Submitted by Erik Townsend via MacroVoices.com
Eclectica’s iconic manager, Hugh Hendry, was the featured interview on this week’s MacroVoices podcast. The entire interview is worth a listen and begins at 10:42.
The interview starts on the U.S. Dollar.
Hendry says that he’s long the dollar as is everyone else in the group of managers he respects. He opines that the pause in the dollar rally over the last year has been a result of the U.S. economy needing to regroup to prepare itself to cope with the pressure of a continuing, secular rise in the USD and the pressure that will bring upon the U.S. economy. But Hendry goes on to opine that he believes the transformation is complete and the dollar rally is set to resume.
Hendry urges caution in calling the last two weeks’ strength a “break out”, saying it may still be too early to tell whether the big move higher he sees for the dollar is upon us. But then he goes on to say that once the prior cycle high of about 104 on the DXY is exceeded, 110 comes into view next. He’s quick to caution that such a move would put considerable pressure on the U.S. economy.
When asked about European exit contagion in the wake of the Brexit referendum, Hendry focuses on the spread between German bunds and the Italian BTB, which is currently 130bps. Hendry observes that pre-2008, then spread remained under 30bps, then blew out to 600bps during the 2011-2012 European sovereign debt scare. Hendry opines that each 100bps of spread represents 10% probability of a systemic regime change, thus implying a 13% probability of the Euro collapsing based on the spread’s current 130bps reading.
Hendry believes that being long this spread offers an exceptional asymmetric risk/reward opportunity. He explains that the spread has consistently traded above 100 bps and he would consider a print below 100 to be a stop-out condition for the trade, implying a max loss of 30bps. Hendry believes that France or Italy dropping out of the Euro would blow the spread out by several hundred more bps, thus creating the asymmetric return opportunity.
When asked about the trade he has on in his fund, Hendry says that his team recently had a “eureka moment” and figured out how to redesign this trade, which has a negative carry when viewed in simple terms, such that they preserve the asymmetric of risk/reward while converting it to a positive-carry trade by adding another “European sovereign component to the trade”. Hendry conveniently leaves out the details of this mystery component, presumably because he views the strategy as proprietary.
MacroVoices host Erik Townsend then presses Hendry on his “benevolent” views toward Japan, asking whether the BOJ’s recent move to fully embrace yield curve management and expanding its balance sheet to own even more of the Nikkei changes Hendry’s view on Japan. Hendry responds by saying that the BOJ’s move actually reinforces his view, and does NOT offer any immediate catalyst for changing asset prices markedly.
Hendry emphasizes that Japan is not Europe. He says that unlike ECB which has to contend with appeasing numerous different sovereigns, BOJ has free reign to use whatever fiscal tools it wants to supplement monetary policy. Contrary to the yen-bearish views of so many of his peers, Hendry opines that repatriation of capital to Japan could strengthen the yen considerably. Hendry suggests that Japan should run bigger deficits, cut corporate tax rates, and “get things moving again”.
Hendry is then asked to explain the evolution of his views on DM equities. Townsend recalls how famously bearish Hendry was 5+ years ago, and observes that when Hendry first turned bullish, his comments seemed to imply that he still thought quantitative easing was crazy and immoral, but essentially thought “who knows how long they can keep this charade going”. Townsend then asks Hendry whether he still thinks it’s a “charade”, or if his view has evolved to thinking that a sustainable, secular recovery is in place.
Hendry first describes a “time stop-loss” on his former bearish views, saying that when you run a macro fund, if your view doesn’t play out in two years time, you have to throw in the towel and admit you were wrong. He said the clock ran out and that’s when he turned bullish.
In shocking contrast to his own remarks on the same subject five years earlier, Hendry opines that Ben Bernanke was “right and courageous”, and has succeeded in engineering a sustained recovery. Hendry goes on to say that QE has leveled the playing field between the creditor and debtor classes, by lowering interest rates to the point that wealth transfer from debtors to creditors is effectively arrested.
Townsend pushes back, pointing out that the consequence of all this policy has been that the world is now awash in upwards of $10tn in negative-yielding sovereign debt. Townsend points out that it’s basically impossible for governments to raise interest rates to historical norms, because it would be impossible to service all the new debt they’ve added to their balance sheets since the 2008 crisis. Townsend presses Hendry to explain how the “recovery” can be sustainable long-term if the major governments of the world are now saddled with so much debt that it’s literally impossible to repay in real terms.
Hendry retorts that while central banks have succeeded in making debt incredibly cheap, few borrowers are really using it. Many households cannot borrow for credit reasons, and Germany is running a balanced budget because there’s no political will to go to deficit spending.
Hendry emphasizes that we still have bond vigilantes and fear runaway inflation, but it’s very difficult for policy makers to create inflation and sovereign bond markets are gigantic. Hendry predicts that the private sector will impose tightening and slow the economy down on its own, even in the face of accommodative central bank policy.
Next, Townsend asks Hendry about his outlook for treasury yields in the context of these arguments. Townsend observes that bond giant Jeff Gundlach has declared that the 35-yr bull market in bonds is over, whereas Raoul Pal has suggested that the current back-up in yields is a buy-the-dip opportunity and U.S. 10-yr yields are eventually headed below 1%. Townsend asks Hendry who has the call right.
Hendry responds by saying that Gundlach has it right, but many people misunderstood his call. Hendry emphasizes that Gundlach never said yields were headed to the moon any time soon. He just said the bottom was in. Hendry thinks that U.S. 10-yr yields could remain in a trading range between 1.35% and 2.00% for the next several years.
Next, Townsend brings up what has effectively been a proxy war of conflicting views about yuan devaluation between Hendry and Kyle Bass in their respective recent Real Vision Television interviews. Townsend explains that in Kyle Bass’ most recent interview, he opines that the PBOC will have no choice, and will be forced to de-value massively in order to recapitalize their banking system after the mountain of bad debt Bass believes has been created since the GFC blows up. Hendry retorts that the Real Vision interviewer didn’t correctly represent his views, then proceeds to go on the offensive explaining his view that the United States would never allow PBOC to massively de-value the yuan as Bass has predicted they’ll be forced to.
Hendry thinks western analysts have failed to recognize that China isn’t Thailand or isn’t vulnerable to a 1990s Asian currency crisis-type event. Hendry believes China is a “grown-up nation” with the autonomy to use fiscal and monetary tools to shore up its economy. He says that the growing Chinese middle class and consumption running 34% of GDP paves the way for organic, sustainable domestic economic growth.
Hendry concludes his views on China by reminding the audience about his rule that if your macro view doesn’t play out within a couple of years, you have to abandon it. We assume this was his not-so-subtle way of suggesting that Kyle Bass has been wrong for more than two years and should give up and move on, but Hendry never says so explicitly.
Finally, Townsend switches gears and asks Hendry to comment on the personal experience of having built a brand around being the world’s most outspoken bear 5 years ago. Townsend reminds Hendry and the audience about his famous comment “advising people to panic”, and his former practice of “schooling Nobel laureates on how things work in the real world on National Television”.
Hendry takes the question in stride, and concedes that his business is considerably smaller today than it was in his heyday as the outspoken Scottish fund manager who advised everyone to panic. He describes the process of losing staff and finding the right size for his current enterprise, in what was a personal and revealing answer.
via http://ift.tt/2f6GZZZ Tyler Durden