Zipping out to Wyoming for a big climb with Jackson and his buddies. Marcel Kasumovich, our Head of Research, is writing wknd notes for the rest of July. Marcel is a truly special human being, one of the top five minds I’ve encountered in all my travels, filled with wonderful market stories, life lessons, and sporting a few scars like all of us who dare reach. A wise soul. A talented communicator. And the former Chief Strategist for Soros, who helped George position for and successfully navigate the Global Financial Crisis. Mara is his editor-in-chief, as she has always been for me. It’s fun to see what they create together. Below is Marcel’s second edition:

Overall: “The Government of Japan must continue working to maintain Japan’s peace and security, which is an essential premise for its prosperity,” Abe concluded in a statement on the Japan-US Alliance on September 11, 2020. Shaken by the sudden loss of a mentor and friend, Japanese PM Kishida observed “[it is] an attack on the core of democracy.” Boris Johnson’s scandals pose their own threat to the UK system. “I want you to know how sad I am to be giving up the best job in the world,” he said after cascading defections from his government. China contemplated an early sale of local government bonds as Premier Li Keqiang indicated that “[the economy’s] foundation is still not solid” and “strenuous effort is required to stabilize growth.” Smaller emerging markets are under severe strain, packing the IMF calendar, including its likely support for Egypt. “We are continuing our close engagement with the authorities towards reaching staff-level agreement,” said the IMF. US Secretary of State Blinken pointedly asked, without the presence of his Russian counterpart at the G20 meetings, “Why are you blocking the ports? You should let the grain out.” Belarus received reinforcements of weaponry from Putin that can carry nuclear warheads. “There needs to be a reform of EDF, we know that; a transformation so that EDF is more efficient,” observed French Finance Minister Le Maire, speaking to the nationalization of Europe’s largest nuclear energy producer. Germany’s Economy Minister confronting similar challenges with utility Uniper SE mirrored France, indicating that “[the government] won’t allow a systemically important company go bankrupt, and throw the global energy market into turmoil.” The Swiss government is readying plans “to keep the reduction in natural gas deliveries to all consumers as low as possible, all non-protected customers are to be allocated quotas without prioritization. In addition, restrictions on use are being examined.”

Market sentiment is oscillating between growth and inflation risks. Our Research Team argues that inflation volatility may capture the real story and it is a key macro driver of digital markets [click here].

Week-in-Review (expressed in YoY terms): Mon: 4th of July - quiet markets, talks of potential US/China tariff roll backs after call between Yellen/Liu, mass shooting leaves 6 dead at July Fourth parade, Bundesbank Pres Nagel says virtually impossible to know if a widened spread is fundamentally justified – opening door for attacks against ECB anti-fragmentation tool, Israel CB hikes 50bp as exp, Australia building approvals 9.9% MoM (-2%e), Swiss CPI 3.4% (3.1%e), Turkey CPI 78.62% (79.95%e) / PPI 138.31% (132.16%p), EU PPI 36.3% (36.6%e), S&P closed; Tue: RBA hikes 50bp as exp, European energy markets continue to price increased probability of complete cut off of Russian gas in coming months, UK PM Johnson challenged by senior cabinet resignations (Sunak and Javid), Russia’s Medvedev warns Japan on energy supply given its price cap idea, Japan real cash earnings -1.8% (-1.6%e), Mexico cons conf 43.6 (43.9e), US Factory Orders (MoM 1.6% (0.5%e), US durable goods orders 0.8% MoM (0.7%e), S&P 0.2%; Wed: Fed minutes broadly as expected / reinforced concerns around high inflation getting entrenched, BOE dep gov Conliffe says prepared to act forcefully to ensure inflation doesn’t persist, covid cases across China included Beijing and Shanghai increase, France to nationalize EDF (large nuclear energy producer), BOE economist Pill warns the UK would not see any growth over the next year, Germany factory orders -3.1% (-5%e), US ISM Services 55.3 (54e), US Job openings 11.254m (11m exp), S&P +0.4%; Thu: UK PM Johnson plans to resign, Shanghai posts highest covid case count since May, China mulling bringing forward $220b stimulus in 2H 2022, US doesn’t expect any announcement on China tariffs, Hungary CB hiked depo rate 200bp (50bp exp), Poland hikes 50bp (75bp exp), ECB minutes show Sep guidance was in response to growing hawkishness on the GC, Fed’s Waller & Bullard still like 75bps for July / play down recession fears, Japan leading index 101.4 (101.5e), US init claims 235k (230k exp), S&P +1.5%; Fri: Former Japanese PM Abe assassinated, US NFP 372k (265k exp) / unemp 3.6% as exp / AHE 5.1% (5%e), Musk terminates Twitter purchase, Peru hikes 50bp as exp, Biden to discuss US/China tariff reductions with advisers, Derek Chauvin sentenced to 21y for violating George Floyd’s civil rights, Germany expects Canada to release turbine for Nord Stream1, China ramped up military patrols around Taiwan in protest of US Senator Rick Scott’s visit, Brazil IPCA infl 11.89% (11.94%e), Canada emp chg -43.2k (22.5k exp) / unemp 4.9% (5.1%e), US wholesale inv 1.8% MoM (2%e), US consumer credit 22.347b (30.9b exp), Russia CPI 15.9% (16%e), S&P -0.1%.

