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.
I wrote to Hugh Hendry after reading that interview and asked him about this opposite thesis from Kyle Bass at Hayman capital in Dallas, TX;
http://www.valuewalk.com/2011/11/kyle-bass-japan-doomed/#.T0MY4fXLhio
http://www.zerohedge.com/news/japans-final-resolution-has-yet-come
Will keep you posted if he responds.
Did you hear anything back from Hendry?
No, I didn’t hear back from him. I used to be a client of theirs from when he was with Crispin Odey.
In any case, the USD/JPY market is proving Hendry’s thesis is completely flawed.
Even when the tsunami and earth quake struck Japan in March last year, the “yen strength due to repatriation” theory held true. Those flows are no longer the dominant force in the markets.
Look at the long term view on European bond yields here;
http://www.macrobusiness.com.au/wp-content/uploads/2012/03/euunemployment.jpg
Bass’s case is that when an inflection p;oint is reached, things go bad very quickly.
It’s hard to predict the timing of when that will happen.
My guess is that the Japan trade deficit announced last month and the USD/JPY move last month
are the first signs of a seachange we will see unfold over the rest of this year.
We should be long Japanese exporters then, and these exporters should not be afraid to leave their foreign currencies unhedged.
Being long Japanese exporters would be a logical play on expected yen weakness.
However, there are other considerations such as the fact that Japanese exporters are now uncompetitive on some products *despite* yen weakness. they have simply lost the technological edge they had over Chinese and Korean manufacturers. So, even a weak yen may not help their prospects.
I think just shorting the Yen is the most direct way of expressing the macro economic outlook on Japan and I have been positioned since Oct/2011. I actually welcomed the contrary views of Mr.Hendry as it forced me to re-examine my own views.
The JGB is the other instrument to watch in the Japan macro play. It hasn’t cracked yet but that may take some weakness in US Treasuries to bring about.
Was wondering if anyone has thought of bottom fishing these Japanese shipping companies which are likely to gain from improving Japanese trade due to the weaker Yen;
Mitsui OSK Lines; http://www.mol.co.jp/ir-e/accounts_e/highlight_e/pl_e.html
Kawasaki Kaisen Kaisa; http://www.kline.co.jp/en/ir/library/bs/__icsFiles/afieldfile/2012/10/31/fh2012_2con_e.pdf
Nippon Yusen KK; http://www.nyk.com/english/release/dbps_data/_material_/NYKCOM_ENGLISH/FinancialResults2Q_2012.pdf
I cringed after a quick browse of their accounts but there may be value to be found here.