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Hugh Hendry: ‘We’re in the death spiral of mercantilism’

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You have to give a fund manager points for admitting to having a “history of contentious posturing.” Hugh Hendry’s also a reformed gold bug, which shows an unusual flexibility of thinking (once people join the gold cult, they seldom leave). Even if you don’t necessarily agree, his talk will serve as a useful grist for thought (hat tip Ian Fraser). Hendry discusses the end of an broadly adopted national strategy, mercantilism, and what he sees as the implications.

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43 comments

  1. dan h

    He ends sounding like Taleb…leaves me with the same feeling I got after reading talebs recommendation for a reader not to enter wall street as a career and instead be a baker, which was what utter bullshit. They’re just talking about contrarian views that are well n dandy so long as you’ve got heaps of capital for “investment”. I think the world is hitting the point that every man on the street realizes ROI is bullshit when the capital is fake…more and more peasants with no chance of ever saving enough capital to find someone like him to invest their money and live off the ROI, the capitalist dream. I think his profession is doomed and it seems particularly vile at this moment.

    1. Optimader

      And a college education is a waste of money… But try and be a physician or an engineer without one?

      1. LifelongLib

        My parents paid for my college and in the 30+ years since I’ve worked in jobs where without a bachelors or better your application goes in the trash. So it hasn’t been a waste for me (I think my parents are glad I moved out too).

        1. citalopram

          Yeah, it wasn’t a waste for the Boomers. The insanity of becoming a lawyer doesn’t pay off in this economy. Mountains of debt (6 figures) and zero jobs.

          The best thing that could happen is for loan demand to dry up. The financiers would be crying themselves to sleep.

          1. optimader

            The insanity of becoming a lawyer doesn’t pay off in this economy. Mountains of debt (6 figures) and zero jobs
            Read more at http://www.nakedcapitalism.com/2012/11/hugh-hendry-were-in-the-death-spiral-of-mercantilism.html#PPAUikaSU9ZoZxPC.99

            Well, citalopram that’s one ray of sunshine! Maybe I may harbour an expectation of fewer lawyers?

            Incidentally, you don’t actually need an undergrad degree or even a JD to be a lawyer, you need to pass a bar exam.

            If you’re in California, you can start here:
            http://admissions.calbar.ca.gov/Requirements/Forms.aspx

      2. dan h

        “Waste of money” is too vague to say anything…college in the US is overpriced for most degrees, the two you mention would be on the other end because of the large amount of highly applicable knowledge one would gain that would hopefully be valued more than money by anyone holding that degree…though that too is a problem that has been accentuated with the exorbitant costs.

  2. R Foreman

    This is going to be a blow-up like we’ve never experienced before. The USA is in the same situation as Japan was 20 years ago, but without the savings to fall back on. When all the foreign bubbles collapse, all those $Trillions of dollars will flow back into the USA (via default or redemption of debt), and the dollar will skyrocket to unprecedented heights. The priceless dollar theory is the best way to describe it. The dollar will be become so expensive that no one will be able to afford to use it any longer (like Berkeshire Hathaway at $thousands of dollars per share), and it will be replaced by something else. Liquidity will tighten to obscene levels, dollars will all but disappear, and lending will all but disappear as well, since multiple claims to the same collateral will be extinguished and creditors will get monkey-hammered to the point of becoming desperate debtors, and the dollar will go the way of the dodo.

    This will come to pass assuming the PTB don’t institute draconian laws outlawing money exchange, and I give that a fairly high chance, since our elite have already demonstrated they will destroy the established order to save their dominant position in that order… catch22 for them. In the end it gets ridiculous, stupid, and we get a big war, but before then we get big brother x10,000,000

    1. SubjectivObject


      When all the foreign bubbles collapse, all those $Trillions of dollars will flow back into the USA (via default or redemption of debt), and the dollar will skyrocket to unprecedented heights. The priceless dollar theory is the best way to describe it.
      Read more at http://www.nakedcapitalism.com/2012/11/hugh-hendry-were-in-the-death-spiral-of-mercantilism.html#IumpPjFjMkhjtDhK.99

      I have never heard this scenario befor. Trillions of dollars washing back home is not hyperinflation for the home?

