The markets have almost reached Crispin Odey’s promised land, says the fund manager who has been waiting for a crash. As one of England’s wealthiest men looks “uncomfortably” at the stock market since the Trump election, he sees “the walk of a drunken man.” In the Odey International Fund June letter to investors, Odey looks at forgotten business cycles, falling corporate sales amid rising stock prices and central banks working in reverse.

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Odey: Auto industry in recession, Apple Computer stock is rising on P/E multiple expansion

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June’s loss in the Odey International Fund, down -0.39%, was encouraging from at least one perspective. While the fund’s benchmark, the MSCI World Index Daily Total Return fund was up a slight 002% on the month, Odey’s monthly loss was at least less than those occurred in February, March and April, which total to a -6.18% year to date.

With a portfolio generally short equities and government bonds, significantly long foreign exchange and a slight long tilt in the commodity portfolio, Odey looks at a forgotten business cycle that is topping.

“The auto industry is already going into a recession. Inventories are 30% too high because sales have fallen by 10% from where they were,” with Europe being a rare exception experiencing rising sales.

But it is not just the auto industry where there are anomalies.

To bolster his peak claim, Odey International looks at the stock of Apple Computer. Just before the US Presidential election, the stock traded near 109 and now is up close to 40 points, up near 36% in nearly nine months. The problem, Odey notes, is that Apple profits peaked in 2015. What moved higher was the price/earnings multiple, which is in anticipation of future profits higher than the past.

“Everything is riding on the 8x iPhone but if that replacement cycle proves weak this autumn, watch out! ” he says.

With business cycles "forgotten," Odey International Fund sees "the walk of a drunken man"

The market panoply does not look pleasing to Odey, which is a familiar position for the bearish fund manager.

“All of this sits very uncomfortably with the fun being felt in the stock markets,” he says, shaking his head at the stock price run-up in Apple but also looking at central banks with a weary eye. “But there, when I look at the move up since Trump’s election as President, I detect the walk of a drunken man.”

That drunken man is influenced by central bank policy that diminishes the business cycle, he says.

“In a world which is only used to credit expansion and has forgotten all thoughts of business cycles, this new tough Fed is unthinkable,” he wrote, pointing to past peaks in 1979, 1989, 1999, 2008. Wondering if his investors “can see it,” Odey points to several market oddities he thinks will lead to lower stock prices.

He turns to the US central bank, which he thinks is caught in a Gordian Knot of sorts. While real wage growth has been hard to come -- wages have generally stagnated for decades – Odey points to a shortage of potential employees.

“The Fed is faced with a growing shortage of potential employees,” he says, pointing to near 400,000 unemployed juxtaposed to annualized employment growth near 200,000 per month. “Suddenly the Fed can no longer just keep the credit cycle moving with QE but must take account of the looming leeward coastline, which will stop growth anyway.”

The Fed, operating with interest rates near zero and working on unwinding its more than $4 trillion balance sheet, appears out of options to Odey as the business cycle is in a topping pattern.

“In every previous such down cycle for the last 10 years, central banks have responded by printing money,” he said. “But this time they are doing the reverse, which must, one thinks, exacerbate this trend.”

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