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Hugh Hendry Sees 1920's Japan-Like Crash In China
Hugh Hendry, whose previous appearances have been well-logged by Zero Hedge, and who is currently raking the money thanks to long Treasury bet and his EURUSD short from when the pair was 20% higher, has never been a fan of China, and almost got into a fight with Marc Faber recently discussing the country's future prospects. In fact, Hendry uttered this memorable soundbite back in February, in which he mopped the floor with Goldman permabull Jim "BRIC" O'Neill: "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." BusinessWeek reports that Hendry has now officially put his money where his mouth is and has bought puts on 20 companies that will profit from “a dramatic collapse” of China’s growth. With the Chinese stock market approaching 52 week lows, will Ecclectica soon become the next Paulson & Co. hedge fund iteration, even as the latter continues (allegedly) to bet on a US recovery, and thus stands to lose tens of billions if the thesis does not play out (although we are fairly confident Paulson's long stock positions are matched by even longer CDS hedges... but without additional data, we can never be sure).
More from BusinessWeek:
“There are striking parallels with Japan in the 1920s, when ultimately the whole system collapsed,” said Hendry, 41, whose firm manages $420 million in assets. “China could precipitate a much greater crisis elsewhere in the world.”
Japan’s export boom collapsed after the war amid excess global capacity, slashing growth and sparking a stock-market crash and bank runs.
Hendry’s flagship Eclectica Fund, a global macro hedge fund with $180 million in assets, may gain almost $500 million from its options if China’s economy plunges into a recession, he said. The options cost the fund about 1.5 percent of its net asset value annually, Hendry said.
China’s vulnerability to a crash comes from the “inherent instability” created by a lending binge for infrastructure projects that’s “unprecedented in 400 years of economic history,” Hendry said. The country is also exposed to exports to a U.S. economy that could shrink from $14.6 trillion at the end of March to $10 trillion within 10 years, he said.
“China’s at the mercy of a credit bubble,” Hendry said. “Once you’ve unleashed the genie it’s out there. They are ultimately unstable and it’s that instability that creates their demise.”
China’s bubble may burst within a year or it may take three years, as Citigroup Inc. economists Willem Buiter and Shen Minggao estimate, Hendry said.
The only thing that can save China, and the US for that matter, is the same liquidity glut that it has been gushing for the past several years. Alas, that particular last Keynesian defense mechanism will fail, but not before central banks in conjunction with the true rulers of the world, most of whom reside at 15 CPW attempt to create hyperinflation. Yes, there is a reason why Paulson has 30% of his $21 billion in gold-related assets.
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Add this to today's ZH cheerful comments. What with Greece being booted out of the EU and China crashing, I ask a simple question: will the sun ever shine again???
Someone should tell Hugh that China massively invested in infrastructure because unlike the US, it is planning 20 years ahead.
Perhaps not on those solar stocks.
Leo, what happens 'if' China descends into civil war? Do a billion starving people care about the future?
Its shining, but now everybody can see the garbage, but I'm not so sure of a total meltdown in China.
Yeah the sun is shining, well here anyways. I'm very greatful for ZH, as they keep you posted on all the news, good and bad. What everyone has to realize its, all the counties are in trouble including the US. There eventually will be a cleanout and we all will be better off without all the corruption. For now just realize the mess, and accept it for what its worth. Also a good place to check on Job news, which I feel is the main driver on where we are heading.
Keep up the good work Zerohedge!
http://www.dailyjobcuts.com
Lost in the decade-long love affair with China is the fact that they are a centrally-planned, communist economy. Communists do not have a real impressive track record when it comes to long-term economic growth.
A quick read of the US Economy since the inception of the Federal Reserve Act of 1913 demonstrates that we have subsited off a centrally-planned economy for the past 100 years. Add to that, the oligarchy that is the two-headed beast called Democrats and Republicans has become a shell game ... we have corporate communism.
