Hugh Hendry On Preparing For The Dawn Of Chaos

Hugh Hendry, the asset capitalist, also a former hedge fund manager who founded and led Eclectica Asset Management, a global macro hedge fund that you ran

from 2002 until 2017 that was uncorrelated to pretty much everything in the financial universe. It is so wonderful to see you again and welcome you back to the show. We always love having you on, Hugh, it's been way too

long.

>> Way way too long. Way too long.

>> It's been over a year.

>> Yeah.

>> And I'm probably still boring people about toot. But

toot. But >> no, you're not. No, you're not. But we

should we should probably get to that at some point. But it has been over a year.

some point. But it has been over a year.

The last time you and I spoke would have been summer of 2024 in New York in Alphabet City in person. So, I'm sad we don't have our Inerson one this year,

but we'll do that in 2026. But since

it's been a while, Hugh, um let's start the big picture, the macro view for you today. How you're thinking about the

today. How you're thinking about the world, what's been on your radar lately?

um more of your outlook and as you know Hugh you can take all the time you need to set the table.

>> Thank you. Thank you so much. Um again I just recalling um the I think when when I visited you in Alphabet City um I think I just had a tattoo.

>> No, you got the tattoo after we recorded.

>> Oh, after. Okay. Wow. Okay. Um so yeah um so let's let's try and and and do it in a calm

manner that maybe people can try and follow um and and so I try and set my I try and organize my thinking um

quadratically uh which is to say I I borrow from an a bit of an old-fashioned um portfolio construction and it's called

the permanent portfolio. Um I call it the macro compass and it's made up of four quadrants and the permanent nature of it is that you are seeking a

permanent representation in each of those uh asset quadrants and and then according to the person you are that you

set up a a a calendar or a set of criteria which asks that periodically you rebalance

uh those quadrants. Um, now this is almost exactly uh what Bridgewater Ray Dalio um did um starting in the early

1970s and and he used he rebalanced his portfolio uh on these quadrants um I don't know if he did it month I'm

sure he with great sophistication you know maybe monthly but um at all times the the quadrants would repres would contribute the same volatility,

the same price variability and that would require either buying more or selling some of the other areas.

So the quadrants themselves are um if you will the S&P or equities uh followed by uh US treasuries followed by

alternative assets um which is an enormous catchall you know from from Bitcoin and and crypto to private equity to index link bonds of course gold and

the precious metals um to to commercial real estate. So 180 $200 trillion in

real estate. So 180 $200 trillion in that basket, four times the size of the um of of the majesty of the S&P. The S&P

and and US stock markets are about 50 or 60 trillion dollars today. Um and the final quadrant would be

cash, strategic cash and perhaps would be um um currency and and which currency you choose or currencies you choose to

denominate uh your wealth. I think

that's very important. We do have choice u in in this world. So if I if I come at it um with regard to that methodology

um of course you would have you would have equities they are um why of course you'd have equities for for many reasons

but um you know so US equities always go up the the bore of course uh the fly in

the ointment presently is simply that um with the valuation of equities um it

would seem that your 10year expected return is is modest with regard to NASDAQ and the S&P. It would seem that you know

the S&P. It would seem that you know that a reasonable person would come to that conclusion. And let's just say that

that conclusion. And let's just say that we're starting off with we want to have 25% in each of the quadrants for for ease. So adds up to 100. Um, so maybe

ease. So adds up to 100. Um, so maybe you wouldn't want to have the full 25% in US equities, but again, you

introduced me as a as a global macro uh former manager and now talking head. Um

and and so from the global perspective, I I like Japanese equities and and I like them because

of a price or a chart pattern that has served my career very well. I'm going to glow here. Here I am in St. Barts. It's

glow here. Here I am in St. Barts. It's

a little bit gray today, but I've still got my sunglasses on. I'm sitting on I'm sitting in this gigantic house. Why?

because because of patterns uh because of voices in my head because my willingness to to take risk uh based on these syncopated rhythms.

Your portfolio has got to have a rhythm.

And so the rhythm that drove me to speculate um was

um I was fascinated with um risk assets where the price had gone sideways for a very very long time.

Um oil for instance uh for 25 years went sideways and it had a $40 um ceiling or

barrier which was u a very durable barrier. It it just couldn't get above

barrier. It it just couldn't get above uh $40.

Um and then it did and it went to 150 bucks within a year.

Um and that happened that happened in a at a very curious time that actually happened in in 200 between 2005 in 2007.

Um so in this equity quadrant I want to have a lot of the Japanese index the topics or

the nikai and I want it because the topics which is a broader range um than than the niki

earlier this year it made a new highra you know it exceeded its 1989 highs so that's That's a 35 year high. I mean that that

was purgatory for 35 years uh and yet this year it's higher. And um

and so I'm I'm lazy maybe, but what I'm doing is I'm piggybacking on the knowledge of everyone who pours uh

research dollars into understanding the future and understanding the Japanese future. For some reason, that community

future. For some reason, that community of experts now feels emboldened to buy new price highs. And so I'm like, I'm in.

>> I'm in. Right. So So let's leave that quadrant and let's say I've taken a a 25% um a 25% equity allocation. Right. So

I've I've used 25% of my portfolio. Um

so I think we said the second one would be um treasuries.

>> Mhm.

>> And so and here um here I'm going to use again I'm going to use the full allocation.

Okay. And I'm going to buy uh the ETF that the which that we call the TLT.

And people watching this are like switching off immediately. I'm sorry. We

should come to it should have been the final quadrant. Um but to those who are

final quadrant. Um but to those who are still there um the reason for my

my full commitment is that the the treasuries have have witnessed and experienced a profound mean reversion in the in the course of

the last three years. the price of longdated US Treasury bonds have h haveved in in price. I was going to say value, but there's no such thing as

value. They've halfed in price. Yeah. Um

value. They've halfed in price. Yeah. Um

and in this quadratic expression of mine um where I'm dealing with indices and not stocks. And so there's there's very

not stocks. And so there's there's very little uh idiosyncratic risk.

