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Hugh Hendry:"i May Be Providing A Public Utility Here, As The Last Bear To Capitulate,"

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Business Insider 22/11/13

'Hugh Hendry of Eclectica is one of the more articulate and closely followed hedge fund managers in the world today. Until today, he was also one of the more bearish managers too.

"I can no longer say I am bearish," said Hendry today according to InvestmentWeek. "When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out."

Speaking at the Harrington Cooper conference, Hendry argued that an ongoing currency war between the U.S. and China will continue to force the Federal Reserve to keep monetary policy loose and easy.

"I may be providing a public utility here, as the last bear to capitulate," he said. "You are well within your rights to say ‘sell'. The S&P 500 is up 30% over the past year: I wish I had thought this last year."

Hendry sounded pretty crestfallen. Here's more from InvestmentWeek:

"I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years' time."

"I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends."

As Hendry said, he is not the first bear to "warn" that stocks are likely to go much higher from here. Here's a round up of some recent quotes we've heard from the long-time bears:

John Hussman: "...we should neither expect, rely or be shocked by a further blowoff..."

Jeremy Grantham, GMO: "My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years..."

Richard Russell: "I continue to think that this bull market will end in an upside explosion."

Bob Janjuah, Nomura: "I still see end Q4 2013, through to end Q1 2014, as the window in which we see a significant risk-on top before giving way, over the last three quarters of 2014 and through 2015, to what could be a 25% to 50% sell-off in global stock markets."

Is there no one else?'

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Here's what he should have said:

"It's mostly guesswork not science."

Quite.A lot of very bright people are terrible traders-which means I might be quite bright dry.gif.I think it was Keynes who reasoned that the most important bit of investment was working out what other people would do.

'His investing philosophy changed over time as Keynes began to doubt his initial belief that he could profit from his broad understanding of economic cycles.

The investment strategy Keynes finally adopted is, in many respects, remarkably similar to Warren Buffett's. Buffett has acknowledged Keynes's influence on his thinking. In 1991 he said Keynes was a man, "whose brilliance as a practicing investor matched his brilliance in thought." Buffett went on to quote a letter from Keynes to a business associate, F. C. Scott, on August 15, 1934 showing how Keynes, in addition to favouring long term investments, had grown to favour limiting these investments to a small number of enterprises:

"As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one's risk by spreading too much between enterprises about which one knows little and has no reason for special confidence… One's knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence."

Like Buffett, Keynes was sometimes criticised for investing in stocks he believed would prosper in the longer term and then sticking doggedly with his selections despite shorter-term problems. Increasingly, Keynes grew to favour a contrarian style of investing, writing in 1937:

"It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find any one agreeing with you, change your mind. When I can persuade the Board of my Insurance Company to buy a share, that, I am learning from experience, is the right moment for selling it."'

Edited by Sancho Panza

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Animals in a herd think they are safe right to the moment where they are cornered or driven off the cliff.

Indeed,this is all getting very 1999.

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"It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find any one agreeing with you, change your mind. When I can persuade the Board of my Insurance Company to buy a share, that, I am learning from experience, is the right moment for selling it."'

For the last 5 years, the market has went up - this kind of streak is incredibly rare throughout history, so next year, I would bet that the market will fox people and end up being down for calendar year 2014.

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For the last 5 years, the market has went up - this kind of streak is incredibly rare throughout history, so next year, I would bet that the market will fox people and end up being down for calendar year 2014.

Superb piece by Mish collating some John Hussman emails concerning earnings being at an abnormally high level.Nothing most HPcers wouldn't be familiar with.

'My friend Pater Tenebrarum at the Acting Man blog commented via email ...

"Hendry's change in stance is akin to Druckenmiller covering all his shorts in Internet stocks in November of 1999 and going long tech. The internet stock shorts he covered topped out two weeks later (they topped well before the Nasdaq did), the Nasdaq's final high came in early March, about 3 months later. Thereafter, an 85% decline in the index - and 3/4 of the internet stocks in which Druckenmiller covered shorts eventually went to ZERO, while the remainder fell between 90% to 99%."

