Crispin Odey: "The West Will Become Flooded With Inflation"

Some interesting observations from the transcript of Crispin Odey's Q1 2011 conference call. In a nutshell: inflationary re-exports from the developing world back into the developed is about to make life for chairprinters a living hell.

In our scenario, we do not see interest rates going from 0.5% to 3%. We see interest rates staying very low but when they do actually start to move up through to 6%/7% and even when they get to 7%, basically finding that that is hardly where they are going to stop, they are actually probably on their way higher still. Our question there is obviously if interest rates go from 0% to 7% there are lots of assets which suddenly become speculations and that means that we have to be worried for your portfolio during that period and the whole question is, how can you insulate yourself against that?


So what have we been having over the last couple of years and where are we now? Well the answer is on page 13, of course these numbers are in part exaggerated; wage growth in the UK does appear to be picking up a little bit more than I am showing here but the essence of everything is really what is important. What you can see is that whilst we have an uncompetitive first world, the good news is that because the emerging markets are pegged to the US dollar currency, they have not been able to push up interest rates to offset the wage inflation that they have been experiencing and essentially wage inflation of 20% has been pretty well the norm across most emerging markets and average interest rates have  been around about 5% in these countries so we are nowhere close to slowing things down.


Then the question only is when you get to a position where the West is competitive, we are not going to continue to see wage growth of 1.8% or 1%, because the fact is we are building up this sense in which we are way behind the line in terms of keeping up the cost of living so we anticipate, whether it is 2012 or whether it is 2013, that we will not see a 1% rise, we will see a 8% rise and if we see a 8% rise, 75% of that will come through straight back into inflation. So our forecast is that inflation, far from being 5% at the end of that, it will be at 11%. Which means at that moment interest rates have to rise because that is the moment that the central banks have got that mandate. If interest rates rise from 0% to 7%, you can be sure that at round about 35% to 40% of that rise will make its way again through to inflation.


So our cry is that you move into a very different kind of cost cut inflation coming through in which essentially the central bank remains behind the curve even if they are raising interestrates which themselves are much higher, the rises are much steeper and faster than people anticipate but I think that is the shock bit and that is why I hope with all of you, I spend my life worrying about that bit, not really about where we are now but about that and making sure that we have got the right franchises.


What you have got to keep on remembering is that actually there is a convergence going on here but there is a benefit to the West from the fact that inflation is taking place, the fact is we do end up with much more competitive western economies, albeit at the same time they will become flooded with inflation.

The chairman disagrees with the premise of this argument.

Full transcript:

Crispin Odey's Transcript Q1-11

h/t Bob