How well is it working out here in America?
Don't know about America. I can tell you that all is tickety-boo in both Iraq and Afghanistan.
Maybe China is really, really smart. Maybe they are planning 200 years ahead. In 2210 they will dominate.
If they planned less, they would dominate already by 2050.
Maybe your'e not being completely objective and just might be lying to yourself a little.
Correct me if I'm wrong, but isn't 20 years from now right around the time when Chinese demographics will start to cause serious problems for their economy? Maybe a little on the early side, but colour me thoroughly unconvinced that the long term picture for China is all sunshine and daisies. Will they experience some further very strong growth between the imminent crash and the demographic crunch? Absolutely. But they're still going to be the first country ever to suffer a demographic implosion without a sustained prior period as a developed power. I don't think that's likely to be a good thing.
Globally, I'm actually very optimistic about what the 21st Century has in store in terms of standards of living. But I think the next 5-10 years are likely to be very ugly just about everywhere, and I think the next pre-eminent world power after America will be India, not China.
Completely agree.
USSR was heavily invested in the infrastructure as well. That and the planned economy. The failure usually comes due to the lack of realization that an economy can not be planned.
"Will the sun ever shine again?"
Depends whether you live upwind or downwind of Katla.
Leo...
I am really getting sick and tired or people bragging about investing in infrasturcture..... They did it for the Olympics.....thats it. They wanted to show off to the world. They were successful. It ends there. They do not have the ECONOMY to support their infrastrucutre (whereas, we don't have the infrastructure to support our economy here - everything is antiquated). How much of it is currently going unused? You will probably say its for the future...... BS.. There future is in their past. If the economies of the world continue to contract the way most SANE people see it, China will be producing for whom? Their own billion consumers??? HA HA...at what price. Even their cheap (even cheaper made) goods are too expensive for their own consumers. They can't afford to sell it in country, that is why they export everything. My Company (nameless) sells huge amounts of items....to China and exports them out of China... Right now things are dead. no steel, no copper, no raw chemicals...nothing. Know why? All those farmers we were selling to over the last 12 months have stock piles of it rusting in their barns right now.
Leo, I enjoy your writings, but this sun will come out tomorrow thesis really needs to come out (yes-that is a play on your solar stuff too, as we are a big player (on the supply side) for those components and they ain't selling much now either. The sun will come out.........but it is one of those COLD, HARD WINTERS for now. Bundle up and protect every long you have with a hedge.
Yah exactly, who is going to buy solar panels? Broke north american consumers? Broke governments (worldwide)? Corporations (who are finding money increasing hard to borrow)? The debt crisis is getting worse by the day. I don't see the fundmentals here.
A lot of China's spending on "infrastructure" is wasted money on useless cities and unneeded apartment and office blocks. It isn't much more useful than the US "investment" in excessively large tract homes in remote areas.
Large tract homes in remote areas will come in handy if the shit really hits the fan.
Cute, but not so much. Self-sufficient farms in remoter areas would be extremely handy when things get interesting. An oil-dependent, large inefficient cheap home surrounded by similar cheap homes on 1/3 acre lots, far from anything useful like, say, a river or rich farmland.... well, pays your money and takes your chances.
Angela Merkel should just blame the previous administration like obama does...oh wait, Merkel actually has respect for her office!
Well we all know how much success China's had planning 5 years ahead, much less 20...
The sun is shining... however the world is at peak debt, peak oil and peak dishonesty. Economies and markets cannot handle that well.
Hugh is a big time dollar bull. Why isn't the thrashing in gold getting real headlines on this site? I think its about to be a rout in the gold markets. Then buy buy buy. Even cramer recommended it =/
Wow, so you look at the gold chart and the S&P charts and they look similar to you?
Remember that next Tues. is expiry on the COMEX. The Bullion Banks are executing their regularly-scheduled PM beat-down – they are hugely short and don’t have the physical to settle with. Ergo try and get as many contract as possible to settle out of the money as possible.
