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Deep Thoughts From Hugh Hendry (Eclectica's Latest)

Tyler Durden's picture


h/t Mike


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Fri, 11/13/2009 - 15:18 | Link to Comment etrader
etrader's picture

Thank you for posting this  Tyler!

I've been waiting to see where Mr Hendry's at.


Fri, 11/13/2009 - 15:19 | Link to Comment Anonymous
Fri, 11/13/2009 - 15:22 | Link to Comment berlinjames02
berlinjames02's picture

Thanks for the post Tyler.

Just today I was thinking to myself, "I wonder what Hugh has to say about the current market?"

Also, I wonder what Taleb has been up to? Haven't heard for him recently either.

Fri, 11/13/2009 - 18:31 | Link to Comment anynonmous
anynonmous's picture

Deep thoughts from Goldman's Head of Research Jim O'Neil on his recent trips to China:

some of the Key Highlights (seriously) from Mr. O'Neil's interview:

"I travelled on some roads that weren't there a year ago, fantastic roads I might add."

"Beijing and Shanghai have really nice airports (they were there a year ago), As a big user of Heathrow and JFK they are an embarrassment."

With respect to naysayers on China (Chanos view ); "these opinions are generally written by people that obviously don't follow China. ...  They obviously don't talk to people on the ground. I sent that article to my staff in China and they told me they cannot find enough cars to buy. I actually find those investor type blogs just typical not just of China but of  the broader mood in this market.


Mon, 11/16/2009 - 08:21 | Link to Comment Anonymous
Fri, 11/13/2009 - 15:27 | Link to Comment Mad Max
Mad Max's picture

I read the whole thing and can't make heads or tails out of it.  Lots of tangents and factoids, but no coherent thesis I can follow, no reason I can find to support the conclusion that the USD may strengthen (itself a rather weak assertion).  Can anyone else summarize and explain the author's point?

Fri, 11/13/2009 - 16:01 | Link to Comment lieutenantjohnchard
lieutenantjohnchard's picture

max, i agree completely. i was totally confused with what he was writing. whatever point he was attempting to make i think he could have made it by writing in simpler and clearer terms. guess it's just me that had trouble though.

Fri, 11/13/2009 - 16:28 | Link to Comment SDRII
SDRII's picture



HH has been a leading proponent of the GDP being overstated by trillions in the US. Therefore one could conclude that the ability to service that mushrooming debt is vastly overstated (e.g default). He goes on to state that the consumers and the pensions etc have all this wealth that could be shifted to treasuries, but that wealth is contingent on the overstated GDP. By admitting that and scaring people into Treasury debt, the Fed would be endorsing the Edwards Ice Age thesis. Ergo, money printing and his endosement of gold as a rebuke to the scoundrels he lauds and loaths at the same time. I get the feeling every time I read him that his entire mssion in life is to defend to the death his deflation thesis if only reflected in dropping 10 yr yields.

HH: [insert picture of wheelbarrow in keeping with the art theme] and run with it


Fri, 11/13/2009 - 16:40 | Link to Comment Anonymous
Fri, 11/13/2009 - 17:00 | Link to Comment TimmyM
TimmyM's picture

Years of excessive credit growth created a phantom GDP level. The unwinding of the credit excess shrinks GDP and also unwinds inflation that has already occurred. The reflationist trade in all its various forms of buying risk spread is crowded. It is crowded because of present condition myopia and a disregard for historical context. A huge part of this risk trade is a crowded position in overnight dollar liability.








Fri, 11/13/2009 - 19:59 | Link to Comment Gwaihir
Gwaihir's picture

British style of being clear and entertaining.

Sat, 11/14/2009 - 17:43 | Link to Comment Orly
Orly's picture

I shall do all my best:

The main gist of the paper is that we have come to the end of the road in creating wealth through the government.  Back in the day, 1865, post-Civil War, government stimulus built the nation back from next to nothing.  Government stimulus, for lack of a better word, worked.

Now that our "world" is so much bigger and so much more complex, government stimulus does very little in helping to grow the real economy.  In fact, stimulus from anywhere has reached what Mr. Hendry called the "zero hour," as foretold by Japan in the '80's, in that any amount of stimulus will do absolutely nothing for the economy.  It is just too ginormous to move.  In fact, now you are throwing good money after bad and actually negativising the effect on GDP.

