What major macro themes will impact financial markets and the global economy as we head into 2011 and beyond?
This evening's must read report comes from Hugh Hendry, arguably the most creative and free-thinking money manager in the world, of The Eclectica Fund.
While CNBC (well, Erin Burnett) is looking at the Kospi and is amazed how the index did not move after it had closed before the military exchange last night, the latest from Yonhap is that the tension in Korea is far from diffused: "North Korea threatened to continue "merciless" strikes on South Korea on Tuesday after the communist state launched a deadly artillery attack across their western sea border. In a statement carried by the official Korean Central News Agency, the North's top military command accused the South Korean military of initiating the exchange by shooting toward its side." Of course, South Korea refuses to demonstrate that it continues to be utterly toothless and issues the following statement: "President Lee Myung-bak ordered his military Tuesday to strike North
Korea's missile base around its coastline artillery positions if it
shows signs of additional provocation, his spokeswoman said." Luckily, Jim Cramer is now expecting both Koreas to sit down for a friendly turkey dinner in a few days in the mine field in the middle of the DMZ, and diffuse the situation.
Former BIS Advisor And Central Banker Warns Entire World Is On Verge Of Another Bubble That "Could Burst With Disastrous Consequences"Submitted by Tyler Durden on 11/03/2010 12:34 -0500
In an interview with Dow Jones, William White, who previously was an economic adviser to the Bank of International Settlements, and prior to that spent 22 years at the Bank of Canada, warned that the "massive infusion of credit" accompanying the sudden and dramatic ramp up in the printing of new money as a policy response to all problems, both within the developed and developing worlds, is now "manifesting itself in the sharp rise of asset prices in large developing economies, which could potentially become another bubble that will burst with disastrous consequences for the global economy." He added that the global economy is in a 'particularly dangerous' position that can only be corrected if the currencies of developing countries strengthen relative to those of developed countries, according to William White, one of the few policy makers to correctly predict the onset of the financial crisis. Of course for that to happen, the much fabled decoupling needs to finally manifest itself, and for Jim O'Neill to be finally proven right. Of course, that won't happen. Which is why we ask, the next time there is a systemic wipe out, in addition to naturally eliminating the Fed, can the terms BRIC, N-11, and all other such ridiculous acronyms, please be banned from usage in perpetuity?
Everything is proceeding exactly as I have foreseen - Emperor Palpatine
Hugh Hendry Interview With King World News: "If Inflation Is A Monetary Phenomenon, Hyperinflation Is A Political Phenomenon"Submitted by Tyler Durden on 09/28/2010 14:27 -0500
In which we learn that that outspoken iconoclast has now taken on a $2 billion short position in Japanese credit, although presumably not cash-based as Ecclectica is well under that in AUM. For those who wish to recreate this position synthetically, we refer you to Dylan Grice's ATM swaption in the 10Y10Y forward which is the cheapest way to follow in Hugh's footsteps, and, ahem, may we remind you of Takefuji's recent bankruptcy...). His bet is in essence a gamble against the "China will never fail" bandwagon: "I am just intrigued as to the optionality, as to the profits that could be made, should that revert. And because it's deemed to be impossible, the trade is actually asymmetric. By golly if I am right, I can make a lot of money." Another topic is the already much discussed malinvestment in China, which was the centerpiece of the argument between Hendry and Faber from some time ago (link for clip). But back to what actual things Hugh is doing, he gives the following specifics: "I am shorting 10 year industrial corporate debt with 1% yield. Should this ricochet, which began in America, should the west be grappling with fears of recession, it goes to Asia, it goes to China, and I do not believe they have the vitality and consumption to pull the global economy out." And just in case there is any doubt how Hendry view the endgame, here it is:"At these immense levels of yen strength, Japan is bankrupt. And when it's bankrupt it has given up hope, and there is huge political legitimacy to then do quantitative easing, which leads to the debauchery of the system." In other words: the nuclear response of monetary debasement is certainly coming. We won't spoil what Hendry says on gold (suffice to add the following quote: "We will see a joint meltup in US Treasrys and gold") - for his insights on where the metal will go, for a shoutout to all Zero Hedge Hugh Hendry fans, and for much more, listen to the whole interview.
