Hugh Hendry Channels Irony And Paradox In His Latest Financial Outlook

Tyler Durden's picture

Submitted by Brett of Contrary Investing

Hugh Hendry Channels Irony and Paradox in His Latest Financial Outlook

Yesterday I had the great honor and opportunity to sit courtside for a live one-hour presentation from our favorite contrarian, irreverent hedge fund manager – Hugh Hendry himself.  What a thrill!

Hendry, as you may know, is partner and Chief Investment Officer at Eclectica Asset Management.  While his claims to fame are numerous, his two most notable (for those getting to know him for the first time) are:

  1. A 31.2% *positive* return in 2008
  2. Some truly hysterical TV clips (See: Hugh  Hendry’s Greatest Hits for four minutes of financial bliss)

Hendry is a big favorite of ours at  I also just learned that he was “The Plasticine Macro Chapter” interviewed (at the time) anonymously by Steven Drobny in his excellent recent book Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money – which profiles a select group of hedge fund managers (all “off the record”) that made money in 2008.  I went back and re-read this chapter the night before Hendry’s preso, to re-familiarize myself with his investing/trading philosophy.

Hugh Hendry Eclectica Asset Management 2012 outlook

Hendry electrifies his Sacramento audience.

The Power of Irony and Paradox

Rather than trying to compete pure “intellect-for-intellect” with the likes of George Soros, Julian Robertson, and the other great minds of the hedge fund world, Henry instead relies upon what he calls “the power of irony and paradox” to foil the logically minded and deliver his superior returns.

In other words, he bets on strange events happening – those not anticipated by the mainstream.

This strategy paid off in a big way in 2008, when his out-of-the-money options hit big, and his fund returned 31.2%.  It has tended to underperform, though, when (to paraphrase Hendry) “bad stuff doesn’t happen.”  Fortunately for Eclectica investors, he sees a bad moon rising once again.

Why China is Not 19th Century America

While many economic observers have drawn an analogy between China's ongoing industrialization and that of America’s, Hendry sees a critical difference.

In the US, he says, capital has always been allocated where it could achieve the highest return.  In the 19th century, when America was the economic upstart on the block, it was also on the gold standard.  Which is very important, according to Hendry, because it allotted entrepreneurs one – and only one – chance to succeed.  It was not a time of bailouts and multiple bankruptcies!

China is different, he believes, because it is industrializing with a fiat currency.  Thus they fall into the trap of misallocating capital – building bridges to nowhere, towers for nobody, and so on.  China’s goal is similar to that of 1980’s Japan in his opinion – full employment, rather than maximizing return on capital.  A critical, and even fatal, difference, in his mind.

The New Model for the Global Economy

You know the old drill – China and Asia produce, the US consumes.  They cycle their greenbacks back over this way, finance our debt, we buy more of their stuff, and the beat goes on.

This model officially stopped with the launch of QE2, Hendry says, as the US officially started rejecting the globalization that had made the global economy hum (perhaps largely at the expense of US employment and manufacturing).  With QE2, dollars were printed and exported – along with inflation – to Asia.

This led to the countries in Asia – and Europe, too – raising rates to combat inflation.  The result, he says, is that global economic growth has essentially ground to a halt.

So what’s next?

A crash, of course.

Europe’s Debt Spiraling Out of Control

Hendry then pulled up a chart of US and Europe non-financial debt to GDP, illustrating that Europe’s debt has been spiraling out of control ever since the formation of the European Union.

Participant nations, he puts it, received initial “ALT-A” rates – nice low German interest rates – for signing on.  But the fixed exchange rate that the euro imposes on the peripheral nations started the time bomb ticking.

Hendry, in fact, is very down on fixed exchange rates, and believes the euro and the dollar/renminbi peg are at the heart of global economic insecurity today.

He believes the recent referendum in Greece could be a very significant event, likening it to a 1931 mutiny in England that forced the Brits off the gold standard.  He things the Greek referendum could be the trigger to disengage from their fixed exchanged rate (and cited everyone’s lack of anticipation for the referendum as a classic example of irony in finance).

Stage Not Yet Set for Hyperinflation and Gold $3000

The high CPI numbers being reported in the UK and other Western nations are “meaningless”, Hendry says, because in today’s economic environment, it does not translate into wage growth.  (In the 1970’s, it did).

Because wage labor is approximately 70% of total business costs, he does not see meaningful inflation without wage inflation.

He’s also down on gold because it is not a contrarian investment today as it was 10 years ago (he had a nice year in 2003 buying gold and gold stocks when nobody wanted them).

