Hugh Hendry and the “Blue Pill” |.
Distorted Markets
We have always liked Eclectica fund manager Hugh Hendry for his sound views and outspoken manner. Below is a somewhat dated video compilation showing several moments in which he stunned his opponents in television debates by voicing uncomfortable and politically incorrect truths. Included in the video is a defense of speculators, entrepreneurs and other risk takers in the marketplace against statist interventionists and “champagne socialists”, which we wholeheartedly agree with. Speculators have a bad name, mainly because they always serve as a convenient scapegoat for politicians (in fact, speculators and merchants have served as scapegoats whenever economic policy failures became apparent since at least the time of the Roman empire). However, they fulfill an extremely important function, as Mr. Hendry points out to his debate opponents.
Mr. Hendry runs the Eclectica Fund and in recent quarters has frequently stressed that being contrarian has been a losing bet over the past few years (there are a few notable exceptions to this, see further below), while investors and fund managers relying blindly on the “money illusion” provided by central bank interventions have done quite well.
This is undeniably true. A prime example of what absurdities have become possible is shown below. The chart shows the 10-year JGB yield; Japan’s monthly annualized CPI rate of change over the past year is also shown, as an inset in the chart. The red rectangle outlines the time period over which these CPI readings were reported. At no point over the past year was Japan’s CPI not at least more than twice as high as the 10-year JGB yield. Even if one disregards the fact that CPI has been boosted due to a sales tax hike in April, current JGB yields make no sense. Prior to the sales tax hike, CPI fluctuated between 1.4% to 1.6% annualized, or 1.5% on average. This would still be almost five times the current 10-year yield of 0.31%.
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