      1. JEHR

        No, it’s just “trillions of dollars washing back home.” Right now trillions are going into the banks from the Fed and we don’t have inflation.

      2. R Foreman

        To offset the trillions delevering in the private sector during the crisis, the gov’t created trillions more, and much of that went overseas (creating all the bubbles, including ramping commodity prices which led to all the food riots/revolutions across the mid-east). It is the new carry trade, borrow at 0.1% in the USA, loan that out in Australia at 4%, make gobs of risk-free returns. When the Australia bubble collapses (as all bubbles eventually do), then the process goes into reverse, and all those dollars will have to be repurchased (aussie dollars sold, US dollars purchased) to repatriate that money, and the USA dollar will skyrocket.

        At least that’s the theory. There are a lot of supply-demand dynamics at work, including the fact that most oil in the world is traded in dollars, and countries moving away from trading goods in US dollars will be downward pressure on our currency. Who knows, it may balance out, in fact that may be part of the plan that is currently playing out unbeknownst to us, that is, the gradual removal of the US dollar as the reserve currency.

        From what I read though, it appears there is just so much delevering that still has to happen, everywhere, including China, that this scenario is still very plausible. It is also consistent with what Hendry says in the interview, that is, so much credit-money issued by creditor nations is equivalent to a naked short of the currency, and they are then very much at risk of a short-squeeze, a repatriation of all that money. Prices will get very low in those countries, but liquidity will dry up dramatically. Dollars will get very valuable, but there won’t be many of them around to spend.

        We shall see. May you live in interesting times.

        1. A Real Black Person

          Thank you, R Foreman for this post. I’ve been trying to say what you wrote, at various times, but without the same amount of clarity.

  3. jake chase

    I listen carefully to presentations like this and wonder why anyone bothers to listen. Ok, this guy has made some good trades. How many bad trades has he made? The investment game is peopled by survivors, but somebody has to survive and others have to fail, because every trade has two sides. Maybe the failures had better ideas but worse timing (or luck)? For better or worse, what this guy is saying sounds like bullshit to me, and I don’t see any way to take advantage of it except to send him money, which I suppose is the point, isn’t it?

    1. craazyman

      that’s the conclusion I came to as well, after being killed dead in my chair from reading too many macroeconomic articles on the internet and watching too many videos like this one.

      As a result, I have to submit comments now from the bardo realm.

      If I look back on my earthly existence and count the hours spent trying to understand the simple stupidity of macroeconomics, I think of how many more hours I could have wasted if I’d only realized how futile it all was and done something useful instead, like laying around watching Abba youtube videos or Master Po scenes from Kung Fu.

      Thankfully though I never sent my money to dudes like this fellow. I always figured that if he could get lucky, so could I.

      1. jake chase

        Craazy, I agree completely.

        Fortunately, I spent much of my otherwise wasted hours studying golf. After 55 years I have figured it out but can no longer do it.

        For only 19.95 I’ll explain it to you!

  4. JohnB

    Lets not lose sight that anything paper (money, stocks, etf’s, bonds etc.) are socially constructed platonic abstracts based on, well,….nothing!

    1. joecostello

      Well that’s half correct or maybe 75% correct, depends on how much debt should be considered ponzi debt. But such paper things can be based on very concrete things like roads, electricity, corn etc. And also, maybe call them “platonic” things such as societal trust, stability, the future. How this is done always a little squishy, nonetheless can prove hard as concrete, things like upholding some sort of justice in criminal matters, holding power accountable all part of the equation.

      America is replacing legitimate money with ponzi money, Gresham’s law in full play, but the US is a very wealthy place, even though the process is fully engaged, it will take much longer than you think, all the more time to fret how such a people can’t engage a politics of reform. The left being more ridiculous than the right in their reactionary void. One can only muse that as the status quo continues to decline, a new politics will arise simply out of necessity, though not necessarily a better politics.

      1. jake chase

        Ponzi money will continue to have value so long as the 99% believes in individual effort as a preferable alternative to collective force. No doubt there is a threshold of pain beyond which individualistic societies cannot be maintained. We seem to be bent on creating a test case.

    2. Darren Kenworthy

      Don’t lose sight of the fact that gold is the original fiat money. All money acquires value through myth, magical thinking, force, demonstration of power and social agreement. The only thing that might be said for gold is that this process started so long ago in it’s case that people believe gold to be intrinsically valuable, at least until they discover they can’t eat it.

