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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.

CHART PAGE 7

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 - 18:38 | 4222985 Angus McHugepenis
Angus McHugepenis's picture

SD1: A retarded billionaire? Like Hugh? Looks like baby Hughie was spanked hard by somebody recently. And don't get me started on, ah fuck it.... here goes....

Why do we Scots wear nothing under our kilt? Because we're too fucking cheap to by underwear!

Fri, 12/06/2013 - 22:37 | 4223552 Yen Cross
Yen Cross's picture

  Nice quote angus. I love the Scots. Bitchez play golf in the middle of winter in kilts.  No STDs in scotland.

  What happened to that Scot James Bond? He ran off to Bermuda and such...

Sat, 12/07/2013 - 02:45 | 4223807 Angus McHugepenis
Angus McHugepenis's picture

Fuck Yen, I said don't get me started, lol!

 

Edit: Hugh the Hendry is a wee Scot, and he just showed us all what is up his kilt. NO BALLS! Doo any'ya need a tranlaycion from Scot to Irish? Fuck off if ya doo.

Fri, 12/06/2013 - 15:23 | 4222335 moneybots
moneybots's picture

"Japan will struggle to produce the incremental GDP necessary to service and repay its gigantic sovereign debt load"

 

How does Japan repay debt which it keeps expanding the amount of? 

Fri, 12/06/2013 - 15:27 | 4222351 yofish
yofish's picture

I get it now. People who post here are not interested in making money other than selling homemade crafts at the Sat. farmer's market. Once and awhile ZH puts up a piece that is actually worth reading. I think this is the first one I've read in entirety for a month. One that was longer than a paragraph, anyway. HH's piece is a great read. I've never been interested much in economic theory but I've always been interested in taxonomy:

 http://mises.org/daily/155/

 

Fri, 12/06/2013 - 20:27 | 4223246 tradewithdave
tradewithdave's picture

I know... I know.  At least BusinessInsider covered the story that the world's ugliest dog had died... Elwood.  By the way... it's "once in a while" not "once and a while." 

 

http://www.businessinsider.com/worlds-ugliest-dog-elwood-dies-in-new-jer...

 

 

Sat, 12/07/2013 - 02:51 | 4223848 yofish
yofish's picture

Usually I hate spelling, punctuation (they piss me off the most, the nit-fucks), syntax and etc. nazis. Thanks anyway. I do try and get better at what is difficult for me.

Fri, 12/06/2013 - 15:35 | 4222395 Element
Element's picture

Can we forget about those prophet of doom interviews he gave a couple of years back now? I guess that was all baloney too?

 

http://hussman.net/wmc/wmc131202.htm

Fri, 12/06/2013 - 15:33 | 4222396 Fix It Again Timmy
Fix It Again Timmy's picture

How bad can it be?  See how at the 30 second mark...

https://www.youtube.com/watch?v=M30qqFdqLkg

 

Fri, 12/06/2013 - 15:49 | 4222454 resurger
resurger's picture

Dear Hugh,

You sound like if the Fed is doing us a favor by countering this "Currency War" by printing more QE. What you need to say is that the Government of Merica is broke it's that simple.

I agree with you on the bullishness part, you can not apply Technicals and Fundamentals in a broken markets, even Risk Analysis does not work anymore.

But ask your self this, if the fed did not print:

1- The Americans could have bought more Chinese Stuff.

2- The Americans could have got a good return on their deposits, hence make more money and spend more.

3- The deposits base (which will increase the credit base) will be higher, more loans would have been made by the banks to the people.

This one caught my eyes:

" re-emergence of risk-seeking bankers fuelling a lending boom in the West seems remote"

Of course, what is the most important thing in a bank? Do you think Equity or Bonds, of course not it's the "Net Interest Income" NII from loans, that's what generates most of the money. And from my banking experience which fucking bank would lend to someone at Zero? Why would i pay you on my $1M 10% while you get this fucking money for free? NO WAY

So you wanna play this broken market, play it i really want you to take a look at Zimbabwes Stock market index for the past 25 years.

Sat, 12/07/2013 - 06:26 | 4223984 Seer
Seer's picture

"The Americans could have got a good return on their deposits, hence make more money and spend more."

"Americans" were WAY in debt BEFORE the Fed starting "printing."  72%+ of US GDP was "consumption."  The "game" had long ago been based on transaction volume (money velocity- this got a HUGE push during the Reagan administration when the first laxing of financial regs took place [though it is in no way the CAUSE of our problems, which we set in stone A LONG time ago]).

If you're massively in debt (especially interest-laden) you're NOT going to be able to repay AND save AND prop up the "consumer" economy.

"The deposits base (which will increase the credit base) will be higher, more loans would have been made by the banks to the people."

The PROBLEM was TOO much credit rather than not enough.  The transaction-based economic world HAS to exponentially increase transactions, so once deposits were no longer enough it was necessary to start accepting more and more "collateral."  What the Fed has been doing is just the same thing that had been going on for a while.  The "difference" is that perpetually increasing returns means a need to increase growth.  The Fed, via Greenspan, cooked up ways to do this: the time so start shifting into the "saving" mode was then; now, and perhaps this might be some of what Hendry is getting at (I don't know, I can't read his mind and all I seem to comprehend from him is that his previous "knowledge" failed, which then undermines any attempt to present himself as being prescient, again), no is/might be the time to use cheap money to buy assets (assets are always what you eventually want- the game is always about getting good deals on them).

"Interest" is only possible if there's growth: in fact, had me paid attention to this correlation as it was orignally founded, by the Phoenicians (http://phoenicia.org/interest.htm), we might have had a shot.