It is no longer fun being a hedge fund manager - first, up until the recent POMO-based rally in stocks, HFs were down for the year, and what is far worse, they were underperforming the broader market - a death sentence for pretty much every hedge fund, as this is proof a fund can not extract alpha and thus has no reason to collect 2 and 20. While the recent ramp in the market is welcome by all bulls, the question remains just how leveraged into the latest beta rally hedge funds have been. If after the nearly 10% rise in the past 2 weeks any individual HFs are still underperforming the market, it is a near certain "lights out." To everyone else: congratulations - you just bought yourself another 3 months of breathing room. Better hope the Fed makes good on its QE promises one day soon. In the meantime, Bloomberg Matthew Lynn and Ecclectica's Hugh Hendry both confirm that in these days of instantaneous liquidity demands, and cheap strategy replicators in the form of ETFs which provide the same beta capture as hedge funds, at a fraction of the price, it is only going to get worse and worse for the once high flying community. In fact, Hugh Hendry goes as far as suggesting that 10 years from now 80% of all hedge funds will be gone. Our personal view is that the target will be reached in a far shorter time frame.
In his latest must read letter, Oaktree's Howard Marks focuses on the age old self delusion pattern formation and mean reversion which so often is the cause of ruin of so many investors: "Investors consistently fail to recognize that past above average returns don’t imply future above average returns; rather they’ve probably borrowed from the future and thus imply below average returns ahead, or even losses. The tendency on the part of investors toward gullibility rather than skepticism is an important reason why styles go to extremes." Yet the High Yield bond manager, is oddly enough, bullish on stocks and bearish on bonds. However, even Marks can't fully bash fixed income - he has now joined those drinking the "HY will outperform IG" kool aid, in no small part dictated by the portfolio allocation of his funds... Just as Pimco will tout Treasurys... Paulson will pimp MGM and "recovery" names...Hugh Hendry will bash China, etc. Buyer beware... Especially when the one true end-buyer is that 1913 Frankenstein creation - the US central bank.
With concerns about surging food prices recently inflamed courtesy of the series of fires in Russia and the halt of grains exports out of the country, several heavy hitters have come out recently to discuss their views. One among them is the man with the best YTD performing macro hedge fund according to Bloomberg, Hugh Hendry, who appeared on BBC's ever-informative Newsnight to discuss potash, food prices, and other scarce resources.
Being right pays off. Being an outspoken, funny, irreverent, non-sycophant, who has achieved the best 2010 YTD return according to Bloomberg's scoring of macro hedge funds, without holding a gun to the head of the American people and telling the president that the latest 100,000 sq. foot expansion wing in the third island palace is really for the common good, is priceless.
In his traditionally curt and to the point way, Hugh Hendry proclaims his "love" for the president, in this rare profile piece on the Scottish fund manager by the NYT. While none of his opinions will come as a surprise to Zero Hedge regulars ("The euro? It’s finished, Mr. Hendry proclaims. China? Headed for a fall."), we do recommend the article to those still unfamiliar with one of the truly iconoclastic fund manager still left in the open. While Hendry does not run a fund nearly as large as some behemoths out there (his Ecletica is less than $1 billion, John Paulson is $30), it does afford him a nimbleness that JP (whose recent rumored liquidations in the gold market are destined to create feedback loops that further accelerate liquidations) or, much more blatantly, Pimco (with its $1 trillion + in Treasuries, Corporates, Sovereigns and Mortgages) which is the market in all its verticals, can only dream about. It also affords him the opportunity to say what is on his mind, and on those of many others, who however dread the political consequences for being a little too honest. It is this forthrightness and honesty that has reserved Hendry a sterling place within the Zero Hedge community, his candor regularly scoring posts receiving well over 20k reads (and at 60k hits, his "I recommend you panic" is among the Top 20 most popular Zero Hedge posts of all time.
In this interview by Bloomberg's Erik Shatzker (we have added the full interview, not the abbreviated version), Hugh Hendry tries hard not to dance on the euro's grave... and fails. He compares the European currency to the gold standard in the 1920's: "We are now seeing a conflict between domestic stability, prosperity and the need for external balance, and that typically rings the bell on such a system." He further discusses George Soros' recent media appearances and his recent Op-Ed in which as was noted, the Hungarian is very concerned about the eurozone courtesy of Germany's non-Keynesian actions. In tried and true fashion, Hendry doesn't mince his words: "George is someone we all aspire to match his brilliance. But remember the richest people in the planet become socialists. Socialism is a great thing for George. I want to bring George down. I want George's reputation. But George is now embracing socialism. Socialism is where you build a moat around the castle. I am spending all of my time trying to decide where I'm gonna live, because taxes country in this are so high, and less of my time trying to work out how do I surpass Soros and his reputation." And his take home message: "The noose is getting tighter and tighter... not in Europe, but in Asia."
