SCHATZKER: I am Erik Schatzker live in London speaking with Hugh Hendry. He is a $450 million hedge fund manager, 18 years of experience in money management and your conversation thus far has ranged from George Soros socialist pretentions to opportunities in Asian currencies which is what I want to get down to now.
If you say Asian currencies have been revalued by 20 percent and there are opportunities, how do you express that view? What are you doing? What Asian currencies would you short or would you play them in a different fashion?
HENDRY: I play in a different fashion. It is desperately important in the macro environment. What macro is about is if your premise is correct you have to ascertain that you have a very high probability that you make money. And in the foreign exchange you don't have that probability. It is not high so again we are looking at credit.
Now what I am saying to you is that people don't understand monetary policy. They don't understand that when you have a pegged exchange rate vis-a-vis the dollar, you have no autonomous monetary policy. So they keep suggesting that a net basis point tightening in Chinese interest rates is going to bring it down. It is not. It is when the currency appreciates, so I take you back to 1995, 1996, 1997. The U.S. dollar appreciated in each of those years vis-a-vis the deutschmark. And the consequence, the Asian tigers fell like dominos.
So now we have the profound weakness in the dollar from the previous decade. It is bottom. The dollar is a strong currency and it is bringing Asia up with it. And given the profit margins are so horrendously low in the export sector, especially in China, I see credit opportunities, opportunities to go short in Asia.
SCHATZKER: Specifically what credit? Where is there enough liquidity to short with confidence?
HENDRY: Well, thankfully there is a lot of liquidity, but I don't have naive written on my forehead. I have $450 million and I have secrets. I have secrets that I am happy to share with my clients.
SCHATZKER: All right. Let's bring it back to Europe because we are here in London. We are talking about the sovereign debt crisis. Where do you see the biggest, the most alarming danger signs here in Europe and the ones that, you know what, let's talk about the ones that we don't know about. Where is not enough attention being paid?
HENDRY: Well, I tell you it is the longer term game. The next step is the economies that we have seen in Latvia and in Ireland where society has embraced austerity. Society has been willing to sacrifice the present for a better tomorrow. And I am worried that they are going to become disillusioned.
I am worried that there isn't a better tomorrow. And I am worried that we will see increased social tension as people say, hey, what's in it for me?
SCHATZKER: Yes, but increased social tension in Latvia is one thing. Increased social tension in Germany is another. Is that what you are anticipating as well?
HENDRY: Germany today the broad current of German - Germany is not represented politically. We had a reversal for the present administration in the regional election last month. The opposition party stood on a mandate to pay the Greeks the money quicker. It was merely a protest vote.
Great Germans want to get rid of all of the political class that represents them. Today in Europe we have a new axis of financial evil. It is Germany and it is French, bureaucrats and politicians who are determined to destroy the wealth and the hard working entrepreneurs that we find in this continent.
SCHATZKER: Hugh Hendry, coining it right here, an "axis of financial evil." Hugh, thank you for sharing some of your secrets with us. That is Hugh Hendry of Eclectica Asset Management.
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