Hugh Hendry: "I Believe Central Bankers Are Terrified"

Hugh Hendry: "I Believe Central Bankers Are Terrified"

- in ideas, Insight, Markets, Outlook

Part One of MoneyWeek's Interview with Hugh Hendry, November 19, 2014

For the full transcript, visit here.

And his most recent letter to investors:


Eclectica Asset Management, Letter to Investors Q3 2014

by Hugh Hendry, Eclectica Asset Management

The Fund is now up 2.6% on the year and, despite running a net long equity book that has exceeded 1x NAV for the past few weeks, we succeeded in weathering a particularly volatile October with rather dramatic intra month price declines in the major equity indices to post another gain of 4.0%. We have now made money in each of the last three months. Therefore, contrary to what you may have heard, our spirits are high and our risk taking is increasingly paying off.

My premise hasn’t really changed since I published my paper explaining why I had become more constructive towards risk assets this time last year. That is to say, the structural deficiency of global demand continues to radicalise the central banking community. I believe they are terrified: the system is so leveraged and vulnerable to potentially systemic price reversals that the monetary authorities find themselves beholden to long only investors and obliged to support asset prices.

However, I clearly confused everyone with my choice of language. What I should have said is that investors are perhaps misconstruing rising equity prices as a traditional bull market spurred on by revenue and earnings growth, and becoming fearful of a reversal, when instead the persistent upwards drift in stock markets is more a reflection of the steady erosion of the soundness of the global monetary system and therefore the rise in stock prices is something that is likely to prevail for some time. There is more to it of course, as I will attempt to explain, but not much.

This should be a great time to be a macro manager. It is almost without precedent: the world's monetary authorities are targeting higher risk asset prices as a policy response to restoke economic demand. Whether you agree with such a policy is irrelevant. You need to own stocks. And yet, remarkably, the most contentious thing you can say in the macro world today is “I’m bullish”.

In a world dominated by the existentialist angst of identifying and trading qualitative value, there is profound mistrust of equity values today; macro investors see prices as overvalued and few are willing to capitalise on the opportunities to make money. This angst and fear of big drawdowns in risky assets in part reflects astonishment that policy makers were able to rescue investors from the folly of their misallocations in the years preceding 2008 and that stocks have massively outperformed the modest rise in global nominal GDP. I should know. I, like others, became a moraliser who just couldn’t forgive the Fed for bailing out Wall Street. I read one “death of money” polemic after another and luxuriated in the work of people like Marc Faber, James Grant, Nassim Taleb, Raoul Pal and Albert Edwards. I became a moral curmudgeon rather than a money maker.

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