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Hugh Hendry Recreates ABX, Discloses Mystery Trade With 1.5% Downside, 75% Upside

Tyler Durden's picture





 

Hugh Hendry, always beautifully opinionated, nails it at the Russia 2010 forum with the following oneliner: "Who cares about anyone's opinion. You pay money for what they do with that opinion." We are in complete agreement as this conforms precisely with what one of our former legendary, multi-billionaire, corpulent superiors once said "nobody gives a fuck about your opinion." On the other hand presenting amusing observations coupled with engrossing narrative, that nobody seems to have an issue with.

The following clip from the Russia Forum pits one against another Marc Faber, Hugh Hendry, Nassim Taleb, PIMCO's Michael Gomez, Investec's Michael Power, resulting in a memorable debate. A few blogs caught this clip and posted it yet few actually watched it, as the biggest news from the panel was not Taleb's admonition that "every single human being should be short treasuries", an opinion which Hugh Hendry squashes through the groupthink meatgrinder, but Hugh Hendry's cryptic disclosure that he has uncovered the ABX trade for the next decade, which has "1.5% downside and 75% upside." Hendry teases, but until the end refuses to disclose what the specific trade is. And while we realize the futility of recreating others' opinions, here is the money quote from the Scottish contrarian:

"The problem with the bailout of 2008 and the first quarter of 2009, is that it did nothing to eliminate the debt. The debt is just unprecedented in the western world... We've had a tripling in leverage for the last 30 years. That tripling in leverage has produced unprecedented gains. The British stock market up 43 times in nominal terms, the S&P up 25 times. This has left many people still hungry for risk. I have a portfolio today... In the UK we have interest rates which are at a 300 year low, since the bank of England was conceived in 1692. I get paid money every day underwriting the risk that the BOE will cut rates further. I use that to cheapen an option which say "I don't think the Bank of England, and ECB, is going to raise rates in the next 4 months." And if nothing happens i make 5 times my money. If they raise rates, I lose my premium. My premium is not a lot. I'll survive that. On the other side of my book, I have discovered something which is close to the Paulson trade in CDOs in US mortgages in 2005 and 2006. Can you believe that a trade with that kind of dynamic exists today. Can you believe if nothing happens and I am just wrong than again I will lose 1.5% but if I am right I will make 75%. That trade exists today and maybe later on I will tell you about it."

And continuing with opinions, here is the former GSAM and Odey executive on Treasuries:

"I am hugely intellectually bullish on Treasuries. I am long. I fear the end of QE, the money funds are making on the [curve], I am aware of the issuance, I am aware that the States is going to have to sell $2.5 trillion of this stuff. But that's the marketplace - the marketplace disseminates the bad stuff. I think there is a lesson in Japan. You think they are going to succeed - Mark [Faber] thinks they are going to create inflation. The precedent of Japan suggest that if you allow leverage in your society to breach a certain level, let's call it 200 or 230% of GDP, then what happens is monetary policy doesn't work, fiscal policy doesn't work. They've had helicopters, they have distributed free money to their citizens, they have built bridges to nowhere and prices are falling and look set to fall further. My fear just now is that the community of risk is very short treasuries, and is very long risk: risk assets are the hedge against inflation. Now if something untoward happens, the gamma on that trade bankrupts you."

Elsewhere, you will hear Taleb's proposed portfolio composition (if you have read Fooled by Randomness or The Black Swan you won't be surprised), as well as his escalating and very much justified disdain for economists: "if the number of economists from US universities in a country is high, the country risk is high, if the number is low, the risk is low."

And a whole lot of debate over China, with Hugh Hendry dismantling Jim O'Neill and the other China bulls. "I love Jim O'Neill. I love that Goldman Sachs guy. He says you either get it, or you don't. I don't get it. In the future there will be a Confucius saying: the wise man not invest in overcapacity. The flaw of the business model, at the center of it is a craving for power as opposed to profit." (Kinda funny, coming from a former Goldmanite.) Please watch Hendry's view on China beginning 55 minutes into the clip.

For those P&L detectives here is Hugh's most recent missive. Good luck with extracting what the next ABX trade is.

The full hour + debate can be found here. We think far too highly of our readers' intellectual ability than to point out that the English audio stream would require hitting the Eng button.

Click on the icon for a link to source.

 


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Sun, 02/07/2010 - 22:27 | Link to Comment andrew123
andrew123's picture

Tyler, any performance data for Hendry's fund you could supply?