And and what you find over the the vast course of history is you get mean reversion and a 50 or 60%

um pullback or calamity.

Um it's kind of like a history reveals is like yeah you should have been buying. You should have been buying. But

buying. You should have been buying. But

of course it's the last thing you want to do. It feels like oh my god you know

to do. It feels like oh my god you know inflation you know. Um, so

I'm trying to keep a discipline. So I'm

coming in on the equities and I'm buying the breakout.

I'm buying the the new high, you know, I'm I'm I'm a momentum brother, you know, and then here I am next door with

the treasuries and I'm doing mean reversion. Okay. Now

reversion. Okay. Now

more than that the so since our since our last engagement our last uh rendevu

um you know like two initials AI you know wow big deal really big deal really

really big deal yeah um and I host um I host a summer camp and you must come next year I'm gonna I think I'm going to host several next year. They're really

really good fun. and and my great great friend and the person I most admire, we call him trader Mike, he spends six months of the year here and he spoke to

the audience and and Mike in vis invisages 20% adult unemployment

like soon like not not in decades like soon like two three years uh with the disruptive

influence of uh of the AI coupled uh with the robotics and

that's a big deal. Can you imagine 20% unemployment you know uh now what people do and and and one of the

it's a discipline perhaps with investing in investing it's almost like you're reading an adventure book and it's it's such a great book and you're turning the

pages what happens next and then you begin to understand the plot right and so uh the plot of this James Bond story

is, you know, the singularity and and and with the singularity comes um you know, the the last frictionless

cost was cheap labor, you know, and we're at the end of that process with China and we're we're pushing back with all the the the tariffs, etc. Um, and I

was writing on Twitter that, you know, before you had the cheap labor, you had the stallion, you had the horse, you know, we had 21 million beasts, beasts

of burden at the at the beginning of the um or the end of the 19th century um which all were sent to the glue factory,

you know, um because we we created an engine, we created the motor engine, the combustion engine of and and and so the the horses wed and and and we all became

fabulously rich. Uh but then there was

fabulously rich. Uh but then there was this social need. U we we had more horses which were the if you will the unskilled labor force

and then globalization of the last 50 years was another engine like the combustion engine and and it took all the unskilled labor force in the west

and it put them out to pasture. Um but

we were again we were made richer by globalization and buying like cheap ship cheap t from to uh from uh from Beijing.

Um and and now we're in this kind of final innings uh where everyone's unemployed. So but people

everyone's unemployed. So but people rush to the to the final chapters and they say aha when that happens you if you have a singularity governments are

going to dole out money. you're going to have a universal credit because we it'd be intolerable to have 20% unemployment.

And so people go, I'm not falling for those treasuries. We're we're back to

those treasuries. We're we're back to the second quadrant. You know, come back people. We're in the second quadrant.

people. We're in the second quadrant.

we've got 25% in TLT and and the rebuttal to that by some really really smart people prominent u bond investors

like ah I'm not doing that because if we get the singularity um they will cave we have this fiat currency and we'll have deficit financing and and therefore you

won't you won't get the move in the bonds I think that's >> I think that's I think that's being too clever I don't necessarily entirely disagree, but I think actually you got

to own the bonds. They've fallen 55%, everyone hates them. You you get what? 4

and a half% yield. Um, and the smartest guy I know really really thinks you're going to have 20% adult unemployment.

>> Wait, who's Trader Mike? Do we know him?

>> You you don't. So, Michael is just a little bit older than me. Um, and he was a professional manager, had his own hedge fund shop, he was West Coastbased.

He was a prominent I he guards his, forgive me, but he he guards his privacy, but he was prominent and one of the first emerging market equity

investors. Um, when you had the the

investors. Um, when you had the the launch of all the the emerging market ETFs, um, those sovereign nations were very welcoming. They they welcomed the

very welcoming. They they welcomed the capital. He had like Mike Mike's met

capital. He had like Mike Mike's met every like when you see all those roguish characters that ran all these you from Suarto in Indonesia to god

knows in in in Argentina and the Philippines he met them all you know and he did a lot of asset arbitrage um and he trades he trades his own account you

know and he sits there with intent intense focus and the last three years He's plus 60 plus 60 plus 60 you know.

So I listened I listened a great deal.

And the fun thing was at the asset camp like maybe everyone took too much acid.

They did not. But everyone just sat going you know this really amazing investor says 20% unemployment and everyone went yeah you know no one went

oh my god there's a fire in the theater.

Our life is coming to an end. And and so I um I reflect on things like that and I feel that

we're be become like we've been talking about AI now for maybe 2 three years where we we kind of are aware of some of the not even tales but I mean it's AI is

a proposition which is tail actually you know it's the singular the the per capita income in America just now the average income it's an average, you

know, um it's not the median. Uh but

it's $50,000.

Um and we're talking about with singularity and productivity being boosted um by the absence of scarcity

that we'd all be be worth 10 times more.

Um that's one tale. And the other tale, the machines kill us, you know, and we die. [laughter]

die. [laughter] Um, and I laugh about that, but it's it's obviously it's a serious matter and and one of the great one of the great mysteries

um in the continent of America just now is um um consumer household uh confidence or sentiment sentiment

indices. And we've got a vast array of

indices. And we've got a vast array of data uh I want to say maybe 70 years of of sentiment indices

and and so whilst we can make comparison with the AI and is it a bubble is it not a bubble and we can compare that to the tech bubble in the in the last years of

the 1990s. Um the thing that separates

the 1990s. Um the thing that separates the two is sentiment. I mean households were really really cooked. They were

really excited about the internet, the www. Um in 1999, uh sentiment surveys

www. Um in 1999, uh sentiment surveys were very very strong. Everyone wanted

to be involved and they saw as an opportunity. Um whereas this time around

opportunity. Um whereas this time around sentiment's on its ass like people like and I think that you Daniel Cannaman don't know if he's still alive but a

Nobel Prize winner in in psychology.

>> Yeah. I think he passed away recently.

>> Yeah. Well, he wrote that wonderful book. Um,

book. Um, >> thinking fast and was that his? No.