The widespread belief among the greatest financial minds today that hyperinflation is inevitable greatly disturbs him.

In the Western world, he sees hyperinflation as a political choice – one that requires the will of the populous.  (Forget Zimbabwe, he says – that might as well be Timbuktu.  It’s not our culture.)

He sees society’s current mood as “dark” (Tea Party, Occupy Wall Street, and social unrest in Europe to name a few), and believes this makes bailouts and money printing very hard.  The only environment that makes hyperinflation possible is “the mother of all depressions” he says.

In keeping with his anticipation of paradox, he quipped that if you believe in hyperinflation, then you should be levered up long on 10 and 30-year Treasuries…because in order for hyperinflation to become a political reality, deflation must arrive first.

2012 Economic Outlook and Investment Positions

Of the many places Hendry doesn’t want to be long, China is near or at the top of the list.  He thinks China could be subject to a 25% (!) decline in GDP over the next five years.

How is that possible?

He draws an interesting analogy: “UK GDP fell 8% in the Great Depression, while US GDP fell 25%.”  Inferring, of course, that today’s China is the upstart US to our current “UK peak empire” role.

In what he calls “the great unwinding”, the strongest economies in the world are also – ironically – the most vulnerable.

But that doesn’t mean he’s bullish on the developed world, either.  He has an aversion to just about everything.

“It’s checkmate.  Everywhere it’s checkmate.”

He believes Italy is insolvent, citing their huge borrowing binge over the last ten years that has only achieved 0% growth.

He loves Japan – as a culture and place to visit – but is especially bearish on several Japanese sectors.  He’s long credit default swaps with respect to cyclical, leveraged Japanese businesses.  He’s also bearish on Japanese utilities, which have issued tremendous amounts of debt since the Fukushima disaster.

Hendry’s favorite sacred belief – which he’s betting against, of course – is the fact that no one believes the ECB will ever cut rates below 1%.

He’s made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1% next year.

Big thanks to the CFA Society of Sacramento for hosting the event, and to my pal Jonathan Lederer for landing Hugh and letting me crash the event as his guest!

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UP Forester's picture

He's not bearish on gold anymore, but long CDS on Japanese sectors.

Too bad the first has only been worth something for thousands of years, while the latter was proven last week to be useless last week....

Bananamerican's picture

"The only environment that makes hyperinflation possible (& gold golden) is “the mother of all depressions” he says."

I think Hugh underestimates western populations impatience with pain...

We've got the embers of unrest now....

How much farther into deflation do we need to go till Argentina? Not as far as he thinks, imho

theMAXILOPEZpsycho's picture

every month more and more baby boomers retire and expect fat pensions. Goverments might think, oh just a little, just a little bit more easing

meanwhile china says, hmmm like to expand the military and take more control in africa, dollar becoming worth less and less, lets just dump a few more billion

and with the velocity picking up the money supply is already big enough to lead to hyperinflation

Having said that I do think we'll see massive deflation first

agent default's picture

Depends on the definition of massive, it tends to be very subjective.  Western society mentality seems to be stuck in "entitlement mode" for quite some time.  can really blame them either.  Many people paid contributions to a national insurance/security system that spent their money instead of saving it for them.  They will be righteously angry when financial reality hits and they will have to be satisfied.  Running the printing press seems to be the most efficient means of doing so, so far.  Very few people understand the implications of CB actions.  Most of them are happy with a scape goat like evil commodity speculators, hedge funds shorting bonds etc.

Spitzer's picture

The countries involved in the Asian financial crisis (400 million people) did not experince "deflation" first.

nick elsworth's picture

The easiest way to determine what TPTB will do (regarding inflation/deflation) is to indentify which demographic has the most money to lose, then bet that they will suck that money from them.  In my opinion the retirees have the most money to grab, so the easiest way to grab it is to inflate their money into irrelevence.  The majority of retirees are already investing in bank CDs yielding NEGATIVE real returns. 

Spitzer's picture

Unfortunatly allot of people look to be dumb enough to hold these bonds while their capital gets destroyed. Negative returning assets actually destroy capital.

Treason Season's picture

Spitz, please,

it's  "... a lot of... .

"Allot" has a completely different meaning. Cheers.

twotraps's picture

agree, totally overlooked aspect of todays trade.  I also wonder about Deflation, despite all the arguments bla bla bla ....simply because its what they fear the most and if there is Any semblance of a mkt left, it finds a way to punish you in the end.  In this case it may just be deflations.

Bicycle Repairman's picture

"The easiest way to determine what TPTB will do (regarding inflation/deflation) is to indentify which demographic has the most money to lose, then bet that they will suck that money from them."

