Hugh Hendry's Trading Ideas at the Milken Conference (Video, May 1, 2012)

Hugh Hendry, co-founder and CIO of Eclectica Asset Management, in a panel discussion at the Milken Conference on May 1, gave his outlook on the euro, U.S. dollar, German market, and when we'll witness the "most profound market clearing moment." Here are a few notable quotes from the video (embedded below).

"Germany has operational leverage (Siemens): "Income within Europe is shifting. It's being redistributed. It's being redistributed from the financial creditors, think the banks. And let's keep it local like Germany. The trade really, is you want to be short the financial sector and you want be long the export sector. Because I think we all agree that where we're heading for is probably euro parity with the dollar if not going below that, which is a profound economic advantage to what are already super competitive businesses. And of course that only happens if we get more financial anarchy, and of course that's going to help your short position."

"The dollar is only going to go one way, and it's going to go higher. This is like early 1980, '82, I think."

"I think we are single digit years away from the most profound market clearing moment, a 1932 or a 1982, where you don't need smart guys or girls, you just need to be long."

"To create the market clearing process that I fear is within reach. I would tantalize you or fear you with the notion that we could see a hard landing in Asia, coinciding and indeed being encouraged by the problems in Europe, and if you get those two events colliding, and given the lack of protection on such a scenario in Asia, then you would have another profound dislocation, and that's the point where you reach the bottom. And you don't need wise guys, you just need courage."

Wow, there it is. Everything you need to know. And what about a recession in the U.S.? I'll add that since Hugh Hendry's trading calls on May 1, EUR/USD topped out at 1.32 (descending channel resistance), rolled down to 1.264 support on May 18, and then bounced back to 1.278. So great trade so far in EUR/USD. And going long Siemens/Deutsche Bank (as a financial) was a great ratio trade as well. SI/DB moved from 2.10 to 2.37 resistance (the 200 day moving average), and then back to 2.30 as of today's close. Well done for a 22 day trade.

But, how would the German export/financial sector ratio trade react to a hard landing in China and the U.S. economy entering a recession? Here's another view. SocGen economist Albert Edwards in The Globe and Mail (via Business Insider) mentioned that a hard landing in China would send Germany into a recession, which would affect their exports and even be positive for the euro.

"Ironically, a Chinese slump – and we’re still talking about annual growth of 5 or 6 per cent – could help the embattled euro zone. “Maybe the best thing for the euro would be if China hard landed and Germany [whose export boom has been powered by Chinese demand] went into a deep recession,” Mr. Edwards muses. “Then they might be far more accommodative or far more reasonable about forgoing austerity.”

Interesting, but wouldn't money still flow back into U.S. dollars as a safe haven either way? I guess you have to watch the Fed as well.

Source: Milken Institute (h/t Merrill over Matter)
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