Everyone knows "you never go bull retard," but it seems Eclectica's Hugh Hendry, the hardiest of hardy Scots, has accepted that there is only one way for this farce to end. As Investment Week reports, the bear-turned-bull 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”. Perhaps summing up the "trend-driven, QE-fueled" new normal better than anyone, Hendry added:"I say to my team 'don't tell me the valuations, it is trending'... This is the environment where Bitcoin could go to $1m. There is no qualitative reason, but it is trending. If I could own Bitcoin, I would. It gets worse: Hendry is now chasing the biggest momentum trend of all, that of Bitcoin, which he now "expects" to rise to $1 million! As for his hedge - don't laugh - 3D printing stocks... Sigh. We suspect, as he noted previously, he will be avoiding mirrors even more now. And yes, that this whole series now reeks of an Onion viral marketing campaign, is clear to everyone. Although sadly, we fear it is all too sincere, and a sad consequence of what happens when Bernanke's centrally-planned markets crush one after another talented asset manager and leave the E-Trade momo babies in charge.
A world, in which former permabears David Rosenberg, Jeremy Grantham and now Hugh Hendry have thrown in the towel and gone bull retard, and where none other than the Chief Investment Officer of General Re-New England Asset Management - a company wholly-owned by Warren Buffett's Berkshire Hathaway, has issued one of the direst proclamations about the future to date and blasts the Fed's role in creating the biggest mess in financial history, is truly upside down...
Faith in the current system is as high as it has ever been, and folks don't want to hear otherwise. If you're one of those people who thinks it prudent to have intelligent discussion on some of these risks -- that maybe the future may turn out to be less than 100% awesome in every dimension -- you're probably finding yourself standing alone at cocktail parties these days. A helpful question to ask yourself is: if I could talk to my 2009 self, what would s/he advise me to do? Don't put yourself in a position to relearn that lesson so soon after the last bubble. Exercise the wisdom to look like an idiot today.
Here’s the crucial part of what Summers and Krugman are saying: this is not a temporary gig. This isn’t going to just “get better” on its own over time. This really is, as Mohamed El-Erian of PIMCO would call it, the New Normal. And if you’re Jeremy Grantham or anyone for whom a stock has meaning as a fractional ownership stake in a real-world company rather than as a casino chip that gives you “market exposure” … well, that’s really bad news... Just don’t kid yourself into thinking that your deep dive into the value fundamentals of some large-cap bank has any predictive value whatsoever for the bank’s stock price, or that a return to the happy days of yesteryear is just around the corner. It doesn’t and it’s not, and even if you’re making money you’re going to be miserable and ornery while you wait nostalgically for what you do and what you’re good at to matter again. Spoiler Alert: Godot never shows up.
Hugh Hendry Capitulates: "Can't Look At Himself In The Mirror" As He Throws In The Towel, Turns BullishSubmitted by Tyler Durden on 11/22/2013 12:55 -0500
"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."
- Hugh Hendry
Back in October of 2012, Hugh Hendry proposed a very simple investment thesis: '"I am long gold and I am short gold mining equities. There is no rationale for owning gold mining equities. It is as close as you get to insanity. The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300. And there is no valuation argument that protects you against the risk of confiscation. And if you are bullish gold why don’t you buy gold ETFs, gold futures or gold bullion." Since then, anyone who listened to Hendry has made a substantial double digit return (yes, one can make double digits returns on gold even when gold is sliding: such is the "magic" of long gold, short GDX pair trades). However, following a massive, 50%+ selloff, there comes a time when even gold miner stocks become attractive to those with deep pockets filled with reserve fiat. For someone like China, that time may be now. The WSJ reports that China's largest gold company, China National Gold Group Corp., has talked to Ivanhoe Mines "about buying a stake in or asset from the company."
2013 has not been kind to Hugh Hendry, whose Eclectica Absolute Macro fund has posted an unchanged performance year to date, broadly underperforming (alongside the bulk of the hedge fund community) the market. Below are his most recent macro thoughts, his holdings (few changes most notable of which is the closure of the Yen short), and his take on how Bernanke "infamously marched his troops to the top of the hill only to march them down again, one moment promising tapering, the next, unlimited accommodation."
The storm that caused chaos across financial markets since May should not dissipate any time soon. As such, we retain a short bias towards China and an outright short in EM currencies. If world trade remains weak and local inflation keeps on gaining momentum, the currencies of several EM countries (ex-China) may remain under pressure. Such weakness may be exacerbated by tightening liquidity.
"This year we have pursued five macro themes: long the US dollar, short China, long Japanese equities, long low variance equities and long interest rate contracts at the short end of G10 fixed income markets... The invisible regime of low volatility and low correlations that had been so supportive of risk markets for at least the last year started to become unhinged."
Succinctly summarizing the positive and negative news, data, and market events of the week...
