Hendry: De-flation is Contrarian

Hugh Hendry, CIO, Partner, Eclectica

"Bonds! The credit crunch – you’ve got to go back to 1942 to last observe the contraction in lending in America to the corporate and industrial sector. You can’t go back far enough to find a period in the UK where mortgage loan growth has just stopped. There are queues outside banks to get mortgages. That is profoundly deflationary. This spike that caught everyone out in oil - when it went from 100 to 140 - got all the experts pointing the wrong way, and saying “inflation inflation”. When the banks are as insolvent as they are today, there is no dissemination. There is no ability to carry higher prices from the specific sector of commodities into the general and into general wages. You have to be willing to be contrarian at this point and own government bonds. And it’s hardly contrarian because -- would you believe -- if you had a portfolio that was solely comprised of 10-Year US  treasury bonds then in the year to June this year you would have returned 15 percent. Ross, the market fell 20 percent, so you would be up 35 percent vis-à-vis the average stock. It’s ironic that we have this obsession with something, whereas the reality – the litmus test – is the Treasury bond, and it’s recording gains of 15 percent, and that’s telling you of the turmoil in the equity markets and the turmoil in the real economy.”