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.
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."
