Hedge fund manager Hugh Hendry of The Eclectica Fund is finally back with a monster new letter to shareholders. In it, he says, is his most lengthy writing since the winter of 2010.
We’ve read it, and summarized his key points into bullets.
- Hendry is still very bearish on China. He doesn’t think that China will be supplanting the US economy as the world’s #1 in GDP anytime soon, and in fact he’s fairly bullish on the US thanks to the burgeoning energy business.
- The problem in China is that its success was long based on the artificial depression of the currency, and financial repression that prevented banks from offering decent interest rates to savers. Anyone with their money in a bank got crushed, so to get around this financial repression the people bought houses like crazy.
- The scale of the Chinese housing bubble has been unprecedented, and the scale of underground credit is enormous. There are trillions of dollars of loans that originate through firms that are nominally in businesses like shipbuilding, but which ended up in the mortgage credit game.
- China is so freaked out by all this, it’s given death sentences to some of the underground players in the real estate bubble.
- Hendry sees a Weimar-like situation where Chinese leaders thought they could get away with fiscal profligacy on the back of strong exports, but the weakness abroad means it might not happen.
- The Chinese market is a casino, pure and simple. It only benefits insiders. There’s no reason for anyone to invest in it.
- The way Hendry has shorted it, however, is via Credit Default Swaps on Japanese corporates that are exposed to China. Japanese companies remain very troubles with debt loads that are way too high. This is why Japan is a value trap that has taken in suckers for years, thinking that stocks are very cheap.
- In Japan he sees, what he calls “The Tranquility That Could Rock the World.”
- Ultimately, he thinks we’ll see one more washout in the market, with 30-year Treasury yields hitting 2.5% (they’re currently at 3.125%) and the VIX surging to 80, at which point we’ll have a truly ‘generational’ opportunity to buy risk assets.
All in all, great stuff.
Now for the other side…
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