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Hugh Hendry Throws In The Bearish Towel: His Full Must-Read Letter

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Via Hugh Hendry's Eclectica Fund December 2013 Letter to investors,

What if I were to tell you I was turning more bullish? Is that something you might be interested in?

We are macro investors. That means that we are constantly exposed to the shifting sands that the world's increasingly powerful gaggle of central bankers - and the capital flows they encourage - impose on global financial markets. However we tend to stick to our big (and often bearish) views, something that means our performance comes with hot and cold spells. The most recent one – and it doesn't take a genius to see this – has been cold. It hasn't been as bad as it could have been for the simple reason that we make big bets when we are doing well and small bets when we aren't. We allocate increasing amounts of capital to winning trades and cut losing trades rapidly. We've been cutting a lot recently. The good news is that this has minimised our drawdown. The even better news is that our returns have improved lately; it looks as if we are entering a hot spell, and we have begun to re-allocate significantly more risk capital to our endeavours.

So what makes me think we are heading hot at the moment? Let me tell you about the character of Bob Ryan, from the US cable TV show Entourage. The show chronicles the workings of Hollywood and Ryan is a legendary movie producer credited with a string of box office winners. His problem is that his success was rather a long time ago. So no one is certain of his skills anymore. His reaction is to make seemingly absurd promises – think along the lines of "...what if I were to tell you that this movie will cost peanuts to make, will earn you four Oscars and will gross $100m... is that something you might be interested in?" In some walks of life (well, mine anyway) such is the popularity of the show that the expression has entered the modern lexicon as a catchphrase for offering up fantastical, if not actually impossible, ideas. With that in mind, what if I were to tell you that I have adopted a tactically bullish outlook? Is that something you might be interested in?

Last bear standing? Not any more...

I know what you are thinking. You are thinking that the last bear is capitulating. It isn't a good sign. Maybe it is that simple. But I think it is a little more complicated. We, and I accept we aren't the first here, sense that US monetary officials may now be willing to subordinate the demands of their own economy to the perils confronting emerging market economies. If that is the case, the great peril is not that the Fed finally tightens monetary policy and US stock prices suddenly tumble from what are very obviously overpriced levels. Would that it were – our curmudgeonly portfolio structure (think dynamic volatility targeting and stop losses) works well with big stock market reversals. Instead the greater peril is that the current backdrop will turn out to mark a rapid acceleration in the ongoing move to the upside. A hint that this might be the case comes from looking back through the 113 years of price data for the Dow Jones Industrial Average. We have done this (so you don't have to), searching along the way for the comparable periods that fit most tightly to the last 500 trading days. What is clear is that periods of trading similar to the one we have seen over the last two years don't often seem to end quietly: they boom big time or they crash. Which is it to be this time? Looking at the markets of 1928, 1982 or even 1998, all of which have scarily similar looking historical charts to today's, we wonder if it won't be both. Starting with the boom bit.

Let's look at what happened in 1998. All sorts of market moving events were shifting the sands. There was the fall out from the Asian Tiger crisis. There was Russia's local currency default. And there were the event risks of the collapse of LTCM and the Y2K scare. Together these things ensured that US monetary policy was set far too loose for the US economy itself. And the result? A parabolic trend to the upside in equities that destroyed anyone who chose to stand in its way. This is what I fear most today: being bearish and so continuing to not make any money even as the monetary authorities shower us with the ill thought-out generosity of their stance and markets melt up. Our resistance of Fed generosity has been pretty costly for all of us so far. To keep resisting could end up being unforgivably costly.

Made a mistake once? Why not make it again...

You will wonder what makes the Fed so concerned that it is willing to risk another bubble and another crash?

The answer rests in the dominance of neo-mercantilism as the most successful economic orthodoxy of our time. For those new to this, the text book definition will suffice. Neo-mercantilism is a policy regime borrowed from 19th century Kaiser Germany. It encourages exports, discourages imports, controls capital movement, and centralises currency decisions in the hands of a central government (to reduce reliance on flighty foreign capital). The point is to increase the level of foreign reserves held by the sovereign government, allowing for an accommodating domestic monetary policy. It also looks like it works — you can make a good case for it being responsible for the superior growth rates seen across Asia since the 1980s. However it comes with what I think is about to be a major problem. It has made domestic monetary policy in most Asian countries very pro-cyclical and we haven't really yet tested this pro-cyclicality to the downside. What happens when the rest of the world becomes unwilling to raise its indebtedness further in order to buy Asian-produced products and facilitate Asian growth? And what if that is about where we are right now?

To date, the experiment with economic growth in Asia has succeeded as an almost direct result of the re-leveraging of the American economy since interest rates began to fall in the early 1980s.

The Japanese authorities blazed a trail on this for everyone to follow. It kicked off with (yet) another credit cycle gone wrong. In the 1970s there was a bubble in lending to Latin American governments. That was popped by Paul Volker's tightening of US monetary policy. Latin American currencies tumbled and sound currencies soared. Except the yen. Japan had a central plan for economic self-sufficiency - one that required a positive current account and endless rounds of domestically funded investment. They did not want a strong currency, low cost imported goods and a consumer boom or anything else that might have risked future trade deficits. So they worked to keep the yen from appreciating too fast, too soon. How? The Bank of Japan created yen and bought Treasuries. This money found its way into the local banking system (as new money does) where it was soon turbo-boosted by foreign capital inflows: overseas investors were attracted by the corporate profits produced from the loose policy and pretty pleased with the way in which a persistently undervalued exchange rate made asset prices cheap to foreign investors. Chuck in fractional reserve banking, and risk-seeking bankers and it was inevitable that asset prices would surge. The rest is history. Equity prices, ignoring all qualitative objections to bubble valuations, quadrupled. Then they crashed.

First Japan. Now China.

To understand today's story we have to leave Japan (reluctantly — we'll come back to it), and travel 20 years later to China, where the same pattern has been repeating itself. Back in 2004. China's cheap land, cheap labour, cheap money, cheap everything, produced high returns on capital and trade surpluses with the rest of the world which encouraged investment inflows into the country. That, as Charles Kindleberger, the intellectual godfather of macro investing and author of the unsurpassed classic Manias, Panics & Crashes, noted, is the kind of combination that "almost always" leads to an increase in the country's currency and domestic asset prices.

However Kindleberger was writing pre-neo-mercantilism. He would have expected the follow-on from this to be higher consumption as a result of the wealth effect of higher asset prices (people who feel rich spend more) and of the boost to spending from a rising currency giving falling import prices. He'd have looked at 2004 China and expected every member of the middle class to be driving a cheap BMW by 2006. That didn't happen. Instead currency interventions held down the yuan and, at the same time, the planners' need for cheap credit to finance their investment projects meant the real returns from bank deposits were forced to stay firmly negative (if you are going to invest in worse than useless investment projects it mitigates matters somewhat if you insist on the debt being cheap...). Negative deposit rates might make residents of countries with developed welfare states more likely to spend. They appear to make the Chinese more likely to save. You will hear much about the rise of a consumer boom in China in no end of bullish papers. But the truth is different. It is that China is unique in the extent to which it has prevented ordinary people being exposed to cheap BMWs; despite the massive growth in the economy consumption has persistently fallen as a share of GDP. The Kaiser would have approved.

Mercantilism needs a donor. That donor has heen you.

The key point about Japanese and now Chinese mercantilism is that the creation of domestic growth in this way has always required a donor country — the one hosting the consumption boom needed to finance the investment spending back home. In the latest round, cash is injected into Treasuries by China (this is what Bernanke referred to as the "glut of savings"). It is then captured by the US banking system (someone has to sell the Treasuries to the Chinese and manage the proceeds). Then the loop repeats. Chuck in (again!) the fractional reserve banking and your usual bullish community of loan officers in the US and you soon see a rise in economic activity and of course in leverage. Then stock and property prices boom. But it doesn't end there. Oh no. The boom boosts wealth in the US. They borrow more and spend more — bringing what should be tomorrow's consumption forward into today. That in turn boosts demand for imports and shovels more dollars into China, something that forces it to print more yuan to keep its currency down and to buy more Treasuries. This cash enters the banking sector... and so on.

All this needs more and more Chinese productive capacity (more steel plants, more concrete, more factories, more ships, more roads, more property, more, more, MORE) to meet the additional foreign demand. China is the host. The US is the donor. The host effectively offers vendor financing to help the donor consume. In return the host gets high domestic investment rates and full employment — both things that help when you are after social obedience and international influence (it's easy to have a strong foreign policy when your would-be enemy owes you money). And everyone gets rising asset prices. Which is nice. In theory this is an expansion without limit. That sounds like a joke. It's more an observation.

Limitless prosperity or limitless instability?

This has been our world for some time now. That's a problem for the likes of us. Why? Because when the psychology of the price discovery mechanism becomes more dependent on money creation than economic growth, as in Japan during the 1980s and in China for the last decade, asset prices become an abstraction. They separate from our qualitative perception of reality; they are more susceptible to wild price trends that in theory have no limit; and they display a two-way causality.

This isn't how it is supposed to work. In a more normal world you can think of finding value in terms of the one-way causality of a thermometer and room temperature. If we doubt the veracity of the thermometer we can always produce an independent, second, thermometer to determine the proper temperature. The temperature is what it is. Just as in investing, the fundamentals are what they are. But what if it wasn't like that? What if by warming the mercury in the thermometer, we could also raise the room temperature? This is what happens in the wacky world of neo-mercantilism. Here "fundamental" investing has little or no merit. There is one reason for being long and one alone: sovereign nations are printing money and you can see that prices are trending. That's it. Nothing else matters. Think of a neo-mercantilist market as if it were a mouse with the toxoplasma virus. The virus hijacks its immune system and makes it fearless. It dies in the end. But not before it does some pretty nutty stuff. There's no more point in yelling "watch out for the cat" at a mouse hijacked by toxoplasma than there is looking at valuation measures in a market hijacked by mercantilism.

