Crispin Odey: No Recovery Until Consumers Unwind Debt

Crispin Odey, CIO, Founder of Odey Asset Management, in the UK, released his outlook for 2009 in his 2008 year-end letter to shareholders. Odey, a high profile hedge fund manager, and Hugh Hendry's (Eclectica AM) former mentor, made a fortune last year shorting UK banks, shares some of his insights and observations on last year and the coming year. Here is an excerpt from that letter:

"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, Japanā€™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 ā€œjust 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.ā€

"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 their 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".

Hat Tip: Jonathan Davis, Independent Investor

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