>> Yeah.

>> Thinking fast and slow, I think. I don't

know.

>> Yeah. Yeah. Um, and he's like, we are in humans. We are inherently cons actually

humans. We are inherently cons actually we're inherently conservative. And if

one of your wings is death, you know, like, so I mean, let's play on you. I

mean, hey Julia, how are you doing?

Like, I am your magic tooth fairy. Um,

I'm going to make you 10 times richer, but I can't dismiss that in making you 10 times richer, you may die.

>> Um, are you in? What do you say to me?

[laughter] >> And that's what the sentiment is saying.

They're going, >> "Did you say die? I heard you say 10 times. Did you say do you mean dye my

times. Did you say do you mean dye my hair or do you mean like dead?" I'm

like, "Dad, like I don't know." Anyway,

so um so 25% in in imports. Let's move

on. Let's move on. Um what else do we have? We have

have? We have >> you said treasuries. Yeah.

>> Yeah. So

>> we're in the third quadrant now.

>> I've got 25% in the Nick high and I don't I've got um 15% in the Nikai and 10% in NASDAQ. Yeah. You know this whole

notion of a bubble. remember

um I interviewed one of George Soros's um uh traders uh spot trader um and George had been on

CNBC and he'd be saying he gold is in a is in a bubble and oh wow George saw a headline gold bubble and the next day

this guy is working to buy half a billion dollars of gold and he's like dude I'm I'm a bit confused. You You

just told everyone it's in a bubble, but we're buying it. And he's like, "Yes, this is where you'll make the money.

You'll make the money in the bubble, you know." So, um um sorry for the terrible

know." So, um um sorry for the terrible Hungarian accent. So, boom. Yeah. 10 10

Hungarian accent. So, boom. Yeah. 10 10

percentage points of this 100 in NASDAQ, let's say, 15 in Nikai. And again, if I stick to the Nikai or topics and a

comparison with the NASDAQ, um 2017, yeah, I told you we get barriers, we get ceilings. It took NASDAQ stocks

17 years and they suffered under this barrier which was 5,000, the level 5,000. And

then something happened and I don't know what happened something in the water but all the experts that that cover technology stocks they suddenly went ah

you know what I'm going to buy NASDAQ at 5,200 5,300 heck I'm going to buy it at 6,000. So

the the professional view of the future became clearer uh allowing people to pay higher prices.

Okay. And so that took a 17-year period, a hiatus of 17 years. I'm saying that's been 35 years in Japan. Okay.

>> Mhm.

>> But the same, if you will, the same energy release or catalyst. Okay. And I

said to you that the treasuries is exactly the opposite. I'm playing mean reversion. Alternatives. We could talk

reversion. Alternatives. We could talk forever about alternatives.

>> So many. Yeah.

>> So many. But the one for me is what I call the Bobby Digital. the the Bitcoin.

Um, it's been a bit roughed up of late.

Um, I don't care. I don't care. And I'm

not a hodler. I'm not a hodler. U,

I was a hodler uh in my marriage and it's not good. Like he's like the love's gone, you move on kind of thing. I

hodddled. But Bitcoin um it's I think is being validated as a digital gold.

Um, and the what I want to say the enterprise value, the the total value of those 21

a.5 million coins when they're all

a.5 million coins when they're all minted and we multiply them by the prevailing price of Bitcoin today that

the total market capitalization of Bitcoin I think is about $2 trillion.

And it's the it's kind of the only asset class that I read about in

newspapers and on Twitter and in the media. Um it's the you know which is you

media. Um it's the you know which is you widely the discourse is wide and deep you know there's a there's a deep

knowledge and there's a an an incredible diversity of view and it's the only asset class of that

nature where I think it could double triple quadruple go up five go up six go up tfold and kind of not change the mode and it can

do all of that because it's only $2 trillion. It's like 1%. So I said to you

trillion. It's like 1%. So I said to you the alternative universe is about $200 trillion and I'm kind of going I'm like with a

laser I want to put everything into that microcosm which just represents 1%. And

I think it's going to occupy more of that quadrant. I think it I think it it

that quadrant. I think it I think it it could match the market value of gold.

>> Now gold um gold is now $30 trillion.

>> Now I if I reverse that and you say well why not buy why not buy gold?

Um because for gold to double it would then have a market capitalization of $70 trillion.

And I can't say that's not possible, but I feel that that would have I feel like we would notice that it would be like something would be different in the universe. You know, you'd be talking

universe. You know, you'd be talking about gold having a market capitalization greater than all US stocks.

And that has happened before. That

happened in 1980, but also marked a high point in in gold and it marked a very low point in stocks. And for the last 15

years, they've kind of moved uh with the same intensity in the same direction. So

I find it hard. And like I say, um I think I'm saying to you, Bitcoin, I think could trade a thousand, what do we call it? A million. A million per coin,

call it? A million. A million per coin, right? So it could rise 10fold

right? So it could rise 10fold now. And at 10fold, it would be the size

now. And at 10fold, it would be the size of gold and it would be less than the size of all stocks.

But if gold were to do that, gold would be almost the size of all the wealth in the [snorts] planet.

And so it just means everything else would probably take a haircut. So it

just finds it I find it extraordinary difficult to conceive >> of how you make two or three times your

capital in in the other components of the alternative asset universe.

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Julia to learn more.

But you've successfully owned gold in the past and I know that's been like a successful trade of yours. Do you still want to own it or you just like not at these levels? You're not coming in and

these levels? You're not coming in and buying at these levels?

>> Well, you know, it's like it's not a girlfriend. is like

girlfriend. is like >> I don't know >> just love it you know and even if I loved it you know I could leave it you know and the so very misogynistic um the

so I said I I really annoyed people with gold so um let me say something I don't

validating first of all you know I was kind of the first of a new generation of global macro managers speculators uh to embrace gold.

>> Mhm.

