2016 has been a difficult year for investors in Crispin Odey’s $1.5 billion OEI MAC fund, and July only compounded the pain. Down -4.1% on the month, the fund is negative by -29.9% year to date. Short stock exposure and currency bets hurt performance in July while longs, government bonds and commodity bets, primarily in gold, helped boost returns, according to a July investor letter reviewed by ValueWalk.
Odey significantly more short than long
Odey is operating a dramatically short long / short ratio at present: 84.1% long and a whopping 163.1% of assets short.
On the month, the short side of the portfolio was helped by the likes of Tullow Oil (+129bps), Swatch Group (+76bps) and Statoil (+32bps), but hurt when shorted stocks moved higher, including ArcelorMittal (-98bps), Ashmore Group (-60bps) and Las Vegas Sands (-56bps). Overall the short equity book after currency hedging subtracted -8.7% from overall performance.
The long end of the portfolio, a much lower exposure level than the shorts, contributed 2.3% to the positive in July. The most significant contributors were (+57bps), Sibanye Gold (+35bps) and Dai-Ichi Life (+27bps).
Problems with currencies
Odey looks over this month’s performance, currencies stand out as a loser. The Hong Kong dollar was among the fund’s largest currency exposures, followed by short exposure in the Australian dollar, British pound, Saudi riyal and euro. It was the AUD/USD currency pair that was most negative.
The Hong Kong dollar, which started out the month strong against the euro, has since fallen back and is mired in a week algorithmic momentum pattern. Likewise the Australian dollar has experienced indecisive momentum patterns. Odey, for his part, looks at currencies from the standpoint of central bank intervention:
If we are at the limits of QE and financial repression, central banks, in the developed world, are at least doing a very good job at printing money. Every chance is taken to push some money printing through. Carney was quick to take advantage of Brexit to keep up with his fellow central bankers.
Gold a particular winner for Odey, who doesn’t like fiat currencies
Commodities proved to be a winner for Odey, with gold being responsible for much of the 2.2% overall gain. “There are some signs of exhaustion in the demand for gold and silver at present,” he noted, pointing to fundamentals. On a separate level, the algorithmic patterns for gold are now looking decidedly mixed if not muddled.
Like a many gold investors, Odey reveals his distaste for a currency whose supply can be expanded at will, a trait that is the norm today among fiat money:
And this is where gold comes in. Gold was the original currency. It came out of distrust of governments and was chosen because it could not be manufactured at will. Today there are around 300,000 tons of gold extant and each year around 2,700 tons are mined, or less than 1% of the stock of gold. In August of 1971, France bought down Bretton Woods by demanding that the USA support every dollar of credit with a dollar of gold (at the then exchange rate of $35 per ounce). Because the USA had been running a current account deficit since 1963 to fight the Vietnam War, gold reserves only represented 26% of dollars outstanding. Sic finit Bretton Woods.
When the US was on the gold standard, it was the French who complained about manipulation. Where is this complaint in modern times?
Today, world GNP stands at $75 trillion and world money supply stands at around $83 trillion – some ten times its level at the start of the millennium. Gold has a value less than $7.5 trillion, of which 57% is for jewellery, 22% is invested and only 17% is held by central banks. So central banks have printed over $80 trillion of money, backed by only $1.27 trillion of gold. The French took fright when they discovered that the USA had been fiddling the books in 1971. But in those days the US gold reserves were only valued at $35 per ounce and still represented 26% of outstanding dollars. Today at $1360 per ounce reserves represent a measly 1.5%. Where are the French this time?
And then Odey makes his final pitch for gold. In a world gone mad with negative interest rates, one where Trump and Podemos must be addressed with policies that actually listen to their concerns, Odey makes his gold pitch:
Today, world GNP stands at $75 trillion and world money supply stands at around $83 trillion – some ten times its level at the start of the millennium. Gold has a value less than $7.5 trillion, of which 57% is for jewellery, 22% is invested and only 17% is held by central banks.
So central banks have printed over $80 trillion of money, backed by only $1.27 trillion of gold. The French took fright when they discov- ered that the USA had been fiddling the books in 1971. But in those days the US gold reserves were only valued at $35 per ounce and still represented 26% of outstanding dollars. Today at $1360 per ounce reserves represent a measly 1.5%. Where are the French this time?
They are, along with all of us, hoping that globalisation, bringing competition to bear across the world, continues to overcome the political reaction to the pain it has caused. If it fails, and it looks like it is failing, then Brexit and Trump will bring back inflation like the wind.
In a world where $13 trillion of bonds are negative yielding, where $4 trillion of investments are in ETF’s, is it wise that only $1.5 trillion of savings are invested to protect investors against a change in the weather?