Hugh Hendry: "I Believe Central Bankers Are Terrified"

Tyler Durden's picture

It was almost a year ago when Hugh Hendry shocked the world when he announced he was, said simply, turning bullish (his full recantation can be found here), even though as he admitted he "Can't Look At Himself In The Mirror." Which was understandable: in a world where markets as many know them (if not the current generation of BTFD and BTFATH traders) no longer exist and have been replaced by centrally-planned "markets" where rising asset levels are not a byproduct of capitalism but a policy tool, Hendry - a person who makes money by managing assets and generating alpha by outperforming the market - did the one thing that would keep his job: he joined the herd of momentum traders to whose lowest common denominator the world's central banks have been pandering ever since 2009.

Some of the pearls of wisdom uttered by Hendry at the time showed just how profound a change in his worldview he was undergoing:

"I can no longer say I am bearish. When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out," Hendry said.

...

"I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years' time."

...

"I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends."

...

"You have got to be in things that are trending."

...

“We want to believe markets go up because the economy is improving, because corporate cashflows are improving. But when you get monetary disturbances creating loops, it does not really matter.”

As we noted back then, "Sadly, his last statement is just the latest confirmation that in the New Centrally-Planned Normal, FOMO  or Fear of Missing Out (the trend, the media appearance, the herd, the year end bonus, you name it) is indeed the new POMO as we warned in May" of 2013.

And while Hendry flip-flop was perfectly understandable, sadly his attempts to generate alpha in a "parabolic" market, where he was merely chasing the trend, did anything but succeed. Perhaps that has to do with the fact that he decided to buy 3D printing stocks and Bitcoin...

Hendry has bought 3D printing stocks as a play on trend-driven, QE-fuelled equity markets, and said the rise in the valuation of Bitcoin amounts to “the same thing”.

 

All US-listed 3D printing stocks are trading on at least 50 times earnings, but Hendry said he has little concern over the sector’s sky-high valuations. "We are in 3D printing stocks. I say to my team 'don’t tell me the valuations, it is trending."

... although in retrospect perhaps someone should have told him the valuation because he jumped on the bandwagon just as printers, and Bitcoin, both hit all time highs.

In turn this led to our observations, just a month later that "Hugh Hendry Suffers Biggest Monthly Loss Since Inception" and then, two months ago, that "Hugh Hendry Is Not Having A Good Year."

So where is Hendry now, and has he thrown in the towel on his bullish phase also? Well, after a horrible period for his fund, Eclectica is now up some 2.6% through November, having risen over 7% in September and October. Still, hardly the return a self-respecting, or not as the case may be, "momentum chasing, trending" bull should generate in a market in which all central banks are now all in, and where even a semi-correction launches verbal and CTRL-P interventions by the world's money printers.

For those curious about the nuances of his performance, here is his latest summary exposure:

And his recent VaR, because nothing shouts desperation to outperform a "trending" benchmark, or Sharpe ratio for that matter, than putting one's value at risk into overdrive:

And his most recent letter to investors:

The Fund is now up 2.6% on the year and, despite running a net long equity book that has exceeded 1x NAV for the past few weeks, we succeeded in weathering a particularly volatile October with rather dramatic intra month price declines in the major equity indices to post another gain of 4.0%. We have now made money in each of the last three months. Therefore, contrary to what you may have heard, our spirits are high and our risk taking is increasingly paying off.

My premise hasn’t really changed since I published my paper explaining why I had become more constructive towards risk assets this time last year. That is to say, the structural deficiency of global demand continues to radicalise the central banking community. I believe they are terrified: the system is so leveraged and vulnerable to potentially systemic price reversals that the monetary authorities find themselves beholden to long only investors and obliged to support asset prices.

However, I clearly confused everyone with my choice of language. What I should have said is that investors are perhaps misconstruing rising equity prices as a traditional bull market spurred on by revenue and earnings growth, and becoming fearful of a reversal, when instead the persistent upwards drift in stock markets is more a reflection of the steady erosion of the soundness of the global monetary system and therefore the rise in stock prices is something that is likely to prevail for some time. There is more to it of course, as I will attempt to explain, but not much.

This should be a great time to be a macro manager. It is almost without precedent: the world's monetary authorities are targeting higher risk asset prices as a policy response to restoke economic demand. Whether you agree with such a policy is irrelevant. You need to own stocks. And yet, remarkably, the most contentious thing you can say in the macro world today is “I’m bullish”.

