Hugh Hendry’s Crystal Ball

February 23, 2012

Global Macro

Hugh Hendry is Eclectica’s somewhat irreverent, sometimes irate CIO. He is a free thinker in a world of compliance and his results speak to both the depth and quality of his process.

My friend and colleague from MacroBusiness, the Prince ( @theprinemb on twitter ), tweeted the recent Barron’s article yesterday and I wanted to share both the link and a few Gems I reckon were in the piece.

As a momentum trader I find myself more often than not moving with the pack – that is buying strength and selling weakness. But as a thinker, researcher and strategist more often than not I do the opposite.

On this topic the following excerpt is superb

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.

So Hendry tries to think for himself but in a way where he knows others will eventually follow, validate his view and deliver his profits.

For the China bears this next bit is really instructive and incredibly thought provoking. I haven’t seen anyone articulate a position that says China won’t tank in such a manner.

In 2009, I made a YouTube video of the empty skyscrapers in Wuhan, China…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.

So if the bubble bursts watch out – but China aggressively defends its economy as a way to defend the regime which is an important difference from the Anglo-Saxon model.

Now if you recall my piece from the other day on gold where I mentioned that the history of these types of crises shows that deflation is more likely than inflation, Hendry agrees.

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.

Me too – my study of economic history tells me we are still closer to deflation than sustainable inflation, whatever the BoE is trying in concert with other their central banker mates.

I’d recommend you read the rest of the article because in a world of compliance, correlated returns and cynical managers closing funds because the high water mark and the prospect of more fees is too remote, Hugh Hendry and Eclectica stand above the pack.

The full article can be found here

Have a great day.

www.twitter.com/gregorymckenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation

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One Comment on “Hugh Hendry’s Crystal Ball”

  1. Andrew Says:

    Thanks for the heads up on this article. Always enjoyed Hugh’s thoughts and his fiery attitude. And your thoughts as well. Keep up the good work, mate.

    Reply

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