Paulson vs. Hendry

30th April 2012

Hugh Hendry, manager of the CF Eclectica Absolute Macro Fund believes that China is the weak spot of the global economy , adding that he is "long the debt saddled west and short the vastly over vaunted and over owned BRICs": "There is a near consensus that China will supplant America this decade. We do not believe this." He says he is "more pessimistic on Chinese growth than ever. This makes us bearish on most Asian stocks, bearish on industrial commodity prices, interested in some US stocks, a seller of high variance equities and deeply concerned that Japan could become the focal point of the next global leg down."

In particular, Hendry is positive on the US: "We are more bullish on US growth than most. The momentous nature of recent advances in shale oil and gas extraction and America's acceptance of the unpleasantness of debt and labour price restructuring looks to us as if it is creating yet another historic turning point."

He believes that the global economy is ‘grotesquely distorted' by the presence of fixed exchange rates as it was in the 1920s and 1930s by the gold standard. This applies in two areas: the eurozone and the dollar/renminbi peg. Hendry, always a natural contrarian, argues that while the distortions created by the Euro are well-known and understood, the distortions created by the dollar/renminbi peg are less well-recognised. This, in essence, has led to the current positioning of his funds.

This stands in direct contrast to most hedge fund managers. Today's FT reports that hedge funds have resumed their significant bet against the Eurozone economies. Increasingly this is not just against the peripheral countries, but also the ‘core' – including France, Germany and the Netherlands, representing a ‘new, deeper level of bearishness on the single currency area's prospects'.

"A clutch of hedge fund managers, supposedly among the savviest investors around, are directly wagering that Europe's problems have become so entrenched that they will lead to a much more serious crisis in the coming months than the eurozone has experienced."

One of the key investors to have raised his head above the parapet is John Paulson, the billionaire hedge fund manager, who has given investors in his portfolios a rocky, if ultimately profitable ride.

"Mr Paulson told investors in a call on Monday that he was betting against the creditworthiness of Germany, regarded in markets as among the safest sovereign borrowers, because he saw the problems affecting the eurozone deteriorating severely." As a result Paulson has gone short German government bonds, believing that the problems from the Spanish government will spill over.

So who to back? Paulson famously spotted the collapse of the US housing market, which has given him some long-term credibility with investors. On the other hand, Zerohedge calls Hendry one of the ‘true (if completely unsung) visionary investors of our time'.

Although Paulson's long term return has been good, he had a dismal 2011. The Advantage Plus Flagship fund had the worst year in its 17-year history last year, falling 44% in the twelve months to October. Paulson admitted he was ‘over-optimistic' about the outcome of the Euro crisis and his net equity exposure was too great. His current positioning may be a desire not to make the same mistake again. He has also suffered from his conviction that inflation will ultimately increase the demand for gold as an alternative to paper currencies. 

Hendry's CF Eclectica Absolute Macro Fund has provided a smoother, if less exciting, ride. The fund launched in December 2009 at 100 and is now trading at 109. It has been as high as 113, but has had a weak run of late and is down 2.8% since the start of the year. He remains 86.4% invested in long-only equity, but has tended to make investors money in falling markets.

Investors deciding on East versus West may be reassured by the thought that they are aligning themselves with the finest minds in the financial world, but the choice is by no means straightforward.


More on Mindful Money

How to avoid sabotaging your portfolio

Reverse Globalisation: manufacturing comes home

China's demographics disaster

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The Financialist

24 thoughts on “Paulson vs. Hendry”

  1. Drf says:

    “How long will the dance continue between Spain and the European Central Bank?” For as long as they can get away with it, and they will attempt it for even longer than that!

    1. Anonymous says:

      Hi Drf
      Meanwhile the Spanish economy continues to weaken. They seem to be modelling themselves on Emperor Nero with the strategy being employed. The catch is that the can kicking ends up with a can in a future which is weaker than the present..

  2. Anonymous says:

    Everyone knows that Spain needs a large bailout and that bailouts come with conditions. The banking sector is in a serious mess and from the outside, the labour market is equally disastrous. Rajoy wants the bailout without the conditions. Understandable, but futile. The visible numbers are enormous, but the hidden ones are perhaps even larger. So he is playing for time. Even worse, he has to keep the large ‘informal’ economy off the agenda, for it is that which is keeping Spain afloat at the moment, and damping enthusiasm for riots and demos. The ECB clearly knows about Spain’s black economy but prefers to ignore it, as does the government. Once opened, that can of worms could do untold damage to future prospects for EU grants and similar handouts and general confidence in the country’s government and businesses.

