Welcome to episode 35 of the Confessions podcast.
It’s Passover, Easter and Ramadan, a very spiritual time of year and we are here with none other than our own Archbishop of High Finance, the Reverand Hugh Hendry in St Barts. How are you, my friend?
I’m Iggy Pop, I’m shirtless, I’m down and out in St Barts. I wouldn’t choose to have it any other way.
If everyone knew the steps we have had to take today, the patience of Mr Sweeney, to make this thing happen. We’ve had a bit of difficulty recording but we’re back and ready to rock and there’s a lot of good vibes in the air so let’s get started.
The first thing Chris asks relates to a headline that caught his attention during the week; it was a hedge fund that made $700 million on its GameStop long bet. Today, it prefers the unloved oil and gas sector. Are they following the Cult of Acid Capitalism, he asks.
Back in 2007, my investment letters quoted Franz Kafka, that the messiah will only come when he is no longer needed. I love a bit of Kafka… So, look at me I wear a stupid ski hat in the Tropics and present in front of my bunker wall that has graffiti written on it and I pretend to be Iggy Pop. Just why do i get frustrated when people don’t take me seriously? But my point is to celebrate the mysticism and absurdity of attempting the ridiculous exercise of attempting to see the future. I think you need to tap your deviant, internal pathways to see the unfolding stories of tomorrow. To be strange. But that makes it hard to deliver the message. Clients want the message delivered in a conventional manner. Not from some heretic. Except, you’re not going to read about tomorrow on the front pages of today’s newspaper, so you’re stuck with Acid Capitalism if you desire to profit from tomorrow.
For those who’ve tuned in over the previous months, the curse of ESG and a preference for oil and gas stocks has been our mantra. You may have heard me say that the ESG lobby has effectively taken our future society hostage by insisting that we go to a zero-hydrocarbon world immediately. One of the obvious consequences has been to embolden Russia into a thoughtless and bloody war against its neighbour, Ukraine. That and the profound incompetence of a generation of European leaders that have bequeathed an energy dependence for the continent to a devilish, rogue despot in Moscow.
Stock markets assume that all listed companies will outlive us; they are priced as though they’ll live forever. That’s absurd, for if you were to go back and look at the constituent stocks that make up the Dow Jones 30, which is one of the longest, continuous stock index series, you’ll find that the names of the largest companies evolve and change over time. Not only that but many expire and go out of business. I can recall when Nokia was the biggest company in the world but now that seems an aberration. So, things change all the time. That’s why I’m engaged in this shaman-like dance of the absurdity, I’m trying to loosen my mind from the chains and burdens that tie our expectations to the rigidity of today where everything seems set in stone.
Today’s valuations for listed hydrocarbon businesses and all the associated ancillary services, the army of suppliers which make it feasible to extract hydrocarbons from the Earth, they’re priced as though they’re mere mortals that face extinction within our lifetime. Curious minds should constantly search for kinks and oddities in the universe of finance. Risk markets are like Lego, the bricks should fit together, and when they don’t your mind should be capable of spotting an opportunity. Today, we have everything associated with oil and gas sector being priced to expire imminently by pessimistic equity investors and yet the Saudi Arabian currency, which is pegged to the US dollar, it may as well be the dollar because it never fluctuates; the presumption is that Saudi Arabia is impervious to the fears gripping the oil sector. That makes no sense. For it is certain that tougher times are coming, that great challenges will present themselves and will necessitate that the Saudis will need to reinvent themselves. I don’t see such challenges when I look at the Saudi FX peg. That’s where the lego doesn’t connect.
Last week we highlighted Hong Kong which has a similar fixed currency peg to the US dollar. Again, we suggested the thermodynamic concept of entropy, that they appear incredibly solid and robust, the Hoover Dams of finance, and yet, out of the blue, boom (!) they break apart; that life tends to move toward disorder, eventually. You want to position yourself ahead of such disorder. The potential returns are legend making, think of George Soros, when currency pegs are shown to be brittle, in his case, The European exchange rate mechanism back in the early 1990s when he correctly forecast that the British pound would be ejected. Currency pegs are the creme brulé of foreign exchange, solid on the surface but pierce them with your inquisitive mind and you may find that they’re all mushy and in a state of turbulent change.
Chris asks about Cathie Woods. She’s been in the news again. This time, claiming that Blockchain which has tripled over the past year when her holding in Coinbase has fallen 40%. She proclaimed that this made no sense. That Coinbase is a far better diversified and better managed company. This prompted Nicholas Carey, ceo of Blockchain to retort that “the market is pretty clear, her position is down 40% percent and ours is up 3x”.