Me and my immune system

My investing immune system has been in pretty good shape recently. But that's the main reason why I've produced mediocre investment performance. I've been sensible. But in doing so I have imposed qualitative, one-way causality arguments onto a market that just doesn't care. I need to be more like the mouse (just without the bit where it dies) and that means I have had to put aside qualitative analysis and be in this trending market. I had thought it would be worth staying bearish and accepting underperformance for the fun of being right in the end - becoming what the British call a vexatious litigant, someone who fights for the sake of it. But I'm not sure any of us can wait that long. Playing it safe, as my good friend Chris Cole wrote last year may be the greatest risk of all." So the mouse it is.

America fights back

Back to our story. What happens when the donor can't take it any more? This happened in part in March 2009 when the US rejected Asia's neo-mercantilism. Two destructive, domestic boom/bust cycles within a decade had left gross debt almost four times GDP. The domestic economy had become unresponsive to even record fiscal expansion and almost zero overnight rates. Something had to be done to regain the initiative. Polite requests for the Chinese to allow their currency to revalue higher versus the dollar were rebuffed and in its absence expansionary American fiscal and monetary policy only served to make China richer. Not ok. So America fought back. With QE.

If the Chinese were never going to revalue their currency themselves, the US would effectively do it for them. QE would target higher prices in China, something that would revalue the renmimbi in real terms and, with a bit of luck, produce the consumer boom that its bureaucrats had so steadfastly sought to prevent. This would transform China into the donor country and also generate the prosperity America needed to recover from the clutches of its debt deflation. And so the sands shifted again. The Fed kicked off its Treasury purchase program in 2009 in the full knowledge that the lack of demand for productive investment in the moribund US economy would create a surplus of speculative flows into faster growing regions of the world. It also knew that such flows would force the foreign exchange targeting emerging market central banks to print even more of their own currencies to keep a lid on their exchange rate appreciation as the dollar debased itself. The Fed then recognised how the chain reaction we have chronicled above would go. Emerging market asset prices would be bid up, something that would in turn be met by more central bank printing of local currencies which would then be leveraged through the emerging market banking system into even higher local asset prices and so on and so on and so on.

The Fed starts winning

This works. Well it works for the Fed. We estimate that total emerging market debt now surpasses $66trn. That's almost two and a half times emerging market GDP and double its level at the start of the Fed's QE extravaganza. At the same time car sales in China have surpassed those of the US and property prices are on a rip. Housing transactions are up 35% year on year and new home prices are rising across the nation by between 15% and 20%. Looks like a consumer boom doesn't it? So from the Fed's point of view this is going well. So well that since July 2008, the renminbi has appreciated by some 30% against the euro. But while the Fed might be pleased the Chinese probably aren't.

"When the monster stops growing. it dies. It can't stay one size."


The Grapes of Wrath, John Steinbeck

The mercantilist plan has always been to push overseas trade expansion via the perpetuation of an under-valued currency. It isn't working out. Look at Europe. Europe's nominal GDP was supposed to be much higher by now (partly on the back of China's helpful 2009 bout of credit expansion). But it has only surpassed its previous highs by 2%. And denominated in renminbi, it's much much worse: the European economy has nose-dived by 25% since March 2008. Try being a small labour intensive manufacturer in some coastal Chinese city renowned for its export prowess but struggling with fast rising wages selling into that!

The German philosopher and experimental psychologist scientist, Gustav Fechner, once proposed a rule that can be expressed as follows "in order that the intensity of a sensation may increase in arithmetical progression, the stimulus must increase in geometrical progression?" That seems to describe China pretty well. The huge disappointments in growth elsewhere mean that for China's GDP to make arithmetic progression, a geometric intensity of effort - with no theoretical end - is required. The monster has to grow. Note that since the Fed turned the tables with its QE policy in 2009, China has had to consume more concrete in its roads, rail projects, bridges, factory construction and new buildings than the US did during the entire 20th century. Yet despite this Herculean effort its structural growth rate has fallen by 30%. This is all fascinating. But tell you what it isn't. It isn't stable. It is what China expert Michael Pettis would call a volatility machine.

Markets predicting deflation get asset inflation

Something happened in April of this year that I think may have marked a turning point. Before I go into that I want to be sure we all understand something. You want to believe that China's growth rate over the last 30 years has been a triumph of superior state planning and the irrepressible force of urban migration, a one way causality if you like. I'd like to too. But we have to accept that it just isn't true. Instead it is the result of a system of foreign exchange suppression - and so anchoring our expectations to it is a very bad idea. With that in mind, I'm going to ask you to consider the US Treasury Inflation Protected Securities (TIPS) market. As you know, we allocate a lot of time and risk capital to equities. Their malleability allied with low transaction costs and liquidity make them an excellent way for us to invest in our macro narratives. But we find it hard to buy and sell equities based on valuations. Doing it like this is just too imprecise. So we prefer the certainty of inflation expectations: you should be long equities if inflation expectations are trending higher — or more specifically for us when the 10-year inflation expectation, derived from the TIPS market, is greater than its 200 day moving average.

Over the last decade you could have done this and nothing else and escaped most criticism. A simple trading rule where one is long S&P futures when the condition is met, and flat otherwise, has produced a return of 75% since the 1st of January 2003 (around the bottom of the TMT crash). A long-only strategy has produced better gains - almost 95% - but using the rule would have lowered your maximum drawdown from 56% to just 20%. So once you adjust for volatility you can say that you would have done better investing guided by trend inflation expectations than not. The 10-year expectation moved below its 200 day moving average in April this year. And yet we have taken a resolutely contrarian message from this signal. Don't sell equities. China's pledge to maintain high GDP growth rates by ploughing on with capacity enhancing supply additions to its fixed capital formation, even at a time when the still risk averse banking system in Europe and America is failing to produce a consumer boom in the West, is fast building global deflationary pressure. That's the resounding message from the TIPS market. And in a world of two way causality, that could continue to prove immensely bullish. Why? Because the Fed uses this criteria as its principal benchmark for determining whether to taper or not.

So imagine the virtuous loop that runs through asset prices today. The Fed begins QE to thwart neo¬mercantilism and capture more of its own domestic expansion. The Chinese witness a shortfall in their GDP growth rates as their overseas expansion moderates. This robs them of the ability to loosen policy in the West. They counter by embarking on more fixed capital formation to maintain a floor on domestic GDP growth. This adds to the global supply equation that drives break-even inflation expectations lower and leads the Fed to once more embark on yet looser monetary conditions. It is a reflexive cycle that can drive mice to be madder and madder. Or braver and braver. Depends how you look at it. But either way, only a foolish investor would stand in the way of this bull market. It'll crash of course, just not for a while.

Want to make real money? Make it in Japan

What if I were to tell you that you could buy something for $300k and it might be worth $5m in a couple of years? Is that something you might be interested in?

Japan has never been very far away from my thoughts. I've grown old as its economy and stock market have languished from the aftershocks of their equity price bubble in the 19805. My first year as an investment analyst in Edinburgh was spent conducting research on Japanese stocks in the year immediately after the bubble had popped. I remember the denial on the part of my superiors that the show had ended. It's hard to accept you have luck not talent.

Later I remember being struck by how the Dow Jones Industrial Average had broken its 1929 price high 25 years later in 1954. That really captured my imagination. I don't know why. Perhaps even then it was the notion of an economic life cycle savings hypothesis. That people make consumption decisions based on their current stage of life. That we have roughly 23 years or so to accumulate savings and a pension to see us through our less industrious later years. It made sense to me that regardless of the stock market bubble in the 1920s, 25 years should be sufficient to take out a nominal price established so long ago. I reasoned that even low rates of inflation compound to quite a large number over so many years. And that the nature of social democracies is that they dislike prolonged hardship. If things get so bad then sooner or later they are going to vote for politicians who will address their concerns.

So I started looking around to see whether I could find other asset classes that complied with this pattern. Gold caught my attention. The price high of January 1980 struck me as being similar in magnitude to what took place on Wall Street all those years previously. Gold flew from its shackles of $35 an ounce in 1970 to sell briefly for more than $800 in January 1980; and then it crashed. But the nominal price high was taken out 27 years later on the 28th December 2007. The silver market had been cornered at the peak making its price high that much more difficult to surmount. It needed 31 years to re-establish the old price high. The oil market took just 24 years to break the $40 handle last seen in March 1980. Interesting isn't it?

I then became fascinated by the 7th of December 1941. Yes it was the date of the attack on Pearl Harbour but it also represented an incredibly rare occurrence: the Dow Jones traded at its 50-year price moving average. John Templeton bought his "penny" stocks and the rest was history. This brings me to Japan. The TOPIX stock price index has recently traded as low as its 50-year moving average and better still, next December will mark the 25th anniversary of its great price peak.

