For years 15 years, Hugh Hendry ran the hedge fund Eclectica Asset Management, earning a reputation as a provocative and contrarian thinker on the entire state of the world economy. These days though, he's living in St. Bart's, surfing, and managing luxury properties for the richest people in the world. But of course, he can't stop thinking about macro. On this episode of Odd Lots, Hendry joins Tracy Alloway and Joe Weisenthal to talk about Europe's big energy mistake, China's property troubles, and why even after all this time, the world can't get enough dollar assets.
Points of interest in the pod:
On what Hugh Hendry’s been up to — 03:07
On previous changes to the monetary system — 06:39
On the yield curve and recession — 16.48
Why people want safe assets — 20:08
Why the world still wants dollars — 23:50
On companies voluntarily sanctioning Russia — 29:48
On how he thinks about investing — 32:26
Hugh Hendry’s China call and the horoscope — 35:55
Joe Weisenthal: (00:06)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal
Tracy Alloway: (00:11)
And I'm Tracy Alloway.
Joe: (00:13)
One of the questions — and of course, that’s I would say in part due to one of our recent episodes that people are debating — is the role, the future of the dollar. And of course, people love to debate this for our entire lives people have been like, oh, is the dollar doomed? Is the yuan going to replace it? It's going to be replaced by gold or Bitcoin or something. But with the sanctions, with Russia's loss of its FX reserves, I feel like this debate has gotten new energy.
Tracy: (00:40)
I distinctly remember my dad sending me articles about Iraq switching to euros for oil payments from many, many years ago. So yes, this is an ongoing debate, but you're entirely right. New life has been breathed into it. And most recently -- we're recording this on March 24th -- and just yesterday we saw Russia saying that it was going to start to demand gas payments in rubles. So there are things happening on this front, but even something like that, you see people portray it in two different ways.
So on the one hand, there are people out there saying, oh, look, this is the end of the petrodollar. Russia has kicked off this entire process. And then other people are saying, well, no, that's not what it is at all. In fact, this is a sign of, you know, Russian weakness. Basically it can't get foreign currency at the moment, so they have to do this. So there's so much debate on this particular topic.
Joe: (01:31)
Yeah. I would say it's also just a big ideas moment. Earlier in the week we recorded that interview with Viktor Shvets about, you know, the world dividing into two. So it is kind of a moment for big picture sort of reassessments of everything. And the dollar is sort of the key icon of the existing world, the global reserve currency, but all kinds of like, it's a moment to sort of step back and think about sort of things that we take for granted and what could change.
Tracy: (02:01)
Yeah. And also I, whenever you get this level of uncertainty, people try to fit their own narratives onto it. And so things that they've been talking about for many, many years suddenly, this is the thing that is going to propel those into existence or into life, but yes, big picture, big moment.
Joe: (02:17)
So I'm very excited about our guest today. Someone who has always had a very provocative ideas in the world of global macro all kinds of things, things related to currencies, China, gold, etc. One of the most interesting people in the space for a long time, we were going to be speaking with Hugh Hendry. He was the founder of Eclectica Asset Management and now he is a luxury hotelier on the island of St. Barts. And he seems to be living a life that's much better and more interesting than ours, his website, you know, go check it out. Hugh, thank you so much for coming on. What have you been up to because I first became aware of you, you know, probably over a decade ago, watching videos you made on YouTube about Chinese ghost cities, but what do you, what have you been up to?
Hugh Hendry: (03:04)
Hey, Hey guys, great to be on.
Joe: (03:06)
Thank you.
Hugh: (03:07)
I have been, I've been recovering. I've been rehabilitating my weary mind. You know, I had many years of active intellectual combat. The Eclectica macro fund, I ran for 15 years. The tenure that I achieved, it's not the tenure you get as a professor at some of these baloney economic universities where you can proclaim whatever and never be called for it. But 15 years. But at the end, and the end was 2017, I was exhausted. I mean, the thing you have to remember is we have this amazing organ inside our head, this brain. But the thing is, it lives in a dark chamber. There ain't no light getting into that brain. And it relies on the idiot on the outside to tell it what's going on. And I spent, I swear, I spent 15 years, thinking I was gonna die, not every day, not every day, but there are moments in investment campaigns and you think, oh my God, you know, remember, I see things.
