Hugh Hendry's Eclectica Fund has had a great Q4 (up 3.3%, 4.0%, and 5.0% in the last 3 months) despite portfolio risk being quadruple his 'old normal'. How did he achieve this? He begins... "There are times when an investor has no choice but to behave as though he believes in things that don't necessarily exist. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully. The good news is that mankind clearly has the ability to suspend rational judgment long and often... He who hangs on to truth has lost. The economic truth of today no longer offers me much solace; I am taking the blue pills now."
In some respects we’re in danger of running out of appropriate descriptive superlatives for the current bout of “irrational exuberance” (we’re open for suggestions). The current asset bubble is in many respects reminiscent of the late 1990s tech bubble, but it also differs from it in a number of ways. One of the major differences is that the exuberance recorded in the data is largely confined to professional investors, while the broader public is still licking its wounds from the demise of the previous two asset bubbles and remains largely disengaged (although this has actually changed a bit this year). Monetary pumping merely redistributes existing real wealth (no additional wealth can be created by money printing) and falsifies economic calculation. This in turn distorts the economy’s production structure and leads to capital consumption, thus the foundation of real wealth that allows the policy to seemingly “work” is consistently undermined. At some point, the economy’s pool of real funding will be in grave trouble (in fact, there are a number of signs that this is already the case). Widespread recognition of such a development can lead to the demise of an asset bubble as well.
Looking for answers to both financial safety as well as financial freedom in the same light or viewpoint where it seems one only needs to “think like a billionaire” or “tweak” or “slightly modify” perceptions on how one approaches these financial markets today – will hurt more than it will help. The Wall Street everyone believes they are dealing with today is just in name and memory. What made sense just 6 years ago not only doesn’t but rather if you try to apply any sense that resembles “common sense” you might as well be asking the Cheshire cat for a more straight answer. "How exactly are you handling the stresses and strains having to basically push sound fundamental theories or market underpinnings aside and now trade and position money at risk based solely on what some Central Bank will do next?" This is the avenue I wish Tony had driven or sought.
In the final part of Hugh Hendry's 3-part (part 1 and part 2 here) interview with MoneyWeek's Merryn Somerset the Sanguine Scot, perhaps surprisingly to some given his previous negativity - though fitting with his world view of fiat currency destruction - believes "to bet against China or Chinese equities, or the Chinese currency is to bet against the omnipotence of central banks. One day that will be the right trade, just not ready or sure that that is the right trade today."
In the second of three interviews (part 1 here), Hugh Hendry tells MoneyWeek's Merryn Somerset Webb why central banks will go even further than anyone expects to keep the global economy afloat. Hendry notes, "there’s so much debt that if you reprice debt, the economy slows down. We saw that I think in 2012, after the taper tantrum and ten-year bond use went over 3%. What happened next? The economy slowed down. If anything I would be a buyer of U.S. Treasuries."
In the first of three interviews with Merryn Somerset Webb, Hugh Hendry, manager of the Eclectica Fund, talks about what it takes to be a good hedge fund manager – and how he learned to stop worrying and love central banks. As he notes, the world is "guilty of the misconstruing of a bull market in equities, for what is actually the ongoing degradation in the soundness of the fiat monetary system."
"My premise hasn’t really changed since I published my paper explaining why I had become more constructive towards risk assets this time last year. That is to say, the structural deficiency of global demand continues to radicalise the central banking community. I believe they are terrified: the system is so leveraged and vulnerable to potentially systemic price reversals that the monetary authorities find themselves beholden to long only investors and obliged to support asset prices. However, I clearly confused everyone with my choice of language. What I should have said is that investors are perhaps misconstruing rising equity prices as a traditional bull market spurred on by revenue and earnings growth, and becoming fearful of a reversal, when instead the persistent upwards drift in stock markets is more a reflection of the steady erosion of the soundness of the global monetary system and therefore the rise in stock prices is something that is likely to prevail for some time."
