May 01, 2012

Hugh Hendry 2012 Letter and Views

Hugh Hendry is back with a great investment and shareholder letter which provides a great insight into what he thinks. Here is a brief summary from BusinessInsider.
  • Hendry is still very bearish on China. He doesn't think that China will be supplanting the US economy as the world's #1 in GDP anytime soon, and in fact he's fairly bullish on the US thanks to the burgeoning energy business. He might be right as natural gas is extremely cheap and USA could become energy independent at a certain point in the future. 
  • The problem in China is that its success was long based on the artificial depression of the currency, and financial repression that prevented banks from offering decent interest rates to savers. Anyone with their money in a bank got crushed, so to get around this financial repression the people bought houses like crazy. That is why he believes that there is a big housing bubble.
  • The scale of the Chinese housing bubble has been unprecedented, and the scale of underground credit is enormous. There are trillions of dollars of loans that originate through firms that are nominally in businesses like shipbuilding, but which ended up in the mortgage credit game. Once the market start crashing it will also affect Japan.
  • China is so freaked out by all this, it's given death sentences to some of the underground players in the real estate bubble.
  • Hendry sees a Weimar-like situation where Chinese leaders thought they could get away with fiscal profligacy on the back of strong exports, but the weakness abroad means it might not happen. He is worried that the Yuan might also depreciate and even crash given the huge money printing the Chinese did compared to the size of their economy.
  • The Chinese market is a casino, pure and simple. It only benefits insiders. There's no reason for anyone to invest in it.
  • The way Hendry has shorted it, however, is via Credit Default Swaps on Japanese corporates that are exposed to China. Japanese companies remain very troubles with debt loads that are way too high. This is why Japan is a value trap that has taken in suckers for years, thinking that stocks are very cheap.
  • In Japan he sees, what he calls "The Tranquility That Could Rock the World." Even though he is pessimistic about the Japanese corporations, he believes that the authorities and the centra bank of Japan will not devalue the yen and will probably do it after another round of yen appreciations and corporate losses.
  • Ultimately, he thinks we'll see one more washout in the market, with 30-year Treasury yields hitting 2.5% (they're currently at 3.125%) and the VIX surging to 80, at which point we'll have a truly 'generational' opportunity to buy risk assets. It is really interesting view because he is not overly bullish on bonds compared to VIX. I wonder how much stocks must go down so the VIX go to 80. Probably his view on the bonds expresses that even though bonds are safe heaven they are at their last stage of a bubble.
You can view the whole 2012 Hugh Hendry letter below:

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."