As FE Trustnet recently highlighted, FE Alpha Manager Crispin Odey sent out a note to his investors in which he said that an economic downturn which will be remembered for 100 years was on the cards.
While the financial press has lapped up Odey’s bearish comments and though Wood-Smith – head of research at Hawksmoor – has the upmost respect for the manager, he has dedicated his weekly note to investors about why the star manager’s outlook is all wrong.
“There is a loudening cacophony that the global economy is out of puff, central banks are out of ammo and we are all off to Hades in a small wicker pannier,” Wood-Smith (pictured) said.
“We could be, of course, but I am not seeing it, which puts me at diametric odds with the much publicised Crispin Odey, who hit the wires with an impressive thump last Friday. I have enormous respect for Odey. He has a record of being right more often than not and his always forthright views are important to be aware of.”
“Some doomsters are, FYI only, broken clocks that must inevitably tell the right time eventually. It is much more important when someone with a good and flexible record takes such an extreme view as Odey.”
“He has scared the horses and I need to use a little of this week’s column to present an alternative view.”
Odey, who set up Odey Asset Management in 1991 and has a history of correctly calling the macroeconomic picture, has become increasingly bearish on markets. He warned that a financial crisis akin to 2008 was on the cards as, despite huge levels of central bank intervention over the years, economic growth is still subdued and the amount of debt in the system has only increased.
Performance of indices in 2008
Source: FE Analytics
“[In 2008] we had seen reckless spending and reckless borrowing, fraudulently obtained credit advances and overvalued housing,” Odey (pictured) said.
“And yet, despite the banks losing a great deal of money and house prices in the USA tanking, we hardly saw a recession in 2009. Why? Because when the Anglo-Saxon central banks lowered interest rates from 5.25 per cent to effectively zero, they put the equivalent of 30 per cent of net income into the hands of the overborrowed.”
The star manager pointed out that while investors are more positive because of central bank intervention over the last six years, all the authorities have done is compound the huge problem of debt in the economy.
Odey therefore says that as there are now issues in commodity markets, dangers in the Chinese economy and deflation in the eurozone, there is little more that the authorities can do to prevent a crash.
“My point is that we used all our monetary firepower to avoid the first downturn in 2007-09, so we are really at a dangerous point in trying to counter the effects of a slowing China, falling commodities and emerging market incomes, and the ultimate First World effects,” he said.
Wood-Smith, on the other hand, completely disagrees.
He says it is almost laughable that so many experts have been so bearish and suggests that many of them, including Odey, are guilty of unnecessarily scaremongering.
Wood-Smith’s first bug-bear is with the eurozone, which moved into deflation last month.
Economic growth has been weak in Europe for a number of years since the crash and the ECB has recently tried to defuse the situation by announcing the implementation of full-blown quantitative easing (QE).
This has already caused European equities to rally in 2015, though Odey and others have warned that the measures will ultimately “disappoint markets”.
Performance of sector versus index in 2015
Source: FE Analytics
“Opinions differ, of course, but some bare facts are that core inflation is still positive, most countries are growing, QE will raise GDP growth by around 1 per cent a year and Greece does not matter,” Wood-Smith said.
“But another fact is that the money supply is growing steadily at between 3 per cent and 4 per cent. Spain and Ireland are growing gangbusters and this morning even the Netherlands’ manufacturing PMI was reported at an impressive 54.1.”
Wood-Smith also thinks concerns about the US economy have been massively overdone.
Performance of indices since Jan 2009
Source: FE Analytics
While he says the country’s equity market looks quite expensive now given that it has made positive gains in each of the last six years, he isn’t concerned about the actual economy as consumer surveys are close to decade highs, largely thanks to the lower oil price, and the housing market is on the path to recovery.
Wood-Smith’s third and final point is about the threat of deflation. Many market commentators are concerned that the prices of general goods and services haven’t started to rise strongly despite the huge amount of added liquidity provided by the world’s central banks.
“I am the stopped clock on this one,” he said. “Deflation is natural and healthy, it is not a monster. I am convinced the reflex reaction that deflation must be bad comes from the performance of the Japanese equity market, not the economy.”
“Any sensible analysis of economic history shows that inflation is the abnormality; rising prices reflect inefficiencies and regulation, falling prices are the norm of free market capitalism.”
Nevertheless, in Odey’s note to investors the star manager said the global economic downturn had already moved into “stage one”.
He said this was the case as there is “precious little” earnings growth in global equity markets, the fall in the oil price will derail the US economy, the ECB’s actions are too late and there are clear and present dangers in the developing world.
While Wood-Smith admits there are a number of headwinds facing investors, they aren’t strong enough to force him to hoard cash and “run for the hills”.
“Yes, there are plenty of things in the world to be worried about. What will China’s growth rate settle at? What is the West going to do with all its debts? Asset prices look richly valued,” Wood-Smith said.
He added: “But these are reasons for caution, not terror. I can only applaud Odey's forthrightness and conviction and we pay heed to what he says, but I do not share his conclusions.”
