Hugh Hendry believes USDJPY will go down to 50s, 60s

He believes in coming risk-off, and that there will be a deficit of yens due to carry unwind. He shares that the catalyst will probably be Italian bond market collapse or a China crash along with Asian recession. He bought protection on companies with high sensitivity to the yen.

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Hugh Hendry on China, Japan and Hyperdeflation

I’ll just say this straight out: you really need to know who Hugh Hendry is and, at the very least, consider what he’s saying. He has a brash style which maybe turns some people off, but don’t let that cause you to dismiss what he is saying. His message is important. Really important. The short story is that the global economy is nowhere near being out of the woods, and there are a (huge) number of unresolved issues that all investors should be following. Don’t let being a value investor cause you to stick your head in the sand and ignore the greater world. Micro-fundamentals are important and should be the basis for any investment, but ignoring these risks completely makes you an idiot.

This weekend, Barron’s ran a great interview with Hendry in which he discusses China, Japan and hyperdeflation. Here’s a snippet:

The London-based Eclectica Asset Management saw a 12% return last year in its flagship Eclectica hedge fund, and an eye-popping 46% gain in a new fund that buys credit-default protection on Japanese corporations. Much owes to the relentless logic and cheeky inventiveness of Hugh Hendry, chief investment officer. The Glasgow-born Hendry tells Barron’s why he expects a hard landing in China, and why hyperdeflation will precede hyperinflation. 

Barron’s: What makes a great macro fund manager?Hendry: First and foremost, an ability to establish a contentious premise outside the existing belief system, and have it go on and be adopted by the rest of the financial community. My great hero is [Caxton Associates' founder] Bruce Kovner, who was able to imagine the dollar falling to 100 yen—when the rate was 200. I am an existentialist. To my mind, the three most important principles when it comes to investing are Albert Camus’ principles of ethics: God is dead, life is absurd and there are no rules. Of course, that’s a doctrine of promoting the individual. You own your own decisions. As CIO of Eclectica, with $700 million [under management], I have no engagement with the sell side. 

Barron’s: Where do you find yourself outside the existing belief system today?Hendry: In 2009, I made a YouTube video of the empty skyscrapers in Wuhan, China. Goldman Sachs and others articulate a very reasonable and compelling argument of being invested in China. With the evidence of my own eyes, I concluded that China had a very robust system of creating gross-domestic-product growth, but forsaking the creation of wealth.
When America was having its China moment in the 19th century, it occurred against the backdrop of a gold standard, a hard-money regime, with a public sector that was minuscule versus the overall size of the economy. As an entrepreneur, if your project failed to generate a sustainable level of cash flow, you failed.China’s great opportunity is taking place within the U.S. fiat system, and so the consequences are perhaps less stark than in 19th-century America, which had stops and starts and many depressions, though with an overarching prosperity. China has not had that volatility.If you talk about a hard landing in China, you talk about GDP growth of 5%, not minus 5% or minus 15%. The Chinese government prints money. It can build superfast railways and overbuild airports, because the rest of the economy can subsidize it. China’s swollen public sector is directing asset allocation, rather than pursuing profit maximization. They see [their system] as a success. But it creates a bubble, which can prove quite damaging.

Source: http://online.barrons.com/article/SB50001424052748703786004577221590093305080.html?mod=BOL_twm_fs#articleTabs_article%3D1

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

2012 Economic Outlook and Investment Positions

Of the many places Hendry doesn’t want to be long, China is near or at the top of the list. He thinks China could be subject to a 25% decline in GDP over the next five years.

How is that possible?

He draws an interesting analogy:“UK GDP fell 8% in the Great Depression, while US GDP fell 25%.”  Inferring, of course, that today’s China is the upstart US to our current “UK peak empire” role. In what he calls “the great unwinding”, the strongest economies in the world are also – ironically – the most vulnerable. But that doesn’t mean he’s bullish on the developed world, either. He has an aversion to just about everything. “It’s checkmate. Everywhere it’s checkmate.”

He believes Italy is insolvent, citing their huge borrowing binge over the last ten years that has only achieved 0% growth. He loves Japan – as a culture and place to visit – but is especially bearish on several Japanese sectors.  He’s long credit default swaps with respect to cyclical, leveraged Japanese businesses. He’s also bearish on Japanese utilities, which have issued tremendous amounts of debt since the Fukushima disaster. Hendry’s favorite sacred belief – which he’s betting against, of course – is the fact that no one believes the ECB will ever cut rates below 1%. He’s made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1% next year.

Source: CFA Society of Sacramento. This post originally appeared at ZeroHedge.


Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."

Stage Not Yet Set for Hyperinflation and Gold $3000

The high CPI numbers being reported in the UK and other Western nations are “meaningless”, Hendry says, because in today’s economic environment, it does
not translate into wage growth. (In the 1970’s, it did). Because wage labor is
approximately 70% of total business costs, he does not see meaningful inflation
without wage inflation. He’s also down on gold because it is not a contrarian investment today as it was 10 years ago (he had a nice year in 2003 buying
gold and gold stocks when nobody wanted them).

The widespread belief among the greatest financial minds today that hyperinflation
is inevitable greatly disturbs him. In the Western world, he sees hyperinflation as a political choice – one that requires the will of the populous. (Forget Zimbabwe,
he says – that might as well be Timbuktu.  It’s not our culture.)

He sees society’s current mood as “dark” (Tea Party, Occupy Wall Street, and social unrest in Europe to name a few), and believes this makes bailouts and money printing very hard. The only environment that makes hyperinflation possible is “the mother of
all depressions” he says. In keeping with his anticipation of paradox, he quipped that
if you believe in hyperinflation, then you should be levered up long on 10 and 30-year Treasuries…because in order for hyperinflation to become a political reality, deflation must arrive first.

Source: CFA Society of Sacramento. This post originally appeared at ZeroHedge.

Hugh Hendry Explains How We Could Be Entering The Mother Of All Depressions

You know the old drill – China and Asia produce, the US consumes.  They cycle their greenbacks back over this way, finance our debt, we buy more of their stuff, and the beat goes on. This model officially stopped with the launch of QE2, Hendry says, as the US officially started rejecting the globalization that had made the global economy hum (perhaps largely at the expense of US employment and manufacturing).
With QE2, dollars were printed and exported – along with inflation – to Asia.
This led to the countries in Asia – and Europe, too – raising rates to combat inflation.
The result, he says, is that global economic growth has essentially ground to a halt.

So what’s next? A crash, of course.

Europe’s Debt Spiraling Out of Control.

Hendry pulled up a chart of US and Europe non-financial debt to GDP, illustrating that Europe’s debt has been spiraling out of control ever since the formation of the European Union. Participant nations, he puts it, received initial “ALT-A” rates – nice low German interest rates – for signing on.  But the fixed exchange rate that the euro imposes on the peripheral nations started the time bomb ticking. Hendry, in fact, is very down on fixed exchange rates, and believes the euro and the dollar/renminbi peg are at the heart of global economic insecurity today.

He believes the recent referendum in Greece could be a very significant event,
likening it to a 1931 mutiny in England that forced the Brits off the gold standard.
He things the Greek referendum could be the trigger to disengage from their fixed exchanged rate (and cited everyone’s lack of anticipation for the referendum as a classic example of irony in finance).

Source: CFA Society of Sacramento. This post originally appeared at ZeroHedge.