Hugh Hendry Blog

Hugh Hendry is Happy After He Changed His Mind. Fund is up 14% in 2015

noreply@blogger.com (Ili) — Thu, 23 Apr 2015 06:49:00 +0000

Hugh Hendry, one of Britain's highest profile hedge fund managers, has told New Zealand institutional investors his 2013 conversion from a bearish to bullish outlook is starting to pay off.

Speaking to an Auckland audience via Skype from the UK this week, Hendry said his Eclectica hedge fund, which he founded in 2005, was now up 14 to 15 percent this year and is currently one of the 10 best performing hedge funds. It also made an 8 percent return in 2014 after disappointing returns in the two years prior to that. Since Hendry started Eclectica Asset Management in 2002, it has averaged a 9 percent compounded return.

New Zealand-based fund manager NZAM has invested in Hendry's hedge fund since 2011, attracted to his contrarian investing and colourful style. Like Scottish comedian Billy Connolly, Hendry hails from Glasgow, has a great accent, and loves to tell a story. His fund attracted attention after achieving a 31.2 percent return in 2008 in the depths of the financial crisis. He became a media figure, including a famous appearance on BBC's Newsnight when he asked Nobel Prize-winning economist Jospeh Stiglitz: "Um, hello? Can I tell you about the real world?".

This week he told Auckland private investors that the fund's franchise was "contentious posturing" and that the most contentious thing you can say today is that you are bullish - a posture he adopted in 2013 and which he believes is now paying off.

Hendry says his assets under management have fallen from more than US$1.5 billion to US$300 million today after he told clients two years ago that he was being forced to leave his bearish outlook behind.

Read more at Hugh Hendry is Happy After He Changed His Mind On Equities and China. Fund is up 14% in 2015

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Hugh Hendry Apologizes, ‘Shifts’ Investments; Now 107% Long Equities

noreply@blogger.com (Ili) — Wed, 22 Oct 2014 13:24:00 +0000

Hugh Hendry’s streak of bad luck in his Eclectica hedge fund continued in July. The Eclectica Absolute Macro Fund finished August with a loss of 1.0, bringing the YTD return to -10.9%, according to a a letter to investors. However, the fund is currently up 2.9% in September, according to data from the fund. In the August letter, Hendry adds a section noting some changes at the fund. The last time Hendry added any special ‘addendum’ to a letter was in late 2013, when the one time bear turned bullish.

Hugh Hendry’s CF Eclectica: Performance SummaryHugh Hendry’s CF Eclectica Absolute Macro Fund Fund lost -1.2% in August.

The best performing strategies were those within the Short EM theme which made +0.4% in aggregate, led by our long Mexican Peso/short Chilean Peso holding (a component of the “good versus bad” EM FX strategy) which performed well on evidence of a continued slowdown in the Chilean economy leading to interest rate cuts.

Additional gains came from our Russian FX short, which we have traded tactically throughout the course of the year. Having begun 2014 short the ruble as a result of our concerns regarding the health of the Russian economy, the situation in eastern Ukraine has provided an additional catalyst.

Hugh Hendry’s CF Eclectica: Long position in the Hang Seng China Enterprises Index within the China theme (which gave back -0.2% during the month), we initiated a tactical long position in the Hang Seng China Enterprises Index via call options. This reflects our view that the Chinese Government will underwrite the domestic banking system. Furthermore, the authorities have embarked on a coordinated push to encourage investment in Chinese stocks, both through increasing domestic interest and by further opening the market to international investors through the Hong Kong – Shanghai stock connect. With Chinese stock valuations and sentiment at rock bottom the potential is there for a strong outperformance.

Gains from holdings in European pharma and global internet companies were insufficient to offset losses incurred during the early part of the month on European index positioning and peripheral equities as the Long DM component returned – 1.1% in aggregate. In Japan, Nikkei futures were the main drag on performance as, in contrast with equity markets elsewhere, the index fell – 1.3% after three consecutive months of gains. The total return for the theme was -0.6%.

Elsewhere, our holding in the US 30 year Treasury generated a return of +0.6% as geopolitical events ensured that demand for “safe” assets held up and speculation regarding further ECB intervention made the yield on US bonds look relatively appealing.

Hugh Hendry’s CF Eclectica: Long position in the Hang Seng China Enterprises Index within the China theme (which gave back -0.2% during the month), we initiated a tactical long position in the Hang Seng China Enterprises Index via call options. This reflects our view that the Chinese Government will underwrite the domestic banking system. Furthermore, the authorities have embarked on a coordinated push to encourage investment in Chinese stocks, both through increasing domestic interest and by further opening the market to international investors through the Hong Kong – Shanghai stock connect. With Chinese stock valuations and sentiment at rock bottom the potential is there for a strong outperformance.

Gains from holdings in European pharma and global internet companies were insufficient to offset losses incurred during the early part of the month on European index positioning and peripheral equities as the Long DM component returned – 1.1% in aggregate. In Japan, Nikkei futures were the main drag on performance as, in contrast with equity markets elsewhere, the index fell – 1.3% after three consecutive months of gains. The total return for the theme was -0.6%.

Elsewhere, our holding in the US 30 year Treasury generated a return of +0.6% as geopolitical events ensured that demand for “safe” assets held up and speculation regarding further ECB intervention made the yield on US bonds look relatively appealing.

Hugh Hendry’s CF Eclectica: Manager Commentary

We should have done better in August. We shuffled our equity cards rather than buying more into the weakness. This has prompted us to rethink our book. As we have said previously, the global macro environment continues to be defined by a historically tepid recovery from the depths of the 2008 contraction. And this demand-light, low inflation recovery has been met by a wholesale purging of those public officials charged with running the largest central banks. The presence of Draghi and not Weber, Trichet or Duisenberg (or in Japan Shirakawa, or an American hawk such as John Taylor) helps to explain why the German, Japanese and American stock markets all rose 30% in dollar terms last year. It also helps explains why, with the European recovery wilting and medium term inflation expectations making new lows, the ECB found the wherewithal to ease further. With European stock prices down over 10% during the summer, the central bank eased policy considerably and stock prices are rising once more. Clearly this marks a monumental shift in Europe: the once austere German based central bank has jettisoned its tradition and is explicitly targeting higher prices.

Hugh Hendry’s CF Eclectica: Japanese recovery shaken by consumption tax hike. The same could be said about Japan. Japan’s recovery has been shaken by the consumption tax hike and any further economic weakness will most likely be met by further monetary accommodation. Again, price weakness has presented an opportunity to buy. Japan’s stock market had fallen 15% earlier this year, today it is not far from challenging its previous high. When central banks are actively pursuing a goal of higher prices the most rational course is to tenaciously remain invested in equities.

Following this latest announcement of policy easing in Europe we have been actively accumulating more equities. In mid-September, we are currently long 107% equities, with 25% invested in the Nikkei, a further 10% invested in European stock indices and 8% equivalent exposure from short dated options on China’s Hang Seng China Enterprises Index, not to mention a further 63% invested in an equity book that spans Europe’s largest pharmaceutical franchises, Japan’s robotic machinery businesses and a global internet basket.

That is not all. We also have a further 6bps DV01 exposure to receiving rates, predominantly long dated Treasuries. The reasoning is similar to our equity book. Central banks seem capable of expanding their price setting franchise to establish nominal rates low enough to support the tepid global recovery.

Source: valuewalk.com

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Hugh Hendry 2014 Letter

noreply@blogger.com (Ili) — Tue, 28 Jan 2014 11:35:00 +0000

Hugh Hendry, one of the smartest hedge fund managers in the UK, who runs Eclectica Asset Management had his 2014 Letter published recently.

What if I were to tell you I was turning more bullish? Is that something you might be interested in?

