market folly

Crispin Odey, founder of hedge fund firm Odey Asset Management, is still quite bullish. Odey's previous commentary from November 2010 notes that he was optimistic on stock markets and that stance is maintained today with his most recent commentary from January 31st.

Given the recent bump in market volatility since he published this, it will be interesting to see if Odey has held steadfast in his views. Before we delve into his latest stance, we wanted to highlight a recent purchase by his firm:

Due to trading on February 24th, Odey have disclosed a new purchase in London listed stock, Xchanging (LON: XCH). They now own the equivalent of 7.13% of Xchanging's outstanding shares via CFDs (see our primer on CFDs: contract for difference). Odey's flagship European fund is holding 4.74%.

Per Google Finance, "Xchanging plc provides processing services to the banking and insurance industries, as well as procurement, finance and accounting, and human resources services across industries."

"Current Outlook

Dylan Grice at Société Générale is pessimistic about markets. The reasons he gives are:

- Developed economies' governments are insolvent.
- There is too much debt around.
- China's economic model is biased towards misallocating resources.
- China and the USA are in an early arms race.
- Bottlenecks are developing in key commodity markets.
- The only thing central banks are good at are creating bubbles.
- Most people think these things are unimportant.
- They might be right.

It is odd to find oneself agreeing with everything he writes and yet so disagreeing with his conclusion. Such are the bricks that make up the wall of worry we need to climb. My role, as I see it, is to protect your money when it is dangerous and make as much money as I can when the opportunity presents itself. This opportunist approach means being a different kind of investor at different times. As of today it means being very long of stock markets, in Europe and the USA, and short bond markets. Why fight the Fed?

Most investors are now waking up to the fact that we are in the midst of a global boom, which is taking key commodities very much higher. Bread riots are being seen in many countries and will intensify but the unseen effect is that inflation in emerging markets is remaining at four times the inflation rate in the developed economies. Inflation may be painful in the developed world, bringing with it a fall in living standards but it also brings a welcome competitive convergence, which will price people back into jobs eventually. When that happens, inflation in the West will get out of control, but for now we have the best of all worlds: inflation rising, interest rates unlikely to rise immediately and an investment boom in its infancy.

Europe is a microcosm of these trends, Germany is now booming. Profits will surprise enormously to the upside. Wage claims in Germany will start to spiral up, but the boom in the domestic economy will provide rich pickings for the depressed southern economies.

For particular reasons, related to bank funding pressures in Ireland and Spain, Europe is the only area likely to see rates rising this year. December's Euribor future is pricing in a 1% rise in interest rates by year end. I think rates could be up by 2%. The authorities in Germany are not going to enjoy the boom they are going to get. They will be pleased to find their southern partners, for reasons of their own, to be equally happy to see rates rising.

Will it hurt the stock markets? No. History is quite clear that not until rates hit 6% do equities get frightened by inflationary pressures. That seems a million miles from here.

This year has started off very well and my own forecast is that there will not be the same volatility as there was last year."

Again, keep in mind that Odey penned the above on January 31st, 2011. Since then, market volatility has certainly elevated so it will be interesting to see if his optimism is wavering in his next commentary.

Overall, Odey has been quite bullish for some time now and it seems as though he'll maintain that outlook until more rampant signs of inflation are evident. For more on this hedge fund, check out Odey's short position as well as Odey's previous commentary.