‘We need Joe Rogan to run the Fed,’ says Hugh Hendry, former CIO of Eclectica AM
Hugh Hendry, the outspoken founder of former macro hedge fund Eclectica Asset Management, told GlobalCapital he sees no evidence for the re-emergence of global macro as a broad and viable investment strategy. Were volatility to rise again, Hendry says he may well get back into the financial fray but the likelihood of that is vanishingly slim.
The pandemic and its impact on global markets was a second coming for Hendry, who in 2017 wound down his global macro fund Eclectica after a 15 year run.
The Covid-19 shock led many to think that macro hedge funds may see some form of renaissance, after years of dwindling returns killed off the attraction to the breed's approach.
Global macro hedge fund stars had their heyday some time ago, making audacious bets on the volatility of nations and markets.
Hendry was one of them. Brought up in Glasgow and educated at Strathclyde University, Hendry began his professional life in the austere corridors of Baillie Gifford. But the Scottish investment manager was too straight-laced for Hendry, he has previously said, and he was itching for a more adventurous investment life.
A chance encounter with Crispin Odey, a fellow troublemaker in Hendry's eyes, prompted Hendry to move to London and work for Odey’s eponymous firm. Odey said to him: “You’re one of us, you’re one of the pirates.”
Three years later, in 2002, he founded Eclectica. It averaged compounded returns of 6% over its 15 years. He became famous within financial circles by chalking up a 31% return by betting against European and US banks, at the height of the financial crisis.
Hendry was known as uniquely combative and publicly outspoken in an industry which tends to favour tact and discretion. In the UK at least, Hendry carved a niche in the public consciousness as a financial polemicist — the hedge fund Hitchens.
In 2010 he said that Jeffrey Sachs, then director of the Earth Institute at Columbia University, may have missed market fears of a Greek debt crisis as he was skiing. On the BBC's Newsnight programme he offered to tell Joseph Stiglitz, economist and Nobel Laureate "about the real world." He accused the former Danish prime minister of being a “champagne socialist travelling business class on the back of money created by risk takers like me.”
But after the global financial crisis and central banks' hefty intervention in financial markets, volatility shrank and so too the returns of global macro funds.
In a famous letter to investors in 2012, in support of the stability of stock markets, Hendry asked them whether they would support his great transition from bear to bull.
The resounding answer was no. Investors started to pull their capital from 2013, and his funds' assets under management fell from $1.3bn to around $30m in 2017. He said he "died in active combat" in his farewell interview on Bloomberg TV.
Hendry was not the only macro man to throw in the towel. Louis Bacon closed Moore Capital Management last year and John Burbank’s Passport Capital shut its doors in 2017.
Hendry moved to the Caribbean, trading in his Bloomberg terminal for a paddle board, and became a property developer.
He had all but disappeared from the cut and thrust of financial debate until March. He set up a Twitter profile, a website and an Instagram page through which he opines on global markets and philosophy.
His first YouTube video, set in Paris and published in early August, begins with him asking: "Why is it that even the smartest people fuck up?"
Its tagline is: “To my mind, the three most important principles when it comes to investing are Albert Camus' principles of ethics: God is dead, life is absurd and there are no rules.”
Hendry spoke to GlobalCapital about why his position on central bank intervention completely changed, the fate of global macro and the need for a character like Joe Rogan to run the Federal Reserve.
GlobalCapital: You’re clearly resurfacing in financial circles. I was wondering if there's a specific reason for this, beyond the fact that during a global shock a macro perspective is pretty interesting. In short, are you looking to manage money again?
Hendry: I’m categorically not interested in managing money again. However, I guess I have to add a caveat. The famous oarsman Steve Redgrave, when he just won a fourth Olympic gold in rowing, said ‘if you ever catch me near a boat again, shoot me.’ And of course he was at the next Olympics winning his fifth.
Hand on heart, I have no envy. I have come to terms with the notion that I’m a storyteller, a provocateur, and I’m trying to etch out a space where I get that satisfaction.
I am attempting to alter the course of my life in a manner which I can neither control nor direct.