We are macro investors. That means that we are constantly exposed to the shifting sands that the world's increasingly powerful gaggle of central bankers - and the capital flows they encourage - impose on global financial markets. However we tend to stick to our big (and often bearish) views, something that means our performance comes with hot and cold spells. The most recent one – and it doesn't take a genius to see this – has been cold. It hasn't been as bad as it could have been for the simple reason that we make big bets when we are doing well and small bets when we aren't. We allocate increasing amounts of capital to winning trades and cut losing trades rapidly. We've been cutting a lot recently. The good news is that this has minimised our drawdown. The even better news is that our returns have improved lately; it looks as if we are entering a hot spell, and we have begun to re-allocate significantly more risk capital to our endeavours.

So what makes me think we are heading hot at the moment? Let me tell you about the character of Bob Ryan, from the US cable TV show Entourage. The show chronicles the workings of Hollywood and Ryan is a legendary movie producer credited with a string of box office winners. His problem is that his success was rather a long time ago. So no one is certain of his skills anymore. His reaction is to make seemingly absurd promises – think along the lines of "...what if I were to tell you that this movie will cost peanuts to make, will earn you four Oscars and will gross $100m... is that something you might be interested in?" In some walks of life (well, mine anyway) such is the popularity of the show that the expression has entered the modern lexicon as a catchphrase for offering up fantastical, if not actually impossible, ideas. With that in mind, what if I were to tell you that I have adopted a tactically bullish outlook? Is that something you might be interested in?

Last bear standing? Not any more...

I know what you are thinking. You are thinking that the last bear is capitulating. It isn't a good sign. Maybe it is that simple. But I think it is a little more complicated. We, and I accept we aren't the first here, sense that US monetary officials may now be willing to subordinate the demands of their own economy to the perils confronting emerging market economies. If that is the case, the great peril is not that the Fed finally tightens monetary policy and US stock prices suddenly tumble from what are very obviously overpriced levels. Would that it were – our curmudgeonly portfolio structure (think dynamic volatility targeting and stop losses) works well with big stock market reversals. Insteadthe greater peril is that the current backdrop will turn out to mark a rapid acceleration in the ongoing move to the upside. A hint that this might be the case comes from looking back through the 113 years of price data for the Dow Jones Industrial Average. We have done this (so you don't have to), searching along the way for the comparable periods that fit most tightly to the last 500 trading days. What is clear is that periods of trading similar to the one we have seen over the last two years don't often seem to end quietly: they boom big time or they crash. Which is it to be this time? Looking at the markets of 1928, 1982 or even 1998, all of which have scarily similar looking historical charts to today's, we wonder if it won't be both. Starting with the boom bit.

Let's look at what happened in 1998. All sorts of market moving events were shifting the sands. There was the fall out from the Asian Tiger crisis. There was Russia's local currency default. And there were the event risks of the collapse of LTCM and the Y2K scare. Together these things ensured thatUS monetary policy was set far too loose for the US economy itself. And the result? A parabolic trend to the upside in equities that destroyed anyone who chose to stand in its way. This is what I fear most today: being bearish and so continuing to not make any money even as the monetary authorities shower us with the ill thought-out generosity of their stance and markets melt up. Our resistance of Fed generosity has been pretty costly for all of us so far. To keep resisting could end up being unforgivably costly.

Made a mistake once? Why not make it again...

You will wonder what makes the Fed so concerned that it is willing to risk another bubble and another crash?

The answer rests in the dominance of neo-mercantilism as the most successful economic orthodoxy of our time.For those new to this, the text book definition will suffice. Neo-mercantilism is a policy regime borrowed from 19th century Kaiser Germany. It encourages exports, discourages imports, controls capital movement, and centralises currency decisions in the hands of a central government (to reduce reliance on flighty foreign capital). The point is to increase the level of foreign reserves held by the sovereign government, allowing for an accommodating domestic monetary policy. It also looks like it works — you can make a good case for it being responsible for the superior growth rates seen across Asia since the 1980s. However it comes with what I think is about to be a major problem. It has made domestic monetary policy in most Asian countries very pro-cyclical and we haven't really yet tested this pro-cyclicality to the downside. What happens when the rest of the world becomes unwilling to raise its indebtedness further in order to buy Asian-produced products and facilitate Asian growth? And what if that is about where we are right now?

To date, the experiment with economic growth in Asia has succeeded as an almost direct result of the re-leveraging of the American economy since interest rates began to fall in the early 1980s.

The Japanese authorities blazed a trail on this for everyone to follow. It kicked off with (yet) another credit cycle gone wrong. In the 1970s there was a bubble in lending to Latin American governments. That was popped by Paul Volker's tightening of US monetary policy. Latin American currencies tumbled and sound currencies soared. Except the yen. Japan had a central plan for economic self-sufficiency - one that required a positive current account and endless rounds of domestically funded investment. They did not want a strong currency, low cost imported goods and a consumer boom or anything else that might have risked future trade deficits. So they worked to keep the yen from appreciating too fast, too soon. How? The Bank of Japan created yen and bought Treasuries. This money found its way into the local banking system (as new money does) where it was soon turbo-boosted by foreign capital inflows: overseas investors were attracted by the corporate profits produced from the loose policy and pretty pleased with the way in which a persistently undervalued exchange rate made asset prices cheap to foreign investors. Chuck in fractional reserve banking, and risk-seeking bankers and it was inevitable that asset prices would surge. The rest is history. Equity prices, ignoring all qualitative objections to bubble valuations, quadrupled. Then they crashed.

First Japan. Now China.

To understand today's story we have to leave Japan (reluctantly — we'll come back to it), and travel 20 years later to China, where the same pattern has been repeating itself. Back in 2004. China's cheap land, cheap labour, cheap money, cheap everything, produced high returns on capital and trade surpluses with the rest of the world which encouraged investment inflows into the country. That, as Charles Kindleberger, the intellectual godfather of macro investing and author of the unsurpassed classic Manias, Panics & Crashes, noted, is the kind of combination that "almost always" leads to an increase in the country's currency and domestic asset prices.

However Kindleberger was writing pre-neo-mercantilism. He would have expected the follow-on from this to be higher consumption as a result of the wealth effect of higher asset prices (people who feel rich spend more) and of the boost to spending from a rising currency giving falling import prices. He'd have looked at 2004 China and expected every member of the middle class to be driving a cheap BMW by 2006. That didn't happen. Instead currency interventions held down the yuan and, at the same time, the planners' need for cheap credit to finance their investment projects meant the real returns from bank deposits were forced to stay firmly negative (if you are going to invest in worse than useless investment projects it mitigates matters somewhat if you insist on the debt being cheap...). Negative deposit rates might make residents of countries with developed welfare states more likely to spend. They appear to make the Chinese more likely to save. You will hear much about the rise of a consumer boom in China in no end of bullish papers. But the truth is different. It is that China is unique in the extent to which it has prevented ordinary people being exposed to cheap BMWs; despite the massive growth in the economy consumption has persistently fallen as a share of GDP. The Kaiser would have approved.

Mercantilism needs a donor. That donor has heen you.

The key point about Japanese and now Chinese mercantilism is that the creation of domestic growth in this way has always required a donor country — the one hosting the consumption boom needed to finance the investment spending back home. In the latest round, cash is injected into Treasuries by China (this is what Bernanke referred to as the "glut of savings"). It is then captured by the US banking system (someone has to sell the Treasuries to the Chinese and manage the proceeds). Then the loop repeats. Chuck in (again!) the fractional reserve banking and your usual bullish community of loan officers in the US and you soon see a rise in economic activity and of course in leverage. Then stock and property prices boom. But it doesn't end there. Oh no. The boom boosts wealth in the US. They borrow more and spend more — bringing what should be tomorrow's consumption forward into today. That in turn boosts demand for imports and shovels more dollars into China, something that forces it to print more yuan to keep its currency down and to buy more Treasuries. This cash enters the banking sector... and so on.

