“If a founder comes here with national or regional ambitions I’m not interested,” said the Emirati, a decade or more younger than I, bursting with enthusiasm, energy, capital. He was raised in Abu Dhabi; I grew up in New York City. We attended the same boarding school in a small Connecticut town, although I didn’t mention it. International students intrigued me back then, usually shy, observant, curious strangers in a foreign land. I had never traveled abroad but hoped to. “I’m interested in people with global ambitions, innovative models that scale,” he said, our respective teams seated across a long table, the Arabian Gulf far below.
Overall: “It is impossible to predict with certainty the exact date when Treasury will be unable to pay the government’s bills,” Secretary Yellen told Speaker McCarthy in a letter. We are told that identifying this precise moment is of the utmost importance. Perhaps. But on January 1st, 2000, when the US national debt was $5.8trln, it was impossible to predict with certainty the exact date that our debt would hit $12.8trln. Nor did it matter. And on January 1st, 2010, when the national debt hit $12.8trln, it was impossible to predict with certainty the exact date our debt would hit $23.2trln. Nor did it matter. And on January 1st, 2020, when the national debt hit $23.2trln, it was impossible to predict with certainty the exact date our Zdebt would hit $31.4trln. Nor did it matter. But here we are, May 2023, with a $31.4trln national debt. It does not really matter; any crisis that can be ended with the swipe of a pen lacks substance. What is of great consequence is that for decades our debts have grown faster than economic output. The process is accelerating, and this is unfolding before the avalanche of entitlement commitments hits in earnest. It is impossible to predict with certainty the exact date when global investors will lose faith in the US government’s ability to service this colossal and growing debt with anything other than debased dollars. This is the only date that truly matters. In a nation unwilling to endure prolonged austerity, the only credible way to push that date into the distant future requires technological advance that generates dramatic productivity gains. And in the meantime, any serious group of political leaders would coordinate every conceivable activity to promote such progress and stop distracting us with absurd crises of their own creation.
Week-in-Review: Mon: SLOOS shows weak demand for loans / shows banks expect to further tighten lending standards but possibly less dramatic than feared by mkt, Fed’s Goolsbee says getting ‘vibes’ of credit squeeze, Yellen reiterates 6/1 debt ceiling x-date possible, Lula nominates two dovish candidates for BCB, BOJ mins shows a few members starting to see inflation environment change, UK out for coronation holiday, ECB’s Knot says inflation too high and more hikes are needed, EU to sanction 7 Chinese companies for aiding Russia war, Australia building approvals -0.1% MoM (3%e), Germany IP 1.8% as exp, EU investor confidence -13.1 (-7.5e), S&P flat; Tue: Biden / McCarthy meeting yielded little movement, Yellen says Biden to make the decisions if debt limit is not raised, US NFIB slips to decade low although financing conditions become ‘less bad’ / 89 (89.7e), media report