Hugh Hendry (Eclectica Asset Mgmt) Discussion
· Why doesn’t high IQ lead to high investment returns? Managers who are smart do not seem to understand how irrational governments, markets, and other players are/can be.
· US Capital Allocation: long term basis of positive returns, a legacy of rational behavior. The fruits of this are a high consumption ratio / GDP. This is good – enjoying (earned) prosperity
· Chinese Capital Allocation: not rational, not done on the basis of economic returns, but conducted on social norms and fitting in to govt plans / crony capitalism. So there will be no relation to returns. This is an Asian phenomenon also observed in Japanese kereitsu and Korean chaebol.
· QE I has led to Asian inflation (food, wages, RE). Believes CPI is meaningless
· Democracy cannot tolerate Austerity. Example given of Royal Navy “mutiny” in 1931 at prospect of pay cuts.
· Gold: ten years ago this was a contentious trade, challenged by investors/clients. Today it is not, and is almost a consensus trade.
· Hendry claims it is hard to engineer inflation even if nations try. Rejects example of Zimbabwe, as it’s not the same kind of society as DM nations. Says there are so many checks and balances to inflation that leaping those hurdles is only possible if there is a deep depression. Uses example of Japan.
· Believes there will be a China hard landing. 25% decline in GDP (!)
· Analogue is US in Great Depression: DM market of UK had 8% drop in GDP peak to trough, EM market of USA had 26% drop. Much more excess to be wrung out of system in China/EM.
· Believes world’s strongest economies (currently) will be the ones that will fall the hardest
· Central Paradox: if one believes that inflation is inevitable, the safest asset are UST for today. Real assets will get destroyed in the scenarios he envisions.
· Japan: their utility co’s have issued more debt than Greece. Govt does not know what to do about guaranteeing those. Japanese CDS on cyclical names (steels, concrete etc.) are ripe to pop once slowdown starts moving. Points out how large the Japanese economy is (i.e. world capital goods are still sourced from there in many sectors) so cannot hide from pan Asian slowdown.
· Does not believe the 1% ECB level for short term funding is a Maginot line that will stand. Thinks that they will cut rates, and suggests high convexity trade is to position for that.
· When asked “what assets do you like from the long side?” – long pause, then “there is nothing good in the world”
