Macro
Hendry warns of "Mad Max" deflation and advises hedging against yuan devaluation, amidst global economic pressures and Fed's potential rate cuts.
By Barry Stearns
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Hugh Hendry, the former manager of the Eclectica hedge fund and now the voice behind Acid Capitalist, shared his insights on the current global economic risks in a recent Odd Lots podcast episode. Hendry highlighted several concerns, including Chinese deflation, the strength of the US dollar, and significant unrealized losses in US Treasuries held by banks. He drew parallels between today's economic environment and the 1998 Asian financial crisis, emphasizing the pressure on the Japanese yen and the potential for a Chinese yuan devaluation. Hendry described the yen's drop as "terrifying," noting its decline from about 102 against the dollar in early 2021 to over 150.
Hendry warned of a scenario he termed "Mad Max" deflation, which could arise from a sudden devaluation of the Chinese yuan. Such a move, he argued, would have profound implications for global deflation. To hedge against this risk, Hendry 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, he believes that the yield on the US 10-year Treasury, now around 4.5%, could dramatically decrease to between 1.2% and 1.5% in the next 18 months.
Hendry pointed out the unique position of the US as a major growth driver in the global economy, fueled by aggressive fiscal and industrial policies. This situation, he argued, has not been anticipated by the dollar standard and is contributing to the yen's weakness. Additionally, Hendry critiqued China's growth model, which has relied on domestic real estate and hopes that exports of advanced technology could compensate for the popping of its real estate bubble. He expressed skepticism about the world's willingness to accept China's export-driven growth, especially in sectors like automobiles, where Europe is a major player.
The conversation also touched on the Federal Reserve's potential response to these global pressures. Hendry suggested that if the Fed were to cut rates in response to a significant break in the global economy, it could lead to a surge in risk asset prices. He humorously advised buying "10,000 call strikes on the S&P" if the Fed decides to ease its monetary policy, anticipating a rapid increase in asset prices.
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