  3. Robert says:

    Shaun hi

    I put a comment on your Blog on October 1st which didn’t come out
    as I think you had problems with the site, but which I wonder will make the
    situation even worse in Spain if this is possible….my comment ran as follows…….

    One aspect that has recently reared its head and which i would have thought
    would have a very negative effect on the EZ in general, is the likely demand
    for Catalan independence. From family there, I understand that there is a very
    genuine majority support to demand independence.

    Leaving aside the rights and wrongs, surely the effect on the Spanish bond
    market will be huge, especially if there is a ‘formal’ demand of the central

    I would have thought that this can only deteriorate the economic situation in Spain as a
    whole, as it will look even less attractive to investors, but the other issue, is that surely a divorce is financially impossible
    to achieve. Even if there was agreement between the Spanish Parliament and the
    catalan Governemt (which is most unlikely), it would surely take years to agree
    the split in the National debt etc etc. During this period, without the support
    of the ECB (and Germany),
    the bond market would be effectively closed. Therefore, any wish for
    independence is academic unless Mrs Merkel is prepared to underwrite the
    Spanish deficit whilst the process proceeds.

    I can see this will create a huge problem, and as the Economist commented
    this week, – to create a Constitutional crisis on top of a financial crisis, –
    is playing with fire. But this seems to be what is happening.

    Am i right???


    1. Anonymous says:

      Disqus was posting everyones comments during ‘the problem’ – just the text was posted in white, and white on a white background is tricky. If you ‘select’ the text on the whole webpage,, you can read the highlighted white text.

      1. Anonymous says:

        Hi DLinneridge
        Thanks I did not know that either and was going into the wordpress site to reply directly.

    2. Anonymous says:

      Hi Robert
      I agree that this poses all sorts of questions. There is also the current situation where supposedly wealthly Catalonia has asked for money from the 18 billion Euros put aside for regional governments by the central government. It is a bit hard to ask for 5.023 billion Euros and then say you want to leave!
      So it is quite a can of worms..
      As to the regional fund with the request from the Canaries yesterday of 757 million Euros it looks as though it is nearly used up with claims for 16.5 billion Euros already.

  4. JW says:

    Hi Shaun
    US figs just out. Unbelievable, literally. Biggest monthly jump in employment since 2003. Divergence of trend of U3 and U6. As this comes from a ‘survey’ and the proximity to the election……. Just add it to all the other random numbers generated to tell a story. As DaveS has said, ‘nominal’ is the new ‘real’.

    1. JW says:

      Ah, its part-time employment, gone through the roof. Add unemployed to under-employed and that has increased by almost 0.5m in a month. The exact opposite of course to the headline ‘fall’ of unemployed from 8.1% to 7.8%.

      1. Anonymous says:

        Doesn’t one of the combatants employ lots of part time labour as part of his campaign at this point in the cycle? How else to spend his share of the, what, $1B?

        Or maybe James, above, is correct that we are all too cynical this Friday ……

          1. Anonymous says:

            Hi JW
            Yes a better report but with some questions. I responded on twitter to it saying it looked better but the issue was around the measure of underemployment or U-6.
            “However the US “underemployment” measure or U-6 was stable at 14.7% seasonally adjusted last month unlike headline unemployment #nfp ”
            There is quite a debate going on about these numbers in the US,as much of it is politically inspired I will leave that alone. However I will point out that Gallup the polling organisation agreed that there were employment gains in September but concluded that
            ” Gallup’s seasonally adjusted September unemployment rate was 8.1%, unchanged from August.”
            For those that do not follow the U-6 measure the reason why is was unchanged was mostly that it was registering a 582,000 rise in part-time work (for economic reasons) in September.
            It was also interesting how many “experts” quoted numbers from the wrong survey…

          2. JW says:

            Hi Shaun
            As they are all ‘surveys’ , the Gallup one is just as valid as any, indeed it seems to have been more robust in the recent past.
            Food stamps are now up at 21m , not exactly a sign of improvement.
            I don’t ‘buy’ either sides politics in interpreting these numbers, but find brainless the acceptance of one months numbers as being meaningful, given the spurious nature of the data collection, the limitations of the X12 program , and the deliberate ‘mixing’ of two separate ‘survey’ data to ‘prove’ a position.