Life is more enduring and interesting when it’s subject to, and indeed can react to, more random events. I’m trying to avoid the kind of rut people get into in their lives when there's no randomness or if they're denied the ability to engage.
I'm surprised more hedge fund managers aren’t more publicly provocative. They often have controversial views and yet seem to be camera shy. You are, or were, unique in that respect.
It's not Machiavellian or by design, it’s just not their superpower. My superpower has always been that I can do this sort of speaking.
I've had the great honour and luxury of sharing public stages around the world with the pantheon of great hedge fund managers over the last 40 or 50 years, and it is striking how quiet or tongue tied they are.
There's an inverse correlation between the ability to manage money in the modern economy and speaking. I, sadly, was more bestowed with the skill set of my big mouth as opposed to my big underwriting pen.
If Eclectica was up and running in, say, February of 2020, on the cusp of the coronavirus and its subsequent impact on global markets, what would you have put money behind?
I'm going to try and resist the temptation to jump in with a comment on this.
I was just talking about the pantheon of immense money managing talents, and the incredible thing about this year in macro is that the very best have truly excelled in a remarkably consistent manner — you know, between 20%-30%-plus portfolio returns.
But the sector in general is still pretty much flat. It’s been pure alpha from some of the great leaders. It would be damn difficult and I'm incredulous at how well the leaders have performed.
Having said that, Eclectica was managed over 15 years to have a correlation to almost nothing. You can say we were long volatility and when bad shit happened, we made explosive convex-like returns. But of course, there just weren't that many of those events, which led to the demise of my ebullient sponsorship of the strategy.
Recently I started a podcast which is like a confession series. What I do is go back and revisit each month from the past as a sort of examination of risk. You might think that sounds so dull, but there’s a kind of asymmetry where the audience knows what happens but me as the protagonist doesn’t have that luxury.
I begin that story in the final quarter of 2002 and explain the landscape and the signals, and the kind of voices in my head. What is so striking is that it was astonishingly like today or six months ago.
Which is to say, gold had had a profound bear market and had been repairing itself rapidly, and who knew it was doing so in anticipation of a virus or another deflationary shock.
In answer to your question, I would be profoundly disappointed if I had not had a large commitment to gold. Now, that would have been troublesome because initially gold like everything else sold off.
I don't know to what extent I would have been able to afford the draw down from owning a large exposure to gold mining shares. You get a lot of convexity, and it would have been almost impossible to hold them in the initial mark-down unless you had purchased protection. I’m not sure.
But in terms of pure volatility, would February 2020 have been easier for your sorts of investments than the mid-2010s?
Well, nothing happened and then everything happened. That break was so dramatic, you're travelling at super speeds that I don't recognise in terms of the market, in terms of its breakdown and, of course, its recovery.
So the pandemic inspired enough volatility even for you?
Enough?! The flare was greater than 2008, peak to peak, if you will.
I have long held a fascination for a kind of final outcome. The [panic] could have been [over] anything but it happened to be a virus, and it kind of plays into a narrative that I formed 20 years ago.
The genesis, desire and motivation to have a global macro fund back in 2002 was very much motivated by me anticipating, or imaging, a reality of a profoundly long and dramatic bull market in precious metals. That would take theatrical steps: you'd have intermissions, schadenfreude, misadventures, and then you'd have a kind of final explosive dramatic ending.
There’s an element to that which I think brought me back to the fold.
Over the past few years, I developed a revulsion for all things finance. I wasn't reading financial news. I had no Bloomberg terminal, I just used Yahoo Finance!
But from time to time I would come into contact with someone still engaged in the market and I found it remarkable how much I actually knew about the here and now, so I thought, why not? Let’s be provocative.
What was your revulsion predicated on? Presumably at least partially due to your feelings around central bank intervention.
No, not at all. The central bank intervention thing was one of my biggest mistakes.
My biggest mistake was to become a moral curmudgeon after the crash of 2008 and, to repeat the words of former US Treasury secretary Andrew Mellon, to want to purge the system of its rottenness — to give the system a damn fine thrashing.
