November 25th, 2012
Hugh Hendry, founder and chief investment officer of London-based Eclectica Asset Management, gave this interview to the Economist’s Philip Coggan at the Economist’s Buttonwood Gathering on October 25.
The Scots-born hedge fund manager admits to having “a history of contentious posturing,” where investment decision-making is concerned adding that, sometimes, “I hear these voices in my head” (often based on historical perspectives of the world which run counter to the conventional wisdom of the day). He said he became a “Gold bug” about 10-12 years ago but a “Treasury bond bug” about six years ago.
Hendry, who started his investment career at Edinburgh-based Baillie Gifford and then Odey Asset Management before co-founding Eclectica in 2005, said that that he and his investment colleagues at Eclectica like to “exist outside the accepted belief system”. Hendry also said that “we are at a point where we are in the death spiral of mercantilism” and that “I am an existentialist, I am here to tell you that God is dead”.
In May 2012, Hendry famously said:
We have reached a point in economic history where the truth is unpalatable to the political class – and that truth is that the scale and magnitude of the problem is larger than their ability to respond – and it terrifies them
Here’s a summary of the key points, courtesy of Hedge Fund Letters
Hendry on gold:
Before he went long gold in 2002, Hendry hypothesized that starting from mid 1970s, if we start at a base point of 100, the stock market went up to say 900 and commodities were trading at 10 by 2000. Simply, it could be that “one was a loser and the other a winner, and maybe that’s what life’s all about”. But he saw that the status quo was essentially being held by a group of technology speculators and that some mean reversion had to happen. He saw the momentum to reject the status quo building up as the telecome, media and technology bubble burst. That is precisely when he launched his hedge fund in 2002 and with his bet on gold made 50% in 2003 — he was also long steel and German copper refineries as he saw the demand for these commodities rising as China built up its massive infrastructure.
Hendry on Treasuries:
In 2006, Hendry became a treasury bug. Not that the gold play was fully gone, but for gold to go to $3,000 or $4,000 or $5,000, hyperinflation had to set in and no central banker would want to be responsible for Weimar mark II. He anticipated that when the credit crisis was at its height (with the bankruptcy of Lehman Brothers in September 2008), the central bankers would intervene and keep rates down which would be beneficial for the high-coupon treasuries. He sees (and seems to enjoy) the paradox that made the trade successful: Something profoundly bad would have to happen for central bankers to be willing to build Weimar II, so when something rather bad happened (the credit crisis) they would do the opposite of what needed to be done — “think inflation but buy bonds”. He made 50% in October of 2008.
Hendry on ‘Lehman times ‘x”:
He envisions that something profoundly bad (“Lehman times ‘x’”) is going to happen that will lead to a surge in the gold price, a surge in the Yen against the US dollar, and China’s GDP undergoing a sharp contraction. Lehman Brothers was a profound shock that brought zero Japanese rates to the Western economies, brought forward money printing, but as a society today we have greater knowledge than any society that preceded us, so it may be possible for the creditor nations of the West to avoid Japan’s fate. Japanese real estate and stock market is down 80% from its peak, but if you go to Japan it looks and feels like a rich country. Yet, there is something rotten in the state of Japan and it seems that some of its corporations such as Sharp are about to go bankrupt.
China is a giant mouse-trap that was formulated to grow at 10%. In its pursuit of 10% GDP growth, China has been prepared to tolerate negative marginal rates of return in its investment, as long as airports where no airplanes land were built, and as long as cities where no-one lives were built. (He compares this to the short-term mania of Wall Street driving companies to beat quarterly numbers, a phenomenon that always leads to corruption). In March 2009, China made bet that it would be able to save the world with its own steady GDP growth, but the bet was wrong. Now there is going to be a deep contraction in China’s GDP, possibly as much as 20%.
Hendry’s current holdings and process:
In accordance with his analysis, today Hendry owns gold and is short S&P 500 stockmarket index. (Note: He is long on gold through futures and ETFs, and thinks owning gold mining stocks now is “insane” as the risk premium in these stocks goes up along with the price of gold, not to mention the risk of “more precarious societies confiscating gold – obviously they like it more at 3000 than 300”.)
He suggests it would be unwise for the audience from blindly following his positions, as he and his team always position themselves “outside the accepted belief system”. Especially in today’s complex and fragile macroeconomic picture, he is an “existentialist” telling us that “God is dead” as “there are no rules and we are on our own”. He normally gets his ideas from “voices in his head” similar to a “paranoid schizophrenic” (which are derived from his readings of history and historical charts).
Pressed upon his stance on gold and the stock market, he says: “I have resigned from the professional undertaking of coin-flipping. I have no idea where gold is going to be. That is my existentialism. I am a student of uncertainty. I have no idea where the stock market is going to be.”
H/T Creditplumber (David McKibben)