Edited by Sancho Panza

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'The chart below is from one of the best tools that the Fed offers the public, the Federal Reserve Economic Database (FRED). The chart shows the ratio of corporate profits to GDP, which is presently at a record. The fact that profits as a share of GDP are more than 70% above their historical norm should immediately raise a question as to whether current year earnings or next year's projected "forward earnings" should be used as a sufficient statistic for long-term cash flows and equity market valuation without any further reflection. Then again, more work is required to demonstrate that such an approach would be misleading. We're just getting warmed up.

Hussman+Fed+Letter+1.png

A simple way to see the implications of the present elevation of the profit share is to relate the level of profit margins to subsequent growth in profits over a reasonably "cyclical" horizon of several years. Remember, when one values equities, one is valuing a long-term stream, not just next year's earnings. Investors taking current-year or forward-year profits as a sufficient statistic should be aware that high margins are reliably associated with weak profit growth over subsequent years.

Hussman+Fed+Letter+2.png

The next relevant question is to ask why profit margins are presently so high. One might argue that the profitability of companies has achieved a permanently high plateau. Despite historical mean-reversion in profit margins (which tend to collapse over the full course of the business cycle), maybe this time is different. As it happens, we can relate the surfeit of corporate profits in recent years rather precisely to the extraordinary combined deficits of the household and government sectors during the same period. ....

Corporate profits as a share of GDP are nearly the mirror image of deficits in the household and government sectors. A simple way to think about this is that dissaving in both sectors helps to support corporate revenues and limit the need for competition, even when wages and salaries are depressed. It follows that most of the variability in corporate profits over time is driven by mirror image variations in the household and government sectors. ....

Read more at http://globaleconomi...HROdvi8bZLRk.99

Edited by Sancho Panza

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Superb piece by Mish collating some John Hussman emails concerning earnings being at an abnormally high level.Nothing most HPcers wouldn't be familiar with.

Judging by the posts on this forum regarding equity markets (particularly extrapolating the situation in the US to other parts of the globe) I'd say that there's an awful lot that HPCers aren't familiar with.

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For the last 5 years, the market has went up - this kind of streak is incredibly rare throughout history, so next year, I would bet that the market will fox people and end up being down for calendar year 2014.

Congratulations. You've just earned yourself a PhD in Economics. ;):D

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Is there no one else?'

You really don't want to read Bob Janjuah's name in the same article as Jeremy Grantham's.

Hendry sounded pretty crestfallen

That's amusing though.

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@Sancho Panchez

I would say those graphs reflect the globalisation of the past couple of decades. But the story as I see it, in addition to all the stuff about asset prices/ taxes/ inequality and taxes is the fact that such profits signal over investment. That sows the seeds for over capacity and pricing pressures and the future Global Mega Depression. The effect on the way up was much more and as is the neat way these things work, the downside will be big too.

But this thing can go on a lot longer yet and probably will. And the topping process and end will likely occur in ways we can't even predict.

And standing looking at the numbers day-to-day, month-to-month or year-to-year, you probably won't even notice....not until the history books are written 50 years hence.

Keynes was right about irrationality and when the bubble is building towards it's Minsky moment,you'll lose your shirt trying to preempt it-a lesson I've learned the hard way.

I'd take the argument a little further than over investment.The money may be going somewhere-buy backs,dividends,various forms of asset inflation, etc but it's not going into the pockets of the most important people-future consumers.

US M1 Velocity

U6 Unemployment

There seems a growing disparity between record corporate profitablity and the evidence of decreasing real disposable incomes.If the DOW and S&P were moving higher on the back of rising velocity(remembering the expansion of the Fed's balance sheet over the last five years) and increasing economic participation rates,then I'd be little less fearful.

