Hugh Hendry: "If China Devalues By 20% The World Is Over, Everything Hits A Wall"

Tyler Durden's picture

Once upon a time Hugh Hendry was one of the world's most prominent financial skeptics, arguing with anyone who would listen that the status quo is doomed and that central planning will never work.

Most famously, back in 2010 during a BBC round table discussion with Jeffrey Sachs and Gillian Tett when discussing Europe's crashing experiment with the single currency, he said that we should "purge this system of its rottenness. Let's take on a recession. It's going to be tough, people are gonna lose their jobs. They are going to lose their jobs anyway. We can spread this over 20 years, or we can get rid of it over 3 years" before concluding "I recommend you panic."

Ultimately everyone did panic, which led to the single biggest episode of global QE and negative rates ever seen, resulting in ever louder speculation even among the most "serious" people that central bankers are now powerless.

But perhaps most notably, Hendry was one of the biggest China bears, certain that the country's massive overcapacity, insolvency and bad debt problems will result in disaster (back then China only had about 200% debt/GDP, it has since risen to over 350%). His Chinese skepticism led to his fund generating a 40% profit by late 2011.

And then after a poor two year performance spell, Hendry had a historic burnout and threw in the towel on bearishness, infamously saying he can no longer "look at himself in the mirror":

"I may be providing a public utility here, as the last bear to capitulate. You are well within your rights to say ‘sell'. The S&P 500 is up 30% over the past year: I wish I had thought this last year... Crashing is the least of my concerns. I can deal with that, but I cannot risk my reputation because we are in this virtuous loop where the market is trending."

He proceeded to buy momentum stocks and 3D printer companies.

Fast forward to the present, when countless hedge funds - key among them Kyle Bass' Hayman Capital and Mark Hart's Corriente - have become China megabears, expecting the country's financial collapse and trading it by shorting the Yuan expecting a massive Yuan devaluation.

It is here that Hugh Hendry has once again proven contrarian, even if it means agreeing with the dominant textbook meme of the day, namely that China can contain its economic hard landing, and in his most recent interview with RealVision's Raoul Pal, he cautions against a Chinese devaluation saying that "tomorrow we wake up, I mean, I would jump out the hotel window if this was the scenario, but we wake up and China has devalued 20%. The world is over. The world is over."

What makes this interview doubly ironic is not just that Hendry is wildly contradicting everything he himself believed in a few short years ago, but disagrees with his interview host himself - recall that one month ago, we showed an excerpt from a Raoul Pal interview in which he previewed "the Big Reset" and laid out how the Kondratieff Winter would unwind, one in which China would play a prominent part.

Whether Hendry is right or wrong remains to be seen: for now he has the powerful People's Bank of China at his back which has been especially active recently especially after the PBOC stated recently it intends to crush all hedge funds who have shorted the Yuan even if it means slamming Chinese trade and the economy once again (as a reminder, one of the biggest reasons why China needs a weaker Yuan is not just the stronger dollar to which it is pegged but because its exports have been crashing against all of its trading partners making the need for a weak currency paramount).

For now, as we showed just ten days ago, those short the Yuan have swung to wildly profitable to losing money as both the USD has slid and the Yuan has spiked, although both of these trades appear to be reversing now.

Needless to say, Hendry disagrees with the China contrarians and believes that the way to fix the Chinese economy is through a stronger currency, even if there is no logical way how that could possibly work when China's debt load is 350% of GDP while its NPLs are over 10% and rising.

So, borrowing form a favorite Keynesian trope, one where when the countrfactual to his prevailling - if incorrect - view of the world finally emerges, Hendry is convinced that a 20% devaluation would lead to global devastation; the same way if Paulson did not get Congress to sign off on his three page term sheet that would lead to the "apocalypse." Only unlike Paulson who only hinted at a Mad Max world, for Hendry the alternative to him being right is a very explicit doomsday scenario, as he explains in the following excerpt from his RealVision interview:

Tomorrow we wake up and China has devalued 20%, the world is over. The world is over. Euro breaks up. The world is over. The euro breaks up. Everything hits a wall. There's no euro in that scenario. The US economy, I mean everything hits a wall! Everything hits a wall!

