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We are at a problem-solving period in history, Crispin Odey, Founding Partner and CIO of Odey Asset Management and manager of the INSYNERGY Odey Fund, said at the start of his presentation at the Morningstar Investment Conference. Odey went on to review the historic fall in CPI in the past 20 years, a great time for the bond market, he said, but not so much for equities. Going into the current century, he attributed the dotcom bubble to too low interest rates set through the Greenspan era.
The property market collapse is also, in Odey’s view, a product of poor monetary policy, as investors were pushed to seek growth in property but the market quickly became a speculative investment rather than just an asset class. “It was always obvious that this was going to blow up,” Odey said. Now, Odey believes, we are at the point where everything is an asset because few investments have negative carry, but this is not a world in which the market is normalised, he says.
How do we get out of this mess, given the tight credit markets and level of debt in the west? The crux of Odey’s argument is that the answer is in labour markets, and wages in particular. The challenge here is that emerging economies have an advantage in providing lower cost labour and are determined to keep this advantage in tact. Thus, Odey pointed out, we are not going to see wages rising in the developed world until we are competitive with the emerging markets. It is here that Quantitative Easing was introduced into Odey’s economic account: QE was really about gaining a competitive edge over GEMs, Odey explained.
In the current economic climate, we are seeing wages in developed markets such as Ireland falling while they are rising in GEMs. So the question in Odey’s mind is how many years of this will we have to sit through before developed markets become competitive? Is this going to be the trend going forward? Well, for a GEM pegged to the dollar, interest rates need to stay on track with the US, he notes. If income is rising fast, then inflation is not such a burden – this is something we often forget, Odey points out. He adds that portfolios have to reflect that, ultimately, we will get inflation. When should investors expect to see this “tsunami”, as Odey calls it? When emerging markets, thanks to their inflation levels, end up with current account deficits, Odey said. Watch those emerging markets’ trade accounts, is Odey’s advice. When this situation occurs, Odey says he wants to be invested in the West.
He takes a view on Germany that is markedly different from other market expectations and expects inflation there to soar by the end of this year. But as the west is becoming more competitive with emerging markets, some of the pressures in Europe will disappear. Although, “I don’t know what one does with Greece,” Odey admitted.
Where does he invest? The German story is key, Odey says and gives his investment in Infineon as an example – a company which is also a beneficiary of the Japanese tsunami. Sky Deutschland is another key pick in Odey’s portfolio, as the company is riding the trend of current development in technology and one that has improved its products alongside the latest tech innovations.
Since QE came in, diversity in the stock market is observed and it has been a "much easier environment to make money," were his concluding remarks.