But our multi-trillion dollar "stimulus" in the modern day, there is all this money out there floating around.  That makes bond traders' hair raise up on the back of their necks.  "All that money makes for an inflationary scenario!" they say.  Inflation rises, bond yields must go up because people want more profit for their perceived higher risk.  If bond yields go up, bond prices go down.  They say to short long-term government bonds (TBT, for instance..) because as inflation kicks in, bond prices will naturally plummet.

But not so fast, Hendry says.  Let's think about this: if nobody is buying anything, no one is loaning anything and the velocity of money has come to a virtual halt in comparison to 2007, then inflation is not the thing (or it is not going to happen anytime soon...).  The thing is going to be deflation- but maybe not so much.

The problem is that even with a little relative delfation in asset prices, such as commodities and stocks, large firms with high debt are going to incur slimmer and slimmer margins to the point where they actually owe more than their enterprises are worth.  That means bankruptcy.

Companies go bankrupt, everyone gets scared, people start BUYING bonds, not selling them!  The guys short the long-term treasuries (including China, btw..) get hammered again on the way down.  Fear reins in risk.  Stocks sell off, oil sells off and people put their money into places deemed relatively safe, such as gold and US Dollars.  Gold shoots the moon (I don't personally believe that.  I am just translating...) and the way to make a boat-load of money is to make bets that corporate debt is going to crash under its own weight.  Buy Credit Default Swaps and watch the carnage.


I hope my understanding is accurate.  :D

Mon, 02/08/2010 - 05:23 | Link to Comment ToNYC
ToNYC's picture

Which is why since July 2008 that I noticed and gave it up, there is no profit shorting TN futures. As Eclectica's thesis and mirroring Japan on a sliding scale, we may have reached the debt Zero hour when each USD creates a negative GNP. The stimulus is the knee-jerk response, but to a Black Hole. The only stimulus must be engineered to produce an event subject to HDTV stimulating SB lending might create a job, but if it is to flip out-sourced goods, it is not helpful and must be refined away. Financial egineering? Dead! Outsourcing without US Manufacturing? Dead!

Buying CDS from who? Without the TP unlikely to play that again to cover there is a BK counterparty. The system is built now set to produce a net short in Cash. The only way out is to grow a US backbone in this jellyfish economy. No inflation hedges, nothing but a grindingly slow tendency toward lower rates and higher USD. Find some way to actually help someone/system and get over thinking you can participate in life best by producing cash and most of all, get over yourself. It's triage time.

So yes Orly, I agree but the CDS counterparty risk is too high a hurdle for a real fix.

Fri, 11/13/2009 - 15:48 | Link to Comment Steak
Steak's picture

NICE...I vastly appreciate any reference to the "Cross of Gold" speech.

So many lessons from the election of 1896.  One very relevant one is that government purchase programs always end badly (as did the silver purchase program of this day).  The other lesson is that choices about the nature of our monetary system are ALWAYS political.  The Democrats supported creation of the Fed largely because they got their asses handed in 1896 stumping for a bimetallic standard (and fiat money was the only other politically favored alternative to the Gold Standard).

Its history MFs.  Read up on it.

Fri, 11/13/2009 - 16:02 | Link to Comment AnonymousMonetarist
AnonymousMonetarist's picture

Though we walk through the valley of debt we fear 'no easing'.

Fri, 11/13/2009 - 16:13 | Link to Comment Grand Supercycle
Grand Supercycle's picture


As mentioned many times i'm still expecting a USD RALLY.



Fri, 11/13/2009 - 16:19 | Link to Comment mdtrader
mdtrader's picture

So am I, but Bernanke has other ideas.



Fri, 11/13/2009 - 16:31 | Link to Comment . . .
. . .'s picture


There are a couple major risks to betting on the Bernanke/Geithner weak dollar strategy.

1.  Populist backlash against banks prevents any more bailouts could cause a stronger dollar due to the massive losses remaining to be recognized on bank balance sheets.

2.  Mercantilists decide to print faster than Bernanke/Geithner, leading to devaluation of all currencies, but a stronger dollar versus all currencies other than gold.

3.  Populist backlash in the mercantilist countries against losing money on their dollar reserves forces them to demand a strong dollar policy from the US.



Fri, 11/13/2009 - 17:36 | Link to Comment Anonymous
Fri, 11/13/2009 - 23:42 | Link to Comment milbank
milbank's picture

I agree to a degree.  B&G are going to do whatever it takes with Congress's tacit or, if absolutely necessary, active (through some excuse they'll pull out of their asses) backing at least through the first Tuesday in November 2010.  The equity markets need to stay aloft or a lot of incumbents will get tossed off the Gravy Train.  After that. . . not so much.

