Hugh Hendry: China Infatuation is Misguided

Friday, February 12th, 2010

Hugh Hendry, CIO, Eclectica Asset Management, writes in the Telegraph UK today, cautioning investors that China’s $1.4 trillion credit expansion and $586-billion domestic spend is a white elephant bet on a global recovery in consumption of its exports that remains to be seen.

“In China, investment spending has tripled since 2001 and the consequences are staggering. A country that represents just 7pc of global GDP is now responsible for 30pc of global aluminum consumption, 47pc of global steel consumption and 40pc of global copper consumption. The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature. Domestic consumption never grows fast enough to absorb the supply, prompting the planners to commit to ever-higher levels of investment. Over-capacity inevitably plagues many sectors of the economy and Chinese profitability is already low.”

Read the whole article here.

Tags: Aluminum, Bet, China, China Investment, Chinese Model, Consequences, Copper Consumption, Credit Expansion, Deflationary Spiral, Domestic Consumption, Eclectica Asset Management, Elephant, Emerging Markets, GDP, Global Gdp, Global Recovery, Global Steel, Hugh Hendry, Infatuation, Investors, Planners, Profitability, Sectors Of The Economy, Steel Consumption, Telegraph Uk, Trillion, White Elephant
Posted in Markets | No Comments »

Jim Chanos vs. Ken Fisher on China

Wednesday, September 16th, 2009

Jim Chanos, CEO, Kynikos, the markets’ biggest short seller, says his skepticism about the China miracle is growing, that he is finding the China story harder and harder to believe.

Major investors are starting to question whether Beijing is telling the truth. “I think the story is getting harder and harder to believe,” says widely followed billionaire investor and hedge fund manager Jim Chanos.

“And I’m not the only guy crying about the data coming out of China. You are seeing a lot more articles being written about it, a lot more skeptical voices being heard about just how accurate some of this data showing this Chinese miracle. And the fact of the matter is I don’t think it’s very accurate at all.”

Click play to view:

Chanos’ thoughts are very similar to those of Hugh Hendry, CIO, Eclectica Asset Management, whose China field-trip video describes what is going on in some parts of China. Hendry takes us on a tour of Guangzhou, a tier 2 Chinese city, home to more than a few empty billion-dollar buildings.

This is in sharp contrast to the views of Ken Fisher (one of my investing heroes of days gone by - one of the great and most interesting Forbes columnists),  CEO, Fisher Investments,  son of Buffett mentor, Phil Fisher, who is currently overweight in Emerging Markets positions in China, India, Brazil.

Fisher predicts Chinese stocks will lead the bull market in global equities, as a 4 trillion yuan ($586 billion) stimulus package and record lending spurs growth in the world’s third- largest economy. Economists anticipate China’s gross domestic product growth will accelerate to 9.5 percent next year from 8.3 percent in 2009, according to a Bloomberg survey conducted the week ended Aug. 28.

“It’s perfectly justified why China has been the best performing market since the Lehman collapse,” Fisher said. “It has a lot of monetary and fiscal stimulus behind it. China is the driver of the V.”

Bottom line: Chanos believes that the Chinese are misusing their financial resources in a fashion similar to the former Soviet Union, spending on money losing projects for which there is in some cases no capacity utilization. Fisher believes that China’s 4-trillion yuan ($586-billion) stimulus is keeping the global economy afloat and the driving force behind the V-shaped recovery in stocks (he also believes that this is not a sucker rally)

Sources: CNBC.com | Bloomberg | GreenLightAdvisor.com

Tags: Allowscriptaccess, Billionaire, Cab Version, Cabs, Ceo, China, China Field, Chinese City, Chinese Miracle, Chinese Stocks, Cnbc, Collapse, Eclectica Asset Management, Emerging Markets, Fact Of The Matter, Fiscal Stimulus, Fisher Investments, Global Equities, Gross Domestic Product, Hedge Fund Manager, Hugh Hendry, India, Investments, Jim Chanos, Ken Fisher, Lt, Miracle, Object Id, Param Name, Player Id, Quality Value, Skepticism, Stimulus Package, Telling The Truth, Tier 2, Trillion, Type Application, Value Application, X Shockwave Flash
Posted in Emerging Markets, Markets | No Comments »

Hugh Hendry: Investment Outlook August 2009

Thursday, August 27th, 2009

Hugh Hendry, CIO, Eclectica Asset Management, has recently published his investment outlook for August 2009. Since the Summer of 2008, Hendry has been a strong proponent of deflation, and continues so, even though his thesis has been getting a thrashing lately. Hendry has discussed investing in long bonds fervently in the past, but had no choice in Late March to reconsider his positions and sell them off, as yields on long term government paper started to climb sharply and the recovery rally of the last 5 months began to take shape. Hendry’s flagship fund was up 40% for the calendar year in 2008, and most of that came from his bets in long term government bonds.

