British hedge fund manager Crispin Odey is short gilts.

The perma bear fund manager and founding partner of Odey Asset Management known for his almost always bearish outlook and big short plays (which made him a jolly 28 million pounds in the 2008 financial credit crunch crisis) is at it again.

The “business big shot” (that is the title given to him by the Times newspaper 2008) latest gamble is on a sharp sell-off in UK government debt. Put simply, Crispin Odey is short gilts in a mammoth way.

How big?
Crispin Odey is short gilts to the tune of more than the entire value of his portfolio.

The multimillionaire money manager has amassed a leveraged short position against long-dated bonds worth 154.8 percent of the €173m net total value of his European fund’s assets, according to investor documents seen by the Financial Times.

Crispin Odey is short gilts to the tune of more than the entire value of his portfolio.

Crispin Odey is short gilts in a make or break trade.

But if Crispin Odey is short gilts in a high stakes play then should other daring traders/investors copycat the trade?

Crispin Odey is short gilts but his pessimistic calls have not always been bang on the money.

Okay, so Crispin Odey big short in 2008 was a one-shot 28 million pounds profit. But following 2008 the perma bear money manager shorts got steam-rolled by the central bank’s policy to pump trillions of dollars on liquidity into the market through its asset purchase program, particularly sovereign bonds.

The programme was known as quantitative easing (QE) and it was a coordinated effort by the main western aligned central banks (Fed, ECB, BoE, and BoJ ) to keep asset prices propped up with an unprecedented amount of liquidity.

Crispin Odey big short in 2008 was a one-shot 28 million pounds profit

RAY DALIO

So while Crispin Odey is short gilts today his previous short position (post-2008 financial crisis) resulted in several years of painful losses caused by bearish bets gone wrong, courtesy of the central bank’s QE programme. For example, Odey Asset Management lost 49.5 percent loss in 2016 and another 21.7 percent loss last year, 2017.

The bears didn’t anticipate the role central banks would play (through QE) to keep asset prices buoyant. In fact, traders who took out short positions ended up being part of a bear short squeeze rally. Short traders were forced to cut their losses, close their short position, in other words, buy (join the bull party) at a loss. QE bled a lot of bears out of the market and wiped out many bear funds.

The value of assets managed by Crispin Odey’s flagship Odey European fund has dropped from €2.5bn at the start of 2015 to €173m.

Nevertheless, Crispin Odey is short gilts. Could the pain (of the previous years) mean future gains? Lately, I string of money managers have turned bearish. Take for example Ray Dalio’s Bridgewater $22bn European ‘big short’or Bill Gross view “that it is the market’s last dance”.

Crispin Odey is short gilts at a time when a raft of other world top money managers are turning bearish too so perhaps the tide is turning, bearing in mind that Crispin Odey fund has made a strong start to 2018, gaining 12 percent.

“Bonds are very bad value and an easy place to be short” – Crispin Odey

So let’s take a look under the bonnet of Crispin Odey’s short gilts trade.

Crispin Odey was an outspoken advocate of Brexit he even donated money to the campaign that backed the UK to leave the EU.  So with Brexit in play why is Crispin Odey turning bearish on debt, particularly UK government debt?

He has increased his bearish bet on UK government debt five months after the Brexit vote.

The crux of Crispin Odey’s short gilts trade is based on years of excessive money creation by the BoE which has already purchased £435bn of gilts through its QE programme to make up for foreign investors selling gilts at its fastest pace in three years.

Moreover, as I pointed out in Brexit means back-pedaling Brexit the UK’s largest export is government debt, gilts. What’s more, the ballooning UK public deficit means that the nation needs to raise approximately 80 billion GDP a month just to service existing debt and meet the day to day running of the government.

So raising funds on the sovereign bond market has become a very competitive beauty contest, there are many contestants and the pool of investors is shrinking, a trend which could continue if the global economy tanks.

So the UK government is finding it more challenging to attract investors in the wake of Brexit.

Now surely Crispin Odey who backed Brexit (partly funded Brexit campaign) ought to have known that as a top money manager.

“Now you have a situation whereby your inflation rate, as we know, in the UK is at 3.1 percent, you have got the public sector borrowing with a cap at 1.5 percent, but now there is a lot of pressure to release that cap, because why shouldn’t they get some money” – Crispin Odey

So is Crispin Odey’s short gilts trade a bit like the play of a villain in a Bond movie?
When a hedge fund manager funds a political campaign be suspicious.

“Bonds are very bad value and an easy place to be short,” he said. “The question is given that we live in a world in which we basically keep on creating money, at what point does that (value) start to come through?” said Crispin Odey.

“In the UK where, after all, we have had a central bank who have, basically, carried on doing QE into the uncertainty of Brexit and, of course, what they are now faced with is encouraging individuals to save even less and to borrow,” Mr. Odey said.

“Now you have a situation whereby your inflation rate, as we know, in the UK is at 3.1 percent, you have got the public sector borrowing with a cap at 1.5 percent, but now there is a lot of pressure to release that cap, because why shouldn’t they get some money,” added Crispin Odey.

Indeed, Crispin Odey is short gilts trade is based on rising inflation expectations. When investors worry that a bond’s yield won’t keep up with the rising costs of inflation, the price of the bond drops because there is less investor demand for it.

Moreover, throw in the political uncertainties of Brexit and Crispin Odey looks like he might be onto a winning trade.

So will Crispin Odey short gilts trade propel him to billionaire propeller status or broke?
Stay tuned.

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