And it's a curse because I normally see things before other people, so I've gotta deal with other people catching up. And as a consequence, there are days when you are out of sync with the world and your P&L bleeds, and you convince your brain. Brain doesn't know, your brain's like, oh my God, you know, this is a flight moment and you get flooded with all this toxic chemistry to get you out of the hole. So 15 years of all that nasty chemical reaction I needed five years to recuperate. And what a better place I can't think of anywhere than this beautiful island in the middle of nowhere, this tiny little volcanic rock where it's a bit like gold clutches, where all the successful people come and they're like peacocks.
They're like, look at the size of my super yacht. You know, I'm making hay. And I sit, I watch it, I accommodate it. I build beautiful villas for, for rental under the brand Blanc Bleu. And then since the body snatching alien invasion, the ‘V’ in 2020, and I don't have access to the dear old beloved Bloomberg terminal, but I tell you it's in the airwaves, or somewhere, because I'm drawing own stuff. And I'm glad to say that invigorated, I've begun shading again. And so I have podcasts, I'm on Instagram in my swimsuit. What am I doing? Yeah, I am doing podcast, etc. So I’m out telling it like it is.
Tracy: (06:01)
Well, I mean, I’ve got to say it's raining and cold here in New York. So hearing about your very glamorous life in St. Barts isn't helping this morning, but I'm glad you've recuperated. In terms of what you're seeing right now out, I mean, you are still very much paying attention to what's going on in markets and the world more broadly, it seems like just looking at your Twitter feed and your videos and things like that. What are you seeing right now? You know, lots of people are talking about this as a turning point in world history and possibly in the economic order as Joe and I were discussing in the intro. What do you see?
Hugh: (06:39)
Oh my goodness. How long do you have? I see confusion. I see people talking about what they would like, and kind of failing to understand. And that sounds very pompous. And let me be even more pompous, very few people. I mean, I wanna say, like with one hand, I start to struggle to use digits once I reach the fifth digit, when I nominate the people that actually understand money. And that includes economists. That includes the biggest hedge fund managers, the bankers, it's bluff. It includes the Federal Reserve. So few people understand the concept of money. And so when we get these dreadful political moments that we're seeing with the invasion in Ukraine, and of course the greatest charge, the loss of life, the change, the dramatic change in lifestyles being dragged 80 years back into the past.
It's horrible. But it creates this energy where people kind of dust off prejudice. And so I'm there on Twitter, as you say, and I'm kind of just trying to bat a straight ball and just like, keep it logical and take the narrative kind of closer to, I can't say the truth, but just try and kind of educate people. Like this thing about money. So dollar, dollar, dollar, dollar, dollar. I think we’re within the proximity of change. Change is sweeping, you know, the kind of description that you gave it, a pivot in history. It ain't gonna come in a linear manner. And it ain't going to be forecast by the Street. Okay. It's going come at you from weird angles and it's going confuse you. Okay. And I wanna put it, if there is gonna be change, we have to put it in historical context.
There have been three previous changes, and as you say, I think we're close to a fourth. The changes and what I'm talking about are really how sovereign nations choose to regulate their external affairs, their commerce with each other, you know. And up until the late 1920s, the affairs of major sovereigns were regulated by the transfer of gold and then gold acted as high power money. And it allowed for, it facilitated the private banking sector to create money or to take money away. Okay. And no system is perfect. And the flaw of the gold system was exposed. The frailties were exposed, its lack of kind of flexibility and response function to the bankruptcy of the U.S. banking system in the 1930s meant that it ceased to exist. It wasn't a solution.
You know, it had created, a depression and therefore it was rejected by the many. It was then, and it takes a long time to replace the system. And the system was ultimately replaced about 15 years later with Bretton Woods, which was essentially a kinda ledger reconciliation of the second world war. But of course it still had gold in its lexis. And it used the dollar as a kind of, as the the mechanism around gold. And then unheralded and unnoticed by the many, around the mid 1960s, the Bretton Woods system came to pass and it came to be replaced by the eurodollar system. You know, around about 1965, British banks began to allow customers to borrow in dollars. When you get a loan from a bank, a bank is creating money.