Maybe this doesn't mean anything. But it is our contention that Japan's long spell in the sin bin has left its society particularly vulnerable to the charms of a radicalisation of monetary policy. We reckon that with the pro-growth shocks of neo-mercantilism essentially having run their course, Japan will struggle to produce the incremental GDP necessary to service and repay its gigantic sovereign debt load. This will provoke inflationary price targeting by a politicised central bank that should send Japanese stock prices heavenwards once more. I'm not eulogising about Abenomics and its golden arrows here. Instead I'm expressing a more negative kind of bullishness: the fear of persistent policy failure that leads to fiat money printing without limit.

Back in 2008, with world equity markets in turmoil, I purchased a one-touch 40k Nikkei call option for which we paid $300k. I could envisage the yen strengthening substantially and triggering a corporate shock as Japanese household names buckled under the duress of currency appreciation. I also bought a lot of credit protection. And sure enough, in 2011 and for the majority of 2012 the yen strengthened. Japan recorded its largest manufacturing bankruptcy and a number of prominent household names, the giant electronic businesses, saw the cost of insuring their debt sky-rocket. For instance, Sharp rose from a spread of around 100 in January 2012 to over 5,900 in October of the same year. The Japan iTraxx Index for five-year protection, however, only flared to 220 (from around 100 in 2010) and so our hypothesis that much of corporate Japan would buckle under the weight of yen strength proved unfounded.

That was a shame but nevertheless, this "crisis-lite" was sufficient to produce the political intervention that we had envisaged. The most senior policy makers at the Bank of Japan were unceremoniously removed from office and monetary policy was set, instead, very loosely, propelling yen asset prices higher. The stock market leapt by 60% on the news and the currency weakened by 20%. And, as the chart below of the Japanese five-year break-even inflation expectation reveals, one should be long their stock market. We still value the one-touch at our purchase price today, and with the market approaching 16k and trending higher, who is to say where it will trade in April 2018? If it touches 40k, get $5m.


Where will it all end?

Remarkably, the aftershocks of Japan's volte-face seemed to catch American policy makers out. In May, the Fed, convinced that its QE program had succeeded in re-distributing global GDP away from China and towards the US economy, began signalling its intent to taper its easy money by autumn. However, with 10-year Treasury rates having moved from 1.75% to 3% and its fourth largest trading paltrier having devalued by 20% since the previous November, the anticipated vigorous domestic American growth never actually materialised; it was captured instead by the new and even looser monetary policy of Japan. Yet again the reflexive loop had worked to sustain the monetary momentum that is feeding global stock markets. And the not so all-knowing Fed? It had to shock market expectations in October by removing the immediacy of its tighter policy and stock markets rebounded higher. Where will this all end? Can it ever end?

There are multiple possible outcomes. The one markets are most vulnerable too is the re-emergence of bullish bankers. They could lend such that the consumer boom in the US and Europe finally sparks and in doing so provoke the Fed to finally tighten policy. That would spook developed market equities but not as much as you might think - they will have the palliative of the stronger GDP growth. Emerging market equities are closer to the edge of a bubble and could prove more susceptible to a greater drawdown owing to the fragilities of their debt fuelled economies. But for now, the re-emergence of risk-seeking bankers fuelling a lending boom in the West seems remote. We aren't too worried about it. In Europe for instance the banking system has an estimated 2.6trn euros of deleveraging (circa 30% of GDP) still to complete, having shed 3.5trn euros already.

So we are happy to run a long developed market stock position with a short hedge composed of emerging market equity futures. We are running an unhedged long in Japanese equities as our wild bullish card (we have, of course, hedged the currency).

It seems then to us that the most likely outcome is that America and Europe remain resilient without booming. But with monetary policy set so much too loose it is inevitable that we will continue to witness mini-economic cycles that convince investors that economies are escaping stall speed and that policy rates are likely to rise. This will scare markets - and emerging markets in particular - but it won't actually materialise: stronger growth in one part of the world on the back of easier policy will be countered by even looser policy elsewhere (the much fabled "currency wars"). So market expectations of tighter policy will always be rescinded and emerging markets will recover rather than crash. Developed markets just keep trending positively against this background - and might accelerate. Remember what we said about 1928 and 1998 at the beginning.

Just be long. Pretty much anything.

So here's how I understand things now that I am no longer the last bear standing. You should buy equities if you believe many European banks and their sovereign paymasters are insolvent. You should buy shares if you put a higher probability than your peers on the odds of a European democracy rejecting the euro over the course of the next few years. You should be long risk assets if you believe China will have lowered its growth rate from 7% to nearer 5% over the course of the next two years. You should be long US equities if you are worried about the failure of Washington to address its fiscal deficits. And you should buy Japanese assets if you fear that Abenomics will fail to restore the fortunes of Japan (which it probably won't). Hey this is easy...

And then it crashed

I have not completely lost my senses of course. Eclectica remain strong believers in the most powerful force in the universe - compounding positive returns - and avoiding large losses is crucial to achieving this.

We have built a reputation for getting the calls right in the difficult space that is macro investing, which has served us and our clients well during both trending bull markets and times of crisis. Today, of course, the market is "golden" which is to say that the 50 day price trend is above the 200 day. But remember that during those forays into the "dead-zone", years like 2008 and 2011 when equity markets crashed, Eclectica performed handsomely. I like to think therefore that I own an alpha crisis management franchise that has rewarded our investors at limes of stock market stress.

This commitment remains as resolute as at any time over the last 11 years that I have managed the Fund. But what if I could produce a consistent alpha return profile with the in-built crisis hedge to your wealth... is that something you might be interested in?


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Fri, 12/06/2013 - 13:34 | 4221866 TruthInSunshine
TruthInSunshine's picture

-"It'll crash of course, just not for a while."

Translation: I just know I'll make it out just in the nick of time. I'm THAT good.

Fri, 12/06/2013 - 13:44 | 4221885 frankTHE COIN
frankTHE COIN's picture

...' I Promise to Pull Out '... Hmmm. We need to know if Hugh has any children and if any of them were a Surprise to him. It would be a Huge Indicator.

Fri, 12/06/2013 - 13:59 | 4221958 dryam
dryam's picture

"I'm a fund manager, and I've been ultrabearish while the markets have skyrocketed.  My investors are doubting me, and some have left my fund.  I have no choice as a fund manager but to go with the crowd to keep my remaining investors.  See, I like to be right & I'm one of the most arrogant people you could ever meet, but I like to make money for myself more than anything else.  My fund makes money for me whether it goes up or it goes down.  Thus, now I'm very bullish."

Fri, 12/06/2013 - 14:13 | 4221980 Pinto Currency
Pinto Currency's picture


Mr. Hendry does not highlight a few things:


  • Loose money breeds a malstructured economy that cannot function properly
  • Additional debt/loose money results in negative real growth and amplified bubbles that break (and the bubbles can break even while the loose money is applied)
  • These same pages note that China's banking system has created $15T of new debt in the last 5 years.  No one is going to force China to revalue its currency higher with western QE
  • This is all leading to monetary system failure and market disruption

Hugh is free to step out on a plank that is 9/10s sawn through just because it hasn't broken yet.

Fri, 12/06/2013 - 14:26 | 4222073 DaveyJones
DaveyJones's picture

Hugh also side steps the real world, that monetary systems are just markers. This historical moment, the energy crisis, the resource depletion / destruction, the inter-dependency and the criminal level are unprecedented

Fri, 12/06/2013 - 14:50 | 4222213 knukles
knukles's picture

Hey you, Hugh!

Listen, you wanna be long of everything?
Hows about I just send you Mrs K's Amex MC and Visa bills along with out county property tax vouchers?
That help?

Fits "everything" in my book, dude.

Fri, 12/06/2013 - 15:35 | 4222407 kliguy38
kliguy38's picture

Mr Hendry received a visit recently and had the new paradigm explained to him in an up close and personal way........he saw the light

Fri, 12/06/2013 - 15:46 | 4222444 Patriot Eke
Patriot Eke's picture

His livelihood depends on people staying in the market, so he argues for people to do it.  Motivation is key.

Fri, 12/06/2013 - 17:14 | 4222776 Manthong
Manthong's picture

Stable disequilibrium, bitchez!

Fri, 12/06/2013 - 18:25 | 4222951 walküre
walküre's picture

Hugh's motto.. If you can't beat 'em, join 'em

Black swan is coming from a completely different direction than TPTB could ever anticipate. TPTB are in control of the markets. Collapse is something they cannot control when it's happening. Like millions dying in China from so far unknown raspitory genetic specific problems related to smog. Massive windstorms flattening the US Northeast and destroying all windows in buildings like the Sears Tower. Unforeseen and never anticipated.

Fri, 12/06/2013 - 18:35 | 4222976 SAT 800
SAT 800's picture

He likes the Japanese Economy ! and Kyle Bass is calling for it to be the first major failure in the coming world crash; maybe we should lock Hugh Hendry and Kyle Bass in a cage and let them have a cage match? One problem, though, I'm pretty sure Kyle Bass could pick Hugh Hendry up and break his back across his knee. Might be a short contest.

Fri, 12/06/2013 - 21:59 | 4223467 CheapBastard
CheapBastard's picture

"If you want to keep your $5 million home, you cannot keep yoru $5 million home."


$5 million home foreclosures on rise


Foreclosure activity on homes worth $5 million surged 61% year over year through October, according to data released Wednesday by RealtyTrac, a real-estate data firm.


Also interesting for a MSM article:


Housing Affordability Shrinking:|headline|quote|video|&par=yahoo

Sat, 12/07/2013 - 06:55 | 4224005 GetZeeGold
GetZeeGold's picture



That gold chart looks pretty damn tough when you put it in that context.


For those that have the attention span of a nat.....I'd definitely pile headlong into equities.

