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    Hugh Hendry Channels Irony and Paradox in His Latest Financial Outlook

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    Hugh Hendry relies on "the power of irony and paradox" in his investing strategy. This allowed him to earn a 31.2% return in 2008. He sees critical differences between the industrialization of China and 19th century America. Hendry believes the global economic model has changed with the launch of QE2, and this will lead to a crash. He is bearish on China, Japan, Italy and believes a crisis in Europe could be triggered by the Greek referendum. However, hyperinflation is not imminent without wage inflation and a "mother of all depressions".

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    Hugh Hendry Channels Irony and Paradox in His Latest Financial Outlook

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    fourje
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    Hugh Hendry relies on "the power of irony and paradox" in his investing strategy. This allowed him to earn a 31.2% return in 2008. He sees critical differences between the industrialization of China and 19th century America. Hendry believes the global economic model has changed with the launch of QE2, and this will lead to a crash. He is bearish on China, Japan, Italy and believes a crisis in Europe could be triggered by the Greek referendum. However, hyperinflation is not imminent without wage inflation and a "mother of all depressions".

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    Hugh Hendry relies on "the power of irony and paradox" in his investing strategy. This allowed him to earn a 31.2% return in 2008. He sees critical differences between the industrialization of China and 19th century America. Hendry believes the global economic model has changed with the launch of QE2, and this will lead to a crash. He is bearish on China, Japan, Italy and believes a crisis in Europe could be triggered by the Greek referendum. However, hyperinflation is not imminent without wage inflation and a "mother of all depressions".

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    Download as PDF, TXT or read online from Scribd
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    203 views5 pages

    Hugh Hendry Channels Irony and Paradox in His Latest Financial Outlook

    Uploaded by

    fourje
    Hugh Hendry relies on "the power of irony and paradox" in his investing strategy. This allowed him to earn a 31.2% return in 2008. He sees critical differences between the industrialization of China and 19th century America. Hendry believes the global economic model has changed with the launch of QE2, and this will lead to a crash. He is bearish on China, Japan, Italy and believes a crisis in Europe could be triggered by the Greek referendum. However, hyperinflation is not imminent without wage inflation and a "mother of all depressions".

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    Hugh Hendry relies on 'the power of irony and paradox' to deliver superior returns by betting on unexpected events. He also saw significant success in 2008 by betting against the consensus.

    Hendry focuses on investing contrarian to the mainstream by betting on unexpected events rather than trying to outsmart other investors intellectually. He looks for 'strange events happening' that others don't anticipate.

    While many compare China's economy to 19th century US, Hendry sees a key difference in how capital is allocated. He believes China misallocates capital and their goal is full employment over return on capital. Hendry is very bearish on China and thinks their GDP could decline 25% over the next 5 years.

    Hugh Hendry Channels Irony And Paradox In His Latest Financial Outlook

    Submitted by Brett of Contrary Investing Hugh Hendry Channels Irony and Paradox in His Latest Financial Outlook Yesterday 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 (for those getting to know him for the first time) are: 1. A 31.2% *positive* return in 2008 2. Some truly hysterical TV clips (See: Hugh Hendrys Greatest Hits for four minutes of financial bliss)

    Hendry is a big favorite of ours at ContraryInvesting.com. I also just learned that he was The Plasticine Macro Chapter interviewed (at the time) anonymously by Steven Drobny in his excellent recent book Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money which profiles a select group of hedge fund managers (all off the record) that made money in 2008. I went back and re-read this chapter the night before Hendrys preso, to re-familiarize myself with his investing/trading philosophy.

    Hendry electrifies his Sacramento audience. The Power of Irony and Paradox Rather than trying to compete pure intellectfor-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 and paradox 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%. It has tended to underperform, though, when (to paraphrase Hendry) bad stuff doesnt happen. Fortunately for Eclectica investors, he sees a bad moon rising once again. Why China is Not 19th Century America While many economic observers have drawn an analogy between China's ongoing industrialization and that of Americas, Hendry sees a critical difference. In the US, he says, capital has always been allocated where it could achieve the highest return. In the 19th century, when America was the economic upstart on the block, it was also on the gold standard. Which is very important, according to Hendry, because it allotted entrepreneurs one and only one chance to succeed. It was not a time of bailouts and multiple bankruptcies! China is different, he believes, because it is industrializing with a fiat currency. Thus they fall into the trap of misallocating capital building bridges to nowhere, towers for nobody, and so on. Chinas goal is similar to that of 1980s Japan in his opinion full employment, rather than maximizing return on capital. A critical, and even fatal, difference, in his mind. The New Model for the Global Economy 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 whats next? A crash, of course. Europes Debt Spiraling Out of Control Hendry then pulled up a chart of US and Europe non-financial debt to GDP, illustrating that Europes 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 everyones lack of anticipation for the referendum as a classic example of irony in finance). 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 todays economic environment, it does not translate into wage growth. (In the 1970s, it did). Because wage labor is approximately 70% of total business costs, he does not see meaningful inflation without wage inflation.

    Hes 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. Its not our culture.) He sees societys 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. 2012 Economic Outlook and Investment Positions Of the many places Hendry doesnt 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 todays 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 doesnt mean hes bullish on the developed world, either. aversion to just about everything. Its checkmate. Everywhere its checkmate. He believes Italy is insolvent, citing their huge borrowing binge over the last ten He has an

    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. Hes long credit default swaps with respect to cyclical, leveraged Japanese businesses. Hes also bearish on Japanese utilities, which have issued tremendous amounts of debt since the Fukushima disaster. Hendrys favorite sacred belief which hes betting against, of course is the fact that no one believes the ECB will ever cut rates below 1%. Hes made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1% 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! Average: Your rating: None Average: 4.5 (29 votes)

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