Patience and faith. As TD says, “Yes, there is a reason why Paulson has 30% of his $21 billion in gold-related assets.”
Most likely that gold thrashing is the bullion banks deperately trying to drive gold down before options expiry. As Ed Steer said today:
It's called margin calls. They have to sell their profitable trades to cover their losers. Lots of people are still hurting from the EURO collapse, especially the ones that levered up and went all on the EU rescue (ha ha).
Or as Harvey Organ said:
What??? He predicts the US economy could shrink from 14,6 trillion to 10 trillion? That would be a worse decline than during the Great Depression.
Do you really see that as implausible? I wish I could rule it out with confidence.
leverage adds to GDP, deleverage taketh away. $15tril GDP was not real - it was borrowing from the future and counting that in GDP. Paying down debt is "spending" on years' past GDP.
US debt doubled in 10 years, but only added 20% to GDP as each dollar of debt was less and less efficient. it will cut the other way... and much harder.
Sure, China will crash. Throughout history, all growing economies have gone through repeated boom/bust cycles (see Faber's book "Tomorrow's Gold" for many detailed examples). The mistake would be to assume it will crash, and that that would be the end of the story.
Difficult to adequately time when those crashes will occur - best of continued luck to Mr Hendry. Safer approach than shorting, IMO, is to buy businesses in those economies, when they have crashed and prices are low.
30%? I need to pick up another 10% then.
Now is a precious time to get more gold and silver. This will be a bargain.
Would be interesting to know the various causes of the drop in silver and gold, apart from the obvious manipulation that is going on, or is that all of it?
To slaughter your population that has the intelligence to see it coming requires resources denominated in the currency of that with the most efficient weapons.
Gold doesn't stop bullets. US Dollars do.
Paulson has to be hedged to the hilt. That dude cut his teeth in arb.
The Chinese are smarter than Hugh Hendry, and an one party system can act promptly to intervene.
Also, if you're a CEO, or official, and disobey, or disgrace the party, you get a bullet in the head. That is a strong incentive to do what the party wishes. And the party is filled with math geeks, and engineers.
Hugh Hendy will blow up in 2012.
"The Chinese are smarter than Hugh Hendry" - They learned from Martin Armstrong.....that's why.
"Hugh Hendy will blow up in 2012." -- Aren't we all supposed to?
How can he "Blow Up" when only 1.5% of his assets are being deployed each year to play out his China thesis?
Hugh Hendry is viewing China from a Western-private-banking perspective and, in that in a sense, he is accurate.
However, China's centrally controlled money creation and debt forgiveness makes it a never-ending economic power house. Hendry thinks there is too much debt accumulating, but unlike the West, there is no private banking cabal to appease. The central government simply adjusts its bookkeeping entries and moves on with more economic projects.
The Chinese can get away with this because they do not allow FX speculation and they have tied the Yuan to the dollar. The Chinese are bullet proof, at least for the foreseeable future.
Actually, China is the United States' bitch. The US owns China.
The United States can drag China through hell if it pleases.
Your argument became flawed the second you said "never-ending economic powerhouse". Nature, by definition, will never allow anything to remain constant. It has checks and balances built into every particle of matter in existence, including the ones that make up the brains and form the basis of the minds for every Chinaman out there.
They are going to go the same way as the rest of the world, a mere matter of time.
Are you sure you know what you just wrote?
No shit. I have some Chinese cousins and they
ain't coolie labor. Come into the 21st century
man.
I like your point...if FED simply monetized to pay for US stimulus (tax cuts, spending on social safety net and building/research/energy improvements etc) we would be pretty well off, people with jobs, economically useful things created...instead they monetize to save banksters reserves.
China upside down population problem in 20 years can be easily solved...immigrants.