Sat, 11/14/2009 - 08:59 | Link to Comment Anonymous
Fri, 11/13/2009 - 20:37 | Link to Comment bonddude
bonddude's picture

That's the trouble. You can't, as I have learned over the last several months, invest in or short equities as in days of old (last year).

Until the mother of all pumps ends I'll be ok just looking at special situations and missing the fraudulent general runup.

Reits are up how much (shaking head violently)?

Mother Pumpers !

Fri, 11/13/2009 - 16:20 | Link to Comment delacroix
delacroix's picture

what I got was not that the dollar is in a strong position, but that other currencies are in a weaker position

Fri, 11/13/2009 - 16:29 | Link to Comment mdtrader
mdtrader's picture

Breaking news - Bernanke loses out in 2009 stimulus awards.

Have a good weekend.



Fri, 11/13/2009 - 16:33 | Link to Comment Anonymous
Fri, 11/13/2009 - 16:36 | Link to Comment Gunther
Gunther's picture

In this 'must read' piece I have difficulties to follow the facts. Inflation as explanation??
There are different definitions of inflation but neither started ten years ago. Growth in money supply, CPI and Pre-Clinton CPI from shadowstats all do not match the timeframe. To finance China Dollars are needed? I heard they use yuan in China.

To call the loss of manufacturing base to China 'comparative advantage' reminds me of Orwell's 1984.

To criticize the monetarist view of inflation please to provide a definition of inflation to start.
The pension fund of the Church of England invested at the top in a bull market; Harvard has a risky portfolio - what does that tell about other investors or even readers of Zerohedge?

If China is the commodity market, what is crude oil?
The US consumes some 25% of the world's production of that stuff.
Not exactly my field, but I highly doubt that a quarter of the cost of an aluminum plant is the inventory of aluminum. Then that plant would have a cost structure completely different from any other basic material production plant.
If China is cornering commodities, there is a difference to the Hunt Brothers. China is not trading on credit and it has nukes. Nobody can change the rules to squeeze China out of a position. That is a subtle difference.

After 27 years of rising bond prices it must be the right thing to buy, as well as buying stocks 1999 was for the Church of England.

There could be a shift of investments to treasuries; the wealth is there. But the money is mostly invested somewhere and for pensions needs usually a return of some 7% or more. Pleas explain how that works. Sure Bond prices could go up and provide investment return, but who would buy the bonds at high price and low yield?

After four pages of bull excrement I give up.
I am glad that my money is not managed by this guy.

Fri, 11/13/2009 - 16:56 | Link to Comment Gunther
Gunther's picture


can you give an example please?

Or is that irony?

Fri, 11/13/2009 - 17:17 | Link to Comment Ben Graham Redux
Ben Graham Redux's picture



It was a superbly written piece.  Inflation is a crowded trade today - and I'm in the crowd - but crowded trades have a way of being wrong.  The fact that most of the Treasuries obligations are short term in nature may ultimately be what proves him right.

Fri, 11/13/2009 - 17:23 | Link to Comment SDRII
SDRII's picture

JGB trade: Helping blow up a longstanding peer/lackey that is drifting out of the orbit anyway (Okinawa basing, treasury debt, China relations, trade etc.) is not outside the realm of reality - diversionary. Wonder how timbo fells about the Einhorn comments?

Gold vs. 10 yr: gold you can take delivery, interest rate swaps not so much



Fri, 11/13/2009 - 17:28 | Link to Comment Gunther
Gunther's picture

Thank you,

that cold be a trade.

Second thought: "The credit intermediation process has been broken," so get out of everything that needs credit to survive. That excludes most stocks and leaves government bonds, hard asstes, forests and so on. In this view investing in government bonds for a while makes sense.

Fri, 11/13/2009 - 17:54 | Link to Comment lookma
lookma's picture

The credit intermediation process has been broken, people don't get that

Maybe, or maybe people get that it is broke and further recognize countries around the world are debasing their currnecies in a crazed attempt to print enough money to save the banks.

Inflation by currency depreciation because credit is broke is the path to worldwide hyperinflation.  Hyperinfaltion is simply monetary panic in the face of deflation.  Deflation and currency depreciation go together in our modern fiat world.