suggests US will begin to refill SPR later this year, Fed’s Williams says Fed will look at “incoming information” which gives a nod to financial stability, BOJ Ueda says there are good signs for underlying inflation / intends to end YCC when 2% infl is in sight, Yellen contacts business leaders to warn of the effect a default would have on the economy, Japan real earnings -2.9% (-2.4%e), China exports 8.5% (8%e) / impts -7.9% (-0.3%e) / trade balance $90.21b ($71.25b exp), Mexico CPI 6.25% (6.22%e) / Core CPI 7.67% (7.69%e), S&P -0.5%; Wed: US CPI 4.9% (5%e) / Core CPI 5.5% as exp / general view is that Powell’s preferred supercore metric continues to step down, Biden / McCarthy to meet again on Fri, S. Africa energy crisis and blackouts continue, Italy intends to exit China’s Belt/Road initiative, Xi picks little known local gov’t official (Li Yunze) to be nation’s top regulator, WSJ’s Timiraos says Fed could pause until Sept, MSFT won’t lift salaries this year, Norway CPI 6.4% (6.1%e) / Core CPI 6.3% (6.1%e), Hungary CPI 24% (24.1%e), Turkey unemp 10% unch, Turkey IP -3.2% (-1.7%e), S&P +0.5%; Thu: BOE hikes 25bp as exp / updated forecasts viewed as hawkish, China top diplomat and US National Security advisor hold talks, US ambassador says S. Africa sold weapons to Russia, US initial claims jump to 18m high, Ince resigns from Turkish presidential race – providing more support for opposition candidate, FDIC announces plan to recapitalize Deposit Insurance Fund – banks over $50bn to provide 95% of the special assessment, Trump urges Republicans in congress to negotiate spending cuts or default, renewed regional bank stress as report indicated deposits declined ~10% week ending 5/5, borrow at Fed facilities rise ~$11b, Turkish opposition leaders warn “Russian friends” from intervening in upcoming election, NZ house sales -15.3% (-15%p), China CPI 0.1% (0.3%e) / PPI -3.6% (-3.3%e), China new loans 718b CNY (1400b exp), US init claims 264k (245k exp), US PPI 2.3% (2.5%e) / Core PPI 3.2% (3.3%e), S&P -0.2%; Fri: Fed’s Bowman says hikes ‘likely appropriate’ if inflation stays high, Yellen reiterates that if debt ceiling not raised the US will default, Musk picks NBC Universal’s Yaccarino to be new TWTR CEO, UK 1Q GDP 0.2% as exp / IP -2% (-2.9%e), India IP 1.1% (3.2%e) / CPI 4.7% (4.76%e), Brazil IPCA infl 4.18% (4.12%e), US impt prices -4.8% as exp / expt prices -5.9% (-5.5%e), US UofM sentiment 57.7 (63e) / 1y infl exp 4.5% (4.4%e) / 5-10y infl exp 3.2% (2.9%e), Russia CPI 2.31% (2.4%e), Argentina nat’l CPI 108.8% (107.10%e), S&P -0.2%; Sat/Sun: Turkish elections.
Weekly Close: S&P 500 -0.3% and VIX -0.16 at +17.03. Nikkei +0.8%, Shanghai -1.9%, Euro Stoxx +0.0%, Bovespa +3.2%, MSCI World -0.4%, and MSCI Emerging -0.9%. USD rose +10.6% vs Bitcoin, +9.6% vs Ethereum, +5.1% vs South Africa, +2.1% vs Sweden, +1.6% vs Euro, +1.5% vs Australia, +1.4% vs Sterling, +1.3% vs Canada, +0.8% vs Russia, +0.7% vs China, +0.7% vs Yen, +0.5% vs Indonesia, +0.5% vs India, and +0.4% vs Turkey. USD fell -1.2% vs Chile, -0.9% vs Mexico, and -0.6% vs Brazil. Gold -0.2%, Silver -6.8%, Oil -1.8%, Copper -4.0%, Iron Ore +1.7%, Corn -1.7%. 10yr Inflation Breakevens (EU -1bp at 2.25%, US -3bps at 2.19%, JP -3bps at 0.80%, and UK +3bps at 3.60%). 2yr Notes +7bps at 3.99% and 10yr Notes +3bps at 3.47%.
