Putin ‘Bitch Slaps’ Billionaire Deripaska

Thursday, November 19th, 2009

This is an eye opener - Russian Prime Minister Vladimir Putin treats his cronies like little children in the following video, (hat tip: Hugh Hendry), in particular, Magna partner, Russian billionaire, Oleg Deripaska.

According to Hugh Hendry (from this month’s Eclectica Fund Letter):

Furthermore, the big Russian players like Rusal are under intense pressure from Putin not to cut capacity (check out ‘Putin bitch slaps Deripaska’ on http://www.youtube.com/watch?v=PprlM5R3Hbg), and are rumoured to be surviving only by not paying their electricity bills.

As I watched this video, I realized that things are different in Russia. Its a foregone conclusion that Russia is a command economy, but to actually see it in action is revealing.

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Robert Prechter: Inflation not a problem, deflationary depression in our future”

Saturday, August 15th, 2009

In the last week we’ve covered Robert Prechter, partly because we are fans, and partly because the material is available so that we can share it with you, in case you haven’t seen it yourself. For a long time, and as an advisor, I wistfully dismissed Elliott Wave Theory as technical market charting gobbledygook, as I was zealously taken with Buffett, and buy and hold, Value and Focused investing. High conviction about a way of doing things, especially in the investment business, is a necessity. However, I’ve since softened up because in hindsight, I missed out on a lot of opportunities that being open minded would have made possible. That’s my first point: Keep an open mind. Just because you believe some outcome (like a depression) is not possible (based on your knowledge), does not mean it will not come true.

I have covered Hugh Hendry’s thoughts throughout the course of this year, i.e. his way of seeing things, and his outlook, and I bought into his perspective on the equity and credit markets, and in a word, I got schooled, convinced that a deflation scenario is altogether possible, given the circumstances that the US and thus the world finds itself in at this time. It was made very clear. In hindsight, it made me realize how little I knew about the bond and credit markets. Now I know a lot more, but in reality its really just a little bit more. Hendry’s flagship Eclectica Fund was up 40% at the end of last year. My second point: Always be learning and don’t overestimate your knowledge.

Three years ago, one advisor that I was visiting with when I was a wholesaler for a fund company, showed me the basics of what Prechter was forecasting for long-term bond yields, the deflationary context, and the equity market. Prechter’s ideas represented a 20% directional bet in his book of business, because, “what if he’s right?” This translated into  having an up-to 20% weighting in long dated US treasuries and Canadian government bonds. That bet has paid off for the last 20 years, and the last two, has it not? So has cash and cash equivalents. My third point: Be prepared for what you feel is the least likely outcome.

I told that advisor, “You’re killing me, depressing me with this Elliott Wave Stuff, and I have to see other advisors today,” and the meeting ended. Don’t get me wrong though, the meeting was a good learning opportunity for me, and I haven’t forgotten it since. That advisor was, in my estimation, probably one of a few advisors in Canada who was thinking this way.

In any event, at each step along the way, I have had my eyes opened, and my mind, and my focus as an investor has shifted firmly to the camp that asks themselves, “What can go wrong, how can I lose money, what can go wrong with my thinking?”

Having said that, make sure you see this interview with Robert Prechter on the subject of the real threat of deflationary times. We will also recap the many thoughts of Hugh Hendry again in a future post. You won’t have to wait long, and in case you want to revisit those stories in the meantime, use the search box at the top of the page to search or click here for “Hugh Hendry” or “Deflation,” or “Deleveraging“, ” Bill Gross“. In the meantime, cash and long bonds have become attractive again.

Recently the dollar is said to have bottomed, and that thanks to the risk trade sucking money out of money market treasuries. In the interview, Prechter says that he believes the dollar will rise in value again for the next on to two years,” as the flight-to-safety trade, deleveraging continues, and earnings disappoint. Prechter doesn’t like the opportunities in the municipal or corporate bond market (too much risk for the average investor) and feels that investors should seek the safest, highest quality bets they can, so they can ride this out as safely as possible. He believes the dollar (treasury-bills) would be safe, and anything where the default risk is very, very low (government bonds) would be among the better bets.

Click play to view:

Source: Yahoo! Tech Ticker, August 11, 2009

Tags: Bet Book, Bond Yields, Buffett, Canada, Canadian Bonds, Canadian Government Bonds, Cash And Cash Equivalents, Circumstances, Conviction, Credit Markets, Deflationary Depression, Eclectica, Elliott Wave Theory, Estimation, Flagship, Gobbledygook, Governmen, Hindsight, Hugh Hendry, inflation, Investment Business, Little Bit, Long Time, Perspective, Robert Prechter, Seeing Things, Term Bond, Treasuries, Wholesaler
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Hugh Hendry: June 2009 Letter

Thursday, June 18th, 2009

Here, below, in its entirety is Hugh Hendry’s latest letter to investors. Its both enlightening, and highly educational, as the outspoken and brash Hendry has a great handle on market history as well as the English language.

Hendry, founder of Eclectica Asset Management, is one of the hedge fund industry’s true luminaries, and often goes out of his way to argue his convictions as well as make his bets publicly known, and while his theses often get tested, as does his durability, he has yet to be proven wrong.

Hendry has made for some of the most incredible intellectual arguments as well as hilarious direct-attack moments regarding the markets and the ongoing inflation vs. deflation debate during European Squawk Box and Power Lunch gatherings. Here, here, and here (whaling moment of the year).

We got our hands on his hard-to-get letter thanks to Tyler Durden at Zero Hedge.

THE ECLECTICA FUND
Hugh Hendry, JUNE 2009

Warning, I am about to repeat myself.