Fri, 11/13/2009 - 19:22 | Link to Comment Anonymous
Fri, 11/13/2009 - 23:31 | Link to Comment hettygreen
hettygreen's picture

I always enjoy reading what Mr. Hendry has to say. So Jim Shepherdesque. As for Treasuries what asset class has ever topped while inspiring such universal revulsion? While the path may be uneven, the secular journey has, I think, some distance to run. The problem with the 30 year is a lot of folks equate buying with marriage. I started picking it up last summer with the view to holding it for a year or two, maybe longer. Nominal interest rates will remain low as long as the unemployment picture worsens or fails to improve. Mish has an interesting post today postulating unemployment could be a problem for years considering the number of parttime workers and historically low (currently averaging 33hrs) hours worked per week. The other thing people miss is how high real interest rates actually are. People were impressed when nominal rates were 15% plus in the early eighties but forget inflation was about two or three percent behind. By some estimates the CPI is running between -2 and -6% today, producing real interest rates on the 30 year of 6 to 10 percent depending whose view you believe. That's a pretty respectable return from an asset class that is far safer than a lot of the crap pension and hedge funds have been dabbling in. Oh and if we should get a spike in long yields (ala 1931) driven by the hysterically irrational fear of inflation I will be buying with both hands.

Sat, 11/14/2009 - 00:35 | Link to Comment jm
jm's picture

Trading treasuries is like playing piano.  Down and up the curve as fear grows and subsides.

The US treasury market has been in continuous existence since 1790.  It has seen worse QE than what 2009 dished out-- multiple times.

And we are no where near out of the woods yet.  Plenty of fear to come. 

Sat, 11/14/2009 - 13:22 | Link to Comment Anonymous
Fri, 11/13/2009 - 16:57 | Link to Comment Anonymous
Fri, 11/13/2009 - 17:03 | Link to Comment the.spear
the.spear's picture

my, I do dislike his style of expression, though the message be a pleasure to receive.

Fri, 11/13/2009 - 17:15 | Link to Comment hp12c
hp12c's picture

An excellent post that gives creedence to the deflationist side of the argument, and poses the question of what if all this Q.E. and stimilus does not add bupkiss to world GDP, and why  Treasuries are a good long play..

A plausible argument, since deflation is very difficult to cure..

Also offers a convincing argument that we are on the road to repeat Japan's  failed economic experiment.. 

Fri, 11/13/2009 - 17:49 | Link to Comment SDRII
SDRII's picture

deflation means default - that is the the point. If it didn't benji wouldnt be printing like a madman.  perhaps a short term trade for the risk reversal, but a natural restting lower on all asset classes hence his butterfly gold trade

Fri, 11/13/2009 - 18:10 | Link to Comment hp12c
hp12c's picture

Yes, indeed.  The Banks are sopping up and hoarding Ben's paper. Combined with suspension of Mark to Market, they have temporarily put the finger in the leaking dyke of asset deflation...

Fri, 11/13/2009 - 20:43 | Link to Comment bonddude
bonddude's picture

It reminds me of that old Kansas song.

"How the point of no retuuuuurnn ???"

Fri, 11/13/2009 - 17:23 | Link to Comment Anonymous
Fri, 11/13/2009 - 17:56 | Link to Comment crzyhun
crzyhun's picture

A great article. At the end did you catch his portfolio?? Talk about tail risk! I am not smart enough to do that. The only dif between Jap and us is that just maybe we a little more innovative than they are. Could be wrong. Also we don't have the demographic problem they do.

Fri, 11/13/2009 - 18:30 | Link to Comment WhataMess
WhataMess's picture

US do not have the same demographics? The US has quite a pronounced demographics issue as do most of the Western Economies due to the post war baby boom, we can not all import other countries youngster.

Fri, 11/13/2009 - 18:28 | Link to Comment Anonymous
Fri, 11/13/2009 - 20:46 | Link to Comment bonddude
bonddude's picture

Problem is we really don't know what Paulson doing unless it's SEC reportable and then maybe not so timely. Offshore?...whatever.

Sat, 11/14/2009 - 13:55 | Link to Comment Anonymous
Fri, 11/13/2009 - 18:32 | Link to Comment Anonymous
Fri, 11/13/2009 - 19:05 | Link to Comment andrew123
andrew123's picture

Is the bulk of sovereign cds trading on sovereign bonds in its own currency? An early poster pointed out that if that was the case, a default must be voluntary, which makes a lot of sense.  What about Euro members.  Teh pigs could default, couldn't they?  Any thoughtful responses appreciated.

