Global macro hedge fund manager Hugh Hendry, who was once a famous China bear, says the world would be “over” if China devalued its currency by 20%.
“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,” Hendry told Raoul Pal in an hour-long interview with Real Vision Television, a subscription financial video service.
Pal, a former GLG fund manager and author of the Global Macro Investor newsletter, disagrees with Hendry. So do numerous well-known hedge fund managers who are betting against China’s currency, the yuan.
The yuan depreciation has become a consensus trade among hedge funds, according to Bank of America Merrill Lynch’s Global Fund Manager survey released at the beginning of the year. It has been a challenging trade so far, however, as the People’s Bank of China has been fighting back against the hedge funds in an effort to slow the depreciation of the currency.
Hendry, who has been running the UK-based Eclectica Asset Management for 14 years and profited during the 2008 crisis, believes the way to enrich the Chinese economy is through a stronger currency. And if a devaluation happened, he thinks we would enter a “Mad Max” world, referring to the Oscar-winning film about a post-apocalyptic dystopia.
The world is over. The euro breaks up. 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 is, like, never been higher. They’re facing no pressure, immense terms of trade improvement, and you would destroy world trade.
Between 2010 and 2012, Hendry established himself as one of the most prominent critics on China. He even famously posted a YouTube video of himself in front of “ghost” cities there. At one point, Hendry said he believed the “final shoe” to drop from the 2008 financial crisis would manifest itself in China. In 2013, he came out as bullish. He’s neither a bull nor a bear at the moment.
Hendry said earlier in the interview he would be long the RMB, but he cannot rule out that China goes “rogue” and agrees with the hedge funds’ argument and devalues its currency.
That’s the risk of geopolitics right there.