No doubt China will have booms and busts even but in a strange way they have more economic democracy than US as the govt seems to have reasonable fear of people uprising and are more worried about angry masses than finanical elite...sort of like Kings versus mercantile class back in the day...Kings often sided poor agricultural people as a hedge against business people getting upper hand on royalty...also Kingdoms in biblical times would declare jubilee because most of the debts were to royalty, by clearing decks, they restart economy...Chinese ruling party a bit like some of these Kings of old, not great when it comes to civil liberties but sometimes better than oligarchies.
By they way, China has built dams, roads, bridges, amazing high speed rail that US won't have in 50 years...not just residences and businesses.
China-bashers just don't get it. We are talking 100 year booms, tectonic shifts. As Jimmy Rogers said, if you want to understand China today think USA in 1901. China has barely even started growing.
The Chinese will (I hope) be smart enough to let everything just crash so they can get on with the recovery. Not like the stupid round eyes in the West who would rob their grandma's pension so they can have one last weekend bender snorting coke off some whore's fake tits.
We shall see.
I am Chumbawamba.
She promised she wouldn't tell anyone. Never trust a whore.......or a communist.
"Round eyes" LOL!!!! Brilliant.
What's next burning crosses ?
China will never crash as long as Madam Lee have many pretty girls make nice nice with American flyboys!
I believe Chumawamba is on to something...
The West v. China is not an 'all-or-nothing' game. In nominal/superficial terms, Chinese markets may stall and/or "crash" and Hendry may well profit from his wagers. Such developments do not and will not change the FACT that China is the ascending global economic empire, period. Nobody even comes close to what China is now doing, and no country will be able to match China in the future, either.
India? Forget it. India has neither the political will nor motivation to match China in any way. China is re-colonizing Africa and Asia - locking-up natueal resources for the next 150 years. India, on the other hand, has a billion educated, english-speaking people, but litle else. Travel to India and try to get hotel/internet/modern infrastructure... Oops, gotta book that stuff 12 months in advance because the place is an absolute mess.
China is an empire. India is a desk clerk. The West is a debtor's prison.
A near-term "crash" in China will not change the long-term dynamic. Hendry may be right (we shall see) but this in no way implies that China has "lost" anything except nominal paper value, which is meaningless INSIDE a one-party state.
agreed
Angry as it makes me, too true about India. Terrible waste.
See my post below, echoes yours with some additional dark thoughts!
Aargh! Such a damn waste and all this being cyclically driven inevitability, besides looking inwards, working on ourselves, all we con do is shoot off on ZH!
Bam!
China's undoubtedly a lot further along the development road than India, which is why it seems a better prospect now, but it has the impending chronic demographic issue I mention above (in common with Japan, Russia and most of Europe, but not Brazil, and not so much the US or UK).
I do rather wonder if in the Sixteenth Century there weren't quite a lot of folks whose opinion could have been broadly surmised as Spain is an empire; England is a desk clerk . . .
interesting analogy - we often forget just how dominant Spain was at one time, and just how quietly and quickly that empire faded.
Two differences, however, between then and now...
First, England had a Navy... what sort of comparable assets/ammunition can India claim?
Second, can one truly draw strong parallels b/t today's China & 16th century Spain? Seems to me that China has/is largely avoiding the mistakes/fate of Spanish empire and colonization. For starters, China has avoided any/all international military conflict. That's a pretty big difference that cannot be overlooked.
China is hypersensitive to inflation to the exclusion of all else. Nothing more important or ever out of their minds is the firmness of state power.
Inflation affects 1.3bn people most of who will find it very difficult to cope. China will do whatever it must to crush inflation, and that means slashing growth if they must.
The Chinese built this stuff the fastest and cheapest way possible. It will fall apart before they can use half of it.
Unrecognized depreciation will manifest itself via price suppression.
So.. what cheep Chinese sh*t should I be prepared to load up on? A new LG TV?
Pan,
LG is korean. Same shit, different flavour is all.
