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In May, the Odey Special Situations Fund returned -0.5 percent, compared to 1.6 percent for its benchmark, the MSCI World USD Index. The fund is up 7.9% in the first five months of the year. Odey Portfolio Manager Adrian Courtenay said in a May letter to clients that the portfolio has been gradually repositioned to better match with inflation and government bond rate sensitivities.
Crispin Odey, a hedge fund manager, and his wife leave Westminster Magistrates’ Court in London… [+] In the late 1990s, Nichola Pease was accused of attacking a young investment banker. (Image courtesy of Aaron Chown/PA Images/Getty Images)
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The Federal Reserve has stated that it anticipates inflation to be slightly higher than its target of 2% for some time, but that the increase will be temporary. Courtenay, on the other hand, stated in his letter that there are more and more evidence that rising inflation is not a passing fad. As a result, in recent months, he has been steadily repositioning the Odey fund.
According to him, the fund’s exposure to opportunity kinds that profit from growing inflation, such as beverage and railroad industries, has gradually increased. Meanwhile, the Odey fund has been limiting its exposure to longer-term investment opportunities, such as software and other advanced technology firms.
Courtenay highlighted that higher government bond yields have historically been associated with periods of increased inflation. Furthermore, he stated that government bonds serve as the basis for the “risk-free” discount rate, to which longer-term securities are vulnerable. In an inflationary climate, increased government bond yields can lead to a moderately larger impairment in long-duration securities.
The Fed maintains that recent inflation is due mostly to the economy’s reopening following the pandemic, and that it will be temporary. Nonetheless, Courtenay cited three reasons why he doesn’t believe this is the case. He pointed out that inflation has not been limited to commodities categories or demand patterns that are sensitive to the conclusion of the lockdowns or the economic recovery.
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Food costs, for example, are unaffected by the reopening, and Courtenay claims that the rises have been among the biggest of any raw resource. Pork prices have grown 106 percent in the year ending in May, while maize has risen 105 percent, soybeans have risen 83 percent, coffee has risen 67 percent, sugar has risen 61 percent, and wheat has risen 31 percent.
As a result of these rises, the UN’s food cost index increased for the 12th month in a row in May, reaching its highest level in a decade.
Courtenay also noted that the Fed’s position on inflation being transient rules out the possibility of a “otherwise short increase in inflation acting as a sufficient precipitate for inflation to stay sustained over a considerably longer time frame.”
When raw material production is labor-intensive, and raw material price inflation encourages wage-price inflation, he believes inflation will be sustained. Courtenay cited evidence that this self-reinforcing inflation process has already begun.
According to a poll conducted by the United States Bureau of Labor Statistics, prospective employees who stated the lowest income they would accept for a new position provided some intriguing data. The average wage in the first half of this year was 30% higher than the same poll in the first half of last year and 40% higher than the first half of 2019.
Many large firms, according to Courtenay, are already seeing salary rises. In May, for example, McDonald’s and Chipotle Mexican Grill, as well as Bank of America and Under Armour, announced wage increases.
A central bank’s ongoing issuing of new money, which devalues its currency, results in sustained inflation, according to the Odey fund manager. As a result, for inflation to be temporary, the government budget deficit must likewise be temporary, but this is not the case in the United States.
From 2021 through 2030, the budget deficit in the United States might be as high as 5% to 6% of GDP, according to the Congressional Budget Office. Even if there isn’t a recession during that time, the federal government’s gross debt will not fall below 130 percent of GDP. In addition, the CBO projects that the Fed will purchase 47 percent of all new Treasury debt issued over the next three years by issuing new money.
Investors in the Odey Special Situations Fund shouldn’t be afraid about continued inflation, according to Courtenay, because it may lead to a “golden moment” for the types of opportunities the fund seeks. Inflation causes a merger arbitrage situation vulnerable to bidding wars, he noted, a type of opportunity that has already produced some of the fund’s biggest wins since its creation.
Cardinal Resources and Guyana Goldfields, according to Courtenay, were the two most important competitive bidding donors. They arrived after the gold price had been raised by more than 30% by 2020./nRead More

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