I first met Crispin Odey in 1980. We were poorly paid, poorly fed company analysts in the City and in those floppy-haired, blue-sky days, Crispin and I followed the fortunes of the UK’s electronics companies, Crispin for Framlington, I for Kleinwort Benson. Crispin delivered questions to management with a courtly elegance that belied a passion for getting to the bottom of things, particularly if he suspected chicanery. I remember a precocious understanding of how companies really worked: top line, bottom line, margins, moats, management. Despite media puff, analysts who think with true originality about what makes companies tick are rare in the City (Terry Smith of Fundsmith is one).
The art of knowing a good fund is the art of knowing a good man. So in the early ‘90s I backed Crispin with client money when he went independent with his European hedge fund. My clients and I remember a volatile ride with some picturesque detours. One year, Crispin assumed that knowledge of European equity markets perfectly equipped him to judge the West African cocoa market. My clients were treated to a Six Flags roller-coaster, hefty drawdowns and the nearest thing to an apology I’ve read in 35 years in the industry. Crispin began his client confessional with some TS Eliot poetry: “I should have been a pair of ragged claws / Scuttling across the floors of silent seas”. It didn’t bring the money back, at least not that year, but it made Crispin a lot of friends.
In an industry filled with helmet-wearing piste-huggers, Crispin has skied off-piste like few others. He has gone on to manage USD 12bn of other peoples’ money, and has made a considerable fortune. I went on to graze in the quieter pastures of the private client world and immerse myself in the fascinating challenge of explaining a sometimes impenetrable and always mischievous world to families, clients and friends, a quest that continues to this day.
So when I read this week that Crispin has written that "Equities Will Be Devastated", I sat up. It is so far from what we believe most likely (a humdrum and extended global recovery supported by technological breakthroughs, cheaper energy and negligible interest rates). Most chillingly, we are part of the very consensus that Crispin decries. Crispin’s warnings could script a Hollywood disaster movie. Here are clips.
Here is Iain Little's Letter.
No forecast from a highly experienced fund manager should be dismissed lightly. Nevertheless, when I read the clips from Crispin Odey’s Letter that Iain Little reproduced, I was far from convinced. I also recalled remarks from other commentators who have said: “This is the most unloved bull market in history.”
I maintain that we should regard widely held extremes of sentiment - either bullish or bearish – as contrary indicators. We are far from such extremes, in my opinion. Moreover, the fact that quite a few commentators have been sceptical throughout this bull market to date, if not outright bearish at times, tells us that they are far from fully invested. A recession that will be “remembered in a hundred years”, sounds like hyperbole to me.
Additionally, “…a bearish opportunity to short stocks as great as it was in 2007-2009…” sounds extreme. Back then, we had the Brent crude oil spike to $147.50, and all similar moves in the world’s most important commodity have resulted in recessions. Moreover, US banks were about to implode because of their collateralised debt obligations (CDOs), more colloquially known a ‘liar’s loans’. Many central banks were also raising interest rates in 2007 and early 2008.
What we see today is closer to the opposite of 2007-2008, no doubt with some drawbacks but preferable to those crisis years. GDP growth remains weak but some of the deflation is positive, being created by rapid technological innovation. Corporate profits are a bright spot, resources sectors mainly excepted, even if they are flattered by share buybacks. The bubble, in my opinion, is in historically low government bond yields.
There have been plenty of uncertainties to be concerned about but a number of them have been partially resolved reasonably favourably. Bottom line: stock markets still offer the best potential. Volatility is an inevitable part of equity trends but I do not expect significant bear markets in the major diversified economies, against a background of low interest rates, low oil prices and the most rapid advance in technologies ever seen. Odey’s forecast that China’s GDP growth could slump to 3% this year is extreme, not least in the context of the lead article above.
Additionally, the SPDR S&P World ex-US Small Cap ETF (GWX US Equity) shown in Iain Little’s eloquent letter is quoted in US Dollars, although it contains no US equities. If it was quoted in Euros it would be testing its September 2014 high. This S&P Small Cap Index of US shares, also quoted in USD, remains steady, albeit in a lengthy range. In contrast, the FTSE AIM Index, quoted in GBP is underperforming, not least as it contains a number of speculative shares, some of which are in the resources sector.
Lastly, this will be one of the many interesting market topics to discuss at the next Markets Now Seminar on 23rd February, where Iain Little will also be speaking. I look forward to it, not least in terms of subscribers' comments.
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