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   Investment Thoughts - Macro Observations

Hugh Hendry 2012 Letter and Views
After two years of silence, Hugh Hendry is back and still at his best with a new investment and shareholder letter.


Here are some excerpts, but we recommend that you read the full original report, you can find the link at the bottom of the page:


"I have not written to you at any length sicne the winter of 2010. This is largely because not much has happened to change our views. We still see the global economy as grtesquely distorted by the presence of fixed exchange rates, the unraveling of which is creating financial anarchy, just at it did in the s and 1930s. Back then the relevant fixes were around the gold standard. Today it is the dual fixed priceing regimes of the euro and the dollar/reminbi peg."




"It has long seemed to us to be the case that this economic crisis would start in the US and make its way in Europe. That has happened. However, we also think that it will end in Asia."




On China

"There is a near consensus that China will supplant America this decade. We do not believe this. We are more bullish on US growth than most. The momentous nature of recent advances in shale oil and gas extraction and America's acceptance of the unpleasantness of debt and labour price restructuring looks to us as if it is creating yet another historic turning point."


Hugh then goes into great length and details to describe the housing bubble in China, and why government statistics just don't add up!

"To really understand what is going on we must look to the shadow-banking system and how the financially repressed, caught in the tyranny of negative real interest rates, use it.These underground lending and ivnesting networks are estimated to total around $1.3 trillion. This rivals the size of the U.S. government's budget deficit."



Comparison with Britain and America in the 1930s


"Consider the paths of the UK and US economies in the early 1930s. The British, playing the role America plays today, as an empire in decline, suffered just an 8% correction in peak-to-trough GDP whereas the tiger economy of the US, role playing today's Chinese economy, suffered the indignity of a 23% nominal GDP decline in 1932 alone. In a downturn, the debtor nation mitigates the economic shortfall by importing less. It then captures most of its own GDP domesticalls and cushions the fall in GDP. The strongest looking economies can sometimes prove the most vulnerable."

The Case of Japan

"But go to Tokyo as I did at the end of February and you will see there is too eerie a sense of calm. I mainatin that the central bank will only seek to destroy the value of the currency after the next leg down in the struggle for corporate profitability that we are currently witnessing. The central bank will require a full blown crisis before it engages in all out financial anarchy. Wait until Chinese growth has unmistakably faltered."

On the Asset Management


"I meet a lot of inquisitive and extremely intelligent people in this business and I have come to think that maybe this is something of a problem. perhaps they are just too smart. Perhaps they just try too hard."




"I do not think it is logical to try and outsmart the smartest people. Instead, my weapons are irony and paradox. The joy of life is partly in the strange and unexpected. It is the constant exclamation "Who would have thought it?"




"For me this has always meant being detached from the sell-side community. It is not a question of respect, it is just that I prefer not to engage in their perpetual dialogue of determining where the "flow" is. I cannot be reached by telephone. I suspect that I am one of the few CIOs who does not maitain daily correspondence with investment bankers and their specialist hedge fund sales teams. Not one buddy, not one phone call, not one instant message. I am not seeking that kind of "edge". Eclectica occupies an area outside the accepted belief system."




"Today the key contrarian point I am trying to make is that hyperinflation is not possible without short periods of hyperdeflation, in this case possibly as a result of the death of Asia's mercantilism."




Volatility and Jesse Livermore's Demise in 1937


"Jesse correctly anticipated that the US economy of 1927-37 would experience that very rare occurence, a depression and balance sheet recession. But volatility killed Jesse. You see, in a balance sheet recession volatility becomes pathological and one needs to be prepared. A game plan is needed for all contingencies. Wat is more it is not necessarily the high volatility that is so daunting but rather the great oscillations from high to low that keep wrong fooring investors."


Comparison with Latin America in the 1970s


(...) "it was Latin America, whose commodity fuelled current account surpluses funded a surfeit of grandiose infrastructure projects in the 1970s that was really the group laid low by the new pricing regime ushered in by falling inflation."



Link to the original full report:




The Eclectica Fund, April 2012-Hugh Hendry







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