Thursday, June 18, 2009

Hugh Hendry Eclectica Fund Letter to Investors

Here is the latest for the Hugh Hendry crowd - another hat tip to ZeroHedge for this one as well (and the readers who messaged or emailed me it had arrived!) I've been waiting for a video from Hugh via CNBC Europe (I search that site almost every day) but as he states in his opening sentences he has been laying "low" while the "wisdom" of the market works against his thesis. Reading between the lines it sounds like despite a stern belief in his theories, with the market completely disagreeing he had to cut back severely his positioning and is waiting to get it back once the market comes to its senses. Which is a good lesson for all of us to remember. As always, you can ultimately be correct but until the market recognizes it, it means little to be 'right'.

Mostly I am just glad to see so many blogs picking up on Hugh's ramblings! I once had the entire market on Hugh Hendry adulation. ;) Just to review Hendry is in the DEFLATION camp, and thinks government bonds are the place to be. His bets paid off in spades last year and the beginning of this, but now the market in its A.D.D. manner has switched from fearing deflation and within a month or two fears inflation. To the point it is already pricing in FED FUND rate increases by the end of 2009 - something I've written is complete garbage. To believe the "wisdom of the market" you have to believe this is just a normal "inventory correction" type of recession and the US consumer will be back right quick like the good ole days right around the corner now that we've right sized inventories. I'm not sure what about the past 2 years would lead people to believe anything is "normal" about what we are going through. Maybe the market thinks the government will be buying inventories because that is the current strategy, replace people's spending with "the people's" spending.

But for now the market says "inflation" and inflation it is - as long as you define inflation via commodities... my view is the Fed will create inflation in due time, lots of it. We're going to stagflation city in time. I think the situation remains poor under the surface as government transfers from grandchildren of tomorrow to drunken spenders of today mask economic data for the next year or so, but the US consumer - the driving engine of the world - won't be back that soon. And then will come Stimulus 3.0 to mask next year's economic data (election year folks!). But we need velocity of money for that to turn into real inflation - it won't be from an overbloated US consumer layered in debts and does not want to borrow despite government laden incentives coming in all shapes and sizes. (buy a house! buy a car! it's literally on us!) And banks still are hoarding most of the money being handed to them - hard to find credit worthy borrowers indeed. So speculators will take some of that money (they are happy to borrow) and funnel it into relatively shallow ponds such as commodities, causing inflation in things we need (food, energy) - while we have deflation in things we want (clothes, electronics, Las Vegas hotel rooms, consumer discretionary). That's my theory for now and until I see evidence otherwise I'm sticking to it.

Eclectica Fund

[Apr 28, 2009: The Latest Hugh Hendry]
[Apr 16, 2009: Hugh Hendry, Citiwire Interview]
[Mar 20, 2009: Hugh Hendry of Eclectica Asset Management is Wickedly Good]

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