I agree,the downside of this is going to be horrendous.

S&P 500 20/50 wk EMA still going strong.

When the sell off comes,it'll be a no news day,people will just not want to play any more,

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TBH I thought he was long the US and USD a while back...theres a vid of his somewhere going on about how with the US, the quality of businesses and business relations is far higher in the US than say, China, as US businesses had to function with the 'straightjacket of the gold standard' and are naturally a lot fitter and streamlined..China taking 20 years to build up as much debt as the US took 200 years to build up.

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SP500 has delivered 2 x 50% declines in the last 11 years or so

Nothing says it can't do that again - 900 points to be lost to do so....

If the Fed keeps giving out US$85bn a month and banks don't trust their customers enough to lend them the money (would you??), the only home for the money is in the stockmarket

The market thinking that the $85bn a month is going to stop, or at least reduce, may be all it needs to tip the trend

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When the sell off comes,it'll be a no news day,people will just not want to play any more,

Sounds like Hendry is already there. His clients must be so damn pissed off. I'd normally have been surprised to see him work again in the field, but if Milken can turn it around so dramatically .. . I guess sheep need wolves.

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Investors should make no mistake. The anger of the 99% will ultimately not be bought off by yet another central bank inspired housing bubble, engineered to pacify them and divert their attention as their real incomes fall and inequality continues to grow.

This paragraph you have quoted (via ZH), is a gross generalisation.

There is not a 99% and a 1%.

There is a gradation from the 0.01% to the 99%.

The levels of inequality that I believe confer stability or instability are the differences within the 99%, not the delta-M between the 1% and everyone else.

After all, we live next to the 99%, not the 1% (unless you are part of the 1%).

One could see the incomes of the top fraction of a percent as random noise on the distribution that actually matters.

Add to that the fact that the majority of the income of the top fraction of 1% is actually not consumed in energy terms- its simply used for jockeying for the most premium insurance-against-anything policies. Or put another way, the wealth of the top fraction is an exercise in complexity that is not instantiated in the real world.

The social mathematics of stability are not, IMO, amenable to trite narratives of the 1%/99% variety.

Edited by scepticus

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The social mathematics of stability are not, IMO, amenable to trite narratives of the 1%/99% variety.

The fact that we now frame our discussions in terms of this narrative is the real point though- like all such narratives it's a shorthand way of expressing a more generic idea.

The point of the narrative is not that a few rich people are doing well-this has always been true- the point is that the system is now seen as failing to deliver prosperity to the rest of us.

Edited by wonderpup

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Vince Cable just said the government sold Royal Mail at the correct price and the markets are just temporarily showing irrational exuberance based on low volumes.

:lol:

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LOL! I love the way the market pauses coincide exactly with the Fed buying pauses.

Id have thought you'd be more concerned why gold doesn't.

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This paragraph you have quoted (via ZH), is a gross generalisation.

The levels of inequality that I believe confer stability or instability are the differences within the 99%, not the delta-M between the 1% and everyone else.

Agree re ZH.

Disagree re 99%. In UK te 99% in income terms is everyone earning below c. £130k. It's actually not that wide a distribution, if you consider that includes London earnings.

30m earners, 1% = c 300,000 earning > £130k. We're really splitting hairs on that distribution.

The biggie is the >1%. Not just their income, but their assets and the tax rates on the combination of their total assets/income and probably more importantly their use of tax avoidance/havens.

Clearly ZH want pitchforks and gold rather than democracy and fairness as is their wont.

Edit: Consider for example Mr Goodwin. His pension is c. £30,000 per month. Say £360,000 p.a. His pension. Not his earnings. That puts him in perhaps the top 100,000 earners in the UK, despite his business failing and causing the ongoing depression. So I think it's wrong to argue that the top 1% of top 0.3% he's in don't matter. They matter a great deal. It's insane for a failed banker to be paid a pension which puts him in the top 0.3% for the rest of his life for never working again.

Edited by R K

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