The turbulence in Crispin Odey’s performance continued in March, with the OEI Mac hedge fund run by England’s wealthiest individual losing -3.9% on the month, bringing the year-over-year performance to -33.7%. In today’s market environment, Crispin Odey, in a letter to investors reviewed by ValueWalk, said it feels “lonely” to be bearish.

Crispin Odey oei mac hedge fund
Crispin Odey oei mac hedge fund

Which is more volatility: the rise and fall in the price of oil or Odey’s performance?

In some respects, the OEI Mac hedge fund performance, with nearly $800 million under management in the strategy, resembles the price of oil: a massive run-up in value followed by a period of giving up all the hedge fund’s gains.  While the timeframes are slightly different – oil peaked in 2008 after running up from near $27 to $143, just about the time OEI Mac performance run was starting – the rise and fall and resulting price volatility has been historic.

After reaching a peak of delivering nearly 1,400% gains to investors, around 2015 the slide began and the fund has given back nearly half its gains. That also correlates to the time when Odey was exceedingly negative as the stock markets – particularly in the US – witnessed strong gains.

In the March letter Crispin Odey has not changed his outlook. One day he will be proven correct and will return to his former glory. The question is when?

oei mac hedge fund
oei mac hedge fund

Crispin Odey oei mac hedge fund – When will the world fall apart so I don’t feel as lonely?

In Odey’s Manager’s Report, he notes the falling apart of the Trump trade, an isolationist US foreign policy that “retreated into an aggressive foreign policy which is almost the opposite to the Monroe doctrine which he was adopting earlier,” and lack of promised tax cuts and a US economy “succumbing to an overvalued dollar” amid “a growing crisis” in auto subprime lending.

What Odey sees is disarray as he predicts the US Federal Reserve will not raise interest rates any more in 2017 as he engages in humorous parody.

“We are now just waiting for the Fed to set up a lending business, loaning 5 year old cars to people who can neither drive nor borrow,” the central bank critic wrote. “That is what they need to do to stop the subprime losses ballooning.”

 

While some have dismissed the negative potential of auto subprime to derail the economy, Odey sees it differently:

With the subprime problem emerging in the used car market, remember that this is nothing but a can (car) kicked down the track some years ago. In 2012, with the compliance of the Fed, leases on cars were extended from 3 years to 5 years with a residual value of 20% of the new at the end of the 5 years seeming reasonable given that cars last 10 years. The result was a 30% increase in demand for new cars on the back of a 30% decline in cash costs. Five years later, with subprime in the USA some 2.3x larger than it was in 2008/9, these second hand cars are not attracting bids at or above the residual prices built into the leases. At present, prices are just 7½% below the expected price. Dangerous but not critical. What frightens everyone is who is going to buy so many second hand cars for cash over the next few years? A change to the new leasing price now needs to be made. Just when sales have already been weakening.

Odey has some shorts in a related sector. He states:

Several of our favourite shorts have shown a tremendous appetite for scrip. Intu Proper- ties, the largest shopping mall owners in the UK are valued at £8bn EV, not surprisingly when they received £447m in net rent and £408m in EBITDA in 2016. They paid out £240m on interest and hedging costs (year end LTV of 44%), needed to spend £121m in capex to keep the tenants happy and so shareholders got £183 million in dividend of  which £29m was in scrip (£73m in scrip the year before). The problem with scrip is people are starting to find that it is not worth the paper it is written on. Intu this year say they will spend not £121m but £297m to keep tenants happy. In a world where scrip is no longer bein appreciated that leaves a £300m shortfall after £230m interest payable, capex and dividend. Whoops!

Odey looks at China, the assumed savior of the world economy, and notes that its debt creation isn’t working to create correlated market demand.

Even though China engaged in a binge of encouraging borrowing, “pumping in 40% of GNP in new lending,” the economy only nominally grew by 7.5% as the auto market actually weakened by -2.5%.

“The chances have to be high that we have just witnessed a giant rally in a bear market for commodities,” he predicted, looking around for a savior. “Where is Trump’s massive infrastructure boom?”

The Great Reflation trade and central bank bubbles are all that is left, he says:

Whilst undoubtedly bonds were in bubble territory last year as evidenced by the fact that the only way a buyer could possibly make money was by selling the loss making asset to a bigger fool, the equity market did become compliant in the game. Companies learnt to pay out dividends with borrowed money and became very adept at using shares as dividends – so called scrip. Very popular with corporates.

The market needs a catalyst or it will finally end the 8 years plus bull market.  “Without the fireworks, equity markets feel vulnerable,” Odey wrote. He feels a little isolated, as well:

A year ago it was easy to be bearish. China was slowing, world trade was creaking, Europe was not recovering and the oil price was hitting new lows. A year later to be bearish feels lonely, despite the fact that the reflationary story of the past year looks difficult to sustain and auto loan lending has joined a long list of risks along with Trump and Brexit. Money creation alone has taken markets to all-time highs but what strong arms take, strong arms must defend. Valuations demand that they do.

SJJP / Pixabay

Crispin Odey feels lonely and isolated. Nothing like a good market crash to cheer him up.