All this needs more and more Chinese productive capacity (more steel plants, more concrete, more factories, more ships, more roads, more property, more, more, MORE) to meet the additional foreign demand. China is the host. The US is the donor. The host effectively offers vendor financing to help the donor consume. In return the host gets high domestic investment rates and full employment — both things that help when you are after social obedience and international influence (it's easy to have a strong foreign policy when your would-be enemy owes you money). And everyone gets rising asset prices. Which is nice. In theory this is an expansion without limit. That sounds like a joke. It's more an observation.

Limitless prosperity or limitless instability?

This has been our world for some time now. That's aproblem for the likes of us. Why? Because when thepsychology of the price discovery mechanism becomes more dependent on money creation than economic growth, as in Japan during the 1980s and in China for the last decade, asset prices become an abstraction. They separate from our qualitative perception of reality; they are more susceptible to wild price trends that in theory have no limit; and they display a two-way causality.

This isn't how it is supposed to work. In a more normal world you can think of finding value in terms of the one-way causality of a thermometer and room temperature. If we doubt the veracity of the thermometer we can always produce an independent, second, thermometer to determine the proper temperature. The temperature is what it is. Just as in investing, the fundamentals are what they are. But what if it wasn't like that? What if by warming the mercury in the thermometer, we could also raise the room temperature? This is what happens in the wacky world of neo-mercantilism.Here "fundamental" investing has little or no merit. There is one reason for being long and one alone: sovereign nations are printing money and you can see that prices are trending. That's it. Nothing else matters. Think of a neo-mercantilist market as if it were a mouse with the toxoplasma virus. The virus hijacks its immune system and makes it fearless. It dies in the end. But not before it does some pretty nutty stuff. There's no more point in yelling "watch out for the cat" at a mouse hijacked by toxoplasma than there is looking at valuation measures in a market hijacked by mercantilism.

Me and my immune system

My investing immune system has been in pretty good shape recently. But that's the main reason why I've produced mediocre investment performance. I've been sensible.But in doing so I have imposed qualitative, one-way causality arguments onto a market that just doesn't care. I need to be more like the mouse (just without the bit where it dies) and that means I have had to put aside qualitative analysis and be in this trending market. I had thought it would be worth staying bearish and accepting underperformance for the fun of being right in the end - becoming what the British call a vexatious litigant, someone who fights for the sake of it. But I'm not sure any of us can wait that long. Playing it safe, as my good friend Chris Cole wrote last year may be the greatest risk of all." So the mouse it is.

America fights back

Back to our story. What happens when the donor can't take it any more? This happened in part in March 2009 when the US rejected Asia's neo-mercantilism. Two destructive, domestic boom/bust cycles within a decade had left gross debt almost four times GDP. The domestic economy had become unresponsive to even record fiscal expansion and almost zero overnight rates. Something had to be done to regain the initiative. Polite requests for the Chinese to allow their currency to revalue higher versus the dollar were rebuffed and in its absence expansionary American fiscal and monetary policy only served to make China richer. Not ok. So America fought back. With QE.

If the Chinese were never going to revalue their currency themselves, the US would effectively do it for them. QE would target higher prices in China, something that would revalue the renmimbi in real terms and, with a bit of luck, produce the consumer boom that its bureaucrats had so steadfastly sought to prevent. This would transform China into the donor country and also generate the prosperity America needed to recover from the clutches of its debt deflation. And so the sands shifted again. The Fed kicked off its Treasury purchase program in 2009 in the full knowledge that the lack of demand for productive investment in the moribund US economy would create a surplus of speculative flows into faster growing regions of the world. It also knew that such flows would force the foreign exchange targeting emerging market central banks to print even more of their own currencies to keep a lid on their exchange rate appreciation as the dollar debased itself. The Fed then recognised how the chain reaction we have chronicled above would go. Emerging market asset prices would be bid up, something that would in turn be met by more central bank printing of local currencies which would then be leveraged through the emerging market banking system into even higher local asset prices and so on and so on and so on.

The Fed starts winning

This works. Well it works for the Fed. We estimate that total emerging market debt now surpasses $66trn.That's almost two and a half times emerging market GDP and double its level at the start of the Fed's QE extravaganza. At the same time car sales in China have surpassed those of the US and property prices are on a rip. Housing transactions are up 35% year on year and new home prices are rising across the nation by between 15% and 20%. Looks like a consumer boom doesn't it? So from the Fed's point of view this is going well. So well that since July 2008, the renminbi has appreciated by some 30% against the euro. But while the Fed might be pleased the Chinese probably aren't.

"When the monster stops growing. it dies. It can't stay one size."

The Grapes of Wrath, John Steinbeck

The mercantilist plan has always been to push overseas trade expansion via the perpetuation of an under-valued currency. It isn't working out. Look at Europe. Europe's nominal GDP was supposed to be much higher by now (partly on the back of China's helpful 2009 bout of credit expansion). But it has only surpassed its previous highs by 2%. And denominated in renminbi, it's much much worse: theEuropean economy has nose-dived by 25% since March 2008. Try being a small labour intensive manufacturer in some coastal Chinese city renowned for its export prowess but struggling with fast rising wages selling into that!

The German philosopher and experimental psychologist scientist, Gustav Fechner, once proposed a rule that can be expressed as follows "in order that the intensity of a sensation may increase in arithmetical progression, the stimulus must increase in geometrical progression?"That seems to describe China pretty well. The huge disappointments in growth elsewhere mean that for China's GDP to make arithmetic progression, a geometric intensity of effort - with no theoretical end - is required. The monster has to grow. Note that since the Fed turned the tables with its QE policy in 2009, China has had to consume more concrete in its roads, rail projects, bridges, factory construction and new buildings than the US did during the entire 20th century. Yet despite this Herculean effort its structural growth rate has fallen by 30%. This is all fascinating. But tell you what it isn't. It isn't stable. It is what China expert Michael Pettis would call a volatility machine.

Markets predicting deflation get asset inflation

Something happened in April of this year that I think may have marked a turning point. Before I go into that I want to be sure we all understand something. You want to believe that China's growth rate over the last 30 years has been a triumph of superior state planning and the irrepressible force of urban migration, a one way causality if you like. I'd like to too. But we have to accept that it just isn't true. Instead it is the result of a system of foreign exchange suppression - and so anchoring our expectations to it is a very bad idea. With that in mind, I'm going to ask you to consider the US Treasury Inflation Protected Securities (TIPS) market. As you know, we allocate a lot of time and risk capital to equities. Their malleability allied with low transaction costs and liquidity make them an excellent way for us to invest in our macro narratives. But we find it hard to buy and sell equities based on valuations. Doing it like this is just too imprecise. So we prefer the certainty of inflation expectations: you should be long equities if inflation expectations are trending higher — or more specifically for us when the 10-year inflation expectation, derived from the TIPS market, is greater than its 200 day moving average.

Over the last decade you could have done this and nothing else and escaped most criticism. A simple trading rule where one is long S&P futures when the condition is met, and flat otherwise, has produced a return of 75% since the 1st of January 2003 (around the bottom of the TMT crash). A long-only strategy has produced better gains - almost 95% - but using the rule would have lowered your maximum drawdown from 56% to just 20%. So once you adjust for volatility you can say that you would have done better investing guided by trend inflation expectations than not. The 10-year expectation moved below its 200 day moving average in April this year. And yet we have taken a resolutely contrarian message from this signal. Don't sell equities. China's pledge to maintain high GDP growth rates by ploughing on with capacity enhancing supply additions to its fixed capital formation, even at a time when the still risk averse banking system in Europe and America is failing to produce a consumer boom in the West, is fast building global deflationary pressure. That's the resounding message from the TIPS market. And in a world of two way causality, that could continue to prove immensely bullish.Why? Because the Fed uses this criteria as its principal benchmark for determining whether to taper or not.