I have been keeping a low profile and have reduced the length of my reports. There has been little to note: my favourite asset class is long duration bonds; not index linkers. These have performed poorly so far this year. I have not fought this trend aggressively. By March I had rebuilt a modest sized position owing to the severity of the weak economic data. However this was mostly eliminated by the first week of April out of respect for the formidable price correction that was ongoing. As a result the Fund is down modestly on the year to date following last year’s surge. However, with the long bond yield in America now not far off 5pc, it is my contention that the trend may be approaching another extreme. I therefore thought it appropriate to once more outline my thoughts: what if the trend in the charts below continues; what if this year is a re-run of last year?

The decision to reduce the book in April reflected an unpleasant seasonality in our preferred trade. The second quarter in four out of the last five years has simply not been kind to risk aversion. Furthermore, markets continue to swing from the binary outcomes of inflation and deflation. At this point last year inflation was in the ascendancy. Backwards, forwards, since July of last year the same investors had to adjust to profound deflationary forces as all risk asset classes fell precipitously. Can we be any more confident that the market has it right now?

Let’s swallow a frog

I do not have the requisite level of confidence to make such a commitment. Better I would contend to always have a vivid image of the worst that might happen in our uncertain future and have this shape our behaviour today. So let’s consider the “bad things” which might initiate another dramatic rotation towards deflation.

My greatest angst is reserved for the four-fold rise in private sector, non-financial, leverage in America. In just 60 years, the private sector increased its debt from 43pc of GDP to 175pc. To put this into perspective, the UK is on the verge of having its formidable tax raising franchise downgraded because its debt may reach 100pc in two years time. And yet, until last year, there was little hand wringing about the private sector having borrowed more than 4x the public sector’s then debt.

Don’t get me wrong, I am sympathetic to the plight of America’s debtors. I understand why they came to believe that they were invincible. In truth, something without precedent occurred earlier this decade. Fearing the fall out from the tech bubble, businesses across all sectors of the economy set about cutting costs and laying staff off to prepare for the impending deep recession. Unemployed workers should have cut back on spending and rebuilt their savings. Instead they leveraged themselves against appreciating home prices to maintain their spending habits. Corporate revenues should have fallen. Instead, with disposable income boosted by home equity extraction, sales rose and profits boomed like no time before.

Today, by comparison, the corporate sector is threatened not so much by its own debt but rather by the loss of spending in the economy from the debt laden workers it has fired. Businesses are slashing costs and letting staff go. American unemployment is at a 26 year high of 9.4pc and total nominal wage payments have fallen for the first time in at least 50 years. This time around the economic orthodoxy is reasserting itself. Companies are discovering that in their quest to contain costs (by firing the economy’s consumers), they are suffering from a loss of revenue in future quarters; because of this I am wary of most prospective profit forecasts and not tempted by trailing 10 year earnings multiples.

My second concern relates to the willingness of governments to use their own leverage as a remedy for asset deflation. Policy makers seem to believe that the only way to reverse the tide in asset prices is to issue vast sums of ‘money-like pieces of paper’, aka government bonds. In doing so they are mimicking the previous decade when investment banks were able to boost the housing market by issuing trillions of dollars of mortgage backed paper, or the 1990s when it was new internet share issuance which drove the TMT bubble and so on back to John Law and his endless printing of Banque Générale certificates which financed the Mississippi stock bubble.

However there is a glaring flaw. Government debt is very visible; certainly more so than the paper previously issued by investment banks. Increase the issuance of mortgage backed securities, from $0.5trn in 1996 to $3.2trn in 2003, and no one bats an eyelid; house prices boom. Suggest issuing a corresponding amount of Treasuries and the bond market quickly fears inflation and frets over who will possibly buy all these bonds. Today bond prices are falling and there is the possibility that economic activity may be subdued by the rising cost of money. US mortgages are now dearer than at the end of last year.

Stimulus, what stimulus?

So prices are falling on the high street, total nominal wages are in retreat and yet the sovereign debt markets are in open revolt on the premise that “inflation is always and everywhere a monetary phenomenon”. Panic has taken over. Marc Faber is asserting that the US will definitely have hyper-inflation, one investment manager recommends an 89pc balanced fund allocation to inflation-proof Treasuries and CLSA’s Christopher Wood is recommending that US pension funds hold 40pc of their portfolio in gold. In other words people are convinced that inflation is the future.

What is less certain is when rising government bond yields begin to remove credit from the mortgage market and so close the door on the exit route of cheaper refinancing; today this is still seen as a distant prospect. The other pertinent question is whether “deficit nations” like the US and UK will be forced to moderate their ambitious spending targets. No one likes criticism and the reprobation of the German Chancellor and the Governor of the Bank of China must produce some soul searching; after all, central bankers are not renowned for their non consensual habits.

I keep thinking that it would be ironic if history were to show that US policy makers were right to fear the prospects of a $54 trillion debt deflation and that they should have been more ambitious in their monetary expansion. The bond vigilantes believe that the double dip deflation of the 1930s will ensure that the Fed will be slow to raise interest rates this time around. But what if the economy stalls because the credit markets are premature in tightening monetary policy for them?

I am beginning to sense another paradoxical twist. What if the Fed is right and Angela Merkel, Zhou Xiaochuan, Warren Buffet and James Grant are wrong? And that contrary to their inclinations the American authorities are forced to moderate their monetary expansion in order not to undermine the confidence of the international community. Whilst at the same time the bond market pushes long rates higher.

Under such a scenario the debt reduction efforts of the private sector would usurp the government’s attempts at stimulus; the economy would falter once more. Back in 1931 the same thing happened. Bond prices dropped and yields rose to the level that had prevailed for the previous ten years; a feeble economy lapsed back into a deflationary spiral. Perhaps if this were to happen again, and we were once more confronted by a truly dire economic outcome, then it is conceivable that the authorities could gain the vital legitimacy necessary to engage in an unquestionably large monetary response which finally purges the system of deflation. That is when I would choose to let rip on buying commodities and cheap equities.

