It has not been a good year for Crispin Odey, who as we reported one month ago, essentially bet it all on a “violent unwind” of the QE bubble. While we commiserate, so far Odey’s bet has not panned out and as Bloomberg reported, his main fund’s AUM has been cut nearly in half so far in 2016, down a whopping 43% in 2016. Still, Odey has not lost hope, and in the modern version of “after him, the flood”, the hedge fund manager predicts that the UK stock market could plunge 80%, as a result of the collapse in earnings, should multiples normalize, one the “guaranteed” recession strikes.
From his latest letter to investors:
These times are getting interesting. The FTSE 100 share index is now up 30% over five years, whilst earnings have fallen by 80%. On an earnings yield of 1.6%, the stock market could fall by 80% and, provided profits did not fall, would be on a 13x P/E multiple. The Bank of England is proud that they have engineered such a pleasant result but there is now increasing evidence that this is unsustainable.
On the back of the uncertainty for overseas investors in UK PLC following on from the Brexit result, the current account deficit is ballooning and the budget deficit is following. Carney, the Governor of the Bank of England, has responded by flooding the money markets with more cash, QE, and in the process supporting the government 10yr bond at a current yield of 1.2%. However, as sterling falls against all its trading partners’ currencies, it is mechanically ensuring that inflation rises up through 3.5%.
Traders have been buying into sterling weakness on the back of an 18% fall in the trade weighted index since the Brexit vote, but do they not understand that the further the pound falls, the greater the difference between next year’s inflation rise and today’s interest rates. Sterling is getting more expensive, the further it falls. Carney is really under pressure and should be raising interest rates, but it now looks as though a rise in interest rates will be over his metaphorical dead body.
We are now destined to have a recession in the UK as well as inflation. It will be difficult for the stock market to remain above all of this. What QE has done is to make investors complacent but also optimistic that only an upturn in economic activity, spelling higher profits could trigger upward interest rates. What the UK is promising is rising wages, recession, inflation and falling profits. Not exactly the prize that ticket holders in the FTSE and the gilt market have paid up for.
And for those wondering what his most recent top 10 holdings are, here is the answer.