We would note that Hendry is the first to pull the plug when he is wrong in the short term, as he did in March-April. He is no buy and hold investor, nor does he wish for the economy to enter a depression, but he does feel that it is inevitable given the debt deflation that he believes is ahead. One of Hendry’s main assertions is that it will take many years for the developed world to correct its over-indebtedness.

Having said that, here are the first 4 paragraphs from his letter:

Good people are becoming desperate. I know a man who is planning to capitulate and buy stocks. He cannot comprehend what is happening today. He is, to employ Churchill, a fanatic; he won’t change his mind and he can’t change the subject. But, fearing the loss of his franchise, he will change his portfolio. He laments that it is as though last year’s events never happened. Rhetorically, he asks whether we have all been sent through time to invest in equities at the end of the 1970s when stocks were cheap and society had thoroughly deleveraged (the opposite of today). “Why do other investors not contemplate the prospect of further household deleveraging when building their profit forecasts?” he fumes. “Can they not see that the private sector’s deleveraging is more than offsetting the public sector’s expansion?” Despite such ranting my Minskian friend remains a most entertaining and charming individual.

Now I know I have not covered myself in glory these last few months. Stock markets have gained 50% from their lows and the Fund has little to show for it except a modest reversal and no wild swings in our monthly NAV. Nevertheless, I would contend that this game of playing “chicken” with the market is not for us. Our ambition has been modest. To survive the onslaught of a positive change in social mood without being forced to capitulate in the face of a frenzy of optimism; so far so good, I think?

In this regard we have been helped immensely by a quote from Robert Prechter in early April. Having correctly called for a counter-trend rally in stock prices in late February, he then described the most likely nature of the advance, “…regardless of its extent, it should generate substantial feelings of optimism. At its peak, the President’s popularity will be higher, the government will be taking credit for successfully bailing out the economy, the Fed will appear to have saved the banking system, and investors will be convinced that the bear market is behind us.”

So far his prophecy reads well. It is reminiscent of Warburg’s line that the business cycle is “a subject for psychologists” rather than economists. Bernanke is already being compared favourably with Volcker. Continental Europe has apparently “escaped” from recession. Positive economic growth across the world for the remainder of the year seems certain. And yet Prechter went on, “Be prepared for this environment: it will be hard for most investors to resist. But beware… [the next move] will be the most intense collapse in stock prices”

Read more, download here.

Tags: 1970s, 5 Months, Assertions, Bets, Calendar Year, Churchill, Deflation, Eclectica Asset Management, Flagship, Franchise, Government Bonds, Government Paper, Hugh Hendry, Indebtedness, Investment Outlook, Paragraphs, Private Sector, Profit Forecasts, Proponent, Public Sector, Rally
Posted in Markets | No Comments »

Hendry: Not Yet Time to Invest in Inflationary Assets

Tuesday, March 17th, 2009

Hugh Hendry, CIO, Eclectica Asset Management, appeared on CNBC, Wednesday, March 11, 2009 and shared his contrarian views on investing in inflationary assets, asserting that it is not yet time to do so. To appreciate Hendry, you must see him in action.

Geoff Cutmore: Hugh has been a huge proponent of Potash Corporation, that was some months ago. Does he still have a view that the business will continue to do relatively well even as the share price falls. There does seem to have been faint signs of life in commodities. Do you still have a trading position in Potash. What is your take on these shares and the macro view for fertilizers and the agricultural space?

Hugh Hendry: A good question. I have in part of my business, we have an agricultural equity franchise (fund), clearly Potash is one of the very best agricultural businesses in the world, but we’re talking about a business, lets not forget, which has now fallen from $260 to, like, $60. The notion that I would have had ownership from that level all the way down is preposterous, and in our trading accounts at the present time, clearly I can’t own that. But what you do hear is that George Soros is the biggest shareholder now of Potash, and if you look at the performance of agricultural equities, they’re performing almost in line with gold shares, i.e. they’re outperforming at the present time.

But I have to throw some water on that, on those flames. I still believe this is still a profoundly deflationary environment, and therefore this whole notion of investing at this present moment in inflation or inflationary assets is ill-conceived and poorly timed, and so I think what we’ve seen is this waterfall decline, then we’ve seen an explosive rally, and I think it then comes down again. I think there’s still a lot of hope, and a lot of recognition how strong these businesses are, but further price swings, I think.

