How one hedge fund manager 'misbehaved' his way to gold profits: Stocks in Translation

On this episode of “Stocks in Translation,” Hugh Hendry, former global macro hedge fund manager, offers his candid opinions on current market conditions, safe havens, and investment strategies. He doesn't shy away from controversial topics, challenging popular narratives about gold, cryptocurrencies, and the stability of global financial systems.

With a storied past, Hendry also opens up about his career from aspiring accountant to controversial hedge fund manager and self-styled "Acid Capitalist." He shares pivotal moments that shaped his contrarian worldview and explains how embracing his outsider status led to both professional success and personal fulfillment.

Yahoo Finance's Stocks in Translation master statistician Jared Blikre, is your guide with essential conversation cutting through the market mayhem, noisy numbers and hyperbole to give you the information you need to make the right trade for your portfolio.

For more Stocks in Translation, watch here: https://finance.yahoo.com/videos/series/stocks-in-translation/

Video Transcript

Welcome to stocks and translation.

Our essential conversation cutting through the market mayhem, the noisy numbers and the hyperbole to give you the information you need for your portfolio.

And today I'm joined by Sydney Fried, as always.

And today we are also welcoming Hugh Hendry.

He is the acid capitalist also a former global macro hedge fund manager.

Thank you for stopping by here on a very warm afternoon in New York today We're going to be talking about smart money and definitely a loaded term perfect for discussion with a former hedge fund manager.

Our phrase of the day is safe Haven Is it Bitcoin?

Is it gold?

US Government IO we are going to discuss And this episode brought to you by the number 162.

That is how many yen you need to buy $1.

If you round up, Mr and Mrs Watanabe fit into the global currency endgame.

We will discuss that Sydney and Hugh.

All right, we're talking about smart money.

You used to run money.

Um, I you're sitting today across from me, Dr very casually, So I'm thinking that you might have departed the, uh, the money universe here and done some other things.

I'm wondering how How do you see the capital, the global capital markets.

Now he is, um I mean, 1st, 1st off the butt, I guess I think I'm the smartest, dumbest looking person you're ever gonna meet.

Um, And with this notion of dumb money or wise money or smart money, I mean, money is just dumb and, uh, and is greedy.

Um, but on the dumbness and people sell you financial products, you don't buy them, you know, And in terms of my appearance, I, I like to kind of shock and provoke.

I want to be the antithesis, if you will, of the disgraced former financier.

You know, Bernie Madoff, who made off with the money and he was impeccably dressed and is like, Wow, I want to give that guy my life savings, whereas I want you to hesitate.

I don't want your money, but you know, I want the volatility is in your garb.

And you where there's there's a famous Buddhist thing about licking the razor's edge.

And with me, I want you to make the you know, I. I want you to think about it because I am is a fascinating subject.

Yeah, and and there are things we can say.

What was it like to run a hedge fund?

Was it stressful?

A little bit of fun.

Hey, the, uh, my I remember my mentors.

I can remember the three most important characteristics in life.

You should be playful.

You should be curious.

And you should be mischievous.

And I was all three of those things in my career in terms of stress.

Um, I run it.

I ran a global macro fund and fund.

Uh, the basis of the object of my fund was to be like no other fund not to correlate eclectic capital management to be eclectic.

And that so I if I made money, I made money out of sync with everyone else.

Yeah, and And I lost money when everyone was making money.

So it was quite lonely.

And, you know, the brain that there are no portals into the brain, the brain, the brain trusts the voice.

And I spent too many days saying, you know, like Mortal Kombat, I'm like they got me.

I'm not gonna make it.

I'm gonna die today, and your brain actually believes that And it.

You know, it pours out all this toxic chemicals.

So after 15 years, I kind of had to seek retreat in the glorious surroundings of ST Barts in the Caribbean.

Do you think it's do you think, um, if you would approach it differently and maybe it's just not your personality?

If you tried to go with the herd and you were making money with other people and you weren't so at odds with the business cycle, do you think it might have worked out?

You tell me it didn't work out.

Do you think you might have stuck with it?

Because clearly there was a little bit of burnout.

It was more the, you know, I. I excel.