Year-to-Date Equities (high to low): Mexico +25.4% priced in US dollars (+13.4% priced in pesos), Argentina +22.9% priced in US dollars (+59.1% priced in pesos), Greece +22.3% in dollars (+20.8% in euros), Ireland +21.8% (+20.2%), Czech Republic +18.2% (+14.1%), Denmark +17.8% (+16.5%), NASDAQ +17.4%, Italy +16.9% (+15.4%), Poland +16.1% (+10.8%), France +16% (+14.5%), Germany +15.8% (+14.3%), Euro Stoxx 50 +15.3% (+13.8%), Chile +14.9% (+6.4%), Hungary +14.6% (+5.1%), Spain +13.7% (+12.2%), Russia +12.7% (+19.1%), Netherlands +10.7% (+9.3%), Switzerland +10.6% (+7.8%), Sweden +9.7% (+9.4%), Taiwan +9.5% (+9.7%), Saudi Arabia +9% (+8.7%), Japan +8.8% (+12.6%), MSCI World +7.9% priced in dollars, S&P 500 +7.4%, UK +7.1% (+4.1%), Venezuela +6.6% (+58.8%), Portugal +6.4% (+5%), Brazil +6.1% (-1.2%), Canada +5.1% (+5.3%), China +5% (+5.9%), Korea +4.2% (+10.7%), Austria +3% (+1.6%), Belgium +2.4% (+1.1%), Indonesia +2.3% (-2.1%), India +1.8% (+1.2%), New Zealand +1.4% (+4.1%), Australia +0.5% (+3.1%), Philippines -0.1% (+0.2%), Russell -1.2%, Singapore -1.2% (-1.3%), HK -1.3% (-0.8%), Finland -1.7% (-2.9%), Israel -3.7% (-0.1%), South Africa -3.8% (+9%), Colombia -4.2% (-9.9%), Thailand -4.6% (-6.4%), UAE -5.6% (-5.6%), Malaysia -6.4% (-4.9%), Norway -7.5% (+0.7%), and Turkey -16.9% (-13%).
Hardware: “This is how to think about the UAE” said the wealthy investor, a banker turned money manager, entrepreneur, an expatriate who left London with his young family. “They have built exceptional hardware, national infrastructure,” he said. “They enshrined English common law like Singapore and Hong Kong in various business-friendly jurisdictions like ADGM [here] and DIFC [here],” he said. “But hardware is worthless without software, IP, so they do whatever necessary to entice the world’s best people to move here and build their businesses.”
Financial Centers: ADGM is Abu Dhabi’s financial center. Created in 2015, it now has over 4k registered business entities. Shopping, luxury living, hotels, schools, courts, regulators. Venture business hubs. Over 13k people work there. They plan to expand it 10x. DIFC is Dubai’s equivalent. Created 19yrs ago, 36k people work there. 700 tech companies. 27 of the world’s 29 systemically important financial institutions (SIFIs) have a presence. 60 hedge funds. Both cities are ranked the safest places to live in the world. Income and investment tax rates are zero.
Venturing: “US start-up infrastructure was built over generations largely around our universities,” said Shan Aggarwal, head of venture investing for Coinbase. “It’s easy to take it for granted,” he continued, speaking with a venture investor at one of UAE’s SWFs. I listened. “The ecosystem you’re building here for early-stage ventures lays the foundation for tremendous innovation from the region and is superior to anything I’ve seen outside the US,” Shan said. “It’s remarkable, built with such conviction, intention, vertically integrated with the leaders in government, investors, sovereign wealth funds, business centers, entrepreneurial hubs, regulators, banks.”
Monsters: “We’ve made over 400 venture investments in the past 5yrs,” added Shan. “We tend to invest very early, in small size. Geographically, roughly 30% of our portfolio companies were founded outside of North America. 10-20 of our companies have moved to the UAE or considered establishing a presence in the past year. All organic. And they include some of the strongest teams,” Shan said. “We make investments in firms throughout the world,” replied the SWF venture investor. “Many are strategic, very long-term horizon. They tend to be larger investments than yours. And the companies know that behind the initial capital we provide sits a monster.”
Nukes: “Upstairs is the mining company,” said the investor, focused on start-ups that build critical digital asset infrastructure, capitalizing on America’s reluctance to embrace blockchain technology. The UAE is hosting COP28 this December and building over 5 gigawatts of nuclear generating capacity. Like all renewable energy projects, there is no cost-effective way to store excess off-peak electricity production. So, the UAE now mines bitcoin with excess electricity, generating over $100mm per year to support investment in renewables. “We are operating at a fraction of our eventual output.”