In this next must see segment, Hugh Hendry and Liam Halligan of Prosperity Capital Management, locked horns over how quantitative easing (QE) will affect the economy. Halligan and Hendry get into a heated argument over QE. Halligan claims to be in a minority of one that it will be inflationary, while Hendry tells Halligan that he is, in fact, consensual, and that his view is held by many. Finally, Hendry points out that they, in fact, both agree that quantitative easing is doomed but that Halligan’s claim that it is inflationary is what’s out in left field, that QE is a profoundly deflationary policy for the time being, hence, Hendry’s assertion that it is not the right time to invest in inflationary assets,… yet.

In this third segment, Hendry and Halligan discuss the effects of falling Sterling and QE. Hendry fires back initially by saying Halligan “has a very loud voice, and he’s kind of a scary guy.” Its is hilarious to hear Hendry take a bite out of Halligan in his usual way. Halligan’s response is that Hendry is insulting and that its demeaning to him. To Hendry, guys like Halligan should not be allowed to come on TV and spout. Hendry tells Halligan, “You’re not a rational person…”

The debate between Halligan and Hendry over QE is revealing and serves as an excellent source of enlightenment on the contentious issue of central banks printing money to get around the credit-burdened economic curve, especially if you’re wondering what to do next and when to do it.

Here is some additional quoted material from CNBC:

The stock market is still an unsafe place for investors as quantitative easing, by which central banks boost the supply of money attempting to kick-start economies, is unlikely to work, Hugh Hendry, Chief Investment Officer at Eclectica, told CNBC.

Hendry also disagreed with Warren Buffett’s view, recently expressed to CNBC, that inflation is likely to be as bad if not worse than in the 1970s.

“I’ve honestly never known a time of near-universal conviction that we have to worry about inflation today,” Hendry told “Squawk Box Europe.”

“For quantitative easing there’s no successful precedent. It has never, ever succeeded,” he added.

He is buying government bonds, shorting stocks and “can’t buy enough dollars.” Taking the contrarian view to the majority of speculators creates opportunities, Hendry added. “Gold, silver, I’m shorting them right now.”

Inflation will become a reason to worry for authorities again at some point, but they should think about combating deflation right now, Hendry said.

“It is coming back in the future. All I’m saying it is just an unprofitable proposition at the time,” he said. Betting on inflation is as if “we got a new book and we’ve read the last page. But if you read the entire novel, it’s a different journey.”

Despite Tuesday’s strong rally in the stock markets, shares are not a good investment, said Hendry, who continues to bet on government bonds.

“I dare you to touch an equity today. Tell me you’re making money on equities,” he said.

The unravelling of the crisis is likely to continue as world economies re-adjust after the cheap credit bubble has burst.

“We were deluded by easy finance and as that easy finance is being removed, we’re shocked,” Hendry, who said his investment fund made a 32 percent return last year and is up 10 percent this year, said.

The market has grown for about 30 years and for a long period, it will be “going nowhere,” Hendry said, likening this period with the one after the crash of 1929 and with the crisis in Japan at the beginning of the 1990s, despite claims that this time it is different because the world has evolved.

“I am saying that we are no different. Here we are, surrounded by technology and computers, and we are no different.”

Tags: Agricultural Businesses, Capital Management, Cnbc, Contrarian Views, Eclectica Asset Management, Explosive Rally, Fertilizers, Franchise Fund, George Soros, Gold Shares, Good Question, Halligan, Hugh Hendry, Potash Corporation, Present Moment, Present Time, Price Swings, Proponent, Qe, Share Price, Signs Of Life, Trading Accounts
Posted in Bonds, Commodities, Credit Markets, Economy, Gold, Markets | No Comments »

Hugh Hendry: Quantitative Easing Won’t Work

Wednesday, March 4th, 2009

Hugh Hendry, CIO, Eclectica Asset Management, discusses his thoughts on ‘quantitative easing’ on CNBC March 1, 2009. This is must-see, clear-eyed commentary from one of this generations market savants.

Hendry is not known for being a doomsayer, but rather has always deemed himself to be a heretic, putting forward ideas and investing in them, while being ridiculed or vilified at times for taking aim on controversial ideas. While it is, by no means original, to be in the gloomy camp, in these brutal financial markets, Hendry proclaims that most people don’t want to read through the whole story, they just impatiently want to go straight to the end of the story, a decision that, today, could wind up very costly.

Many participants are trying to suspend the notion that we are suffering through a deflationary bust (which is the central plot) and want to go straight to the part where the story concludes in hyperinflation. Hence the reluctance among many investors to invest in long bonds, and the willingness to be long gold at this time.

“The point is that there is no precedent for quantitative easing succeeding. The presumption again in risk markets is that it will succeed. It partly explains why there is this fervor to own gold and that gold is just a one-way bet to making money,” Hendry said.