Am I using the superlative term to describe my performance?

The 2008 you know, the worst financial returns in 100 years?

The month of October 2008, and gloating.

I made 50% but after that they came.

The authorities came down and just loaded the sector with a profound degree of regulatory bureaucracy, and it raised your break even assets under management.

You fund client money from like you could when I started you could run a Hege from $30 million when I stopped.

Your break even was $300 million.

So the barriers to entry usually, I mean, the theme of technology over the last 1000 years is barriers to entry.

Come down.

You're saying they've gone up in the hedge fund space?

Yeah.

There's no technology in there.

Hey, listen, Hedge fund investing again, right?

I'm I'm, uh I'm now on the other side, but it's it's a It's just a silly business.

You are pretending that you can see the future.

Um, and and actually, sometimes I think I did.

But, you know, I'm the acid capitalist.

If you want to see the future, you got to get high.

You ain't going to see the future like looking for straight lines, linear lines off your spreadsheet or off the sharp lines from your suit.

You know, it's the Mavericks like me that are out of step.

And sometimes we see the future.

I love how when I was watching a couple of old videos with you and you talked about the value of misbehaving, um, you were expected to maybe become an accountant.

I don't want to tell the story for you, But tell me about how you have been misbehaving.

Have you used that?

How you've used that to your advantage?

Oh God.

Well, let's do you know what?

Let's misbehave now.

Let's do it because the audience, right?

I'm guessing I'm guessing one of their favourite acids.

Acids.

Be careful.

There is Is gold, right?

The yellow metal.

I mean, let's say positive things.

I mean, it's made from exploding stars.

You know, the energy that that gives off crazy.

Yeah, these heavy metals is interstellar, right?

And there's there's even a What is it?

The veneer hypothesis that the gold deposits we have on this planet came from meteoroids.

I mean, it's pretty.

There's more meteorites out there with gold just waiting to come.

I hope they wait a little bit longer before striking.

But anyway OK, so wow, it was incredible.

OK, and then Secondly, I've got good form and good grace with the yellow metal because my first year as the hedge fund manager, uh, again, I'm glory.

But like most people think, I'm an idiot.

So my first call, I made 50%.

It all came from gold.

2003 was the the was the end of the bear market.

Were you going to do, I say?

Well, I was trying to figure out what age I was in 2012.

I was thinking about go in 2003.

I hate that.

When you're in the bar, the girl says, What age are you?

I'm like, Yeah, I'm worried you might be maybe just too young, but anyway, the, um So it got 850 bucks.

And in 19.

82,003, it was like I was buying a nasty bear market in between.

So that was like, OK, let's talk about bear market.

The Dow famously peaked in 1929.

It took 25 years to regain the high in 1951 with stocks.

I think, too.

Yeah, Yeah, as a you know.

Yeah.

Stocks took 25 years from the 29 peak.

Um, in Tokyo.

34 years.

Yeah.

Um, and the gold bear market was kind of just toggles between the two.

About 28 years, Um, which is to say, in 1980 it was in a bubble.

And like the gold people, So now we're misbehaving because you're not allowed to say that gold could be a bubble right?

But it was It was a bubble.

And so let's and we can actually do Let's let's actually try and pretend we're hedge fund managers.

We'll talk about statistics because are we misbehaving?

Now you pay me like a hedge fund manager.

The, uh we're going to shock people because we're go, We're going to actually let's do insight, OK, because gold gets a real free ride in that.

How do you value gold?

You know, like the stocks.

You got a price earnings ratio.

You got a dividend yield, maybe measure the finite supply, do some backhand calculations with the amount of fiat on earth and see how much gold fills void.

That's maybe how it's you're talking nonsense.

But anyway, the I was I was thinking I was thinking you were my head fund analyst and I was chewing you up.

I'm just regurgitating what I've heard.

OK, so, um so cha G BT That's my middle name.

So let's do the way like a global macro hedge fund, like I would do it.

OK, so, um, something which is quite a robust, stable, um denominator, if you will.

In terms of the valuation of of gold would be global GDP the total income of the planet.