In a world dominated by the existentialist angst of identifying and trading qualitative value, there is profound mistrust of equity values today; macro investors see prices as overvalued and few are willing to capitalise on the opportunities to make money. This angst and fear of big drawdowns in risky assets in part reflects astonishment that policy makers were able to rescue investors from the folly of their misallocations in the years preceding 2008 and that stocks have massively outperformed the modest rise in global nominal GDP. I should know. I, like others, became a moraliser who just couldn’t forgive the Fed for bailing out Wall Street. I read one “death of money” polemic after another and luxuriated in the work of people like Marc Faber, James Grant, Nassim Taleb, Raoul Pal and Albert Edwards. I became a moral curmudgeon rather than a money maker.

As you know, I have sought to overcome this deficiency. However my risk controls, or rather my procedures for dealing with big monthly losses, seemed to anchor me to the bearish camp (against my better wishes). No-one wants to lose more than 5% in any one month (for the record, we have recorded only 9 such months over the Fund's previous 144). But typically this has entailed selling when there has been a spike in volatility; since the end of last year I have  been a bull that had to sell for lower prices. No wonder I couldn’t make you money. But perhaps you don’t need such reactive stop loss policies when the world's central banking community is intent on protecting you; which is to say, I needed to apply greater risk tolerance and intervene less often.

You are not convinced? Japan was down 16% from its highs earlier this year. I was particularly long Japanese equities at the start of the year and so at some point, fearing greater losses, I swallowed my pride and booked a loss. However, the ongoing policy intentions of the BoJ meant that the stock market clawed back all of its losses. Why did I sell?

European stocks fell almost the same over the summer but again the ECB upped its ante, pushed short term rates negative, tolerated a weaker currency and promised to re-stock its balance sheet with more local risk asset purchases. Lo and behold, European stock prices recovered sharply in August and early September. So why did I reduce my holdings?

October is simply another example. US stocks fell over 10%. I don't really know why. Was it the threat of the end of QE or a global pandemic or more misgivings as to the state of affairs in Greece and Europe's enduringly weak economy? It doesn't really matter. Such is the perceived risk in the financial system that enough investors now anticipate a policy response whenever the S&P falls more than 10%. This ensured that shorts were covered and volatility sold in mid-October. The fixed income market's expectations for hawkish future Fed rate hikes evaporated with stock price weakness and other risk markets soon rallied; the S&P is now back to its all-time high.

Pity the macro manager then who had to stop loss mid-month; that used to be me. But I widened my tolerance for loss. We have no desire to lose money but unless something tangible happens to challenge our narrative we are less willing to automatically reduce our risk taking in response to modest, if rapid, short term market gyrations. Making money requires making the right calls of course but just as importantly it necessitates that we provide trades with enough breathing space to develop and hopefully prosper.

So why all this enthusiasm for upside equity risk?

To my mind the current period is analogous to the Plaza Accord of 1985 when central bankers agreed to intervene in the currency market to drive the value of the dollar lower. The fast moving world of FX was deemed a more expeditious way of correcting for the huge US current account deficit than the laborious and slow process of waiting for the totality of countless micro wage and productivity deals to rectify the yawning trade gap. No one really knew for sure how high the yen or Deutsche Mark should trade back then but this didn’t stop macro managers from being very long such positions.

The FX market tends to take the US Supreme Court view. Overruling an obscenity charge for showing a salacious French movie in Ohio in 1964, Justice Potter Stewart wrote that the Constitution protected all obscenity except hard core pornography. Unwilling to define the latter, the judge maintained that he would know it when he saw it. And likewise currency values; you just know the wrong ones when you see them. This is to say that the market becomes more treacherous once the imbalances of the primary economic transactions (the US current account) show signs of improving from the remedy of the price changes engineered via the relative currency movements.

Which is a rather long preamble to describe what I believe is a very analogous central banking intervention in today's financial markets. It would take just too long for the Fed, ECB or the BoJ to rely on a return of animal spirits in the real economy to lift their flagging economies. They need the remedy of fast  moving risk asset prices. By using QE to promote more risk taking, asset values in the US have risen faster than fundamentals and, with better perceived collateral and more confidence, the demand for risk taking in the real economy has recovered somewhat. At a lag, the theory runs, so will the rate of  expected inflation.

So I think we find ourselves especially in Europe (and Japan) with a situation whereby the central bank has to use all of its powers to engineer higher stock and bond prices. And I think the precarious nature of France and the election timetable in 2017 means that they need higher European stock and bond prices NOW or there will be no economic recovery, budget deficits will continue to overshoot 3% and the Euro area will get trapped in the poisonous and perpetual cycle of having to demand more and more unpopular austerity measures. This is high stakes: boost European stock prices or risk losing France and the euro. To my mind the message is simple: don’t short French bonds, buy European stocks and short the euro.