“I disagree. I think by the end of this year it will be shown that quantitative easing does not succeed in an environment where in America they have debt which is the equivalent of global GDP. How can you tempt people to take even more debt on?”

“I think this is comparable to 1930, so I still have my reservations. But if we were to see a plunge from these level, then tactically I could trade a little bit around oversold levels,” he said.

Tags: Bust, Central Plot, Cnbc, Controversial Ideas, Doomsayer, Eclectica Asset Management, ETF, Fervor, Financial Markets, Forward Ideas, GDP, Global Gdp, Heretic, Hugh Hendry, Hyperinflation, March 1, Plunge, Presumption, Reluctance, Risk Markets, Savants, Taking Aim, Willingness
Posted in Bonds, Gold, Markets | No Comments »

Hugh Hendry: “AIG is no longer with us”

Tuesday, March 3rd, 2009

Hugh Hendry, CIO, Eclectica Asset Management, hosted CNBC Asia’s Squawk Box, while on a visit to Hong Kong, and shared his thoughts on AIG and the revelation of its record-breaking writedown.

The thing about Hugh Hendry is that while he has been one of the most outspoken and brutally honest practitioners in the hedge fund sphere, he has also openly shared his calls on global television, and in articles, sounding the deflation call firmly well ahead of the present. We hitched our trailer to just about everything Hendry, and it has been with enormous common sense, and an unwavering passion for his art that Hendry has called it right.

Hendry sticks by his long-duration bond investments in 30-year US Treasuries, German Bunds and UK Perpetual Gilts firmly, even today, as the market has been consensus on what has been described as a bond bubble. By Hendry’s estimates, (and his money is where his mouth is) there is far more delevering in store for the market, that debt levels are still far too high.

Click play to watch here:

“American International Group is being kept alive on artificial support from the government, and many other financial companies are in the same situation”

“I think it’s rather a series of redundant thoughts, because AIG is really no longer with us,” Hendry said when asked about the chances of success of a new bailout for the insurer. “AIG is a ward of the US government, AIG’s executives were naughty. They wrote naked (credit default swaps) and in the process they bankrupted the business.”

“We live in a very strange, twilight period where we pretend that a lot of these financial companies are still with us. I think the reality is they left the business last year,” Hendry added.

Banks’ stock prices show that the markets think many financial institutions are bankrupt and the big debate is really how we bring down the debt supporting these companies, he said.

“Nationalization really provides for an orderly liquidation for what are insolvent institutions and I think we have to be willing to have that discussion,” Hendry said.

“If we had governments actually saying listen, the financial sector is insolvent, we would be on the first positive step to moving way from that situation,” Hendry said.

Tags: Aig, American International Group, Bailout, Banks, Bond Investments, Bunds, Cio, Cnbc, Cnbc Asia, Credit Default Swaps, Debt Levels, Deflation, Eclectica Asset Management, ETF, Financial Institutions, Financial Sector, Gilts, Global Television, Governments, Hong Kong, Hugh Hendry, Insurer Aig, Nationalization, Orderly Liquidation, Revelation, Squawk Box, Stock Prices, Twilight, Us Government
Posted in Bonds, Credit Markets, Markets | No Comments »

Hugh Hendry: Bank Chiefs, Regulators Have Damned Our Future

Thursday, February 12th, 2009

In the wake of the heads of banks apologising in front of a Commons Select Committee, hedge fund manager Hugh Hendry joins committee member Mark Todd on Jeff Randall Live.

In this interview, Mr Hendry, co-founder and CIO,  Eclectica Asset Management, says unabashedly of bank chiefs, regulators and politicians alike, “I damn them all because they’ve damned our future.”

Tags: Bank Chiefs, Banks, Cio, Co Founder, Committee Member, Commons Select Committee, Eclectica Asset Management, Hedge Fund Manager, Hugh Hendry, Jeff Randall, Member Mark, Politicians, Regulators
Posted in Markets | No Comments »

Hendry: What to Buy if You’re Bearish on Oil?

Friday, January 16th, 2009

Hugh Hendry, CIO, Eclectica Asset Management, discusses oil with Geoff Cutmore of CNBC. We are big fans of Hendry’s outspoken views, and this is a must-view. Click the image below to watch the segment:

Here is what he said:

It is phenomenally difficult to be bullish on oil owing to the fact the oil curve is in contango. What I mean is that while oil is trading today at $40, if you go out two years, its expected, indeed it trades at $70, and that’s why you have all the surplus oil being hoarded on these vessels at sea.

Now, every day that the oil price doesn’t move closer to $70, is a day of negative carry, its a day where you’re losing money being long oil, which is why I proffer my caution.