>> In my first calendar year, >> 2003. [clears throat]

>> 2003. [clears throat] >> Yeah. I I I made I made a calendar year

>> Yeah. I I I made I made a calendar year gain of 50% and it all came from owning lots and lots of gold gold miners and gold and silver and s silver miners,

probably some palladium and whatever, but predominantly gold. Um and and I caught a I I had I got a good contribution from gold um up until about

2006 or so and then I I I withdrew from it and I started plotting for if you will the big short of of 2008 which for me was um a 210

um steepener trade and and again I made 50%. Okay. If we bookend those 250%, I

50%. Okay. If we bookend those 250%, I want to say uh I was I was the first to come in and see the merits of gold. Um

gold had fallen from $850 and I I purchased it at $300 and I was purchasing it at that time when the British Treasury um

decided to sell half of their reserves.

Um and again it I think that's an interesting point just to reflect on that. So, I'm not saying they're bozos.

that. So, I'm not saying they're bozos.

I mean, I am, but you know, um, but it's but let's say it in a in a in an articulate manner. Um, the the decision

articulate manner. Um, the the decision to sell gold, uh, to my mind reflects the curse of the curse or maybe the conceit of

well-formed arguments. So the British uh

well-formed arguments. So the British uh central bank must employ 200 PhDs and they're like, you know, go this thing's dreadful. You know, stocks have gone up

dreadful. You know, stocks have gone up 10fold in the last 20 years and this thing has fallen by 60%. Why do we own it, you know, get rid of it? It it

doesn't have an income, you know, and the world's moved on. I I can understand that. I can understand it. It's conceit.

that. I can understand it. It's conceit.

And then you have I'm over here. My my

logic I don't I don't I'm acid. I don't

I don't do um I look for irony. I look

for these kind of I look for disturbances in the universe. Um and a disturbance is is usually something very curious is happening. Yeah. And so the words I would typically use would be it

feels like a paradox or it seems ironic that that's happening. These are like things that I I gravitate and I and I I drift towards, you know, and for

instance, 20% adult unemployment and no one wants to to own 10-year treasuries.

When you say it like that, it sounds like a paradox if if you say it like that. Okay. So anyway, yes, I uh have

that. Okay. So anyway, yes, I uh have experience with gold. Um,

I was fortunate, but with with good judgment, um, I recognized in the runup to the the great crash of

2008, you know, the Leman crash. Um, so

there were lots of really smart investors who could like who who allocated to hedge funds and they

they they could feel what I could feel.

Like there was a uh a calamity coming >> and they were hedging their book and

they were hedging by owning gold. Um

gold has this kind of moniker of it's a safe asset. Um and and it proved

safe asset. Um and and it proved anything but safe in the initial uh pulse of that great storm. It it fell

almost 50%. and it fell 50% because it

almost 50%. and it fell 50% because it was owned um and and people had to liquidate and you kind of liquidate everything and it's like wow you know

this is the one that has hasn't gone down I I'll sell that and then suddenly it's down 50%. So again, I feel like I understand gold and

and um what can I say at $300 the what do I say today? The price is >> it's 4,200. It's north of Yeah. 4,200

and some change.

>> 4,200 and that's got a market cap of let's say $30 trillion. Um and so divide that we're saying that the the value of of gold would have been what 2 or3

trillion back when I was buying lots of it. So,

it's very comparable to where Bitcoin is today. I guess maybe that's why it

today. I guess maybe that's why it appeals to me. Um, and that's that's really that's really it. Um, why is it

why is it very weak just now?

Like I don't wish to be nonulant. Um,

but I don't really care. Um, yeah.

>> I mean, you know, it's um it's in an uptrend with wide ranges. Yeah. Um and

of course you've had this uh strategy phenomenon, micro strategy phenomenon.

You've had the treasury digital companies um being silly, you know. Um the I don't know how many times in my career I've

seen this investment vehicle, this idea um it gets there's typically a scarcity.

It's typically very difficult for the wider body of investors to participate in a new asset class. So there's a vehicle. The vehicle gets a premium to

vehicle. The vehicle gets a premium to its asset value owing to the scarcity.

Uh the premium becomes too big. It's

replicated, replicated, replicated and then the scarcity becomes less and less.

Um, and then you discover there's absolutely no validation for treasury companies and they end up trading like a

closed end fund at discounts of 40 to 20 to to 45%. So, we're presently going through that, you know, with with the guy with the funny eyes.

>> But you okay, you like convexity, though, and like you're okay like losing losing losing and having like that explosive upside.

>> Oh, no. Well, I mean, well, I know losing losing loser. [laughter]

>> You've said before that you're like good at being a loser. I feel like you said something like that, didn't you?

>> Yeah. Yeah. Yeah. Yeah. Yeah. Uh, okay.

Let Let me clarify.

>> Okay. Fix fix it for me. I got that wrong then.

>> No. Okay. So, I'm I'm vibing with you.

Um, >> okay. T-shirt.

>> okay. T-shirt.

>> I'm a worldclass loser.

Okay. So, like I set out to be really really good at losing.

Okay, so come back again. What what was he talking about? What's he talking about? Okay,

about? Okay, we are trying to predict and profit from events which haven't happened yet.

We and there's no time travel. Okay, so

what that means is we're going to be wrong lots and lots of the time.

And and so I I I put that center stage and I say, "Okay, you you're going to be wrong many many many many many times."

Okay. So, can we just make the consequences of being wrong? Can we make that like really modest? Can we make it like tiny? When you're wrong, it's like

like tiny? When you're wrong, it's like But it's boring. You don't go, "Oh my god, I'm dead." Boom. You know,

>> just like a little bit little bit.

>> Yeah.

>> Teeny tiny. And so, you know, I was called the plastasine macro trader. Um,

better term would be like a centipede um with 100 legs, you know, and so I'm marching, you know, and I'm in the Bitcoin just now and a leg just fell

off, >> but I'm like I've got 99 others, you know, I can keep marching and you know,

and and so that metaphor is just um, you know, I'm I'm choosing the, you know, it's the configuration of Bitcoin coin is kind of like 23 trillion

dollars in the context. And so if you will think of it as a um atomic particles or atoms or or planets and think of mass, think of it

as a a cannonball.

