More Accounting Tomorrow Posts

Hugh Hendry's financial outlook: It's not pretty

Print
Email
Reprints
November 16, 2011

Last week I had the great honor and opportunity to sit courtside for a live one-hour presentation from our favorite contrarian, irreverent hedge fund manager Hugh Hendry himself. What a thrill!

Hendry, as you may know, is partner and chief investment officer at Eclectica Asset Management. While his claims to fame are numerous, his two most notable are:

1.    A 31.2 percent positive return in 2008

2.    Some truly hysterical TV clips (See: Hugh Hendry’s Greatest Hits for four minutes of financial bliss)

The power of irony

Rather than trying to compete intellect-for-intellect with the likes of George Soros, Julian Robertson and the other great minds of the hedge fund world, Henry instead relies upon what he calls “the power of irony” to foil the logically minded and deliver his superior returns.

In other words, he bets on strange events happening—those not anticipated by the mainstream.

This strategy paid off in a big way in 2008, when his out-of-the-money options hit big, and his fund returned 31.2 percent. It has tended to under-perform, though, when (to paraphrase Hendry) “bad stuff doesn’t happen.” Fortunately for Eclectica investors, he sees a bad moon rising once again.

The new model for the global economy

You know the old drill: China and Asia produce, the U.S. consumes. They cycle their greenbacks back over this way, finance our debt, we buy more of their stuff, and the wheel goes on.

This model officially stopped with the launch of QE2, Hendry says, as the U.S. officially started rejecting the globalization that had made the global economy hum (perhaps largely at the expense of U.S. employment and manufacturing). With QE2, dollars were printed and exported—along with inflation—to Asia.

This led to the countries in Asia—and Europe—to raise rates in an effort to combat inflation. The result, he says, is that global economic growth has essentially ground to a halt.

What’s next? A crash, of course.

Europe’s debt spiraling out of control

Hendry then pulled up a chart of U.S. 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).

2012 economic outlook and investment positions

He sees society’s mood as “dark” (the Tea Party, Occupy Wall Street and social unrest in Europe to name a few examples), 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.

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 percent (!) decline in GDP over the next five years.

How is that possible?

He draws an interesting analogy: “U.K. GDP fell 8 percent in the Great Depression, while U.S. GDP fell 25 percent.” Inferring, of course, that today’s China is the upstart U.S. to our current “U.K. peak empire” role.

In what he calls “the great unwinding,” the strongest economies in the world are 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 percent growth.

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 percent. He’s made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1 percent next year.

Big thanks to the CFA Society of Sacramento for hosting the event, and to my pal Jonathan Lederer for landing Hugh and letting me crash the event as his guest!

Brett Owens is chief executive and co-founder of Chrometa, a Sacramento, Calif.-based provider of time-tracking software that records activity in real time. Previously marketed to the legal community, Chrometa is branching out to accounting prospects. Gains include the ability to discover previously undocumented billable time, saving time on billing reconciliation and improving personal productivity. Brett can be reached at 916-254-0260 and brett@chrometa.com.

 

Comments (0)

Be the first to comment on this post using the section below.

Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.