Hugh Hendry, CIO, Eclectica Asset Management, appeared on CNBC, Wednesday, March 11, 2009 and shared his contrarian views on investing in inflationary assets, asserting that it is not yet time to do so. To appreciate Hendry, you must see him in action.
Geoff Cutmore: Hugh has been a huge proponent of Potash Corporation, that was some months ago. Does he still have a view that the business will continue to do relatively well even as the share price falls. There does seem to have been faint signs of life in commodities. Do you still have a trading position in Potash. What is your take on these shares and the macro view for fertilizers and the agricultural space?
Hugh Hendry: A good question. I have in part of my business, we have an agricultural equity franchise (fund), clearly Potash is one of the very best agricultural businesses in the world, but we're talking about a business, lets not forget, which has now fallen from $260 to, like, $60. The notion that I would have had ownership from that level all the way down is preposterous, and in our trading accounts at the present time, clearly I can't own that. But what you do hear is that George Soros is the biggest shareholder now of Potash, and if you look at the performance of agricultural equities, they're performing almost in line with gold shares, i.e. they're outperforming at the present time.
But I have to throw some water on that, on those flames. I still believe this is still a profoundly deflationary environment, and therefore this whole notion of investing at this present moment in inflation or inflationary assets is ill-conceived and poorly timed, and so I think what we've seen is this waterfall decline, then we've seen an explosive rally, and I think it then comes down again. I think there's still a lot of hope, and a lot of recognition how strong these businesses are, but further price swings, I think.
In this next must see segment, Hugh Hendry and Liam Halligan of Prosperity Capital Management, locked horns over how quantitative easing (QE) will affect the economy. Halligan and Hendry get into a heated argument over QE. Halligan claims to be in a minority of one that it will be inflationary, while Hendry tells Halligan that he is, in fact, consensual, and that his view is held by many. Finally, Hendry points out that they, in fact, both agree that quantitative easing is doomed but that Halligan's claim that it is inflationary is what's out in left field, that QE is a profoundly deflationary policy for the time being, hence, Hendry's assertion that it is not the right time to invest in inflationary assets,... yet.
In this third segment, Hendry and Halligan discuss the effects of falling Sterling and QE. Hendry fires back initially by saying Halligan "has a very loud voice, and he's kind of a scary guy." Its is hilarious to hear Hendry take a bite out of Halligan in his usual way. Halligan's response is that Hendry is insulting and that its demeaning to him. To Hendry, guys like Halligan should not be allowed to come on TV and spout. Hendry tells Halligan, "You're not a rational person..."
The debate between Halligan and Hendry over QE is revealing and serves as an excellent source of enlightenment on the contentious issue of central banks printing money to get around the credit-burdened economic curve, especially if you're wondering what to do next and when to do it.
Here is some additional quoted material from CNBC:
The stock market is still an unsafe place for investors as quantitative easing, by which central banks boost the supply of money attempting to kick-start economies, is unlikely to work, Hugh Hendry, Chief Investment Officer at Eclectica, told CNBC.
Hendry also disagreed with Warren Buffett's view, recently expressed to CNBC, that inflation is likely to be as bad if not worse than in the 1970s.
"I've honestly never known a time of near-universal conviction that we have to worry about inflation today," Hendry told "Squawk Box Europe."
"For quantitative easing there's no successful precedent. It has never, ever succeeded," he added.
He is buying government bonds, shorting stocks and "can't buy enough dollars." Taking the contrarian view to the majority of speculators creates opportunities, Hendry added. "Gold, silver, I'm shorting them right now."
Inflation will become a reason to worry for authorities again at some point, but they should think about combating deflation right now, Hendry said.
"It is coming back in the future. All I'm saying it is just an unprofitable proposition at the time," he said. Betting on inflation is as if "we got a new book and we've read the last page. But if you read the entire novel, it's a different journey."
Despite Tuesday's strong rally in the stock markets, shares are not a good investment, said Hendry, who continues to bet on government bonds.
"I dare you to touch an equity today. Tell me you're making money on equities," he said.
The unravelling of the crisis is likely to continue as world economies re-adjust after the cheap credit bubble has burst.
"We were deluded by easy finance and as that easy finance is being removed, we're shocked," Hendry, who said his investment fund made a 32 percent return last year and is up 10 percent this year, said.
The market has grown for about 30 years and for a long period, it will be "going nowhere," Hendry said, likening this period with the one after the crash of 1929 and with the crisis in Japan at the beginning of the 1990s, despite claims that this time it is different because the world has evolved.
"I am saying that we are no different. Here we are, surrounded by technology and computers, and we are no different."