I’m a believer in Peak Oil, I’m a believer in this capital destruction we’re not going to be investing or looking for oil in all the hideous places like Russia etc. over the next ten years, and we need to. The world of ten years time the time of our grandchildren needs us to be looking for the blasted stuff now.

We ain’t going to do it, we’ve suspended all that activity. I agree [that there is an opportunity there], but as in all walks of life, it is going to be a matter of timing, and I believe the [Carl Weinberg, see video] timing is way way off.

It’s an enormously difficult task to be bullish on oil today.

Lord John Brown was the most bearish person in the world about oil, and for twenty years the price of oil lost 80% of it value, and the most bearish guy in the world ended up at the top, when the price of oil reached its lowest levels.

BP stock in absolute price terms went down during the ten years the price of oil was going from $10 to $150 per barrel, so if you’re bearish on oil you should own BP; you should own Shell, because they’re contra-cyclical, they’re unleveraged, you get a very high carry. In a market like this one, you want to own assets like this that are unleveraged, and you get a 5% yield.

Tags: Absolute, Ascii, Assets, Believer, Bp, Cambria, Caution, Cnbc, Curve, Div, Eclectica Asset Management, Font Definitions, Font Format, Footer, Grandchildren, Hendry, Hugh Hendry, Money, Mso, Oil Price, Orphan, Outspoken Views, Panose, Paper Source, Peak Oil, Pitch, Price Doesn, Price Of Oil, Props, Russia, Sans Serif, Segment, Shell, Stock, Stock Price, Stock Terms, Style Definitions, Style Name, Style Type, Surplus Oil, Theme Font, Times New Roman, Twenty Years, Video Timing, Walks Of Life, Weinberg
Posted in Markets, Oil and Gas | No Comments »

Hendry: Bonds Still The Safest Bet

Friday, January 16th, 2009

Hugh Hendry, brash and bold CIO, Eclectica Asset Management, made an appearance January 12,2009, on CNBC Europe with Geoff Cutmore, and strongly asserted that government bonds are still the best bet for investors these days. This is must-read, must-view. Hendry has been a no-nonsense, fresh voice in the midst of all the noise. Click image below to watch:

Here’s a synopsis of his appearance:

• When it comes to treasuries I don’t care about the next 30 years, I care about the next 30 months.
• The Euro is a flawed mechanism and that spells trouble.
• There is no money on the sidelines. We have had one of the most profound periods of wealth destruction in the last 12 month. Billionaires are throwing themselves in front of trains. Sideline cash is a myth.
• Debt of all forms went from a generational low of 110% of GDP in 1974 to 360% of GDP recently. We have supersized everything. In 25 years it will be back at 110% of GDP. That has profound implications on valuations and asset classes. It puts a downward damper on everything.
• Government bonds are still the safest bet for investors in these uncertain times, and the euro will face an uphill battle as weak economies will need more flexibility, Hugh Hendry, Chief Investment Officer and Partner at Eclectica, told CNBC.
• Bonds are showing us that “it is ferociously dangerous outside… Businesses are failing, wealth is being destroyed,” Hendry told “Squawk Box Europe.”
• “The people who tell you they know what’s going to happen in the next 12 months are either foolish or liars. I’m going to be flexible in my mind and flexible with my portfolio,” he added.
• Many analysts said corporate debt was cheap and investors would be better off in company bonds than in shares, but Hendry said that the big difference could be justified by the fact that the cheaper debt is the one that reflects the grim reality of falling earnings because of the economic slowdown.
• “We took savings to zero in the Western world” and now that savings are retracing, they will most likely go into bonds, he said.
• “People are going to buy US treasury bonds because the dollar is going up and that’s going to be more attractive than Chinese bonds for example,” Hendry said.
• The euro zone faces tough times as the PIIGS-Portugal, Ireland, Italy, Greece and Spain-will need a flexible exchange rate to compensate for the economic slowdown so some of them may decide to break free from the single currency’s straightjacket, he said.
• “The euro is a flawed mechanism. The euro has no flexibility. We need drachmas, we need lira, we need pesetas… and we don’t have them,” Hendry said.
• In the current climate of capital destruction, big oil and agriculture are relatively safe bets as they are not leveraged, while other areas of the economy have big debts, he said, adding that companies who had anticipated a low oil price are also on top of his list.
• “It’s an enormously difficult task to be bullish on oil today,” Hendry said. “If you’re bearish on oil you should own BP , you should own Shell .”
• Their shares have been largely flat, but nowadays “flat is wonderful,” Hendry added.