Fri, 12/06/2013 - 17:13 | 4222780 Mrmojorisin515
Mrmojorisin515's picture

i agree, but he's not discussing that and i think this actually sheds alot of light on why the market is acting the way it does.  I found this to be very insightful

Fri, 12/06/2013 - 18:25 | 4222946 The Mist
The Mist's picture

He's saying "My investor clients and board of managers force me to go bullish because our profits are too low. Obviously this thing is going to blow, but hey whatever if they want me to I'll just long fucking everything and see how that goes... Idiots. Maybe I can pull out in time... anyway I'm going to buy a private island with 10 years of food supply for me and my family"

Fri, 12/06/2013 - 20:19 | 4223220 Imminent Crucible
Imminent Crucible's picture

Yup. It reads like a desperate justification for having no idea how the markets can keep running against the fundamentals--without admitting his cluelessness:  "Yeah, I know I just threw in the towel on my bearish calls, but nothing makes any sense so I'm going to invent the phrase Tactical Bullishness, meaning I don't feel bullish but I don't know what else to do."

Note to Hugh: I've spent the last thirteen years proving that overlaying one chart with another has zero predictive value.

Sun, 12/08/2013 - 16:14 | 4227170 webspin
webspin's picture

"I've spent the last thirteen years proving that overlaying one chart with another has zero predictive value."


You just don't know what your looking at. Perhaps your looking for a 100% "tell" but no market can ever be read at 100%. Casino's become fabulously wealthy with just 1 or 2% advantages over randomness. Warren Buffet only increased his wealth by 1/4% per week as an investor. The rest is the 'magic' of compounding.

Fri, 12/06/2013 - 20:22 | 4223228 TheFourthStooge-ing
TheFourthStooge-ing's picture

Or it could be something as simple as:

"I've decided to get with the program because they know my kids' names, where they go to school, their class schedules, their teachers' names, their soccer schedules (including practice), and the places they go. Am I bullish? I'd be a fool not to be."

Fri, 12/06/2013 - 23:33 | 4223617 fockewulf190
fockewulf190's picture

The more I read about Mr. Hendry, the more I visualize Mr. Hanky.

Fri, 12/06/2013 - 18:32 | 4222968 SAT 800
SAT 800's picture

I'm going to agree with you; I've told so many people that "this isn't 1987"; or whatever year they were shilling for; that I'm exhausted. As always; the macro situation is unique; it's not 1929, it's not 1829, and it's not 1987. It's 2013 and this particular rubber band has been pulled out a really, really long way from the paddle; sooner, rather than later, I'm willing to say, the little rubber ball is going to start accelerating in the opposite direction. Also, it really bothers me to hear anyone talking about numerical values for Stock Markets without trying to assess what the purchasing power of the currency may be. The stock market in Zimbabwe went up 30,000%; but it didn't do the people any good who were stuck in it; and stuck in it's Zimbabwean "dollars". This is so fundamental; if your thesis is that the stock market is gong to rise because of money printing, hadn't you better attempt to understand what this "money" might actually buy after you're wonderful "rise". So far, the answer is pretty clear; people whose stock market accounts have "increased" since 2000; have broken even in purchasing power. Wouldn't it be simpler, with less possible embarrassments to just put the money in Silver Bullion? You're predicting an inflationary period; whether you call it that or not; is it really likely no one will notice the devaluation in the purchasing power of the currency? So far many people have been quite wakey wakey on this question and that's why Silver is $20/0z. instead of $5. To be sure, many, many muppets are distracted by the "hew and cry" of the greatest game in town, the Stock Market; but what happens when they're disappointed? Is every Bond Investor who finally gives up and changes their portfolio; and virtually all of them will; that's a class of investor that's literally doomed, how many of them will buy Silver or Gold instead? Some of them, for sure. As Omar Khayam said, "I've been with many wise men, and listened to many prophets, but I'm leaving the tent by the same door at which I entered".

Sat, 12/07/2013 - 03:16 | 4223865 Seer
Seer's picture

You mean that Bitcoin isn't going to fix all of this?

BTW - Bless you for tying things to reality.

Fri, 12/06/2013 - 15:07 | 4222264 FEDbuster
FEDbuster's picture

I too was surprised that Hugh didn't bring up the China QE ($15T in new debt) which out paces US, Euro and Japan combined.  The race to the bottom is still full speed ahead, the pressure is building and soon the central bank submarines will start to be crushed.  

Sat, 12/07/2013 - 03:27 | 4223871 Seer
Seer's picture

It's all like we're measuring by the throw of the accelerator and not noticing that it's having no effect on the flow of fuel.  We're only pretending that we're experiencing acceleration because we've been conditioned to not allow the thought that it might be possible for it to not occur.

This is the Wiley E. Coyote moment in which suspension of disbelief meets up with gravity: the hubristic human projection of perpetual growth on a finite planet meets Mother Nature.

Fri, 12/06/2013 - 14:02 | 4221981 TruthInSunshine
TruthInSunshine's picture

Wait, let me add a little somethin'

"Thus, after missing a completely fiat reserve
"bank" printfestapalooza, that's moonshot the "markets" including the shittiest of assets 200% to 1800% higher for 4 years, now I'm very bullish, and am leaping head first off the 10th story diving board, because I'm the ultimate FOMO HOMO."

Fri, 12/06/2013 - 14:11 | 4222025 fonzannoon
fonzannoon's picture

I wonder what his magical "in-built crisis hedge" is that will protect his investors when this thing blows.

Fri, 12/06/2013 - 14:22 | 4222076 dudeman
dudeman's picture

Probably some form of out-of-the-money puts on tail events.

Fri, 12/06/2013 - 14:38 | 4222165 fonzannoon
fonzannoon's picture

if this thing implodes i am pretty sure he will be able to wipe his ass with his trade confirms, but that's about as much as he will profit from them

Fri, 12/06/2013 - 15:17 | 4222303 RSloane
RSloane's picture

I imagined he was thinking suicide.

Fri, 12/06/2013 - 16:28 | 4222587 Pinto Currency
Pinto Currency's picture


He's got very large, long dated out-of-the-money call positions on RGR and SWHC.

Sat, 12/07/2013 - 03:32 | 4223877 Seer
Seer's picture

Yup.  These talking-heads have ZERO ability to survive in the REAL world.  Kyle Bass might be one of the few exceptions... (but he'll probably also be counting on slaves to do his work in the future)

Sat, 12/07/2013 - 08:05 | 4224038 fxrxexexdxoxmx
fxrxexexdxoxmx's picture

Slaves are doing the work right now. Nothing changes. Why will it be different this time?

Fri, 12/06/2013 - 15:00 | 4222244 Solon the Destroyer
Solon the Destroyer's picture

It will be some form of leveraged USD...  He hints at it earlier in the note.  And as far as I can tell, that is pretty much everyone's safety blanket, which is part of the reason it will make a successful crisis hedge.  When the crisis hits, it will be in emerging and developing markets first, and cash will flood to the US and it's "cleanest dirty shirt".  That hedge then buys you time and money to unwind and re-position.


Fri, 12/06/2013 - 15:38 | 4222337 TruthInSunshine
TruthInSunshine's picture

That is one hell of a complicated strategy that would probably tax an algoblackbox's proprietary coding (or a rocket scientist staffed LTCM style "brain trust"), since it you reflect on the 2008 meltdown, you'll see nominal trillions of currency swaps & exchanges that the Fed committed to just to literally keep the global financial system from imploding (whether it was right, moral, smart, exceeded their authority, etc. can be a discussion for a different day, but the ECB, at the very least, would have been toast without being able to resort to the Fed for currency swaps, not to mention the BOJ, etc.... and I'm thinking, and it's a SWAG admitedly, that the Fed would have HUGE problems doing that again since they now have a 4 trillion dollar balance sheet versus the 800 billion dollar one they had at the outset of the 2008 meltdown - and I haven't even mentiond the PBOC and how dire a position it is now in given the malignant cancer that China's provincial banks, which have massive unbooked losses, represent to the Chinese economy & financial system).

Fri, 12/06/2013 - 15:41 | 4222428 spastic_colon
spastic_colon's picture

maybe complicated on the surface but the idea is simple....hugh is part of the bearish collective trying a last ditch effort to impart a contrarian thought into the markets, to make TBTF think they have skewered the last of the bears all in an attempt to sway the trend.


Valiant in it's transparency and self-serving in its simplicity.....I doubt they are as long as they say, or ever will be.

Sat, 12/07/2013 - 06:04 | 4223969 DFCtomm
DFCtomm's picture

You mean someone might lie about their investment strategy? Heavens to Betsy!

Fri, 12/06/2013 - 20:38 | 4223272 PT
PT's picture

I thought the phrase was, "If you're not on the inside then you're on the outside."  Sounds like Hugh is on the outside.  Ring up the NSA and see if you can get the contract to monitor certain telephone calls - hey!  It's legal if you do it "for the NSA" right?

Fri, 12/06/2013 - 14:02 | 4221976 Pinto Currency
Pinto Currency's picture


Fri, 12/06/2013 - 13:46 | 4221907 Divided States ...
Divided States of America's picture

Hugh is missing one big thing. Like most of these self absorbed HF managers, he forgot to mention that even as the rich gets even more wealther (thx to the Zionist Federal Reserve Cartel).....whats the point when you have all this money and you cant go anywhere to enjoy it because 99% of the rest of the world wants to cut your throat out for backing them into the corner through rampant inflation, lower quality of life, lack of jobs etc.