So imagine the virtuous loop that runs through asset prices today. The Fed begins QE to thwart neo¬mercantilism and capture more of its own domestic expansion. The Chinese witness a shortfall in their GDP growth rates as their overseas expansion moderates. This robs them of the ability to loosen policy in the West. They counter by embarking on more fixed capital formation to maintain a floor on domestic GDP growth. This adds to the global supply equation that drives break-even inflation expectations lower and leads the Fed to once more embark on yet looser monetary conditions. It is a reflexive cycle that can drive mice to be madder and madder. Or braver and braver. Depends how you look at it. But either way, only a foolish investor would stand in the way of this bull market. It'll crash of course, just not for a while.

Want to make real money? Make it in Japan

What if I were to tell you that you could buy something for $300k and it might be worth $5m in a couple of years? Is that something you might be interested in?

Japan has never been very far away from my thoughts. I've grown old as its economy and stock market have languished from the aftershocks of their equity price bubble in the 19805. My first year as an investment analyst in Edinburgh was spent conducting research on Japanese stocks in the year immediately after the bubble had popped. I remember the denial on the part of my superiors that the show had ended. It's hard to accept you have luck not talent.

Later I remember being struck by how the Dow Jones Industrial Average had broken its 1929 price high 25 years later in 1954. That really captured my imagination. I don't know why. Perhaps even then it was the notion of an economic life cycle savings hypothesis. That people make consumption decisions based on their current stage of life. That we have roughly 23 years or so to accumulate savings and a pension to see us through our less industrious later years. It made sense to me that regardless of the stock market bubble in the 1920s, 25 years should be sufficient to take out a nominal price established so long ago. I reasoned that even low rates of inflation compound to quite a large number over so many years. And that the nature of social democracies is that they dislike prolonged hardship. If things get so bad then sooner or later they are going to vote for politicians who will address their concerns.

So I started looking around to see whether I could find other asset classes that complied with this pattern. Gold caught my attention. The price high of January 1980 struck me as being similar in magnitude to what took place on Wall Street all those years previously. Gold flew from its shackles of $35 an ounce in 1970 to sell briefly for more than $800 in January 1980; and then it crashed. But the nominal price high was taken out 27 years later on the 28th December 2007. The silver market had been cornered at the peak making its price high that much more difficult to surmount. It needed 31 years to re-establish the old price high. The oil market took just 24 years to break the $40 handle last seen in March 1980. Interesting isn't it?

I then became fascinated by the 7th of December 1941. Yes it was the date of the attack on Pearl Harbour but it also represented an incredibly rare occurrence: the Dow Jones traded at its 50-year price moving average. John Templeton bought his "penny" stocks and the rest was history. This brings me to Japan. The TOPIX stock price index has recently traded as low as its 50-year moving average and better still, next December will mark the 25th anniversary of its great price peak.

Maybe this doesn't mean anything. But it is our contention that Japan's long spell in the sin bin has left its society particularly vulnerable to the charms of a radicalisation of monetary policy. We reckon that with the pro-growth shocks of neo-mercantilism essentially having run their course, Japan will struggle to produce the incremental GDP necessary to service and repay its gigantic sovereign debt load. This will provoke inflationary price targeting by a politicised central bank that should send Japanese stock prices heavenwards once more. I'm not eulogising about Abenomics and its golden arrows here. Instead I'm expressing a more negative kind of bullishness:the fear of persistent policy failure that leads to fiat money printing without limit.

Back in 2008, with world equity markets in turmoil, I purchased a one-touch 40k Nikkei call option for which we paid $300k. I could envisage the yen strengthening substantially and triggering a corporate shock as Japanese household names buckled under the duress of currency appreciation. I also bought a lot of credit protection. And sure enough, in 2011 and for the majority of 2012 the yen strengthened. Japan recorded its largest manufacturing bankruptcy and a number of prominent household names, the giant electronic businesses, saw the cost of insuring their debt sky-rocket. For instance, Sharp rose from a spread of around 100 in January 2012 to over 5,900 in October of the same year. The Japan iTraxx Index for five-year protection, however, only flared to 220 (from around 100 in 2010) and so our hypothesis that much of corporate Japan would buckle under the weight of yen strength proved unfounded.

That was a shame but nevertheless, this "crisis-lite" was sufficient to produce the political intervention that we had envisaged. The most senior policy makers at the Bank of Japan were unceremoniously removed from office and monetary policy was set, instead, very loosely, propelling yen asset prices higher. The stock market leapt by 60% on the news and the currency weakened by 20%. And, as the chart below of the Japanese five-year break-even inflation expectation reveals, one should be long their stock market. We still value the one-touch at our purchase price today, and with the market approaching 16k and trending higher, who is to say where it will trade in April 2018? If it touches 40k, get $5m.

CHART PAGE 7

Where will it all end?

Remarkably, the aftershocks of Japan's volte-face seemed to catch American policy makers out. In May, the Fed, convinced that its QE program had succeeded in re-distributing global GDP away from China and towards the US economy, began signalling its intent to taper its easy money by autumn. However, with 10-year Treasury rates having moved from 1.75% to 3% and its fourth largest trading paltrier having devalued by 20% since the previous November, the anticipated vigorous domestic American growth never actually materialised; it was captured instead by the new and even looser monetary policy of Japan. Yet again the reflexive loop had worked to sustain the monetary momentum that is feeding global stock markets. Andthe not so all-knowing Fed? It had to shock market expectations in October by removing the immediacy of its tighter policy and stock markets rebounded higher. Where will this all end? Can it ever end?

There are multiple possible outcomes. The one markets are most vulnerable too is the re-emergence of bullish bankers. They could lend such that the consumer boom in the US and Europe finally sparks and in doing so provoke the Fed to finally tighten policy. That would spook developed market equities but not as much as you might think - they will have the palliative of the stronger GDP growth. Emerging market equities are closer to the edge of a bubble and could prove more susceptible to a greater drawdown owing to the fragilities of their debt fuelled economies. But for now, the re-emergence of risk-seeking bankers fuelling a lending boom in the West seems remote. We aren't too worried about it. In Europe for instance the banking system has an estimated 2.6trn euros of deleveraging (circa 30% of GDP) still to complete, having shed 3.5trn euros already.

So we are happy to run a long developed market stock position with a short hedge composed of emerging market equity futures. We are running an unhedged long in Japanese equities as our wild bullish card (we have, of course, hedged the currency).

It seems then to us that the most likely outcome is that America and Europe remain resilient without booming.But with monetary policy set so much too loose it is inevitable that we will continue to witness mini-economic cycles that convince investors that economies are escaping stall speed and that policy rates are likely to rise. This will scare markets - and emerging markets in particular - but it won't actually materialise: stronger growth in one part of the world on the back of easier policy will be countered by even looser policy elsewhere (the much fabled "currency wars"). So market expectations of tighter policy will always be rescinded and emerging markets will recover rather than crash. Developed markets just keep trending positively against this background - and might accelerate. Remember what we said about 1928 and 1998 at the beginning.

Just be long. Pretty much anything.

So here's how I understand things now that I am no longer the last bear standing. You should buy equities if you believe many European banks and their sovereign paymasters are insolvent. You should buy shares if you put a higher probability than your peers on the odds of a European democracy rejecting the euro over the course of the next few years. You should be long risk assets if you believe China will have lowered its growth rate from 7% to nearer 5% over the course of the next two years. You should be long US equities if you are worried about the failure of Washington to address its fiscal deficits. And you should buy Japanese assets if you fear that Abenomics will fail to restore the fortunes of Japan (which it probably won't). Hey this is easy...

And then it crashed

I have not completely lost my senses of course. Eclectica remain strong believers in the most powerful force in the universe - compounding positive returns - and avoiding large losses is crucial to achieving this.