Tags: Asset Classes, Best Bet, Billionaires, Chief Investment Officer, Cnbc, Cnbc Europe, Corporate Debt, Damper, Eclectica Asset Management, Economic Slowdown, Government Bonds, Grim Reality, Hugh Hendry, Profound Implications, Profound Periods, Sideline, Squawk Box, Treasuries, Uncertain Times, Uphill Battle
Posted in Bonds, Economy, Markets, Oil and Gas | 2 Comments »

‘Encouraged by a wicked wizard, Greenspan, Bernanke toils at his printing press’

Friday, November 28th, 2008

The Guardian has published below, an insight-full essay by Hugh Hendry, CIO, Eclectica Asset Management. Hendry’s brash and eloquent commentary has earned him a reputation which he best personally describes as heresy, as many in the City of London have tried at times to dismiss his bold and controversial views.

Again, Hendry closes in on his decision to be long the long government bonds, as he contends that long term rates will come down as central banks globally, have little choice but to follow the Fed to lower interest rates over the next year or two.

As markets liquidated in the deleveraging fervour that has proliferated this year, investors have piled into short term treasury bills and money market instruments. As sentiment for equity markets and commodities continues to wane, its starting to appear more likely that short term bond money will go in search of yield further along the yield curve, and as it does the rather steep yield curves should flatten.

Here’s another thought. What incentive does the US government have for reviving the stock market? After all, where else are they going to get the money to pay for a trillion-dollar war and a trillion-dollar bailout, but the bond market? It would serve government if an entire segment of investors fled into the longer (duration) end of bond the market for capital safety so as to indemnify those at the printing presses.

The Wizard of Oz must be one of the creepiest stories ever told.

“The past 30 years of economic history may have produced a daunting sequel to the original Wizard of Oz, written by Frank Baum.

By Hugh Hendry
Last Updated: 10:59AM GMT 27 Nov 2008

Follow the yellow brick road to get a picture of where we are

People blame this crisis on cheap money and greedy bankers. They certainly cannot be exempted. But I take a more fatalist point of view. There has to be a reason for humans to die off in their 70s and 80s. I believe it is so that the memory of a generation’s mistakes is erased, allowing future ages to repeat the folly of greed and fear.

Because of this, I spend a lot of time reflecting on social mood and behaviour. Popular fiction is a particular fascination; I believe it provides a mind map of the social conscience. The Wizard of Oz is a personal favourite. I would contend that bullish markets produce feel-good films, like Disney animation; that bear markets produce depictions of horror and foreboding (think Hammer House of Horror in the 1970s and SAW, its modern equivalent); and that social mood is linked to stock market patterns.

The original Frank Baum story was written as a political allegory of America’s entry on to the gold standard in 1879. The strictures of sound money coincided with a vibrant post Civil War economy. The result was deflation: prices fell by 1.7pc pa between 1875 and 1896. The farmer, as depicted by the scarecrow, was held captive by falling agricultural prices and mortgages owed to the big banks, the wicked witch of the east. The spell of tight monetary policy cast a pall over the poor tin woodsman: every time he swung his axe, he chopped off part of his body. It was a depiction of the economy’s shuttered and rusting factories.

The easy-money crowd, Bernanke and Greenspan’s great grandfathers perhaps, argued the responsibility for the economy’s woes lay with an insufficient monetary response. The gold market had a scarcity that choked the US economy into serfdom.

Instead, the populists’ manifesto called for the readmission of more plentiful silver coinage into the system – a point captured by Dorothy’s silver slippers (Hollywood changed them to ruby) as she skipped along the yellow brick road (the gold standard). Print more money and remove us from penury. Consecutive presidential elections were contested on such a return to bimetallism in 1896 and 1900. Surprisingly, the easy-money crowd, proved unsuccessful; they were defeated by powerful bankers such as JP Morgan. However, the story ends with the good witch of the south (the populace) prophesying that Dorothy’s silver slippers (easy-money policy) are so powerful they can fulfil her every wish. This utopia was made possible just 13 years later with the formation of the Federal Reserve. The tin man and the scarecrow would have a more forgiving lender of last resort after all and 71 years later the wizard, called Nixon, went one step further and abolished the need for gold and silver ounces (Oz) when the US reneged on its Bretton Woods commitment to sound money.

Of course, today we could be watching a comparable parable unfold. The past 30 years of economic history may have produced a daunting sequel. I would suggest tomorrow’s fiction will prove much darker, perhaps in the image of Goethe’s Faust.

The story would feature an apprentice printer called Bernanke. Encouraged by a wicked wizard, Greenspan, he toils at his printing press night and day producing reams of paper money. At first his monetary accommodation seems to bring unbridled prosperity. Boom follows boom, as the business cycle is seemingly abolished, house prices grow to the sky and his political stock rises. In time, the scarecrow is bought-off by crop subsidy; the tin man vacations in Vegas, having refinanced his mortgage for the 13th time. And the sorcerer’s apprentice is promoted to top wizard.