And for the first time round about that date, banks outside the regulation and the domain of the Federal Reserve of America began to create U.S. dollars. And then that really exploded when we had the petrol crisis, the petrocurrency crisis, because effectively that created a huge amount of deposits, which were put on the accounts of these overseas banks and deposits are a liability. And those banks needed an asset, which is a loan. And so they really took off in terms of dollar printing, making loans in U.S. dollars. And that system has prevailed and it reached its apex in the years 2004 to 2006/2007, but it was mortally winded with the housing crash in the United States in 2008. I won’t say it died. And we've been operating ever since without a proper and certainly a well understood means of regulating the affairs of sovereigns.
And because we've not had a properly functioning means of exchange ever since 2008, the global economy has been subject and been operating under the confines of a depression, not a Great Depression, let's call it a mild depression, but a depression. It's remarkable how we do not see that word in print. Now, what is a depression? My definition of a depression is when the recovery in GDP fails to take out the previous trendline in GDP growth, right? We have failed in a spectacular manner across the world. And I wanna say, the world is missing $30 trillion worth of value, if you will, which is why we're creating this animosity. You know, one section of society is fighting the other, the gains are uneven. They're not being distributed as we would hope. The pie is not as big as it should be. And that's because we've not been creating money.
And into that theater comes the absurd. You know, comes the Wizard of Oz, the Federal Reserve and its bombacity. All right. They're like, Hey, we're, we're creating money. Hey, over here, Hey, you want dollars? We're create, Hey, $7 trillion, no problem. You know, Bank of Japan, same thing, ECB, same thing. Okay. They're creating laundry mat tokens. They're not creating money. Right? The Federal Reserve, it is illegal. It cannot all print money. Private sector agents create money through creating loans. U.S. loan growth has been far superior in the 15 years or so since 2008, but far superior means like 5%, 6% compound growth. And Europe is like 2%, 3%, right? That's the missing module.
Joe: (13:42)
So, I mean, I think, you know, the point that you make about the missing money I think is well put, and we've seen those charts of the pre-2008 trend line continuing to shoot up and this sort of extremely anemic – and the U.S., as you say, it was better off than many — but globally, this very anemic recovery. Now we're seeing arguably the opposite and arguably some would say, well, having learned the lessons of 2008/2009 governments didn't just rely on central banks this time, fiscal expansion. And now we have some trend lines that are breaking the old trend lines, at least the pre-2020 trend lines. So talk to us a little bit about this shift because, okay, maybe the old system in a way, per your view, died in 2007 or 2008. Now we see this other shift. What is the now?
Hugh: (14:32)
Help me, help me. Because you know, I've always been called a contrarian throughout my career. And yet I'm a trend follower. I seek the legitimacy of market prices. You know, I buy things going up and I sell things going down. Okay. So trends are very important to me. So it’s rather provocative, what trends are changing?
Joe: (14:56)
Well, if you just look at something like U.S. GDP or nominal GDP or nominal spending seem to be on this sort of mediocre growth, but upward to the right, going up to February, 2020, basically. Then we got a huge plunge, obviously, as the world shut down. And then this ‘V’ that now seems to at least by some measures gone the other way and not just return to trend, but shooting above it.
Hugh: (15:22)
You think so?
Joe: (15:24)
Just some lines I've seen.
Hugh: (15:26)
These are kind of, you know, like I'm a data junkie. Give me more, more, more. Okay. So when I see one year, I wanna see it in the context of 20 years. So like, look, we had an alien body invasion. The economy went, we suspended global economic activity for the best part of 18 months. Right. And then when it switched back on, on a base of like minus, minus, minus, the recovery was positive, positive, positive, right. And then with all the supply disruptions, there's clearly been a degree of over-ordering just to kind of get inventories back into situ, it's chaos. It's chaos just now. I see no sign. I see no sign that the economy is doing anything, anything distinct from the trends that we observed post-2008, except it's just been amplified by this, you know, remarkable intervention from outer space if you will.
