Tuesday, August 4, 2009

Crispin Odey's Apocalyptic Worldview

From Forbes:

A fiscal crisis in Britain gets ugly, leading to social unrest and inflation, warns the fund manager.

What keeps British hedge fund manager Crispin Odey up at night? His country's sorry financial state.

In his second-quarter conference call with investors, Odey, who runs the eponymous Odey Asset Management, said that while the savings rate in the domestic sector has risen to 8% from about 3.5%, the U.K. has a budget deficit, which is running at around 14%, resulting in a current account deficit of -6%. "If you can't fund that, then it becomes a crisis at some point," he told investors on the call, a transcript of which was obtained by Forbes. It would take a 12% to 15% fall in government spending to address the deficit, Odey estimates.

Odey is worth listening to because he has had a great track record lately. His Odey European fund made 35% in the second quarter and his OEI Mac, which invests in the Odey European fund and currencies, delivered a return of 39%.

Odey points to a number of worrisome signs. For the first time in three years, starting at the beginning of 2009, overseas investors turned net sellers of gilts, which are bonds issued by the U.K., he says. "This means that we are going to have a crisis at some point," he reiterates. "But in a way that is not too bad, because we can protect ourselves by being short the gilt market,'' a bearish bet on U.K. government bonds.

A fiscal crisis is likely to be the trigger to lead the U.K. from its deflationary course, which it is on currently, to an inflationary path. When the crisis comes, "we are going to have to go cap in hand to the IMF [International Monetary Fund] because the nature of the crisis is that no one gives you any credit and no one gives you any time," he explains on the call.

To obtain IMF funding, the government will have to agree to cut spending by 15%, which will likely lead to a "lot of social unrest. Invariably what happens is that these things don't quite work and that is when essentially you end up printing money. If you can't fund it through the debt market, you print it. That is the Zimbabwe option. It doesn't mean we'll get to that option, it just means that actually there is a transmission mechanism, which takes us from deflation to inflation, and I am very scared about that at this point.">>>MORE