It’s time for the people of Europe to throw out the politicians and reject the Euro ideal, says fund manager Hugh Hendry. The co-founder of Eclectica Asset Management told the BBC that “we have reached a very rare moment in economic history where the problem is greater than the ability of politicians to respond”. As a result, he says, the only solution to Greece’s debt problem is bankruptcy and a withdrawal from the euro.
Hendry doesn’t understand why Greece’s creditors are being protected. Lending to Greece was “a folly, a misjudgement. And all this fire fighting is trying to protect the creditors who made those loans as opposed to the oppressed person who is being fired and who is seeing their education and health systems being closed down”.
Citing Argentina and Ukraine as positive examples of how defaults can help kick start a recovery, Hendry predicted that eventually Greece would follow the same path.
He is also gloomy on the UK’s prospects, stating “we are not in a recession, we are in a depression”. He noted that the UK still hadn’t recovered to “activity levels seen in 2006/7” and might not for another five years.
Many commentators now share Hendry’s pessimistic outlook. But where the Glaswegian money manager stands out from the crowd, however, is in his belief that China is set to disappoint.
He thinks that China’s impressive recent growth is a sham based on a credit bubble and government stimuli rather than real demand. He has even made an amateur video showing empty buildings in China to demonstrate the glut of overcapacity there. For Hendry, the fundamental problem with the Chinese economy is that “at the centre of it is a craving for power as opposed to profit”.
Convinced that China’s growth “will collapse” within three years, Hendry set up the Eclectica Credit Fund late last year. The fund buys credit default swaps (CDS) written on Japanese exporters that are particularly exposed to China. The swaps act like a type of insurance where holder receives a payout if the company defaults on a loan. So if the loan paying ability of those companies – ie their general profitability – gets worse, it makes those swaps more valuable.
So far the strategy appears to be working. The FT reported recently that the fund made 22.5% in August and 38.5% over the year. The gains are even more impressive coming at a time when other hedge fund performances have been hit by recent market falls.
While China bulls still far outweigh the bears in fund management, the Shanghai Composite Index is down 16% in sterling terms since the start of the year.
Meanwhile, even senior Chinese economists have admitted that the economy will cool next year. Hendry might well find more China bears joining him soon.