A few weeks ago Zero Hedge offered a modest critique of Jeffrey Sachs after his disastrous performance in a round table debate with Hugh Hendry and Gillian Tett, in which the Columbia professor came out sounding as clueless as a first year economics major. It now appears that Mr. Sachs may be attempting to atone for his myopia memorialized by the BBC, in the following FT Op-Ed in which he unabashedly lashes out at Keynesianism. In it we read: "Mainstream Keynesian economics is facing its last hurrah. The global fiscal stimulus championed last year by the Obama administration is coming undone, repudiated by the same Group of 20 that endorsed it last year. Now, against a backdrop of a widening sovereign debt crisis, we need to abandon short-term thinking in favour of the long-term investments needed for sustained recovery." Such words of caution from a man who as recently as two weeks ago was encouraging precisely the very steps he is now purporting to be against. Nonetheless, we greet with open arms this most recent act of contrition by yet another economist who leaves the warm innards of the corpse of the economic false religion, and finally sees the light. Welcome Jeffrey.
Oh, what a tangled web we live in. On one side of the Atlantic, there is a fundamentally broke European Union. On the other, the world’s largest debtor nation, these United States. Rotate the globe and you discover China, the world’s most populous nation: a nation whose economy is desperately dependent on export revenues, without which its government may find it hard to meet the population’s soaring aspirations. And who is China’s largest trading partner? The European Union, that’s who. The web also encompasses the role that the U.S. dollar plays in the relationship between the European Union and the Chinese. Or, more specifically, the role the peg plays that China maintains with the U.S. dollar. As long as the U.S. dollar is weak, the Chinese yuan is weak and therefore competitive in European markets. The problem now is that, with the euro falling, in order to remain competitive, Chinese companies must reduce their margins. Therein lies the rub, because the razor-thin margins of the Chinese companies – estimated to be on the order of just 2% -- face the very real danger of thinning to the vanishing point. After which the best a Chinese company will be able to hope for is to make up its losses on volume. That was a joke.
We apologize in advance for harping back on this issue, but it is pretty damn hilarious. In the BBC Newsnight interview with Hendry, Tett and Sachs, the esteemed Columbia professor, at 4:50 into the clip, asks "How long has this Greek question been on the table. Ablout 10 weeks maybe?" A rather violent explosion from Sachs follows when Hendry calls him out on his tenured stupidity. All this was discussed yesterday. However, we wanted to provide a response to the Ivy League professor, as he did pose a legitimate question. In the following FT interview from January 2009, Hugh Hendry discussed the future of the eurozone and the PIIGS, and at 24 seconds into it, he provides the response Sachs is seeking: "I fear [the collapse of the Eurozone] is becoming more likely." He follows "If we saw parity with the euro, my goodness, that would be deemed to be unthinkable." And concludes, "There is a shortage of dollars. People think I'm crazy - they are printing billions, trillions of dollars. But keep in mind America has $50 trillion of debt outstanding. And that was fine because they thought it had $50 trillion of assets. And what we are discovering is these asset prices deflate - it's vaporization..." Dear Mr. Sachs - the very person you were sitting across the table from foresaw everything to the dot, just as it would happen 16 months later, even as you were calling up old buddies to get that Teacher of the Year award, or get that extra fellowship (in demagoguery?). Our advice to you is do what your parents did, get (an honest) job sire.... which will never happen - pouring the Kool Aid is easy and pays well. So here is our second bit of advice: watch all Hendry appearances, and listen to what he says. He will always ends up right, and you will always be wrong, since you defend a broken system which is fated for implosion. And just as Hendry sees deflation first, then hyperinflation (and watch this clip for some more brilliant insight), so it shall be. And for some reason people like Sachs will once again be invited to roundtables, in which they will goundlessly claim that nobody foresaw any of ensuing Keynesian collapse... So now that we have answered your question, we have one of our own - how does Columbia allow this level of mediocrity to be publicized on national television?