Crispin Odey’s Odey European Inc Fund, which consists of the OEI, OEI Mac, and Odey Swan funds had yet another terrible month during August.

For August 2016 the fund returned -8.1%, against the MSCI Daily TR Net Europe (EUR) return of +0.7%. Year-to-date the fund is now down by 34.9% and over the past 12 months, the fund has lost 38.5%. Over the previous five years, the fund is down by 8.2% underperforming its benchmark by 72.1%.

After currency hedging, the short equity book made a negative contribution for the month of -4.1% and the long equity book made a negative contribution after currency hedging of -1.1%. The fund’s active currency exposure made a positive contribution of +0.2%, the majority of which came from the GBP/USD position. Elsewhere, government bonds returned -0.1% and commodities returned -3.0%, most of which was attributable to gold futures, according to a letter to investors reviewed by ValueWalk. The hedge fund had a profit on a short position in Elon Musk’s Tesla Motors (TSLA) joining a chorus of investors short the firm.

More from Crispin Odey:

As you can see from the charts below (click to enlarge) the fund is overwhelmingly short UK and US equities with around 80% of its net asset value short Consumer Discretionary and Financials. Also, the fund is short the Hong Kong dollar and long US dollar. Odey remains long gold futures with 100% notional exposure.

Odey still hates central banks


Odey still hates central banks

Odey tries to regain some composure and explain his hefty losses this year in the ‘Managers Report’ section of the Odey Europe monthly tear sheet. In the report, Odey blames central bank failures for the world’s current situation, and opines that central bank policy is no longer proving effective, it is only damaging the world’s economy. “When will central banks realise that monetary policy which holds up asset prices whilst growth disappears actually exacerbates the divide between the Haves, who own the assets, and the Have-nots, who are losing their jobs?” He asks.

Also see Q2 2016 hedge fund letters

Odey blames the Fed for his disastrous performance. Specifically, he states:

“It is always dangerous to fight the Fed and that is what we have been doing this year. The world economic growth continues to disappoint despite the benefit of lower energy costs. Corporate earnings in most parts of the world have continued to fall and now the USA is experiencing falling earnings. My thinking this year was that stock markets would follow earnings. What we did not expect was that markets would re-rate massively into an earnings downturn. Moreover, it still seems to be a re-rating which is not supported by hopes that earning will soon recover but only by the monetising undertaken by central banks. The quest for yield explains 100% of this year’s performance. Quite apart from the pain that this policy is bringing to pension funds, insurance companies and banks, it has ensured that individuals have been buyers of dividend streams which are not underwritten by earnings streams. There is nothing sustainable about the current status quo.”

He then goes on to warn that the UK economy is heading for trouble next year:

“Already we have seen, since the crisis of ’09, central banks expand cash in the system by around 700%, so that cash now is closer to 100% of GNP up from 13% of GNP, when things were normal. No one will ultimately trust Fiat money again, but the fact they have gone so far, means that there is no way back for these guys. We saw that, in the UK, Carney’s reaction to a Brexit result, which immediately took 10% off the trade weighted value of sterling and was the equivalent of a massive monetary expansion anyway, was to lower rates and increase QE. All assets responded to the Bubble machine. But next year will be a different one for the UK economy. The balance of payments could show a 10% current account deficit. Inflation could easily be 4%, or if not, real wages will take the equivalent hit. Investment uncertainty will take its toll. Fiat money may meet its nemesis then. Since it is the central banks who are responsible for the bub-bles, it is no surprise that the epicentre of the bubbles lies in the sovereign bond markets. After all, $14 trillion of govern-ment bonds now have a negative yield up to 10 years. Whilst world GNP stands at around $75 trillion, M2 now stands a close to $83 trillion, the stock markets are close to $75 trillion, bank lending somewhere in the $140 trillion range and gov-ernment bonds at around $40 trillion. No one is spared. The bulls on equities argue that sentiment remains negative even as stock markets hit new highs. However, we worry that earnings and prices are going in different directions. Take the UK equity market. Since 2011 the earnings for the FTSE 100 companies have fallen from 500 to 119 currently or nearly 80%, whilst the stock market has risen by around 10%. That would be okay if we were at the beginning of an upcycle but indications point to a peaking in demand for most production. This peaking is coinciding with new capacity coming on stream. No wonder sentiment is a little off colour.

And warns that central bank policies are pushing saves into products that will untimely result in the total loss of capital:

“Investors are being driven to invest further and further from home. Keynes wrote in the thirties that “people should travel, goods should travel but savings should never travel.” I never understood that remark until now. The developed world has always had a surplus of savings because on the whole capital is protected and labour is not. In the developing world they are always chronically short of capital because labour is protected and capital not. Sadly savings, thanks to QE, are going into a place where the odds of their survival are slim. Who is responsible for these irresponsible policies?”

Finally, Odey proclaims that it’s time to start selling insurers:

“It would certainly be simpler to follow the market. But then we would be ignoring the fundamental data. At present, we are selling insurance shares. Interest rates can hardly go any lower. The credit cycle and with it, economic growth, will be more difficult and all asset classes are simply overvalued. At the same time, the insurance industry lacks capital, and the financial regulators would like to see more of it. In the boom years, the dividends paid out were too high. At present, we would only pay 0.5 of book value for insurance companies. However, in reality, the book value is about 2.5. We are not very enthusiastic either about Swiss watchmaker Swatch, or Video-on-Demand operator Netflix.”