Macro: UAE has the 8th largest oil reserves (100bln barrels). Venezuela has the most (304bln), followed by Saudi (298bln). The US has 69bln. When a nation with the 8th largest reserves builds over 5 gigawatts of nuclear generating capacity, it sends a powerful signal about the appetite for making long-term investments in oil and gas. The global energy transition has begun. If the world’s top producers slow investment in oil infrastructure, we could see a non-linear jump in the price of hydrocarbons, ironically, because we are weaning ourselves from them.
Patriots: “Consider each emirate on its merits,” said the head of one of the nation’s leading family offices, mid-30s, Ivy league educated. We sat in a WeWork tower, an innovation hub he helped pioneer, soon-to-be 3,200 desks. “I’ll be happy no matter what you choose, after all, I’m a republican,” he said, content with a victory for UAE, no matter which of its seven emirates wins. “But I think you’ll find Abu Dhabi is the place where you’ll want your greatest presence,” he said, his team of investors and infrastructure consultants in a healthy competition with Dubai.
Anecdote: I first traveled to the UAE in early 2001 to lead a technology project in Sharjah, one of seven emirates, working out of a windowless warehouse at the airport, a tax-free zone built to entice entrepreneurs. Back then, skyscrapers were rising, sporadically, abruptly, separated by vast tracts of desert, connected by wide empty highways. Fast forward 22 years and the UAE is transformed by ambition, execution. Poised to become a 21st century Switzerland. Open to all, aligned with none, a vital place where East meets West. “You see right there?” asked a sovereign wealth fund investor this week, pointing north, through the tower’s window. “Two miles out there are 100 billion barrels of proven reserves, more than 200 years of supply,” he said, the Arabian Gulf spread before us, powder blue, sandy islands, cranes spinning. I had asked what inspired the UAE to act so aggressively, with such clear intention, to transform its economy. And why the UAE had made such remarkable progress, when Kuwait, by comparison, appeared somewhat frozen in time. “In 20 years, perhaps 30, all that oil will be worth nothing,” he said. “The energy transition is now happening, and we have committed to Net Zero by 2050.” The UAE has roughly 1.5mm citizens, 8.5mm expatriates, $1.5trln in sovereign wealth fund investments, and is racing to diversify, reinvent. “Kuwait is somewhat of a sad story, the war with Iraq was devasting, they never fully recovered,” he said, touched by the travails of his northern neighbors, but more interested in focusing on his nation’s future. “We have been making strategic investments across the globe for years, generating strong financial returns, bringing key technologies here, creating the space for young firms to grow, searching for synergies,” he said. “I am a chameleon, sitting here with you, dressed as such, and in Silicon Valley I’m in jeans, tee-shirt. New York, Taipei, all over the world,” he said. “Our strategy rapidly accelerated with US and China geopolitical strains, then came Covid, Ukraine. There’s now a flood of people, businesses, opportunities.”
Good luck out there,
Chief Investment Officer
One River Asset Management
Disclaimer: All characters and events contained herein are entirely fictional. Even those things that appear based on real people and actual events are products of the author’s imagination. Any similarity is merely coincidental. The numbers are unreliable. The statistics too. Consequently, this message does not contain any investment recommendation, advice, or solicitation of any sort for any product, fund or service. The views expressed are strictly those of the author, even if often times they are not actually views held by the author, or directly contradict those views genuinely held by the author. And the views may certainly differ from those of any firm or person that the author may advise, converse with, or otherwise be associated with. Lastly, any inappropriate language, innuendo or dark humor contained herein is not specifically intended to offend the reader. And besides, nothing could possibly be more offensive than the real-life actions of the inept policy makers, corrupt elected leaders and short, paranoid dictators who infest our little planet. Yet we suffer their indignities every day. Oh yeah, past performance is not indicative of future returns.