 

The dollar strength that you imagined is devastation because you just eliminated dollars. They're a scarce commodity. You've wiped them out. And China is a pariah state.

 

It's a 'Mad Max' movie, right. OK, China gets to be the king in 'Mad Max' world. How appealing is that? There is no world after the tomorrow where China devalues by 20%. There is no world. Yeah, it's looney tunes to believe that, people say, 'oh wow, they needed to catch a break.'

 

Their share of world trade has never been higher. They're facing no pressure, immense terms of trade improvement, and you would destroy world trade. World trade is down 25%. You would probably have passport restrictions, the world is over.

And while it is clear on which side of the Yuan Hugh is currently positioned (Hendry's Eclectica is down 2.1% through March 18 and -5.9% YTD) either directly or synthetically, we can't wait to see who is right in the end: China and its central bank (as well as Hugh Hendry) or reason and common sense (as well as some of the smartest hedge funds in the world).

The RealVisionTV interview excerpt is below:

To view the full interview, subscribe to Real Vision Television, which offers Zero Hedge readers a 7-day free trial.

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Hapte's picture

Fingers crossed eh?

philipat's picture

HH thrived in a world in which common sense, logic and fundamentals counted. He then started to go down the rabbit hole and he is now so far down the hole I think he is having problems knowing what to think at all. It only makes any sense if you are in the Keynsian Central Planning Club, and even then it is now so convoluted i think there is every chance that someone is going to make a catastrophic mistake.

espirit's picture

Meh. Moar Doom Porn.

Chyna can devalue because they Khan.

Whomever has the GOLD, makes the RULES.

SafelyGraze's picture

is it quote "bad" unquote

or quote "wrong" unquote

to line ones walls with poster of hugh hendry

does one cross the quote "line" unquote if one covers one's ceiling with see-above-re:-hugh-hendry

am asking on behalf of a friend

 

Spitzer's picture

I agree 100% with Hugh

China is the CREDITOR. They can weaken the dollar if they want to.

Man I was a big Hugh critic before but I take it all back.

Yes We Can. But Lets Not.'s picture

So, Chinese citizens are said to be converting their money and parking it overseas in Vancouver real estate, etc. 

I'm weak on currency flow stuff.  Would that behavior be consistent with Chinese citizenry believing a 20% devaluation loomed?

Spitzer's picture

its as simple as this.

 

The worse it gets in China, the more US dollars will be put on the forex market by China.

curbjob's picture
"If China Devalues By 20% The World Is Over, Everything Hits A Wall"

It's the motherfucker of all ironies that the communist island state, 90 miles off the coast of the US, is probably the best hedged globally to weather a global currency collapse ... well that and that the US bankrupted itself "fighting" the ideology of a centrally controlled economy, only to end up with a centrally  (bank) controlled economy 

rbg81's picture

Disagree.  The FED will just buy all the US debt that China dumps; either directly or through intermediaries.  There will be no panic.  The USD will not crash.  The much hyped "Bond Vigilantees" will just accept it, calm as Hindu cows.  Why?  Because they start getting disappeared if they make too much of a fuss.  Let's face it:  the "Nothing to see here, move on" crowd is in charge--and they have ZERO tolerance for dissent.

SWRichmond's picture

HH...I think he is having problems knowing what to think at all.

+1.  He doesn't look good.  Hugh talked truth for a bit, then got his head handed to him by the central banks and the acolyte banks and power brokers.  He didn't go along to get along.  Then he changed his tune, prob in order to keep his fuind alive.  The rollover has started, and he doesn't know what to do now.  He looks like he doesn't know what to do now.

bunnyswanson's picture

It's a ploy to destroy America via currency war, terrorism to deplete power and exhaust military members, destroy labor force, housing, on and on.... and everyone is in on it.