Eclectica Asset Management should be renamed Eccentrica Asset Mismanagement.

Investors of his fund should send in their redemption request asap.

Fri, 12/06/2013 - 13:52 | 4221942 prains
prains's picture

they're gonna need one big mutherfucking cruise ship to hide from the rest of the world

Fri, 12/06/2013 - 14:10 | 4222019 Son of Captain Nemo
Son of Captain Nemo's picture

Just to "piggyback" on the "who's who" among the biggest...

Anyone out there tracking these guys? 

When the announcement was made almost two years ago of the top 20 international bank CEOs making a discrete "exit" you could hear a pin drop and then the story just disappeared.  I know ZH followed this especially the change in title at JPM and GS for Jamie and Lloyd. 

Been trying to locate those old news feeds on the subject with updates but they are hard to find now.

Wonder if any paparrazi will be tracking them in the forseeable future?

Fri, 12/06/2013 - 14:15 | 4222034 prains
prains's picture

Hugh may be "all in" now as he thinks he has a sense of the T minus.....countdown to SHTF, he might be a canary

Fri, 12/06/2013 - 15:13 | 4222291 FEDbuster
FEDbuster's picture

Here's their big ass, mutherfucking escape ship:

"You can run, but you cannot hide!"

Fri, 12/06/2013 - 15:44 | 4222445 spastic_colon
spastic_colon's picture

this is a "i'd rather know where the alligators are, than where their not" type ship.....the only people that will be on this thing will be tourists and wannabe's......I've already secured the contract to the Maps to the Billionaires franchise, I'll have a kiosk right next to Pizza In A Cup on the poop deck.

Sat, 12/07/2013 - 07:56 | 4222963 Doña K
Doña K's picture

I will give you a few hiding spots: July August check Fiscardo in Cephalonia. Check for yachts with Marshall islands or Cayman Islands flags. In the winter months check St. Barts in the Caribbean. Check Costa Smeralda Sardenia during Rolex regatta. Siimilar flags.

Late August check Ibiza in the Balearides 

Also follow the cocaine silk route and the Miami ho's. 

Trends change however.

Fri, 12/06/2013 - 19:02 | 4223042 Son of Captain Nemo
Son of Captain Nemo's picture

Unfortunately you are so right.

When it hits the fan my only prayer is that someone that has the double duty of getting the YB stains out of said "alligators" underwear as well as delivering them to there next destination without address, will have an epiphany and summon the courage that the worst pieces of shit on the planet will need to be systematically 'cared for' and will take the necessary steps to see that task to it's fruition.

Fri, 12/06/2013 - 16:49 | 4222704 holgerdanske
holgerdanske's picture

Errhhhmm? Aren't we talking about a ship, mate? So it will be something.

"How far is it to America, mom"

"Shut up, son, just swim."

Fri, 12/06/2013 - 15:20 | 4222320 Abiotic Oil
Abiotic Oil's picture

Here is one thread detailing the resignations:

And a bunch more parts in the op's series.

Fri, 12/06/2013 - 16:41 | 4222666 Son of Captain Nemo
Son of Captain Nemo's picture

Much obliged.

Fri, 12/06/2013 - 14:38 | 4222150 HRamos_3
HRamos_3's picture

That would be gold over blue, one torpedo to drown them all!

Fri, 12/06/2013 - 17:37 | 4222847 N57Mike
N57Mike's picture

bullish for the private, mercerary armies, of the world.....

Fri, 12/06/2013 - 18:50 | 4223013 SAT 800
SAT 800's picture

Australia; the un-sinkable aircraft carrier for the multi-billioinaires. Plenty of room to get lost in. Stay home in the Ranch house and watch movies while you're private troops patroll the fence line.

Sat, 12/07/2013 - 01:13 | 4223775 Advoc8tr
Advoc8tr's picture

Those pansy arse fuckers couldn't survive 5 minutes in 90% of this country - and that includes their private troops ...  they'll be staying at the Port Douglas luxury resort and be easy to find.


Fri, 12/06/2013 - 14:19 | 4222055 eclectic syncretist
eclectic syncretist's picture

Hugh's middle name is Jass.

Sat, 12/07/2013 - 03:41 | 4223880 Seer
Seer's picture


What's coming won't be something one can run from...  We're going to have one hell of a big Man-Up moment, and the talking-heads (who serve power) ain't going to make it.

All the "money" will be basically worthless because it's so totally disconnected with the physical world, the one where more and more people are being "introduced" to.  I don't think that the "natives" will be falling for baubbles ("money").

Sat, 12/07/2013 - 08:12 | 4224041 fxrxexexdxoxmx
fxrxexexdxoxmx's picture

I think it is important to remember that every social group generally looks out for itself. Humans are pretty evil little shits.

Find yourself some people who have that evil side under control and happiness can be found.

Zionism, facism, socialism, capitalism, are only words that level blame when you have not found happiness.

Fri, 12/06/2013 - 13:51 | 4221940 nbsharma
nbsharma's picture

Well-said. He is putting 2-and-2 together *after* the fact. Great explanation. I wish he could tell me the same about the next 3 years. Then, he will have my money to manage.

Fri, 12/06/2013 - 13:54 | 4221948 Stoploss
Stoploss's picture



Where are we at again??

Sat, 12/07/2013 - 03:41 | 4223883 Seer
Seer's picture

But, but... everyone knows that the best part of the roller coaster ride is when you crest the big peak and start racing toward the bottom!  Buy The FUcking TOp!

Fri, 12/06/2013 - 14:52 | 4222121 Bokkenrijder
Bokkenrijder's picture

How low/high were inerest rates back in Hugh's 1928, 1982 and 1998 scenarios? How much was government debt? Can the market take off again with so much debt/weight on top of it?

Additionally, how tapped out were consumers back then?

p.s. How old is that gold chart he has used? It still got gold at roughly $1600.

Fri, 12/06/2013 - 20:00 | 4223172 walküre
walküre's picture

Don't know about 1998 but throughout history the elite never had debt. They controlled the debt and therefore could spend as they pleased. The poor never consumed much back then and the middle class saved before they spend. Totally different paradigms.

Fri, 12/06/2013 - 15:59 | 4222491 rubiconsolutions
rubiconsolutions's picture

Captain Smith: "Ladies and gentlemen, the noise you just heard and the shuttering you just felt was merely the ship glancing off a piece of frozen water while steaming ahead. Titanic is built to endure such trivial encounters and I assure you, nothing is wrong. Please continue to enjoy your meal and the evenings entertainment."

Fri, 12/06/2013 - 18:41 | 4222992 SAT 800
SAT 800's picture

Imagine what an idiot he's gonna look like if it crashes starting Monday morning in New York. Anybody here want to guarantee it won't? Is it impossible? NOt the last time I looked.

Fri, 12/06/2013 - 20:48 | 4223293 PT
PT's picture

Don't they need the bears to buy the CDSs so they can manufacture the synthetic CDOs?

Fri, 12/06/2013 - 13:35 | 4221869 LawsofPhysics
LawsofPhysics's picture

So China is to the 21st century, what Germany was to the 20th?  Well, that should end well...

Many, myself included, have been saying this for 20+ years.

Fri, 12/06/2013 - 13:52 | 4221945 pirea
pirea's picture

only if they will get a hitler

Sat, 12/07/2013 - 04:44 | 4223922 r3phl0x
r3phl0x's picture

Hope he's named Adorf.

Fri, 12/06/2013 - 18:41 | 4222995 SAT 800
SAT 800's picture

I've been trying to explain to people why they should buy Silver for twenty years; did anybody every listen to you? If they did, you did better than I did.

Fri, 12/06/2013 - 21:04 | 4223336 Radical Marijuana
Radical Marijuana's picture

Quite the sarcastic understatement, LawsofPhysics:

"Well, that should end well..." 

As Hugh Hendrey repeatedly pointed out:

"The Japanese authorities blazed a trail on this for everyone to follow."


Japan Secures Final Passage Of Secrecy Bill - Designed by Kafka & Inspired By Hitler?!!

The first rule of the pending Japan’s Special Secrets Bill is that what will be a secret is secret. ... The right to know has now been officially superseded by the right of the government to make sure you don’t know what they don’t want you to know. ...

Japan led the way for bankster dominated countries to self-destruct.


In my opinion, that is what Hugh Hendrey is saying. He KNOWS, but he can not do anything else than adapt to operating within what he KNOWS. Meanwhile, those well-established systems of legalized lies, backed by legalized violence, controlling everything from atomic power on down, are based upon being able to keep runaway triumphant FRAUDS going and going ... Which means that, more and more, the truth about basic facts will be made criminal to reveal.

Of course, I have seen all this before, in my own little world. In Canada, in the early 1980s, the Canadian government passed a law that made it a crime to publish anything that said "marijuana is good." That law was latter overturned, as being unconstitutional. However, the basic trend has not changed. The governments that are based upon huge lies WILL PASS LAWS TO TRY TO CRIMINALIZE THE TRUTH. In that context, Japan is leading the way towards the future, of a society dominated by financial frauds, and related lies about almost everything, which will respond by attempting to make the truth be criminalized. WELCOME TO THE PSYCHOTIC BREAKDOWN OF CIVILIZATION!

Sat, 12/07/2013 - 04:07 | 4223903 Seer
Seer's picture

My take on the Japan "thing" is that it's to cover the Japan+US military strategy to push back on China.

It's how it always goes...  greater and greater control in an attempt to hang on to power, while the very mechanics of applying more control are but self-defeating.

