If a bear dies in the woods, is anybody listening?
This week, the world lost a great bear. Hedge Fund guru Hugh Hendry is closing his fund.
Hugh Hendry is a bit of a legend in managed fund circles. With a name like Hugh Hendry, he was always destined for funds management, politics or porn. He chose the lesser of three evils.
In 2002 he launched Eclectica – a contrarian fund for people with more money than all of us combined. At the time, the fund attracted a lot of attention… and a lot of money.
And in the early years, it made good money. It made great money. And the contrarian strategy saw Hendry and co. well positioned to ride out the GFC.
But since the GFC, its returns have been disappointing to say the least. 2011 was its best year, but even then it only posted 8.6%, only slightly bettering the market.
Every other year, however, it underperformed the market substantially.
And 8 months into this year, already down 10%, Hendry decided to throw in the towel. The great bear howled its last howl, rolled over and died.
Essentially Hendry’s bet – that the radical money-printing experiment that followed the GFC was only going to end in tears – turned out to be wrong.
The theory was impeccable. The case was well argued. The mechanisms were obvious. It was just never true.
And ultimately, in his farewell letter, Hendry capitulates completely. The nightmare scenarios of the GFC just never came true, and right now, the economy looks pretty good.
Right now, Hendry “is not bearish on anything.”
In fact, the outlook is positively sunny.
“If anything we feel more convinced that our thesis of a healing global economy is understated: for the first time in an age all parts of the world are enjoying synchronised economic momentum and I can’t see it ending for some time…
… The implications of a sustained bout of economic growth are good for you. It’s good because it should continue to underwrite a continuation in the positive performance of global equities. I would stay long. It’s also good because I can’t see interest rates rising abruptly to interrupt the upward path of equities. And commodities have already acknowledged the upturn in the fortunes of the global economy and are likely to trend higher still. That’s a lot of good news.”
Oh, how the mighty have fallen.
For the record, Hendry still maintains that the markets are broken. Quantitative Easing created massive disruptions and misallocations of capital. However, the fallout from these misallocations has been largely contained, and the real economy is recovering and gathering steam.
And if the economy keeps doing well, time, ultimately, heals all wounds.
The GFC might still get a rehash at some point, but to Hendry, it doesn’t look like it will be soon.
I find this all fascinating because it still feels like the contrarian mindset is the dominant mindset.. (I know. Ironic)
Most people still don’t trust the economic recovery – we’re still calling it a recovery. It all feels fragile. The ghosts of the GFC still linger and are now rubbing shoulders with Trump and Kim Jong Un.
It can’t end well.
But how long does it take for confidence to take hold?
How many years of “recovery” do we have to see? How low does the unemployment rate have to go? How many contrarian hedge funds have to keel over and die?
More and more the tone of commentary is brightening. More and more people are saying, you know what, maybe things aren’t that bad. Maybe the economy has got legs.
Given this emerging shift in sentiment, I would actually say that the worst is probably behind us. The global economy is gearing up for a solid spell.
This is all great news for Australia – as a small open economy, our fortunes flow with the world. And if it’s true as Hendry thinks that, “commodities… are likely to trend higher still,” then it is fantastic news for Australia.
These past five years have been a bit of a battle for Australia, mostly because our major trading partners, apart from China, have been struggling.
But what happens if they all start finding form?
What happens to Australian growth rates – rates that are already the envy of the world? What happens to the unemployment rate? What happens to wages?
And what happens to property prices?
Just look at how well property has done with all the headwinds under the sun being thrown at it.
Now imagine what happens if it starts getting some tailwinds. Imagine what happens if incomes start gathering speed again.
In my mind, if Hendry’s thesis plays out and the global economy continues to go from strength to strength, it is very hard to see property prices decelerating.
In that scenario, the only way is up.
Mark my words.
The other point I’d make is that sentiment always flows this way. At first, there’s only a few dissenting voices, like Hendry. In time, the herd capitulates and the contrarian view becomes the dominant view.
And by then, your opportunity to make real money has passed you by.
There are no guarantees in this game, but my bet is that Hendry won’t be the last bear to cop it in the neck this cycle.
The mood is shifting.
Mark my words.
Where do you think we’re heading (globally speaking)? It’s it’s black clouds and storms ahead or bright skys and tailwinds?