Cathie is given great prominence because she did something extraordinary, she tapped into the great pool of ordinary peoples’ savings, the folk left beind by the surge in asset prices over the last ten years, she is a harbinger for those trying to crash the big asset party, those that need a tall ladder to overcome the levitation in asset prices. Woods’ funds initially delivered extraordinary annual investment gains, maybe they came to be thought of as a sort of get rich quick scheme and she attracted over $60 billion in the space of three to four years. That’s an astonishing feat and she’s to be congratulated for that but unfortunately since the turn in tech share prices last year, she’s arguably lost more money for her cumulative community of investors than she ever made for them on the way up. It makes me recall a viewer’s question from last week’s episode on YouTube, where did all the dollars go?
Investors in Cathie’s Ark fund, their dollars have vanished, most likely never to return. They’ve been set on fire by the vanities of the stock market just like the great Nasdaq bubble which peaked in March of 2000 when the valuation of stocks was 2x the size of the American economy only to half. Where did all those dollars go? One of the things that’s got policy makers scratching their heads is that typically when asset prices rise, usually following a rout, that the risk mood changes, and the economy recovers to its previous trend growth rate. But this time, despite the tremendous rise in asset values, private sector banks have not been tempted to take more risk, which is to say, they’ve not been printing more money, certainly not with the flourish that they once did prior to 2007 and therefore the Federal Reserve has stepped in and pretended to be printing money via Quantitative Easing. They’re not actually printing money, it’s more like they’re printing laundromat tokens. You can’t buy a coffee with a bank reserve…
Another presumed oddity is the strength of the dollar, it has consistently strengthened over the period coinciding with QE; a persuaded rationalist taking the Feds at their word, that they’ve made dollars plentiful by printing $7 trillion more, might have expected to find that such a glut had weakened the dollar. Instead, the dollar has risen in value. So, it’s as though markets are a nursery playground with the kids yelling “you don’t fool us… liar, liar, your pants are on fire”. The reality is more complex. Today’s world operates on a dollar standard, countries borrow money in u.s dollars because for the present time that’s a cheap way to raise money but if the dollar rises then all these global dollar liabilities become greater still and overseas borrowers need to find more and more dollars to eventually repay what they’ve borrowed in the past. Something very similar was at play in the course of the 1920s. We talk about the 1920s because it represented a great failure of the global monetary system. A giant insolvency in the contractual obligations and the engagement of sovereign nations which caused the world to break and suffer 15 years of mediocre economic growth during which time society became angry and which ultimately resulted in a global war. That’s a clear and present danger for our world today as we too have spent 15 years where the economy hasn’t allowed the majority of global citizens to prosper in the manner that they did previously and our society is becoming resentful and angry and war has even returned to stalk Europe. That’s why its important that we talk about the 1920s
Back then, sovereign liabilities were denominated in gold and gold was becoming scarce and really hard to obtain except by trading more and more with your neighbours to capture their gold holdings via current account or trade surplus ledger accounting. Today, these sovereign liabilities are dollars. The rise in the dollar is ominous. It suggests that dollars are becoming harder to obtain, and that countries will double down on this chase for dollars from suppressing domestic consumption and flooding export markets in the vain hope that America will continue to send its dollars abroad. I think we will probably see the dollar rise to levels which terrifies the rest of the world. It could even cause the world economic order to break again. Should this come to pass, and the dollar rises dramatically, I fear that a breakage might take the form of a devaluation in the Chinese renminbi within the space of the next two years. The economic news from mainland china continues to darken. Yes, they are imposing more and more draconian covid type measures but that feels self-inflicted, but their economic data looks less and less robust. I imagine that we are going to return to this theme repeatedly.
Chris mentions the mooted energy bridge that Germany’s largest power utilities are brokering with the Australian company, Fortescue, to make clean or green hydrogen and ship it to Germany. Chris is aware that the distance between Australia and Europe is perhaps too far. That Europe would do better locating green hydrogen closer to home. But where? He’s elected Libya as an interesting candidate. It’s the 16th biggest country in the world with a population of only seven million and ninety percent live in only ten percent of the country, the cities along the coast of the Mediterranean sea. It’s very close to Europe, especially Greece and Italy, and there’s lots of empty spaces in the interior with only one person per square kilometre. Surely, he insists, we can organise a pipeline or a maritime distribution network to make this work. The median population is a young 28 years old offering a local source of capable, working people versed in the ways of the domestic oil and gas industry that might transfer smoothly to new energy forms. Chris is very excited.
Australia is certainly too far away to be a viable solution to Germany’s predicament. If nothing else, hydrogen would have to be cooled to the surface temperature of Pluto before you could conceive of transporting it over such great distance. Just what are Germany’s utilities thinking? So, desperate times might call for desperate measures such as locally sourced alternatives from Libya. I fear the world is still conceiving of alternative energy in the manner that we thought of the past, that we’re trapped in an analogue that is no longer relevant. That we have to find it first then worry about transporting it later, much later. But new energy forms such as solar and wind are going to necessitate that energy sources must be localised around their customers, transportation is today an insurmountable obstacle. Ultimately, I can conceive that we will have to transfer the production of energy-intensive industries like chemicals and cement production away from northern hemisphere locations to places like Libya, rather than consider shipping it to the customer.