There is no "solution" because we're not identifying what the REAL problem is.  I suggest that the problem is that we're still trying to apply "solutions" to a growth-based system when a growth-based-system is no longer able to function (because of the REAL physical world- lack of natural capital to back up demands for future growth).

Fri, 12/06/2013 - 15:49 | 4222463 ivana
ivana's picture

he cannot find the tree in a forest

Sat, 12/07/2013 - 06:29 | 4223987 Seer
Seer's picture

I think that the problem is that we're IN the forest and there's a raging forest fire!

Fri, 12/06/2013 - 16:00 | 4222503 ebworthen
ebworthen's picture

Short version: 

"When in Wonderland, one must converse with the Caterpillar and the Mad Hatter."

Fri, 12/06/2013 - 16:05 | 4222519 Toolshed
Toolshed's picture

The perfect synopsis. +1

Sat, 12/07/2013 - 06:30 | 4223990 Seer
Seer's picture

Calling William, William Banzai...

Thanks for the chuckle!  Maybe we can set up that debate with Hendry and Bass and have Bass pull out this line?

Fri, 12/06/2013 - 16:04 | 4222511 Papasmurf
Papasmurf's picture

The chart is useless without overlaying bond rates.  There is no secular change like we had in the mid ninties with the emergence of the internet into common use.  The secular change this time is a bubble in  the fed reserves balance sheet expansion along with a bubble in federal deficit unfunded obligations.

You can stay at the party longer and maybe snipe off the last bit of the rally, but the downdraft this time will be 50% in a matter of days.  Good luck calling that unless your the one who causes it.

 

Fri, 12/06/2013 - 16:04 | 4222516 Toolshed
Toolshed's picture

I really enjoyed the author's explanation of what motivated the fed's actions. It almost makes it sound like they know what they are doing. On the other hand, historical evidence would suggest otherwise. However, his explanation of the various trading strategies for various scenarios sounds a lot like a woman rationalizing about why should should pay way too much for something she does not need. I have stayed on the sidelines and only put money into physical pm's. Yep, a real loser so far, but not nearly as big a loser as one could be in the near future playing the paper shuffling game. I wonder how he sleeps at night?

Sat, 12/07/2013 - 06:47 | 4224001 Seer
Seer's picture

Again! the Fed is NOT stupid!  If they are stupid then what make you?  THEY control everything.

Sun Tzu preached to not underestimate your opponent.

"I have stayed on the sidelines and only put money into physical pm's. Yep, a real loser so far, but not nearly as big a loser as one could be in the near future playing the paper shuffling game. I wonder how he sleeps at night?"

If you're "on the sidelines" then you're AT the game!  Fuck!  Get away from it all!

I woke up today, have no significant pains, am sufficiently sheltered and have not gone hungry.  I am, therefore, today, a "winner."

Sitting on a stack of PMs is no "plan."  It is, for the most part, little different than promoting a revolution without having any idea of what to do AFTERWARDS.  The aim is to have working assets.  Sure, PMs are assets, and better than holding fiat (or other paper-based things), but their value is as a currency (to acquire things like working assets).  Well, that's my take on it, it's how I roll...

Fri, 12/06/2013 - 16:08 | 4222529 lasvegaspersona
lasvegaspersona's picture

Hugh is just sad to be right but be loosing. If it were just his money he could sit back, all smug, and think'just you fools all wait'.

The latter is what most here seem to be doing, I certainly am. We'll be right and richer. Hugh is facing the problem of having to please other, less rational people. Good luck Hugh. In the long run I think e eryone would be better off if you stuck by your head but I do see the need to cater to those who think with their hearts.

Fri, 12/06/2013 - 16:23 | 4222586 Central Bankster
Central Bankster's picture

career risk is a bitch.

Fri, 12/06/2013 - 16:17 | 4222553 reader2010
reader2010's picture

The stronger argument is that it's truly different this time. 

Fri, 12/06/2013 - 16:37 | 4222646 toros
toros's picture

I've been reading this stuff for awhile now expecting there to be a governer that will self regulate the system.  It started with saving the retirement accounts, then went to the recapitalizing the banks, then recapitalizing small countries, now we are up to recapitalizing Japan and China.  Though it all, it was wash rinse repeat.  It looked like inflation was going to regulate the system, but though the magic of balance sheets, that has faded as the wealth of many becomes the wealth of a few.  Bitcoin looks to be challenging the system, but I suspect it will fail as retailers won't be able to bear the volitility that comes with it, and there will never be enough money in the bitcoin system to make a difference.  The cental banks will never allow bitcoin to trade above gold.  So it looks like we may have a new system.  One of capture, and control.  This is one of those unforetold outcomes of our brave new computer world.  In the past this could not have been possible, but now you need a keyboard to raise(or lower) the market cap of a county by $100B.   It is different this time. 

Sat, 12/07/2013 - 07:06 | 4224016 Seer
Seer's picture

While I agree that it's different this time, I believe that the real measure isn't what most use.

For me, I see this as still all being of the same mechanics.  There's no real significant change in the greater structural arena.  What I DO see as being different is TIME. Your comments tend to point to this as well.  It's the frequency at which things are occurring.  Since I tend to see things through logical/mathematical lenses I suggest that what we're seeing is a perfect correlation with the behaviors of the exponential function.

Economics, and all its numbers, is basically tied into the notion of increasing -GROWTH_BASED- wealth.  Wealth can really only come from physical resources: yes, wealth can be "value added," but REAL wealth stems primarily from pre-existing physical stuff; one need only look at the wealthier nations to see this (one that are wealthy but don't have physical resources are likely where they are from past acqusitions [imperialist actions] or rode on the coat-tails of from extraction booms of other nations- Japan and Germany can be placed in this category).

