One of the best presentations at this year's Economist Buttonwood gathering (which is still being live-streamed here), was, as usually happens, Hugh Hendry. The contrarian Scotsman, who describes his style as one where he "positions ourselves outside the accepted belief system", managed to say in 15 minutes what takes most pundits hours, and that's without the appendices, charts, long-winded essays, and graphs. Because when it comes to conveying ideas, simplicity always wins, and few are as good at speaking in simple, logical terms, as Hugh Hendry.
Some of the higlights from the one-time self-professed goldbug's speech:
- "10-12 years ago I became a gold bug and launched my hedge fund in the end of 2002, and in 2003 we made 50%. By and large that was from gold beginning to gain some momentum."
- "When Citigroup and other banks started to endorse very high prices on gold, you needed the intervention of paradox"
In 2006 Hendry flipped, got out of gold on the expectation that something “profoundly bad” would have to happen for gold to rise to $3000, and as Lehman was collapsing he made another 50% in October 2008 by going long the long bond on expectations of outright monetization of the long-end of the curve by the Fed. And that is the kind of fat tail return that suffering a consistent slow-bleed theta for years makes it all worthwhile in the end (also see: Kyle Bass, despite the dins and the jeers of the journalism major crowd).
Other observations include the monetary impact of global mercantilism, where every country is desperately trying to crush its currency, which to Hendry means the possibility of a massive FX short squeeze is increasing.
Hendry says that $3 trillion in Fed monetization has not unleashed inflation. Yet. What would? It would be “another trillion number” which would come when the central bankers no longer fear that their legacy would be of those ushering in Weimar 2, which means an opportunity cost of even greater catastrophe. "Society is saying we need the most profound Lehman times X in order to allow the central banks to cross my Rubicon, to be revolutionary, and they can be only revolutionary when they have given up hope.” In other words things have to get so bad, deflation has to be such a threat, that everyone goes thermonuclear on their CTRL-P buttons.
He summarizes the macroeconomic situation which he sees as juxtaposing the “green shoots” in America, is offset by the “theater of the absurd” in Europe, but as usual focuses on his favorite macroeconomic topic: China: “Like Germany, they have been an operationally leveraged economy, but unlike Germany, have now adopted financial leverage- the sovereign financing of these unproductive investments, so now they have double jeopardy, and if we don’t have a sustained economic recovery I am very fearful of the events that may befall the Chinese.”
Next, Hendry touches on the politically sensitive topic of China selling US Treasurys, which he thinks is ludicrous, explaining that "US Treasuries are not an asset – you can’t sell it to protect yourself", because selling TSYs would lead to a surge in the renminbi, which in turn would crush Chinese exporting companies.
The bottom line for China, "whose medicine is its poison" is that it has little recourse: it can’t protect itself in a downside case with its $3 trillion in reserves, or by selling Treasurys, and on the other the impact of financial leverage would magnify any economic crash: “UK GDP peak to trough dropped 8%. In the US in 1931 it dropped 23%. That’s the leverage. Now am I sitting here with video cameras saying the Chinese economy is going to contract 23%? Of course not. But if we have coffee later, I may say something different.”
Then from the Q&A we learn the following:
Hendry is long gold and short the S&P. "It was a great trade until 2008." It has been “profitably but less predictable” since the intervention of QE in 2009. “there is an observation that QE has fortified the S&P versus the performance of gold.”
For the edification of those caught in the endless debate of gold vs gold miners, he says: "I am long gold and I am short gold mining equities. There is no rationale for owning gold mining equities. It is as close as you get to insanity. The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300. And there is no valuation argument that protects you against the risk of confiscation. And if you are bullish gold why don’t you buy gold ETFs, gold futures or gold bullion.”
And his brilliant conclusion: "I have resigned from the professional undertaking of coin flipping. I am not here to tell you where gold’s going to be. I have no idea. That’s my existentialism. I am a student of uncertainty, I have no idea where the stock market is going to be. So when I am creating trades in my portfolio for my clients, I am agnostic. I just want to enhance the probability that I make money come what may."
It would be so great if the empty, hollow, talking heads (especially those who have been wrong by so much more than 50% in the recent past) on the business stations admitted the same. However without them, the CNBCs of the world would immediately go bankrupt. And where would all those companies advertise during daylight hours and needing a somewhat wealthy audience turn to then?
Full clip below