London-based hedge fund manager Crispin Odey laid out a depressing scenario in his latest investor update.
In order for things to get better, especially for young people looking for jobs, we need to have a recession. This recession would be the result of central banks tightening monetary policy by raising interest rates.
“Nobody wants a recession but sometimes recessions can be better than the alternative policies which not only destroy incentive structures but also, create wrong price signaling, which in fact creates more mayhem as production reacts to misleading signaling, and ultimately leads to governments becoming even more involved in life of the economy. Having witnessed several years in which companies used cheap debt to buy back expensive equity, expect that in a few years’ time companies will be doing the reverse,” Odey wrote in his fund’s April performance report seen by Yahoo Finance.
He continued: “A world in which banks don’t lend, young people cannot find jobs, overcapacity is not the cause for prices to fall, is not a world which can long survive. Higher interest rates would not only create the recession, it would ironically create the inflation and the preconditions ultimately for young people to find jobs. Thus we have a paradox. Seven years ago it was necessary given a crisis, to lower interest rates from 5% to 0%. Today a crisis may give us the chance to raise interest rates back to these levels. Any other solution looks very unlikely to be successful.”
Odey joins a chorus of hedge fund managers who have raised concerns about the efficacy of central bank monetary policy after eight years quantitative easing and zero interest rates. In the letter, Odey wrote central banks’ actions “create dangerous bubbles or in the case of the banks, serve to weaken credit creation, which they so desperately want.”
He also pointed out that the debate has now moved to “just how long policies can support the current status quo?”
For Odey, it’s been a brutal 2016. Odey European, a now £676 million ($986.9 million) long/short equity fund, is among the bottom performers. According to data compiled by HSBC, the fund was last down 27.36% through May 13.
The poor performance follows a challenging 2015 when the fund lost 12.82% for the year, the HSBC data shows. Since its inception, Odey European has produced annualized returns of 10.98%, the data shows.
Julia La Roche is a finance reporter at Yahoo Finance.