The concern then must focus on sovereign robustness, can we really conceive of such enormous investments in unreliable and uncertain domains such as Libya? And the realisable investment returns are way beyond our lifetime. But it does make me think of where I am today, St Barts, which was really put on the map by the Rockefellers when they they landed on the island in the 1950s and encouraged the Hollywood jet set to follow. The same phenomenon happened simultaneously in places like Aspen. Locations that were beyond the imagination and profoundly poor have been transformed, almost unrecognizably so, from were they where 70 or 80 years ago. So, perhaps it’s not preposterous to imagine that within 80 to 100 years, Libya might be transformed. I might need a lot of acid to imagine it but strategically its location is impeccable for the green revolution
Chris redirects us to my investment letter written in 2007 when I described a position shorting front wheat and being long next year’s harvest, he wants to know more.
Conversations regarding soft commodities rarely stray far from speculating on the outcome of harvests, the great uncertainty. Back then the determinant that fascinated me most was the behaviour of the farming community. I had launched an agricultural equity fund in 2006 on the premise that those who knew the sector best, the farmers, loved it least. That they’d endured three decades of very poor economic returns and were mostly kept commercially alive by by selling parts of their farms to rich hedge fund managers or tech billionaires. I thought of The Scarecrow, from the Wizard of Oz, desperately seeking a brain to make sense of the economic calamity that had befallen his community. It was a strong contrarian signal which rhymed with the price signals that we were receiving as commodities grew into the ascendancy. Farmers were spending less money on fertilizer, on potash, on the huge John Deere tractors, on acquiring less Monsanto seeds. Back then, they reasoned, why would you spend money when the harvest always delivers a poor economic return and that’s why I wanted to be long next year’s harvest because that behaviour could create positive price surprise. That such gluts of pessimism remove any margin of security from the supply chain, why would you choose to store grains when their price never rose (?) but what if we suffered a random weather disturbance that led to the loss of a large part of the anticipated crop? I was betting that gluts of pessimism by economic agents like farmers would create scarcity in the final product and an orgy of price explosions to the upside in the grains.
Chris then changes the focus to my investment letter of February 2008 when I made 18% for the month; was I thinking about what was going to happen in October 2008?
February marked the beginning of the end, except I didn’t foresee that the next chapter would be so gloriously absurd. The extinction of Bear Stearns, it had been around for 85 years and, in the bat of an eyelid, it was gone, put out of its misery by being acquired by Jp Morgan. It was all part of the prophecy that I had seen as early as 2003. That the banks were in a desperately perilous situation, that they could not be just knocked off course but they could be eliminated, wiped out; all of them… In August of 2007 we saw the same thing with the implosion at northern rock, a major retail bank in the United Kingdom, here for 43 years gone again in an instant with depositors lining up in the street trying to get their money back and conjuring up unwelcome images from the 1930s. Again, where did all the dollars go (?) except into the into the trash can of human misery.
Remember our tale about George Soros and betting against sterling? He was able to amass such a huge speculative position against the pound because he initiated the position with his fund already up 40 for the year and so he reasoned that even if his pound bet failed, he could lose 40% and still his fund would be flat; he’d have taken an enormous bet worthy of that time but in the event that he was wrong he’d walk away unharmed, therein lies the rub of macro hedge fund management. I adopted a similar ethos. I was two months into the year but I had this huge profit margin that could underwrite massive risk taking. But then those mechanical bull things that you go on and they throw you off, the bucking broncos, intervened.
That year, I had my worst fears confirmed. I saw it as my solemn duty to take my risk-taking to the max, to chase a return of three four five six hundred million dollars for my clients. But as it turned out that was the high water mark for a very long time, until October of that year. In an enormously turbulent year, I went from being up 25% to down 15%, I lost 40% during the summer months. I’m stressed now just thinking about it but back then I thought I was dead man walking before
of course Lehman brothers, the domino that I thought Bear Stearns would be, and my profits exploded to the upside. I had vanquished the bucking broncos…
I had been saying that salvation will come when it’s too late and that came to pass also because the Fed and other global monetary authorities led the system to become so fragile that when it broke the system broke and humpty dumpty fell off of his wall, and humpty dumpty couldn’t be put back together again. That’s been the legacy of the last 14 years. That breakage in the monetary order has not been repaired. As hard as they’ve tried to resuscitate the moribund banking sector, they’ve failed to recreate that febrile spirit of risk-taking within the temples of private banking which is responsible for money creation. And without that money creation, the majority are left in this loop of doom where you work harder and harder but acquiring assets becomes more and more unattainable and that’s the recipe for a very angry society that’s going to snap.
I posted some charts on my Instagram account this week.