I don't think that people like Hendry can comprehend what "economies of scale in reverse" means.  Most that can only think in terms of (positive) growth are unable to do so.  As such he/they will miss the real drivers....

Fri, 12/06/2013 - 16:48 | 4222700 RaceToTheBottom
RaceToTheBottom's picture

"Don't fight the FED"

Now pay me 2-20!

Sat, 12/07/2013 - 07:08 | 4224017 Seer
Seer's picture

Another winner! :-)

Fri, 12/06/2013 - 17:11 | 4222768 Yen Cross
Yen Cross's picture

   I sure as hell wouldn't want to be short the dollar going into the Fed. meeting. 

  I'm still scratching my head over the dollar selloff today. The news was good across the board,(we know it was horseshit) and I'm guessing TPTB knew it was as well. That tells me there was some repositioning going on. The markets are not pricing in a December taper. The markets are looking at the fed in a "Little Boy Cried Wolf" sort of way...

 It could be a major miscalculation, even if the Fed. takes a different more hawkish stance, without tapering.

Fri, 12/06/2013 - 17:50 | 4222873 mccoyspace
mccoyspace's picture

This is what I come to this site to read. What an amazing letter.
It says it all.

Maybe it's time to bring the curtain down on this site. What more is there to say? Fire it up again after the Big Crash.

Fri, 12/06/2013 - 18:15 | 4222921 Black Forest
Black Forest's picture

Hugh said through complex words that currencies steadily devalue, and the nominal valuation of (most) assets follows accordingly.

Sat, 12/07/2013 - 07:11 | 4224019 Seer
Seer's picture

"Fire it up again after the Big Crash."

While I'd vote for this as well, I'm afraid that it isn't likely going to be possible, not with the kind of crash that'll be happening.  AND, well, before I forget to mention it, I LOVE ALL OF YOU FOLKS HERE! (except of course, well, you know who you are!)

Fri, 12/06/2013 - 19:21 | 4223088 reTARD
reTARD's picture

Perhaps just do what a number of big managers have done. Return your investors their money and close shop.

Sat, 12/07/2013 - 07:29 | 4224024 Seer
Seer's picture

Not enough spot-light in That.  Not enough to rub the ego with...

As with all "screamers" like Hendry, people eventually tire of the screaming.  I think he only adopted his "stance" because it allowed him to scream...

Sat, 12/07/2013 - 18:18 | 4225259 yofish
yofish's picture

Now that is a stupid last sentence. Maybe you read a different piece than I did because I didn't detect any 'screaming'. Now, if screaming to you in the written word means the us of punctuation, as in an exclamation, then, carry on....As I get tired of you and your home-spun psychologism. 

Fri, 12/06/2013 - 19:30 | 4223110 Yes We Can. But...
Yes We Can. But Lets Not.'s picture

I suspect that what I just read above is scriptwriter Hugh Hendry's pending huge box-office flop Wrong & Wronger.  I'll bust out the popcorn and watch for it.

Fri, 12/06/2013 - 19:39 | 4223122 Notarocketscientist
Notarocketscientist's picture

What has changed since 08?  Nothing. 

Loans are being forced into the economy - subprime auto loans - student loans that will not be repaid - zirp cash handed to the likes of Blackrock

There are bubbles and risky loans everywhere - this is going to end just as the easy money housing bubble ended - with a resounding CRASH.  And Europe is in far worse shape - if that is possible.

American and Europe 'resilient' - what are you smoking Hugh?

Fri, 12/06/2013 - 20:02 | 4223179 forwardho
forwardho's picture

Let's look at what happened in 1998.

Why?

In 1998 the Fed did not dump 750 billion into failed securitys, Then continue to to dump over a trillion per year there-after.

If you find yourself in UNCHARTED waters, throw out the old charts and open your eyes.

Too many people lookin back.

Sat, 12/07/2013 - 07:38 | 4224027 Seer
Seer's picture

"In 1998 the Fed did not dump 750 billion into failed securitys, Then continue to to dump over a trillion per year there-after."

I think this needs to be emphasized more.  I do NOT believe that this was so much a failure by the Fed so much as it was sheer desperation in response to how bad the underlying fundamentals really are.  It's kind of like how I saw the invasion of Iraq: many claimed Bush et al as being "stupid," but I ultimately came to view it as more of a desperation move to hold off potential energy market contortions (Iraq was soon to be free of the sanctions on/against it's oil, and it was pretty clear that US/western interests would be held back).  TPTB don't do "stupid." (if they do then that means the rest of us are really fucked up)

If ever there was a description of what's been going on it is this:

"The secret plan is that we're going to keep doing exactly what we've been doing, for as long as we can."

- Daniel Quinn, in, "What a Way To Go"

Fri, 12/06/2013 - 19:42 | 4223129 devo
devo's picture

You'd be stupid to not participate in this massive wealth transfer from the savers to anyone who owns stocks. Even if you love gold; cash out your stock winnings to buy it for free.

Hendry is late to the game and will likely lose, but there's more to run...

Fri, 12/06/2013 - 19:53 | 4223158 theprofromdover
theprofromdover's picture

"He said he wiz gettin aff at Paisley"

Fri, 12/06/2013 - 19:52 | 4223160 Heroic Couplet
Heroic Couplet's picture

We have Wall St., Venture Capital Funds, money sitting in offshore accounts, and numerous tax dodges. No one cares what Hugh Hendry thinks about anythikng.

Fri, 12/06/2013 - 20:02 | 4223181 theprofromdover
theprofromdover's picture

No Hugh, the smart mouse would get out of the building.

This is not a game anyone with any experience should be playing. Someone else has control of the rules, and the umpires.