It just seems that you can fire a cannonball like a little small cannonball like a golf ball. You can

fire that into the sky with le with with little energy. But if it's really really

little energy. But if it's really really big and so Bitcoin is like a golf boying

a golf ball I can't speak. Um and and Bitcoin and Bitcoin is a golf ball and gold is like a cannonball, right? Got

it. And so [clears throat] you require they can both be propelled higher [snorts] but the additional weight and mass of of

the gold capitalization requires way more energy for that disturbance to happen. And I don't see where that that

happen. And I don't see where that that extra energy comes from. Whereas to make Bitcoin trade uh higher to propel it higher into the atmosphere, it doesn't

seem to require an energy that would subtract from from our our lives. So is

that preparing for making errors? Kind

of. Um

again, I'm coming back to the having the treasuries and and having a competing strategy you could maybe say is preparing to be a

loser as well. you know, maybe um um and I I typically have five or six traits. Not

that I'm trying to say I'm macho or um these are my best I I really don't like this language. These are my best ideas.

this language. These are my best ideas.

I'm so committed. Okay. What I'm doing there is I'm being a human being with two legs. I'm like really committed to

two legs. I'm like really committed to my legs. Whereas I'm saying to you, I

my legs. Whereas I'm saying to you, I want to be the centipede. I've got a hundred. I'm like, I could I can lose a

hundred. I'm like, I could I can lose a leg. I can lose a leg, but I won't be

leg. I can lose a leg, but I won't be transient. All right? You know, I I will

transient. All right? You know, I I will be flexible and prepare to turn. I'm

prepared to reject everything I say. Um

these are these are the hallmarks of being a great loser. So u um but you know it's it's language but it you know [clears throat]

>> I'm sure your your mother said to you like you control your losses and your winners will take care of you or whatever. It's that kind of household

whatever. It's that kind of household wisdom that I'm just being playful with.

>> What else have we got? We've got um >> well he said currencies >> currencies. So,

>> currencies. So, >> so the you have to remember that um the professional portfolio managers, you say they've got a billion dollars in

their mutual fund or hedge fund. Um they

never spend a billion dollars on equities. They they buy everything on

equities. They they buy everything on margin.

Yeah. So the asset value sits in cash and cash today, what's two-year cash? So

like just by turning up for the year you should have a base foundational return as a professional manager of 4%.

And then if the in if the stock market's up you know 20%. You've typically got a beta which beta which will be close to that. So you'll be 24%. So this should

that. So you'll be 24%. So this should be a really good m year for um for portfolio managers. Of course it never

portfolio managers. Of course it never works out that way. Cash cash. So it's

great. We've we've got a lot of cash.

Okay. Um the only interesting thing one I might try and say would be that going back to the first quadrant and my nick eye um I would be long the dollar and

short the yen.

>> Mhm.

>> Um and um and I don't know why.

I just I I just know I just know I know something >> something you're seeing in the chart like reading in a pattern or something.

>> Yeah. So, um and and again it's so it's listen listening attentively to the universe. Um and and the universe is sending you messages.

It's not just sending you a message in a spreadsheet, you know. It's not just sending you a message by sending some highly paid employee of an investment bank to your office. Yeah, the universe

sends it in lots of different ways and yeah, charts. And so, one of my great

yeah, charts. And so, one of my great investment heroes and I have many many you many people that I've I've looked upon to learn from, but one of them um

is Bruce Coer um and the Caxton Fund.

Bruce is hasn't been active um certainly not for for Caxton for a decade if not 15 20 years um and actually had a house

in St. parts. Um but he very famously

in St. parts. Um but he very famously um traded he was long the yen and short

the dollar and dollar yen was trading 300 and he said I I I don't know why I don't know why but the voice is in my

head it's going to trade at 100 which [clears throat] is a huge call and of course because Bruce is a genius um that prophecy which was really participating

in in the price momentum in the foreign exchange market came to pass. So there's

an enormous u price momentum. Um and from a historical perspective um it it's remarkably rare and again I I feel a

little bit when I say 20% adult unemployment and everyone goes yeah whatever you know whatever. Um but

the the yen has devalued visav the dollar in the last 3 years by the order of 30 35%.

And that's and that's that's incredible.

That is incredible. You know the the taibat uh fell by that proportion. I mean it fell more and then it stabilized run about that proportion back at the end of

the 1990s. Um, that's an emerging market

the 1990s. Um, that's an emerging market currency. We're talking about one of the

currency. We're talking about one of the Templars, one of the foundation stones of of the global economy. Um, now

my my opponents, if you logical PhD people like they're on the other side and they're saying, listen, this has happened for a very particular reason.

We had um we had the sharpest most accelerated sequence of rate hikes by the Federal Reserve ever

or on a par with vulkar uh from 79 to 82. Uh US went from zero to to 5 and a

82. Uh US went from zero to to 5 and a half% rates and of course Japanese overnight rates remain largely

unchanged. Um, and we're in the process

unchanged. Um, and we're in the process of reversing that and and it's possible, and I might come back to it. Um, I I

could certainly create an argument for why Federal Reserve policy rates might go very low. I mean, of course, one of the arguments would be 20% of

unemployment. Um, so surely we're we're

unemployment. Um, so surely we're we're setting up the circumstances for the the yen to come back to to 100. So the yen

should be strong. So uh so my opponents their case seems very very logical and and I believe that uh US interest rates are going to come down and and I align

myself with the Fed governor uh Steve Mirin Miran not sure.

>> Is it Mirin or Myin? I think it's I don't know, Myin maybe. I don't know. He

follows me on X. He should come on the show.

>> He um he reached out. Can I tell the story? I don't know.

story? I don't know.

>> Yeah, tell the story. We're not going to bleep it out. So, tell it.

>> Yeah. No, but just in terms of confidentiality with him, I I think so.

Yeah. The um the Financial Times had run a a ghastly awful article.

Yes, they done that. So, my mind works like five times forward. Um but it was saying that he so he was the head of

economic affairs for the presidency or something of that nature and and he had been in Europe and had been taking

audience with large um investors in US treasuries and and putting across the new administration's economic philosophy

and and intents and ambitions and this was uh closed door uh you know nothing quotable and the Financial Times run an

article saying that the big investors were very unimpressed by by Steve M.