Fri, 11/13/2009 - 20:51 | Link to Comment bonddude
bonddude's picture

So China defaults on CDSs as they said they may... What then would their increasing Gold stores be worth? Would we be at Ammo and canned food by then?

Boggles, don't it?

Fri, 11/13/2009 - 19:12 | Link to Comment Phillycheesesteak
Phillycheesesteak's picture

What?  No Dr. Seuss to get his point across?  The anecdotes are cute, but meaningless.  He may be right that what governments have done thus far will be proven impotent in halting deflation, but we will have to see is what they are willing to do. Who would have thought a few years ago that our largest insurance company, one of our largest banks, and our auto industry would be effectively nationalized? 

If his definition of inflation is more money supply, no problem.  If it is higher prices, there are plenty of things governments can do.  They can pay farmers to burn crops, as they did during the Great Depression.  They could send out "stimulus" checks, not for $500, but for $50,000.  They could have the PPT push the S&P to 5,000.  They can print money to build new shopping malls to sit empty.  Or better yet, then pay someone to knock them down.  If they are hell bent on rising prices they can do it.  They just have to make sure Dancing with the Stars is on so noone thinks and questions the long term ramifications.

It would seem to me that governments all over the world are printing like crazy and eventually economies will heal themselves despite their interference.  And then? Wham! More inflation than they ever thought possible.

Fri, 11/13/2009 - 19:54 | Link to Comment Great Depressio...
Great Depression Trader's picture

Overall a good article. I too am a short term deflationist. Benji and the feds have put "a finger in the deflationary dike" for now but they will have to do even more in order to stave off the deflationary abyss. One point that he left out was the 900 billion dollar price tag for the US empire and its overseas adventures.

Here is the best analogy i could think of for the current situation. Governments and central banks are at war with deflation right now. At the same time they have to be careful of inflation and inflation expectations. The US is tiptoeing on a tightrope as the USD is the world reserve currency and want to avoid a USD panic selloff. So if they shoot too many bullets they will destroy the city killing every man, woman, and child (inflation overshoot). If they dont shoot enough then the troops get slaughtered (deflation continues). There will be ebbs and flows in both directions and this is what we need to base our trades off of. In the end, however, inflation will prevail as i can see the feds literally sending out printed money to households within a few years.

Fri, 11/13/2009 - 20:01 | Link to Comment Anonymous
Fri, 11/13/2009 - 20:20 | Link to Comment Anonymous
Fri, 11/13/2009 - 20:29 | Link to Comment Anonymous
Fri, 11/13/2009 - 21:04 | Link to Comment Anonymous
Fri, 11/13/2009 - 21:50 | Link to Comment Anonymous
Fri, 11/13/2009 - 22:13 | Link to Comment Anonymous
Fri, 11/13/2009 - 22:14 | Link to Comment Anonymous
Sat, 11/14/2009 - 00:31 | Link to Comment Anonymous
Sat, 11/14/2009 - 01:37 | Link to Comment chindit13
chindit13's picture

Ladies and Gentlemen:

I'm writing CDS on all Japan JGB's and all US Treasuries.  No amount is too large.  Since we are gentlemen and ladies, let's not get sticky about collateral.  But please forward the CDS purchase price to the following account at Bank Pictet:

XXXXXXXX in favor of Chindit13

And rest assured I am as likely to pay off in the event of default as anyone else on this planet.

Sat, 11/14/2009 - 07:04 | Link to Comment Anonymous
Sat, 11/14/2009 - 13:33 | Link to Comment Anonymous
Sat, 11/14/2009 - 13:30 | Link to Comment Anonymous
Sun, 11/15/2009 - 11:04 | Link to Comment Anonymous
Mon, 02/08/2010 - 02:22 | Link to Comment Quantum Nucleonics
Quantum Nucleonics's picture

This painfully long article can be summed up in one prediction and one recommendation.  The prediction: Deflation, not inflation, is to come.  The recommendation: Short Japan

As to the prediction... time will tell.

As to the recommendation... investors have been losing $$$ on this trade for two decades.  Beware.

Fri, 02/12/2010 - 09:46 | Link to Comment Anonymous
Fri, 02/12/2010 - 09:58 | Link to Comment lklam
lklam's picture

Hugh Hendry - good entertaining theater, does make some sense.

soliciting comments on him and his fund performance, data on Bloomberg:

2009: -8.03%

5 Year: 6.44%

Charges 1/20, ticker: ODYECLE KY

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