The key is the economy’s sensitivity to bond yields. Russell Napier argues that it would require ten-year yields of 6pc (vs. 4pc today) to knock the economy and stock market from their perch and reassert the deflationary trend. But he bases his assertion on observations taken since the early 1960s. My quibble is that today’s leverage is unprecedented and prices are falling. May’s American CPI is forecast to contract by 0.9pc YoY; they fell in April. We never had falling prices in the 1960s, 70s, 80s or 90s. I therefore maintain that it is feasible that some unquantifiable but certainly lower nominal rate could choke the economy.

Regardless, it is my contention that many are investing in risk once more almost oblivious to the notion that a heavily indebted economy is confronted by a very real tightening of monetary policy. It is not inconceivable that the macro compass could swing violently towards deflation and wrong foot them again.

Will it happen? As I suggested at the beginning, it really comes down to whether we are trading in a groundhog version of last year. By last summer, oil had been bid up to $147 per barrel and markets were anticipating that central bankers like the Bank of England would be forced to raise (not cut!) rates by 200 basis points. The pressure was intense. I recall philosophical conversations regarding short sterling; what did it really represent? And with oil spiking I was taking my gross long position down but replacing it with $200 call option premium; not $50 put strikes. As Robert Prechter reminds his readers, “the news at turning points is just too strong for most people to act contrarily to it…fundamentals so intensely support the continuation of a trend just when it is ready to reverse”; mea culpa.

I have had cause to think long and hard about what caused the turnaround last July in the commodity spectrum. I believe the persistent and government approved appreciation of the Yuan played a prominent role. Forget quantitative easing, I believe this was the printing press that propelled risk asset prices higher. Chinese speculators could borrow in dollars knowing that their loans could be repaid for less in their local currency. And when the US entered the global recession first, and began cutting rates, the Chinese were emboldened to ramp up their overseas borrowing further; they had to buy something and as we know oil went parabolic. But then the Yuan stopped appreciating. Perhaps the central planners didn’t like spending so much on commodities? I suspect it was more that they became fearful of their competitive position vis-à-vis the Koreans and other mercantilist trading countries. Whatever the reason, it is clear that since last July their currency stopped appreciating vs. the dollar. This provoked an immediate response: speculators rushed to reverse their trade and we immediately went from inflation to deflation.

Since early March the price of risk assets has again risen considerably; the Yuan has gone sideways. Perhaps the Chinese don’t want to re-price their scarce exports amidst the economic weakness? I see this as a non-confirmation of the move in equities and commodities and it reinforces my bearish slant on the year. However, I happily contend that should the Yuan begin to appreciate once more and establish a new high vs. the dollar then I am just plain wrong with risk aversion and I will change the Fund’s posture; but so far it has been almost a year and nothing.

Rapidly Decreasing Pessimism?

I have been very fearful of fighting this stock market rally, taking the view that we could see something vigorous enough to convince the majority that we were in a new bull market. I did not expect anything like new absolute highs; more like 1930 when the Dow Jones rallied 52pc from its 1929 bottom. I was therefore heartened to hear, “History says fill your boots, sell your wife, dive in…” from David Schwartz, the self styled stock market historian, in an article from The London Times on the 9th of May, one day after the European stock futures had completed a 50pc rally from their intra day lows back in March. Furthermore, it was taken from a piece entitled, “Investors bet that worst of recession is over and predict new bull market”. These are early days but clearly the process of social herding and higher prices is succeeding in tempting many investors to risk their capital again.

I have written previously of life imitating art and continue to take inspiration from Will Self’s collection of short stories, “The Quantity Theory of Insanity”. In one tale a plucky undergraduate succeeds in locating his missing college professor by determining a pattern from a collection of integers copied from homosexual graffiti lifted from the cubicles of London lavatories. But it’s just a lucky coincidence. This got me thinking about Soros and Paul Tudor Jones plotting where the Dow might trade in 1987 from the entrails of the Dow in 1929. They thought the “great crash” of 2008 was due in 1987. They were wrong. But their pattern of integers, by coincidence, matched perfectly and Tudor Jones made 50pc in October 1987. In this business it doesn’t matter if you get lucky; just stay lucky.

Investment Strategy

So here I am in June 2009. My favourite asset class is down over 20pc on the year and is popularly derided. But I am feeling lucky. My gut feeling is that this year could follow last year. If I am right then it is time to re-engage tentatively with deflationary trades. Remember, I am fearful that the next few months could still contain further euphoric moments. My preference is therefore to start modestly and go for low delta but big pay-off option trades.

Such opportunities are rare today. However, over the last couple of weeks we began purchasing out of the money call options on the current 30 year US Treasury bond. Do not be too concerned, we have only used about 20 basis points of the Fund’s NAV on such option premium so far. However it is our intention to add to this amount should the elevated levels of fixed income volatility subside. Given the capacity of this market to thrash around from extremes, it is not unrealistic to imagine that yields could match their lows of just six months ago. Should this happen before the year end, our options would payout 14 times our investment.

Similar asymmetric payouts are achievable in the short sterling interest rate market where investors are pricing in a 2pc hike in Bank of England base rate by the end of 2010. This is eerily like this time last year when they were expecting a 2pc hike for the second half of the year. If this time around the market again reverses its opinion by December, and takes the view that this is unlikely to happen, then our option package could payout over 10 times our money.

I also like German sovereign CDS at this level: an annual fee, paid quarterly, of just $30k (a total outlay of $150k if held for 5 years) to insure $10m of notional debt should something truly calamitous happen to the finances of the German Republic. Could it happen? No. However, those who underwrite credit default swaps today can only see Germany’s formidable strengths and laud it for its high savings, fiscal prudence and large trade surplus. But as I wrote to you previously, I fear the “surplus” nations of China, Japan and Germany have been duped by the West’s borrowing binge.

