of the Chinese economy. Odey believes that the only way economies will be able to work their way through the next downturn is by writing off capacity. Therefore, with credit tightening as well, according to Odey, it’s a good time to be short...
As Bloomberg details, [13]it's been a tough month...
The loss by Odey European, a $1.4 billion fund betting on rises and declines in stocks, brings the drop for the year through Oct. 16 to 17.4 percent, said the person, who asked not to be identified because the information is private. The fund profited in August and September from Odey’s negative view of the Chinese economy.
A 7.6 percent increase in September cut the fund’s 2015 loss to 0.7 percent, said the person. Odey European posted a record monthly loss of 19 percent in April -- described as “bloody” by Odey in an investor letter -- before recovering in the following five months.
Short positions, or bets that shares will fall, against five companies -- ArcelorMittal, Las Vegas Sands Corp, Anglo American Plc, Volkswagen AG and Sands China Ltd. -- were the strategy’s five most profitable positions last month, according to an investor letter.
Odey, 56, founded Odey Asset Management, which has about $11 billion in assets, in 1991, according to its website. The firm’s Odey European strategy rose 5.5 percent last year and 26 percent in 2013.
But, as excerpted from Odey's letter to investors, Odenyt remains negative on China and questions central bankers' ability to save the world this time...
On China
Crispin Odey went on to talk about the state of China’s economy in his September letter to investors. Odey concludes that China is only getting worse, and the country’s deteriorating economic situation has changed investor sentiment for the worse:
“Something has happened between last year and this, to convince those who are brave enough to catch falling knives, that something had changed for the worst.
For me that something is China. China’s problems are going global. The authorities will not be able to solve their four bubbles – in housing, the bank lending market, the stock market and their own currency – with current policies. This is a $29 trillion problem area and current policies can only exacerbate overproduction and further price falls in anything connected with Chinese output. Ultimately the currency will have to fall and by at least 30%.But China is only following a version of QE which is being played out by others. Their version is unusual because their QE is not attended by immediate currency devaluation. However QE is now a force for deflation. Whilst the spigot of credit remains open, capacity in all industries remains, and prices of products and profits fall. Equally zero interest rates after five years has meant that a zero cost of capital is also undermining technology companies as new competition is free to spring from nowhere.”
On the next recession
Odey notes that major scams, like the Volkswagen emissions scandal, Petrobras scandal, and Valeant pricing issue only come to light only happen in bear markets. This leads him to conclude that we’re heading into a major crisis.
With interest rates already at their lowest levels in decades, Odey believes that the only way economies will be able to work their way through the next downturn is by writing off capacity. With credit tightening as well, according to Odey, it’s a good time to be short, although, after a rough start to the year, Odey’s stance on risk management is notable:
“Bad things happen in bear markets. The Volkswagen saga, which has only just begun in terms of repercussions, only happened as car sales globally have peaked. The Petrobras scandal could only come to light once the oil price had halved. The Valeant pricing and Enron-like behaviour could only happen in a world which is suddenly looking for price gougers.
In the world that we are going into, only those companies that are offering more choice and greater value for money can prosper but the headwinds will be great.
Whereas the crisis in 2007/8 was solved by low interest rates ultimately, this downturn will only be solved by capacity getting written off. That is still somewhere far away, but watch corporate credit spreads reveal that there is a credit tightening taking place, which is wholly not what the central banks want to happen.
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As Odey previously concluded, it is unclear at this point what central banks could do to prevent a crash.
"I find it intriguing that we are so dependent on these central banks who are expected to do great things and yet what can they do? They start with interest rates pretty well at zero."
He believes the US Federal Reserve will be motivated to begin the tightening cycle.
"You're going to be very tempted to raise interest rates simply because you want to normalise," he said. "There is a sense in which these guys are longing to try and stop some of this activity taking place as well as getting the situation back to some kind of normalcy.
"My view is hey look, if they do raise interest rates, I don't even need it to happen but I do think that will put a bit of pressure on the sharemarket as well... Everything points to it being a bubble. You can never know the height of a bubble but by the time it gets to here you haven't got much time."
...
"For me, what I find very interesting is given the risk of recession, how is it the West stockmarket can be hitting all-time highs? History tends to be not very generous in this regard. If you get a recession in a low inflation environment it tends to impact the ratings of stocks dramatically."
It was akin to "watching the markets take drunken bow after drunken bow".
"It's amazing that nobody else is on the same page."
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.
