February 14, 2012

2012 Economic Outlook and Investment Positions

Of the many places Hendry doesn’t want to be long, China is near or at the top of the list. He thinks China could be subject to a 25% decline in GDP over the next five years.

How is that possible?

He draws an interesting analogy:“UK GDP fell 8% in the Great Depression, while US GDP fell 25%.”  Inferring, of course, that today’s China is the upstart US to our current “UK peak empire” role. In what he calls “the great unwinding”, the strongest economies in the world are also – ironically – the most vulnerable. But that doesn’t mean he’s bullish on the developed world, either. He has an aversion to just about everything. “It’s checkmate. Everywhere it’s checkmate.”

He believes Italy is insolvent, citing their huge borrowing binge over the last ten years that has only achieved 0% growth. He loves Japan – as a culture and place to visit – but is especially bearish on several Japanese sectors.  He’s long credit default swaps with respect to cyclical, leveraged Japanese businesses. He’s also bearish on Japanese utilities, which have issued tremendous amounts of debt since the Fukushima disaster. Hendry’s favorite sacred belief – which he’s betting against, of course – is the fact that no one believes the ECB will ever cut rates below 1%. He’s made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1% next year.

Source: CFA Society of Sacramento. This post originally appeared at ZeroHedge.

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."