Another thing to consider is: what has worked in the past?  Looking to the 1970s inflation is the answer.  If we look to the 1930s we see deflation, but that is the period that is marked as a mistake and a never-to-be-repeated calamity.  The 1970s is just another decade.  So the answer is inflation.  2% to 10% a year until this blows over.  This might take a generation.

mkkby's picture

Everyone on ZH believes banks rule the world.  So hyperinflation will never happen because that frees everyone from their debt.

The banks already have their perfect setup.  Zero interest rates, which allows them to slowly suck the retirees savings.

If you (wrongly) believe in hyperinflation, don't just buy gold.  Get as heavily into debt as you can.

Voodoo-economist's picture

but wage inflation, to be fair

hbjork1's picture

In addition, there is always the destruction of buying power in any savings denomitated in paper money buying power.  I have two fixed pensions granted as a result of corporate acquisitions. One was 1972, the other abouit 1979.   The buying power when granted would be roughly equiviliance to Social Securiy payemts today. 

But I know what it is to dig ditches professionally with a shovel in a southern summer sun.  Life is a terminal condition and I am at an age of entitlement so I might as well enjoy it.  

Citxmech's picture

It's never been "either/or" it's been whether hyper-inflation would follow the deflation that is looming. 

Deflation is assured at this point.  If loans aren't being made at a rate to pay the interest on the current debt-load - our debt-based system will collapse out of necessity.

Do our "leaders" have the will to idle the printing presses in the face of catastrophic deflation?

I'm with M. Faber:  NO.

PMs Bitchez.

Libertarians for Prosperity's picture



Deflation is assured at this point?  Are you aware that there are individuals at ZH who don't believe in deflation?  They think it's a myth.  


Bicycle Repairman's picture

Inflation, deflation or hyperinflation are policy decisions, IMHO.  If the economy was left to its own devices there would just be deflation.  Does anyone believe that the economy will be left to its own devices?  Deflation will be tolerated to a point when it is helpful e.g. driving down gas prices in an election year.  The long term solution is inflation and lots of it.  They will not allow hyperinflation.  It's not helpful to TPTB.

Dane Bramage's picture


"The only environment that makes hyperinflation possible (& gold golden) is “the mother of all depressions” he says."

I think Hugh underestimates western populations impatience with pain...

We've got the embers of unrest now....

How much farther into deflation do we need to go till Argentina? Not as far as he thinks, imho




Zactly!  & yes, we can "forget about Zimbabwe" (maybe?) , but what of the litany of all other inflationary examples throughout the world & history?   Untenable debt is untenable, even in bizarro land where debt = *money*...errr, currency.  Default or Inflate (or do I repeat myself?) ~ those are the only options.  Place yer bets &/or prepare accordingly.


Bwahaha WAGFDSMB's picture

The 2 leading causes of hyperinflation are, foreign denominated debt, and war.

camaro68ss's picture

who says you cant have inflation with out wage incresses? why? why cant you have staghyperinflation?

pirea's picture

Hyperinflation will come when all money on the side, in preservation mode, will start bidding on something real.

Does not have anything in common with wages this time, because is going to be run by a minority.

Mike2756's picture

Where's Tyler's lampost pick again, lol. We'll see how long the minority lasts.

wisefool's picture

Someting real? Groupon IPO'ed at $20/share. As explained to me, you are going to take one of these into a local business and have the lost in translation soup nazi negotiation with your local small businessman. That sounds real funny!

hayesy316's picture

Because inflation is self-limiting unless labour can demand higher nominal wages. In a low-skill, globalised economy obsessed with free trade and a bottomless pit of slave labour (ie, China), it ain't gunna happen. But hey, buy gold, right? You know better than Hugh Hendry.

CapitalistRock's picture

You could not be more wrong. Ever since the Roman Empire inflations were created by debasing the currency. Higher wages are never necessary if your central bank keeps printing.

Crime of the Century's picture

But hey, buy gold, right? You know better than Hugh Hendry.

If you are speaking of physical gold, then yes, I guess I do. Hendry likes to tell people his judgement of whether they are true contrarians, but it is still a most accurate assertion that owning bullion is a contrary position. ETFs, shares and rolling futures are something fundamentally different from bullion, the ultimate contrarian position.

Bicycle Repairman's picture

Inflation without wage inflation means a lower standard of living.  Well we know that could never happen.  LOL.

jcaz's picture

Yep- Hugh needs to update the value on those CDS's to "when they don't feel like honoring them" on his balance sheet....