A few weeks ago I posted on Twitter an extract from a letter of 2006 and then one from 2007, where I was explaining that we were most likely to have a deflationary event, and items like gold would have a tremendous sell-off.
Those who had missed the initial move higher between 2003 and 2007 would have the schadenfreude of saying ‘yeah I told you so’ and bang, you should have been buying it. I compare this to the schadenfreude of having missed the run up to US equities into 1987, that the October stock market crash was your opportunity to load up.
And yet, when this scenario came to actually happen, I failed. I was in this other place – I was on Newsnight picking fights with Joe Stiglitz. You know, that's fine but your number one day job is to maximise the returns on a risk basis for your clients.
At the end of 2012 I gave my mea culpa. At that point I was managing around $1.5bn, collectively. I put out a letter and noted how I was wrong, and that were it not for the actions of central banks most likely we would have suffered a Great Depression 2.0. The pain inflicted on regular families would have been huge.
So, I completely switched to a position where central banks have to do anything to avoid a situation where there’s adult unemployment at 18%-plus. I said to my investors, what if I turned bullish? Would that be something you’d be interested in? Kind of imitating the character from the TV series Entourage.
I knew the resounding answer would be no. But I thought that central banks would not make these catastrophic errors from the past. The flight path for assets is more secure, and the most likely path is that they go higher.
And the interesting thing is, even to this day, people dispute that statement. How can you dispute it?Everything's gone up.
We still have this pathological ideology governing how people are approaching markets.
I'm thankful for that because it gives me the opportunity to be provocative, but provocatively intelligent, in my commentary.
How do you best characterise that "pathological ideology"?
We're dealing with events which we have never seen before, and potential solutions we have never tried.
The radicalisation once belonged almost exclusively to those who ran central banks — it's a small group, the Japanese, the Europeans and the Americans, and let’s add the Brits in there for historical reasons. The magnificent Lords of Finance book [by Liaquat Ahamed] reveals the pathological zealotry of a hard monetary regime. All of this is wonderfully put into verse in Frank L Baum's Wizard of Oz, the political allegory for the gold and silver standard in the US in the 19th century.
Central banks were willing to sacrifice labour on a cross of gold, and if the cost of purging the system was 20%-25% adult unemployment, then so be it. Today that ideology is almost extinct from the governing class of those who manage central banking decisions.
But this radical flame still burns brightly; now the keepers of that flame are found in investment circles. This is still profoundly damaging because of the engagement of the two in the synthesis of the market price, which is failing to allow prices to clear or is failing to give policymakers the mandate to be even more heroic. Which just means we’re delaying the inevitable.
The Jackson Hole commentary this year was another mea culpa. The Fed began with a mea culpa from Ben Bernanke in 2002, on Milton Friedman’s 90th birthday. Bernanke essentially said ‘you were right, we were wrong. We had an ideology. It was a bankrupt ideology, and we sacrificed American families on the cross of gold. It'll never happen again’.
But then a few years later he's the guy who ushered in the Taper Tantrum [in 2013 when investors sold out of US Treasuries en masse when the US Federal Reserve said it would slow quantitative easing, causing yields to spike] and said, ‘we can foresee an environment where the economy strengthens and it’s necessary to remove QE’. I mean, why have that pre-emptive commentary? What did it serve?
All it served was to double the 10 year rate to 2.9% at a point when unemployment was still at 8%. There was absolutely no sign of any incipient price inflation in the economy, so we had a reversal in the economy as they tightened policy. Then of course we went to 2016 and 2017 where they began very slowly nudging policy rates higher. Ridiculous.
So, Jackson Hole this year they were like ‘OK, we're done. We're done being stupid, OK? We’re not going to touch interest rates. It’s taken us the best part of 10 years to recognise this.”
You have to remember, we are in year 20 of a mild, slowly encroaching depression.
People will tell you about Tesla or show you a chart on Amazon or Alphabet, or whatever. But for all those charts, I can show you 10 times the number of charts of woe and destruction. Stock markets are not signalling any crazy inflation; stock markets are telling you about depression. Look at the chart of Vodafone, British Land or BT; or we can take this international — Japan Tobacco, for example.