Yeah. And so it's one thing to say one thing to make an allegation and it's not a nice allegation but to make it you have to substantiate it. it has to be,

hey, this guy and he's a big deal and he said, I don't like it. But instead, it was all unsubstantiated. So, I I wrote a piece on Twitter saying, "This is a dumb

a dumb dumb disgrace, you know, and and anyone deserves better than that. It's

just appalling." And he reached out as a little messy, [laughter] I appreciate it. Thank you

very much. You know, so I'm glad I did that. The Financial Times

that. The Financial Times just did it again um yesterday or two days ago. Um the same thing they said um

days ago. Um the same thing they said um that supposedly Trump's preferred or Bessant's preferred candidate uh he was

what's he called? He the

>> um is it Hasset?

>> Hasset Hasset.

>> Kevin Hasset. Yeah.

>> Yeah. Again, it's like, well, the US Treasury have had informal discussions with big domestic investors and they warn, oh, we're not impressed with

Kevin. And again, it's unsubstantiated.

Kevin. And again, it's unsubstantiated.

Okay. So, um it >> I don't like that. I don't like that.

And what that shows it shows a prejudice.

>> Um and I try and profit from prejudice.

Yeah. So anyway, the >> um Steve Mirren's uh point of view is that

um the Fed has very successfully guided the markets to a terminal um um blue spot or whatever they use in terms of

interest rates. has said that the the

interest rates. has said that the the natural the kind of non-invasive um level of policy rates is 3% for the

US economy and if you look at expectations they convert to around about 3% for the end of next year. H

>> uh and Steve saying I think that's too high and this data dependency that the data

has been not corrupted but it hasn't been appropriately adjusted for a phenomenon uh from from immigration that

we had two diametrically opposed administrations. one was very welcoming

administrations. one was very welcoming to immigration and and the other uh the extreme opposite and and you saw under

the kind of Biden the argument is you saw almost 30 years worth of the immigration dynamic um in certain parts of the country

uh you saw that in a kind of two threeyear window and then it's been reversed very very quickly now the manifestation of that would Poor

immigrants seeking credit, high yield credit, you know, to get a car, a secondhand car, a second. And what do

you see? You see, uh, you see huge

you see? You see, uh, you see huge defaults in, you know, high yield credit, uh, anything to do with

automotive, you saw Car Max, which what is it just me? I mean, did they call Car CarMax is the America's largest retailer of secondhand cars?

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>> I don't know the if it is. I don't know.

It's But it it's a massive It probably is. I don't know the fact, but it

is. I don't know the fact, but it probably is the largest for reh secondhand cars. Yeah. It's a used car

secondhand cars. Yeah. It's a used car retailer.

>> Exactly. So, and

>> and and their share price has been destroyed. Yeah. Um and so you've got

destroyed. Yeah. Um and so you've got communities where um people came in, they were welcomed with a new administration, they were welcomed with

u high [snorts] yield risky credit. Um

they they bid up like apartment blocks to rent. Um the secondhand value of cars

to rent. Um the secondhand value of cars was kind of there was a a bump in in its uh favor. Um, and then [clears throat]

uh favor. Um, and then [clears throat] you know, ICE came calling and they all they they all left town and you know, the car parks are all full of secondhand

cars and and you've got credit card defaults. I'm exaggerating but that is a

defaults. I'm exaggerating but that is a kind of that's the Steve Mirren argument and he's saying the longer so it may be

that u to nudge the economy as as we lose that momentum that if we think three is going to be a nudge

uh we're wrong and because we've been wrong for like a year and time is of the essence we may actually have to have a intervention rate which might be 2% or

1% % is E's argument. So, and I actually I I give credence to that and and again you would say well but surely dollar yen

is going to go back to 100. It trades

and and for context today it's I don't know 159 158 159 that that sort of level um just looks like it's going to 200 and

if it goes to 200 it's going to 300. Oh,

the dollar yen today. Let's see. 154.97.

>> Okay. We in my world we call it 155.

>> Yeah.

>> And it's been as high it's been as high as 160. Uh um 161 162 were the wides if

as 160. Uh um 161 162 were the wides if you will. And and then for the last year

you will. And and then for the last year of course rate exit rates have been cut.

>> US rates have been cut. Um I um I don't know what I So another thing I would say to investors it's a bit of a copout not meant to be but

guidance and professional investors and how you set things up. Um

you don't always have to know why, right? Uh why is kind of the least

right? Uh why is kind of the least important. It's the participation that's

important. It's the participation that's the most important. Now, I'm not arguing that you're reckless. Um, but you from people like Stan Duck Miller, when they have a feeling, when they have a a chart

that's pushing them away, they'll take a position. They'll take a position

position. They'll take a position without knowing why. Now, they'll size it according to their level of knowledge, but they'll take the

position. Um and the fascination with

position. Um and the fascination with why seems redundant when

we don't know why um we don't know why you the Dow Jones peaked in October 1929.

We don't know why the Dow Jones or the S&P lost 20% in one day in October 1987.

We don't know why NASDAQ stocks peaked at the end of March 2000. You know, we don't know. So why why why are we trying

don't know. So why why why are we trying to why do we have to write an essay telling us what's going to happen before it happens? You don't need to know. So,

it happens? You don't need to know. So,

but you know, um, and I think partly the US might actually

have to cut grace to help Japan as well.

>> Interesting. But um I you know um ch Japan has been absolutely rogered by the

Chinese. The the the IP of all their

Chinese. The the the IP of all their automation. Um the the Chinese took it

automation. Um the the Chinese took it like like many other things. Um and and

and actually the if I'm more deliberate for for a moment, my call for for a weaker yet um stems from this idea that

the country that introduced quantitative easing, uh the country that's on the 27 or 28th version of quantitative easing,

um actually is the country that may blow up with regard to inflation.

owing to quantitative easing. So

quantitative easing is uh the accumulation of central bank reserves on the balance sheet of private sector banks. So the

the banks sell uh JGBs and and the central the central bank pays for those JGBs with these reserves.