I fear they have over-estimated the global economy’s demand and are confronted with huge pools of surplus marginal capacity. A prolonged and feeble recovery in America’s nominal GDP would have especially dire consequences for such economies; Germany is already on course to contract by 5pc this year. It could be that with a moribund export market (traditionally two-thirds of economic growth) and the likelihood that politicians change the constitution to ban state and local deficit spending, investors might prove willing to pay more for their German bond insurance. Remember it only has to trade at the highs of earlier this year and I would double our money.

Sovereign defaults are today priced as black swan events despite the fact that more than half of all governments defaulted on their external debt back in the 1930s. Already in this decade we have seen both Argentina and Ecuador default. In both cases the recovery rate was 25pc. This is low; historically 40pc is more typical. Perhaps 25 is the new 40? Today it seems likely that Latvia will join them. Their sovereign CDSs trade at €750k per €10m of notional protection. What this means is that should Latvia default tomorrow, or within the next 12 months, you would receive €10m minus the assumption of recovery (25pc) and minus any CDS payments incurred; or 10x your money. I own Hungarian protection which is priced at €340k per €10m of equivalent sovereign protection. Again, assuming a 25pc recovery, a default this year would return us 22x our money, 11x if it is next year, 7x in 3 years and so on.

Lastly, in an effort to help fund the cost of carrying these risk-averse trades, I have been selectively buying corporate bonds in the tobacco, agriculture, and utility pipeline industries. This portfolio has an average yield of 8pc and I would be happy to take you through its finer details on request.

Here is hoping that I get lucky.

(Legal)

This document is being issued by Eclectica Asset Management LLP (”EAM”), which is authorised and regulated by the Financial Services Authority. The information contained in this document relates to the promotion of shares in one or more collective investment schemes managed by EAM (the “Funds”). The promotion of the Funds and the distribution of this document in the United Kingdom is restricted by law. This document is being issued by EAM to and/or is directed at persons of a kind to whom the Funds may lawfully be promoted. No recipient of this document may distribute it to any other person. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of, and no liability is accepted for, the information or opinions contained in this document by any of EAM, any of the funds managed by EAM or their respective directors. This does not exclude or restrict any duty or liability that EAM has to its customers under the UK regulatory system. This document does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe or purchase, any securities mentioned herein nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract therefor. Recipients of this document who intend to apply for securities are reminded that any such application may be made solely on the basis of the information and opinions contained in the relevant prospectus which may be different from the information and opinions contained in this document. The value of all investments and the income derived therefrom can decrease as well as increase. This may be partly due to exchange rate fluctuations in investments that have an exposure to currencies other than the base currency of the relevant fund. Historic performance is not a guide to future performance. All charts are sourced from Eclectica Asset Management LLP. Net Asset Values are as at the date of the document. © 2005-09 Eclectica Asset Management LLP; Registration No. OC312442; registered office at 6 Salem Road, London, W2 4BU.

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Hugh Hendry: Citywire Interview

Saturday, April 11th, 2009

Hugh Hendry, the outspoken CIO and co-founder of Eclectica, one of the UK’s most successful hedge funds during the last 4 years, and in particular the last 2 years, appears in a full length interview, speaking on a variety of issues, including his thoughts on contrarianism, quantitative easing, deflation vs. inflation, his outlook for the market, and future of the hedge fund industry.

As usual, Hendry is both enlightening, and controversial, and his remarkable accuracy about the nature of the market and course during the last year make him worth listening to. Click play to view:

Part 1: The Eclectica co-founder explains why he is sticking to his guns despite having ‘my tail between my legs’ after the recent banking sector rally, and why the dollar could approach parity with the euro.

Part 2 : The outspoken hedge fund manager argues that the majority of his peers ‘have no future’, and explains his fear that tighter financial regulation will mean two decades of deflation in the second of a two part series.

Here is a complete transcript of the interview:

We have had an unprecedented period, unprecedented. Its never happened before. It’s never been the case that the stock market has gone up almost 30 times in just one movement. What I’m saying to you is that the Dow Jones in 1975 was around 590 points, and in 2007, we got to around 14,200 points. I round down, you know. That’s never ever happened. That is unprecedented prosperity. And the people who gained the most from that, are the fund managers, like me. Except, I’m aware of it. A lot of people are just not aware of it, to be lucky to be in the right place at the right time. But as you know, equity markets have done nothing for the past ten years, and if you look at the example of Japan, you’re stretching 25 years, and you’re seeing lows that we recorded in the 1980s. And I think that’s coming, that’s encroaching on our path.

When I go the major cities of the world, I say, hey, “Where do the fund managers live?” “Where do they work?” I want to short people like me; I’m very fearful about my profession’s career. So to lay it off, I want to short these guys. “Who has the biggest portfolio of assets?” ’cause all assets are coming down, coming down. So, you’re going to go from being the luckiest and the chosen, to being the unluckiest and the reviled. So, fund management franchises, insurance companies; I don’t care if you’re composite or if you’re life. I worry about the opacity of it. The ability to see in and the ability to test the value of their portfolio. I worry about what’s this mark-to-market. The banks have had the discipline of it, and we’ve seen what that’s done to their share price. The insurance companies haven’t. That’s my premise, the same thing applies with General Electric, GE, GE Capital. That’s a huge investment manager: $660-billion in assets and they’re coming down, but they’ve only marked 2% of the assets to market. To my mind, if you gave that business an appropriate hair cut, it would suggest that that business is insolvent, and yet its deemed to be one of the most credit worthy companies in the world today. Nothing makes sense today.

Will the Dollar Maintain its Strength?