"We continue to maintain a long equity risk exposure through companies least exposed to the business cycle, whilst favouring receiving rates in developed countries most prone to a loss of economic momentum as other countries, notably Japan, weaken their currencies through the pursuit of QE. We also retain a structural long position in the US dollar and remain long yen assets [currency hedged] via the Japanese stock market.... One of our core investment themes remains the fight against deflation launched by Japanese authorities through QE of historic proportions. We believe that such radical QE creates the perfect recipe for a weaker yen and booming Japanese equities. The Nikkei rallied by 11.8% in yen terms in April 2013, the best monthly return since December 2009, and has now gained 61% from the November 2012 low. Against this background, the Fund recorded a gain of 30 bps from Japanese equities."
Aside from being core long gold and oil on the basis of an ongoing global reflation effort by the myopic central bankers of the world; Eclectica's Hugh Hendry is long consumer Staples (as he explains - for a conservative investor, there is little choice but safest, least volatile, most liquid consumer non-discretionary blue chips), long USD (cleanest dirty shirt), long Japanese equities (extreme reflation efforts), and is long the short end of the curve in various sovereign bonds around the world (once again on the basis that weaker data combined with central bank intervention means this duration will benefit). Critically, the outspoken Scot notes that Japan's monetary pivot towards QE will not create economic growth out of nothing. Instead it seeks to redistribute global GDP in a manner that favors Japan versus the rest of the world. This is the last thing the global economy needs right now. His base view remains that there will be more central bank intervention, more debasement, that a sound money core is key, and taking advantage of liquidity flows in the meantime can be profitable.
There were many casualties following Friday's 4% gold rout, but none were hurt more than one-time hedge fund idol John Paulson, who according to estimates, lost more than $300 million of his own money in one day. Per Bloomberg: "Paulson has roughly $9.5 billion invested across his hedge funds, of which about 85 percent is invested in gold share classes. Gold dropped 4.1 percent today, shaving about $328 million from his net worth on this bet alone." This is merely the latest insult to what has otherwise been a 3 year-long injury for Paulson and his few remaining investors, whose very inappropriately named Advantage Plus is among the bottom 10 hedge funds for the third year in a row. Yet despite being a one-hit wonder thanks to one lucrative idea (long ABX CDS) generated by one of his former employees (Pelegrini), Paulson still has been lucky enough to somehow amass a $10 billion personal fortune which can have a $300 million downswing in one day, even if it is in an asset class which eventually will go only one way - up. Unless, of course, like so many other fly by night billionaires, Paulson too hasn't somehow managed to lever up all his equity into numerous other downstream ventures, and where a $300 million blow up leads to margin calls and other terminal liquidity outcomes.
Last October, among the various statements by Hugh Hendry at the annual Buttonwood gathering was this blurb by the man who is otherwise a big fan of physical gold: "I am long gold and I am short gold mining equities. There is no rationale for owning gold mining equities. It is as close as you get to insanity. The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300." Vivid imagery aside, he was spot on as the GDX tumbled 30% since then. Yet with the gold miners now universally abhorred and hated by virtually everyone, has the time come to take advantage of the capitulation? That is the question posed by John Goltermann of Obermeyer Asset Management, a firm better known for its deeply skeptical view toward Apple express as part of its April 2012 letter, and which also ended up being spot on. Goltermann says: "Whatever the reason, the underperformance of the mining shares in the last 18 months has been significant. At this point, because of the price divergence, the valuation disparity, and general capitulating sentiment, there doesn’t seem to be a case for selling mining shares. Given the valuations, we are evaluating whether it is appropriate to add to the position. The negative sentiment towards gold could continue for a time, but as economist Herbert Stein cautions, “If something cannot go on forever, it will stop.” When price divergences like this occur, they usually self-correct. In the interim, there is a strong case that gold mining stocks are cheap and that much bad news is priced in." Then again, as Hendry said, it may just as well be insanity.
Several weeks ago, when sharing his latest outlook at the Economist's Buttonwood gathering, Hugh Hendry had this to say about gold miners: "I am long gold and I am short gold mining equities. There is no rationale for owning gold mining equities. It is as close as you get to insanity. The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300. And there is no valuation argument that protects you against the risk of confiscation.” For those confused, what he means is quite simple: the higher the price of gold goes, the greater the temptation of those extracting it (usually mined in various locales where worker satisfaction with labor conditions is less than stellar - see recent events in South Africa) to strike and demand higher wages (i.e., lower EPS), or of host government to nationalize it. The end outcome is a collapse in the extracting miner's cash flows and profitability, if not outright liquidation. The paradox is that the fewer actual global miners in operation, the better for the price of the actual hard commodity, as less supply means lower price, means greater probability of more miners suffering the same fate, means even higher gold price and so on. But back to the topic of gold miners. Below, for those still confused, is a simple story courtesy of the BBC in 10 pictures, summarizing the bitter dispute over Kyrgyzstan's gold production.