Tracy: (16:28)
I want to go back to the dollar, but before we do just one question based on that, what do you think about central banks, specifically the Federal Reserve now getting ready to raise interest rates, given your assertion that, you know, the economy isn't necessarily as good as it looks because of all the confusion and disruption that we've experienced?
Hugh: (16:48)
Hey, listen. It's not my assertion. I'm simply commenting on the observations that I see daily, I'm commenting on the genius of the enormous Treasury market. Alright? This is an unprecedented situation in terms of where the fixed income markets have priced for the Fed to begin raising rates, the Treasury market's going guys, don't see it, don't see it, don't see it. And you know what? Our record is like 10-10 better than yours. Like we, you know, you always get it wrong, we always get it right. I mean, you do not need, first of all. The principle function of the Federal Reserve is as a bank regulator for those with a license to operate in the United States. Okay. Its record in terms of being able to see the future I'm afraid is not very good.
And so they require enormous bluster. They invest in immensely in the almighty posturing of their institution. Okay. It is nothing versus the majesty of thousands, if not hundreds of thousands of smart, and maybe not so smart, people engaging with each other. And it gets more and more interesting as you go out in time where people are kind of about themselves, their businesses, and how to protect themselves, how to prosper. And that brings in the role of hedging. And it's the hedging, and it's the thousands of decisions taking which align and create market prices. And they create interest rate levels. They create expectations of where we will be. And those expectations are distinct and at odds with the Federal Reserve.
Joe: (18:41)
Let's talk about the dollar. You sort of de described the sort of post-Bretton Woods system is having been broken since 2007 or since 2008, but nothing has clearly replaced it. There's no obvious new regime. As I said in the intro and as, you know, people are like, okay, this is the end. This is the start. People are going to find some alternative because they don't like seeing that FX reserves can suddenly disappear. Is there so new? I mean, is there a threat to the existing order? Is something new gonna replace it?
Hugh: (19:17)
Okay. So clarification, Bretton Woods, I said began to be unwound in a kind of somewhat private, like, undisclosed manner by the emergence of the eurodollar market.
Joe: (19:29)
Yes, yes, yes. Sorry, the end of the eurodollar regime, as you say, began to break in 2007.
Hugh: (19:37)
But what we can say is we can say that, you know, originally we had a gold system. And then we kind of dialed that back after the mess of the 1930s. That we have increasingly deployed U.S. dollars. So it was U.S. dollars with gold, you know, with the ability to redeem and receive gold. And then it became essentially dollar-based collateral. That is what the eurodollar system is. It's a dollar-based collateral. So it's a dollar system.
Joe: (20:07)
So what now?
Hugh: (20:08)
And that is still the prevailing system. The problem, however, is profound conservatism on the part of banks, right? Because they messed up. They took too much juice from the fountain in the early 2000s. And they kind of, they went bust if it wasn't for the extreme financial intervention, which I welcome, by the Federal Reserve, we would've been talking Great Depression 2, as it is, we're talking about a mild depression. So the problem you have is that that facility is still there, but it's encumbered by profound conservatism. And let me take that into this weird tangent. I believe equity markets are not in a bubble, or if I was to caveat, I'd say, I wanna say like 90% of listed stocks are not in a bubble. And even those which have profoundly high valuations. And they’re are not many, but the pinnacle of it would be Apple, you know, two and a half trillion, you know, a few weeks ago was $3 trillion, which is to say, was capitalized greater than the market capitalization of all German stocks.
You know, the notion that we have those kind of five ‘FAANG’ stocks, you know, with Alibaba, greater than the value of Japan. Single U.S. corporations trading greater than the value of the stock markets of great sovereigns. And even then, I still wanna say, I struggle to say, that that's a bubble and I wanna relate that to the eurodollar market, because what it's saying is, it is the pinnacle of this conservatism. Like I say, a mild depression, commercial risk is scary. If you're a banker, it’s something that can bite you in the proverbial. It can affect your career. And so there is a crowding into businesses which are perceived to be devoid of commercial risk. Now nothing is devoid, but then we have, again, we have this remarkable incident of the virus where we have, you know, an unprecedented plunge in economic activity.
