Once again the British hedge fund legend Crispin Odey was rightly positioned in the crisis. After a few meandering years, he hit the bull’s eye with his bets against Wirecard and the British real estate company Intu Properties. According to Bloomberg, he made around £100m out of these bets. However, as Odey says in an interview with «Finanz und Wirtschaft», the future is likely to become increasingly difficult for short sellers due to the massive interventions by central banks. Many players have already withdrawn from the market.
Mr Odey, the last couple of weeks have shaken up the economy. What does that mean for you as a short seller?
It’s getting more and more difficult. That’s why hedge funds are closing down every day and why it is exceptionally painful to have a short book today. Most of us have brought our short positions down.
What’s the reason for that?
Central banks are pumping a huge amount of money into the system. Financial asset prices are going up because people have to buy something. There we see a huge difference to the last crisis. Today, cash is truly going into the economy. Customers are today saving but we expect them to be spending every penny they get from the furlough scheme in due course.
Is it much more about timing than before?
That’s a cause, not the reason. We have to face the new reality that it’s not the private sector any more who is paying the wages, it comes from the government through furlough or short-time work schemes. I don’t think that this will stop anytime soon as long as the government is able to borrow money at very low prices.
You said that markets have become very difficult for short sellers. What does that mean in the long run?
We are in a world that is moving very quickly from being run by markets to being run by governments. The problem that one has running a balanced book is that if there is a shock like the pandemic, the world seems like it’s going to disappear, but after five minutes, the largest monetary policy action ever seen is introduced and the stockmarkets rocket back up powered by this massive liquidity. Running a delicate book feels like being in a small sailing boat in a force of gale.
In Switzerland, they extended the scheme from 12 to 18 months, the UK has plans to end the scheme by October. Don’t you believe them?
That’s what they say. What we know is that on the one side, they would love to stop the schemes, but they have taken over the mantle of God. They feel they have to continue to support the people.
So they won’t stop anytime soon from your point of view?
That’s what I think. Governments have put themselves into the place where they are underwriting the system. They will carry on until somebody stops them, until it seems just to be money and not real any more.
Do you consider gold as an alternative in this environment?
Gold is just another thing in a way. Yes, it’s wonderful because it’s heavy and you can store it. The price for gold has gone up even in a deflationary environment because the central banks of Russia and China were among the big buyers. Gold will be important in the aftermath of all of this when the world needs a transparent payments system which is trusted.
How do you see the equity space?
If I am right, then very surprisingly inflation can come through the system even within 6 months. The problem I see is that in the last decades companies were managing profits very well, they got very stable. There is a sense that the business cycle doesn’t exist anymore. That means that the risk premium has disappeared. Today, the average Nasdaq stock is on 93 times earnings. Inflation would reintroduce a business cycle.
That means you would neither go short nor long on equities now?
I think that we have to wait at least one year or two before we see more attractive buying opportunities. Microsoft, for example, is a wonderful company. But its valuation is way too high.
One of your last big successes was to be short on Wirecard. Although there have been rumours going on for years, nobody cared about all those warning signals.
It was not only us, the short sellers. Whistleblowers came up long before this but nobody believed them. There were letters sent to Mastercard and Visa asking why did they allow Wirecard to mislead the regulator about their customers. Wirecard was fined €50m in Germany two years ago for shady dealing. I had some friends in the City ending up gambling online. They found that all the UK banks refused to allow them to have clearing accounts. So they moved to banks from the Netherlands Antilles, and then to banks from Cyprus. By the end, nobody was willing to clear except Wirecard. It became clear that something weird was going on.
Was this the first attraction to go short on Wirecard?
No, it was five years ago when Wirecard bought a Mauritian-based Indian company. They bought it for €340m although the seller, a private equity firm, only received €37m. So why would you exaggerate the price? The answer is simple. The extra €300m gave Wirecard the ability to show that for at least in one year €100m a year as profit so that they could say that they had bought a great business cheaply. Three years later they have to get another deal where you can follow the same example. There was an element of Madoff in the system.
What’s the difference?
With Madoff, almost nobody suffered a loss because anybody who made a profit out of Madoff was forced to pay back the profit. A lot of people thought they were rich thanks to Madoff but in fact, they weren’t. The Wirecard case is much worse. When the market cap of the company went down from €20bn to nearly zero, all the people owning the stock lose almost everything.
You are on the side of the winners coming out of this with a decent profit.
Yes, we had a good run. I started shorting the shares at about €170. When Bafin came in and stopped short selling, the stock was around €96. I covered half my short at €110 and it went up to €150 in a short period of time. At that time, we increased the short again. To be honest, shorting shares is a very difficult game, and even more in a world where central banks and local regulators are stepping in with massive interventions.
Your plan is to sue Bafin for lost profits.
I did plan this, indeed. The problem is that there are some important hurdles to do so. You have no discovery in Germany which means that it is very difficult to prove what exactly went wrong. And there is a clause in Bafin’s constitution that it cannot be sued inside of Germany and therefore only through the European courts. But the German courts have to agree to Bafin being trialled outside Germany. That’s very unlikely, and has certainly not been allowed over the recent past.
So you stopped your plans to file a lawsuit?
The paradox is that you can sue them for negligence but not in Germany. When it comes to disclosure and discovery, a lot would come out to highlight that Bafin was sleeping for 10 or even 20 years. And Bafin’s defense that this wasn’t really a financial company but a technology company, is based on rather shaky foundations, as Olaf Scholz has also remarked.
Can we consider Wirecard as a model case for short sellers?
It’s rather an unusual model because there are not a lot of such criminal companies out there. Typically, an ideal company is like Intu which we have long had a short position in, a British real estate company owning shopping malls. There you see that the business model is failing. If you find a business model that has changed or is no longer working, and has leverage against it, it is most likely that you can see the company disappear over time. Ultimately, the equity is subsumed by the debt, and the debt itself is subsumed as well. That’s our bread and butter. Wirecard was different: the more you studied the business, the infinitely less you understood.
Your biggest worries regarding the financial markets?
That people might underestimate that the current environment will not last forever. The massive increase in money supply could be associated with inflation in a year of 5 to 15%. But the bond market is looking for 5 years with 0% interest rates. The markets are miles away from what some people are saying that it’s inevitable. Many investors may become uncomfortable as they possibly are underestimating what is going on for the last 3 months.