Hugh Hendry’s 2011 Outlook: Why He’s Bearish on China, Bullish on the Buck, and Still Long Deflation

Hugh Hendry’s 2011 Outlook: Why He’s Bearish on China, Bullish on the Buck, and Still Long Deflation

It’s been WAY too long since we checked in with Hugh Hendry – THE most engaging and entertaining fund manager to listed to, in my humble opinion.

Fortunately we’ve got some fresh Hendry takes, courtesy of Bloomberg.  First up, a 6-minute video interview where he shares why he’s bearish on China, bullish on the buck and yen, and still a believer in the deflation story.

And a Bloomberg writeup to go along with the interview.

Hendry on China:

Now, Hendry is focusing his rhetoric — and investing strategy — on a bigger target: China. He’s betting that growth in the world’s No. 2 economy will collapse because of rampant real-estate speculation, sending shock waves through Asia and beyond. The problem, Hendry says, is that China’s gross domestic product growth isn’t matched by wealth creation at home. In his doom-laden scenario, a plunge in Chinese stock prices and property values will be exacerbated by a softening demand for the country’s exports, triggering an extended period of global deflation and slower growth.

Also highly entertaining were his thoughts about Japan:

“I see Japan as a nuclear bomb strapped onto the chest of the global economy,” Hendry says. “They’ve got uranium — which is, they sell credit protection: CDSs. I’m the other side of that.” If the Japanese corporate bond CDS spreads widen to equal or surpass their record highs of 2009, Hendry’s fund could rise by as much as 50 percent, he says.

Over the past half-decade, Hendry’s fund has done excellent when the sh*t goes down (returning PLUS 31.2% in 2008, versus -38.5% on the S&P), and so-so to mildly poor when things hum along (his performance lagged in 2006, 2007, 2009).

He projected a modest 5% return in 2010, lamenting: “It’s not our year; nothing profoundly bad has happened.”

We can’t talk about China without including Marc Faber’s take – who disagrees with Hendry (Bloomberg):

“It may be a painful adjustment, but in the near term there is no danger of an implosion in China,” says Marc Faber, the Hong Kong-based investment adviser and fund manager who publishes the Gloom, Boom & Doom report. “If I was negative about China and the credit implosion in China, I would short the Chinese banks.”

Want more Hendry?  If you haven’t yet read his December commentary, that is definitely worth a read.  His writing is as engaging as his speaking.

I am personally sympathetic to Hendry’s “deflation now, then maybe inflation/hyperinflation after” scenario – it just makes more intuitive sense to me, given the tremendous levels of outstanding debt that continue to deflate.

But as we’ve seen from the past two years, it appears that QE is capable of creating asset boomlets – gold, commodities, stocks to some extent.  So I’m warming to the idea that we see waves of inflation and deflation battling each other in the years ahead, in which paper currencies devalue against each other, and gold continues it’s general trend up (though setbacks are certain to come – even in the ever ascending price of gold!)