‘It wasn’t meant to be like this’: Hugh Hendry’s farewell letter than three years later he quit Odey to set up his hedge fund boutique Eclectica. Below we repost his full final letter in its entirety, and wish Hendry good luck in his next endeavour. * * *. CF Eclectica Absolute Macro Fund. Hugh Hendry is back with a bang after a two year hiatus with what so many have been clamoring for, for so long – another must read letter from.
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In the beginning, Hugh Hendry was the consummate contrarian bear, which helped him make a killing a decade ago when everyone else was blowing up. Unfortunately for him, he did not realize just how far the central planners were willing to take their monetary experiment, so after the market troughed inhe kept his bearish perspective, which cost him dearly in terms of missed gains and lost capital under management, until one day in Novemberhe capitulated and turned bullish, infamously saying ” I cannot look at myself in ecpectica mirror; everything I have believed in I have had to reject.
This environment only makes sense through the prism of trends. It culminate with July and August, when Hendry posted some of his worst monthly returns on record which ultimately sealed his fate, and as he writes in a letter sent to investors today, Hendry decided to shut down his Eclectica hedge funds after 15 years, following a 9. So eclectiva is Hendry’s parting message to his investors and fans?
Surprisingly, perhaps, he disavows the original Hugh Hendry, and goes out long if not quite so strong. Below we repost his full final letter in its entirety, and wish Hendry good luck in his next endeavour. Is that something you would be interested in?
If anything we feel more convinced that our thesis of a healing global economy is understated: For the implications of a sustained bout of economic growth are good for you. I would stay long.
And commodities have already acknowledged the upturn in the fortunes of the global economy and are likely to trend higher still. But it is bad news for me because funds like mine are required to demonstrate negative correlation with risk assets when they go up like this I go down…avoid large drawdowns and post consistent high risk adjusted returns.
To begin with, and for the sake of clarity, I think we have to carefully go back and deconstruct the volatile engagement between capital markets and central banks for the last ten years for an understanding of where we stand today. The first die was cast by the central bankers in early The bond market hated the idea as it was expected to cause a severe inflation problem. QE rescued the financial system but the liquidity created was distributed to the very rich who have a very low monetary velocity and so the expected inflation fillip never materialised as the liquidity injection came to be stored rather than multiplied by the banking system.
Several years later, inthe Fed suggested a reduction in the pace of its QE program. They wanted to tighten credit conditions gradually. Within four months the market had taken 10 year treasuries from a yield of 1.
Markets initially thought the US could cope with this higher level of rates, but with a slowing economy, an unfortunately-timed oil price crash, and persistent ghosts in the machine like the substantial Yuan devaluation fear which never materialised they were proven wrong. Back then, with a 7. And so last year, following many years of berating the Fed for its easy monetary policy regime, investors collectively threw in the towel.
This rejection of the basic tenets of the business cycle by those who direct the huge pools of real money is proving particularly onerous to attack as it seems that the basic macro fund model is broken: Managers, and I must count myself in this camp, feel compromised by our poor absolute returns since and we find ourselves unable to put up much resistance to this FAKE NEWS.
Hugh Hendry Q3 Letter: Dramatic Fulcrum Point; Only Precedent Is 1930s
Why should you fight it? I would largely ignore and when monetary policy was tightened and the economy buckled under the duress of the dramatic reversal in what had been credit fuelled misallocations of capital in the TMT and property sectors. No, for me is far more illuminating. In the middle ofCPI core inflation was running at 1. It seems to me that wage or cost push inflation is far more difficult to prevent and contain than asset price inflation. It tends to bear comparison with how Hemmingway described going broke: Look at the graph below, the unemployment rate red is at lows, job openings ehndry have increased beyond the hiring rate teal and are now approaching the unemployment rate for the first time since the Job Openings and Labor Turnover Survey data began.
Ultimately robust GDP growth plus this labour tightness will lead to wage hikes and conceivably eclechica self-sustaining inflationary cycle. This is all the more ominous as the Fed has been reluctant to unwind its balance lettr.