      1. Thisson

        No, gold is not “fiat” money. Fiat money is money because some powerful interest declares it to be so. Gold is money because people agree to accept it as such, and for good reasons (it is durable, divisible, inert, etc.).

      2. redleg

        Gold backed currency is still fiat. The quantity of the backing can be changed at any time for any reason.

        Also, who controls the gold supply? Or is it tungsten? Gold backed currency = status quo.

        Gold may retain value over time, but even gold backed currency inflates and deflates with changes in debt – especially private debt.

  5. The Dork of Cork.

    The Manchester economics of the UK is even worse then narrow export lead mercantilism.

    This guy does not believe in building a domestic wealth base of any importance.
    It makes sense – he is a Glaswegian that never worked with his hands other then…………
    Come on lads – he is a fucking wanker.

    1. Stephen Nightingale

      “Come on lads – he is a fucking wanker”

      Think about this for a millisecond, it’s a contradiction isn’t it? Either he has a partner or he’s playing solo, but he can’t be doing both at the same time. I assume the same sort of logic applies to the rest of your posts.

      1. The Dork of Cork.

        @Stephan
        Its a Cork thing.
        If I called him a fucking langer you would most probally not get it either.
        Try not to take yourself too seriously.
        I am sure Hendry does not (although maybe ? )

        He is a intelligent bluffer.
        Glaswegians are all the same.

        He has been Anointed as the court Jester……..

        The fool always speaks much truth in these plays.

        King Lear comes to mind.

  6. JGordon

    Reformed gold bug, eh? Although I’m not a goldbug, I’m all for taking away all government’s ability to decree fiat currency, simply because throughout history all governments have proven that they are completely incompetent and corrupt at managing fiat monetary regimes. That includes particularly our current one.

    1. JGordon

      By the way, I am perfectly well aware that the Wall Street criminals who manage our currency through the Fed nominally not part of the government. But if you all are being honest with yourselves you will admit that they either are, or own, the government.

  7. The Dork of Cork.

    The mirror image of German & Chinese mercantilism is the Manchester school freak show that is the UK.

    Both go hand in hand.
    All I say is look at UK trade figures , both China and Germany dominate its real goods imports.
    The UK does not have the power stations to rebuilt its industrial base.
    Its real goods trade deficit with the rest of the world was £100 billion in Y2011.

    He talks some good quality shit but you must remember he has probally been given a letter of marque to talk shit for mother England.

    1. Synopticist

      Hendry has some interesting things to say, as long as you remember his loyalty is to the 1% and his own pocket.

      1. Thisson

        The fact that he is acting in his own self interest is exactly what makes him credible to begin with.

  8. The Dork of Cork.

    There is one wild card out there that I believe no one is taking seriously……….

    The UK looks like its leaving dodge

    The France / UK are in perfect trade balance……….

    Its happened before , indeed many times in history and now that the Gaullist elements are so weak in France.

    http://en.wikipedia.org/wiki/Cobden-Chevalier_Treaty

    France gets a market for its nuclear reactors and agri – produce.

    Not too sure what the UK can bring to the table – perhaps access to the gulf of st lawrence wider hinterland via close ties with the US & canada.

    France is close (with a part) of Canada also.

    Its possible.

    Anything is possible now of course.

    A new plantagenet ?

    If Japan goes down will Detroit be back in business ?

    http://www.youtube.com/watch?v=U15Fwo9tbJ4&feature=plcp

    http://www.youtube.com/watch?v=AoY8OxuvvXc&feature=relmfu

    Will North Atlantic trade push out longer distance Pacific and Indian / med trade routes ?

    Its a long way between the UK and Japan / China……..much marine bunker fuel is burned to preserve this labour arbitrage.

    Is it worth it now ?

    I don’t think so.

    1. rotter

      oh wow the nonexistant-technology-which-has-not-even-been THOUGHT-OF-yet-much-less-put-to-use-will-save-capitalism people have come around to the idea that making lead bricks in China for sale in Iceland uses up a lot of costly dissappearing fuel. awWWWesome. Good job guys.