"“Connecting British firms and markets to China’s extraordinary expansion is a key part of our economic plan, because it brings jobs and investment to our country,” George Osborne, Chancellor of the Exchequer, said in a statement yesterday."

http://www.bloomberg.com/news/articles/2014-06-18/china-s-yuan-to-start-...

 

Firepower's picture

China's economic circuity will survive - if it can but outlast Murka's. Not hard. WE are the ones with a collapsing demo and Garrisons Everywhere http://wp.me/p2kmGE-4aK

HH's world screams "collapse!" when he gets glares from the elder members of his Polo Team, but to Detroit, LA & St. Louis - they've fallen decades ago.

 

balz's picture

This guy is absolutely not alarmist. /s

Frankie Carbone's picture

A coupla years ago his fund took an ass raping with one of these gloom predictions that didn't turn in his favor. I think it was China that he bet on. 

Frankie Carbone's picture

Hugh is funny as hell, but he's hit an miss on his predcitions. I wouldn't put money into his hedge fund. It's like playing roulette. Strikes me as a more sane version of Gerald Celente. Not enough accurate forecasts to bet the farm on. 

 

Dr. Spin's picture

All true, but in his defense, I would have to say that most everybody is getting the strategic timing wrong on this collapse,,,myself included.

;-D  

Abitdodgie's picture

The weak minded are of little faith , say's Yoda , the FED has your back.

Bolweevil's picture

Without faith the weak minded are.

spdrdr's picture

Rhetorical pronouncements "The World is Over!!!" without dialectic logical rationale from a fund manager (no less!) is now newsworthy on ZH?

"Shit happens" is a much more succinct description.  Is Hendry starting to fear the rope?

medium giraffe's picture

The new normal has unhinged the poor fella by the sound of it.  Cash out Hugh, save your sanity.

DeadFred's picture

Way too late. He's already a bull.

tarabel's picture

 

 

My guess is he cashed in, just like all the other pro-China mouthpieces.

Suddenly, I like China.

Oh, what's this at my door?

It's a check for ONE MILLION DOLLARS delivered by a horny Asian girl and her procurator with a briefcase full of blow and the master copy of Hugh"s session with Madame HurtU back in 1981. 

hungrydweller's picture

Who gives a fuck about Hendry.  He sold out to the central banking cabal last year.  I value his opinion for nada.

Dreadker's picture

WHO RUNS BARTERTOWN!  **SPOILER ALERT - ITS CHINA**

NoWayJose's picture

Down 5.9% YTD? Must not own enough gold?

omi's picture

"Why do I need a fridge if I don't smoke" type of logic. Not worth posting. The guy has entertaining factors, sometimes brings up an interesting historical anecdote, but not a good fund manager overall.

toady's picture

Hasn't China already devalued 20%, in 3-6% chunks, in the last six months or so? He must be talking about ANOTHER 20%

Soul Glow's picture

Which is why they won't.  They'd rather have gold rise even if their stock market trades sideways.

buzzsaw99's picture

20% is nothing. they could just say fuck it and not redeem yuan at all.

saldulilem's picture

How would a 20% yuan devaluation translate to game over? Did he mean waves of defaults?

fattail's picture

I think he means a 20% devaluation would cause china's trading partners to finally retaliate for their cheap money credit expansionary policies that led to transnational corporations relocating their factories to china and employing 400 million peasants.  Having the worlds cheapest labor force, zero labor protections, and zero environmental controls and costs, is not enough.  A currency devaluation that gives a further price advantage to the worlds cheapest producer will be met with tariffs.  Like obama slapping the chinese steel industry with tariffs this past week.  

The chinese have to feel the pain.  If they try to avoid the hard landing by expropriating fair trade exports of their competitors they will be met with tariffs, and less trade.  If they don't devalue they will have a banking crisis because world trade is collapsing and those bad loans will have to be charged off.  Either way their 400 million peasants, which is probably a low estimate are not going to be pleased and are going to lose a lot of their jobs.

This avoids the larger issue that credit bubbles result from easy money and easy credit and the strong GDP growth anamoly is just the increase in industrial capacity and the pulling of future demand forward, not the growth and profits that result from improved effenciencies or new technology.  

