Hugh Hendry, CIO, Eclectica Asset Management told Power Lunch Europe that it will take 10-20 years to heal from the current turmoil in markets. This is a must see interview.
Here is the summary of the interview:
Hendry has avoided risk the last few years. His hedge fund is up 20% YTD and 42% this month. He has been investing more heavily in long term US treasuries recently. Hendry is looking at increasing the risk exposure in his hedge-fund's portfolio.
He pointed to Mervyn King's hinting toward the "R" word as putting it mildly, that the big "D" is in the forecast.
"It's not a question of losing out in a recession, I'm talking about 10 or 20 years before we recover from this. This is a catastrophe," Hendry told "Power Lunch Europe."
Hendry made an example of Hungary. He lambasted the Hungarian central bank governor, Mr. Andra Simor, who described the situation as akin to "the slower antelopes in a chase being devoured by lions one after the other."[!AdServe:bigbox!]
This stems from Hendry's past involvement in discussions with European financial officials about European convergence.
Hendry specifically alludes to discussions he'd had with the Hungarian governor in particular regarding the integration of Hungary into the EU and that he warned against the way in which they planned to finance their move with Swiss Francs and Yen via the carry trade.
While in violin-playing posture, Hendry claimed,"It's tragic."
"What it [the reel] doesn't reveal is that I sat there, he just said, you're rubbish. I'm Hungary. I'm going join the EU. My interest rates are 8% and they're going to be 4%. You're a fool, You can't catch me Mr. Lion, I can outsmart you, I can outrun you. And I said "I dare you."
I said, "I'll give you a head start."
They suspended all economic rationality. Mortgages were given to poor people in Swiss Francs and Japanese Yen. They took on an enormous foreign exchange risk, because they thought that the little antelope could outrun the lions of economic intelligence. And you can't.
Hendry said, "You can game the system, but you can't beat it."
There's nothing crude, there's nothing moral here. They were wrong."
Dominoes. Iceland, Hungary, Latvia, Bulgaria, Eastern Europe, the dominoes are crashing. There's economic disequilibrium. The economic chaos which we ignored for 5 years because we were bribed to ignore it, because they paid high interest rates. It was a bribe to ignore reality. But in a world where everything is falling down, the dominoes just crash. There is no answer.
Hendry's beef is with EU and UK regulators and officials.
"I'm the heretic. I was laughed at, scoffed at, dismissed, ignored, at a time when investment bankers who advise governments, and who manage money, took reckless risk upon reckless risk.
We reached a point at which the Royal Bank of Scotland had a bigger balance sheet than the economy. Everyone looked the other way. Its not a question of losing out in a recession. I'm talking about 10 or 20 years before we recover from this. This is a catastrophe.
Forget about Mervyn King, UK Finance Minister, saying the "R" word. You wait until he says the "D" word.; depression. We had interest rates in the UK at 5% for a year as everything collapsed.
There's a notion of stall speed. Never allow an aircraft to reach stall speed. That is the pledge central bankers must make. " We won't allow the economy to reach stall speed," because everything below that you're pushing on a string.
Interest rates in the UK will be 2% at the end of next year, and they'll be 2% at the end of the year after that.
The ECB, the most hideous, intellectually conceited group of bankers, raised interest rates this summer; history will send the ECB to damnation because they have sent us to damnation. That's the reality.
Thank you Mr. Hendry.