FTSE 100: 7244.41 ▼ -7.98 (-0.11%)
Hedge fund manager Crispin Odey has warned the stockmarket could fall by a whopping 80% in his latest update to investors.
Odey (pictured), whose ultra-bearish stance has meant his flagship European hedge fund has failed to deliver a positive return since 2014 as markets rallied, told investors 'times are getting interesting'.
He added: 'The FTSE 100 share index is now up 30% over five years, whilst earnings have fallen by 80%. On an earnings yield of 1.6%, the stock market could fall by 80% and, provided profits did not fall, would be on a 13x P/E multiple.'
Odey pointed an accusatory finger at Mark Carney, governor of the Bank of England, saying that while the central bank may be 'proud' to have engineered such a result, there was increasing evidence that this was unsustainable.
'On the back of the uncertainty for overseas investors in UK plc following on from the Brexit result, the current account deficit is ballooning and the budget deficit is following,' Odey noted.
'Carney, the governor of the Bank of England, has responded by flooding the money markets with more cash, QE, and in the process supporting the government 10-year bond at a current yield of 1.2%.
'However, as sterling falls against all its trading partners’ currencies, it is mechanically ensuring that inflation rises up through 3.5%.'
Odey believes that the traders buying into sterling weakness on the back of its 20% fall since Brexit, fail to understand the further the pound falls, the greater the difference between next year's inflation rise and today's interest rates will be.
'Sterling is getting more expensive, the further it falls. Carney is really under pressure and should be raising interest rates, but it now looks as though a rise in interest rates will be over his metaphorical dead body.'
Ultimately Odey believes we are destined to have the double whammy of a recession and inflation in the UK, making it difficult for the stock market to stay above this level.
'What QE has done is to make investors complacent but also optimistic that only an upturn in economic activity, spelling higher profits could trigger upward interest rates,' he said.
'What the UK is promising is rising wages, recession, inflation and falling profits. Not exactly the prize that ticket holders in the FTSE and the gilt market have paid up for.'
Odey, a leading Brexiter, made £220 million from betting markets would collapse as a consequence of the UK's decision to exit Europe. He famously said the 'morning has gold in its mouth', after the result was declared.
The win was initially a boost for his Odey European hedge fund, which gained 15% as markets nosedived in the days after the referendum.
However, the recovery in stocks since has failed to marry with his negative view, leaving the strategy down some 43% this year. This includes a massive 22% loss in a two week spell in March after incorrectly predicting a fall in Japanese and Australian government bonds.
The fund, which has 28% of its assets in cash, gained 1.1% in September versus a 1.4% rise in the benchmark, according to his investor letter.
Odey Opus , the global equities fund he runs for retail investors, has also had a difficult time. Bestinvest, the fund supermarket, has just downgraded it from a four star to a one-star rating, which means it thinks investors should consider a switch to funds such as Fundsmith Equity or Artemis Global Income , which it prefers.
The company said: 'Crispin Odey is undoubtedly a talented manager, but the performance of this fund has been erratic and returns tend to be lumpy, both on the upside and downside. Despite Odey, you need to have a strong stomach to hold this fund and we have higher conviction in other funds from the same sector.'