Hugh Hendry Eclectica Fund Investor Letter ~ market folly
However the legacy of QE plus wage gains leyter turn this equation on its head. It would distribute incremental dollars to those with a much higher propensity to spend. The boost to monetary velocity from widespread wage increases would start to look much more like the helicopter money that Chairman Bernanke promised back in and subsequent central bankers dared not distribute. The macro shock would not necessarily be the subsequent fclectica but, that by waiting to respond until later, higher policy rates might fail in the first instance to induce a recession setting off a loop begetting higher and higher rates.
Hugh Hendry’s Eclectica Letter: The rate of living theory and an enduring US economic recovery
So companies will commit to pay staff more whilst raising prices to meet higher wage and interest payment demands where possible. Like I said, wage or cost push inflation is a very different beast to contain. I have to say that should this scenario unfold then capital markets will be as culpable as the Fed.
This year, bond investors have aggressively flattened hug US yield curve.
The clear message is that 1. I think they are undermining the ability of the Federal Reserve to respond proactively; the Fed is simply not going to hike rates under such conditions having learnt the hard way back in and But what if such flatness has more to do with the commercial investment pressure brought on by QE rather than a genuine recession threat?
Clearly of course no one knows.
Hugh Hendry’s Eclectica Letter: Hard hats and sunglasses
hemdry However if an inflationary path like is gestating then I fear there is very little chance that anything timely will gendry done about it. Rate hikes will continue to be sparse, we only have one quarter point hike predicted between now and the end ofwhich if fulfilled will be highly unlikely to spark a severe recession. Most likely the US economy will continue to grow and the labour market will tighten making a larger adjustment to rates in the future inevitable.
And so QE could conceivably end up doing what it was always supposed to do in the first place: This scenario would diminish greatly if bond curves steepened a lot now and gave the Fed the credibility to hike.
They will steepen of course but I fear only after the virus of cost push inflation is released into the global hothouse. This potentially leaves us in a strange environment. In the absence of any recognisable asset bubble set to burst, and the Fed grounded, the US economy is unlikely to slip into recession.
China continues to rip. And now the European continent is recovering. Risk assets should continue to trend positively. And with the bond market, wrongly in my opinion, infatuated with the likelihood of an approaching US recession, the Treasury market is unlikely to move much. This is simply not a good time to offer a risk diversifying portfolio.
It has not been persistently lower than this for almost three decades. And leyter equity volatility it does not tend to trade in lengthy and definable regimes; it is never eclecttica great idea to go long equity volatility just because it happens to be low. The same cannot be said of its fixed income counterpart.
The collapse in volatility since seems to resonate with the drawn out process of QE in the US and its slow spread across the world. And yet fixed income volatility resides on the floor…. Looking at the one year implied volatility on 10 year swaps, the cost of entry seems reasonable even compared to the narrow trading range we have seen this year.
With only one Fed hike priced in until the end of any further contractions are likely to be driven by outright recession.
In that case volatility will rise across all asset classes. On the other hand, if our thesis is right, and the market and Fed are too complacent on inflationary pressures, then it is likely that we see more hikes from the Fed alongside yield curves steepening from their currently very low levels.
Fixed income volatility will surge. When the status quo priced in is this boring, fixed income volatility really has only one direction it can go. With inflation still weak and government bond lteter unlikely to crack just yet it is too early to seek a short fixed income trade in disguise.
In the past, correlations have, just like in the stock market, typically been negative between the price SPX or Treasury and the implied volatility VIX or swaption vol. Now however the correlation is mildly positive. My contention is simply that fixed income volatility has over shot to the downside, that such moments are fleeting and that you are not necessarily dependant on a correction in treasury prices. Sadly I will be unable to participate with such trades during the next upheaval in global markets with the Fund but I hope that this commentary has at least roused you into contemplating scenarios that are presently deemed less plausible.
It remains hendty that I thank you for the great honour of having been responsible for managing your capital and to wish you all great financial fortune. Finally, for one last dash of perspective from Hendry as he turns off the light, below is a podcast he just recorded with Erik Townsend of MacroVoices. Sort by Relevance Newest Oldest. Thankfully Henddry, a student of the great depression knew better. And yet fixed income volatility resides on the floor… Looking at the one year implied volatility on 10 year swaps, the cost of entry seems reasonable even compared to the narrow trading range we have seen this year.