Manufacturing PMI (high-to-low): Switzerland 59.1 (previous month 60), Hungary 57 (previous 51.9), Norway 56.39 (previous 54.73), Netherlands 55.9/57.8, Canada 54.6/56.8, Brazil 54.1/54.2, Vietnam 54/54.7, India 53.9/54.6, Sweden 53.7/54.9, US 53/56.1, UK 52.8/54.6, Japan 52.7/53.3, Spain 52.6/53.8, South Africa 52.5/50.7, Hong Kong 52.4/54.9, Mexico 52.2/50.6, Germany 52/54.8, China 51.7/48.1, France 51.4/54.6, South Korea 51.3/51.8, Austria 51.2/56.6, Greece 51.1/53.8, Italy 50.9/51.9, Russia 50.9/50.8, Singapore 50.3/50.4, Indonesia 50.2/50.8, Taiwan 49.8/50, Czech Republic 49/52.3, Turkey 48.1/49.2, Poland 44.4/48.5. Services PMI: Sweden 62.8/67.8, Brazil 60.8/58.6, India 59.2/58.9, Ireland 55.6/60.2, China 54.5/41.4, UK 54.3/53.4, Spain 54/56.5, Japan 54/52.6, France 53.9/58.3, US 52.7/53.4, Germany 52.4/55, Russia 51.7/48.5, Italy 51.6/53.7, Australia 48.8/49.2.

Weekly Close: S&P 500 +1.9% and VIX -2.06 at +24.64. Nikkei +2.2%, Shanghai -0.9%, Euro Stoxx +2.5%, Bovespa +1.3%, MSCI World +1.6%, and MSCI Emerging +0.2%. USD rose +16.6% vs Russia, +4.1% vs Chile, +3.0% vs Turkey, +2.8% vs South Africa, +2.2% vs Euro, +1.7% vs Sweden, +0.9% vs Mexico, +0.7% vs Yen, +0.5% vs Sterling, +0.4% vs Canada, +0.3% vs India, and +0.3% vs Indonesia. USD fell -13.1% vs Ethereum, -9.9% vs Bitcoin, -1.4% vs Brazil, -0.7% vs Australia, and -0.1% vs China. Gold -3.3%, Silver -2.2%, Oil -3.4%, Copper -2.3%, Iron Ore +0.0%, Corn +2.6%. 5y5y inflation swaps (EU -4bps at 2.01%, US +4bps at 2.47%, JP -9bps at 0.88%, and UK +1bp at 3.73%). 2yr Notes +27bps at 3.11% and 10yr Notes +20bps at 3.08%.

YTD Equity Indexes (high-to-low): UAE +8.7% priced in US dollars (+8.7% priced in dirham), Chile +3.7% priced in dollars (+18.7% priced in pesos), Argentina +2.7% in dollars (+26.8% in pesos), Saudi Arabia +1.2% (+1.2%), Turkey +0.2% (+31%), Brazil +0.2% (-4.3%), Portugal -2% (+9.7%), Indonesia -2.4% (+2.4%), Singapore -3.5% (+0.2%), Venezuela -7.7% (+11.5%), HK -7.8% (-7.1%), Mexico -10.7% (-10.7%), Colombia -11.1% (-4%), Norway -11.8% (+1.2%), India -12.2% (-6.5%), China -12.5% (-7.8%), Canada -12.6% (-10.4%), South Africa -12.7% (-7.4%), Thailand -12.7% (-6%), UK -13.5% (-2.5%), Malaysia -14.5% (-9%), Australia -15.7% (-10.3%), Spain -16.5% (-7%), Israel -16.6% (-6.9%), S&P 500 -18.2%, Denmark -18.2% (-8.9%), Philippines -18.3% (-10.7%), MSCI World -19.5% in dollars, Greece -19.8% (-10.2%), Switzerland -20% (-14.5%), Russell -21.2%, Belgium -21.6% (-12.2%), Czech Republic -21.8% (-13.7%), Japan -22.1% (-7.9%), New Zealand -22.7% (-14.3%), Netherlands -24.6% (-15.5%), France -24.7% (-15.7%), NASDAQ -25.6%, Taiwan -26.2% (-20.6%), Germany -26.4% (-18.1%), Finland -26.6% (-18.4%), Euro Stoxx 50 -27.2% (-18.4%), Korea -27.4% (-21.1%), Italy -28.5% (-20.4%), Sweden -30% (-18.5%), Ireland -31.5% (-23.2%), Poland -32.1% (-21.2%), Austria -32.4% (-24.8%), Russia -32.5% (-41.3%), Hungary -35.8% (-21.4%).