Fri, 12/06/2013 - 13:44 | 4221870 Ignatius
Ignatius's picture

Hendry's crib note:  Don't fight the FED

Fri, 12/06/2013 - 14:06 | 4222004 nevadan
nevadan's picture

Gotta love the irascible Scot.

Fri, 12/06/2013 - 18:47 | 4223007 SAT 800
SAT 800's picture

Yeah, exactly. Dont' fight the FED; buy Silver. Then you can cheer them on; "Print some moar, assholes ! ".

Fri, 12/06/2013 - 20:52 | 4223304 PT
PT's picture

Don't they need the bears' CDSs so that they can manufacture the synthetic CDOs?

Does it still work that way or has something changed since 2008?
Perhaps we could time the crash by looking at the exit of the bears? 

Sat, 12/07/2013 - 04:12 | 4223906 Seer
Seer's picture

And that there's no other outcome for the Fed other than collapse.

Fri, 12/06/2013 - 13:34 | 4221873 firstdivision
firstdivision's picture

Being long just becuase of expected priting is a bad decision.  The only thing to be long today is PM's and having dry powder.  I wouldn't advise anyone to short in this environment, cuase you can easily be squeezed out and forced to help the market rise. 

Fri, 12/06/2013 - 13:42 | 4221898 zaphod
zaphod's picture

"Polite requests for the Chinese to allow their currency to revalue higher versus the dollar were rebuffed and in its absence expansionary American fiscal and monetary policy only served to make China richer. Not ok. So America fought back. With QE."

So am I suppose to be routing for QE here?

OK, so QE addresses the Chinese mercantilism issue, but destorys domestic savers in the process.

Another way is to just use a gold standard. At some point (rather quickly with current trade) the US will come up short on gold holdings, that then forces the Chinese to revalue their currenct and reverse the deficit, while at the same time not destroying domestic savers. That's they way it is supose to work.

Fri, 12/06/2013 - 14:25 | 4222080 dudeman
dudeman's picture

Well, that's the way the world works. You can't get something for nothing.

Sat, 12/07/2013 - 04:27 | 4223918 Seer
Seer's picture

"but destorys domestic savers in the process."

You need to consider the importance of "velocity" in all of this, that is, the "velocity of money."  The Big Gears operate based on high transaction volumes.  "Saving" is NOT beneficial for the Big Gears.  And, well, how can you pay off debts AND save?

Trade balances are ALL about exports.  The intent has never been to have a "strong currency."

The Chinese are fucked.  The couldn't reach "escape velocity" (impossible to maintain "growth" levels necessary to build up a powerful enough "middle class" to protect the "upper class" from the "lower class").  Again, as a reminder, China is not all that resource rich: the US, on the other hand, IS (though rates of consumption has the say on the overall importance/longevity of this).

And while exports are key, having too much of a dependency on them is also problematic.  Here's an view of it from Germany's seat (I'd warned long ago that Germany was also fucked, but most folks were too myopic to get it [too busy ganging up on all the "free-loading" EU countries and pounding their chests over how great Germany's economy/productivity was]):

This is the same fate for the Chinese, but, unlike the Germans, their population is a little more volatile.

BTW - My long-term strategy isn't to "save."  Reason being is that one gets nowhere by sitting on "wealth."  And, when you understand this you can understand why, in reality, TPTB are trying to force money to circulate (though, in the end, it fails).

Fri, 12/06/2013 - 13:44 | 4221906 Tim Knight from...
Tim Knight from Slope of Hope's picture

Interesting choice for the star pattern......

Fri, 12/06/2013 - 13:47 | 4221925 FieldingMellish
FieldingMellish's picture

Hendry vs Bass?

Sat, 12/07/2013 - 04:35 | 4223923 Seer
Seer's picture

Well, Hugh could ask Kyle about Kyle's stash of nickels...  Though I've tended to gravitate toward Kyle's thinking it doesn't mean that I sign on to everything.  ALL of these folks can only stab away at things.  None of them have enough power/influence to sway things to their levered position(s).

Only true "saviors" should be running around campaigning for "salvation."  Hedge fund managers and such can hardly be confused as being saviors of mankind...  The more they run around talking the more it means that they're desperate (trying to drum up business): one can witness this in marketing ads, when one sees a big increase of them it's highly probable that sales are insufficient.

Fri, 12/06/2013 - 13:47 | 4221928 novictim
novictim's picture

Godwin's rule #2:  When the "Gold Standard" enters the discussion, the discussion no longer holds any relevance to reality.

I'm out'a here!

Fri, 12/06/2013 - 14:30 | 4222111 Flakmeister
Flakmeister's picture

Yep... there are very good reasons why the international gold standard went the way of the dodo...

Hey, Au is a wonderful asset class but a really bad thing to tie your economy to...

Sat, 12/07/2013 - 04:41 | 4223925 Seer
Seer's picture

"a really bad thing to tie your economy to"

And what would be better?

Keep in mind that the "economy" essentially necessitates operating as a Ponzi: perpetual growth on a finite planet.  Without any means of tying things to the PHYSICAL world, which contains the REAL capital (natural capital), then it's but a free-for-all for deceptive practices.

NOTE: I did not down-arrow you because I'm expecting a meaningful response/discussion (not some popularity contest).

Sat, 12/07/2013 - 08:07 | 4224040 GetZeeGold
GetZeeGold's picture




I'm expecting a meaningful response/discussion


Yeah.....good luck with that.

Sat, 12/07/2013 - 12:51 | 4224502 Flakmeister
Flakmeister's picture

What you don't know about the failure of the international gold standard fills many many books...

Sat, 12/07/2013 - 12:51 | 4224498 Flakmeister
Flakmeister's picture

Tough problem, all I said gold has been shown to not work as an international standard, now if there was a single soveriegn nation, then gold might work...

But, I am not sure whether the denizens here dislike fiat most or the world being a single state.... Pick your poison...

BTW, I am not even sure there is a solution to the problem, but if there was, Energy would be closely related...

Fri, 12/06/2013 - 13:48 | 4221935 JustObserving
JustObserving's picture

The bottom line is that US debt and unfunded liabilities of $144 trillion today ($1,250,000 per taxpayer) can never be repaid.  Besides, they rise at $7.9 trillion a year ($69,000 per taxpayer).  So the Fed has to keep printing.  That ensures that we are in the beginning stages of hyperinflation.  So one must buy assets - any assets.  Even $5 million 2 bedroom condos in New York, Bitcoin, TWTR, FB, TSLA, NFLX.  Of course Central Banksters do not want you buying gold and silver as it undermines confidence in their power to print to perdition.

Fri, 12/06/2013 - 13:55 | 4221953 prains
prains's picture

don't you think one should be purchasing assests oriented to a "defensive" pattern. Condos in SOHO may be a great buy now but when the SHTF who the fuck is wandering down to the grocer arm in arm with the missus in NYC to pick up arugala salad.

Fri, 12/06/2013 - 14:04 | 4221987 JustObserving
JustObserving's picture

Wall Street is a scam that benefits most from the printing by the Fed.  So a lot of the money goes directly into NY real estate at the expense of everyone else.  It is no coincidence that condos in NY cost 20 times more than in flyover country.


Fri, 12/06/2013 - 14:11 | 4222023 prains
prains's picture

....and NYC will be ground ZERO for the zombie apocolypse, so good luck to all the SUCMO yuppies when the lites go out....arugala will NOT be on their shopping list! LOL



Fri, 12/06/2013 - 14:23 | 4222036 JustObserving
JustObserving's picture

Best to convert NY into a prison to keep the criminals in as in Escape from New York (should have done it 20 years ago):

 The film is set in a then-near future 1997 in a crime-ridden United States that has converted Manhattan Island in New York City into a maximum security prison (Wiki)

Fri, 12/06/2013 - 14:59 | 4222239 Rogue Trooper
Rogue Trooper's picture

Yep, the knockout 'game' will be looked back on as the good days.... those 'progressive' wankers are going to regret not having a tooled up AR in SOHO when the SHTF.

Payback is a bitch.

Fri, 12/06/2013 - 16:08 | 4222528 Marco
Marco's picture

Payback? You just get some of the shitty juppies.

The real rich have plenty of mountain retreats, ranches, backups for infrastructure collapses etc. Look at Ellison with his personal fully self sustainable island.

Sat, 12/07/2013 - 04:51 | 4223929 Seer
Seer's picture

"going to regret not having a tooled up AR in SOHO when the SHTF."

I'd think the regret would be to have not gotten the fuck out of there in the first place.  The POINT is that big cities are not sustainable; having a "tooled up AR" is meaningless: that "non-sustainability" part guarantees that, IF you hold off the zombies with the AR, you're going to starve.

I'll take this opportunty to remind people that you'll have to sleep at some point and that weapons aren't going to be all that valuable when you succumb to sleep.  While there may be some good tech gadgets out there for security I tend to find that things break when you most depend on them, and, for the long-haul it's better to go lower-tech.  Get a good dog: that's always been my FIRST choice in security.

Fri, 12/06/2013 - 16:37 | 4222631 ajax
ajax's picture



Escape From New York:

Fri, 12/06/2013 - 18:51 | 4223015 Angus McHugepenis
Angus McHugepenis's picture

prains: If I recall, you are a fellow AB-tan. For the record, I have no idea what arugala is and I refuse to Google Image Search it. It must be some sort of "healthy", disgusting weed (think Seinfeld and Newman with broccoli).