We have built a reputation for getting the calls right in the difficult space that is macro investing, which has served us and our clients well during both trending bull markets and times of crisis. Today, of course, the market is "golden" which is to say that the 50 day price trend is above the 200 day. But remember that during those forays into the "dead-zone", years like 2008 and 2011 when equity markets crashed, Eclectica performed handsomely. I like to think therefore that I own an alpha crisis management franchise that has rewarded our investors at limes of stock market stress.

This commitment remains as resolute as at any time over the last 11 years that I have managed the Fund. But what if I could produce a consistent alpha return profile with the in-built crisis hedge to your wealth... is that something you might be interested in?

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

"Hendry: I would buy Bitcoin if I could"

noreply@blogger.com (Ili) — Tue, 03 Dec 2013 14:11:00 +0000

Eclectica’s Hugh Hendry has said he would buy into online currency Bitcoin if it were feasible to do so within his funds.

Hendry (pictured) has bought 3D printing stocks as a play on trend-driven, QE-fuelled equity markets, and said the rise in the valuation of Bitcoin amounts to “the same thing”.

All US-listed 3D printing stocks are trading on at least 50 times earnings, but Hendry said he has little concern over the sector’s sky-high valuations.

"We are in 3D printing stocks. I say to my team 'don’t tell me the valuations, it is trending,'" he said, speaking at a Harrington Cooper conference at which he also revealed he is no longer bearish.

The power of those trends is such that Hendry said he would own Bitcoin if it was accessible on a regular exchange. The value of the volatile online currency passed $1,000 per coin for the first time last week.

“This is the environment where Bitcoin could go to $1m. There is no qualitative reason, but it is trending. If I could own Bitcoin, I would. If I own 3D printing, it is just the same thing,” he said.

Hendry added equity market fundamentals do not matter at a time when policy is misaligned, emphasising instead the ‘feedback loops’ created by US quantitative easing.

“There is no point arguing about the one-way causality we [as an industry] believe determines our processes. That is all about a belief this is rational.

“We want to believe markets go up because the economy is improving, because corporate cashflows are improving. But when you get monetary disturbances creating loops, it does not really matter.”

Meanwhile, although the hedge fund manager remains concerned over the fate of China, despite his bullish turn, he acknowledged trend-driven investors could also play Chinese stocks effectively.

“You could go long consumer discretionary, or long Chinese internet stocks, and hedge out the beta,” Hendry said.

Source: investmentweek.co.uk

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

'I can't look at myself in the mirror': Hendry reveals why he has turned bullish

noreply@blogger.com (Ili) — Mon, 25 Nov 2013 19:01:00 +0000

Eclectica hedge fund manager Hugh Hendry has said he has been forced to leave his bearish outlook behind as he faces up to a market “which only makes sense through the prism of trends”.

Speaking at Harrington Cooper's 2013 conference this morning, Hendry (pictured) said he is no longer fighting the "two-way feedback loop" which is continuing to boost risk assets.

That centres on the currency war being played out between the US and China, in which US QE prompts dollar-denominated investment to head to China, and China fights the resulting upwards pressure on its currency by manufacturing an investment boom.

Hendry said this creates a "global supply glut", leading to falling US inflation expectations (as this supply far outweights US domestic demand) - which in turn prompts the Federal Reserve to loosen policy once again.

"I can no longer say I am bearish. When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out," Hendry said.

"I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years' time."

"I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends."

Opportunities

Hendry said he is looking for ‘auto-correlations' that benefit from this feedback loop.

Though he first began turning more positive on the likes of US and Japanese equities last year, Hendry suggested this morning the current environment created more counter-intuitive opportunities.

"This applies to European banks, Greek equities, Spanish equities. You have got to be in things that are trending," he said.

The manager's Eclectica Absolute Macro fund had a 64% value at risk equity allocation in September, up from 45% in August, with December 2013 Japanese TOPIX index futures his biggest single holding on a VaR basis.

Addressing attendees this morning, Hendry said his comments would take on a "confessional" tone, and admitted his performance over the past year had been "at best, mediocre".

Hendry's CF Eclectica Absolute Macro fund has lost 2.6% in the nine months to 30 September, according to the firm.

Risks to his reputation

The manager acknowledged his changing stance may be viewed by some investors as a 'top of the market' signal, but said he is not concerned by the prospect of a crash.

"I may be providing a public utility here, as the last bear to capitulate. You are well within your rights to say ‘sell'. The S&P 500 is up 30% over the past year: I wish I had thought this last year."

"Crashing is the least of my concerns. I can deal with that, but I cannot risk my reputation because we are in this virtuous loop where the market is trending."

Hendry said he retains a degree of safety within his portfolio by hedging out his bullishness through trades such as high beta US stocks versus emerging market stocks.

"There is the constant danger that Western bankers turn bullish again, start leveraging up, and we see money go into productive assets, not financial assets," he said.

"If that happens and the Fed does tighten policy [as a result], it will just be really bad news for emerging markets."

Source: http://www.investmentweek.co.uk

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Hugh Hendry Investment Outlook - June 2013

noreply@blogger.com (Ili) — Sat, 10 Aug 2013 19:18:00 +0000

From Hugh Hendry, CIO of The Eclectica Fund.

This year we have pursued five macro themes: long the US dollar, short China, long Japanese equities, long low variance equities and long interest rate
contracts at the short end of G10 fixed income markets.

Towards the end of May, however, the Fund experienced a sharp rise in its volatility from an annualised rate of 4% to 7%. The invisible regime of low volatility and low correlations that had been so supportive of risk markets for at least the last year started to become unhinged.

The catalyst came from the announcement that the US Federal Reserve may soon tighten its monetary policy following yet another better than forecast US employment figure. The jobless rate in America is down to a four-year low. This purported change of policy however created a chain reaction that spread across global financial markets.

As cross-asset correlations rose, the Fund became less diversified. This necessitated that we reduce our risk exposures across all trades; G10 receiver trades and Japanese and low variance equities were closed completely as their severe price reaction challenged their intermediate up-trends.

As a consequence, the Fund fell by 2.1%. The main negative contributors were the short-end interest rate swaps and afore-mentioned equities, offset by modest gains from FX positions as the dollar strengthened and volatility trended higher in EM currencies.

In the Far East, by contrast to the bullish American outlook, the evidence of an economic slowdown in China continued to mount and commodity exporting countries that rely heavily on sales to the Middle Kingdom came under heavy selling pressure. China accounts for 27% of total Australian exports, mostly raw materials, and the country finds itself in China’s slipstream. Unfortunately, in a break with the recent past, it was the currency markets, and not our 3yr interest rate contracts, that benefited the most from the move. The Australian dollar recorded its seventh worst monthly performance (-7.7%) of the past 20 years. But instead of enjoying some of this move, the spectre of tighter US monetary policy contaminated the outlook for rates globally and our 2y1y swap positions rose rather than fell costing the Fund 57bps.

In Japan, rising bond yields were also the culprit. Volatility surged as Japanese 10-year rates went from 30bps to trade over 1% at one point in May, before closing at 0.85%. As it costs the government about a quarter of its total tax revenues just to pay the interest on its debt at current levels, the unsettling disorder in the bond market was rapidly interpreted as a threat to public finances and GDP growth. Japanese stocks saw heavy profit taking with the TOPIX recording a 17% slide in late May. The Fund recorded a loss of 31bps from Japanese equities.

Heading into June, we retained a slightly larger short China position, we boosted our long position in the US dollar and re-directed it to reflect an outright short of emerging market currencies.

We also transformed our Australian rates trade into a bullish curve steepener (that is to say, we added a short ten year leg). A similar position was initiated in Korea. These countries remain unique in having a developed world FX profile and overnight rates which remain high by international standards, giving the authorities considerable leeway to cut overnight interest rates. Ten-year rates, however, are liable to be dragged higher by US Treasuries. So if the respective central banks do react to the slowdown evident in China by cutting short term rates, this could give rise to further steepening.

