Hugh Hendry, the outspoken Founding Partner and CIO of Eclectica Asset Management, gave a 22 minute talk at the Economist’s Buttonwood Gathering. Along with his signature parted-in-the-middle hairstyle and the wry expression from all the gloom and doom, the talk was typical in approaching the macro picture from historical and psychological perspectives. We recommend a viewing of the full video, and provide below some of the highlights from the hedge fund manager who describes his trades as “a history of contentious posturing”.
Before he went long gold in 2002, Mr. Hendry hypothesized that starting from mid 1970s, if we start at a base point of 100, stock market went up to say 900 and commodities were trading at 10 by 2000. Simply, it could be that “one was a loser and the other a winner, and maybe that’s what life’s all about”.
But he saw that the status quo was essentially being held by a group of tech speculators and that some mean to reversion had to happen. He saw the momentum to reject the status quo building up as the tech bubble burst. That is precisely when he launched his hedge fund in 2002 and with his bet on gold made 50% in 2003 — he was also long steel and German copper refineries as he saw the demand for these commodities rising as China built up its massive infrastructure.
In 2006 Mr. Hendry became a treasury bug. Not that the gold play was fully gone, but for gold to go to USD 3000 or 4000, hyperinflation had to set in and no central banker would want to be responsible for architecting Weimar II. He anticipated that when the credit crisis occurred (Lehman 2008), the central bankers would intervene and keep rates down which would be beneficial for the high coupon treasuries.
He sees (and seems to enjoy) the paradox that made the trade successful: Something profoundly bad would have to happen for central bankers to be willing to build Weimar II, so when something rather bad happened (the credit crisis) they would do the opposite of what needed to be done — “think inflation but buy bonds”. He made 50% in October of 2008.
Lehman Times X and the West, Japan and China:
He envisions that something profoundly bad (“Lehman Times X”) is going to happen resulting in higher prices for gold, Yen’s dramatic rise against the USD, and China’s GDP undergoing a sharp contraction.
Lehman was a profound shock that brought zero Japanese rates to the west, brought forward money printing, but as a society today we have greater knowledge than any society that preceded us, so there possibly might be a way for the creditor nations of the West to avoid turning into Japan.
Japanese real estate and stock market is down 80% from its peak, but if you go to Japan it looks and feels like a rich country. Yet, there is something rotten in the state of Japan, as some of the corporations are going bankrupt.
China is this big mouse trap that was formulated to grow at 10%. In this pursuit of 10% GDP growth, China has taken negative marginal rates of return in its investment as long as the airport where no airplane lands were built and the city where no one lives was built. (He compares it to the short-focused mania of Wall Street wanting to beat quarterly numbers, a phenomenon that always leads to corruption). In March 2009 China made the wrong bet that it will save the world by their steady GDP growth. Now there is going to be a deep contraction. He tells the audience that he is not going publicly to say that the contraction will be more than 20%, but if he were to have a coffee later with someone he might say it.
Current Holdings and Process:
In accordance with his analysis, today Mr. Hendry owns gold and is short S&P. (Note: He is long gold commodity through futures and ETF, and thinks owning gold mining stocks now is “insane” as the risk premium in these stocks goes up along with the price of gold, not to mention the risk of “more precarious societies confiscating gold – obviously they like it more at 3000 than 300”.)
He does caution the audience from blindly following his positions, as he and his team always position themselves “outside the accepted belief system”. Especially in today’s complex and fragile macro picture, he is an “existentialist” telling us that “God is dead” as “there are no rules and we are on our own”. He normally gets his ideas from “voices in his head” similar to a “paranoid schizophrenic”.
Pressed upon his stance on gold and the stock market, he threw in the towel: “I have resigned from the professional undertaking of coin-flipping. I have no idea where gold is going to be. That is my existentialism. I am a student of uncertainty. I have no idea where the stock market is going to be.” Hopefully Mr. Hendry’s shareholders are not our readers.