Fri, 12/06/2013 - 14:05 | 4221989 yogibear
yogibear's picture

"So the Fed has to keep printing."

Yes, Indeed.

The Federal Reserve has adopted Zimbabwe econimics. 

With penison obligations, welfare and social security  hyperinflation is their only choice. It just won't show up in the COLA numbers or in TIPS. 

Fri, 12/06/2013 - 17:51 | 4222878 Offthebeach
Offthebeach's picture

It's really not fair to put Gideon Gomo in the same category of a Greenspan/Bernanke. Gomo never set to trash the whole world.

Sat, 12/07/2013 - 05:01 | 4223933 Seer
Seer's picture

"The Federal Reserve has adopted Zimbabwe econimics. "

Economics has always been based on a big Ponzi: perpetual growth on a finite planet.  Zimbabwe only dropped out of the game sooner because it didn't have as much ammo/resources to burn through.

Principal + interest has never, in total, been fully repayable.  This FACT has always been covered over via "growth."  When growth stops, as it is mathematically certain to (finite planet), repayment is NOT possible.  Returns on "investment" become vapor.

Fri, 12/06/2013 - 13:58 | 4221954 q99x2
q99x2's picture

I'm not making much sense of financial analysis these days. I think the problem is that FRAUD is so prevalent and the basis for anything related to financial markets that it is not possible to logically conclude much. Everyone is forced to put all the world's money in under the control of central bankers--much like the fat, medicated, stupid and desperate that shop at Walmart.

We are doomed.

Fri, 12/06/2013 - 14:27 | 4222095 NOTaREALmerican
NOTaREALmerican's picture

Just depends what your definition of "doomed" is and who "we" is.

Fri, 12/06/2013 - 15:19 | 4222305 anonnn
anonnn's picture

That's why Hugh Hendry mentions FRAUD, over and over, in his learned essay.

Oh, wait...that word disappeared when I reread it. How strange.

Well, FRAUD is still there in spirit. It's always there when explanations are so long and complicated with multitudes of half-baked theories and fancy word-engineering [which itself is also just an artifice to pretend certainty gained from actual and repeated trials/experiences; oten by substituting complexity for understanding.].

Fri, 12/06/2013 - 18:22 | 4222939 lakecity55
lakecity55's picture

Have to agree. Too much unsustainable world-wide debt, rigged markets, lack of Law.

The only ones winning are the Casino owners.

Sat, 12/07/2013 - 05:17 | 4223939 Seer
Seer's picture

The "fraud" has always been there.  The "difference" today is that it's increasingly more noticable because time intervals are shrinking: exponential curve.  As I note just above, it NEVER has been possible to fully repay both Principal + Interest and that this fact is hidden via the "growth meme" (and when growth stops the music stops and the rush is on for a chair).

"Money" is but a certificate/token for power, a claim on power/resources.  If power/resources ain't there then "money" is worthless.

"the fat, medicated, stupid and desperate that shop at Walmart"

Can people PLEASE stop demonizing the poor folks?  (didn't Jesus have something to say about this?)  It only distracts from addressing the REAL underlying problems.

"We are doomed."

And this has to do with the fact that we're no different than yeast or the cancer cell.  However, there's really little we can do about it, so, as Derrick Jensen says, it's entirely possible to hold two conflicting ideas: one, that we're fucked, and the other, that life is really, really good.

Fri, 12/06/2013 - 14:03 | 4221990 madbraz
madbraz's picture

Really think this is "must read"?  It's more like "must justify why anyone would pay me or any of my hedgie buddies 2/20 any longer".

Fri, 12/06/2013 - 14:51 | 4222219 AndrewJackson
AndrewJackson's picture

This!!! The letter reaks of desperation, especially after zerhoedge posted the "I can't look at myself any more, I've turned bullish" article.

Fri, 12/06/2013 - 14:05 | 4221994 vote_libertaria...
vote_libertarian_party's picture

About that first chart.


He kind of fails to mention that was the lead up to the internet bubble.

Fri, 12/06/2013 - 14:24 | 4222077 NOTaREALmerican
NOTaREALmerican's picture

Re:  He kind of fails to mention that was the lead up to the internet bubble.

He's planning on "taking profits" on day 800.    No guts no glory.   

He's basicially saying the "markets" are just bubbles (aka male optimism) so that's the only game to play.  

If you don't play, you can't win.

Fri, 12/06/2013 - 14:11 | 4222012 NuYawkFrankie
NuYawkFrankie's picture

Re  ...price trends that in theory have no limit... - Hugh H.

In this case, however - the trendry is not your frendry, Mr Hendry

Fri, 12/06/2013 - 14:18 | 4222046 NOTaREALmerican
NOTaREALmerican's picture

Good article.  It's a good description of the past 5 years.  Seems to me he's simply betting on chart number 1 and that red line following the blue line for another two years.

I wish him luck.

Fri, 12/06/2013 - 14:27 | 4222090 ChaosEquilibrium
ChaosEquilibrium's picture

Really an admission of arrogant ignorance!!!!


What happens when Taper begins?.......EM/Asia begin contracting/collapsing/leveraged mis-matched books explode/ equities drop!!!


This will happen within 60 days!  Why would you 'close' your thesis 60 days short?


The first indicator of ignorance is attempting to match chart patterns at different times in History!!! That is simply a vain attempt to justify your 2 and 20!


FUCK YOU HENDRY---YOU ARE A CHARLATAN!....also makes you a thief to your clients...just as if Bernanke is 'stealing' from savers!  CLOSE YOUR FUND......PUSSY!

Fri, 12/06/2013 - 14:31 | 4222123 LawsofPhysics
LawsofPhysics's picture

 Math makes the "Taper" impossible, unless you think servicing that debt and those liabilites will be easier when short term rates explode higher.

Fri, 12/06/2013 - 15:35 | 4222405 yofish
yofish's picture

Are you really as frightened and angry (about nothing) as you sound? Do you live with anyone? I hope not. 

Fri, 12/06/2013 - 17:02 | 4222714 Tall Tom
Tall Tom's picture

It is not that he is angry about nothing. He lives in your world. He is living with an entire world. Nobody really lives alone.


Maybe he might even be your next door neighbor...and knowing how to make grenades....SOCIALIST!!!


Let me help him out...


And will not even know it.


Personally I am not frightened. But I am very, very angry. I do not reside with anybody. I am socially isolated by intent. It just serves to give me lots of time to work out plans and designs....for REVENGE.


I am...THE LONE WOLF. /sarcasm


You hope that he does not live with anybody?


You may just realize the fruits of your curse and the consequence thereof.


Now do you want to breed the next terrorist? You really want to breed someone who will blow up Pipelines or Oil Refineries? Haven't you ever read the Psychological PROFILES of people who do that?


"But...But he was so nice and so quiet. He just kept to himself. I am...I am just so shocked."


Now are you that much of a total fucking idiot to really want that?


You are a sociopath pretending to be a socialist. So who is the one who is frightened?

Sat, 12/07/2013 - 02:33 | 4223835 yofish
yofish's picture

I can make this a lot shorter than your self-love induced word salad: you're not a poet, don't write well and are most likely on drugs. Seeing as how the OP did not respond, but of course, fools will always rush in - enjoy your autoerotic jollies, sport.

Sat, 12/07/2013 - 05:22 | 4223942 Seer
Seer's picture

"Seeing as how the OP did not respond"

Like his entire aim in life is to be sure to wait around here to respond to YOU?

Don't you think that sometimes people need to get up and take long pee breaks (and maybe off to do something else)?

Whenever people resort to name-calling/label-dropping and drift away from using logic is when they've lost...

Fri, 12/06/2013 - 14:42 | 4222118 Ham-bone
Ham-bone's picture

Yeah, I get it.  Crack up boom.  Funny Hendry doesn't address what not to be long in...PM's or other commodities...for some curious reason these are not participating in this "be long anything (except commodities)"...too bad Hugh doesn't even touch this.

I'm coming to the conclusion and belief more and more that we will see $10 "silver" (paper) simultaneously to Dow 20k?!?

Fri, 12/06/2013 - 14:36 | 4222144 Dezperado
Dezperado's picture

I think the markets today followed this line of thought.

After the non farm payrolls and the unemployment numbers the first (and good) reaction was to fell, but after that it changed. "They`ll never taper" could be the reason.

Of course when you enter this kind of game you must have a feeling that you´ll know when to exit because, you ultimately think the others dont.

Of course this is madness not economics.

Sat, 12/07/2013 - 05:32 | 4223946 Seer
Seer's picture

"Of course this is madness not economics."

The older I get the more I see ecomomics itself as madness...  I believe that the word "economist" was defined as someone used to give cover to the lies/crimes of the wealthy...

Nature is artful in deception.  Humans are OF nature.  One is advised to adjust one's perspectives accordingly...

Fri, 12/06/2013 - 14:53 | 4222198 khakuda
khakuda's picture

It sure took him long enough to come around. Free central bank money for extended periods ALWAYS ends in a bubble. This is and will be the biggest yet because they won't stop stimulating to end it this time. The market will have to do that job, eventually. Yellen is going to drive this thing right into the wall at 300 miles an hour, as she foolishly believes that if she can't see inflation of at least 2%, money should be free forever, regardless of asset bubble formation.

Rest assured, it always ends in tears and a crash.

Fri, 12/06/2013 - 16:40 | 4222659 jomama
jomama's picture


Rest assured, it always ends in tears and a crash.

