Once upon a time Hugh Hendry was one of the world’s most prominent
financial skeptics, arguing with anyone who would listen that the status
quo is doomed and that central planning will never work.
Most
famously, back in 2010 during a BBC round table discussion with Jeffrey
Sachs and Gillian Tett when discussing Europe’s crashing experiment
with the single currency, he said that we should “purge this system
of its rottenness. Let’s take on a recession. It’s going to be tough,
people are gonna lose their jobs. They are going to lose their jobs
anyway. We can spread this over 20 years, or we can get rid of it over 3
years” before concluding “I recommend you panic.”
Ultimately everyone did panic,
which led to the single biggest episode of global QE and negative rates
ever seen, resulting in ever louder speculation even among the most
“serious” people that central bankers are now powerless.
But
perhaps most notably, Hendry was one of the biggest China bears,
certain that the country’s massive overcapacity, insolvency and bad debt
problems will result in disaster (back then China only had about 200%
debt/GDP, it has since risen to over 350%). His Chinese skepticism led
to his fund generating a 40% profit by late 2011.
And
then after a poor two year performance spell, Hendry had a historic
burnout and threw in the towel on bearishness, infamously saying he can
no longer “look at himself in the mirror”:
“I
may be providing a public utility here, as the last bear to capitulate.
You are well within your rights to say ‘sell’. The S&P 500 is up
30% over the past year: I wish I had thought this last year… Crashing is
the least of my concerns. I can deal with that, but I cannot risk my
reputation because we are in this virtuous loop where the market is
trending.”
He proceeded to buy momentum stocks and 3D printer companies.
Fast
forward to the present, when countless hedge funds – key among them
Kyle Bass’ Hayman Capital and Mark Hart’s Corriente – have become China
megabears, expecting the country’s financial collapse and trading it by
shorting the Yuan expecting a massive Yuan devaluation.
It
is here that Hugh Hendry has once again proven contrarian, even if it
means agreeing with the dominant textbook meme of the day, namely that
China can contain its economic hard landing, and in his most recent
interview with RealVision’s Raoul Pal, he cautions against a Chinese
devaluation saying that “tomorrow we wake up, I mean, I would jump
out the hotel window if this was the scenario, but we wake up and China
has devalued 20%. The world is over. The world is over.”
What
makes this interview doubly ironic is not just that Hendry is wildly
contradicting everything he himself believed in a few short years ago,
but disagrees with his interview host himself – recall that one month
ago, we showed an excerpt from a Raoul Pal interview in which he
previewed “the Big Reset” and laid out how the Kondratieff Winter would
unwind, one in which China would play a prominent part.
Whether
Hendry is right or wrong remains to be seen: for now he has the
powerful People’s Bank of China at his back which has been especially
active recently especially after the PBOC stated recently it intends to
crush all hedge funds who have shorted the Yuan even if it means
slamming Chinese trade and the economy once again (as a reminder, one of
the biggest reasons why China needs a weaker Yuan is not just the
stronger dollar to which it is pegged but because its exports have been
crashing against all of its trading partnersmaking the need for a weak currency paramount).
For
now, as we showed just ten days ago, those short the Yuan have swung to
wildly profitable to losing money as both the USD has slid and the Yuan
has spiked, although both of these trades appear to be reversing now.
Needless
to say, Hendry disagrees with the China contrarians and believes that
the way to fix the Chinese economy is through a stronger currency, even
if there is no logical way how that could possibly work when China’s
debt load is 350% of GDP while its NPLs are over 10% and rising.
So,
borrowing form a favorite Keynesian trope, one where when the
countrfactual to his prevailling – if incorrect – view of the world
finally emerges, Hendry is convinced that a 20% devaluation would lead
to global devastation; the same way if Paulson did not get Congress to
sign off on his three page term sheet that would lead to the
“apocalypse.” Only unlike Paulson who only hinted at a Mad Max world,
for Hendry the alternative to him being right is a very explicit
doomsday scenario, as he explains in the following excerpt from his
RealVision interview:
Tomorrow we wake up and China has devalued 20%, the world is over. The world is over.
Euro breaks up. The world is over. The euro breaks up. Everything hits a
wall. There’s no euro in that scenario. The US economy, I mean
everything hits a wall! Everything hits a wall!
The
dollar strength that you imagined is devastation because you just
eliminated dollars. They’re a scarce commodity. You’ve wiped them out.
And China is a pariah state.
It’s a ‘Mad Max’ movie, right. OK, China gets to be the king in ‘Mad Max’ world. How appealing is that? There is no world after the tomorrow where China devalues by 20%. There is no world. Yeah, it’s looney tunes to believe that, people say, ‘oh wow, they needed to catch a break.’
Their
share of world trade has never been higher. They’re facing no pressure,
immense terms of trade improvement, and you would destroy world trade.
World trade is down 25%. You would probably have passport restrictions,
the world is over.
And
while it is clear on which side of the Yuan Hugh is currently
positioned (Hendry’s Eclectica is down 2.1% through March 18 and -5.9%
YTD) either directly or synthetically, we can’t wait to see who is right
in the end: China and its central bank (as well as Hugh Hendry) or
reason and common sense (as well as some of the smartest hedge funds in
the world).