Copyright © Hugh Hendry, The Eclectica Fund

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Hendry: Japan's return is bad news for the global economy

noreply@blogger.com (Ili) — Mon, 17 Jun 2013 14:59:00 +0000

Hugh Hendry believes that Japanese equities will continue to go up in 2013 but he also increased bets that Japanese recovery will have harmful effects on other sovereign bonds. He has bought TOPIX index futures and shares in Japanese property companies to exploit the weakening currency. But Hugh Hendry, same as Jim Rogers said that Japan's initial success at revitalizing its economy will be someone else's loss. "Japan's monetary pivot towards QE will not create economic growth out of nothing. Instead it seeks to redistribute global GDP in a manner that favors Japan versus the rest of the world. This is the last thing the global economy needs right now," Hendry said.

The manager pointed to PMIs that suggest business activity is again slowing, and said the combination of this trend and a resurgent Japanese export sector "does not bode well for economies in Europe and the rest of Asia".

Hendry said he has started buying short-dated sovereign bonds from issuers in Australia, Europe, Korea, Switzerland and the US.

Other investment themes

Hugh Hendry has been buying US blue chips, focusing on those with the least debt on their balance sheets.

"Given our longstanding caution regarding the prospects for the global economy, we have looked to express equity risk by being long cash generative businesses with the strongest balance sheets and the least economic sensitivity," he said.

After bank accounts confiscation, bonds with no yieleds and gold going down, people worried about inflation it seems that the stock market might start its next asset bubble as money has nowhere to go.

"It could be argued that for such an investor, all roads lead to the safest, least volatile, most liquid consumer non-discretionary blue chips on Wall Street, which provide a 3% dividend income payable in dollars."

A long trade on the USD has also been a major position for the Eclectica fund, with Hugh Hendry highlighting the relative strength of the US economy as a major investment theme in the portfolio.

He says that unlike many other countries, the USA has dealt with its housing bubble, recapitalized banks, and took the pain as wages there went down while in Asia up. Not only is this but shale gas providing temporary boost to the USA productivity and industry.

Hendry also stated that the dollar has become less negatively correlated to the performance of the stock market, in a break from its recent correlation traditions.

"It is too early to draw anything firm from this, but the sight of the stock market and the dollar rising in tandem looks more like the regime which accompanied the last two dollar bull markets of 1980-1985 and 1995-2001," he said.

Hugh Hendry Still Bullish On Gold

noreply@blogger.com (Ili) — Thu, 18 Apr 2013 13:23:00 +0000

Even though Hugh Hendry stated during a conference in 2012 that he has no idea where gold is going for the foreseeable future, he continues to be bullish on the metal and expect it to go much higher in the future.

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Watch Hugh Hendry And David Einhorn Discuss The Markets - Live Webcast Of Buttonwood Gathering

noreply@blogger.com (Ili) — Thu, 25 Oct 2012 17:10:00 +0000

Watch live streaming video from theeconomist at livestream.com

Everyone's favorite outspoken critic of everything that is broken, Hugh Hendry, is currently speaking at The Economist's Buttonwood gathering. Watch him contemplate macro and micro issues live in the webcast below. And for desert, everyone's favorite poker player, David Einhorn will follow Hendry.

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Views from Hugh Hendry's 2012 Letter

noreply@blogger.com (Ili) — Sun, 21 Oct 2012 19:35:00 +0000

Hugh Hendry is back once again with a shareholder and investment letter that basically explains what he thinks about World Business. Businesslender has summarized that letter into the following points.

Hendry is skeptical that China will take over US for having the highest GDP in the world. He is fairly confident about the booming energy business in the US and highlights the fact that Natural Gas is very cheap inside the US and that very soon the US could reach a point where it becomes energy independent.

The issue with China's success is that it was based too much on the depreciation of their currency which was brought about by artificial means. It prevented banks and other financial institutes from raising interest rates on saving accounts. People who used to save their money in banks would usually get their estates crushed and that is why more and more people started buying houses which created a housing bubble. The scope of the housing bubble in China has never been this wide. Underground credit has also reached very high values and the trillions of dollars originating from different firms like shipbuilding and house building are ending up in mortgage credit. Hendry believes that when the market collapses, countries as far as Japan might get affected.

China is worried about this situation and this is why it has removed plenty of underground companies from the setup.
Hendry predicts a Weimar kind of situation for people of China. This is because the Chinese government took different measures to ensure that they got a lot of money printing done as compared to their economy side and the financial weakness abroad means that China cannot simply have a better economy on the back of exports alone.
The Chinese market resembles more like a casino as there is no benefit to invest in China. It only benefits the people in the inside.
Japanese Corporate companies falling to credit default swaps are exposed to the Chinese market. Japanese companies have to worry about the different issues that arise with high debt loads. That is why Japan still manages to attract fools who think that the stocks are priced too low.
The situation in Japan is peaceful says Hendry and this peace could rock the entire world in coming years. Japan is not expected to depreciate the value of Yen anytime soon. The central bank of Japan and other authorities will most probably do it after a phase of corporate losses and yen appreciations.
In the end, Hendry closes off by saying that another washout for the market is imminent and that the VIX figures could touch 80 with Treasury yields falling to 2.5% from their current figure of 3.12%. In the coming years, people will be presented with a very good chance of buying some of the valuable risk assets. Hendry isn't too confident about the effectiveness of bonds as compared to VIX but the question is how much the stocks will fall to allow VIX to go up to 80.

Hugh Hendry 2012 Letter and Views

Ultimately, he thinks we'll see one more washout in the market, with 30-year Treasury yields hitting 2.5% (they're currently at 3.125%) and the VIX surging to 80, at which point we'll have a truly 'generational' opportunity to buy risk assets. It is really interesting view because he is not overly bullish on bonds compared to VIX. I wonder how much stocks must go down so the VIX go to 80. Probably his view on the bonds expresses that even though bonds are safe heaven they are at their last stage of a bubble.

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

The State of Present Day Europe from the words of Hugh Hendry

noreply@blogger.com (Ili) — Sat, 20 Oct 2012 14:43:00 +0000

Hugh Hendry was present at the Milken Institute Conference that was held recently and Hendry was in fullform as he delivered another one of his usually expressive speeches about the state that Europe is at the moment. The young and shrewd Hendry started off his talk with the statement that "All of Europe has defaulted" and that,

"The political economy in Europe is such that the politicians chose to default on their spending obligations to their citizens in order to honor the pact with their financial creditors and so as time goes on, the politicians are being rejected".

Throughout the time he took stage, he went through the different consequences of Mr. Hollande's election as France's premier, the tough policies adopted by Luxembourg and the fact that Europe is left with only one inspiration and that is fiction since no one can really make out how bad the situation in Europe actually is. He discusses a new method for going forward, talks about the failures of fixed-rate exchanges, why the Weimar tragedy took place, why a union transfer can never happen and what was the reality behind Ayn Rand's story. You will get a very good idea of the situation in Europe when you watch this discussion.

Hendry goes on to tell what the underlying reality is,

"The underlying reality that what the European monetary union is about is not about preventing a third so-called European civil war, it is essentially about making someone (France, Germany or both) a Great Power, a European Hegemon, and a global player."

Hendry takes stage around the halfway mark of the discussion and starts talking about the British point of view about the flawless German mind and why a union transfer cannot take place in Europe. Fifteen minutes later, he is having a go at Germany again as he explains why its housing bubble will never take place. Furthermore, at 52:00 he tells about his expectations for a strong US dollar. At the start of the hour mark, he recollects why he could not finish Ayn Rand's Atlas simply because it was just too much a close description of the world that we inhabit today.