Bad Lieutenant's picture


Hendry obviously has an impressively keen mind.  I think his weakness, however, is that is pride is so wrapped up in identifying with being contrarian that his mind is biased against strategies that happen to be even somewhat widespread (the key of course being to figure things outs before the masses do).  Being a contrarian may pay off well in minor to moderate turning points in history, but when the insolvency of the G8 is becoming increasingly clear to even the most wool-headed financial minds then guess what: we're getting close to the rapids and waterfall.  The sad thing is that most people are still in subconscious denial in what's ahead, so in that way it's still not even contrarian to to be positioning in common-sense trades that will payoff when things start to go nuts.

Zh posted that four part video of Hendry a week ago, and to me it was really apparent how much on the edge of sanity that guy is.  


Bolweevil's picture

Sanity is overrated. Could it be said that the definition of INsanity is NOT doing something repeatedly and expecting a different outcome (read: sit idly by as fraud and corruption rule the day)? Short ban pfft! ES pump pfft! PM manipulation pfft! Regulatory capture pfft! Moral hazard pfft! Have honesty and transparency always been so elusive?

Bad Lieutenant's picture

Yeah, you're totally right, plus I'd be the first to agree with the fine line between genius and insanity augment.  I suppose my criticism should have been more thought out.  Now that I'm putting my finger on it (and I thank you for your comment), I suppose that it was comment about his long term return figure written on a piece of paper that he said what he was most interested in.  It made me think that although being right in trades can feel good and do amazing things to a life, I'm pretty sure it's not healthy for that to be the most important thing.  It's the same affliction as any of these bankers have, except that Hugh runs his own show.

Bolweevil's picture

Some of them are full on pathological. How else could they sleep at night with their shenanigans? And we only know about the few things that get reported...

kaiserhoff's picture

Bad moons, and facials, and money shots, oh my!

wisefool's picture

I generally dont like low humor, but man, that was funny. On the more up and up side of humor, bloomberg had a "Formal Federal Prosecutor" on the phone today around 15:00 EST re: MF Global.

Maybe my eyes are bad, but for the entire telephone conversation segment they had the guys portrait on the screen and his title was "Formal Federal Prosecutor" what woud an "informal" federal prosecutor be?

Strom's picture

Probably was a "former federal prosecutor" and the person typing it in heard it wrong.

wisefool's picture

Ohh I know. I was just kinda wishful thinking that there is a shadow government that catches the bad guys like corzine. (legally, without violence)

Strom's picture

Likely a shadow government, but they do not catch bad guys like corzine (unfortunately).

moskov's picture


So dollar is not currency of capital, but fake confidence without manufacturing production backing with it.

Nuclear Bombs? Plenty of countries have them these days. Not a big deal.


Hugh Hendry Long CDS? good luck with him. Hope you can dress them AS underwear in the bedroom and put your food on the table
Bumblebee Tuna's picture

I reckon that Fort Knox is stuffed full of gold, 'however' it's probably mostly illegally looted gold from post WWII Germany and Japan, and more recent exploits in Iraq and Libya.  

All the gold that the US doesn't want the rest of the world to know it has in its possession.

wisefool's picture

What exactly could they do about it? The world pulled more gold out of the western hemisphere than is still there (above or below ground) regardless of who "owns" what chunk.

iDealMeat's picture

Even if you can "prove" or at least provide a compelling argument that there is no god, the blind faithful will still go to church.


donsluck's picture

Yes, we are a faith based economy. Geitner et al have been complaining about the loss of faith, and what to do about it. So, the question is, what happens to a society who has lost it's faith. Your argument is that we will "still go to church" ie use this instrument we have lost faith in and I agree. But this site is not for those who want to get by. This site interests those whos' persuit is profit.

Mike2756's picture

Let them print some more, real incomes will fall even faster.

smoked's picture

Engaging site.  Happy surf & turf all you can Heat branding.

knight99's picture

HH is Legendary

centerline's picture

HH is legenday - no doubt.  He is right on the fucking money.  The only thing he doesn't do (because it would be moot in his position) is outright connect the dots a little further outside the economic spectrum.  What I am talking about is the obvious unsustainable, silly notion of perpetual exponential growth based on a monetary system that generates malinvestment on the basis of pure profit (serving those closest to the creation of various fiat currencies most) over what is best for society as whole.  "Checkmate" alludes to this though - so I have to give another favorable nod to HH.

Bruin4's picture

I like Hugh a lot, but his timing has been absolutely fuking awful these past 2 years, then again so has does not mean he is wrong - just early, which is wrong no?

WonderDawg's picture

When it comes to trading, yep, early is wrong. When it comes to preparation for a cataclysmic event, early is genius.