Hugh Hendry Embraces The Central-Planning Matrix: "I Am Taking The Blue Pills Now"

Tyler Durden's picture

Hugh Hendry's Eclectica Fund has had a great Q4 (up 3.3%, 4.0%, and 5.0% in the last 3 months) despite portfolio risk being quadruple his 'old normal'. How did he achieve this? He begins... "There are times when an investor has no choice but to behave as though he believes in things that don't necessarily exist. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully. The good news is that mankind clearly has the ability to suspend rational judgment long and often... He who hangs on to truth has lost. The economic truth of today no longer offers me much solace; I am taking the blue pills now."


Via Hugh Hendry's Eclectica Fund's Letter to Investors,

Apples are not the only fruit

There are times when an investor has no choice but to behave as though he believes in things that don't necessarily exist. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully. The good news is that mankind clearly has the ability to suspend rational judgment long and often.

Let me explain - borrowing from a paper my son recently wrote on Platonic realism to do so. He pointed out, for example, that an apple very clearly exists. We can see it, recognise it and touch it. It also always obeys the known rules of the universe: throw it into the air and it will return to earth. Fruit however is a far more nebulous concept. Fruit is not just one recognisable object. The word relates to group of objects that share some physical and chemical traits. You cannot definitively draw "fruit"; we might think we will know it when we see it but it hasn't a single identity.

So far so fruity: you'll be wondering what my point is. It is that similar different forms of reality seem, to me at least, to exist between different asset classes. Equities are more like apples. They exist within quantifiable and qualitative parameters such as earnings valuations and growth. Currencies are a hybrid in that you could point to the notion of purchasing power parity (PPP) as serving as a universal rule of nature in helping to determine the reality of prices (a bit like gravity for the apple). But we also know that more often than not the value placed on them by PPP is not very close to their trading value. Gold, on the other hand, is closer to the idea of fruit. It doesn't seem to conform to any known rules of the investing universe. There is no income and no growth. It is, perhaps, the closest thing an investor has to an imagined reality. You either "get it" or you don't. As a result, apart from the odd occasion when it rallies violently on the back of an imagined future reality (usually hyperinflation), it is commonly ignored by the majority of investors. It can be entertaining and periodically very financially rewarding but, as it is all about faith and stories, it isn't something most of us are that comfortable investing in.

Gold: Disney for grown ups

But here's the thing. Every now and then asset classes transmutate. And recently I have been asking myself if the equity market might have taken on the characteristics of the gold market. As I see it, investors have been living in a world in which markets have transcended reality since early 2009. In the first three years - until Draghi’s "do whatever it takes" speech in the summer of 2012 - gold was the poster child of this phenomenon. For me it became the financial equivalent of Disneyland or perhaps a Platonic simulacrum (a false likeness). It is real and tangible, but it only represents reality when viewed from a particular perspective; in this case, what its believers saw as the inevitable inflationary consequences of central banks printing money. However since Draghi spoke, the role of market Disneyland has increasingly been taken on by the equity and fixed income markets. So the S&P has massively outperformed what has proven to be a tepid recovery in nominal GDP and a global real economy that is beset by deflation; just this month, European swaps contracts began to price in near term deflation. Yet equity markets are ignoring that reality in favour of the idea that the deflationary fall out from the collapse in the oil price will almost certainly mean even more monetary accommodation. The worse the reality of the economy becomes, the more we take on the reflexive belief in further and dramatic monetary expansion and the more attractive the stock market looks.

What is one to do with such a situation? In my view there are really only two responses. On one hand we have today's bears. Remember the film The Matrix? Morpheus offered Neo the choice of two pills - blue, to forget about the Matrix and continue to live in the world of illusion, or red, to live in the painful world of reality. They, as the "enlightened", chose red, and so are convinced that they understand everything which has become illusory about today's markets. Their truth is Austrian economics. They know that today's central bankers are spinning a falsehood of recovery; they steadfastly refuse to be suckered in by the euphoria of a monetary boom; and they are convinced that they will therefore be spared the consequences of the inevitable crash. Everyone else, currently drugged by the virtual simulation of prosperity and its acolyte QE, will be destroyed, leaving them alone, to re-invest when markets finally get cheap. They will once again be masters of the universe.