He was quoted as saying,

"We have reached a profound point in economic history where the truth is unpalatable to the political class - and that truth is that the scale and magnitude of the problem is larger than their ability to respond - and it terrifies them."
Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Hugh Hendry: 2012 Milken Institute Global Conference

noreply@blogger.com (Ili) — Fri, 07 Sep 2012 12:34:00 +0000

Hugh Hendry Comments

noreply@blogger.com (Ili) — Thu, 03 May 2012 18:28:00 +0000

“The thing that I fear is confiscation. Confiscation of my assets, confiscation of my clients’ assets. I fear that this thing could get out of [control]. I think we’re a year away from the French fully nationalizing their banking system…”

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Hugh Hendry 2012 Letter and Views

noreply@blogger.com (Ili) — Tue, 01 May 2012 17:03:00 +0000

Hugh Hendry is back with a great investment and shareholder letter which provides a great insight into what he thinks. Here is a brief summary from BusinessInsider.

Hendry is still very bearish on China. He doesn't think that China will be supplanting the US economy as the world's #1 in GDP anytime soon, and in fact he's fairly bullish on the US thanks to the burgeoning energy business. He might be right as natural gas is extremely cheap and USA could become energy independent at a certain point in the future.
The problem in China is that its success was long based on the artificial depression of the currency, and financial repression that prevented banks from offering decent interest rates to savers. Anyone with their money in a bank got crushed, so to get around this financial repression the people bought houses like crazy. That is why he believes that there is a big housing bubble.
The scale of the Chinese housing bubble has been unprecedented, and the scale of underground credit is enormous. There are trillions of dollars of loans that originate through firms that are nominally in businesses like shipbuilding, but which ended up in the mortgage credit game. Once the market start crashing it will also affect Japan.
China is so freaked out by all this, it's given death sentences to some of the underground players in the real estate bubble.
Hendry sees a Weimar-like situation where Chinese leaders thought they could get away with fiscal profligacy on the back of strong exports, but the weakness abroad means it might not happen. He is worried that the Yuan might also depreciate and even crash given the huge money printing the Chinese did compared to the size of their economy.
The Chinese market is a casino, pure and simple. It only benefits insiders. There's no reason for anyone to invest in it.
The way Hendry has shorted it, however, is via Credit Default Swaps on Japanese corporates that are exposed to China. Japanese companies remain very troubles with debt loads that are way too high. This is why Japan is a value trap that has taken in suckers for years, thinking that stocks are very cheap.
In Japan he sees, what he calls "The Tranquility That Could Rock the World." Even though he is pessimistic about the Japanese corporations, he believes that the authorities and the centra bank of Japan will not devalue the yen and will probably do it after another round of yen appreciations and corporate losses.
Ultimately, he thinks we'll see one more washout in the market, with 30-year Treasury yields hitting 2.5% (they're currently at 3.125%) and the VIX surging to 80, at which point we'll have a truly 'generational' opportunity to buy risk assets. It is really interesting view because he is not overly bullish on bonds compared to VIX. I wonder how much stocks must go down so the VIX go to 80. Probably his view on the bonds expresses that even though bonds are safe heaven they are at their last stage of a bubble.

You can view the whole 2012 Hugh Hendry letter below:

April 2012 TEF Commentary

Hugh Hendry Investments

noreply@blogger.com (Ili) — Wed, 14 Mar 2012 20:00:00 +0000

Below you can read what Hugh Hendry of

Electica Asset Management

Has Been Buying
"In the next 12 months, we'll see further pathological swings in investor sentiment. Despite my reservations, I'm modestly long equity-market futures, some nonindustrial commodities, and some bullish fixed-income positions. We are very bullish agricultural commodities and agricultural equities, and hold a global basket of businesses—with interests ranging from fertilizer to farm equipment."

He has also positioned his fund by betting on Japan’s corporate debt problems by buying protection on steel names and businesses sensitive to the yen. He's also bought credit protection on the shipping industry in Japan such as Mitsui OSK.

Additionally, Hendry mentioned he's got protection on companies levered to the global economy such as Sumitomo and Marubeni.

Hugh Hendry Quantitative Easing Cycle

noreply@blogger.com (Ili) — Wed, 07 Mar 2012 21:00:00 +0000

1. FED QE
2. Rejects Globalization
3. Rejects China Gaming FX
4. Fed Seeks to Create Domestic Price Inflation Overseas
5. Fed Seeks to Revalue China et al FX Real v Nominal Prices
6. But China Imposes Tighter Credit Controls to Offset Fed Stimulus
7. And Euro Debtor Countries Raise Rates Despite High Unemployment a la 1931
8. And so EM Growth Slows
9. And with a six month lag US / Germany Slows
10. But Zero Lower Bound Restricts Monetary Policy
11. And High Sovereign Debt Restricts Additional Fiscal Stimulus
12. FED do another QE

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Hugh Hendry 2012 Investments

noreply@blogger.com (Ili) — Tue, 06 Mar 2012 10:03:00 +0000

In the next 12 months, we'll see further pathological swings in investor sentiment. Despite my reservations, I'm modestly long equity-market futures, some non-industrial commodities, and some bullish fixed-income positions. We are very bullish agricultural commodities and agricultural equities, and hold a global basket of businesses—with interests ranging from fertilizer to farm equipment.

Hugh Hendry on the Greece

noreply@blogger.com (Ili) — Mon, 05 Mar 2012 19:01:00 +0000

As for Greece, the end game will be the Greeks rejecting austerity. The euro is nothing but a gold standard lacking flexibility, and the entire onus is on private citizens to take the pain. Eventually, a Greek politician will say, ‘Vote for me, and I’ll get us out of this system.’

Hugh Hendry bought CDS on Japanese Corporations

noreply@blogger.com (Ili) — Mon, 05 Mar 2012 19:00:00 +0000

Hugh Hendry of Eclectica Asset Management: Clearly, they can and do go bust. I’m buying the CDS on investment-grade Japanese corporations because of the overpricing anomaly. Japan had a bust 20 years ago, and yet today the banking stocks, relative to (Japanese bourse) Topix, are making fresh lows.
If I’m a Japanese bank and I lend money to a new business, I get 1% on 10-year paper. Then the bank gets a call from me, and I’m willing to pay 50 basis points for five-year protection on this same company. So suddenly, the yield has gone from 1% to 1½%. Compare that to five-year Japanese government bonds, yielding 30 basis points. The bank thinks: This is a great trade! Japanese steel companies are investment-grade and won’t go bankrupt. So, the bank gets this huge yen yield, and thinks it is not taking any risk. You’d better believe it will sell way too much of that good thing.
One of my partners told me about Japanese steel: Here is a country with no energy, no iron ore or coal, yet it’s the largest exporter of steel in the world, exports half its output. To put that in context, China manufactures 700 million tons of steel and exports perhaps 30 million. Japan produces 110 million tons and exports 40 million. As long as Asia is strong, they are fine. But if Asia hiccups or reverses, plant-utilization rates go from very high to very, very low very quickly.
Then we discovered that Warren Buffett owned shares of South Korea’s Posco [5490.S. Korea], and that Korea was the biggest importer of Japanese steel, but Posco and Hyundai [5380.S. Korea] are building huge, integrated steel plants. They have a surplus of steel capacity and—guess what?—they’re exporting to Japan, because the yen is so strong.
Initially, I wanted to buy a three-year, out-of-the-money put on Nippon Steel. My broker said, “I’ve been in a 20-year bear market; my boss will kill me.” Then I thought, being long credit protection is being long volatility. I redialed his credit counterpart. I said: “I’m thinking of purchasing up to a billion yen of five-year credit-default swaps in Nippon Steel.” The first thing he said was, “Would you consider 10 billion?” So one part of the bank is banned from selling volatility, and the other part is having a party. I bought reams of the stuff.

