A hedge fund manager telling investors about continual losses is never easy. For Crispin Odey , down another -5.73% as of the close of November and off more than -40% heading into the end of the year, this year in particular might be painful. Speaking to his investor based filled with elite UK individuals and other high net worth investors, many of whom might be wondering when to exit the investment train that appears to have no breaks, Odey appeared stressed but put on a stiff upper lip. In a recording of his third quarter investment conference call reviewed by ValueWalk, the UK’s wealthiest individual reviewed the market panoply and attempted to explain his position in a world where corporate earnings are dropping but stock prices are rising.

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Crispin Odey

Odey: “It hasn’t been easy… but you find me in good heart”

“It hasn’t been an easy quarter,” he told investors. “But you find me in good heart, actually.”  Calling his hedge fund’s performance “not good,” his fund engaged in a major short equity position that has been suffering as stocks have continued to rise, pointed to corporate earnings, which are starting to decline.

The problem with the short position is “the story has not been about earnings.” In presentation slides he notes that “the UK market hasn’t taken any notice of (earnings per share) have been falling 80%.”

With the UK stock market up by 30% in the face of an 8% drop in earnings, Odey expresses concern that what drives the market isn’t generally understood. “Hey, look. It’s not QE,” he said. “If it’s not QE and it’s not earnings that are driving this market.”

The earnings issue is not just gripping the UK market, where mining concerns are a significant component of performance. Pointing to the MSCI Europe Price Index, it, too, has been rising in the face of falling earnings.

Odey: How can stocks rise with earnings falling? QE and loan expansion is not working

Earnings are falling but stock prices are rising? Is the world going mad? In an attempt to explain the problem, Odey considers the negative interest rate world around him.

Saying that central bank quantitative easing has driven the stock market higher recently, Odey reaches back on a familiar theme. “The stock market has been driven not by earnings, but by QE the last four years.” The problem is that “monetary creation, QE is basically not working.” This is part of a global puzzle where “monetary policy and QE are being challenged for the first time,” pointing to UK political leaders being critical of QE, which is being painted as “an enemy of the people.” In the US QE has been called “trickle down economics in drag.”

Odey, calling UK central bank leader Mark Carney a “madman in the basement,” mentioned the potential for currency debasement and joked that Carney might find himself back in his native Canada shortly.

Odey: Chinese are leading the world in using monetary and fiscal stimulus

Looking at the Chinese economy, Odey notes the economically contentious point that “there is no connection between lending and growth in the economy.” The cornerstone of how quantitative easing is expected to work in theory is that lower interest rates lead to increased lending which boosts the economy. Odey is saying that interest rates can be lowered only so far before they no longer have a positive impact.

There is a connection between bank profitability, insurance profitability and bank profitability,” he said, noting that all are hurt during QE. “There is even a connection with corporate profitability in that it falls on QE. But asset prices luckily go up. So we are all fine.”

Unique in China is not just monetary stimulus, but also how they are combining it with fiscal stimulus — preceding the western world in the experiment. Tier one cities have benefited in China, while tier two cities have not, he said, with the biggest impact seen in the currency.

“When monetary and fiscal stimulus is combined, something has to give,” Odey noted as he pointed to the Chinese currency as a fall out point, a hot topic in both economic and political circles. Odey said China was very careful around its inclusion in the IMF’s SDR currency basket but with that over it is now considering how it can be more competitive economically, which is taking place through a weaker currency.