The truth? You have to reject it

This sounds good. Really good. I have long thought of myself as one of the enlightened. My much thumbed copy of Kindelberger's Manias, Panics and Crashes aided and abetted my thinking as I correctly anticipated and monetised profits from the crisis of 2008 for example. But it isn't always good. Kindelberger has been absolutely detrimental to my investment performance for the last six years and as a result I have changed. I still believe that the attempt by central bankers to prevent the private sector from deleveraging via a non-stop parade of asset price bubbles will end in tears. But I no longer think that anyone can say when. Look back on the last five years and I think that it is indisputable that mass injections of loose monetary policy have both fuelled asset prices and staved off further crisis. I am also absolutely persuaded that the global economy remains so fragile that modern monetary interventions are likely to persist, if not accelerate. They will therefore continue to overwhelm all qualitative factors in determining the course for stock prices in the year ahead.

So I have come to embrace the French philosopher Baudrillard's insight. "Truth is what we should rid ourselves of as fast as possible and pass it on to somebody else," he wrote. "As with illness, it's the only way to be cured of it. He who hangs on to truth has lost." The economic truth of today no longer offers me much solace; I am taking the blue pills now. In the long run we will come to rue the central bank actions of today. But today there is no serious stimulus programme that our Disney markets will not consider to be successful. Markets can be no more long term than politics and we have no recourse but to put up with the environment that gives us; the modern market is effectively Keynesian with an Austrian tail.

My suspension of disbelief on all this has won me many detractors. These investors reject my notion of imagined realities and prefer to speculate instead on movements in capital markets in a manner similar to making propositions about chemistry, biology, or physics: they describe a cold, rational, mind-independent reality and focus on the inevitable outcomes; they have no interest in fanciful flight paths. I think they are missing the key to success: the fact that markets are vulnerable to forces far more variable and subjective than the tenets of stock valuation. In this new imagined reality there is every chance that risk markets grind higher for much longer. The Fund, you will be pleased to hear was up another 5% in November. Year to date returns are now almost 8%.

The Phantom Menace

To conclude I thought that I would expand upon our present Platonic thinking on the Chinese equity market. China is set to record its weakest growth in GDP in 25 years. Yet it seems to have entered a bull market and may be where we deploy much more of our risk capital next year. That's because the recent exuberant run up in onshore Chinese equities seems to me to amply demonstrate the power of imagined realities. Earlier this year, the shocking reality of falling property prices across China began to emerge such that even the official Chinese government economic data series had no choice but to admit it was happening. On the assumption that insolvency was all but inevitable international investors (Eclectica amongst them) began to fear a surge in bad debts at the major Chinese banks and sold. Financial stocks took a beating and the major banks started to trade at a steep discount to their reported book value.

At this point, the situation in Chinese capital markets began to resemble that of Europe back in the summer of 2012 when Spanish and Italian government bond yields came to exceed 6%. The capital markets were effectively betting on the ECB failing to contain the crisis. With Spanish and Italian government bonds now trading below 2%, this has proven a bad bet. The interesting question to ask today, however, is not who lost money on the bet, but who made money? Institutional fixed income managers that had little or no discretion but to own such assets did, but the returns on offer evaded the majority of discretionary global macro managers. Why? They were looking at qualitative truth factors such as enduringly weak economic growth, political backsliding on structural improvements and a systematic failure to control the size of fiscal deficits. They shouldn't have been: despite all this the market has relentlessly ground higher on the basis of the imagined reality that the ECB will overcome all institutional objections to the contrary and will buy sovereign European bonds en masse.

