Poor Hugh Hendry Capitulates

Sad.

"I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years' time."

"I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends."[...]

"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."

I'd rather lose half my clients than half my clients' money.

The Important Point From the Hugh Hendry Interview in Barron's

Which we agree with:

"The road to hyperinflation is via hyperdeflation. That is why it’s proving so difficult for hedge funds to make money. How does the rational mind that anticipates hyperinflation own 10-year government Treasuries yielding less than 2%? It can’t. That’s why people are struggling. To lay the seeds of hyperinflation, you need really, really bad things to happen."

That was why we made the - ultimately correct - long Treasury bonds call starting two years ago. We are now neutral on Treasuries.

As I've pointed out before, there is a huge divergence between Treasury yields, which are still low, and the equity markets, which have rallied significantly off of the October lows. One theory is that Treasury yields are "artificially" depressed, either by Fed intervention or by the flight-to-safety bid, and that there are significant risks to owning Treasuries if the equity market is in fact correct this time. Technical "analysts" point to a "double top" in the Treasury bond.

And it is true that the earnings yield on the S&P 500 has the biggest spread ever over Treasury yields.

Is what we are experiencing a false recovery like the one we saw last year? Or, is there significant pent-up demand for consumer durables like automobiles?

Funny Hugh Hendry Interview

"A tie, however, is just... too much."

Still My Favorite Financial Youtube Video

A Day at Work with Hugh Hendry

As you may know, Credit Bubble Stocks is a fan of Hugh Hendry.

Thoughts on China Real Estate Situation (Crash?)

From a Credit Bubble Stocks contributor:

Real estate construction must be the simplest, easiest, fastest low-skill activity for a command economy to expand in response to a big, one-time windfall such as our offshoring and borrowing.

[China's] over-all growth will slow or halt. They won't be buying any more of our debt or stockpiling any more commodities.

We here at Credit Bubble Stocks are in the Chanos camp regarding China. And we are bearish on real commodity and real estate prices, worldwide.

Hugh Hendry / Eclectica Asset Management Monthly Letter

Credit Bubble Stocks is a huge fan of Hugh Hendry.

Anyone who plays with his blackberry and laughs while Joseph Stiglitz is talking is OK with me.

Eclectica Asset Management Monthly Letter

Nassim Taleb is Hilarious But I Disagree With Him About Treasuries

From the widely circulated video of The Russia Forum panel last week, Nassim Taleb (@13:20),

"So long as you see the picture of, what's his name, Bernanke, and he still has that job, you gotta run to make sure that you are short" Treasury bonds.

Regular readers will know that I've been bullish on Treasuries and Treasuries volatility. (By the way, for the past several months there has been a Current Trades sidebar on the right side of the blog, which shows us long Ts.) Evidently, I have a friend in UK hedge fund manager Hugh Hendry, who, while chewing gum, made the point to Mark Faber,

"You're bearish on Treasuries, you're bearish on the dollar. My hero is Mr. Consensus."

Indeed! At the end of 2009, every hedge fund manager's letter was declaring an impending Treasuries rout and $2,000 gold. Don't get me wrong - I would not want to be stuck with a Treasury bond until maturity, but sentiment was totally one-sided. Specifically, as Hugh Hendry puts it,

"My fear just now is that the community of risk is very short treasuries, and is very long risk: risk assets are the hedge against inflation."

We all know that the U.S. Treasury has gotten itself into a jam with too much of the national debt now financed with short term paper.

This is a problem for two reasons. First, it creates rollover risk. Second, you can't "inflate away" debts of very short tenor, for the simple reason that your creditors will have the opportunity to demand higher coupons at frequent intervals. They see you inflating and you end up digging a deeper hole because you are rolling over debt so often!

So from their (Geithner and Bernanke) perspective, it must seem imperative to lengthen the average maturity of the national debt. But what the consensus doesn't appreciate is how easily this could be accomplished.

An equities crash. Remember when the 30-year Treasury rate hit 2.5%? If we start having a sickening crash again, they can sell as many T bonds as they want.

That's when I'll be selling my Treasuries calls and buying back my equities shorts.