Sunday, October 19, 2008

Hugjh Hendry

Q: Today, liquidity is being pumped in by Greenspan, then?
A: Yes. The mechanism is the government-sponsored enterprise sector in America, the Fannie Maes and the Freddie Macs. The U.S. has nationalized the credit-creating process, previously the preserve of the banking sector. Freddie and Fannie can borrow money at almost the risk-free rate. At times of anxiety, they are profit-motivated to expand their balance sheets because government bond yields, the risk-free rate, fall during times of risk aversion. The spread widens between riskier assets like mortgage-backed securities, which Fannie and Freddie buy, and Treasury bonds. The combined balance sheet of Fannie and Freddie is $3 trillion, 30% of the U.S. economy. The annualized growth rate in September and October of their balance sheets was 50%. Now when people talk about M2 or the old monetarism, it hasn't kept pace with the disintermediation, which has gone on in the economy. It doesn't include agency paper. The money supply looks as if it's waning. It's not. There's enormous dollar creation. You can control the domestic price of money. Short-term interest rates have not gone up in America because of this economic Frankenstein. But you can't control the external price: The dollar is weakening versus everything, even versus the ruble.

The response to the crash since March 2000 has been to create even more money. Just as it was 300 years ago. We've created a tidal wave of liquidity, with the Dow back at 10,000. But in doing so, strange things have happened. Gold has broken its 25-year downtrend and has now established an uptrend. The CRB index is at a nine-year high. Oil prices didn't come down after the Iraq war concluded. Strange things are going on in the world at large. But not strange to a citizen of Paris in 1720.

Q: And this suggests?
A: The authorities have broken their trust with us. Middle-class society preserves its wealth in paper assets and the honesty of the paper asset is that the central banks will not dilute your financial assets by printing too much money. We're having to go to extreme measures to preserve our wealth by owning gold, a barbarous relic. Greenspan is the smartest guy on the planet, but you know what? Wise guys make mistakes. That's what LTCM [the Long Term Capital Management hedge fund] was all about. In 1998, the Fed made the same mistake it did in 1927, used an overseas agenda to determine its interest rates. The Asian economies are on their backs. Russia does the unthinkable and defaults. LTCM defaults. And Greenspan, acting like James Bond, saves the world by cutting interest rates when the U.S. economy is expanding at 7½%. In doing so, he throws petrol on the flames. Nasdaq goes exponential. He unlocks a bubble in domestic stock markets and we've been paying for it ever since. He knows the consequences are a period of prolonged economic weakness and that terrifies him because he's got so much debt in the economy. Debt today is 360% of GDP. Not just in America but elsewhere. We're ill-prepared for a rise in savings. And so he's done everything to prevent a rise in savings.

If the Fed succeeds in re-inflation, then the good news is that the Dow is going to be at 10,500... in 2020.

Table: Hendry's Picks and Pans1

Q: That's the good scenario?
A: The other scenario is that we can envisage a situation where it becomes possible that the tail can wag the dog. The stock market today is capitalized at 100% of GDP and debt is 360%. Here we are with the U.S. gross domestic product recently having shown 8.2% growth, a classic economic recovery. But history suggests that if growth continues, then 10-year bond yields will have to go to 6%-7%. But that debt level -- i.e., mortgage refinance-based consumer spending -- can't accommodate such high interest rates. That's why the Fed keeps saying that it will be putting the short rate up; it's desperate to control the long rate. This is a bear-market rally. They have never lasted more than 12 or 13 months in any asset class. This market bottomed on the ninth of October last year, so we're [generally] in that 12-month period. At this point, I feel very much like Jesus in the desert. I haven't eaten for 40 days, and I'm getting fed up with the juniper berries. The devil is saying to me: 'Look what I've done to the Nasdaq. Up 80% or so. Russian equities were up 100% a few weeks ago. All of this, this could be yours if you would give up on your disciplines.' If it rolls over, if all the bears are converted back into bulls, concluding it's a natural cycle, then this market will test last year's lows. If those are breached, then I believe you could lose 80% of the value of the S&P and the Dow from their peaks.


Blogger The Sheriff said...

Hugh Henry's father was rather drunk when filling out his birth certificate.

10:43 PM  
Blogger John Liberty said...

typical inane lawyer comment

1:22 AM  
Blogger John Liberty said...

it's Hendry, but not Hugjh

1:23 AM  

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