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Crispin Odey's transcript Q4-10

Crispin Odey's transcript Q4-10

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Odey Asset Management LLP
Transcript of Crispin Odey’s Q4-10 Conference Call
Confidential Page 1 of 10 25/01/2011
Good morning and thank you for dialling in to my quarterly. I always feel happiest whenwhat others fear is what I want to happen. The truth, as we know, is that the future will quiteslowly move into the present and the immediate past dominates not only the discussion butalso the policy response, although probably too much so. At times of change it is not good tobe looking at the referee in order to understand how to get ahead and I love these kinds of markets. We have got a very big book at the moment. The Odey European Inc Fund is 120percent net long and we have a short bond book of about 40 percent. I remain committed to aworld which continues to recover, a world in which there is convergence between thedeveloped and the developing world, competitively, and one in which the crucial ingredientsof inflation, wages and interest rates are in favour of inflation and wages with interest ratesremaining low. Whereas at the present the developed world is seeing inflation comingthrough ahead of wages both of which are running ahead of interest rates, ultimately, whenthe developed world is competitive enough, I expect to see wages leading inflation, leadinginterest rates.It is a world which demands that policymakers hold their nerve and obviously this is going tobe one of those years where actually the recovery comes through but there will be quite a fewpeople asking for interest rates to be raised quickly. Also we will see some people stillarguing for some kind of denouement where actually debt is priced properly at 50 cents. Ihope that the policymakers will resist the first; and I don't think that three years into thisrecovery, where policymakers have decided essentially the only way in which the dollar isworth 50 cents is maybe because that dollar has been inflated away, I don't think we can turnaway from the path that we chose two or three years ago.In terms of the fund and where we are, page 2 just gives you a bit of the numbers. I think what is interesting for all of you is that since the low point of August 31st, OEI itself has seensomething like nearly a 30 percent rise and the question really is, have we gone into adifferent world because that is the world in which the bond market has basically turned roundand it is a world in which we have moved away from the narrow confines of the emergingmarket growth story to actually looking much more broadly at the developed markets. Forme, looking back last year, I kind of put it into a context of the last two years. Obviously in
 
Crispin Odey’s Q4-10 Conference Call
 
Confidential Page 2 of 10 25/01/2011
2009 in February/March time we really did change our portfolio quite markedly and boughtin to a lot of value stocks.The chart on page 3 (actually it is wrong in the sense that it is showing September highs forabout mid-February 2010) shows the September highs of 2009 which is the previous high tothat. In 2009 we bought into a lot of companies where the pricing would never be a recoveryand we saw many stocks rise by 10 times through the lows that we were buying into and fromthat September high through to August we saw those same shares fall by 30 percent andBarclays is one, and Avis again another. What did that mean for the portfolio? It reallymeant that last year it was always very heavy because actually the value stocks were reratingdownwards again, having probably had too high a spike in the immediate period from March2009 to September. What has been very nice since the lows of August is that I have arguedthat these value stocks are now properly yielding 6 to 7 percent again, they are on about eightor nine times the earnings and they are no longer hurting the portfolio. What you can see,therefore, is the portfolio has lightness to it. It tends to mean that in an up market we tend tobe out performing by 1.2 percent, 1.4 percent, and then in down markets only being hurt byabout 80 percent of the hit. That is important when you are running a big book as I am doing- it still doesn't militate; obviously, if you think the market is going to fall apart you wouldn’thave the positions I am running. I am saying that everything that I’m looking at still says tome you should be very long equities at this point. So, I want to have a portfolio that has thosecharacteristics.There is a paradox on page 5, I have put down some of the things that I feel are importantbecause last year, going back, we had three attacks to my view. We had first of all Greece,we had May, we had August and we had November. We had Greece, we had Ireland andthen we had Spain and each time an entirely different viewpoint was in evidence which wasessentially bearing you back and saying, we are not out of this and not only are we not out of it but actually we are going to have to unpick most of the last three years. I have just beenaround a bit too long, it reminds me too much of Sweden in 1995 when we all believed thatSweden was going to be no more. 15 years on we now hail Sweden as one of the few greatcountries that have got through this crisis with no pain whatsoever and indeed is booming likenowhere else. And so yes, we have had three attacks and there are many people out therewho believe that we are going to continue to see attacks on the euro and on the weakermembers. Where I am coming from is to say just as Spain, Ireland and Greece have suffered
 
Crispin Odey’s Q4-10 Conference Call
 
Confidential Page 3 of 10 25/01/2011
from being part of the euro when they had not been competitive and therefore they have hadthe wrong exchange rate for the own blowups, so actually the converse of that is thatGermany has been part of the euro which has been very undervalued relative to whereGermany's position is in exports etc. What we are going to see is this change from theimpotence being felt by the Irish and the Spanish and the Greeks to impotence over the nextcouple of years being felt by Germany because actually Germany's going to boom in a waythat we haven't seen. Now that is quite a statement because I have only been coveringGermany for 30 years but the fact is since the war with probably the exception of 1961/63,Germany has never seen a consumer boom domestically.But before I go on to that I think it is worthwhile talking to you about the UK because in away it embodies everything that I think the right policy response is. If we look at last year inthe UK, GNP grew by six percent. Inflation was 3.8 percent maybe 3.3 depending where youlooked, basically wages grew by 1.8 percent and interest rates were at 0.5 percent. Twoweeks ago BarCap came out and said they expected Sterling to rally because they saw interestrates rising quite sharply this year because how can you have interest rates at 0.5 percentwhen you've got inflation coming through ever stronger. My forecast is to say actually, theyare looking at it the wrong way round. If you're the Bank of England, and this is how theylook at it, they should be saying, look this is all to the good, what we want to see is wagesrising relative to assets. Actually, if we look at last year, yes we have got an easy monetarypolicy but Sterling has been a reasonably strong currency, so the market is not scared by thefact that we are running an easy monetary policy. On top of that, when we look at monetarynumbers, M3 showed no growth whatsoever. This is really just the increase in the velocity of circulation of money. This is not dangerous and so for me the UK is in the right place and itmeans that as a market I've been very happy to be invested in it, I don't think there aretremendous risks.I think today the interesting point is that the euro has the perception that it is all going tobreak apart whereas actually my anticipation is that this year and next year are going to betwo years where the currency union shows that it can work. And why do I think that? It'sbecause I think that thanks to Germany having an exchange rate which is probably 20 percenttoo cheap over the last year, actually German monetary policy is massively easy and Germangrowth is going to be much stronger than people have forecast. I know Tim Bond wastalking about this yesterday but again the difference between the economist and strategists

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