Hugh Hendry: "I Have No Idea Where The Stock Market Is Going To Be"... But "I Am Long Gold And Short The S&P"

Hugh Hendry is worth a listen.

From Zero Hedge:

Other observations include the monetary impact of global mercantilism, where every country is desperately trying to crush its currency, which to Hendry means the possibility of a massive FX short squeeze is increasing.

Hendry says that $3 trillion in Fed monetization has not unleashed inflation. Yet. What would? It would be “another trillion number” which would come when the central bankers no longer fear that their legacy would be of those ushering in Weimar 2, which means an opportunity cost of even greater catastrophe. "Society is saying we need the most profound Lehman times X in order to allow the central banks to cross my Rubicon, to be revolutionary, and they can be only revolutionary when they have given up hope.” In other words things have to get so bad, deflation has to be such a threat, that everyone goes thermonuclear on their CTRL-P buttons.

He summarizes the macroeconomic situation which he sees as juxtaposing the “green shoots” in America, is offset by the “theater of the absurd” in Europe, but as usual focuses on his favorite macroeconomic topic: China: “Like Germany, they have been an operationally leveraged economy, but unlike Germany, have now adopted financial leverage- the sovereign financing of these unproductive investments, so now they have double jeopardy, and if we don’t have a sustained economic recovery I am very fearful of the events that may befall the Chinese.”

Next, Hendry touches on the politically sensitive topic of China selling US Treasurys, which he thinks is ludicrous, explaining that "US Treasuries are not an asset – you can’t sell it to protect yourself", because selling TSYs would lead to a surge in the renminbi, which in turn would crush Chinese exporting companies.

The bottom line for China, "whose medicine is its poison" is that it has little recourse: it can’t protect itself in a downside case with its $3 trillion in reserves, or by selling Treasurys, and on the other the impact of financial leverage would magnify any economic crash: “UK GDP peak to trough dropped 8%. In the US in 1931 it dropped 23%. That’s the leverage. Now am I sitting here with video cameras saying the Chinese economy is going to contract 23%? Of course not. But if we have coffee later, I may say something different.”

Hendry is long gold and short the S&P. "It was a great trade until 2008." It has been “profitably but less predictable” since the intervention of QE in 2009. “there is an observation that QE has fortified the S&P versus the performance of gold.”

And his brilliant conclusion: "I have resigned from the professional undertaking of coin flipping. I am not here to tell you where gold’s going to be. I have no idea. That’s my existentialism. I am a student of uncertainty, I have no idea where the stock market is going to be. So when I am creating trades in my portfolio for my clients, I am agnostic. I just want to enhance the probability that I make money come what may."

http://www.zerohedge.com/news/2012-10-25/hugh-hendry-i-have-no-idea-where-stock-market-going-be-am-long-gold-and-short-sp