Bubbles, unpopular politicians, and fighting the Fed: A $9 billion hedge fund just gave an epic excuse for poor performance
Crispin Odey is having a tough year.
His UK-based hedge fund is down about 35% this year through August, according to an investor letter. The firm manages around $8.9 billion.
And Odey is blaming central bankers, and in particular low interest rates, for creating an unsustainable economy.
"It would certainly be simpler to follow the market," he wrote. "But then we would be ignoring the fundamental data."
His explanation for his fund's terrible performance, while quite macro-focused, is coherent and compelling. Here's what he had to say:
The world got too expensive.
"As individuals gained access to leverage in a world that was globalising, individuals became richer (thanks to asset price inflation) even if their incomes were constrained by growing international competition. However, by 2005 asset price inflation and the expansion of the balance sheet had created a world in which wage earners could no longer afford the asset prices. The reaction of the authorities since then has been to lower interest rates so as to support asset prices and intervene via QE where appropriate."
The response has been ineffective.
"Productivity in the west has now fallen to almost negative rates, investment has stalled and individuals have turned against globalisation. This is a long answer as to why Brexit was always likely to be popular in the UK. It also lies behind Trump's possible success later this year. Without productivity growth, capitalism becomes unpopular, globalisation becomes unpopular and politicians become unpopular."
Fighting the Fed is a losing bet.
"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."...MORE