Uh and the reserves if you look at base money M0 base money is predominantly those reserves

and they are the kryptonite of credit. I

just made that up. They are credit >> the kryptonite of credit. Bank reserves.

The central bank reserves are the kryptonite of credit. uh QE has not been this inflationary Armageddon that

was much touted when it was introduced in America in March 2009.

It it hasn't been an inflation Armageddon um because there's been very little impulse or desire by the banking

community to use the kryptonite to expand their credit. And that's that's been a conundrum. Banks are meant to be

greedy. They get very little return on

greedy. They get very little return on these uh reserves, especially in Japan.

Yeah. Um so why wouldn't they take these reserves and multiply them into um high profit margin credit loans and and and

in doing so generate prosperity and more economic momentum? That's been the

economic momentum? That's been the conundrum of the last 20 years. But it

may be that the Japanese did they just did it kind of surreptitiously and they took bank reserves and and and

JGB uh overnight bills and etc. you know, an alphabet soup of acronyms and but essentially they took these yen

assets into the into the interbank market into the collateral window and they said, "Hey, how many dollars would you give me

for these yen assets?" And the other banks looked at it and they said, "These are JGBs. They're the best credit

are JGBs. They're the best credit quality in the world. we will give you like no haircut, we'll give you the the dollar equivalent. And the banks went,

dollar equivalent. And the banks went, "Wow, whoa, cool." And and so Tokyo became one of the focal points of the this Euro dollar system, which creates

dollars and I would say has been the principal money printing mechanism for explaining why stocks have gone up so many times. you you were the one that

many times. you you were the one that taught me that um about the importance of that. Um

of that. Um >> Hugh, I I want to ask you about the dawn of chaos because you wrote this paper back in 2020. You wrote another update

just recently on your Substack um why the dawn of chaos still matters. And I

just want to quote something you wrote.

I think this is from the 2020 version.

Um, I want to warn you that it's the fi the f fe fibral I don't know the word >> fibral febri >> fibbral world that's I like your vocabulary world of psychology and shifting expectations that matters more

than the Fed and its reserve printing and it's the mood of society that ultimately unleashes the inflationary genie from the bottle not these huge inert central bank banking reserves I

want to talk about the dawn of chaos why that's still relevant today and I just thought that was such an interesting point that It's not really the central banks behind this inflationary genie.

>> Yeah. Um

and and I and I and I go back and I I look at the evidence of the of VHimar the Vhimar inflation of of the German Republic um after the first world war

and and so it's it's known for having obviously hyperinflation. But what's

obviously hyperinflation. But what's less well known in some circles is how raw a deal political deal the Germans

were given after the war. Now you say, "Oh, quite right." You know, you know, screw them, you know, bad people. But um

the Kane's in the in his critique of the the Treaty of Versailles is like you you're going to have another war if you

pursue this this, you know, so rather victory is all about um forgiveness.

um and and the allies didn't forgive and they and they went for retribution and they imposed terms on on on Germany which um kind of replicated

the the singularity threat of of AI. It

led to unbelievable uh adult unemployment. The the Belgian and the

unemployment. The the Belgian and the French marched into Germany and took uh the rural valley which is the most productive was the most productive part of the country at that point. It was

where all the uh commodity reserves, the metal reserves, the the iron ore reserves were held, you know, um and and Germany started printing money. So, it

was um chicken or egg, is it the people getting angry or is it the money? I would say that you kind of need both. That's this

notion of the febrial word that I was using. Um I was moved to uh update my

using. Um I was moved to uh update my dawn of chaos paper. I make I write these things just to deal with being wrong. You know, they're like compass

wrong. You know, they're like compass points. I try and write down my my

points. I try and write down my my thoughts. And so, four or five years

thoughts. And so, four or five years later, I felt like it needed an update.

But the update was what what scared what alarmed me was that that terrible shooting uh the the killing of >> Charlie Kirk.

>> Charlie Kirk. Yeah. Uh and of course, we'd seen attempted assassinations with with Trump. Um they're really bad. like

with Trump. Um they're really bad. like

if they are kind of inflationary impulses um when you get to that point you um Japan Japan suffered terrible

hyperinflation in in the years before the second world war. um they were rearming and spending and boosting the economy and the central bank was

accommodative and low interest rates and it was uh financing the deficit incurred by the government and then the Bank of

Japan government went ah I think it was the new guy he said oh you know like hard money like we're going to rebuild the yen we're going to get strong and and the military the military put him

against the wall. They shot him. Shot

him dead, you know. Uh he's actually the only Bank of Japan governor who features on a on a modern note. The the notes in circulation, one of them has I can't

remember the denomination, but it has the governor. Um so people getting angry

the governor. Um so people getting angry uh is is I I regard as and they get really angry, you know, like killing

people. Um if we go back to Germany, the

people. Um if we go back to Germany, the French, the Belgians, they took over the rur um the government's kind of going for a universal creditish

strategy and then there's an assassination of the country's most popular politician and the whole thing

collapses. Um so what I want why why is

collapses. Um so what I want why why is why is inflation so hard?

Why have we not had inflation? Yeah,

we've we've had it would seem um it would seem that they've printed a lot of money. It would seem that deficit spending has been enormous and

typically that's that's the again kryptonite if you will or that's the source comes from deficit spending. um

co um we went from at its peak the the US government was spending 15% of GDP 15%.

Deficit uh spending um and had interest rates at zero and we got no Yeah. We we went to nine

but where are we today? We're at three.

Yeah. Why?

Um and and the the thing that separates the American or the modern economy from

modern inflation examples like um Venezuela, Argentina or the older versions like the

Germans, the Chinese, the Japanese um in that kind of 1930 period.

The thing that differentiates is the sheer size of the modern treasury market. So again, market value, this is

market. So again, market value, this is one of the I keep coming back to market value. I said to you that I like Bitcoin

value. I said to you that I like Bitcoin because its market value is like a a tenth or a 15th of gold. And that that weighs on my thoughts that the market

value of gold is so great that I I find it difficult to imagine it doubling or tripling.