It will only become a bubble when slow moving price inflation and real wages start moving; we’re obviously nowhere close to that just now in Europe (or in Japan) and hence my large net long.

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Colonel Klink's picture

You can say that twice!

Notice the article was posted twice.

Try and execute the Central bankers for debasing money as the laws state!!!  Nothing stops until this happens.

thetruthseeker's picture

I concur.  The Central Banking jihadis will continue to levitate asset prices.  It will continue to have no impact for 99% of the population but will only exacerbate the divide between the wealthy and everybody else.  This widening gap of inequality will ultimately lead to massive civil unrest.  At that point, you will see executions of bankers and other wealthy individuals in the normal course of literal class warfare.  Unfortunately, the Central Bankers will escape the knife.  Their just desserts, I am afraid, will come in the afterlife.

MalteseFalcon's picture

Are the CBers terrified?

In between the CBers and the "terror" is the entire police state.

In contrast, Hugh Hendry has one foot on a banana peel.  One slip and it's into the abyss with ole Hugh.

SoberOne's picture

BTFATH! And by that I mean stack/hoard gold and silver!

TheAnalOG's picture

We are Zerohedge and we don't get shaken out like little boy Hendry!

DOOM!  DOOM WE SAY!!

outamyeffinway's picture

So be it; it's the Age of The End of Morals. Thx Fed!

outamyeffinway's picture

"Their just desserts, I am afraid, will come in the afterlife."

 

This idea has made complacent cowards out of many a man.

kliguy38's picture

Foch YOU HENDRY......you chickenshit PONZI PUMPER

Bangalore Equity Trader's picture

Listen Zero's.

The "PONZI" Pumper is Long EURO Banks!

Remington IV's picture

Hugh = zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz

LooseLee's picture

Their death will be their 'afterlife'....They will not escape the guillotine. It is written.

Escrava Isaura's picture

 

 

So, the decapitation (guillotine), do you think we should use the Wahhabi, the Taliban, or the Old Testament interpretation?

 

Because I don’t want a lot blood spilling around, you know?

 

So, I am open for suggestions that minimize the mess.

 

 

eddiebe's picture

Don't worry about it, the elite will beat you to it. With something like ebola.

Escrava Isaura's picture

 

 

thetruthseeker

You wrote: At that point, you will see executions of bankers and other wealthy individuals

 

Where?

acetinker's picture

Maybe not, tts.  I apologize for the bold font in advance- for some reason, I can't turn it off.

Thank the Gods, I'm back to normal.  Anyway, all this wealth is notional, and the players don't trust each other any more than we trust any of the cocksuckers, ourselves.

When she blows, it's gonna be a deusy.  Gonna need a miracle, but it ain't likely.

TruthInSunshine's picture

Hendry is a contrainDICKtator - seriously, look at his long term record.

This dumb motherfucker has earned 2.6% in nominal sums over a one-year period while playing a widow maker and black widow game.

All these assholes FREEly speaking up lately, whether Hendry, iCon, or whomever, should have a slice of STFU, because they're talking their book and out their asses.

Dr. Engali's picture

Unless you're talking about silver or gold, it's not money...

Eyeroller's picture

... are damned lucky to get together in the first place.

SAT 800's picture

LOL. that's a real eyeroller.

QQQBall's picture

I agree with the analysis but not the conclusion to get long risk in a grossly over-leveraged climate. Yeah the guy is smarter than me, but +<3%; I'll sit and spectate rather than speculating. If its 2/20 fund; I'll buy a mattress versus +/-1% net of charges.

Kirk2NCC1701's picture
"I Believe Central Bankers Are Terrified"

As they SHOULD be.

Kaiser Sousa's picture

"tell me Mr. Anderson - what good is a phone call if you are unable to speak..."
Agent Smith

"and therefore the rise in stock prices is something that is likely to prevail for some time."
Hugh hendry

"what does it matter if the dow is a 20,000 if the debt coupon dollar is at ZERO..."
Kaiser Sousa

Bangalore Equity Trader's picture

Listen.

What good are my breadcrumbs of wisdom if you are unable to hear?
--Bangalore

Sick's picture

Perfect time for the USG to invest all the Social Security Trust Funds in the Market.  They will point to how it has performed so well.

ZoroAustrian's picture

Sad, just sad.  Just another pig with his snout in the trough.

The monetary feedback loop he is talking about isn't really a loop, it's a one-way street enriching financial playas at everyone else's expense.

No wonder he can't look in the mirror.