OK, And so in 1980 right when gold was 850 bucks, what was the total value of gold expressed as a percentage of the economy.

Now you want you guys read the financial press?

You're I'm sure upset, Right?

Have you Have you ever heard that metric?

Do you know what the number is?

Because the people out there like I don't know, but this sounds interesting.

OK, um so it was 20% of GDP 20.5% of global GDP.

Uh and people tell because we're your, uh your team is up for safe havens as a gold is a Bitcoin and like and everyone's like, Wow, US stocks are massively overvalued.

But again, OK, so we can value stocks.

How do we value gold?

So they're saying that the safe haven is this gold, But I'm going to come back to you and say, Well, what's the corresponding valuation today for gold vis a vis global GDP?

And the stacks up is at 16.5%.

OK, so gold was at.

We know that 20% of GDP It took 28 years to recover from being excessively overvalued.

Right?

And we're 5% percentage points of GDP of 5% points on that ratio away from it being in and again in a profound bubble.

Where what would that price level, uh, be it would be $3000.

Um, So I want to see what my experience as a hedge fund manager is that, um if profoundly bad things happen, You know, if they lose and and what is profoundly bad things happen.

You know, LTCM the largest head 1998.

OK, and why do that go down?

It went down because the Federal Reserve, I think they're honest.

You know, I think they mean they mean well, they mean well, but they're clueless, OK?

And I wanted and again I want to model.

What did I tell you?

The future ain't gonna come at you in in linear spreadsheets.

We got to get That's tough for Jared.

Jared loves and spread.

I I'm dyslexic with spreadsheets.

Um, so I'm just a little two things that gold actually seems to be quite.

It's rich.

Everything is rich if we live in a world where everything is over You were trying to guess your age in 1980.

I was trying to calculate.

But what I mean by that is in 1980 OK, it was the opposite.

Everything except gold.

Everything was cheap and no known stocks.

No one was interested.

We saw the death of stocks, headlines or cover of Newsweek.

What to do it like personal sector, household sector stocks.

Like, you know, mutual funds Get out of here, Right.

And now here we are, like 4050 years was 45 years like you know later and stocks are massively overvalued and everyone is clamouring to own them.

So we're kind of out of sync with the world.

Everything is overvalued now in the context of everything being monstrously overvalued.

Um, I've got a kind of soft spot again on kind of like acid kind of logic for Bitcoin because all Bitcoin in the scheme of things is tiny Bitcoin in terms of its total capitalization.

So we're talking about gold.

Total capitalization of gold is 16 between 16 and $17 trillion.

Total capitalization of US stocks is $40 trillion and probably US Treasuries is something similar.

OK, Bitcoin is 1.3 trillion.

It's just tiny, teeny weeny teeny weeny teeny.

If it had to fill the void, I get your argument.

If it had to fill the void, um, you would expand that multiple?

Well, I'm saying to you, like, if gold tripled, the value of gold would be greater than the capitalization of US stocks, and that kind of feels like a bit of a reach.

But I mean, if there are some smart people and I'm sure there are smart people listening and watching this, they will be saying, Yeah, but in 1980 the gold, the value of gold, all you know, above ground reserves and gold was actually two times the total value of US.

So it's not impossible.

But I think if that scenario, if gold is two times the value of US stocks, I think US stocks will be 50% below where they're trading today.

I'm not that's not my prophecy.

I'm just saying that's how I think you could get back into that ratio.

So when I look at the world and again like, if I'm I'm a kid, all right.

I don't have I don't have much money.

I'm kind of keen to get in the game.

Everything is over bowed, and I need to make money.

I'm not in it to compound it.

56 7%.

OK, I need to make big bucks.

What is the one asset that could triple?

And it really wouldn't make any big difference.

And it's Bitcoin.

If Bitcoin tripled, it'd be the same same size as the NVIDIA market capitalization.

Or just slightly greater.

It's not impossible.

We gotta pause right there.

Um, we're gonna take a quick break coming back.

We're gonna be talking about the magic number of the day.

It has to do with the Japanese yen, and we've got it.

Who wore it better for the ages.

Stay tuned.

All right, we are back.

And I think we've been talking about safe havens the entire show.