The easy money has been made here. So my question today is whether we will see a similar prolonged bull market in Chinese equity markets, one that the hyper-realist discretionary global macro community will dismiss as they cite worsening qualitative concerns and fret about an impending property crash? I think so. The valuation of Chinese equities today suggests that once again capital markets are betting against the success of the local monetary authorities. They are probably wrong. The Chinese state is the largest shareholder in the Chinese financial system. That surely makes its ability to stave off a liquidity crisis pretty much limitless. One more thing strikes me: the more I examine the obvious similarities with today's China and Japan back in 1989, the more I wonder why no one is speculating that the renmimbi might go on to match the yen's strength in the 1990s or suggesting that sovereign CNY bonds might one day be priced as JGBs now are. Perhaps that is a discussion for next year.

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JohnnyHenriksen's picture

I'm sold, putting all my fiatscos into the eclectica fund.

pods's picture

I take the blue ones now too, three at a time. After the Mrs. is all tired out and I get bored of poking holes in the walls, then I call the doctor.


Arius's picture

"He who hangs on to truth has lost."


The Truth Shall Set You Free!

Jeff the Terrible's picture
Jeff the Terrible (not verified) Arius Dec 31, 2014 3:48 PM

MOrpheus, sea shells on a sea shore for yous'

scrappy's picture

Agreed, the top must be near - 9-10 months to the correction, bumpy till then.

First this sign will come...

Then this sign...

Ignatius's picture

"After the Mrs. is all tired out and I get bored of poking holes in the walls..."

Hendry, is that you?

SickDollar's picture

Cypher: All I do is what he tells me to do. If I had to choose between that and the Matrix, I'd choose the Matrix.
Trinity: The Matrix isn't real.
Cypher: I disagree, Trinity. I think that the Matrix can be more real than this world. All I do is pull a plug here, but there... you have to watch Apoc die.

Cypher: I know what you're thinking, 'cause right now I'm thinking the same thing. Actually, I've been thinking it ever since I got here: Why oh why didn't I take the BLUE pill?

acetinker's picture

Ask me about my four hour erection.  My missus is about as interested in my erections as Hugh Hendry is in investing in actual value.

I get it, you can't invest in actual productive enterprise today and make money.  Do you happen to share my incredulity at this turn of events?

Mr. Hendry helped create the money-makes-money market.  He can't credibly decry it now.

The only thing he can do is abandon it (Ann Barnhardt), or whine and cry and pretend it's not his own goddam fault.

Mr Pink's picture

I have to admit with a new year starting I am giving some serious thought about taking the blue pill too.

It's depressing thinking about another year of watching my investments get slammed while watching the "muppets" get rich.

Deep down I know I won't and I will choose to go down with ship, but that isn't exactly what I had in my mind when I dreamed about losing my silver in a boating accident

Bryan's picture

I am opting to think in a different direction.  The accumulation of fiat wealth is becoming a dangerous game.  It seems that 'money' is not where wealth will be stored in the future, at least for a while.  I would look instead for non-fiat places to invest, like real estate, PMs, tradeable goods.

Mr Pink's picture

In a logical world that seemed to be the smart plan but after 5 years of this clown show it might be time for me to stop overthinking this

mkkby's picture

Hendry is investing other people's fucking money, so naturally he doesn't really give a shit.  His management fee is all that matters to him.

If you are investing your own money, this is a long in the tooth bull market IN EVERYTHING.  It's pretty late to be throwing in the towel and joining in.  Have patience and wait for a big correction.  Or not, and probably get screwed... your life, your choice.

william114085's picture

I totally agree with mkkby.  Furthermore, is there anything more nauseating than a losing bet on something you intuitively knew was a bad bet before you made it, but still did it anyways, for whatever reason?  Keep your sanity, the risk of losing it is not worth whatever profit may lie in joining this farcial market.  

bwh1214's picture

This is simply an example of an investor capitulating and doing what everyone says they will never do and always does, buying high.  It’s no different than capitulation at the other end and selling low.  All think they can avoid it but don’t. 