And so that reveals, again, it's like the tide goes out and you go like, wow, these guys, their profits were intact. Their profits were up, like all this happens, these guys just don't have risk. So what happens is when you can conceive of a business as being risk-less, it becomes price-less. You know, there is no upper bound to the valuation of such businesses. And it's the same phenomena when we had Treasuries yielding 40 basis points. And of course, negative basis points with the European sovereigns. I'm really, really gonna hack off your listeners because again, I'm gonna go against all the propaganda that gets stuffed down them every single day. That is not a cause of the Federal Reserve or central banks buying Treasuries. Okay. There's no need for them to buy. The private sector can't get enough of those damn Treasuries. And why does it need the Treasuries? Because it needs the Treasuries for the collateral to support and to create money. So that's why there's been a log jam. Now, now, now, so Russia reserves. Okay. So reserves. Okay. And again, if I haven't annoyed or aggravated your listeners enough, I'm going to say…
Tracy: (23:46)
I feel like you have a low opinion of our listeners.
Joe: (23:47)
Yeah. They're gonna like it.
Tracy: (23:49)
They'll love this. Yeah. Keep going
Hugh: (23:50)
50,000 people on Twitter and when I say the ‘B’ word, they light up. Now, what is the B word? Don't worry, don't worry. So let's preface it. The U.S. makes a ton of damn stupid mistakes. It gets careless. It has, Hey, like we all have dumb ass politicians, and they make some, you know, dumb, unwise decisions and sometimes that's militarily and it's overreach, and wrong. Okay. But despite all of that, I'm gonna say that the U.S. is like an empire and it's a benevolent empire. The empires that have duration, that persist, they persist owing to a form of benevolence. Now it's a self-interest, you know, we can keep in all of our Scottish economists and whatever in our invisible hand, it's benevolence, which is on the basis that we'll prosper from this.
But for us to prosper, we have to invest and encourage prosperity with our neighbors. Prime example, you know, the Second World War, we have the Marshall Plan and the U.S. funds direct and gets the region back on his feet. That's benevolent, sure. But of course the U.S. has won that deal like many times over by having this prosperous, peaceful, European neighbor that it trades with. Right? Done. Great, wonderful, same thing with Japan. You know, we had a problem, we fixed it, we paid it. We got it sorted, great trading partner, another prosperous region in the world. And then China finally seeks a moment where it gets an avenue to kind of come out of the cloud of its political theology. And it says, ‘Hey, you know, we wanna be rich.’ And back in 2001, Clinton signs off and says, you know what, why not?
You know, join our club, join the WTO. Trade with us. We're taking a bet that a rich China is a better China, a China that wants to trade and get rich with us is a China that enriches America. So I call that benevolence. Like was the Iraq invasion a mistake? Yeah. Okay. But you know, when it comes to, I travel the world, I'm not all the time on this little volcanic rock. But I tell you the only line outside embassies when people are seeking visas, the only line is the U.S. embassy. Okay. So the U.S. reigns supreme and the dollar reigns supreme, because it radiates freedom. You know, like people write songs about living in America. You know, like the Rolling Stones are incredible because it's the sound of LA in the 1970s, you know?
I mean, they're not writing songs about downtown Moscow. They're not writing songs about Baghdad. Okay. Right. As wonderful as these places, culturally, enormously rich. Right. But there's no zing and zang, right? They don't offer freedom assets. So you can trade, you can kind of prosper. But if you're not willing to create a free structure where you've got law, you've got order, you've got contracts that things work, right. Where you don't have to seek permission to get married, blah, blah, blah. Okay. Where you can't get confiscated. Then you've got a big problem because you can't create the assets that foreign people like. The only countries that have consistently demonstrated this freedom axis, are the United States, the United Kingdom, which is kind of small and irrelevant increasingly so, but in terms of that motivation. If you wanted to anoint triple-A status in terms of political economy, the United States, the United Kingdom, and let's throw in Australia, you know, people wanna buy their sovereign bonds. They’ve got big reservations elsewhere.
