In February, Cripsin Odey's quite bearish $11 billion Odey Asset Management had a tumultuous month: it was down -10.6% as the overall market levitated relentlessly on low volume hopes of central bank stimulus and intervention ever since the February 11 lows, leading to the biggest short squeeze in history and the most overbought market ever.
However, as Crispin himself would go on to admit, February's 11% drop was just an appetizer. Because what happened in March, when Crispin went on to not only fight the Fed but declare war on every single central bank, was unprecedented. In his own words "by mid-March the fund was rising and falling by over 5% per day. At which point this was no longer an investment market but a battlefield."
Does he regret it? Not at all - Odey is convinced these desperate central bank interventions are just a confirmation that they have run out of ammo, and for the most part, he is absolutely spot on:
Central banks can ignore the CDS market, but they cannot imagine away the losses coming through the system. They cannot save the banks now, without creating a recession, with all the consequences that has for bad loans and falls in GNP. The fall in productivity is already encouraging companies to eschew capital spending in favour of buy backs, which compounds the problem of credit growing faster than the economy. Profit margins are naturally falling as wages rise faster than prices and overcapacity rules out pricing power. No wonder that central banks feel that they are nearly out of ammunition. There is not a good choice to be made.
For now their choice has been to save preserve the markets, as the next crash in stocks may well be the last before the Fed and its central planning peers have no choice but to unleash the helicopter money.
In the meantime, we eagerly look forward to observing Odey's valiant daily fight with Yellen et al, armed with the following top 10 positions...
... resulting in a net exposure of just about -110% net.
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Here are his latest monthly thoughts:
Bull markets do not die of old age. They are murdered by central banks. How far away we are from that old adage. The last six weeks have seen yet again central banks responding to further weakness in the world economy, by lowering or at least not raising interest rates and continuing to subsidise the weakest. Wherever they see any sign of distress as with the CDS market in Europe, their response is to believe that risk premiums are unfairly rising and immediately to take action to cancel the effect.
However, several years of watching central banks responding to ever falling productivity numbers by reducing interest rates have shown that they can effect asset prices with their actions, but that not only do they have almost no effect on economic activity, but they positively damage it.
The reason is simple. Banks work, like everyone else, off profit margins and the lower and longer interest rates remain close to zero, the more that net interest margins shrink and the less inclined, because profits are falling, are they to countenance new lending.
Without credit expansion there can be no strong nominal growth of GNP globally. Strangely even where there is strong credit growth, nominal incomes have responded sluggishly. For this is the good news. Over the last twelve months there have been 20% more dollars created in relation to GNP in the USA than a year ago. In China there have been over 30% more renminbi created. This should have resulted in blow out growth of nominal incomes, but in fact GNP in the USA has grown by 4.5% and in China by just under 7%. In both instances private indebtedness has grown by multiples of that. That a 20% increase in dollars has only resulted in inflation of 2.1%, reveals that strange things are happening. It has not just been worrying us here, but also seems to have unnerved the Fed. On all our numbers such credit growth would have resulted in over 5 or 6 interest rate hikes by this time in the cycle.
What frightens them and should frighten us all is that the overcapacity built up post 2008/9 in so many industries linked with China is now coming through in a severe credit down cycle. An unwillingness to countenance closure of capacity, even as new capacity was still being added, in the face of prices that were far below fair value, have ensured these industries have ongoing losses which are still not abating. And this is where it gets interesting, because these losses are undermining the loans that these industries have. As bonds due for redemption trade below par, companies are drawing down credit lines, which would usually be the signal that bankruptcies would follow. However, because of the very weak profitability of the banking sector, these banks are not able to absorb these losses. As they wait, their loan becomes the cash to pay back the bonds and their losses expand. Banks now need rights issues but the central banks’ attention remains on trying to lower rates to reflect falling productivity. There is thus no story to attach to a rights issue for a bank. The only way that the banks would be a buy is if interest rates were to go up, repricing assets relative to deposits, but that can never be because down that route lies recession. And strangely recessions are no longer permitted. However, negative productivity rates are already telling the central banks that any growth in nominal GNP is the equivalent of eating your capital.
Central banks can ignore the CDS market, but they cannot imagine away the losses coming through the system. They cannot save the banks now, without creating a recession, with all the consequences that has for bad loans and falls in GNP. The fall in productivity is already encouraging companies to eschew capital spending in favour of buy backs, which compounds the problem of credit growing faster than the economy. Profit margins are naturally falling as wages rise faster than prices and overcapacity rules out pricing power. No wonder that central banks feel that they are nearly out of ammunition. There is not a good choice to be made.
Markets need equilibrium to prosper. When the authorities have a problem, markets have a problem. We have been hurt by this rally in China-related companies, and indeed we reduced the gross and net positioning of the fund significantly in mid-March, to help reduce the short term volatility of the fund, but we remain convinced that China is in many ways in an even greater bind over policy than the developed world. By mid-March the fund was rising and falling by over 5% per day. At which point this was no longer an investment market but a battlefield. On the day that Draghi came out with his massive market support operation, the stock markets rose 2.5% and then closed down 1.5% on their lows. Imagine how painful it was to see the markets bounce the next day and celebrate his success. At that point I reduced the short book by a third and the long book by 10%.
Despite this strong rally, there is, aside from a pickup in government spending in China, little to support growth in the world economy. Everything from rising default rates in the booming auto financing industry to new lows in LNG, dry bulk shipping prices, points to slowdown everywhere.
For equity markets, a world without credit is for now a deflationary world. The underperformance of the banking, insurance and asset management industry warn that this is when equities can de-rate as the Japanese stock market did between ’96 and ’98.