Mon, 02/08/2010 - 00:08 | Link to Comment Anonymous
Mon, 02/08/2010 - 00:41 | Link to Comment Anonymous
Mon, 02/08/2010 - 13:37 | Link to Comment antonio
antonio's picture

Hendry is not a Goldmanite, as far as i know he has never worked for the squid

Sun, 02/07/2010 - 22:30 | Link to Comment Anonymous
Sun, 02/07/2010 - 22:37 | Link to Comment Anonymous
Sun, 02/07/2010 - 22:54 | Link to Comment merehuman
merehuman's picture

i have looked all over the house for that english button. Dog must have eaten it. Same place my equity went!

Sun, 02/07/2010 - 23:03 | Link to Comment monmick
monmick's picture

Lower right-hand corner. Next to the volume <ENG> <PYC>

Mon, 02/08/2010 - 01:12 | Link to Comment merehuman
merehuman's picture

thanks.  captcha didnt allow the minus sign. cheech

Sun, 02/07/2010 - 23:10 | Link to Comment IKEA Is Swedish
IKEA Is Swedish's picture

Some of Hendry's CNBC (UK) guest host spots are available on YouTube.

http://www.youtube.com/user/NemoPublius#p/u

Highly entertaining and informative.

Sun, 02/07/2010 - 23:04 | Link to Comment crzyhun
crzyhun's picture

This why I read ZH particularly the posts that matter.

I still suggest a long vol. trade. As for the video, I am honestly too short on time, but mostly too dumb to get the high level of dialogue here. Gamma? Last I used that word was with a ray gun in the 5th grade. Sorry.

BUT, I am aware we are heading toward a tipping point, a no return point where we go through a type of black hole and end up looking totally like Japan without the sush up to our groin in wasabe. I admit to not being long stocks, but I am worried about MM funds and seek an alternative...gold is not totally it. TIPS some, not correct either. If Hendry is right, there are no alternatives to TB/Bls. Ouch.

In the eternal words of Oliver Hardy, "Well here is another nice mess you got us into." Thanks for nothing.

Sun, 02/07/2010 - 23:24 | Link to Comment CONners
CONners's picture

Is gamma the rate of change of delta which is the rate of change to the price of an option relative to the rate of change of the underlying security? Given F=ma, then gamma is to "a" as F is to what? Does speed kill or does acceleration?

Sun, 02/07/2010 - 23:34 | Link to Comment Oracle of Kypseli
Oracle of Kypseli's picture

It's the impact

Mon, 02/08/2010 - 01:53 | Link to Comment Anonymous
Mon, 02/08/2010 - 02:21 | Link to Comment Anonymous
Mon, 02/08/2010 - 02:37 | Link to Comment Anonymous
Sun, 02/07/2010 - 23:25 | Link to Comment Anonymous
Sun, 02/07/2010 - 23:30 | Link to Comment Gordon Freeman
Gordon Freeman's picture

The only way to be "right" with these idiots is to be them:  that is, individuals who are richly rewarded to express any opinion.

As others have asked, what exactly is Hendry's track record for his investors?  Does he have any?  Does Faber?  

If they are so successful, why doesn't everybody invest with them?  Really--is that such a stupid question?  

(cricket sounds...)

Mon, 02/08/2010 - 00:26 | Link to Comment Anonymous
Sun, 02/07/2010 - 23:34 | Link to Comment Roscoe
Roscoe's picture

Hi Tyler,

Just wondering, is Marla OK? I don't post much, but I do follow almost every post and poster, so I worry when someone goes dark for a while. I hope all the principals are getting along and everyone's health is good! (Fight Club just wouldn't be the same without the Foil, and you've all come too far to break up the original gang!)

Best Wishes to all, especially you & Marla,

A Loyal Space Monkey,

Roscoe

Sun, 02/07/2010 - 23:42 | Link to Comment Instant Karma
Instant Karma's picture

Black hole of bad debt will suck the risk trade into a vortex of whirling destruction.

Sun, 02/07/2010 - 23:59 | Link to Comment Anonymous
Mon, 02/08/2010 - 00:01 | Link to Comment glenlloyd
glenlloyd's picture

yes but is it swirling clockwise or counterclockwise?

Mon, 02/08/2010 - 00:30 | Link to Comment Anonymous
Mon, 02/08/2010 - 00:41 | Link to Comment Quantitative Wh...
Quantitative Wheezing's picture

Hugh Hendry has alluded to this masterful trade in his musings on Japan.....

Mon, 02/08/2010 - 01:11 | Link to Comment Jefferson
Jefferson's picture

"All I see is dead people" is a Hugh Hendry classic.

Mon, 02/08/2010 - 01:21 | Link to Comment Anonymous
Mon, 02/08/2010 - 01:27 | Link to Comment Anonymous
Mon, 02/08/2010 - 02:09 | Link to Comment chindit13
chindit13's picture

As of this writing, Japan has giving up the ghost on Nikkei 10,000 and the Mystery Sunday Night futures ramper in the US must be a Saints fan because he/she has gone missing.