Go buy some farmland, or London real estate. You'll sleep better. Folks like you daren't fall asleep in this putrid market. Why bother, there is no return. And if you look like making a return, they'll steal it off you.

Sat, 12/07/2013 - 07:46 | 4224030 Seer
Seer's picture

"Go buy some farmland"

At the very least at least look to get out into the country side.  But... at some point it'll be too late, as folks in the country side will be too wary of newcomers (when things start to go bad).  Sometimes you have to compromise, you have to get going even though you might think that you should "hold out" for a bit longer.  As Winston Churchill once quipped: "Sometimes you have to do what is necessary."

Playing in the markets is really only now for addicts that don't know when to quit.  The end pronouncement is likely to resemble that of the surgeon who declared that the operation was a success (Hey! I made a TON of money!), but the patient died (the money really wasn't usable anymore).

Fri, 12/06/2013 - 20:33 | 4223256 Stanley Lord
Stanley Lord's picture

HH recently said it was insanity to own gold mining stocks for the usual reasons.

With this bullish call by HH I am starting to like the idea of gold mining stocks.

Fri, 12/06/2013 - 21:18 | 4223343 honestann
honestann's picture

Hugh is a smart cookie, but his thinking and analysis presumes too many "usual assumptions" in my opinion.  Maybe for him to keep his business, he must do this, but that means I lose interest in hearing his rationales.

What I mean is, what the western world looks like going forward cannot be properly compared to what has happened before.  Look at the news story about Japan today, for just one instance.  Not only have the predators-that-be decided to go increasingly full-bore aggressive over the next few decades, they have made clear they don't even intend to bother with pretense [for the most part], either because they don't think they have to any more, or because they know their existential actions will soon be so over-the-top egregious that even braindead sheeple cannot fail to notice.

Perhaps the simplest way to explain what I'm trying to point out is this.  Hugh is absolutely committed to playing [almost] exclusively in paper sandboxes, which just means, he restricts himself to paper vehicles.  But what if everyone playing paper games is being set up by the predators-that-be?  We all know, paper games are far and away the easiest for the predators-that-be to manipulate and steal from (which is why ZH contains a never ending fight of words between advocates of paper instruments versus advocates of "hide your precious metals where nobody can find them" and similar notions.

To play in paper sandboxes in the coming years is to be completely exposed to the whims of all sorts of predators, from the predators-that-be at the top, down through the many lower and more local levels of predators who also tend to feed off the easiest prey.

To play in physical sandboxes is a way to be much less exposed to predators of all types, at all levels.  I'm not saying every physical sandbox is safer or less exposed, but some of them are, and I am not just talking about holding and hiding physical precious metals here... or even alternative physical goods.  Partly I'm talking about where are your physical sandboxes (which countries, provinces, states, counties, etc), and partly I'm talking about what kind of physical sandboxes you play in, and how "out of sight, out of mind" are they (or at least, how uninteresting do they appear from the outside).

I will now grossly oversimplify, and admit I am doing so.  But this nonetheless expresses the general attitude and direction of what I'm talking about.

First, here is one possible scenario of how people playing in paper sandboxes will do over the next few years.  Yellen keeps yelling "print, print, print" to "make sure the economy is actually doing better and on a solid foundation".  I'm not sure why, but I seem to be the only person who noticed something astonishing Yellen said recently, that shows how both Obama and the Fed intends to PR the next year or two.  Yellen pointed out something true, but something that people in the Fed never say --- that real unemployment is vastly higher than reported unemployment.  Why did she do that?  The most reasonable assumption (or so I believe) is that she is creating her excuses for raising and extended QE, for tapering up QE over the next year.  At the same time, the statistical lies saying unemployment is falling will continue to come out (until almost nobody is employed), which Obama and his cronies will sing loudly to praise and justify their performance and actions.

Which leads to what?  To what we all know... an absolute commitment to cause inflation and prevent deflation, no matter how strong deflationary forces may be.  She will jam the monetary fire-hose into JPM, GS and the other predators-DBA-banksters who own the federal reserve, turn the pressure up high, and force the banksters to buy more and more and more paper assets, and eventually convince even "regular folks with savings" that they cannot afford NOT to play in these utterly manipulated paper sandboxes (to protect themselves, they image).

The oversimplified outcome in a few years (if they can keep all the increasingly large flocks of black swans they created from screwing up their scam), is this.  Everyone playing in paper sandboxes will "double their money" (but very well could be triple, quadruple or possibly even 10x their money).  And the so-called "value of the dollar" (DXY or equivalent) will still be about 80 (where it is now).

So all these people playing in these paper sandboxes will be very happy indeed (except the tiny percentage who remain honest with themselves (and their clients) and understand what I'm about to say next).

So, the actual results of playing in the sandbox is this.  You doubled your money.  Now you pay 50% taxes on your gains (all forms of taxes).  So okay, you only realized a 50% gain, not a 100% gain.  Right?

Well, no.  Because DXY is a measure of the dollar versus other fiat currencies, not against milk, broccoli, gasoline, health-care and other expenses.  In fact, the dollar is worth half as much as January 1, 2014 when we started measuring the performance of our little paper and physical sandbox experiments.

So the bottom line is, your 100% gains are actually 0% gains... your "nominal" AKA "paper" gains were not real gains.  But at least you protected yourself from inflation, right?  Hurrah for you!  But oops!  Wait a second.  You paid 25% of your gross in taxes on gains that were not real.  So all you very proud players in paper sandboxes, who run around wasting money and bragging to everyone because you think you are so rich and so smart, actually LOST 25% in real terms.  And this doesn't even count losses from wasting money on stuff you don't need because you "feel rich" due to the fake "gains".

