Hugh Hendry's latest thoughts

The high CPI numbers being reported in the UK and other Western nations are “meaningless”, Hendry says, because in today’s economic environment, it does not translate into wage growth. (In the 1970’s, it did).

Because wage labor is approximately 70% of total business costs, he does not see meaningful inflation without wage inflation.

He’s also down on gold because it is not a contrarian investment today as it was 10 years ago (he had a nice year in 2003 buying gold and gold stocks when nobody wanted them).

The widespread belief among the greatest financial minds today that hyperinflation is inevitable greatly disturbs him.

In the Western world, he sees hyperinflation as a political choice – one that requires the will of the populous. (Forget Zimbabwe, he says – that might as well be Timbuktu. It’s not our culture.)

He sees society’s current mood as “dark” (Tea Party, Occupy Wall Street, and social unrest in Europe to name a few), and believes this makes bailouts and money printing very hard. The only environment that makes hyperinflation possible is “the mother of all depressions” he says.

In keeping with his anticipation of paradox, he quipped that if you believe in hyperinflation, then you should be levered up long on 10 and 30-year Treasuries…because in order for hyperinflation to become a political reality, deflation must arrive first.

2012 Economic Outlook and Investment Positions

Of the many places Hendry doesn’t want to be long, China is near or at the top of the list. He thinks China could be subject to a 25% (!) decline in GDP over the next five years.

How is that possible?

He draws an interesting analogy: “UK GDP fell 8% in the Great Depression, while US GDP fell 25%.” Inferring, of course, that today’s China is the upstart US to our current “UK peak empire” role.

In what he calls “the great unwinding”, the strongest economies in the world are also – ironically – the most vulnerable.

But that doesn’t mean he’s bullish on the developed world, either. He has an aversion to just about everything.

“It’s checkmate. Everywhere it’s checkmate.”

He believes Italy is insolvent, citing their huge borrowing binge over the last ten years that has only achieved 0% growth.

He loves Japan – as a culture and place to visit – but is especially bearish on several Japanese sectors. He’s long credit default swaps with respect to cyclical, leveraged Japanese businesses. He’s also bearish on Japanese utilities, which have issued tremendous amounts of debt since the Fukushima disaster.

Hendry’s favorite sacred belief – which he’s betting against, of course – is the fact that no one believes the ECB will ever cut rates below 1%. He’s made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1% next year.