And he his citing recent gains to show he is correct.  You could have done the same thing in tech stocks in 2000 or Las Vegas condo’s in 2007. 


A justification for capitulation by someone who knows better, sad very sad. 

SAT 800's picture

I used to think he was pretty smart; boy did he fool me.

tplink's picture

my best friend's half-sister makes $77 every hour on the computer . She has been laid off for 5 months but last month her pay check was $14292 just working on the computer for a few hours. read...

Hal n back's picture

Tyler said the risk is quadruple normal. Did hendry really say that?

kliguy38's picture

Foch you Hendry you sniveling NWO lapdog

himaroid's picture

Hendry is a pussy.

I stopped hustling for wall street long ago, when I realized it was ALL lies.

Tough in the short term. Best move ever in the long term.


surf0766's picture

I worked with a very senior code developer who was working with math boys creating alogs to rip people off. He made great money but when he finally realized the were ripping people off and left. I was never able to figure out why he was able to see it but others were not. Peace. Happy New Year

cowdogg's picture

Yea I don't see it either. There are no markets anymore. It's all just applied game theory.The Central Banks creates virtual capital and the algos handle the virtual details. Nothing real about it but as long as someone is making money everyone else will want in too.

DFCtomm's picture

Hendry is running an investment firm, and not a prepping reality show. He needs to figure out a way to make money regardless of the environment. He should remember, though, that those who panic first panic best.

Winston Churchill's picture

Time to get off the train Hendry, not on.

That light you see, oh well.....

Drachma's picture

I'll grant you the term 'investment firm', although in my mind that's debatable. My question would be; Are 'running an investment firm' and 'having a sense of moral responsibility' mutually exclusive? What I hear from Hendry's logic is, if you can't beat the criminals with reality, join them in their fantasy, as long as you can keep making money for investors. By playing the game, he only feeds the monster, and worse, since Hendry knows that the game is rigged and that what he is doing is only capitulating to the manipulators, his is that special kind of mild-onset psychopathy which is seemingly afflicting more and more of the population, with respect to ethical norms, whereby a broken and overwhelmed plebeian finds comfort in a subtle insanity, that goes unnoticed by the similarly afflicted, if only it relieves the pain purposely brought about by the patricians. The argument that he must do what he can to make a return is a non-sequitur for me. In my mind the ends do not justify the means. If someone makes it impossible for me to fulfill a legitimate need by moral means and I understand this, am I then morally justified in satisfying those needs immorally? Is Hugh not just hustling for Wallstreet?

If morals matter any more, upon having taken and understood the implications of the 'red pill', Hendry should have opted for a change in career, not ask the agents to re-insert him into the matrix at the long-term expense of his investors. This is the problem, most never dare see their job and how they draw an income as a moral issue, but it is. And that's why, as George Carlin would say, "they got you by the balls". I may upset a lot of people on ZH but all of us really need to take a hard look at how we finance our lives. Are you producing something in the real world or are you pushing paper in mark-to-fantasy land, knowing that your gains are parasitic in the macroscopic picture? I think many would agree that there is no real market and that the stock markets are the biggest casino/pyramid scheme ever created. Would you knowingly work for or be associated with a business that has been shown time and time again to be fraudulent? I bet many would keep quiet and ignore the moral implications as long as the association was profitable. Not only does Hugh ignore the moral implications, he doesn't keep quiet, but instead announces with pride his moral bankruptcy. The way I see it, if you are making REAL long-term gains from pushing paper, you are either an insider or lucky. And then there is the Hugh Hendry willing to take what scraps he can get from the movers and manipulators. In this respect he is a speculator, not an investor based on fundamentals. I'm sure Hugh thinks he knows what he's doing and knows exactly when to liquidate in order to avoid the inevitable haircut his and so many other funds will endure in this game of musical chairs. Cheers.

mojojojo's picture

Nice words. Glad to see a couple of paragraphs.