Bell&#039;s 2 hearted's picture

gosh, what a dope

 

not a word on corporate profits (sky high) and stock buybacks (sky high)

 

the oncoming recession will put an end to both ... and high stock prices

dracos_ghost's picture

Nope, bailins for everyone not just the rich are coming. We will be paying for the privilege of loaning d-Bag corporations money so they can buyback stock and layoff workers. In fact, I betcha there will be clauses for employment of holding a percentage of stocks in lieu of wages. Used to be called 401(k) matching but there are too many regulations around that.

Bell&#039;s 2 hearted's picture

disagree

 

BUT if we get any of that "Shock Doctrine" stuff ... stocks will have to be lower first ... a lot lower

disabledvet's picture

What he should have said is "bwhahahahahahaha" and left it that.

Jack Burton's picture

"he joined the herd of momentum traders to whose lowest common denominator the world's central banks have been pandering ever since 2009."

I followed Hendry a long time, and for a long time he was right. But of course he got burned by the extent to which Central Banks would plan and manipulate markets totally, without regard to economic fundamentals. Hendry talked Fundamentals and traded on fundamentals back in the day. When it came to the 2008 crisis and aftermath, he was often right when others bought the lies.

Now, I saw him recant and join the herd, this does not make him wrong and a failure, it just says that he was honest too long! He needed to forget the real economy , market fundamentals and join the "wealth effect" centrally manipulated markets. Who in their right minds would believe that those claiming to be capitalists, would ditch capitalism totally, and move into centrally planned wealth effect communists?

SO Hendry was taken down a peg or two! His experience took some arrogance off his personality. But fundamentally, in a real capitalist world, Hendry was right all along. Communism is a strange thing, when it takes over in a new form of "1%'er dictatorship" using the "communist central planning" to aid the 1%, who could really see that coming? I studied Soviet communism for many years, I saw it fail and fall. Now I have lived to see the 1% adopt Lenin's and Stalin's dictates, only this time to make a revolution from above, and 1%'er dictatorship. And MY, have they transfered some wealth from workers and savers into the Bankers hands!!!!!!!!

Glass Seagull's picture

 

Here's who is proclaiming market upside this week, interestingly enough...coming out of the woodwork here:

Grantham (bear)

Lee (bull)

Siegel (bull)

Hendry (bear)

Fast Eddie's picture

This guy is a real d bag

Bell&#039;s 2 hearted's picture

i do agree with his point central bankers are terrified

 

i don't think they have near the power many think ... and they know it

 

he's babbling about ecb printing ... i'll believe it when germany says OK (personally, i think they'll leave before large scale PRINT) ... had recent word 7 or 8 euro bankers not happy with draghi ... kuroda's move came on 5 - 4 vote ... ain't no slam dunk going forward

suckerfishzilla's picture

Yeah whatever. Moar Silver.

Bryan's picture

When you throw fundamental and even technical analysis out the window, you might as well throw darts at the WSJ for your stock picks.  3-D printing?  Sure.  Biotechs?  Why not.  Fuel Cells?  Of course.  Gold alchemists, perpetual motionists... what the heck. 

 

Dr. Engali's picture

I think what Hugh failed to recognize was that all the central banks were willing to kill their respective currencies in tandum. All fiat is dying, some of them just happen to be dying faster than others.For those of us who understood this fact and accepted it for what it is (even though we don't like it), it's been a very profitable few years.   

Osmium's picture

I don't think the bankers are scared at all.  They have held this shit show together for 6 years now, pushed the markets to all time highs, suppressed gold, silver and oil.

I can't see anything that will be able to stop them.

espirit's picture

Try pitchforks, flaming torches, hot oil, garrotes, guillotines, knives, swords, ropes, stakes thru hearts, & pathogen laden bodies tossed over walls.

If those don't work try Pu210, Mercedes prom mods, slips, falls, & nailguns.

...and sunlight.

LooseLee's picture

You're obviously blind. Move to North Korea where your ideas have merit.

bid the soldiers shoot's picture

 

Say what?

I can't see anything that will be able to stop them.

How about REALITY?

limacon's picture

Bankers , Financial Authorities and Investment advisors have lost Respect .

 

They are quite right to fear their future .

 

See

https://www.academia.edu/9354151/The_Economics_of_Disrespect_

or

http://andreswhy.blogspot.com/2014/11/economics-of-disrespect.html

sbenard's picture

SO he capitulated. That itself is a sign of imminent reversal!

SickDollar's picture

exactly, it show you how bad the economic system is broken tor non existent, and there is no going back

 

css1971's picture

He capitulated a year ago.

SheepDog-One's picture

Hugh Hendry says 'Don't tell me about valuations, 3D stawks are 'trending'.
Why should I listen to anything this hipster douchebag says?