This is just one (probably the simplest) results of playing in paper sandboxes for the next few years.  In fact, this is probably one of the better case scenarios, because it assumes no black swans will screw up your (and their) schemes... which is one hell of a bet when the actual dislocations and malinvestments are so extreme.

On the physical side, one only need figure out a few real (and durable) goods that will remain in demand... and hide them away.  That is probably the simplest physical sandbox to play in.  But vastly more lucrative physical sandboxes exist.  If you can figure out a reasonable place to locate, and a good that will remain in demand, then setting yourself up with a productive facility can lead to vastly better results.  As the world becomes more and more artificial, and more and more inefficient due to malinvestments, you will be far, far, far ahead if your wealth happens to be in the form of a facility and machinery (or whatever it takes) to produce some real, physical goods that everyone always wants or needs.  Could be food, could be some form of fuel or energy, could be an efficient low-cost healthcare-for-cash business, could be anything people continue to consume when times are bad.  And if you have a facility that can expand output simply by adding more workers, you will not only get rich, you'll be a hero and life-saver for a great many people who did not have the vision you had.

The bottom line is... Hugh is stuck in the wrong gig, and has no plans to change his occupation.  Too bad.  It is always more satisfying to see smart folks spend their time, effort and genius in more productive areas.  But I guess Hugh is not that flexible, or not so inclined.  Fortunately, very few other people on this planet are in the same situation as Hugh.

Oh, and I didn't even account for the probable implementation in the next few years of either or both of these:  "various forms of bail-ins", and "one time wealth-tax".  Which means, those who wish to play in physical sandboxes should get themselves and their wealth out of dodge, and keep both well hidden (and NOT in any paper form).

Sat, 12/07/2013 - 06:02 | 4223964 lewy14
lewy14's picture

Bravo, honest ann. Heartfelt and headstrong.

A few points, though.

- Essentially - perhaps without meaning to - you made the case for playing along in the paper market. It's the only choice many people have. I have family for instance who are in their 60's, past the age where they could act on your advice to go physical... if they don't play, they will lose for sure. If they play, they may break even... so why not play? So many are in this position that the Fed games will "work"... for a while... this is consistent with HH's position as well.

- Read the "thought leaders". Read Krugman, and his ilk. Read Izabella Kaminska at the FT, and the posts she links. Where are things headed? The government will be the "employer" of last resort. Guaranteed Minimum Income. Anyone opposing this will be "on the wrong side of history", vilified as a "really terrible person", audited, harassed. You are correct, they are playing hardball now, and this is what's coming, and there will be no real debate. The usual "conservative" suspects (Chamber of Commerce, corporate America) will love it - guaranteed demand. More Treasuries -> more capacity for QE. The US will do it and the rest of the world will follow - or some country like Japan will do it (per HH) and the US will be compelled to follow. There will be no austerity. The boom will play out for some time.

- In the meantime, the apparatus of the totalitarian state will become much, much more efficient and pervasive, from it's already scary current state. For one thing, there is no such thing as "well hidden". I follow the capabilities of big data analytics because of my professional commitments; social network analysis capabilities are frightening (and lucrative). Anything anyone gets away with in the next ten years will be because the authorities choose to let them. The social graphs are very complete; that you are not on Facebook is of no help in hiding. No preference cascade will ever again sweep any OEDC power. Look at Greece. Look at Spain. Shouldn't those countries be on fire right now? No revolution is possible anymore. The Snowden revelations prove that what the global intelligence network does is constrained only by what is technically possible - which is very, very comprehensive, already.

- Increasing "harmonization" and "international coordination" will be the response to every crisis. There will be nowhere to hide.

In the end the state will have such fine grained control that paper markets will crash and it will be reported in the state propaganda as a kind of relief; a breakthrough to "post scarcity, radical abundance"... which of course will be as accurate as any slogan in 1984. Red-pill reality will be a kind of free range FEMA camp. 

You presume the freedom to grow what you eat, make what you need. Perhaps you presume too much.

Sat, 12/07/2013 - 08:13 | 4224042 Seer
Seer's picture

Excellent reply!

I do not, however, believe that all actions, or the primary currents there of, are initiated with nefarious intent.  I believe that it's just a natural progression, one of increasing control to "protect" key/existing systems*.  Increasing controls always become self-defeating: we're never able to pull back because the controls get latched on to by various interests who then do what it takes to keep them going.

* And none of us are free of the potential downsides to the loss of such systems.  Seeing it this way then gives one an idea as to how folks tasked with introducing/managing controls (can think in terms of police enforcement) view their roles.

As resource scaricty becomes greater there WILL be greater out-right theft, and from larger soveriegn entitites threats of military take-overs (of other soveriegn's resources).

So, by "natural" I really mean that it'll be fairly predictable along the lines of resource management from any entity: if my budget starts to get squeezed I have to place tighter control on spending- I need tighter protection of my $$ resources.

All of this is easily predictable for ANY growth-based system.  It's NOT a management problem, but a System one.

Sat, 12/07/2013 - 12:24 | 4224415 Bogdog
Bogdog's picture

Ah, the SYSTEM! The system as I've always envisioned it is a living creature that always seeks self preservation and growth. To do otherwise would mean suicide. It will defend itself against all perceived attacks and change it's very nature (birth right of individual liberty, free men) in the name of self-preservation. And so, all that you have or think you have is vulnerable to the whims of the creature as it lives and grows and absorbs all around it. It is the body politic, the state, the ENTITY. There is no hiding. Hording gold and silver? Try eating it when capitol controls prevent you from selling it. Growing your own food? It will be confiscated. Have a windmill on your homestead producing electricity? That's not yours anymore. Confiscated. Bank account? Nope. All is vulnerable. No place to hide. This is the endgame. This is the natural evolution of the ENTITY. Total control. The STATE owns everything. Including you and your labor. It is the natural result of every trendline we see and blather on about on ZH.

