“Yes, absolutely.”
That’s what Hugh Hendry says when asked if we should be panicking right now about the risk of a currency crisis.
In an interview with the Odd Lots podcast, the former chief investment officer and founding partner of Eclectica Asset Management, who now writes under the ACID Capitalist brand, says the world economy is giving vibes of the 1998 Asian financial crisis. The Bloomberg Dollar Spot Index has jumped almost 4% this year, pressuring the yen and setting off a wave of speculation about possible interventions and devaluations to offset the move.
“Heavens, we’ve got to go back to 1997, ‘98,” Hendry says. “Countries like Thailand, they had too many debts denominated in dollars, and they had to default. I mean, their currency fell 40% — like the yen,” says Hendry.
“The move in the yen is terrifying,” he adds.
That plunge in Japan’s currency has seen the yen go from about 102 against the greenback in early 2021, to over 150 as of right now, despite suspected interventions to reverse, slow or halt its decline.
The big “elephant in the room” though, Hendry says, is the risk of a Chinese devaluation. Speculation regarding such a move has been rising as China struggles to revive its moribund economy. Meanwhile, memories of the country’s shock 2015 devaluation still linger.
“What if the Chinese come around and go ‘boom!’ and they devalue, right? That would be profound. I would call that ‘Mad Max’ deflation,” he says.
While this may be a tail risk right now, Hendry says he’s been buying long-dated calls on US Treasuries to hedge against this risk.
“I’ve been owning Leaps on the TLT,” he says, referring to the iShares 20+ Year Treasury Bond ETF, which has taken a beating over the last several years of faster-than-expected rate hikes. “If I’ve got a million dollar portfolio, I’ve been spending like $50,000 and then topping it up as I lose money on them and just keeping a lot of time on it. So I’ve probably spent a tenth of my portfolio. You know, I'm underwater, but I own that.”
Right now, the yield on the benchmark US 10-year Treasury is hovering around 4.5%, a number that Hendry sees as potentially coming down massively. “I think the end of this bull market is in the next 18 months. And I think Treasuries — I don’t think they’ll yield 40 basis points — but I think they could get down to like 1.2%, 1.5% yields.”
Per Hendry, there are really two big structural things going on that make this moment unique and fraught.
One is simply the unusual situation whereby the US has found itself as one of the major growth drivers of the world, in part thanks to aggressive fiscal and industrial policy.
“What’s happening today, the fascination and the drama of today, is the fiscal policy is working. And the US is being transformed into the economic locomotive for the rest of the world,” he says. “Now, this dollar standard, right? The mighty dollar, it was not conceived on the basis that the US would be the chief. It wasn’t conceived that the US would be at 5.5%, and the ramifications of that are coming through the Japanese yen.”
The other dimension comes in the form of limits to China’s growth model. In recent years, the country attempted to pop its own domestic real estate bubble, with the hope that exports of advanced technology could fill the gap. The problem is that the rest of the world clearly doesn’t like it, Hendry says, noting that the biggest industry in Europe is automobiles.
“You think Europe’s going to sit there and go, ‘Hey, we’re open, we’re friendly. Come and wipe us out.’ That avenue is over. The proportion of exports to the Chinese economy, the proportion of exports to the global GDP, we are at levels where it’s intolerable for the rest of the world to accept it.”
Still, Hendry argues that if the Federal Reserve were to back off from higher rates which are helping to keep the dollar strong, that could spark a boom in risk assets.
“The Fed only ever cuts when something breaks. And the rest of the world is saying, ‘We’re kind of at that point.’ So if something breaks the Fed’s cutting, it’s going to subjugate the strength of the United States economy,” at which point, Hendry says, asset prices “will become intoxicatingly” high as currency pressures are diffused.
“If the Fed does that, like, buy 10,000 call strikes on the S&P, it’s not going to be there in two months. But that's where it's going to head really rapidly,” he says.
In the meantime, while waiting for his TLT Leaps to pay off, Hendry is living the good life out of his base on St. Barts in the Caribbean, where he’s seen real estate explode to “insane” valuations as the global elite park more of their money in luxury locations. The country is basically, as he sees it, a physical manifestation of Bitcoin in the role it plays as a wealth sink for the rich.
“St. Barts is kind of like Bobby Digital,” says Hendry. “Forgive me, I call Bitcoin, ‘Bobby Digital.’”