Hugh Hendry Eyes 'Mad Max' Scenario, Buys US Treasuries

Key Takeaway

• Hugh Hendry warns of a potential 'Mad Max' deflation scenario due to global FX weakness, likening current conditions to the 1998 Asian financial crisis.
• Hendry is hedging against this risk by buying long-dated calls on US Treasuries, anticipating yields could plummet from 4.5% to as low as 1.2%-1.5%.
• Despite current challenges, Hendry suggests that a Federal Reserve pivot away from high rates could trigger a surge in risk assets and elevate asset prices significantly.

Currency Crisis Fears Ignite

Hugh Hendry, the former chief investment officer of Eclectica Asset Management, now writing under the ACID Capitalist brand, has voiced concerns reminiscent of the 1998 Asian financial crisis due to the current state of the world economy. The Bloomberg Dollar Spot Index's nearly 4% rise this year has notably pressured the yen, sparking fears of potential interventions and devaluations. Hendry draws parallels to the late '90s when countries like Thailand faced severe financial distress due to dollar-denominated debts, highlighting the yen's "terrifying" plunge from about 102 against the dollar in early 2021 to over 150.

The Chinese Devaluation Threat

Amidst these currency fluctuations, Hendry points to the "elephant in the room": the risk of a significant Chinese devaluation. Given China's economic struggles and the precedent of its unexpected 2015 devaluation, there's growing speculation about a similar move. Hendry describes such a scenario as "Mad Max" deflation, indicating profound global economic implications. To hedge against this risk, he has been purchasing long-dated calls on US Treasuries, specifically targeting the iShares 20+ Year Treasury Bond ETF (TLT), despite being currently "underwater" on these investments.

Structural Shifts and Fed's Role

Hendry identifies two major structural shifts in the global economy: the US's emergence as a primary growth driver due to aggressive fiscal and industrial policies, and the limitations of China's growth model, particularly in the face of global resistance to its technological exports. He suggests that a Federal Reserve pivot away from high rates could ignite a boom in risk assets, potentially leading to "intoxicatingly" high asset prices as currency pressures ease. This perspective underscores the delicate balance central banks must maintain in the face of global economic tensions.

Asian Currency War Looms

The yen's weakness has raised alarms about a potential new Asian currency war, with competitive devaluations threatening regional economic stability. The yen's historic lows against currencies like the yuan, won, and Taiwan dollar have eroded export competitiveness, prompting speculation about Japan's and its neighbors' next moves. Despite Japan's interventions to support the yen, the currency remains weak, influencing inflation trends and fueling further speculation about policy adjustments and the broader implications for Asian economies.

Street Views

• Hugh Hendry (Neutral on the global economy and currency risks):

  "Yes, absolutely... The world economy is giving vibes of the 1998 Asian financial crisis." "Heavens, we’ve got to go back to 1997, ‘98. 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." "The move in the yen is terrifying." "What if the Chinese come around and go ‘boom!’ and they devalue, right? That would be profound. I would call that ‘Mad Max’ deflation." "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."