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Hedge fund manager: People are incorrectly blaming capitalism for the world's problems

Republican presidential candidate Donald Trump. (REUTERS/Clodagh Kilcoyne)
Republican presidential candidate Donald Trump. (REUTERS/Clodagh Kilcoyne)

London-based hedge fund manager Crispin Odey, the founder of Odey Asset Management, slammed central bankers for giving capitalism a bad name.

He blames their actions for creating an environment where the Brexit and a Trump victory are to be expected.

Odey is among a growing number of hedge fund managers who have been critical about the efficacy of central bank monetary policy. Following the financial crisis, central bankers unleashed ultra easy monetary policy. One of the efforts involved the Fed making large-scale purchases of bonds, aka quantitative easing. Today, rates are still at or near zero and in some parts of the world they’re negative yielding.

“Six years later and it is becoming obvious that ‘Houston has a problem.’ Productivity is not only around zero in most developed countries but falling into negative territory. Market forces are no longer driving investment decisions on the allocation of resources – driven out by governments using central bankers as their conduit for extending credit,” Odey wrote in a recent investor update seen by Yahoo Finance.

Odey has previously said that a recession would be the result of central banks tightening monetary policy by raising rates. He’s also said that a recession would help things get better, especially for younger people looking for jobs.

The thing is no one wants a recession on their watch.

“Central banks do their master’s bidding and governments tell them ‘stop recession at any price.’ They can control asset prices by printing money but can they control the economy? ‘No.’ So what we have now is a world in which the Have-nots are rising in number and, thanks to the workings of central banks, see the Haves still seemingly enjoying themselves on the back of rising asset prices,” Odey wrote.

He added that it’s not surprising to see politics moving to extremes.

“The politicians and the central bankers are serving each other but not the common purpose. In such an environment you must expect ‘Brexit’ to win, Trump to succeed.”

Federal Reserve Board Chair Janet Yellen
Federal Reserve Board Chair Janet Yellen

In the letter, Odey compared the current environment to the 1970s — a time when productivity fell and wage increases became inflationary. He noted that governments in the 70s were “obsessed” with not endangering employment. This gave the trade unions power and thus caused inflation to continue to rise, Odey writes.

The issue then, he explained, was that “governments were in charge of the show.” Things turned around in 1979 though.

“Let markets dictate asset allocation and society live under a regime of free markets and all will be better. By 1979, in Reagan and Thatcher, there were politicians willing to take on the unassailable unions and risk higher unemployment,” he wrote, adding, “The effect was electric, but what ensured that it was to last for over 30 years was that at the same time that market forces were allowed to act, there was the [privatization] of credit.”

The central banks today are the equivalent of the “trade unions” then, Odey wrote.

“Why do I write this? Because capitalism is now being blamed for something that they are not party to. This is etatism and the central bankers are the trade unions of this debacle. No wonder that Trump is determined to get rid of the Fed. Just as in 1979, politicians [realized] that they had to turn on the unions, so today the central banks with their endless printing of money need to be stopped, or capitalism will be blamed for consequences not of their making.”

Crispin Odey
Crispin Odey

For Odey, it’s been an especially brutal year for performance with some funds showing steep losses. The €476.75 long/short Odey Swan Fund gained 3.9% in the month of June, while the MSCI Daily TR Net Europe fell 4.3%. Still, the Odey Swan fund was last down 24.7% through the end of June, the performance report shows.

Elsewhere, Odey European, a now €730 million ($802 million) long/short equity fund, is the bottom-performer of the funds tracked by HSBC. According to the HSBC report, the fund was last down 29.99% through July 14. The fund did erase some of its losses by correctly positioning itself for the Brexit vote. The fund, however, has since pared back most of those gains.

The poor performance also follows a challenging 2015 when the Odey European fund lost 12.82% for the year, the HSBC data shows. Since its inception, Odey European has produced annualized returns of 10.63%, the data shows.

Value investing blog ValueWalk first reported the contents of the letter.

Julia La Roche is a finance reporter at Yahoo Finance.

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