I wish I could access the data to model some kind of visual aid representing a time frame for this.  For just how much longer and world central banks devalue at increasing rates until inflation is so great that those in the middle in masse cannot afford to eat, pay rent, and go to work?  This divide increases everyday, in spite of this 7% unemployment bullshit number I keep seeing today.  More and more of my friends are either dropping out being a contributing member of society to going onto the dole.  There is no way this trend and continue indefinitely, and I don't see anything that could cause it to reverse.

Being far from a capable economist, I assume this is impossible to model, since inflation is being exported at varied rates to various second and third world countries along with deflation pulling prices of everything down because real producers at the bottom and in the middle are being stretched further and further every year?  Does it just continue until we have a polarized society like many of the second and third world countries around the world?

I guess if I had that model, I wouldn't need ZH, would I?

Fri, 12/06/2013 - 18:30 | 4222961 khakuda
khakuda's picture

I'm not convinced there are any capable economists.

I think a lot of people could agree that, if you are going to have a central bank, it's function should be to step in during emergencies to provide some liquidity and guarantees, if necessary (as they did in 2008 with money market funds to prevent a global bank run).

However, the next several years and several trillion dollars and counting have only served to keep the markets from clearing.  With all the subsequent and continuing rounds of stimulus, it became clear that that goal was not cleanse the system at all, either quickly or over time.  The goal was to create all the preconditions of the last bubbles, to create an even bigger bubble to create the appearance that all is well.  A smart economist interested in long term sustainable growth and minimal capital misallocation would have said, we need to ween ourselves off debt and we can do it in 2 ways.  Choice one, let it default, let market's clear and let prices fall and lose my job as a central banker OR, spread it out to take decades, figuring it took a long time to build, may as well unwind it very slowly.

They chose neither.  They decided that debt and unsustainable spending and capital misallocation wasn't the problem at all.  The problem in their mind was that asset prices were too low and needed to be raised a lot to prevent debt from defaulting, create a 'wealth effect' and all sorts of capital gains tax revenue like during the Clinton years.  The downside is unintended consequences that could arise, like the poor getting poorer or inflation, etc.  So, they are going to address all of these one by one with new policies to redistribute wealth like obamacare taxes, etc.

It's a 100% managed economy, not a free market.  One would think that with asset markets acting bubbly, the Fed wouldn't be pumping in more stimulus daily than they EVER have, but they are and continue to.  Hell be damned.  Yellen is telling you that she thinks stocks are cheap after nearly tripling in 5 years and inflation is non-existent.

The markets didn't fail, they were (and are) cajoled into doing things that wouldn't make sense in a free market, then they weren't allowed to adjust when reality reared it's head.  The abberation in the system is the Fed and Congress.  An economy with a central bank and central planners in Congress is FAR away from the limited government the founders sought and has led to most, if not all, of the problems were are currently in.


Fri, 12/06/2013 - 19:02 | 4223040 SAT 800
SAT 800's picture

yeah; no they're aren't any capable economists. It's a pseudo-science; like Sociology.

Sat, 12/07/2013 - 05:40 | 4223950 Seer
Seer's picture

"as she foolishly believes that if she can't see inflation of at least 2%, money should be free forever, regardless of asset bubble formation."

People need to quit mistaking what They SAY with what They KNOW/BELIEVE.  THEY pretty much have to say stupid things, as telling the truth would be like telling everyone that someone pee'd in the pool (and that outside of the pool was only raging fires): the path has been set- we're going to swim in this until the fires evaporate all the water along with the piss...

The "market," as we know it, is going to die along with the realization that growth is done.  We won't be seeing deliveries from Amazon drones...

Fri, 12/06/2013 - 14:59 | 4222240 Iam Yue2
Iam Yue2's picture

Hugh do you think you are?

Fri, 12/06/2013 - 15:03 | 4222255 moneybots
moneybots's picture

"This works. Well it works for the Fed. We estimate that total emerging market debt now surpasses $66trn."


The FED isn't 330 million American people.  It isn't working for us.

Sat, 12/07/2013 - 05:42 | 4223952 Seer
Seer's picture

And of the 750 million folks in India living on $0.50/day, it's not WORKING for them either...

Fri, 12/06/2013 - 15:05 | 4222259 paint it red ca...
paint it red call it hell's picture

lets see,

congressmen are bumbling turds
senators are corrupt opportunists
the POTUS is a gay facist
his wife's college buddy got the no bid obamacare contract
the queeen is a masonic bitch
charles murdered the princess
the aliens are gonna save us or take us
fukishima is a extinction event
the house of saud is going nuclear
CIA created Al-Qaeda
GHWB killed JFK
the zionists want WWIII
the NWO has us right where they want us
Iran are the good guys
bank of america loves bitcoin
the french will defend the middle east
nobody, but nobody in high finance or govmt goes to jail (unless they turn themselves in or don't take the bribe)

and Hendry SAYS (wait for it) ----- BUY EVERYTHING!!!

Yeh, that makes sense...............WTF

Fri, 12/06/2013 - 16:26 | 4222598 Solarman
Solarman's picture

Now that is one wall of worry.



Fri, 12/06/2013 - 19:02 | 4223046 SAT 800
SAT 800's picture

I used to enjoy his ultra-rationalism, and his prose; but I think I've had my lifetime dose of Hendry; as of today. He can go his way and I;ll go mine.

Sat, 12/07/2013 - 05:45 | 4223954 Seer
Seer's picture

And you forgot:

Depleting "Natural Capital."

When growth-based systems meet finite environments...

Fri, 12/06/2013 - 15:07 | 4222267 moneybots
moneybots's picture

" Where will this all end? Can it ever end?"


That which cannot continue, won't.  The question is when does it end?

Sat, 12/07/2013 - 05:50 | 4223956 Seer
Seer's picture

When you die?

The question is really only relevant when playing this game.  When the game is over the game is over.  Better to just turn and walk away.

Fri, 12/06/2013 - 15:11 | 4222285 moneybots
moneybots's picture

"You should buy equities if you believe many European banks and their sovereign paymasters are insolvent."


They are, but that does not cause me to want to buy equities, due to the ongoing financial fraud.


You should be long US equities if you are worried about the failure of Washington to address its fiscal deficits.


I am, but that does not cause me to want to buy equities, due to the ongoing financial fraud.

Sat, 12/07/2013 - 05:58 | 4223963 Seer
Seer's picture

Equities require support from consumers.

It's ALL tied together, in which case it will ALL fail together.  The ONLY question is what the contortions will look like, whether govts collapse first or whether "too big to fails" get taken over by govts (nationalized- for "national security" reasons).  The vultures will continue to feast for a while, but their numbers are ultimately limited.

Fri, 12/06/2013 - 15:14 | 4222295 moneybots
moneybots's picture

"It seems then to us that the most likely outcome is that America and Europe remain resilient without booming."


Resilient?  47 million on food stamps is resilient?

Fri, 12/06/2013 - 15:19 | 4222317 BandGap
BandGap's picture

With Spain, Portugal and Greece in the toilet employment-wise, and France and Italy sliding fast, too. What a dumb fucking stetement.

Hugh, how do they trun that shit around, especially with the youth employment north of 50%? Not only do they have to stop the fucking slide, they have to get enough momentum in the other direction to put these people to work.

Sat, 12/07/2013 - 06:02 | 4223967 Seer
Seer's picture

Add to that list Germany:

NOTE: I'd pretty much front-run this well over a year ago.

Fri, 12/06/2013 - 15:21 | 4222334 SheepDog-One
SheepDog-One's picture

I think what he means by 'resilient' is 'full-retard'.

Fri, 12/06/2013 - 19:25 | 4223097 reTARD
reTARD's picture

I'm here, LOL.

Fri, 12/06/2013 - 15:51 | 4222473 resurger
resurger's picture

Well, he recommends that "Part timers" and those of are "out of the working force" buy stocks, including those 47M on food stamps so that they get rich,

Wouldnt you be interested in getting rich?

Fri, 12/06/2013 - 17:42 | 4222859 Tall Tom
Tall Tom's picture

The United Kingdom is receiving emergency International Food Aid because the Queen cannot feed her people? Yes. That is one resilient economy across the pond.


Oh...Let them eat Derivatives. They can eat British Pounds. They can gulp air. Max Keiser was right about that. He hinted about the problem last week.

Fri, 12/06/2013 - 19:06 | 4223053 SAT 800
SAT 800's picture

Yeah, I know what you mean. I don't get it either; it sounds like he took some kind of chemical that was bad for him.

Sat, 12/07/2013 - 05:59 | 4223966 Seer
Seer's picture

Who needs Kyle Bass to go head to head with Hugh when we've got you :-) (well played!)

Fri, 12/06/2013 - 15:17 | 4222304 BandGap
BandGap's picture

Last stone to fall.

I see his admissions as the final straw for the camel's back to snap. He knows it, too.  There are so many factors in play right now that any attempt to predict what the next month will bring, much less the next year, is futile. 

Every indication is negative. Pick a country or pick a currency. Name any place on good old planet earth that is doing something positive in an economic sense NOT using extraordinary measures. There is nothing "normal".


Fri, 12/06/2013 - 15:17 | 4222312 Antifederalist
Antifederalist's picture


Kind of miss how this is a MUST READ letter.

I have been wrong.  Therefore, now I am right.  Expect a melt up. But do not worry, I will get you out in time.

What rubbish.



Fri, 12/06/2013 - 15:27 | 4222326 SheepDog-One
SheepDog-One's picture

Fuck me....if I could have only been full-retard equipped since 2008, I could be a billionaire by now.


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