Having infamously "thrown in the bearish towel" late last year (must read), Hugh Hendry's Eclectica fund has not enjoyed the kind of money-printing melt-up euphoria he had hoped for in 2014. According to his August letter to investors, the fund is -10.9% year-to-date, shrinking the firm's performance since inception to a mere +0.7%. His positions are intriguing but his commentary can be summed with this sentence alone, "when central banks are actively pursuing a goal of higher prices the most rational course is to tenaciously remain invested in equities." And so he is...
With everyone focusing on the "Holy Grail" deal between Russia and China, and debating who got the upper hand in the 30 year price delivery arrangement, a just as notable story is that quietly overnight Goldman's China team just took China to the cleaners. In a flurry of reports covering everything from Chinese banks to property developers to the Chinese, Goldman effectively mirrored what Hugh Hendry said several years ago when he correctly concluded that China is drowning in overcapacity, and concluded that a "two year property downcycle is imminent."
We have bad news for hedge funds who, like Hugh Hendry in December of last year, threw fundamentals and caution to the wind and, with great reservations, jumped into this momo bandwagon in which mere buying beget more buying until nobody knew why anyone bought in the first place... and then everything crashed, leading to the worst day for hedge funds in a decade: according to Goldman's David Kostin, whose job is to be a cheerleader for the intangible "wealth effect" leading to all too tangible Goldman bonuses: "The stock market will likely recover during the next few months... but not momentum stocks."
In the aftermath of the recent Wall Street Journal profile piece that, rather meaninglessly, shifted attention to Bill Gross as quirky manager (who isn't) to justify El-Erian's departure and ignoring Bill Gross as the man who built up the largest bond fund in the world, the sole head of Pimco was eager to return to what he does best - thinking about the future and sharing his thoughts with one of his trademark monthly letters without an estranged El-Erian by his side. He did that moments ago with "The Second Coming" in which the 69-year-old Ohian appears to have pulled a Hugh Hendry, and in a letter shrouded in caveats and skepticism, goes on to essentially plug "risk" assets. To wit: "As long as artificially low policy rates persist, then artificially high-priced risk assets are not necessarily mispriced. Low returning, yes, but mispriced? Not necessarily.... In plain English – stocks, bonds and other “carry”-sensitive assets would outperform cash."
Having thrown in his bearish towel in December, the self-proclaimed "last bear standing" has had a tough January. His plan, to "just be long pretty much anything" appears to have back-fired (for now) as Eclectica reports a 3.6% loss in January - the worst month since the Fund's inception. His largest loss was on a long Japan theme (leveraged) and that was somewhat offset by gains in his short emerging markets and short China themes. It appears nothing hs changed from Hendry's December perspective of the inexorable melt-up in developed markets thanks to central bank largesse (247% of NAV exposed to stocks) though he does note "renewed turmoil" which, we suppose, merely supports his thesis longer term.
SocGen's Albert Edwards, who refuses to pull a Hugh Hendry and to "stop looking at himself in the mirror", remains one of the few coherent realists in a world where soaring nominal asset prices have managed to confuse virtually every pundit into believing central bank balance sheet and stock market expansion means an economic recovery. Today he shares the one chart which as he says "the importance of which we cannot emphasise enough", and which he believes highlights the biggest risk equity investors - hypnotized by the Fed's H.4.1 weekly statement and its weekly record high balance sheet - take when they put all their faith in the Bernanke/Yellen grand behavioral experiment.
While fundamentals remain, for now, as useful as useful as having the only phone in the world; we demur to BofAML's technical analysis team for their short-term trading focus across various asset classes. In light of the only thing that matters, the Fed balance sheet (as Hugh Hendry so eloquently explained), BAML warns "beware the bear trap" in stocks...
For practitioners of Schadenfreude, seeing high-profile investors losing their shirts is always amusing. But for the true connoisseur, the finest expression of the art comes when a high-profile investor identifies a bubble, perhaps even makes money out of it, exits in time – and then gets sucked back in only to lose everything in the resultant bust. An early example is the case of Sir Isaac Newton and the South Sea Company... but there are much more recent examples that may prove just as disastrous...