Squiddly Diddly's picture

"I bet many would keep quiet and ignore the moral implications as long as the association was profitable. Not only does Hugh ignore the moral implications, he doesn't keep quiet, but instead announces with pride his moral bankruptcy."

This paradigm is sadly true across the professional spectrum.  It has become precursor of the new feudal guild structure.  Physicians, lawyers, finance, managers et all have been weighed in balance and found wanting.  The same is becoming true of the average "schlub" while he has little authority, our failure to speak up and comply makes us all culpable.  I am praying and talking to my pastors making little progress.  The capital of residual Christian culture has depreciated to the point where the moral leaders are so divided that they don't seem to know how to respond.  I would suggest hair shirts, sack cloth and ashes. May God have mercy on us.  Who is Lord Christ or Caesar?

Farmer Joe in Brooklyn's picture

It's settled...  2 + 2 = 5

I love Big Brother.

disabledvet's picture

Wow.  Far out dude.


And you manage other people's money too?




Not a single data point and a discussion of "objects as in fact not objects." What's your trading position in Apple again?  Do you even have a cell phone?


Do you know what one is?


I mean seriously...there are not product shortages here...but there is always a shortage of GOOD product.


That is TRUTH.


So why not begin by asking "is the Tesla Model S worth a hundred grand?"

bania's picture

Man, this guy loves to listen to himself talk/write. The pompousness is almost... Gartman-esque.

css1971's picture

Meh. Plato defined man as a featherless biped.

"Diogenes plucked a chicken and brought it into Plato's Academy, saying, "Behold! I've brought you a man."" - wikipedia


lasvegaspersona's picture

Poor Hugh

He knew what was right but decided to do otherwise just as it became time to do the right thing. Maybe he secretly has his clients in some physical gold and all the rest is just a hedge. That would make sense.

DFCtomm's picture

We've been sitting around here waiting on the "end" for quiet some time now. After a while you will realize that you might as well live and let the "end" take care of itself.

Svetoslav Tassev's picture

"He who hangs on to truth has lost. The economic truth of today no longer offers me much solace; I am taking the blue pills now."


What was that thing about bulls, bears and pigs who get slaughtered?  He will probably need a pill of some color to feel less pain some day.

Al Huxley's picture

Speaking of blue pills, shouldn't J-Yell be on the fucking button about now?  We need 100 pts to close out the year at 18K and there's only 20 minutes.  Get after it Mr Chairman, get to fucking work for fuck sake!


EDIT:  This dizzy cunt doesn't understand her job at all - YOU'RE GOING THE WRONG FUCKING WAY!  BUY- BUY! NOT SELL!  FUCK WHAT DO WE PAY YOU FOR?

deeply indebted's picture

The problem, as it turns out, is not too much debt. There's just simply no money to be made from truth, reality, or prudence anymore. Sound money really IS a barbaric relic, and nobody cares. The illusion benefits the now. The next generation will have nothing, and nobody cares. Wars are profitable. Human life (along with any productivity it generates) is irrelevant, and nobody cares. Yes. Take the blue pill andlive it up because tomorrow doesn't exist today.

surf0766's picture

Thats a pretty goos dam post

lasvegaspersona's picture

When a world full of savers is forced into a  fixed amount of paper the price of the paper will rise or the amount of paper will be expanded. The problem is that the promises those pieces of paper represent cannot be fulfilled. Another problem, for most of the world is that the paper itself is under the control of a hostile nation that calls many of them enemies. Using gold would be a better solution for the 'store of value ' question. Fiat could continue to satisfy the needs of society to occasionally have more circulating medium of exchange than growth dictates.

doggis's picture










EndOfDayExit's picture

Well... Perfectly logical and fine for somebody who is playing with _somebody_ else's money.

lynnybee's picture

Poor Hugh Hendry...... he's just toooo cute to lose money.   don't fight the Fed, Hugh !