Um the market value of of the debt market just the government debt market is the same size as the economy. It's 100%

of GDP and it's never been that big in those historical. So like a Colombia, a

historical. So like a Colombia, a Venezuela, an Argentina, their bond market will be 7% of GDP

and it may be a dog and it may bark, but if it's five or 7% of GDP and is barking, no one no one either hears or cares. But

if the Treasury market barks, if the dogs of doom bark, Yeah. you damn

hear it. Yeah. And so, um, again, my enthusiasm for the TLT, the enthusiasm,

my my need to have it within my my orbit is the price hedd.

And that's why we didn't get the inflation. Like 10 year yields went to

inflation. Like 10 year yields went to 5%. Um the housing market is dead. PE

5%. Um the housing market is dead. PE

people are not moving. Yeah. new new

businesses. Everyone refinanced and they got a they they kind of got a roll to five years which is all needing refinance now and they're still

resetting at levels and like ah so the the private market has created u like a you stop forest fires by having those um

what do you call them like huge gaps fire gaps um and that's the treasury market today. So it's it's very

market today. So it's it's very effective but you make the people angry and you will get the inflation. And so

how would you make the people angry today?

It's already started. So it it let me answer the question again. How would you make the people angry whereby you would overcome the inflation um

stopouts?

Um 20% adult unemployment rate. That

would make people damn angry. Okay. And

it's so it's happening at the front of the labor curve. So the the capability and the technology and the wisdom and

the knowledge. It's already evident that

the knowledge. It's already evident that corporations can do the same or more with less people. Um, but there seems to

be a shame like you kind of you don't want to take the mic and say, "Oh, you know, I'm laying off 15,000 people.

Goodbye, folks. My profits are going up." Kind of like, and Amazon have made

up." Kind of like, and Amazon have made a few of those statements, but they've been at great lengths to say, "This has got nothing to do with the eye. You

we're streamlining. We're really sorry."

there's a great and you know great respect for for the for the workers that would be displaced but no major board of directors wants to be the author of that

just yet. So what but but there's a

just yet. So what but but there's a commercial there's a commercial need to do something and and so the manifestation

of it is in the in youth unemployment it's the the manifestation of it is in the grad graduates who are not finding uh jobs

and the manifestation of it is in what they're debating in Harvard like this house proposes no billionaires

like the one the kids of the 1% are actually coming to reject their golden legacy. like down with the

golden legacy. like down with the billionaires and that takes you it takes you into New York and that that gives you like you know the mayor how do you pronounce his name

>> Mandani Azoron Mani >> Mani Mandani you know um and the big and he's young he's like >> he's younger than I am he's 30 I think

like 34 maybe >> I didn't see you a day over 27 but uh >> Oh thanks [laughter] the, you know, I've got two daughters.

Um, I was walking around the UCL, a university campus of London or whatever it's called. Um,

it's called. Um, it's it's always the the walls always have Marxist. Hey, come and be a

have Marxist. Hey, come and be a Marxist, you know, redistribute. It's

the plateau. But, um, the the the the initial there's a storm out there. And

I'm saying to you that the coastal residencies are the kind of younger folk. And when you look at charts of of

folk. And when you look at charts of of of unemployment within those clusters, it's concerning and it's poisoning how

they look. It's making them seek uh

they look. It's making them seek uh people that do redistribution. I need

free stuff. I need free bus passes. I

need free child care. I need I need I need every my life has to be free universal credit. So the great test

universal credit. So the great test is so ideally um we get this Elon

argument where there's um no scarcity, we're 10 times richer um and we and we get the productivity

and the expansion in incomes which pays for the universal credit. But

if you that's the best case scenario and then that's an amazing scenario. But

if it comes in a noisy signal and it comes with uh disruption to the labor force and we do get spikes uh in unemployment of that nature, government

governments for sure will I mean I wrote another paper recently about the mess of the UK that they just their treasury just had um twice a year they they have

a budget or you know they um they can't afford where they are present presently.

Um they are overdistributing and they're distributing their distribution.

It's all politic it's hard to comment because it's it's the politics and who am I to say what which is right. All I

can say is there's a dead weight cost on where they're allocating their spending. So they're spending in what

spending. So they're spending in what they call disability and so it's very hard like when you say if someone's disabled

it's like we have to help them. We're

all good Samaritans and so everything so suddenly everyone is has disability because it's very hard to refute. So the

fastest growing expenditure in the UK is disability. You know it's it's the it's

disability. You know it's it's the it's the walk it's lang it's the the challenge of languages the the virus of language but they are in in the budget.

So they they are already spending a huge amount which is the the choice of the population on disability. And one of

the manifestations of disability is that um one in five new car sales cars, one in five new cars in the UK are purchased

from disability uh checks, you know. Um

uh but anyway, they they're financing it'd be okay if they were financing that from productivity, UK GDP, boom, boom, boom. But that they're taxing

boom. But that they're taxing they're taxing people who who already are at the threshold of very high levels. Um and and people are leaving.

levels. Um and and people are leaving.

So again, not only could you have 20% unemployment, people forget that the the inverted pyramid these ghastly 1% actually contribute a

hell of a lot of the budget revenue and and the UK is like incentivizing them to leave is not reducing the dead weight of his expenditure and within three years

might have to deal with unemployment levels way higher and none of those rich people in the country.

I just can't see how the UK I I I I wrote that the UK and we and we were we were technically we're still in the

fourth quadrant of the FX and and I feel like Sterling may be the first currency casualty of AI because it's

such a serviceorientated um economy and it's those jobs that would seem to be um I say service but you know I mean white collar um to be

most acutely at risk. Um so yeah.

>> Yeah. Well, chaos is coming. I have to say Hugh Hendry, the acid capitalist, it is always a treat having you on the show. I love listening to you. I love

show. I love listening to you. I love

learning from you and I look forward to our next conversation hopefully in person. Really appreciate you.

person. Really appreciate you.

>> That would be fun. Thank you very much.