Hugh Hendry wrote his latest letter to investors (embedded below) because of the advice of a poet, Robert Prechter, who says one should write more when certain and less when uncertain.Hendry is certain about a few things – the latest round of QE is blind and dumb compared to the last one, the Fed is creating a plutocracy, and Europe.
Last year, he writes, QE was inevitable. The Fed bid for about a third of the outstanding stock of 10-year Treasuries and today their holdings are $767 billion, up from $450 billion in early 2008, but directed the majority of their funding towards buying mortgage-backed securities. By doing so, they ensured that the cost of servicing the housing sector’s debt would not rise because of risk-averse investors. “I salute this round of easing,” writes Hendry. “It succeeded.”
But the latest, most recent round of QE, he says, is like the Fed “dancing around a bubbling cauldron, rubbing two chicken bones together.”
He does admit, however, that we might look back on the latest round of QE and investors’ reactions to it and laugh at their sensitivity to it. In the end, he says, we’ll get over it and it probably won’t cause inflation.
But of course Hendry, colourful as always, illustrates his point with literary allusions (to Richard Prechter, Walt Whitman – and David Einhorn, to name a few) and reminds his readers that Whitman’s generation were startled when they read his poems about sex and today, we hardly bat an eye.
Hendy’s December letter to investors is a work of art.
His greatest criticism of the Fed’s policies, he writes, is how it’s allowing elite individuals to amass great fortunes, much like what happened in Weimar Germany.
Look at “the hedge fund manager,” he says, who told everyone “Making money is so easy!” and “You can’t lose!” – all he did was buy a house or stock at a time when general asset prices were rising.
The trick is, he almost knew they would rise, Hendry writes, because he’s got friends at the top. They’ll bail him out if he gets into trouble. Hendry likens the plutocracy to what happened in Weimar Germany, when huge private fortunes were amassed during a time of little economic prosperity.
But what’s happening in America is nothing compared to Europe, according to Hendry, who makes the hilarious comparison of what’s gone on with the Euro to a James Bond gadget that fooled the German logic. (Q’s gadget tricked the Germans by making it screw backwards – he knew German logic would never consider that it might screw the wrong way. In the same way, Germany never assumed that new states wouldnot invest wisely and not take lower interest rates. Of course, they did.
Read his letter below. (Note the photoshop of Merkel on a weathervane.)
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