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.
Hugh Hendry: "I Have No Idea Where The Stock Market Is Going To Be"... But "I Am Long Gold And Short The S&P"Submitted by Tyler Durden on 10/25/2012 14:51 -0400
Hugh Hendry: "I have resigned from the professional undertaking of coin flipping. I am not here to tell you where gold’s going to be. I have no idea. That’s my existentialism. I am a student of uncertainty, I have no idea where the stock market is going to be. So when I am creating trades in my portfolio for my clients, I am agnostic. I just want to enhance the probability that I make money come what may."
Everyone's favorite outspoken critic of everything that is broken, Hugh Hendry, is currently speaking at The Economist's Buttonwood gathering. Watch him contemplate macro and micro issues live in the webcast below. And for desert, everyone's favorite poker player, David Einhorn will follow Hendry.
Frustrated with the know-it-all bullish 'experts' on the Chinese economy lambasting wise boots-on-the-ground deep-thinkers such as Hugh Hendry and Albert Edwards; Marc Faber (who discussed this in detail in the clip we presented here) today set about correcting some of that vacuous chatter on China's dominance (with all its current stuffed inventory). Noting that the Chinese stock market is not exactly pointing to the growth everyone is relying on (and we add since the MAR09 lows it is only fractionally better than Spain), Faber brings up one chart (courtesy of The Bank Credit Analyst) to rule them all. Alongside the mega-bubbles of: Gold in 1970s, the Nikkei in the 80s, and the Nasdaq in the 90s, Iron Ore prices since the start of 2000 have them all beat - and recently (as we noted here) have begun to roll over.
Riots, chaos, mayhem—these are not the earmarks of a contented society... But can the stock market go up anyway??
There are various reasons why not only we at Zero Hedge are big fans of Hugh Hendry. One of them of course is his uncanny ability to not only tell the truth, but to bash his competitors faces into it (as Joseph Stiglitz so vividly recalls), even if it means running squarely against the consensus. The other reason are self-aware statements such as this one via the FT today: "What I found was that when I speak in person, and especially when it’s television and timing is so acute, it gives the impression that I am cavalier and, if you will, full of myself,” says Mr Hendry, speaking by phone from his office in Bayswater, central London." Hendry was obviously discussing his self-imposed media blackout which unlike other prominent financiers is not being used for book sales promotion purposes but appears quite genuine. It also means he won't get to collect $200/appearance fees as a guest contributor on CNBC but we digress. "The danger when people look at that from a distance is that they try to align that with the guy that they’ve just given $50m or $75m to and it’s not the same person." iI is sad that none of the other talking muppet heads and "daily pundits" who appear on financial comedy TV to merely blow smoke up assorted holes and talk their books, don't share Hendry's revelations a little more often.
The global central bank market propping continues with the ECB following in the footsteps of the BOE and PBOC, and cutting its benchmark rate by 25 bps to 0.75%, and the deposit rate to 0%. EURUSD slides. In other news, today the BOE, PBOC and now ECB have all eased.... and ES is up a whopping 0.2%. Houston: we have a problem.
The past few years have produced an impression of the Chinese government that it is invincible, and it has miraculous control over the economic machine, that the slowdown is “intentionally” engineered by the government and everything within the economy is still very much under control. Unfortunately, most who use this argument to justify that the slowdown is not a big problem have all invariably forgotten that most economic slowdowns in recent memories started with central banks tightening monetary policy to control inflation and slow down the economy, and most, if not all, of the cases ended with recession that they did not want to get into. Many have also not realized how difficult it would be for China to relate its way out of a debt deflation. So how different China is in this regard is totally beyond our comprehension, and we are forced to suggest that the believers of China cult have gone delusional. As the economic slowdown becomes a reality and a hard landing unavoidable, more of the problems we have identified will surface. The cult will surely die within the next few years at most. The only questions are when it will finally die, and whether it will suffer a violent death or slow death.
Just because ZIRP is so 2009 (and will be until the end of central planning as the Fed can not afford to hike rates ever again), the ECB is now contemplating something far more drastic: charging depositors for the privilege of holding money. Enter NIRP, aka Negative Interest Rate Policy.
Classical Hendry moments.
There are deepening concerns in Switzerland about the debasement of the Swiss franc. The SNB has pegged the franc to the euro and is engaged in the same ultra loose monetary policies as the Federal Reserve, BOE and the ECB. The SNB won't allow the franc to rise above an arbitrary “ceiling” against the euro Walter Meier himself said on April 5 that the SNB is ready to buy foreign currencies in "unlimited quantities." Meier’s comments regarding the vastly depleted Swiss gold reserves came after Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland, called on the SNB to disclose where its gold is stored, in a letter published in the respected Swiss publication Finanz und Wirtschaft. Meier said that the SNB holds its physical gold reserves “domestically and internationally, with provisions for a crisis scenario being a main factor in the decision for this decentralized storage”. “The criteria for the storage countries are: appropriate regional diversification, exceptionally stable economic and political environments, immunity for central bank investments, access to a gold market where stocks could be liquidated if necessary,” he continued. He concluded by saying that “such a decentralized storage is still preferable to an exclusive storage in Switzerland. The listed factors can change over time and that’s why the central bank is reviewing and adapting the storage locations periodically.” The SNB’s monetary policies have been imprudent in recent years and their gold sales have lost the Swiss people a lot of money.
Today the ECB is expected to do absolutely nothing, although many have their hopes up that at the post announcement press conference Mario Draghi may possibly hint at some more easing (with what collateral we wonder, and with what Germany) to bring some spring into the step of a continent that has milked $1.3 trillion in 3 year repo/discount window borrowings for all their worth and then some. And instead if the ECB cuts its rate below the psychological barrier of 1% today, or at any time over the next several months, it will make Hugh Hendry once again that much richer. Recall as of November: "He’s made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1% next year." Below is a full rundown of what to expect, and not to expected, from the former Goldmanite, now head of the central bank for the world's biggest economic region.
At The Milken Institute conference yesterday, Hugh Hendry delivered his usual eloquent and critical insights on the state of Europe. Beginning with the statement that "All of Europe has defaulted", the canny-wee-fella (translation: shrewd and cautious young chap) explained that "The political economy in Europe is such that the politicians chose to default on their spending obligations to their citizens in order to honor the pact with their financial creditors and so as time goes on, the politicians are being rejected." Between France's election of Mr. Hollande and Luxembourg's 'when times get tough you have to lie' Juncker, Hendry says the only inspiration for Europe is fiction as "you just can't make up how bad it is" as he goes on to discuss the precedent for a way forward, the grotesque distortions of fixed exchange rate regimes, why Wiemar happened, why the transfer union will never happen, Ayn Rand's reality, and fear politicians are feeling - ending with his view that "we are single-digit years away from the most profound market clearing moment".
Hugh Hendry is back with a bang after a two year hiatus with what so many have been clamoring for, for so long - another must read letter from one of the true (if completely unsung) visionary investors of our time: "I have not written to you at any great length since the winter of 2010. This is largely because not much has happened to change our views. We still see the global economy as grotesquely distorted by the presence of fixed exchange rates, the unraveling of which is creating financial anarchy, just as it did in the 1920s and 1930s. Back then the relevant fixes were around the gold standard. Today it is the dual fixed pricing regimes of the euro countries and of the dollar/renminbi peg."