Tracy: (28:00)
So the argument here is that banks are conservative, investors are conservative. They're looking for safe assets. At the moment, that's mostly dollar-denominated assets, maybe some things for Europe or maybe Japan or something like that. Is there any chance that the definition of a safe assets starts to change in the current geopolitical situation? You know, maybe there are countries out there who decide, well, freedom, isn't actually that important to me and I would rather align myself with someone like Russia or China, something like that?
Hugh: (28:37)
Okay. I mean, really? Really? So like the world GDP is a hundred trillion dollars approximately. Right. Russia was 1.7, rapidly heading to $1 trillion. Okay. China’s 15, but you know, massively overstated. They’ve reached 15 without the ability to create wealth. You know, the stock market has gone nowhere for decades. Right. Because they don't create wealth, they create GDP. So I'm undecided. So I've just, I've said to you 15-plus what's gonna be one, so $16. I can throw in my weight with $16 trillion or I can choose to trade, you know, with the happy clappy guys who actually create wealth and have GDP of $84 trillion. Okay. What am I gonna do really? I mean, you help me, what am I missing?
Tracy: (29:29)
We have to ask the question.
Joe: (29:30)
I think it's, I mean, I've thought about this recently with the number of companies voluntarily leaving Russia, even though the sanctions don't require it, which is that ultimately, yes. I'm sure there's a moral element. I'm sure there's a PR element in many cases, but also in many cases, I just don't think they're walking away from that much money.
Hugh: (29:48)
Yeah, absolutely. Well, exactly. They're not walking away from much and if they don't walk away, they jeopardize a lot. Okay. And where I thought you were going also is, I wanna say, the sanctions that were introduced by the U.S. side and elsewhere were [inaudible]. They were like, well, we're scared, like these guys, this guy's crazy, you know, he's got a nuclear bomb and you know, and so we're gonna go slow. You remember the sanctions and you can, maybe you have to fact check this, but I’m pretty sure most of the U.S. sanctions were announced at the start of the month with the notion that they'd be implemented like on the 27th, you know, it's like ooh, we're gonna go slow. You know? It was the private sector, private sector picked it up, went too right, right. Morally we are we're outraged.
And secondly, to your point, you know, these countries, because they're not free, they're damn irrelevant, right. I'm not gonna jeopardize, like, there's just no optionality in staying here, especially with the suicide policies they're pursuing, I'm not gonna jeopardize trading like the free world to carry on in this theater of the absurd. Boom, done. So this is not a Biden victory. This is a private sector victory making choices. A point emerged in history and you were asked to make a choice. History will judge you in the future in terms of those choice that you made.
Tracy: (31:15)
There's something that I wanted to ask you. And it sort of goes back to your experience at Eclectica and also the way you think about things now. So you're known as a contrarian investor or a contrarian thinker, but at the same time, it feels like you're very attuned to trends in the market to momentum. I think Eclectica was described as a momentum hedge fund at one point. But how do you sort of square those two things? So thinking differently to what everyone else is thinking about at the moment?
Hugh: (31:48)
Yeah, so I have to point out Eclectica was called many things, some things on a family radio show. So yeah, people are like, Hey, well, let me let, I'm doing my questionnaire. So you're okay. Tick the box. You follow trends. Tick the box. Really/ These things are inconsistent. Like, you know, and I also have to remind people that I sound like a moron, but in fact I'm an oxymoron. Okay.
Joe: (32:19)
It sounds like you've used that line before.
Hugh: (32:22)
You think so?
Joe: (32:23)
Keep going, sorry. I didn't mean to interrupt.
Hugh: (32:26)
I’ve got a lot of spare time. Yeah. So Hey, you know, I read, I learn from the master, you know, the George. George Soros. You know, this all Soros. You take understanding from the genius of the marketplace, you know, if I'm in a foreign city, I will go and eat in a busy restaurant and nine times out of 10, that's a wise decision. I won't walk past an empty restaurant and go, wow. Yeah. I really gotta eat there. Right? You know, so there's a little bit of that. The biggest mistake, right, you see it with Tesla, right. People put narrative, let me take on another well-rehearsed term for my lexicon. It is the conceit, it is the arrogance of a well-conceived argument. Okay. Your job as a speculator is to stockpile well-conceived ideas.