Therefore it is intuitively obvious to the most casual observer that the alternate outcome is dissolution and death of the ENTITY. With whatever causes the breakup/collapse there is new freedom from it in the chaos. Smaller, locally run provinces and communities rise from the ashes. Agrarian in nature. The return of anything industrial would take decades (if it ever returned) as the capitol required would have gone up in smoke. 

So which would you choose, as if you even had a choice? To live in a semblance of fearful safety, albeit under the all powerful iron heel? Or to live as a free man on a farm in the year 2102, toiling endlessly but enjoying the fruits of your own labor? There will be no IPads in 2102. Again, the choice will be made for you.

The humble amoeba writ large.

Sun, 12/08/2013 - 02:17 | 4225856 honestann
honestann's picture

No need to wait until 2102.  I finished my high-tech self-sufficient farm in 2012.  The year 2102 is 90 years too late.  By then the best places in the extreme boonies may all be taken.  Long before 2032, much less 2102, we'll be off this predator-dominated planet, at which time the human predators will completely consume their human prey.  Get out of dodge or be prey.  Those are your only choices with significant odds of success that don't involve becoming predators yourself.

Sat, 12/07/2013 - 23:16 | 4225845 honestann
honestann's picture

Basically true.

But final results depend on who plays hardball.

You may be correct that the paper market will continue to boom for several years before the utter non-viability of it causes a massive dislocation.  As you say near the end of your message, the paper markets will crash, and the predator propaganda will report this as both "a victory" and as "justifications for the predators to practice even more extreme powers".  Also, remember that you've been fleeced of 25% of your wealth every year at tax time, due to the scam I mentioned above.  So when the paper markets do crash, you're already poorer than when you started, and so the crash leaves you... devastated.

In contrast, if you wisely chose which physical goods to hide away, after all the up-years and the crash, your savings are worth as much as when you chocked them away... at least.  And compared to the herd of sheeple, well, you're in positively great shape (but only in comparison, if you're still living in one of the mean, nasty, horrific, predator-controlled police-states).

I basically agree with what you say... except for those folks who really, really, really do play hardball too.  And I don't mean "join the tea party" or "elect Ron Paul" or even just "store away gold and silver".  And I definitely don't mean fight the predators in any direct way (unless you consider finding ways to avoid their fangs, and refusing to take actions that sanction, support and defend them as fighting, which I don't).

The very fact that you fully understand how bad the totalitarian state has and will become in the near future should motivate you to move some place where the predators are less capable in practice (like "keystone cops") if not a bit less egregious in theory (which does exist, and will continue to exist to some degree).  Perhaps the most important fact to understand is... the predators focus their time and energy on population centers (plus any electronic transmission they can intercept, decrypt and comprehend).  If you live a simple life in the extreme boonies, you can be completely off their radar, either by being completely invisible, or by appearing transient and/or poor.

If you're gonna say, "most people aren't cut out for that", you are correct.  Just as most people will continue to pretend the predatory systems are somehow legitimate, not just "enforceable".  Nobody has a plan that will save the majority, or even a sizable minority.  Too few people will be honest with themselves to even correctly characterize what is happening, and what is coming.  And of the few who are honest with themselves, very few are willing to play hardball - which again, does not mean fighting, but instead means taking smart actions, keeping your wealth in some form, and if possible, having what you need to continuously produce more goods over time... for your own consumption, and for trade with others in the boonies.

There will indeed come a time, probably very soon, where almost NO public form of communications will be practical for those who disconnect from the system.  And so we will have to implement private forms of communications, and/or implement schemes that hide our real communications within much larger banal communications that also must pass through many levels (with random delays at each node), to prevent the very effective kinds of association inference processes that NSA currently operates.  I am a lifelong techie (scientist, engineer, product developer), so I understand both how amazing are the capabilities of the predators-that-be, and also how infinitely more ways to communicate securely exist.

All populated areas of the western powers already ARE free-range FEMA camps.  What people call FEMA camps are just for whatever more problematic sheep arise.

I presume the freedom to do whatever I wish.  However, I also presume every action I take has consequences, and always estimate both the probabilities and the severity of consequences of every action before I take it.  Yes, I presume to eat everything I grow, and do whatever I wish with everything I design, develop and implement.  Unlike 99.99999% of humanity, I have taken extreme measures to put myself in a situation where I can.  This require expenditure of 90% of my life savings, several years to locate the perfect spot on this planet for me, and a year to build out my little self-sufficient digs in the extreme boonies... in a place where land access is now impossible (without constructing a bridge over a slot canyon), and where nobody can see signs of my digs from more than 100 meters altitude above me, and where nobody lives within 125km, and only a few hundred people in tiny groups within 250km.  Yes, most people won't go that far, and too bad for them.  Nonetheless, there are lots of steps people can take to improve their future.  While anything can work for a while, I don't believe playing with predators in predator/paper sandboxes is a very wise move.

Ultimately, the only solution is to get out of dodge... again!  Yes, get out of the more predatory and capable locations on earth as a temporary measure.  But long term, the only solution is, get off this planet.  The nature of space is such that predators cannot effectively operate in a solar system.  Too much volume.  Too easy to hide.  Too much energy required for predators to attempt to steal or intimidate sheep to hand over their goods... plus, we can see predators coming millions of meters away, and they are sitting ducks.  Sadly, space is the only long-term solution.  Well, not the only possible solution, but the best solution... the solution that does not require any wars or destruction.