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

Shot their Sunday night stash Friday afternoon?

Mon, 02/08/2010 - 02:15 | Link to Comment Anonymous
Mon, 02/08/2010 - 03:56 | Link to Comment Anonymous
Mon, 02/08/2010 - 05:59 | Link to Comment aus_punter
aus_punter's picture

HH loves deep o-t-m options.... he spent the best part of 2009 looking for no rate hikes from the RBA..... I guess those options were "cheap" for a reason.... so I wouldn't get too carried away with his asymetric pay off trade

Mon, 02/08/2010 - 06:09 | Link to Comment godfader
godfader's picture

Hugh was down 8% or so in 2009. He made 30-40% in 2008 though.

Mon, 02/08/2010 - 07:11 | Link to Comment Bear
Bear's picture

His thinking must have been pretty far out of the box

Mon, 02/08/2010 - 06:35 | Link to Comment Anonymous
Mon, 02/08/2010 - 06:46 | Link to Comment Anonymous
Mon, 02/08/2010 - 07:11 | Link to Comment Anonymous
Mon, 02/08/2010 - 08:20 | Link to Comment antonio
antonio's picture

Hendry is not a Goldmanite, never worked for the squid as far as i know

 

 

Mon, 02/08/2010 - 08:29 | Link to Comment Anonymous
Mon, 02/08/2010 - 09:00 | Link to Comment godfader
godfader's picture

Hendry is from Odey. Who was so dumb to think a nuthead like Hendry would have been offered a position at Goldman? Oh wait.. Cramer was at Goldman?

Mon, 02/08/2010 - 09:17 | Link to Comment Anonymous
Mon, 02/08/2010 - 09:35 | Link to Comment Anonymous
Mon, 02/08/2010 - 10:46 | Link to Comment phaesed
phaesed's picture

cash is the Federal Reserves liability.... the true reserve currency of the world is US Treasury bonds..... until that changes, it's the only true money out there.

Mon, 02/08/2010 - 09:55 | Link to Comment Anonymous
Mon, 02/08/2010 - 10:32 | Link to Comment Anonymous
Mon, 02/08/2010 - 10:44 | Link to Comment phaesed
phaesed's picture

lol, I don't need to say anything here....

But I needed to let you know that ;)

Mon, 02/08/2010 - 10:46 | Link to Comment jswede
jswede's picture

"On the other side of my book, I have discovered something which is close to the Paulson trade in CDOs in US mortgages in 2005 and 2006. Can you believe that a trade with that kind of dynamic exists today. Can you believe if nothing happens and I am just wrong than again I will lose 1.5% but if I am right I will make 75%. That trade exists today and maybe later on I will tell you about it.""

>> if I've been paying attention to Hugh (and I have), this trade is short risk on sovereign CDS -- not Greece etc, but the "it cannot happen here" countries like US/Germany/Japan/China...  Hugh has been talking about Euro sovereign CDS risk and that the PIIGS will dismantle the Eurozone for years.  He's also been pushing the fact that debt deflation is equally as bad for the surplus nations, they are built for a Western World growing its debt (and demand) by 10-15% per year, and won't meet budgets without it returning... IIRC, he was talking about German CDS early last year, and mentioned this type of ~1% risk, 50x return...

Mon, 02/08/2010 - 10:50 | Link to Comment godfader
godfader's picture

If Club Med implodes and the Nazis bail them out then German sovereign CDS will soar. That's his play. He mentioned he is financing these type of low probability/big pay-off trades with high quality corporate bond coupon payments. In particular he mentioned Philip Morris debt.

Mon, 02/08/2010 - 10:54 | Link to Comment Anonymous
Mon, 02/08/2010 - 11:16 | Link to Comment Anonymous
Mon, 02/08/2010 - 11:26 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

Faber speaking at the same conference......

Faber said that if we go back to a gold standard now we would go back to 1 million dollars per once – is he saying that the USA has very little gold , if the US has 8000 tons + as stated then gold would only be in the region of $4000 to $10000 a once
Is he just tired and had a few to many vodkas or is he trying to tell us something?

http://www.youtube.com/watch?v=pAJeZaFdbJA

Mon, 02/08/2010 - 11:46 | Link to Comment Anonymous
Mon, 02/08/2010 - 12:45 | Link to Comment Anonymous
Mon, 02/08/2010 - 13:33 | Link to Comment antonio
antonio's picture

Hendry is not a Goldmanite, as far as i know he has never worked for the squid

 

 

 

Mon, 02/08/2010 - 13:35 | Link to Comment antonio
antonio's picture

Hendry is not a Goldmanite, as far as i know he has never worked for the squid

 

 

 

Wed, 02/10/2010 - 15:01 | Link to Comment Anonymous
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