Crispin Odey “Can Feel It” Market Is About To Turn; “Gold is one of the few things you should own”

Looking at what he describes as a “horrible” 2016, Crispin Odey, down over 49% the OEI MAC fund, the traditionally bearish UK-based hedge fund manager had a message of hope. Speaking to Investors January 17, a recording of which was obtained by ValueWalk, Odey said hedge fund investors ship is coming in, the market environment is changing. He can feel it.

2016 Hedge Fund Letters

Odey: Don’t expect interest rates to rise too high with government debt where it is

After a global financial crisis and central bank financial gymnastics on a historic level, the world is at a crossroads in some respects similar to 1994. In 2017, however, inflation is likely to emerge and central bankers are going to find their hands tied, Odey told investors in the nearly one-hour presentation.

Interest rates cannot rise as much as expected due to government debt levels, Odey noted, pointing to a paradox. This comes in a world where quantitative easing (QE) has been blasted into an economy where productivity and wage growth have both flat lined.

After QE, productivity moved down to zero, he said, noting the “political system gets restless when productivity is near zero.”

Stocks rise higher as forward earnings multiples decline, not a good sign

Much of the bets in the stock market are on the prospect of higher earnings multiples, but an oddity is taking place. As earnings growth expectations have faltered, stock prices have been rising. Odey likes a world where earnings grow but the stock price stays the same, providing value investing opportunity. What this is a world where earnings expectations fall and the stock prices increase, a world going “against nature,” one in which he is “uncomfortable.”

The world has moved from cautious to excited, and this irrational exuberance is concerning. Expectations already priced into the market regarding fiscal stimulus. However, If the government increases spending activity, will they only raise inflation and produce short-term gains? Without the underlying issues being addressed from the global financial crisis, this could be the case.

A Wounded Crispin Odey Sticks To Super Bearish Bets

Central banks pulling markets to sleep

“Central banks have been mollycoddling us all,” he says, noting that such debasement doesn’t change core behavior for the better.

Noting that he “missed China,” the hedge fund billionaire and one-time wealthiest UK resident wonders if the rising US dollar is going to cause market problems but at the same time saying that “Trump arguments one year out of date.”

“This is not a Reagan moment,” he said. Leading up to the reign of US President Ronald Reagan, there was significant inflation and debt had been monetized. The current environment is entirely different as the stock market “isn’t responding to anything.”

Markets are expecting a profit boom, but the world is going to get a wage boom, which is very different

In fact, the economy is becoming less competitive, he says, with the UK government becoming “dependent on kindness of strangers to buy bonds.” This could be tough during the next three months as Odey expects inflation “to push through the entire world.”

It is a push / pull, yin / yang world. “Markets are expecting a profit boom, but politicians are saying a wage boom is occurring,” he said. This dichotomy is important because wage booms – what is good for the majority of people — often diminish corporate profits, he said.

What should investors do in this environment? “Gold is one of the few things you should own,” particularly as multiples tend to fall.

Odey: China Bank Loans = Spain 2007

Companies with rising profits and static stock prices are where value is found

He also likes companies where there is a low correlation between earnings growth and share price, one where value can be had. In this regards he likes the stocks such as SLC Agricola, which is trading at a lower multiple to piers in a business model he likes.  He also likes Pendragon, one of the largest automotive retailers in the UK.

Odey thinks oil futures have reached a top, judging in part based on the tight dispersion with the outer futures time horizon and the near expiration contract.

While the discussion of dreary past performance was brief, the problem was not only shorts – they were down -30.6% on the year — but it was longs that also hurt the fund during a rising market environment, down 10.4% on the year.

All hedge funds did not sustain as big of losses as OIE MAC, which was down 17.9% in the fourth quarter. The fund manager’s long-only funds delivered performance on the quarter: Opus (£) +4.02%, Odey Allegra International (€) +6.6% and Odey Pan European (€R) +2.9%.