Then your second job is to be an inventory manager. And to remember that you have stocked this larder full of wonderful ideas, but you only get to play with those ideas when you get confirmation from strangers, when people say, yeah, yeah. This thing is going up. Yeah. We’ve got a trend, or the inverse. Okay. You know it's a humbling -- believe me, I began with arrogance, I began with conceit -- I began with well-formulated arguments. And I sat with a career going nowhere for the best part of eight years. Super education but I was missing the Jesse Livermore. You know, Jesse Livermore effectively was the first real hedge fund manager operating at the turn of the previous century who actually had this ability to see around corners. He felt, he sensed the San Francisco earthquake in what? 1908, I wanna say?
Now he didn't know it was gonna happen, but he was so closely attuned to markets and how they were trading and trends that he had a sense that something was gonna give. And, you know, something gave, that's the world that I'm talking about. Keeping your thoughts pure to trend. Now again, that's not easy because just now, if you look at the U.S. 30-year or 10-year Treasury bond yield, you know, trend’s against. I mean, I had a simple rule, you know, I would take the market serious if Treasury 10-years went above two, they're trading above two, I think they're close closer to two 40. Looks like they might go to three. But you know, they can go all the way from 40 basis points to 300 basis points. Heck they might even, markets are mendacious, right? They might even push to 320, 325, 340. Right. Probably. And I think most likely will mean revert back to the prevailing trend. So you can get wide ranges. And so markets are humbling. You've always gotta be listening and you've got be able to take positions on and unfortunately take them off.
Joe: (35:26)
So we just have a few minutes left. You're on this volcanic rock, the gorgeous island in St. Barts, the people you must interact with, who stay at your property, hotels, some of the most successful people of all time in the history of the world. You must interact. What do you learn from them? Like you must like, you know, in addition to running properties, and of course your amazing, you know, your surfing life. You must learn a lot from just hearing and talking to the people that come through your properties. What are you learning these days?
Hugh: (35:55)
They're really rich. They’re really, really rich. And they wanna spend money, you know, like the pent-up demand, obviously for the two years. I mean, when I look at my reservations, we are, you know, bling bling, full, full stretching into next year. But given the preciousness of the time, I really wanted -- because we were talking about the dollar -- so if there's gonna a further turning point, I fear the further turning point. So like this death that I prescribed to the eurodollar system from 2008. Yeah. It first rolled through America like, you know, with Lehman et al. Two years, three years later, it rolled through Europe and we had, you know, the European sovereign debt crisis. And back then, I was sure that the, the final domino, this system will end when the Chinese domino drops.
And so back then 12 years ago, I had a, well, I had a special sit[uation] fund. I raised a hundred million dollars. I’d have made a billion dollars if I was right. Turned out my timing was off. And so I burnt 40 million and I gave 60 back, walked away from it, you know? Why was I off? I'm not a value investor. I'm not a momentum investor. I wanna say contrarian. Sure. What else am I? I'm a time investor, Chinese system. And I didn't know this, I've only recently gained this. So I didn't gain this from my customers, but I gained it from, you know, I engaged with the smartest minds on the planet and the Chinese horoscope, the Chinese horoscope. But they use 12 characters, different characters. They don't measure the heavenly bodies and their movement and over the course of one year, but it's over the course of 12 years. If only I had known that! Time moves at a different cadence in China. Now you add 12 onto when I launched that fund. And that takes you into today, right?
Joe: (37:57)
This is the best ‘I was right, just earl’ I've ever heard. That actually, you got the 12 year cycle right when you were making those videos of Chinese ghost cities, the real estate implosion, actually was right. You called it. You were just off the wrong cycle of the Chinese horoscope. This is the I've ever heard.
Hugh: (38:17)
I blame the dumb horoscope but you hey, listen, remember, I think I charged a 50 basis point management fee. I could not charge a performance fee until you successfully redeemed. Right? I do not know why the world has not gone that way, but there you go. So yeah. Horoscope takes you to today. Why is today relevant? So there's been two profound sovereign failures of late. Europe sold its energy short. Like the number one role of a sovereign is to secure energy resources. Europe has five years left, right? So dollar versus the euro, I think the dollar breaks the buck, if you will, which to say, I think the dollar trades much higher versus the euro owing to the shame and the errors of European politicians a generation ago.