Something about this is off...are they calls or do you mean the puts will be a profitable strategy? I'm confused. Thanks.
Whew! I'm sure glad that the parallels are to Japan's 1920's collapse, which had a happy ending for everyone in that part of the world. I'm sure that when it happens again with a nation 10 times larger, things will work at at least as well.
Anyone got info on how I can settle Mars or some other faraway place?
The 30% in gold is highly misleading. Has a huge stake in miners as you can see from the 13f but the entire GLD position is for purposes of giving investors the option of having their investment denominated in gold/gld (there is a major difference). So to the extent the GLD position increases/decreases, it is investor driven rather than PM driven.
What is the trade that dramatically profits from China's collapse but only costs 1.5% a year? It would have to be some very far OTM puts. Maybe with some short calls. But that does add a very different risk element if the forecast does not work out. costs could be much geater than the 1.5% mentioned.
1.5% of portfolio value (i believe), not 1.5% of potential investment outcome.
Many people down this thread are correct, in their own way, but no one central thesis really holds up.
China is is a US keep, all pretensions aside. Through the 90's, in the face of terrible YOY losses, US companies fed China massive amounts of money and technology. And scholarships. Why/how do you think there were so many Chinese kids in most US universities even when China had not really boomed? Massive USG subsidy.
Huge Defense contractor I worked at in the US could look at no other developing nation and in-spite of huge communication/cultural issues HAD to, as if by some higher directive, invest/invest/invest in China. Not sure if they have still pulled a profit out of it, 15 years later.
Same for all the Motorolas, GE's, GM's, you name it.
China was set up to be the Industrial powerhouse it is today for some good reason and it was not to feed cheap crap to the US consumer.
If there is a parallel to be drawn, it is the cozy pre WWII relationship between Standard Oil and IG Fraben (in present dollar terms, may even be equvivalent, at least if you take per-capita investment.
So, the US set up the German manufacturing powerhouse (with patents, money (Prescott Bush anyone???) and safety, 97% of IG Fraben was untouched during bombings as were Ford and GM in Germany) and then on a false flag pretext, went to war with them. Common knowledge to tin-foilers I think.
So, all this really is is a set up for the coming war, same as the old war. Their play-book does not really change, only the actors and theaters do.
And all fisco/fino babble cannot or does not take into account this ultimate game-changer, which, if properly considered, puts everything the governments are doing in crystal clear light. The great reset will soon be upon us.
Follow the money trail and you know who the Axis will be and who the allies.
India, sad to say....bah! Like a long jilted girl-friend, now sucking up to the US/UK but more the US. Same old game, buying US war equipment with dollar loans to be the sacrificial lamb against China (notice how the US always sets up it's wars far away from it's borders?). We are a whore nation, not as a people, but the long "embedded" political dynasties.
Pakistan = Local Flashpoint Central Asia
Iran = Local flash point Middle East (first Yemen then Iran)
North Korea = Global wild card
And such.
And it is inevitable.
interesting...
Hugh Hendry's appearances on the BBC's Newsnight programme have been classics.
Thanks to him and people like Joe Saluzzi of Themis Trading who have been telling it like it is for the last year and more.
DavidC
Catherine Austin Fitts has said that in the late 1990's the orders came down to the institutionals and pensions etc to start moving all assets out of the US towards China. The collapse here was planned and they are hoping to use China as a vehicle against Russia in the next decade or two.
Now that the US has served its purpose as the Pit Bull of the New World Order, it will be discarded as a burned out, looted, bankrupted husk in the next few years. The scheme of the Oligarchs is going to fail because China is just as corrupt and is going to blow up despite being given most of America's wealth to build their slave plantations.
From an American in China:
http://www.youtube.com/watch?v=k8TiqgN6GxY&playnext_from=TL&videos=JlW8i...
Lindsey Williams on China:
http://www.youtube.com/watch?v=sGw-_A-nbHQ