Whatever I say now, no one will understand, so with that caveat, I don’t say that as a conceited man, I’m not talking down to anyone, its just a difficult theory, nevertheless its a theory postulated by one of the great economists of the twentieth century, Irving Fisher, and its [the kind] along the lines of paradox of thrift. And what’s happening is that, or what’s happened again in America is that like everyone else we took on too much debt, and at its peak we had $53-trillion, think about that, that’s a lot of zeroes, $53-trillion of debt outstanding. People went crazy, they had these liabilities and they hoped that on [the other] this side, they had $53-trillion of assets, and indeed, three years ago, they probably had $80-trillion of assets, and they were looking kind of funky.

The problem is the assets, house prices have fallen 25% in the US, that’s a big haircut, equity prices, they’ve fallen 50-60%, that’s a huge haircut. Commodity prices, they’re down 30%-40%-45%, that’s a huge haircut. Suddenly, you’re finding that as you come to create dollars [convert assets in to cash], because you own things and you sell things, you’re getting less dollars. So what I want to tell you is that there is a scarcity of cash, there is a scarcity of dollars, and that sounds absurd, because here we are today, and they’re announcing they’re bank bailout scheme, and they’re talking about $50-100-billion of government money and leveraging it, they can’t break the link with the past, they want to leverage it up to half a trillion dollars. That’s why I want to say to you…if you think about all of the government’s announcements in the US…its small change out of $53-trillion of debt. That’s why I say to you, the economy will weaken, because they’re not being heroic enough, actually they believe the consensus that if you print enough money you create inflation.

Every one believes in Friedman, everyone is being slow to deal with the fact that there’s this legacy of $53-trillion and its like a heavy object, just pressing the life out of the entrepreneurial spirit, and therefore keeping the economy down. Look, that’s my presumption, and under that presumption, the dollar should be strong, and the dollar has been strong. Its been a frustration to the many people, the strength of the dollar. Now in the last two weeks with the quantitative easing announcement, the dollar has weakened, but I think in the process of the next month or two, you will see the dollar bottom and then go on, and I wouldn’t be surprised if we got close to parity vis-a-vis the Euro within the months and years to come.

The Paradox of Contrarianism

Expert after expert lines up to tell you that the future’s inflationary and you should be selling conventional government bonds. Government bonds have been in an uptrend, so that is an intellectual conceit which is not supported by the price trend, and therefore I am invested in government bonds, I’m trend following, but I’m contrarian. The dollar over the course of the last 3 years has risen. Every investment counsellor will advise you to sell dollars. I will advise you to buy. I pursuing the trend, yet I’m being contrarian. You see how it works out? So first principals are 1) identifying the idea, the opportunity, and then 2) testing it against the market. I got a computer screen on the wall and I say to my kids, Mirror, Mirror on the wall, who’s the prettiest of them all? When I’m stuck, I ask the market. And if the market’s trending higher, then it says I should be trying to buy them, and if its trending down, I should be trying to avoid it.

What people forget is that a successful contrarian is only contrarian 20% of the time. Less than 20% of the time do you ever dare to go against the trend. So most of the time we are pursuing trend. And yet, being contrarian.

A Bear Market Rally - A Test of Faith?

Last March, my hedge fund, we lost 16% percent. That’s a hefty decline. The preceding two months, we made 25% and then we lost 16%, then we lost money in April and May, and June. I have to say, I was quite suicidal, but remember, for the year we made 32%.

So, I tell you, we could sum it up, the stock market was captured by the biblical story. It was St. Peter or St. Paul, but he was the most fervent believer. He’s seen the almightiest Jesus Christ, he’s there in the garden, and he says’s “You’re the man!” And Jesus says, “What are you talking about?” Before the cock crows three times you’ll have rejected me not once, but three times. And he says “Impossible!”

That’s what stock markets are all about. Here I am with my deflationary notions of what might happen. Here I am believing that there’s no intrinsic value in banking stocks, and the cock’s crowing and its kind of “Have I changed my mind?” I haven’t. Have I changed my mind? Markets are set up to take you away from the purity and the sanctity of sensible thinking. And because of that I spend my time talking to you. I spend my time; I’m just back from China, I hug trees, I do anything but sit in my office and watch the portfolio go like that [he makes a fluttering motion].

People claim that I get very cocky. I read some of the correspondence that goes on when they’ve seen me on television and they were saying after my last appearance, I really was a bit cocky, so you know what? Yeah, I get my head handed to me by these people. I sober up, you’re quite right, It’s a lesson that has to be relearnt over and over again, that no one person is bigger than the market, that no one person has a divine right to be right. There, I hear you, I hear you [motioning hand to ear to God].

The hedge fund industry in its construction, as we know it from like, a year ago or 18 months ago is finished. Its finished, I think, yeah. And it was a disfiguration of the spirit of hedge funds. Hedge funds in the 1970s, there weren’t many, they were kind of kooky, kind of maverick, eclectic people. The kind of thing that I’ve tried to emulate, probably with less success. And because of all those characteristics, you can never give them much mind. That’s why they’re alternative. You kind of respected them, but it was just too much, they were just too mad. And then you spent of the rest of your life wishing you’d given them more money. I think we go back to that environment. There are too many hedge fund managers, and not enough kooky brave independent thinking spirits out there like them. I  think the mechanism that will take us there, is all these non-kooky individuals losing money. The average hedge fund lost money last year. 

The average hedge fund has imposed gates and locked their clients in. They’re finished. They’re finished. There are hedge funds out there and they have gated, what I mean is they’re denying their clients withdrawing their money. They’re writing to their clients, the good news, is that we’ve made money in January, and February, we’re making money in March. Absolute tripe! Okay, you have not made a penny, when you’re denying the clients their money. So these are people who have no future, who are walking around pretending that they have a future. That time will catch up with them. Lastly, the point I want to make to you is that the common thread of these funds like Madoff, which have failed, and the example of one unveiled last week in London, this Global Macro fund, the commonality is the very low volatility. These are funds that made money in a reasonable consistent manner; it was almost linear, linear, linear, year after year after year. I never believe in linear progression.