Secondly, China. China facilitated a credit boom in order to satisfy the political desire for GDP growth. Because when they have GDP growth, their citizens are willing to put up with a heck of a lot of civil dis-liberty or whatever. But when you allow domestic real estate assets to be 4X GDP, you're gone. I do not care how clever your bureaucrats are. They were never clever in the first place. Bull markets make dumb people intelligent. Okay. So I fear China. And then, you know, again, just lacking the democracy gene. And so they could not embrace our technology, with the boosters and the vaccines. And they had to go like with their own thing, which hasn't worked. And so there's zero tolerance campaign on top of the Russia conflagration etc., etc. And with this property thing, like, GDPs going down. So in terms of the fourth turning, I fear in the next three years that things could really get so weak in China and a flight of capital that you might see a Mad Max reaction from the Chinese. I fear they may replicate what the Taiwanese ironically did back in 1997, which to say they might devalue by 20%. It would be an economic crime, but they might do that. And at that point, the U.S. would have to intervene and we'd have to have a global conference of leaders and decide on a new monetary order.
Joe: (40:44)
Hmm. Well, Hugh, it was fantastic to talk to you. We will absolutely have you back in three years.
Tracy: (40:51)
Do we have the horoscope right? Is the timeline correct?
Joe: (40:55)
Or maybe 12 years or maybe 24 years, but at some point we'd love to have you back. I hope you have a great day surfing in St. Barts. Thank you so much for coming on Odd Lots.
Tracy: (41:05)
Thanks so much Hugh.
Hugh: (41:06)
Thank you.
Joe: (41:07)
I love talking to Hugh. It was so clear, like, you know, years ago he mastered media, obviously, with those YouTube videos of the Chinese ghost cities, and you can hear instantly talking to him, why he’s so compelling.
Tracy: (41:20)
There's a lot of, I feel like there are a lot of quotes in that conversation that I'm probably gonna use going forward. But yeah, I mean, I thought a number of really interesting points. I did think what he said about the private sector, the sort of triumph of the private sector, when it comes to sanctions in Russia and people making, you know, maybe moral decisions, of course they don't want to be associated with a regime that is invading another country. But on the other hand, these are also very practical decisions tied to the size of the market and the feasibility of actually leaving it.
Joe: (41:52)
There were so many interesting points. I mean, I thought it was important, the endurance of dollar and dollar assets was really powerful that ultimately like what the U.S. can manufacture in droves and into the scale that others can't are assets that are tied to freedom and a stable legal system and the rule of law, basically. And that no one else has the capacity to manufacture the, as Hugh put it, I think the term he used was freedom assets, at a scale the U.S. can and how powerful that is, is one reason to sort of bet on over of like when people go, oh the demise of the dollar. To bet on the over is simply that point.
Tracy: (42:31)
Yeah. I mean, I agree with that. And the idea of a safe asset shortage is something that's come up again and again, but I would also say there are probably a few countries out there who aren't necessarily as interested in freedom assets and may look at alternatives. But again, the question for them is whether or not they sacrifice economic growth in order to secure, you know, I guess security from this idea of the dollar being weaponized. But overall, I agree with that thesis
Joe: (42:59)
And I just have to say that I wasn't wrong, I was early..
Tracy: (43:05)
I wasn't looking at the right calendar?
Joe: (43:06)
I was right that it was gonna be the year of the tiger, It was just 2020, instead of 2010, has gotta be one of the best lines I've ever heard from an investor.
Tracy: (43:16)
I mean, I know it's mostly a joke, but there is also a kernel to that, right? Because when you have a centralized economy like China, there are all these different levers that they're able to pull in order to lengthen the cycle. And we've seen that over and over and over again, you know, people have been calling for a massive crash forever and it never seems to happen or it didn't seem to happen until last year.
Joe: (43:39)
And it's not going away. I mean, nothing I've seen in any news report suggests, oh, this thing is stabilizing. So yeah. We're gonna have to revisit that specifically again soon.
Tracy: (43:48)
Yeah, for sure.
You can follow Hugh Hendry on Twitter at @hendry_hugh.