However, Greenspan, now in retirement, finally reveals his scheme has brought only “bogus riches”. The printing presses have created a “zero-sum game” where dollars lose their purchasing power against God’s brew of precious metals. The populace begins to save. Spending is reined in. Even the corporate sector suffers. With consumers no longer spending, there are no profits. Shares slump and the fiat kingdom collapses in anarchy.

And that is pretty much where we are today.

I withdrew my hard-earned money from a bank this summer. But it may surprise you to learn that I bought government bonds of long duration. Surely I should have bought gold? Except that I believe the way to make money is to seek opportunities through paradox.

And therein lies our brinkmanship: everyone has skipped our story and read the conclusion. They fear financial anarchy. Gold coins are sold out. Everyone is in. And yet the price of gold has fallen this year. So, for now, I would stick with the bonds. The 18-year British gilt yields 4.8pc but, with the Bank of England likely to follow the Fed and slash rates to 1pc, I believe we could see gilt yields below 3pc. And I promise you that if bond yields broke 3pc there would be a stampede to buy.

At this stage gold might trade close to $500, and those who missed its rally from 2002 would have the solace of schadenfreude when in reality they should be buying the stuff and selling their bonds. What delicious irony: deflationists and inflationists could both claim to be right. But how many will have profited?

Hugh Hendry is the co-founder of Eclectica Asset Management.”

Tags: Agricultural Prices, Bailout, Banks, Bear Market, Bear Markets, Bernanke, Bond Market, Bond Money, Bond Yields, Bonds, Br, BRIC, Central Banks, Cheap Money, City Of London, Collapse, Commodities, Controversial Views, Deflation, Desc, Disney Animation, Dollar, Dollar War, Dow, Eclectica, Eclectica Asset Management, Eco, Economy, Eloquent Commentary, Equity Market, Fed, Federal Reserve, fiat, Frank Baum, Gold, Good Films, Government Bonds, Greed And Fear, Hugh Hendry, Img, inflation, interest rates, Investors, Loc, Market Patterns, Markets, Metals, Monetary Policy, Money, Money Crowd, Money Market Instruments, Mortgage, oil, People, Political Allegory, Post Civil War, precious metals, Printing Presses, Prosperity, Rally, REW, risk, Scarcity, Sentiment, Silver, SMI, Social Conscience, Social Mood, Sound Money, Stock Market, Stuff, Term Bond, Tight Monetary Policy, Tin Woodsman, Treasury Bill, Treasury Bills, Trillion, UK, Us Government, War Economy, Wicked Witch Of The East, Wicked Wizard, Wizard Of Oz, Yellow Brick Road, Yield Curve, Yield Curves
Posted in Bonds, Commodities, Economy, Gold, Markets, Oil and Gas | No Comments »

Hendry: Going long on government bonds

Monday, November 24th, 2008

By Hugh Hendry

Published: November 19 2008 16:03

Someone once said there are certain things that cannot be adequately explained to a virgin, either by words or pictures. It is therefore with some trepidation that I attempt to outline our investment policy. We are bullish on agriculture and bearish on the financial community. For 10 years we have contended that equity markets can, and do, stagnate for periods as long as a quarter of a century. Accordingly, we have refused to follow the market, choosing instead to invest in unleveraged sectors which have endured long bear markets.

However, there are complicating cycle considerations. A process of debt liquidation is under way that resembles a turning point heralding weaker global growth. This undermines almost all risk taking, including agriculture, and for this reason we presently favour only government bonds.

According to Prada: “There is a rejection of fakeness - the fake avant-garde.” And the inflation scare that took the price of oil to almost $150 per barrel, and created a hawkish central banking community, was perhaps the biggest head-fake of all. Certainly, the market for 10-year government bonds is beginning to think so. It is trading near a record high.

And today, even those regional Fed governors and hawkish European central bankers seem to see it as well. As I say, this is the time to own government bonds. But we are aware of just how out of sync we are with our heroes. Can the combined intellectual weight of Mark Faber, George Soros and James Grant all be wrong? Why do they insist on shorting Treasuries during the worst financial crisis since the Depression? I blame the Romans.

Monty Python’s Life of Brian famously asked, “What have the Romans ever done for us?” In a similar vein, one might enquire: “What did the central banks do to contain inflation in the 1970s?” As in most things, fate and chance play an important part. Let’s consider the facts. The Fed reacted to the first oil shock 36 years ago by driving its rate up from 3.5 per cent in February 1972 to 13 per cent in the second quarter of 1974. Such high nominal rates were unheard of and at the time ranked as the highest in American economic history. The average US stock lost 74 per cent of its value from its 1968 high. The real economy went into reverse and contracted in both 1974 and 1975.

