Hendry: Markets Assuming Optimism

Hugh Hendry, the outspoken hedge fund manager and founder of Eclectica Asset Management, known for his remarkably accurate call on deflation, and long-duration government bond bets, appeared on CNBC last night to share his controversial outlook on markets. In his usual and cutting way, Hendry dismissed critics of his stance on long bonds, by pointing out that we are in the midst of "a rally of risk".

The recent rise in stocks and talk about green shoots in the markets are optimistic assumptions, as the world downturn "still has a way to run," said Hugh Hendry, CIO at Eclectica.

Here are the accompanying notes from CNBC.

The recent rise in stocks and talk about green shoots in the markets are optimistic assumptions, as the world downturn "still has a way to run," Hugh Hendry, Chief Investment Officer at Eclectica, told CNBC Tuesday.

World gross domestic product looks overestimated, because global consumption has been based on debt, and this cannot continue, Hendry told "Squawk Box Europe."

"In the last five weeks we had a rally in risk. Big deal," he said.

"I am fearful of the surplus countries, like China and Germany. I think GDP has been overstated," Hendry added.

"My notion was, you had Bernie Madoff doing US GDP accounting." China "built capacity to serve a world that doesn't exist. We're drowning in capacity. The idea to propose we build moreā€¦ that ain't a remedy," he explained.

Although companies' results beat forecasts, this is mainly because they marked their expectations too low, but their outlook is grim, according to Hendry.

"I believe the downturn in the global economy still has a way to run. We've only been given evidence of further deterioration," he said.

The rise in bond yields shows that the yield curve is flattening, pointing to more economic weakness ahead.

"What it reveals is that it's terrifying. This rise in bond yields showsā€¦ the private sector is countering the Fed and is tightening policy," Hendry said.

During the Great Depression, there had been rallies in the stock market, but stocks generally fell, Hendry reminded, explaining his bearish stance on stocks. He added that nobody can predict where the bottom was for the stock market.

"Monkeys spend all their time picking bottoms. I refuse to pick bottoms as I don't live in trees," he said.

Hendry also shared his thoughts on Tobacco stocks, commodities, bonds, and gold.

Tobacco stocks, especially in the US, are among the few assets that Hugh Hendry, chief investment officer at hedge fund Eclectica, said he likes Tuesday, but he added investors should be prudent as world economies are still in the middle of a deleveraging trend.

Altria and Philip Morris are interesting choices as they are "priced in dollars," Hendry said, adding "I like dollars."

"One of the things we know with certainty is that people smoke, they're addicted to it," Hendry added.

He said he was getting a 9 percent yield on the stock, but, because of the fragile economic situation, was thinking of buying senior debt, which would give the same yield but offers more security in case of bankruptcy.

"As a society, we have taken debtā€¦ to almost four times greater than the economy. That's unprecedented. And it's a turning point," Hendry said. "Governments around the world want some inflation, and they are targeting inflation. It's one thing to target it and another to achieve it. Who wants to take on debt today?"

Because of this, the economy will continue to contract and commodities such as oil are not a good bet either, according to Hendry.

Bonds are not a good buy for the summer, as they are usually an investment for the second half of the year, and investors should be "patient and scared" and, at the end of debt deflation, may get "fantastic values".

Gold has behaved as a risk-free asset, but Hendry said he hopes for a correction in the price of gold to around $600 to $700 per ounce, from the current level of $898, to start buying.

"I'm not saying it will happen, but stranger things have happened," he said. "Gold investors have had it easy. I expect gold to get a bit more uncomfortable for the people who hold it in the short term."

"The intellectual case for gold is very strong. Governments are printing money, but only God prints gold and that takes billions of years."

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