I believe in volatility and the craziness of life as we search for the uncertain future. My returns are volatile. Our only thing is from a calendar year of risk, we never lose much money. One year, we lost 3% and it still gobbles me that we lost 3%., not 33%. On a month-by-month basis it can be crazy. So what we found, we found a conceit in that as a society, we have abolished the business cycle so rather than going up and down with the economy. Gordon Brown told us he had abolished boom bust so that we have a linear progression. Bernie Madoff was a linear progression. We could make money without doubts, hence we elevated the hedge fund community into the premier division. That was all a mistake. And, cyclicality is re-imposing itself, and I’m just warning you that cyclicality, once unleashed, isn’t necessarily 2-3 years, it’s 20-30 years in its formation. 

Can the Regulators Save Us?

This is a big fear, I think its a legitimate fear. The fear is that there’s now an open outcry, by society at large as to the remuneration, and the risk taking that was necessary over the last few years by the financial sector. And, because society has been called in to rescue the financial sector is demanding its pound of flesh. And I don’t take issue with that, I accept that as the natural course of events. But, there is also this law of unintended consequences, so we look at say the British property market, and it now seems crazy. One could get up to 5 times your salary to purchase your house. And now we might impose a low amount of leverage of 2-3 times. The problem with that is that even with the decline in housing prices, no one could afford a house price if you bring down the… so that the credit leverage was only a function of asset prices being very high, and therefore you had to overarch in order to gain a competitive return as a speculator or just get on the housing matter as a regular person. The commonality between those two transaction is asset prices. They were too high.

So the regulator’s coming in and trying to bring down leverage in the market, and they are after hedge funds. I don’t know why… I do know why - They are rich and successful. Fair game - bring down their leverage and bring down the leverage of home buyers, prospective house buyers. The problem with that is it bakes in the notion that house prices and assets will spend the next 20 years deflating, under this more sober and conservative environment.

The Hedge Fund as Investment Laboratory

The last two weeks, nothing has been fun, because all the portfolios, they all go the same way. There’s no product diversification, so one fund’s doing well another one’s not doing well. I don’t understand that word, supermarket, and the difficult thing right now is we have no confirmation for our ideas, we’re taking a pasting. Three weeks ago, we were 11 or 12 points ahead of the index and today, that’s probably now 3 or 4. At the same time, we were up 10-11 points in absolute terms in the hedge fund and that’s come down to 4. So everywhere I look now, my tail’s between my legs. But my message is the same. All my money’s in my hedge fund. The hedge fund, I believe, is as superior product, and if you’ve got that minimal market, those pounds, euros, and dollars, I, we’ve placed within the hedge fund; we use the hedge fund as a laboratory, a test pad. We incubate ideas and once they take root and they gain legitimacy, and once we start to make money on the blasted things, we can then take little transplants and put in to our long [term] holdings. Its a better way, I hope its harmonious and they can live together, one benefits from the other.

What is Eclectica’s Investment Process?

We are very much free thinkers at the macro level. We, through our collective efforts in travel, in terms of information sources, in the way we look at things - you know we’re trading currencies, we’re trading commodity futures, we’re trading government bonds, we’ve got fingers in the all of the pies, so when we come to look at an equity portfolio, we drill down all that wealth of experience, to try and determine the most likely path of the economy and the stocks that benefit from it. Our portfolios have undergone a dramatic change. Up until July of last year, we had up to three quarters of the portfolios invested in commodities, and the majority of that was agricultural commodities. But then, something happened. This deflation shock struck, and it hit, our crisis, and after three or four more months it hit the two year trend, and our portfolio changed. And today our portfolio is defensive. Tobacco, health care,  utilities, staples. In the last three weeks that’s come under enormous downside pressure. But as I say to you its three weeks and we need monthly observations. Now if that downside pressure were to continue, our portfolio would change again.

My ideological preference is that that won’t happen, but I have to remain intellectually robust to change my portfolio if it does need to. As I say to you, it’s not a process of three weeks or four weeks, we’re not high intensity traders. New world, new price. New trend, new portfolio. That’s our mantra, but today, we’re still from the view that the economy is under duress and therefore we’re still sticking to the low end of these trends, close to trends in the defensive stocks. Time will tell if we have to change them. 

Fund Management Without Conviction

Conviction has got no role in my operation. There are concerns about Eclectica, or about, me… The concern is that you see me everywhere, you see me on CNBC, I do Bloomberg in the US, I’m on the BBC - heavens, I made a documentary for Channel Four last year, and its all high falutin stuff and it all gives the impression that there’s all of this conceit and arrogance - Hey, you’re taking on, I am Hugh Hendry taking on the market, but its actually driven by the reverse. I actually very fearful of having ideas that I can articulate and gain your conviction. I’m very fearful of that, and so those first principals that we built up, what we call portfolio management principles. - we developed a series of rules which are there to constrain what I can do. So I can only get involved in the portfolios as I said to you when we have the legitimacy of a positive trend. Without a postive trend, you can take my conviction and you can throw it away. You can discard it. Conviction has to married with discipline, and we’ve always done that, but of course, when you see the odd soundbyte, and I’m going on and pontificating about something, you forget that if the trend changes, we change the portfolio.