And I just got to define this real quickly, and then I think we'll move on.

Safe Haven is an investment that's expected to retain or increase in value during times of economic stress.

And, uh, just to tie this back to our conversation, do you think Bitcoin can fill that role by itself, Or do does it there need to be some gold in the mix or anything else?

So it was where the three questions are.

The first question.

Can you fill that?

Can they fill that role?

Bitcoin cannot cannot with the help of other assets.

And then you said with the help of gold and I just said to you I think gold is like, almost as preposterously our stalks so that that won't really help me.

OK, um, and Safe Havens.

I think safe havens are oxymoronic.

I don't think they really let me give you my definition of a safe haven.

Safe haven is the most reviled.

Asset class is an asset class that's had a profound, uh, draw down.

And everyone's like, Oh, you know, it's like a bad day.

It's like, Oh, I just don't want to think about it.

Yeah, um, And today that is a long dated US Treasury bonds the 30 years.

So if we look at the proxy for that would be the TLT, the ETF.

That's half the price, and, like everyone doesn't like it now, what will bonds?

What would risk free government bonds do if something really bad happens.

They'll go back up in price and then to close this kind of again, these notions of being playful and mischievous and curious.

The US Treasury bond market has been in a 50 years the greatest bull market of all time.

And it began, if you will, with a double bottom.

I'm not talking about anatomy.

I'm talking about, like the price double bottom right between 1982 and 1984 and this preposterous.

Actually, the bonds were as weak in 1984 as they had been too years before.

But there was a psychosis that people were concerned about inflation, and the US economy was recovering inflation again.

And that double bottom set set a floor for this stupendous bull market.

And I'm kind of the disposition.

I think the US Treasury bond market bull market will conclude with a double top if you are, and so we saw a profound top, and I don't think that top of that low in US treasury yields that we saw during the pandemic period in 2020 2021 which like, let's call it 50 basis points, I don't think we'll we'll see that but I think we we could see a profound rebound in bond prices.

Um, and then I'd be a seller, but, you know, step by step, step by step.

So the the safe heart Oh, the safe haven.

The most sound way of having something, uh, protective in your portfolio would be actually wouldn't be the treasures.

It would be options to buy the Treasuries because one of the things that that that that kept me wealthy was I only bought things going up and I saw things going down.

OK, now again to the really smart people watching and listening Bond Price had been going down for three years.

OK, so I can't actually commit a lot of money to like if you were physically owning these things.

But I can buy an option with two years of life at today, like with the strike price at today's level.

And if it strikes a hun If it if it goes to like 100 and 40 I think we could see 100 and 40 over the next two years.

I'm gonna make money, lots of money.

So you, if you're early to investing, how can you misbehave or should you misbehave?

You know, for new investors when they're looking at how to build their portfolio.

I heard you only invest about 10% of your net worth in stocks.

Is that misbehaving to someone who's just starting out?

What do you think?

Well, yeah.

So I get horses for courses to the 10% ratio.

I'm saying, Like for most people, uh, the majority of your wealth is you bought a house 10 years ago, 15 years ago, 20 years ago.

And there's a lot and and the value of it is a lot higher than your mortgage.

And the gap between that is your wealth, OK?

And so if I was going to have a risk portfolio, I was going to buy equities and Bitcoin and gold and some treasury options.

Um, I'm seeing that the total amount that I would lay out there would be no more than 10% of that wealth thing.

And then today, because everything is over vowed it would actually only be 5%.

And it'd be five because I'd be holding the other five back because eventually things will things correct.

And then they get cheap and then and the worst thing is when they get cheap.

Uh, all these people like you remember, You remember the Bible with the apostles, you know, like Jesus.

Like, Oh, tomorrow is gonna be a bad day.

I'm going to get hung, and they're going to crucify me like you're getting a lot of I know.

You're getting, like, a lot of push.

I'm gonna get I'm They're crucifying me, and they're going to come at you and they're going to say, Do you know me?

And you're going to deny it and like, that's impossible.

You know, the cock crow and the guy with a beard.

So what happens is there's so much faith, uh, invested in investing, and it gets in the way.

