Hendry’s Capitulation and the End of QE

With Hugh Hendry closing down his hedge fund this week, we may be hitting that moment of “Peak Central Banking.” 


One of the hallmarks of being a contrarian is noting when the ‘blood in the streets’ moment occurs.  Famed perma-bear then mega-bull hedge fund manager Hugh Hendry, after a decade of fighting the profligate money printing by the world’s major central banks, called it quits this week.

That’s right, he shut his fund down.

Why?  Because the markets are wrong and he can’t make any money betting against a market that keeps rising.

In Hendry’s long goodbye letter to his subscribers he misses the fundamental point as to why money velocity refused to rise during the last ten years even though the central banks were printing trillions.

QE rescued the financial system but the liquidity created was distributed to the very rich who have a very low monetary velocity and so the expected inflation fillip never materialized as the liquidity injection came to be stored rather than multiplied by the banking system.

Several years later, in 2013, the Fed suggested a reduction in the pace of its QE program.

Hendry is wrong here.  In fact he sounds like Bernie Sanders with this veiled reference to ‘soaking the rich.’  Money velocity didn’t rise because Bernanke never let the money he printed circulate.

The IOER Conundrum

Gary North, the great Austrian economist, wrote about this on Lewrockwell.com back in 2009 (those articles are unfortunately gone).  He told us all that all of the money printing was ‘sterilized.’  Bernanke even said this is what he would do.

The money wouldn’t circulate.

The plan, simply put, was to hand the banks a risk-free 0.25% investment on first $1 trillion and eventually, like today post-taper-tantrum, $2.3 trillion.  Today, things have changed, now the banks get 1.0%.

With each round of QE the banks took the money and parked it.

They did it for the reasons North cited when Bernanke first proposed it, because there wasn’t anyone worth lending the money to.

For years I have talked with people who are far more famous and far more successful than me who do not understand this basic point.   Why don’t we have any inflation?  Because QE causes deflation not inflation.  It is a signal to investors and banks that the economy is weak and credit-worthy borrowers are few and far between.

So, the best you can do is to front-run the central banks’ asset purchases (bond buying) and park even more capital in over-priced bonds and stocks and stay ahead of the deflation.

Interest on Excess Reserves was the main disincentive for the banks to lend money into the economy and build a true credit expansion.   And Bernanke knew this.  He also knew the amount of money he was printing was so big that if it circulated it would create hyperinflation as confidence in the financial system would never be restored.

So, the plan was to suck the capital out of the productive class, drain the pool of real savings (or what was left of it) and hand it to the banks through taxes and interest payments to the banks.

The banks took some of the money and played put it in the stock markets, boosting them while companies issued cheap corporate debt to buyback their own shares even while their businesses were being hollowed out.

The slow grinding away of the pool of real savings provided just enough stability to calm us all down and believe the system was safe.

It’s tough for a guy like Hugh Hendry to be a bear in times like this.  And now, even he is has the Central Banker equivalent of Stockholm Syndrome.  Because he actually believes the global economy is on the verge of a real boom.

He’s been abused enough by the central banks that he’s learned to love Big Brother.

2+2 really doesn’t equal 5, Hugh.

The Crack-Up Boom

Now that things have supposedly improved economically and the labor market is getting tight, lending can begin again.  Money velocity is still abysmal, so I don’t understand what Hendry is thinking here.

M2 Money Velocity Continues to Crater

Well, I do know.  He’s tired of fighting the good fight and, rightly, can’t find a place for his business model, a diversified risk portfolio, in the current market.

But, that’s the thing.  Hendry is only looking at the U.S. economy.  He says he’s looking at the global picture by giving lip service to Europe and emerging markets, but he’s not.  He still believes the U.S. economy is the engine of the world’s growth and if it is growing everyone else will be too.

If this is a new boom it will be the last one before the system cracks wide open.  This weak dollar environment is creating the setup for the next crash and it will start in Europe before it engulfs us.

Hugh should have spent more time listening to Martin Armstrong than Janet Yellen.

I see his giving in here as the ultimate contrarian indicator.  This is the ‘blood in the streets’ moment where we’ve reached “Peak Central Banker” and the bottom is about to drop out on this very fragile system.

Hendry is selling out at the bottom here.  He’s misinterpreting why the equity market is still rising.  Sovereign bond markets are the biggest bubble in history and they are about to burst wide open.

FOMC Chair Janet Yellen said at her Jackson Hole Speech that she didn’t feel another financial crisis was possible anymore.

Those also sound like famous last words.

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