  9. Susan the other

    That was weird. Steve Keen, who has embraced econophysicist Robert Ayres, would probably tell Hugh that this is an example of the entropy of merchantilism. It’s homogenized! The debt equates one to one with wasted energy, or something. The only thing left to do is become hyper efficient, not as manufacturers but as societies. Hugh lost me when he lamented China’s economy and said “the sovereign will have to pay” for all those foolish stimulus expenditures – but China only has to pay China.

    Nobody knows what’s happening. Saw a blurb on Max Keiser about a new documentary entitled Four Horsemen (what else?) which has lots of excerpts from Stiglitz and Chomsky. Chomsky is saying we need a new cognitive map.

  10. Herman Sniffles

    “Hugh Hendry’s also a reformed gold bug, which shows an unusual flexibility of thinking (once people join the gold cult, they seldom leave).”

    You mean like Alan Greenspan?

  11. Herman Sniffles

    At the very end of the video, which I enjoyed, Mr. Hendry states “I am long gold.” What he seems to me to be saying is that for gold to go insane, something very insane will have to happen. Right now that sounds like a pretty darn good bet to me. I don’t think he ever was a goldbug. He was just executing a trade. A true goldbug believes that a gold backed currency stops governments from engaging in monetary monkey business. This fellow makes a fortune by anticipating and betting on monetary monkey business. If a gold standard was put in place, he’d have to open a haggis factory. But he also discusses the potential confiscation of gold as a real possibility, which is definite goldbug territory, and indicates he has read history and understands gold’s historic function in the world’s monetary systems.

  12. Herman Sniffles

    And regarding gold confiscation, when this actually happened during the Great Depression in the US, American citizens who kept their wealth in gold mining stocks did quite well, some made fortunes. It was the gold that was confiscated, not the stocks or the companies. The companies continued selling the gold they mined to the government at a price set artificially high by FDR, so they did very well, as did their stockholders. The stock of Homestake Mines went up, I beleive, by a factor of 10 during the depression, while the Dow dropped 90%. But that may not be exactly right. Since I’m not a goldbug, I’m not completely up on such things.

  13. financial matters

    Mercantilism (protectionism) as the opposite of monetarism (Milton Friedman type laissez faire)is therefore almost by definition a good thing.

    Countries need to protect their domestic industries and agriculture to become more self sufficient and less dependent on foreign imports especially those denominated in foreign exchange such as debt or necessities which right now includes food for many countries.

    By protecting their industries and agriculture and spending the money to increase their education and infrastructure toward this goal then they can trade on a more equal footing with other countries that used similar methods to establish their own more diverse and less fragile economies.

    This requires spending rather than the destructive austerity measures imposed by the IMF and World Bank but it is investing in long run productive activities.

    1. R Foreman

      Oh they’ve already gone crazy with the spending, but it’s going to the wrong places, like piling up as reserves in the central banks, and going overseas creating asset bubbles in foreign countries. If you want to create demand, you give money to people who wish to (and will) spend it.

    2. KnotRP

      Complex systems rarely respond well to driving one signal to 11….there is rarely “a right answer”, “a more of something good is always better”. But we can’t help ourselves. The recent “The Dust Bowl” documentary
      lays out the same problem:

      (1) tragedy of the commons (everyone trying to maximize their own farm yeild, harming everyone including themselves, while defecting from the game just results in poverty sooner than those who don’t defect)

      (2) mal-investment (borrowing money to swap out more expensive but proven plowing technology with cheaper, faster unproven plowing technology, when the ability to repay the farming debt was founded on long term farming history using the older plowing method, not the newer
      (ultimately destructive) plowing method.

      A “governor”, in any feedback system, is supposed to
      counter act such things. Unfortunately, our governments
      are amplifying the signals instead. That’s how things break, spectacularly.

  14. Herman Sniffles

    And regarding Taleb’s buffoonery (anti-humility?), nothing will turn a respected person into a clown faster than ardent self-sanctification. Self appraisal is best directed by one’s peers, doubting them all along the way especially when their observations are positive. But you have to give the guy credit, he certainly is a “smart ass.” I enjoyed one of his other books, will probably take a pass on this one. My guess is that as he self-inflates, his work will slowly deflatulate. Definitely not the kind of guy you’d want to be stuck with on a small sailboat for long periods of time.

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