Oh, BTW, a brief commercial message for everyone who loads up on, then securely hides durable goods like gold, silver, platinum, etc.  AFTER you load up and hide your goodies, take a nice vacation to Las Vegas or Macau (where-ever you leave closer to).  Don't gamble, but otherwise enjoy yourself for a week or so.  Then if and when the predators appear and demand your physical savings, just act sheepish, start crying, pee down you leg if you can, and tell them how you gambled everythign away in Las Vegas or Macau.  Or invent a better story, but make sure you have your story stone cold memorized, and your delivery practiced, and don't even think about giving in, because the more observant of them can smell your internal confliction.

Sat, 12/07/2013 - 23:54 | 4225928 lewy14
lewy14's picture

Sounds like... exile.

A noble and hard won exile, to be sure. But exile, nonetheless.

By "not cut out for this" please include those whose conceit for their own dignity and social nature precludes them from considering such a fate; myself among them.

I respect your choice very much though. It's just not for me.

Yes, hide, but hiding in plain sight is sometimes an answer. 

Sun, 12/08/2013 - 03:28 | 4226198 honestann
honestann's picture

I hope you can pull that off.

A few may.

PS:  As for me, I've always had a deep, solid, sincere love of solitude and extreme boonies.  So unlike most folks, my new life of high-tech peace, quiet and solitude makes me very happy, secure and comfortable.  Obviously many would feel the opposite.

Fri, 12/06/2013 - 21:11 | 4223353 Ned Zeppelin
Ned Zeppelin's picture

This epistle from Hendry is actually very interesting. He presents a whole new theory (to me) behind the Fed's rationale for QE, i.e., as a necessary counter measure amid neo-mercantilist intrigue among nations. This is meaty stuff and needs to be read through a few times.

A welcome change from the Bitcoin Channel of late.

Fri, 12/06/2013 - 21:33 | 4223407 Aknownymouse
Aknownymouse's picture

When will it end? When bears capitulate. O wait!

Fri, 12/06/2013 - 21:42 | 4223426 GovtMediaLiars
GovtMediaLiars's picture

Great article. I've been following a similar line of thinking for a bit now with my modest investing and speculations. This was a very well researched and written article which I really enjoyed reading tonight.

It talks about a "300k one-touch call option" and I'm curious is that like a professional, more advanced version of the binary options offered by the dedicated brokers spoken about on sites like this one?

I know contracts like that can be structured by regular brokerages for large or institutional clients but as far as I know such contracts are not really accessible for your average trader like myself.

Cheers!
GML 

Fri, 12/06/2013 - 21:43 | 4223433 CheapBastard
CheapBastard's picture

Must...Keep...Printing.....

Fri, 12/06/2013 - 22:35 | 4223544 YHC-FTSE
YHC-FTSE's picture

The bloke sounds like he is applying for the job of chairman at the Federal Reserve. 

And is he seriously trying to hint that gold prices will drop and stay there for the next 27yrs?  That Japan's equities will go to the moon without wiping out what's left of the radioactive country? WTF. 

Yes please Hugh, here's my postal order for your super concentrated Brawndo Investments (it's got electrolytes! ), that will surely reward me handsomely with millions of dollars & quadrillions of yen. Maybe just enough to buy a cup of coffee in a few years. 

Fri, 12/06/2013 - 22:39 | 4223553 Yen Cross
Yen Cross's picture

  Nice post. Are we ever going to get serious about the real nuclear energy?

Fri, 12/06/2013 - 23:31 | 4223614 London Dude Trader
London Dude Trader's picture

What an unbelievable crock of shit he had to concoct to justify his mediocre performance. How very typical of these guys who think they're masters of the universe just because they got it right once, generally by sheer luck or accident.

Fri, 12/06/2013 - 23:42 | 4223637 Dr. Destructo
Dr. Destructo's picture

"Walking Ghost Phase" of investing?

Sat, 12/07/2013 - 00:02 | 4223664 Douglasnew
Douglasnew's picture

Sounds like he wrote that while coke blown out of his shorts having an illuminating discovery, so simple and striking. Man makes plans and God laughs.

Sat, 12/07/2013 - 00:02 | 4223665 Douglasnew
Douglasnew's picture

Sounds like he wrote that while coke blown out of his shorts having an illuminating discovery, so simple and striking. Man makes plans and God laughs.

Sat, 12/07/2013 - 01:05 | 4223765 TheFulishBastid
TheFulishBastid's picture

"You'll like the way you look...I gaurantee it!"

Sat, 12/07/2013 - 03:29 | 4223873 rogerjarema
rogerjarema's picture

Basically he's trying to explain the various reasons why the central bank will keep printing. Basically the argument boils down to this:

1. no matter what happens, the central banks will keep printing

2. because all of them are printing there is only one way to go for asset prices: UP.

Premise number 1 is virtually true under all circumstances. But is premise number 2 also correct? In his previous letters & missives, bonds were always within the discussion. But try find the word "bond" in this letter and you'll find that word count to be precisely zero.

And perhaps this is where he misses something big. What if the great bull market in government bonds has just reversed and the yields are TRENDING up? The period of 1970s showed something in regards to this: equities can go down in the face of massive printing. 1970s was the period the Fed could start print willy nilly due to the gold standard being rescinded. In the face of that stock market experienced a decline of ~50%. In a way, this showed premise number 2 is incorrect.

Premise number 1 is "virtually" (but perhaps not absolutely) true... but there is one condition where the Fed might have second thoughts about this. If the bond market starts revolting and the currency suddenly quickly depreciates, it might hold them back. Hyperinflation actually diminishes their powers and also impoverish those big banks they hold dear.

Conversely, if because of this fear they hold back and we get massive deflation, this can be politically unpopular. Legally as of right now, the Fed is independent but in practice, their actions are quite political. Ironically, a fear of hyperinflation may revert them back to their independent nature...but this very independence is quite possible to be rescinded by a government facing pressures. If the government gets their way, hyperinflation is the likely outcome.