Tags: Array, Banking Sector, Cio, Cities Of The World, Citywire, Co Founder, Decades, Deflation, Dow Jones, Eclectica, Fear, Full Length, Fund Managers, Guns, Hedge Fund, Hedge Fund Manager, Hedge Funds, Hugh Hendry, inflation, Legs, Length Interview, Lows, Major Cities Of The World, Parity, Peers, Quantitative Easing, Rally, Remarkable Accuracy, Right Place At The Right Time, Stock Market, Unprecedented Period, Unprecedented Prosperity
Posted in Bonds, Commodities, Credit Markets, Markets | 3 Comments »

Crispin Odey: No Recovery Until Consumers Unwind Debt

Thursday, March 5th, 2009

Crispin Odey, CIO, Founder of Odey Asset Management, in the UK, released his outlook for 2009 in his 2008 year-end letter to shareholders. Odey, a high profile hedge fund manager, and Hugh Hendry’s (Eclectica AM) former mentor, made a fortune last year shorting UK banks, shares some of his insights and observations on last year and the coming year. Here is an excerpt from that letter:

“2008 was a difficult year. As our shareholders remarked, it was not the year of the rat for nothing. If something could go wrong it did go wrong. No asset class rose but some currencies fell. Stock markets on average fell by 50% in US dollars. Commodities fell by 70% from their highs in June, admittedly after rising by 30% in the first five months. Hedge funds saw on average redemptions of 40%”.

“Whatever they might still say all clients started to view cash as their benchmark. Noted individuals were badly caught out. Joe Lewis, a legendary currency trader, lost a billion dollars in Bear Stearns. Kirk Kerkorian famously declared that he should have died a year ago and he would have saved both his fortune and his reputation”.

“So what does 2009 promise? Firstly it has to be said that governments, institutions and regulators have been slow to understand the credit cycle. At each turn they have believed that it was not part of anything greater. What was nothing more than a problem in the interbank market became a lending problem for the major banks and in September caused a slump in the economic activity worldwide”.

“The numbers are now so bad that they are not worth repeating. In January 2009, Japan’s exports were down 40% year on year. A combination of not understanding the credit cycle and no interest in history has served our leaders poorly. As John Train recently remarked “just as Keynes said that leaders thinking they were acting in good sense were in fact slaves to some defunct economist, so today these politicians have been slaves to Keynes.”

“Even if they could find solutions to the problems we have, we cannot now escape the most painful recession post-war. However, there is also no consensus over the solution necessary. What is true is that politicians will not stand by whilst unemployment rises and activity dwindles and that is precisely the outlook we face with current policies. Current policies are helping to contain the worst effects”.

But his main point is that there will no recovery until consumers start to unwind their indebtedness, which is going to take time and pain. “There will be a rise in prices in those countries that have devalued, despite current widespread belief to the contrary, which will be felt when companies re-order. We may be in recession in the UK, but a 25% fall in our currency will result in a 10% rise in prices at some point. It is the fact that no economy is remotely in the recovery position which makes me still quite depressed for this year. I am happy to buy when faced with irrational fear, but the fear that I see around me today appears reasonably rational”.

Hat Tip: Jonathan Davis, Independent Investor

Tags: Array, asset class, Bear Stearns, Billion Dollars, Crispin Odey, Currency Trader, Defunct Economist, Eclectica, Economic Activity, Five Months, Good Sense, Hedge Fund Manager, Hedge Funds, Hugh Hendry, Interbank Market, Joe Lewis, John Train, Keynes, Kirk Kerkorian, Legendary Currency, Letter To Shareholders, Post War, Redemptions, Stock Markets, Uk Banks, Year Of The Rat
Posted in Commodities, Credit Markets, Economy, Markets, Outlook | No Comments »

Jim Chanos: Short sellers are market’s real-time detectives

Thursday, February 26th, 2009

Jim Chanos’ Kynikos Associates has gained legendary status as the world’s biggest short seller, managing some $7-billion in assets this way. Chanos is renown for exposing the Enron ‘irregularities’ back in 2001. It was easy to get caught up in last year’s blame game when the Wall Street CEOs were pointing the finger at short-sellers, which resulted in the ensuing short selling ban, however, as Chanos puts it, short sellers are the real-time detectives of the market, and regulators, the SEC, are archeologists.

Hugh Hendry, CIO, Eclectica points out that short sellers take on far more onerous risks than long-only asset managers, and they have to do far more homework to uncover problems that can potentially lead them into profitable short sales.  

Here’s noted short seller Jim Chanos’ latest interview where he talks investment opportunities in the current market on the PBS Nightly Business Report, citing his distaste for the Healthcare and Defense sectors: Video

Click on the image to see the interview:

Short sellers may provide valuable insight, and guidance by serving as an indicator that problems exist in particular companies, and sectors, and short sellers provide an important element of support to the liquidity of the market, acting as bottom-fishers when they cover their positions, at weak spots in the market.

This is a worthwhile interview to listen to, as Chanos has a mild-mannered intellect that is both refreshing and honest.

Hat tip: MarketFolly.com

Tags: Archeologists, Asset Managers, Blame Game, Current Market, Defense Sectors, Distaste, Eclectica, ETF, Hat Tip, Hugh Hendry, Intellect, Irregularities, Jim Chanos, Kynikos Associates, Legendary Status, liquidity, Nightly Business Report, Pbs Nightly Business Report, Pointing The Finger, Renown, Short Sellers, Time Detectives
Posted in Markets | No Comments »

Jim Chanos: FT.com Interview

Wednesday, February 4th, 2009

Jim Chanos, founder and managing partner of Kynikos, talks with Chrystia Freeland, US Managing Editor, FT.com. Click the image to view this must see interview. Highlights are below:

James Chanos, president of Kynikos Associates, is the biggest short-seller in the world. Chanos, second-generation Greek-American, grew up in Milwaukee, where his family owned a chain of dry-cleaning stores, then attended Yale, where he studied economics, before entering finance. He worked first in Chicago, then moved to New York.

Recently, Chanos told Portfolio.com how Bear Stearn’s Chairman and CEO, Alan Schwartz, called him on the evening preceding the company’s bailout acquisition, to go on CNBC and tell them that everything was hunky-dory at BS.