But central bank policy played a part in the withering decline of macro hedge funds.
Macro strategy makes money when central banks get it wrong. If central banks don’t get it wrong, macros hedge funds don’t make money.
Central banks are like dumb terminals: they are slaves not masters.
Are 10 year Treasuries at that modest nominal level because the central bank has purchased $11tr? I would say no, with as much gusto and conviction as everyone else on the other side who would say ‘of course!’
I would say no because on the other side of that purchase has been a transfer of $11tr of collateral to the banks, enabling them to make a barrel load of loans, like giving candy to school kids.
10 year Treasuries trade at around 70bp points today because the private commercial banking sector in America, when given free collateral, think ‘the last thing we want to do is take all the commercial risks of lending in this economy. This is a depression.’
That's why 10 year Treasuries are nominally so low. I think the yield will fall further.
You have spoken before about radicalising the Fed. Could you flesh that out a little bit more.
Of course. This is the idea that we need Joe Rogan as the head of the Federal Reserve.
Let’s take this in small easy pieces.
What I can say is the policy makers that succeed in shaping and forming and changing expectations are the men and women who change history. Fail to change expectations, and you don’t change history.
Paul Volcker [Chair of the Fed from 1979-1987] was someone who very definitely changed expectations, and therefore someone who changed the course of American and global monetary history.
Banks essentially have liabilities, which are their deposits to you and I, and they choose to balance those liabilities with essentially two assets: lending to the government with the purchase of treasury bills, or loans.
With Volcker, the banks were choosing to exercise their discretion to own just loans. They were lacking the greed gene to buy 10 year Treasuries yielding 12%-plus, and they found greater comfort in having loans to the real economy.
I liken the Federal Open Market Committee meetings to a game of poker where there are only two players at the table. The Fed guys, like the men from Matrix with the glasses and the black suits, and the bankers, big fat Mafia types like you would see in The Sopranos.
Volker comes in and he’s like ‘listen, I’m a new sheriff and you have never met a guy like me.’
In the background you have the self-fulfilling disaster of the oil price surge, which created petrodollars. Banks were flush with these new liabilities, these deposits. Someone worked out that sovereigns never defaulted and so they lent all the money to sovereigns in South America, which then of course turned the theory upside down and began to default.
This unfortunate background made banks keener to just have assets which were not sovereign and not external, that there was a comfort blanket from lending to Mom and Pop firms.
So, the economy is slowing down and Volcker says, ‘I am going to kick it, I am going to trample it. We're going to have a major, major recession. I'm going to raise interest rates by 100bp or 200bp in the face of a recession. What do you think's going to happen to your risk assets – these illiquid loans to Mom and Pops? You guys will be up to your necks in default’
He’s trying to make them switch their allocation to US Treasuries. Back in his day, and we're talking almost 40 years ago, they believed you could scientifically measure and nudge and change monetary aggregates and money supply.
Money is created by the private commercial sector and not the Federal Reserve. To change and influence money supply you have to change the expectations of those who create money — and that's what he did. He persuaded the banks that their position was a dumb bet.
There wasn't one game of poker, it was several quarterly games of poker that lasted 18 months. Volcker was kind of crazy, he was radical. He shifted the allocation of banks’ portfolios at the margin, from lending to the economy to lending to the government. And that marked the high tick on US Treasury yields.
Today is the opposite. It’s been 11 years since the Federal Reserve began this charade of quantitative easing and basically it has given the banks $11tr and said ‘mate, here’s collateral, make loans’.
But banks still love 10 year Treasuries yielding 70bp. Low rates you say? I don't care. You want me to take your $11tr and lend? We’ve just had Covid-19. I’ll lose my job, no thank you.
So we’re stuck with the status quo, where the predominant risk now is the fear of losing. The fear is not the return on capital, it's the return of capital.
So, my point is, you bring Joe Rogan in who says, ‘I have no idea what all this crazy stuff is, but we're gonna do whatever it takes to get you to lend.’
