Hugh Hendry and Eclectica fund August 2009 commentary

I ran across Hugh Hendry a several weeks ago and enjoy his irreverant style.








The Great Debate right now is inflation versus deflation and Mr. Hendry falls in the deflation camp.

Here's the August 2009 Eclectica commentary which he manages.

Hugh Hendry is also very bearish on China.





Mr. Hendry's positions are quite contrary. How many of his predictions come true will be interesting to observe.

Looking for that inventory bounce

I drive though the Port of Tacoma, which is a major import hub for several Asian car manufacturers, on my way to work every day.

From the freeway spur you can see acres and acres of cars, waiting for distribution to local and regional suppliers. During the panic you could see the inventory stacking up in all sorts of locations not usually used for storing cars. Parking lots for businesses, spare lots, etc. were full of row after row of brand new cars right off the boat.

Some of that excess inventory appears to have been worked off as the fields of cars are only located in their 'normal' staging areas.

Except this spot. This is a brand new warehouse just completed . Google maps' satellite photos don't even show the building yet. It does not contain a business but is completely full, and surrounded by new car inventory.

Driving around the building you can peer inside some of the garage doors and see the entire inside of the warehouse is full of cars as well. This is a 500,000 sq foot warehouse which is absolutely HUGE. Take the time to examine some of the photos below and look at the how many garage doors are along the long side of the building.

At least one real estate management firm is getting inventive on how to lease space.
(Photos were taken August 19th, 2009)












If you are looking for a brand new 500,00 sq foot warehouse right next to a rail hub in Tacoma, you might want to give them a ring.

Home foreclosures and delinquencies accelerating

In my previous postings I may have appeared a bit negative on future home prices and suspicious of the optimistic feelings exuded in the popular media regarding the housing market. Here's some reasons why.

Both graphs show functionally the same data but from different sources and slightly different methodologies. The coming flood of home foreclosures will further erode consumer wealth, bank balance sheets, home prices and consumer confidence. That's just some of the primary effects.

Graph #1 is from Paper Economy blog and shows loans on Fannie Mae's books that are seriously delinquent.

Graph #2 from Calculated Risk blog provides a slightly more granular look at similiar data from a different source, showing both mortgages delinquent and in foreclosure. I recommend you check both blog entries.

Look at the graphs and you will see the foreclosure crisis is getting worse, not better.

First time home buyers skewing sales data

Just like the Cash for Clunkers program, the first time home buyer tax credit is stimulating home purchases.

Calculated Risk blog is all over this.

Remember this in December if home sales fall more than expected.

Home price seasonality

I have brought up the seasonality effect with respect to the quantity of homes sold but Rich Toscano has a great blog entry with some great perspective on the current seasonal national home price rise. In sum, the markets tend to rise in the summer as more people want to move during the summer school recess. As such activity and prices tend to rise during the summer and fall in winter.

ONLY when we see year over year sales and prices stop falling will I consider the housing market train wreck nearly over.

Inflation - Numbers to live by

Not since the 1950's have we had deflation in America. Right now 'headline' inflation is running greater than negative 1% (thats deflation folks) and looks to accelerate downward.


Will we have consistent deflation for a long period of time? I don't know but lets examine some of the factors that go into inflation.



I am focusing on 3 charts; all show data on a year over year basis to remove seasonal fluctuations.


While headline inflation is decidedly negative right now, the 'core' inflation rate is still positive. 'Core inflation' excludes energy and food prices from the calculations. Some may argue one still needs to eat and drive your car to work so why look at a number that excludes these important parts of daily life? Since energy and food prices are highly volatile the theory is they will balance out over time and policy decisions (like raising short term interest rates) should not be based upon such volatile factors.

As you can see we still have inflation within the 'core' but the rate is sloping downwards. If / when this drops below zero and we have 'core' deflation it will hopefully make the news! Core inflation has not dropped below zero in the entire time it has been sampled. (since 1957)


Housing costs are also part of the inflation figure and as you can guess it is also trending downwards and may also start going negative in the near future. Housing inflation has not been negative in the entire data set as well. (since 1967)


Most Americans alive today have not had to deal with chronic deflation and I believe we are culturally programmed to only think in inflationairy terms. Life may get very interesting if the US consumer changes their mindset to one of chronic deflation instead of inflation.


Additional Reading:
WSJ: Worldwide deflation
Bloomberg: High real interest rates attracting interest

Source: Federal Reserve

Weather and Oil

It is fascinating how the financial markets and real world are so intertwined. Take for example, the weather. Recently reading about the hurricane season I realized I had not added that as a factor for oil prices. Duh!


The chart you see here shows the frequency of hurricanes throughout the year. A nice FAQ from NOAA explains the various colors. The majority of severe hurricanes occur in August and September.


By mid August we should be well into the hurricane season and yet we have not had any major storms in the Atlantic. The National Hurricane Center shows in real time any storms and their predicted tracks. As of today there are no major storms threatening the Gulf of Mexico. Storms travelling up the East Coast will not have the same influence on the energy markets as one that enters the Gulf of Mexico. The Gulf is home to a large number of oil and natural gas pumping operations as well as a large portion of the refining capacity of the United States. Not only did Hurricane Katrina (which made landfall on August 29, 2005) devastate New Orleans, it severely hampered the energy capabilities of the U.S. for several months.

Keep an eye on the National Hurricane Center web site. If you see a storm forming with a high probability of entering the Gulf, you'll see oil prices perk up.