  5. Jason Aris says:

    The real reason for Spain not wanting a bail-out is one of the ‘strings’ attached will be a significant haircut for private sector investors holding assets in the banks which get cash injections. To date this has fallen on institutional investors who have been able to disguise the impact to ordinary people as these can be drip fed out to them over a number of years. Spain is different, the desparation of the Caja’s in particular to secure adequate capital and remove contingent liabilities has seen them by fair means or foul persuade a large number of ordinary depositors to move to what they were led to believe were higher interest paying accounts. They were no such thing they were linked to preference shares or bonds of these institutions, therefore these assets will be subject to the haircut. Some €30 – €40Bn is at stake at least.
    The howls of protest are bad now can you imagine the scenes in Madrid and elsewhere when people who have had 90+% of their savings wiped out watch as the banks revert to their normal modus operandi and start paying massive bonus’s again. This will not be pretty.

    1. JW says:

      Excellent observation Jason. How many in Catalonia I wonder?

    2. DaveS says:

      Wow – Spanish lawyers will be getting massive bonuses too.

      Then again I think law is the new boom industry in the City too.

    3. Anonymous says:

      Hi Jason
      A very good point. There was a lot of this and it distinguishes Spain from Ireland. I have argued many times that bondholders in Irish banks should be in the vernacular “burned” or to be more specific fulfill their obligations rather than be paid out. But in Spain many more ordinary investors were miss-sold these type of bonds and from this one way or another there will be an unhappy ending.
      It all sounds rather similat to the zeroes scandal in the UK from a while back for those who remember it.

  6. james says:

    I agree with almost all of the article, but am sure that the eurocrats/polititcians will see the same facts and will put the following gloss on it:
    1. By doing nothing except talk, interest rates have halved on Spanish debt at no cost – what a result
    2. There is an agreeable number of acronyms (OMT, ECB etc etc) behind which to hide whatever is going on
    3. Well, ok so none of the problems are solved on the ground, but our pensions are safe for the time being
    4. If the price to pay is a bit (well, ok, a lot) of unemployment and suffering, we can talk bravely about the pain necessary (to be endured by others, naturally) to achieve restructuring of the economy
    5. It looks as though we can pretend for a further while that democracy still exists in Europe while the Spanish government pretends to set its own budget.
    6. The real problems are much too hard to articulate let alone resolve, so let’s keep everyone in the dark as usual and kick the can down the road.
    Too cynical for a Friday afternoon?

    1. Anonymous says:

      Hi James
      It would be a good exam question I think for say degree students. Something like, Can you be too cynical about our political class/establishment?

      1. James says:

        As a matter of interest, Shaun, do you agree with my analysis or just the comment about cynicism?

        1. James says:

          Another thing. Are you not shocked and I mean shocked at the apparent indifference to the level of unemployment in Spain. If I were running a country with 50 per cent youth unemployment, I would be thinking the unthinkable even leaving the euro. At what point does u employment matter?

  7. Anonymous says:

    We are going to one of the Spanish islands next week where we have many Spanish friends who are all business owners and who i gave a good heads up to the coming (at the time) storm..
    One of them delayed a expansion due to it and is so grateful as it would of wiped him out..
    I talk to them on Skype and they have been saying takings are down 50% at the very least and i do wonder how many years of suffering they can sustain..
    I know of quite a few English people who owned bar/restaurants on the island and had to disappear during the night never to return.
    When we first looked at buying property the cost for a 2 bed villa was 200k and we paid 80k for one of the same three years later.
    I look forward to meeting these friends to get their take on how things are panning out for them on the ground.
    Plus i get to do nothing for 11 days..bliss

    1. Anonymous says:

      Hi Geoff
      I think that one has to have a very cold heart not to feel a fair bit of sympathy for the ordinary Spaniard caught in this mess. Please come back and let us know what they are actually saying.

      1. James says:

        On my Greek holiday this summer, they also said takings were fifty per cent down…

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