This is an extract from Crispin Odey’s 2008 Annual Report. The hedge fund manager had an excellent year and is of the school that inflation is now the coming enemy – the only question being when and how long we take to get there. (It is my view too, for what it is worth).
“Keynes believed that economics was a polemical science. He made economics popular
and powerful because he abstracted ideas that in the workaday world looked sensible
and showed them to be dangerous if followed by everyone. Thus he changed the way
that policy makers and people thought. Has there been a better time to renew the
“Given that all of this is a long way away from being accepted we must reluctantly
conclude that the world economy is not yet in a recovery position. The recession only
started to get into its stride in September of last year. Most companies will have been
guilty of over-trading as they have sought to cover falls in orders by accepting any
orders. They will be finding themselves with customers going bust and inventory still
rising. Profit numbers will be dire. The only good news is that at some point the
survivors will be able to charge more for less, and margins will be higher on the other
side of this hill”.
“Current investments come about from the outstanding opportunities being opened up by
the pain from the falls in share prices that we have seen over the last year. This anguish
is sorely felt by us all but it is also the time to be investing. We have become big buyers
of the UK clearing banks. This reflects quite how cheap they are. The shares are trading
like options. After Northern Rock and Lehman Brothers, many are now convinced that
they will be nationalised. However, the government has realised that nothing is solved
by nationalising them, and in the UK’s case, that there is everything to be gained from
letting them live. In an election year who else has Brown got to blame?”
“Given that on
the other side of this disaster these banks can earn multiples of their current share price,
the risk/return is wrong. In many ways these purchases remind me of Marconi, when the
share price fell to 10p but the lack of covenants on the £4 billion bank loan meant that it
could not be bankrupted for four years. We made 450% on that trade. Hopefully these
banks will fare better and for longer. Given time and distance they will be fine”.
“This is because the markets have been giving misleading signals for some time. Wheat
is a typical example. There is barely any surplus supply over demand in wheat. Yet last
year farmers found themselves with rising input costs, thanks to the oil and fertilizer
price hikes, and then falling incomes with wheat prices that were some 60% off their
highs. They had one of their worst years ever. As a result this year plantings are way
down, farmers are distressed and in Brazil and Argentina facing droughts. The wheat
price is likely to soar”.
“All in all I expect that within 12 months government bond markets will go into a bear
market which may be long and protracted. The stockmarkets remain good value and
would prosper after some worries if inflation came back and my portfolio should do
quite well in that environment. However it remains hard work in the main”.