He is best known for shorting Enron, as well as the work he did in blowing wide open the company’s dirty accounting. He is bearish healthcare, defence and for-profit education companies. Hedge funds will have to get used to the fact there will “lean years,” and of his own fund, he says that cash strapped investors have been using it like some sort of ATM, which has shrunken from $7-billion to $6-billion this year$. (Note: This has been the fate of winning hedge funds, another example of which has been Hugh Hendry’s Eclectica)

Here are some highlights:

How much worse are things going to get?

No one knows for sure.

The last few weeks has seen fear re-enter the banking system, both here and in the UK. The [Bernard] Madoff affair also did a lot of damage to confidence.

Are people right to talk about nationalising the banks?

I don’t know. We almost have it de facto for our largest institutions. The real crux of the problem [is] people still don’t believe the numbers.

What will it take for people to believe the numbers? There is still a bit of Pollyanna in the air. We don’t really know where these banks have marked these assets, because the news is still surprising us on the downside . . . The magnitude of these writedowns is still somewhat staggering.

What do you think of [head of the Federal Deposit Insurance Corporation] Sheila Bair’s idea of creating some sort of aggregator bank?

We continue to violate all of Walter Bagehot’s principles on lenders of last resort . . . As long as we continue to do that we are empowering the worst decisions, we are rewarding the people that got us here.

Are we running out of people able to run these big banks?

I don’t know that we could do a whole lot worse than the people who have been running them lately.

Should the banks be lending more?

Prior to this the banks would lend to anybody with a pulse, and now even JP Morgan himself probably couldn’t get a loan. It is a chicken and egg problem; you have people who are completely creditworthy, who probably don’t want to borrow money now, and the people who do are your lower creditworthy borrowers and the banks are terrified to expand their balance sheets.

Isn’t it prudent for banks to hoard capital now?

They should be coming clean with investors and with the government on their methodology for marking these assets and their loan loss reserves, and giving the Street as much transparency as possible.

Why isn’t it happening?

Because so far the surprises seem to have been on the downside. I think there is still a lot of damage on these balance sheets that has not come out. My guess is the number is going to be over the trillion [dollar] mark when all is said and done.

What effect has [the alleged Madoff fraud] had?

It was a blow to confidence exactly at the wrong moment, when things seemed to be getting better, and injected that nasty concept of fraud into the equation.

Will we see changes in taxation for hedge funds?

We already saw it very quietly. One of the most attractive aspects of hedge fund management was taken away in the Tarp legislation, which was the tax referral for offshore managers. That very quietly went away, and that was a big deal.

Are you worried about a climate of criticism over pay in financial services? [People] should be upset.

Bankers still took home, and my hypothesis is that in fact they never really made the billion dollars.

That’s the problem: we are going to find out when we go through the accounting that in fact these things were never that profitable.

Is America’s financial capital moving from New York to Washington?

Power is beginning to shift, clearly, because of the government investment in these firms.

And anyone who doesn’t see that is kidding themselves.

Have you identified any surprising areas of weakness in the economy?

The three areas we are focusing on would be healthcare, defence and the for-profit education business. All those areas are going to be under a lot of pressure under the new administration.

What is the big thing everyone is missing?

The next battleground is private equity. It is going to be very tough for the industry to look at Washington with a straight face and say “Gee, you’ve got to be hands-off with us”, while they are laying people off who are voting. That is going to be a PR nightmare, and I wish my friends in private equity good luck with that.

This is the week Barack Obama became president. What significance does that have?

I think the world is looking to America for a new beginning; I think a lot of Americans are too, no matter what your politics. The president-elect is hosting a dinner for John McCain, his defeated opponent, which is a very class act.

Long or short? Watch.

Source: FT.com

Tags: Alan Schwartz, Array, Bailout, Banking System, Bear Stearn, Bernard Madoff, Cnbc, Crux, Dry Cleaning Stores, Eclectica, Education Companies, Executive Compensation, Financial Services, Freeland, Greek American, Hedge Funds, Hugh Hendry, James Chanos, Jim Chanos, Kynikos Associates, Managing Editor, Pollyanna, Profit Education
Posted in Economy, Markets, Outlook | No 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 »

New Audio Resource at GreenLightAdvisor.com

Saturday, November 8th, 2008

Now you can listen to the Investment Outlook and Commentary from Bill Gross (PIMCO), Vanguard Funds’ Portfolio Managers, and others on GreenLightAdvisor.com’s Audio Resources page.

This month, Bill Gross presents his latest investment outlook, Kenneth Volpert from Vanguard discusses the Credit Crisis, and Dominic Frisby, from MoneyWeek interviews Hugh Hendry of Eclectica Asset Management.

Enjoy!

Tags: Bill Gross, Blog, Credit, Credit Crisis, Dominic Frisby, Eclectica, Eclectica Asset Management, Hugh Hendry, interview, PIMCO
Posted in Markets, Outlook | No Comments »

Hugh Hendry: Don’t Bank on the Bailout

Sunday, November 2nd, 2008

Hugh Hendry, the brash, outspoken, and eloquent CIO, Eclectica Asset Management was invited to host Channel 4’s Dispatches, a UK TV program - “Don’t Bank on a Bailout”- a production that aired on October 27, 2008 about the fallout from this years credit debacle which adversely affected the UK and the US. Hendry travels throughout the City Financial District and then Wall Street.

Hendry has been one of the harshest critics of the lack of regulation in credit markets.

The three segments total about 15 mins. Its a must see:

Hugh Hendry, Part 1, Dispatches: Don’t Bank on the Bailout

Hugh Hendry, Part 2, Dispatches: Don’t Bank on the Bailout

Hugh Hendry, Part 3, Dispatches: Don’t Bank on the Bailout

Tags: Bailout, Credit, Credit Market, Credit Markets, Eclectica, Eclectica Asset Management, Hugh Hendry, Markets, risk, UK, Value, Wall Street
Posted in Credit Markets, Markets | 1 Comment »