Odey Asset Management LLP

Transcript of Crispin Odey’s Q1-11 Conference Call

Confidential Page 1 of 11 28/04/2011

Thank you everybody for coming up to hear me today. I hope I will get through this, I amafraid I am suffering from jet leg, not the greatest thing to have when you want to make a bigimpression but anyway let’s just go ahead. I am afraid also I have inundated you with paper,you will see that we have got about twenty-two charts, so we have got to get through it.The whole story is really making sure that you understand where we are and we feelourselves to be. Speaking essentially, the half time point i.e. zero interest rates or 0.5%interest rates cannot last forever and the only question is going to be, when will they startmoving up? Our cry at heart is they will unfortunately move up late and only after wageinflation has taken hold in the West but up until that time what we are seeing is inflationtaking off and taking hold in emerging markets and re-pricing assets and re-pricing the West.So that is the good news and it is why we have got a big position in equities at the momentand we also see the real crisis coming through much later on but through the bond market.In terms of currencies we essentially remain pretty positive on the euro and we were the firstto say that we thought European interest rates would rise. We saw that with the alliancebetween both the Germans and the Spanish and the Irish for funding reasons, and essentiallyour view was that the UK and the US would really not see fit to raise interest rates and westill cannot really see why they should.In terms of how we have done, page 2 shows you OEI was up 2.74% and OEI Mac was up5.13% at the end of March. It has of course been quite bumpy, the fact is as we talk today thenumbers are round about 8% for Mac and round about 4.5% for OEI so it is a nice year thisyear. It is quite volatile, again we have got a big book [because of what] we see, and whatmakes us reasonably optimistic at this point [is that] we are not taking a great deal of risk.In terms of what has made a contribution, it is about finding good franchises. Obviously Skyhas had a good time and that is really just due to the bid. Again the news should be that thebid may come through at the end of this month. We have a pretty relaxed view here becauseI think that for less than £9.50 we do not really want to see the company sell out to NewsCorporation. If he bids too low, well we could hold onto the company, it is doing well. I amgoing to talk a little bit later on about Sky Deutschland because that continues to be one of

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our major longs. Regus has done well. In Ireland, we have not had a great time there, for meIreland could be one of the great recoveries, it is obviously in the sick bay at the moment butthere is a lot that is going right for them.On the short side, we made money out of Nokia, and Commerzbank was kind of free moneyfrom the Germans basically telling us that they were going to have to have a massive rightsissue and it is not a very profitable bank and the shares were pretty well at one times book value and we have made a bit of money out of that.In terms of where we are today, this is a crucial thing. Let me take you to page 4 and this is just a recap to remind you where we are coming from and where we are going to. The fact iswhat we are looking at and what we have been looking at is obviously we have had a twentyyear period when essentially, when the wall came down, the emerging markets emerged withundervalued currencies and a desire to compete. That has been of great benefit in terms of the inflationary side; it has kept costs down, it has ensured that wages have not risen in theWest, it has brought down interest rates and it has been very good for the bond market. It hasnot been quite so good for the equity market as page 6 shows you, essentially the equitymarket rose happily in the 90’s when corporates were borrowing at about 10% a year, so itwas a corporate bonanza, especially after 98 when thanks to the crisis in Brazil and in Russia,the Greenspan cut interest rates into really a boom and you can see that fed through also tothe markets. We then had the profits recession in 2003, that was the dot.com bubble and thenwhat we saw was Greenspan deciding that supporting property prices was a very good way of keeping the world economy going and keeping consumer spending rising. The point is thatobviously in 2007 that story came to an end. Page 7 shows you how much housing reallytook over from equities providing the growth and that was the whole period of the GreatModeration as we know when interest rates went down because activity was low, thenbasically more money went into housing, people were spending their gains and so suddenlyconsumption lifted. Consumption lifts, interest rates start to rise, putting pressure on housing,housing comes off, less money being spent, consumption comes down and that was the GreatModeration.We tend to live long periods of time when we see what is going to happen but it does notalways happen as quickly as we would like. The fact was that through that period 2005 to2007, property had gone from being an asset and turned into a speculation i.e. the average

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person was paying around 200 over Libor. Libor was about 5% in most countries so theywere paying 7% for property which was yielding at best about 4%. So there was thisnegative carry and the question was at some point that was going to blow up, especiallybecause not only was there this negative carry but actually there was monstrous amount of lending taking place as it became more and more speculative. What we saw when the crisishad happened was how do you turn the speculation back into an asset when you lowerinterest rates to 0%, at which point property yielding 4% becomes an asset not a speculation.So they tried to stabilise property. In the US they have not yet stabilised property, soproperty and the average house in the US is now only on 2.3 times average incomes, soproperty has come down a very long way in the States.Our point here is to say once interest rates went to zero there were a lot of speculations thathave become assets. Gold basically yields at best 2% on lending, if you lent it suddenly atzero interest rates, gold looks very interesting. In our scenario, we do not see interest ratesgoing from 0.5% to 3%. We see interest rates staying very low but when they do actuallystart to move up through to 6%/7% and even when they get to 7%, basically finding that thatis hardly where they are going to stop, they are actually probably on their way higher still.Our question there is obviously if interest rates go from 0% to 7% there are lots of assetswhich suddenly become speculations and that means that we have to be worried for yourportfolio during that period and the whole question is, how can you insulate yourself againstthat? It is easier with a hedge fund than it is with a long only book but even with a hedgefund the truth is the duration of most interest rate plays is much shorter than the duration of the equity market, so we have to be quite leveraged into the short end of the bond market inorder to protect ourselves and that is really where we think we will have to be so a lot of whatwe do today is fire practice for the future.Why do we think that this is all going to happen? It is really because of Northern Rock.Northern Rock was synonymous with what was happening in the States but it comes down tothe fact that once the asset bubble was over in 2007 the authorities had a problem becausethey had allowed the equity market to provide a level of confidence, they had allowedproperty to basically be the engine of growth and suddenly credit was exhausted. There wasno credit going to come through and how do you get nominal GNP to grow and the answer is,not easily.