Perversely, I would attribute the decade’s inflation to the lack of leverage in the economy. The bankruptcy of so many banks during the 1930s encouraged the politicians to de-risk the sector. For more than 40 years, the banking sector grew modestly, attracted modest people and produced modest returns. The emergence of today’s cadre of cavalier banker was only detected by Soros, Rogers et al in their 1972 report, The Case for Growth Banks, some 43 years after the stock market peak in 1929.

If a tree falls in a forest and no one is round to hear it, does it make a sound? Likewise, if house prices fall but mortgage debt is low, does it really matter? This was the case in the mid 1970s and, in the absence of today’s unprecedented leverage, house prices did not falter, repossessions never soared and there was no major bank insolvency. I would contend therefore that it was the phenomena of low asset prices and a conservative banking sector that ensured that the Fed’s monetary policy response failed to tame inflation.

Contrast with today and the prospect of containing inflation should be high. Thirty years of unfettered monetary expansion has left the banking sector fully leveraged and vulnerable to insolvency. For instance, the mere act of holding UK interest rates at 5 per cent from April through to October of this year has guaranteed a sharp contraction in the economy which has the Bank of England reaching for the “D” word.

Don’t get me wrong, I think Soros, Faber and Grant are right to fear the inflationary consequences of our present breed of central banker. But my paradoxical recommendation is to buy bonds. Many scoffed, but this policy is working. A paradox, remember, is a self- contradictory statement based on a valid deduction from acceptable premises. Here is another: the smartest investor in London is short bonds. I’m long bonds, yet we share the same vision of the future. I’ll let you decide.

The writer is chief investment officer and founding partner of Eclectica Asset Management

Source: FT Alphaville

Tags: Agriculture, Banks, Bear Market, Bear Markets, Central Banks, Eclectica, Eclectica Asset Management, Economy, Euro, Faber, Fed, FT.com, Government Bonds, Hugh Hendry, inflation, interest rates, Markets, Monetary Policy, Mortgage, oil, REW, risk, Trading, UK, Value
Posted in Bonds, Economy, Markets, Oil and Gas | No Comments »

Hugh Hendry Interview: Invest in Long Government Bonds

Tuesday, November 11th, 2008

Hugh Hendry, the brilliant, brash and outspoken and eloquent CIO of Eclectica Asset Management, one of the UK’s most prolific asset managers discusses global markets and is investing in long-term government securities in the US and UK. Dominic Frisby, of Money Week and Commodity Watch Radio conducts this interview, which was recorded on November 1, 2008.

Here is a summary of some of Hendry’s thoughts:

• the present environment is all about the return of your capital, not return on capital.
• he is intrigued by government bonds and bets that interest rates will be cut further than people anticipate at the present time.
• interest rates will come down to unprecendented levels but it won’t make a difference.
• monetary policymakers will be pushing on a string.
• Hendry has been investing in long term US treasuries
• he is profoundly bearish on commodities, for now
• He believes that gold will drop further to below $600 as a result of the deflationary pressure that we are facing from the fixing of the system, then as a result of all the stimulus, we will face profound inflation. When long-term bond yields drop to around 2.5% that’s when you want to own commodities. That’s when he’ll back the truck up for gold, the big 16 oz. bars.
• For now Hendry will place his bets on deflation and falling long term interest rates.

If being leveraged means shorting cash, then deleveraging means buying cash, and he’s afraid the deleveraging is far, far, from over, because debt levels are still very high at this point. That means the dollar will continue to rally on the resultant repurchasing or short covering of the dollar. The rallying dollar, and ongoing asset liquidation is deflationary for now.

Hendry’s case and outlook is deeply compelling and worth taking seriously.

The second part of Dominic Frisby’s interview is with Dr. Francis Claessens of Peers, who tells us what the super rich have been doing with their money. Claessens leads WealthPeerGroup.com, a peer group that meets on a monthly basis to discuss financial issues. Minimum entry to this group is investable assets of £5-million ($8-million). This too is very interesting, i.e. if you’re interested in what’s worrying the very HNW investor these days.

Listen to the entire interview here:

Tags: Blog, Claessens, Commodities, Commodity, deflationary pressure, Dollar, Dominic Frisby, Eclectica, Eclectica Asset Management, Gold, Government Bonds, government securities, Hugh Hendry, inflation, interest rates, interview, Markets, Monetary Policy, podcast, Rally, risk, Term Bond, UK, Value, Video
Posted in Bonds, Commodities, Gold, Markets, Outlook | No Comments »