The final outcome of massive deflation or hyperinflation is uncertain this day. It will most likely happen by mistake, rather than by design. 

Sat, 12/07/2013 - 08:40 | 4224054 Seer
Seer's picture

And the other thing about assuming rising equities (with printing) is EMPLOYMENT.  Last I checked the world was pretty much geared toward consumerism.  It's ALL been about trying to force-feed over-bloated consumers.  Unless there is forced consumption (well, it's kind of been that way for a long time, but it's been indirect, with "consumers" feeling like it's been their "choice") I'm NOT seeing how equities can rise (for much longer).

I cannot stress this enough, "economies of scale in reverse."  I don't know what the current US factory utilization numbers is, but for the longest time it had been dropping.  That can ONLY be offset by: 1) Reduction in R&D; 2) Reduction in capex; 3) Increase in price of finished goods. (or combinations of)  With wages dropping (and not likely that new markets with higher wages are out there, at least not in significant enough numbers to offset loss in established markets) I don't see #3 getting much traction.  #1 and #2 both signal future declines, not something that tends to parallel increasing share prices.  There is, of course, the option of downsizing, but that would tend to require increases in capex: seems of late that the sale of larger industrial buildings is a bit slow.  We have had, and will likely to see much more of it, increases in acqusitions; buying out your competition in order to save money... not exactly something that seems to guarantee an increase in shareholder value (a good example has been HP, and as bad as they've done I don't think that others have had all that much better success).

Hendry is looking at the movement of the accelerator pedal, not of the affect of the accelerator on the movement of the vehicle.  I suppose, however, that if one is basing things on just the movement of the accelerator pedal, and no one is interested in the movement of the vehicle then Hendry is right, in terms of "investing."  For me, personally, we're stuck on the railroad tracks and a train is coming- I'm jumping... and, I'm not suicidal (as bad as the future might look I'm thinking that this is it and that I'll go with what I know- life)

Sun, 12/15/2013 - 14:19 | 4248522 MrSteve
MrSteve's picture

Re: the final outcome.... the final outcome of EVERY inflation in history is a massive, sudden deflation no exception and no "different this time". The law of compounding interest is a built in termination program; that is the nature of things.

Gresham's Law was an observation in the time when money was gold coin minted by the God-saved sovereign ruler's regime. That bad money drives good money out of circulation is just a corollary to the fact that we are all economic beings (except fools), saving good money and trading away that which will lose value. What's in your wallet?

Sat, 12/07/2013 - 06:41 | 4223997 fiftybagger
fiftybagger's picture

Pompous loudmouth

Sat, 12/07/2013 - 08:44 | 4224056 Seer
Seer's picture

Even pompous loudmouths can be right.  But to be wrong...

I'll guarantee that in the future he won't be... a pompous loudmouth.   The meek shall inherit the earth...

Sat, 12/07/2013 - 10:32 | 4224126 Drifter
Drifter's picture

There's no "must read" about his suddenly-turn-bullish blabbering, he finally realized you don't fight Fed's printing press, same thing everybody else figured out some time ago.

These idiots must get paid by the word.

"Zimbabwe bet" is the sure-fire bet.  Bet on collapsing USD.   But you need guts and staying power.  It'll look like a losing bet right up to the moment it becomes the winning bet, and winning in a big way.

Sat, 12/07/2013 - 13:05 | 4224530 FreeNewEnergy
FreeNewEnergy's picture

I dunno. Been hearing about how all this was going to crash for five years and I have to agree with HH on at least one basis: being bearish can be very detrimental to your wealth, health and happiness.

I've been lucky enough to have acquired physical assets over the past four years and now seems to be the opportune time to turn them for a profit, i.e, sell.

Real estate is higher, no doubt, as are many other assets classes outside of stocks. It's about marketing skills and managing money, rather than cringing over the macro-picture.

Look at it this way: it can get worse, and likely will, for the bottom 20-40%. So, don't be in that group. I just went out with a bunch of people who all turned 60 this year. Couldn't buy a drink for anybody. Everybody had more than enough money, house, cars, toys, etc. Most will hold onto what they have as generational wealth. Me, having no offspring, look at this time as a good time to sell and improve my asset/purchasing power.

Cap spending is at generational lows. Think it's going to stay there? Buy low, etc. This could be the best time ever to start a new business or buy an existing one, if one has a good handle on value and can actually run said business. Lots of people are desperate... blood in the streets, as the saying goes. Best time to move forward.

Sure, it could all go to shit, but like I said at the start of this post, it's been five years already and could be another five... or seven... or more. Better to light a candle than curse the darkness, for whatever that's worth.

Good luck. Move forward and don't wait for or let the government drag you down. They are the greatest destroyers of wealth and value.

Sat, 12/07/2013 - 17:46 | 4225161 reader2010
reader2010's picture

"A man who gives a good account of himself is probably lying, since any life when viewed from the inside is simply a series of defeats.”

-George Orwell, All Art Is Propaganda: Critical Essays

Tue, 01/14/2014 - 02:46 | 4329920 ThirdCoastSurfer
ThirdCoastSurfer's picture

If you analyze the very first chart you see a large dipafter a double top in the last 500 days of the DJIA which simply has not occured (until now, maybe?). We have not had even a 5% correction in who knows how long. Way to make the data fit you thesis instead of the other way around.

Fri, 01/24/2014 - 15:13 | 4363703 arm50
arm50's picture

Top Ticked

Fri, 01/24/2014 - 15:14 | 4363705 arm50
arm50's picture

Top Ticked

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