Would you really take great solace in owning a 10 year Treasury yielding 70bp when Rogan’s in charge, or would you expand your loan book?
And of course, Joe Rogan is simply a metaphor for the crazy Fed dilemma. How do you turn sober bureaucrats into crazy poker players who can change the course of history?
What do you think of the Fed’s extension of swap lines?
Absolutely uncontroversial and thank god the Fed did it. Why are we even talking about it? We subscribe to a dollar standard, and there are moments of stress in the system and the central bank is in a position where it's able to provide liquidity, and it provides that liquidity.
We live in a world where the dollar is the principal reserve asset. There are $25tr-odd of Treasuries, and central banks and their reserve managers probably have $4tr of those and they use it to manage their external liabilities.
The amount of idiotic commentary I see on this…
Take China. People say, ‘why would the Chinese accept 50bp and the absolute certainty that there’s going to be inflation? Why would they accept these certificates of confiscation?’
That’s simply so dumb. The supposition is beyond banality.
First of all, they are not hedge fund managers. They are not seeking to make a commercial return. They are sitting on top of an immense volatility machine that could go kaboom at any moment. China has huge dollar liabilities, it has a flow of dollars from trade that is coming in all the time. But the majority of Chinese individuals and businesses have no daily need for dollars, so they sell them back to the central bank.
The dominant function of a reserve asset is liquidity preference management — again it’s not the return on their capital but rather the prompt and speedy return of their money when crisis beckons. You must be able to liquidate that dollar asset back into your local currency so that you can put out the fire which is threatening to burn your house down. Welcome to reserve currency management.
The talking point shouldn’t be the swap line. The talking point should be the disruption to liquidity in March for three or four days. There was an unprecedented lack of liquidity which emerged in the reserve asset of choice globally in the US Treasury market, and the Fed made liquidity available via swap lines and other means.
The Fed established categorically a put to reserve managers and to my mind that put is worth something. Treasury yields were already 70bp before this and now they’re back to 70bp after it.
I think that price now does not value the liquidity put the Fed has very clearly stated via its actions. I think Treasuries should actually trade with a lower compensation and it’s incredible that reserve managers actually get positive nominal carry from the provision of such abundant liquidity.
Can you see a way in which macro funds can regain some form of ascendancy. Is that a feasible proposition?
Have you seen Ben Melkman recently? Ben launched his own hedge fund, Light Sky Macro. He was very much embedded at Brevan Howard and had a big risk allocation.
His performance last year was really, really good and again I think he's hot to trot this year. But he recently gave an interview with Bloomberg, which was very much saying: ‘this is our time, we survived 10 lean years to arrive at this point.’
Ben thinks interest rates are going to stay zero for the next 50 years, so if rates won’t change, something’s going to change. You’re going to get currency volatility, and that’s the most liquid market to wager really big bets.
With great disrespect to the gormless Bloomberg guy, there were no push-backs. So, Ben, if you're or reading, I would love to question you. I dare Ben to let me be the inquisitor.
What would you ask him then?
If you suck volatility out of one area it must re-emerge elsewhere. Ben’s hypothesis is that if you take volatility out of interest rate settings and it’s going to be zero forever, volatility must represent itself elsewhere and therefore, we should look at foreign exchange markets.
Well, I don't think there’s a rule of nature which says that's true. There's no disequilibrium which rears up to confront that.
Volatility was removed from the bond market, but at the same time it was removed from the stock market. And now it's being removed from interest rate setting.
Volatility just seems to evaporate like the rain on a hot beach.
There is no evidence of a more widespread re-emergence of macro this year. Forgive me if I'm wrong, but the average macro manager is kind of flat or up 1% or 2% year to date. That is nothing to stage a comeback on. For a renaissance, the like of which we have only really seen from the great managers lionised in the pantheon of macro land, you would have to see consistent policy errors to keep producing the magnitude of returns that they have achieved this year.
Give me consistent policy errors, and I will launch a macro hedge fund.
But I don’t see it happening.