Vinz Klortho's picture

Thanks for 'esplainin' that!

Along the same lines, the dollar would become scarce because everyone would be trying to dump Yuan because of the devaluation?

Vinz

too_big_to_fail's picture

What the central planners including the FED need to realize is, that government spending is only good for the economy when the projects that are invested in are NPV positive.

If investment projects are NPV negative, such as building a road that leads nowhere, ghost cities in the middle of nowhere, or spending healthcare money on gang members who will get shot again for the 5th time, then it is a waste of resources, that will ultimately kill the economy.

sschu's picture

The change in "government spending" is debt.  Governments are borrowing.

We have all seen what has happened to the marginal utility of debt, it is at historic lows or even negative.

Adding more debt which does not provide any real return is the problem.  And government projects cost SO MUCH, it is difficult to see how they produce a postive return.

The technical term is a financial "bubble".  :-)

sschu

Space Animatoltipap's picture

The guy is a crybaby who only thinks about money and cheap enjoyment. Well, the material world is construed in a different way. War and death are part of it. Never noticed? Then perhaps wake up to reality. Hare Krishna.

nathan1234's picture

Ridiculous talk to me.

He should be worrying about the forthcoming 50% drop in the US$ instead.

Or in general about all fiat currencies.

Globalization was by the banksters for the banksters with their fiat currencies.

It's time each nation and its people lead their own lives without it being influenced by someone/ another country, in another part of the world.

 

g'kar's picture

so that means stalks up 5% on monday....

Dangerclose's picture

Sounds like Hugh is long the yuan.

RabbitOne's picture

If the Chinese just wait for Trump to be POTUS then when they devalue 20%....Well then… Trump will devalue 40%....and… 

gregga777's picture

Hugh Hendry is out of his mind. The world is not going to end if the Chinese devalue the yuan by 20% against either the dollar or their target basket of trading partner currencies. I expect that the Chinese are going to devalue the yuan by a lot more than 20% before the end of this decade. Not that it's going to prevent an internal collapse. It is difficult to put the scale of Chinese malinvestment in perspective. By far the largest Chinese export is going to be deflation. But, that's not going to help their manufacturing exports as their trading partners hammer them with import tariffs. China's annual steel industry capacity is 1,200 million tonnes with 2015 production or 810 million tonnes. China's domestic auto industry's annual steel demand is only 45 million tonnes and that's crashing. Total Chinese domestic steel demand may be 200 million tonnes. Good luck finding buyers for that other 600 million tonnes of steel. Annually! China may continue building unsold and unsaleable stockpiles of rebar and cold rolled steel and so on. Maybe they'll build ghost warehouses districts stuffed full of unsold production. How long can that possibly continue? To the end of 2016? 2017? All of China's debts are eventually going to be paid by some group in China. My bet is that the Chinese Communist Party is going to try to make the Chinese People pay those debts with a drastically reduced standard of living. Goodbye consumer economy! Hello violent revolution! Of course, the analogous situation exists, with probability for similar results, in all of the Western Oligarchy's/Kleptocracy's.

Atomizer's picture

gregga777,

You have never interacted with Globalisation! You don't have a pot to piss in on getting a container shipped to United States of America or Brazil. 

strangeglove's picture

When you think about what is cheap plastic shit made of? Maybe 60% deval needed

strangeglove's picture

When you think about what is cheap plastic shit made of? Maybe 60% deval needed

Pabloallen's picture

Lets get it over with please. Im not getting any younger.

 

FranSix's picture

The world is run by old men who qualified for senility at the tender young age of 50.

Atomizer's picture

Let China and Japan Central banking panic. 

Buy low, sell high SWF (sovereign wealth funds)

Fund Rankings | SWFI - Sovereign Wealth Fund Institute

yovatti's picture
yovatti (not verified) Mar 26, 2016 11:57 PM

 

 In that video, Hendry looks and sounds like he's been on a month-long scotch and cocaine bender.

 

He's a fascinating and intelligent gentleman, but I wouldn't let lim manage my money.