October 21, 2012

Views from Hugh Hendry's 2012 Letter

Hugh Hendry is back once again with a shareholder and investment letter that basically explains what he thinks about World Business. Businesslender has summarized that letter into the following points.

Hendry is skeptical that China will take over US for having the highest GDP in the world. He is fairly confident about the booming energy business in the US and highlights the fact that Natural Gas is very cheap inside the US and that very soon the US could reach a point where it becomes energy independent.  
The issue with China's success is that it was based too much on the depreciation of their currency which was brought about by artificial means. It prevented banks and other financial institutes from raising interest rates on saving accounts. People who used to save their money in banks would usually get their estates crushed and that is why more and more people started buying houses which created a housing bubble. The scope of the housing bubble in China has never been this wide. Underground credit has also reached very high values and the trillions of dollars originating from different firms like shipbuilding and house building are ending up in mortgage credit. Hendry believes that when the market collapses, countries as far as Japan might get affected.
China is worried about this situation and this is why it has removed plenty of underground companies from the setup.
Hendry predicts a Weimar kind of situation for people of China. This is because the Chinese government took different measures to ensure that they got a lot of money printing done as compared to their economy side and the financial weakness abroad means that China cannot simply have a better economy on the back of exports alone.
The Chinese market resembles more like a casino as there is no benefit to invest in China. It only benefits the people in the inside.
Japanese Corporate companies falling to credit default swaps are exposed to the Chinese market. Japanese companies have to worry about the different issues that arise with high debt loads. That is why Japan still manages to attract fools who think that the stocks are priced too low.
The situation in Japan is peaceful says Hendry and this peace could rock the entire world in coming years. Japan is not expected to depreciate the value of Yen anytime soon. The central bank of Japan and other authorities will most probably do it after a phase of corporate losses and yen appreciations.
In the end, Hendry closes off by saying that another washout for the market is imminent and that the VIX figures could touch 80 with Treasury yields falling to 2.5% from their current figure of 3.12%. In the coming years, people will be presented with a very good chance of buying some of the valuable risk assets. Hendry isn't too confident about the effectiveness of bonds as compared to VIX but the question is how much the stocks will fall to allow VIX to go up to 80.
Hugh Hendry 2012 Letter and Views 

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."