Page 32 of Barron’s features an interview with Hugh Hendry, founder of Eclectica Asset Management.
“If you talk about a hard landing in China, you talk about GDP growth of 5%, not minus 5% or minus 15%. The Chinese government prints money. It can build superfast railways and overbuild airports, because the rest of the economy can subsidize it. China’s swollen public sector is directing asset allocation, rather than pursuing profit maximization. They see their system as a success. But it creates a bubble, which can prove quite damaging.”
Jim Chanos has also said that a hard landing in China would happen if GDP growth slowed to 5%. But that’s because he believes the reported numbers are exaggerated lies. If China is reporting 9% GDP growth, Chanos thinks the actual number is about half that; and if China ever reports 5% growth, in reality they are flat. My opinion is that most economic figures reported by the Chinese government are lies.
I think the yen could soar from these levels [about 79 to the dollar] into the 60s, if not the 50s, with further dislocation in European sovereigns or a China hard landing.
This is exactly the opposite of what most Japan bears are thinking. If you’re betting that the market will lose faith in JGBs, you probably believe that the market will lose faith in the yen as well. One of David Einhorn’s biggest losers in 2011 was his short position in the yen. He is a fundamental investor trying his hand at global macro trading and runs the risk of oversimplifying things. Hugh Hendry elaborates his logic:
From the early 1960s almost, Japan began recording current-account surpluses. Unlike Germany, it always invoiced in dollars.
So Japan is short its own currency, and has an enormous private-sector hoard of foreign assets. If the Nikkei falls, and your hedge and private-equity funds fall, pension funds in Tokyo will have fewer yen assets, but their liabilities will be the same. So they’d have to sell some overseas dollar assets and retrade them back to yen. If we have a series of bad events from China to Europe, that will express itself in a very strong yen rally.
I had to read this over a few times to really understand it. I like the way Hendry thinks… very Soros-like.