So in terms of the kids, like, don't don't believe in anything.

And don't be great to be dumb and, like, keep it dumb, buy things going up and, like, sell them when they go down.

I'm never afraid to be dumb.

Never.

All right.

I want to talk about things that have gotten cheap here.

And that would be the yen this episode brought to you by the number 162 which is the dollar value.

So you got 100 and 62 yen to the dollar right now.

This is what, a 3540 year low for the yen.

But the the Bank of Japan has kind of painted themselves into an interesting situation.

What do you think about what's going on?

OK, so again, I've got to correct your language.

OK, so, like, so we're going to again pretend we're like smart global micro hedge funds, right?

Uh, things are not cheap.

The lowly rated right.

They sell at a price which reflects heightened risk and and the risk concerning the Japanese yen in terms of being a store of value.

Uh, because it's it's had an abysmal and and a very remarkable failure over the last 18 months, those Japanese citizens, uh, 18 months ago, they only required 115 yen to buy $1.

And now, of course, they require 100 and 62.

So you've got to work more if you will to earn earn a dollar, and that is that is an exceptional event.

And it and so I would say the the yen is not cheap, that the yen is trading at a level that says it is in such a precarious position, fiscally and with their room to manoeuvre that it could trade 202 150.

So the only good news is like a higher a lot lower, depending on how the yen would devalue more.

But the devaluation to date is of historical like importance.

And it, to my mind is Harbinger is a red red flag that's telling you that there is something profoundly wrong in the in the money system of the world.

I'm really interested in this, but I'm wondering if the average US citizen or investor I should just say, should care about what's going on with the end.

Yeah, because, um, if we trade 202 $50 you U US US stocks are ain't going to be trading here, you know?

So the thing that's going on is, in the end, at the end of the 19 seventies, the West German chancellor, what was it called her?

Helmut Schmidt.

He said, 00, my goodness.

Interest rates are as are as high as they've ever been since the birth of I get my friend Jesus, Jesus Christ went back to that because remember, they were 16% or whatever back in back then.

I want to say that the Fed at five and a quarter to 5.5, These are the highest interest rates ever since Jesus.

They're actually higher than the nominal rate because we've got, like, four times the debt load.

So the multiplier and its impact the housing market is that you know, you like the you can't move house because you've you've got a 30 year like 2.5 3% and if you were to move house, you'd have to go into the market is dead.

These interest rates are really high, and Japan is under pressure to raise interest rates because they've been at zero or negative for like, 23 decades.

Problem is, they spent so much we keep lashing the US government, you know, fiscally because we all want to be fiscally conservative.

Japanese have just been hosing domestically.

They they they import oil based on your price in US dollars too.

And there's not a easy way around that, but they you know, they they also have a they they do have a huge they make things really Well, you know, and they run, they do run a corresponding trade surplus.

The problem is, they they've I mean, the problem is the Chinese have copied them, but, uh, but, you know, they build bridges to nowhere, et cetera.

They run budget deficits every year for 35 years at 6% of GDP.

And so even though interest rates are zero, the servicing of the government debt in Japan takes 30 35% of all the government receipts, and that's what the US is today.

But US rates of five and a quarter, so Japan actually would go bankrupt if they raise interest rates.

So, um, the financial markets, smart people like me know that Japan really, really is, is is in a bind.

Um, and we know that when you've got very, very high interest rates, something breaks.

We mentioned LTCM from like 30 years ago.

We're in the environment that something's going to break, and it's going to feel really, really scary.

And there's going to be a big correction.

This happens about once every 10 years, sometimes more frequent frequently.

We got under a minute to go.

What does that look like?

any final words for investors here on that is meant to happen every 100 years.

But we built a system around an unsustainable trade model which we don't have time to discuss.

And things that should happen every once every 100 years are happening once every 10 years.

And so I think you're quite right.

Um um, the money system is dying and is and is gonna come to light.

The yen is just the the first, uh, is the first warning.

So watch out.

Always interested to see what rises from those ashes, though, as always, Thank you, Sid and Hugh.

It's been a fantastic pleasure to have you drop by here.

Keep it locked at Yahoo Finance.