Can’t Happen: “We must forge an unshakeable oath with all civilized people that never again will the world stand silent, never again will the world look the other way or fail to act in time,” said President Carter in 1979. He commissioned a report on the Holocaust, already three decades past the UN Declaration of Human Rights, an attempt to avoid repeating history. Today, Kaliningrad is the fulcrum between peace and war. Fiona Hill, foreign affairs specialist, laments “sadly, we are treading back through old historical patterns that we said that we would never permit to happen again.”

Can’t Happen II: A rapid switch to gold and the US dollar was widely anticipated after 1945. Special international coordination stretched it across decades, highlighted by the Basel Agreement in 1961. The dethroning of reserve currencies is slow. And it is not preordained by a historic norm. A dominant reserve currency other than the US dollar is not obvious. But there are always competitive forces, revealed with subtle policy such as the RMB Liquidity Arrangements recently organized by the BIS. China is positioning to be a reserve currency. It can happen.

Can’t Happen III: Over hundreds of years ahead of the Industrial Revolution, GDP per capita grew 0.16% per annum in the United Kingdom. In the past hundred years – despite wars, depressions, and default – living standards exploded to 1.5% annual growth. It is now presumed to be the natural state of being. To be sure, growth can be perpetual even with finite resources. But it is innovation and austere policies supporting productivity that generates the outcome. Living standards aren’t enshrined – not even for rich countries. Growth can stagnate for long periods.

Can’t Happen IV: “Demographic drivers should propel housing construction…to new heights.” This was the judgement of experts at JCHS of Harvard University in June 2006. Financial businesses were built around the historical norm that home prices do not decline – they never had nationally. Most of those businesses disappeared, rightfully. Yet, housing investment as a share of GDP peaked at 7% of GDP in 2005. It fell for two years before the financial crisis. Two years. And it has never, and may never again, reach those heights.

Can’t Happen V: In 2012, ECB President Draghi emphatically declared that “within our mandate…within our mandate…the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Draghi set in motion words that turned into programs. Now, ten years later, the widening of peripheral spreads presents the perfect time to employ these prescient programs. But they are deemed unusable – too politically charged. Europe’s monetary union is incompatible with its political interests. Whatever it takes is not whatever you want.

Anecdote: “Cognitive psychologists call it recency bias - a built-in mental tendency to exaggerate the significance of recent events and experiences while slighting those further back in time,” Gideon Rose offered in explaining the seemingly invisible fraying of living standards. “The fault lies not in our algorithms but ourselves.” It creeps into all aspects of our lives, our thinking, and most certainly our investment decisions. The power-hungry prey on recency bias with the repetition of a simple message – the more it is seen, the more it is heard, the more it is internalized, the more real an issue becomes. Dominating thought processes and narrative. Increasing future risks. Neuroscientist Dr Kristjian Kalm reminds us that “this recency bias persists even when past events contain no information about the future.” It is a behavioral reality. Statistical exceptionalism won’t help - it can even hurt. Short-sightedness is built into big data exercises with a tendency to overestimate short-term trends at the expense of history. Being aware is half the battle. Terence Tao teaches a Masterclass on the issue. Hunt for diversity in expert opinions. You may learn more from a zoologist about the vulnerabilities of a financial ecosystem than a banker. Stay grounded. Decisions are best made well-rested while turning off the daily news. Look to the distant past. Mathematics advanced rapidly in the 9th and 10th centuries during the Golden Age of Islam, transitioning to Europe in the 10th to 12th centuries. Names like al-Hassar are critical to modern mathematics. It is a reminder that all power and all privilege is vulnerable to the assumption that it can’t be lost. Fight to be better than the day before. Resist the temptation of leveraging past success. Get comfortable with discomfort. And if all else fails, a long, humbling hike will clear your mind of recency delusions.

Good luck out there,

Marcel Kasumovich

Head of Research

One River Asset Management           

Toronto, Canada

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, drink 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.