Crispin Odey’s thoughts on 2009

The hedge fund manager Crispin Odey, whose public thoughts I have been tracking since 2000, had a spectacular year last year. Thanks to a remarkably good month in December, his Continental European fund ended the year up almost as much as his benchmark was down (plus 42% vs minus 46%). This was one hedge fund manager who certainly earned his fees and added rather than subtracted from the reputation of his profession.

To do so well in a year when almost every asset class bar gold and Government bonds fell in value meant inevitably that he profited from being very down on the markets in general and smart enough to exploit the opportunities he identified within those markets to the full. Here is an extract from his latest fund report.

“2008 was a difficult year. As our shareholders remarked, it was not the year of the rat for nothing. If something could go wrong it did go wrong. No asset class rose but some currencies fell. Stock markets on average fell by 50% in US dollars. Commodities fell by 70% from their highs in June, admittedly after rising by 30% in the first five months. Hedge funds saw on average redemptions of 40%”.

“Whatever they might still say all clients started to view cash as their benchmark. Noted individuals were badly caught out. Joe Lewis, a legendary currency trader, lost a billion dollars in Bear Stearns. Kirk Kerkorian famously declared that he should have died a year ago and he would have saved both his fortune and his reputation”.

“So what does 2009 promise? Firstly it has to be said that governments, institutions and regulators have been slow to understand the credit cycle. At each turn they have believed that it was not part of anything greater. What was nothing more than a problem in the interbank market became a lending problem for the major banks and in September caused a slump in the economic activity worldwide”.

“The numbers are now so bad that they are not worth repeating. In January 2009, Japan’s exports were down 40% year on year. A combination of not understanding the credit cycle and no interest in history has served our leaders poorly. As John Train recently remarked “just as Keynes said that leaders thinking they were acting in good sense were in fact slaves to some defunct economist, so today these politicians have been slaves to Keynes.”

“Even if they could find solutions to the problems we have, we cannot now escape the most
painful recession post-war. However, there is also no consensus over the solution
necessary. What is true is that politicians will not stand by whilst unemployment rises and
activity dwindles and that is precisely the outlook we face with current policies. Current
policies are helping to contain the worst effects”.

But his main point is that there will no recovery until consumers start to unwind thier indebtedness, which is going to take time and pain. “There will be a rise in prices in those countries that have devalued, despite current widespread belief to the contrary, which will be felt when companies re-order. We may be in recession in the UK, but a 25% fall in our currency will result in a 10% rise in prices at some point. It is the fact that no economy is remotely in the recovery position which makes me still quite depressed for this year. I am happy to buy when faced with irrational fear, but the fear that I see around me today appears reasonably rational”.

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