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Hugh Hendry on Hyperinflation and Hyperdeflation

noreply@blogger.com (Ili) — Sat, 03 Mar 2012 08:31:00 +0000

Hugh Hendry: The world is very fearful of hyperinflation. Pension schemes have a preponderance of real assets, from forestry to gold to TIPS [Treasury inflation-protected securities], because they are very fearful. The road to hyperinflation is via hyperdeflation. That is why it’s proving so difficult for hedge funds to make money. How does the rational mind that anticipates hyperinflation own 10-year government Treasuries yielding less than 2%? It can’t. That’s why people are struggling. To lay the seeds of hyperinflation, you need really, really bad things to happen. I thought the U.S. housing market having a massive crash would be hyperdeflationary. But then my Chinese friends pumped $1 trillion of credit into their $5 trillion economy, and created a global recovery, which has just come to an end. I’m speculating that hyperdeflation happens before hyperinflation. What’s the worst that could happen? But the sum of all my fears would be China having a real hard landing of minus 5% or minus 10% GDP growth. If we had that—and Europe—the Fed would be printing $20 trillion, and I would have gold at $5,000. You can have a modest amount of gold, but you can’t have all your assets in real assets, in case we get that hyperdeflation event.

Hugh Hendry is a fund manager at
Eclectica Asset Management
. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Hugh Hendry on the Chinese Stock Market

noreply@blogger.com (Ili) — Fri, 02 Mar 2012 13:13:00 +0000

Hendry: I should add something else that is contentious—U.S. quantitative easing [that eventually sent more money flowing to China], promoted because America had two sharp recessions and pursued orthodox policies, and had very little to show in the creation of jobs.

The policy was very successful. China now has inflation. Minimum wages have grown 20% annually for the past three years. This has encouraged the Chinese to tighten monetary policy. When you have bubbles and you tighten, bad things happen. China’s stock and property markets are weak, a side-effect of quantitative easing. We may now have the pricking of the Chinese bubble. A year or two down the line, it could have enormous repercussions for the global economy.

It seems that Hugh Hendry same as Jim Rogers, believe that the collapse might come in 2013-2014, and not in 2012.

Hugh Hendry China

noreply@blogger.com (Ili) — Thu, 01 Mar 2012 14:03:00 +0000

Hendry: In 2009, I made a YouTube video of the empty skyscrapers in Wuhan, China. Goldman Sachs and others articulate a very reasonable and compelling argument of being invested in China. With the evidence of my own eyes, I concluded that China had a very robust system of creating gross-domestic-product growth, but forsaking the creation of wealth.

When America was having its China moment in the 19th century, it occurred against the backdrop of a gold standard, a hard-money regime, with a public sector that was minuscule versus the overall size of the economy. As an entrepreneur, if your project failed to generate a sustainable level of cash flow, you failed.

If you talk about a hard landing in China, you talk about GDP growth of 5%, not minus 5% or minus 15%. The Chinese government prints money. It can build superfast railways and overbuild airports, because the rest of the economy can subsidize it. China’s swollen public sector is directing asset allocation, rather than pursuing profit maximization. They see [their system] as a success. But it creates a bubble, which can prove quite damaging.

Hugh Hendry believes USDJPY will go down to 50s, 60s

noreply@blogger.com (Ili) — Fri, 24 Feb 2012 00:14:00 +0000

He believes in coming risk-off, and that there will be a deficit of yens due to carry unwind. He shares that the catalyst will probably be Italian bond market collapse or a China crash along with Asian recession. He bought protection on companies with high sensitivity to the yen.

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Hugh Hendry on China, Japan and Hyperdeflation

noreply@blogger.com (Ili) — Mon, 20 Feb 2012 17:16:00 +0000

I’ll just say this straight out: you really need to know who Hugh Hendry is and, at the very least, consider what he’s saying. He has a brash style which maybe turns some people off, but don’t let that cause you to dismiss what he is saying. His message is important. Really important. The short story is that the global economy is nowhere near being out of the woods, and there are a (huge) number of unresolved issues that all investors should be following. Don’t let being a value investor cause you to stick your head in the sand and ignore the greater world. Micro-fundamentals are important and should be the basis for any investment, but ignoring these risks completely makes you an idiot.

This weekend, Barron’s ran a great interview with Hendry in which he discusses China, Japan and hyperdeflation. Here’s a snippet:

The London-based Eclectica Asset Management saw a 12% return last year in its flagship Eclectica hedge fund, and an eye-popping 46% gain in a new fund that buys credit-default protection on Japanese corporations. Much owes to the relentless logic and cheeky inventiveness of Hugh Hendry, chief investment officer. The Glasgow-born Hendry tells Barron’s why he expects a hard landing in China, and why hyperdeflation will precede hyperinflation.

Barron’s: What makes a great macro fund manager?Hendry: First and foremost, an ability to establish a contentious premise outside the existing belief system, and have it go on and be adopted by the rest of the financial community. My great hero is [Caxton Associates' founder] Bruce Kovner, who was able to imagine the dollar falling to 100 yen—when the rate was 200. I am an existentialist. To my mind, the three most important principles when it comes to investing are Albert Camus’ principles of ethics: God is dead, life is absurd and there are no rules. Of course, that’s a doctrine of promoting the individual. You own your own decisions. As CIO of Eclectica, with $700 million [under management], I have no engagement with the sell side.

Barron’s: Where do you find yourself outside the existing belief system today?Hendry: In 2009, I made a YouTube video of the empty skyscrapers in Wuhan, China. Goldman Sachs and others articulate a very reasonable and compelling argument of being invested in China. With the evidence of my own eyes, I concluded that China had a very robust system of creating gross-domestic-product growth, but forsaking the creation of wealth.
When America was having its China moment in the 19th century, it occurred against the backdrop of a gold standard, a hard-money regime, with a public sector that was minuscule versus the overall size of the economy. As an entrepreneur, if your project failed to generate a sustainable level of cash flow, you failed.China’s great opportunity is taking place within the U.S. fiat system, and so the consequences are perhaps less stark than in 19th-century America, which had stops and starts and many depressions, though with an overarching prosperity. China has not had that volatility.If you talk about a hard landing in China, you talk about GDP growth of 5%, not minus 5% or minus 15%. The Chinese government prints money. It can build superfast railways and overbuild airports, because the rest of the economy can subsidize it. China’s swollen public sector is directing asset allocation, rather than pursuing profit maximization. They see [their system] as a success. But it creates a bubble, which can prove quite damaging.

Source: http://online.barrons.com/article/SB50001424052748703786004577221590093305080.html?mod=BOL_twm_fs#articleTabs_article%3D1

2012 Economic Outlook and Investment Positions

noreply@blogger.com (Ili) — Tue, 14 Feb 2012 09:09:00 +0000

Of the many places Hendry doesn’t want to be long, China is near or at the top of the list. He thinks China could be subject to a 25% decline in GDP over the next five years.

How is that possible?

He draws an interesting analogy:“UK GDP fell 8% in the Great Depression, while US GDP fell 25%.” Inferring, of course, that today’s China is the upstart US to our current “UK peak empire” role. In what he calls “the great unwinding”, the strongest economies in the world are also – ironically – the most vulnerable. But that doesn’t mean he’s bullish on the developed world, either. He has an aversion to just about everything. “It’s checkmate. Everywhere it’s checkmate.”

He believes Italy is insolvent, citing their huge borrowing binge over the last ten years that has only achieved 0% growth. He loves Japan – as a culture and place to visit – but is especially bearish on several Japanese sectors. He’s long credit default swaps with respect to cyclical, leveraged Japanese businesses. He’s also bearish on Japanese utilities, which have issued tremendous amounts of debt since the Fukushima disaster. Hendry’s favorite sacred belief – which he’s betting against, of course – is the fact that no one believes the ECB will ever cut rates below 1%. He’s made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1% next year.

Source: CFA Society of Sacramento. This post originally appeared at ZeroHedge.

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."