Hope all goes well… “Are you asking what allocation I think our plan should make, or what percentage of my net worth I’ve invested?” asked so many of the largest money managers in Asia and Australia that I lost count. “I’m asking what percentage of your personal wealth you have allocated to digital assets,” I would respond, clarifying, city-to-city, back-to-back meetings. Their answers ranged from 0%-20% with almost all of them personally invested. Naturally, their personal investments are what I am most interested in understanding. Because these are the early movers in their organizations, the people who will ultimately drive the investment decisions of the largest allocators on earth. The process is only just starting. And such dynamics drive long-term trends.

Marcel Kasumovich, One River’s Head of Research, published a fantastic piece on inflation, the similarities and differences between now and the 1970s, financial repression, and how our youth will innovate within the digital ecosystem to build a better future [here].

Overall: “While central banks in the U.S. and Europe are moving toward monetary tightening or rate increases, the Japanese economy is still on the road to recovery,” said the Bank of Japan Governor. “It is most important to support economic recovery by patiently continuing monetary easing,” added Kuroda-san. The Bank of Japan first cut interest rates to zero 23yrs ago, and ignoring a couple aborted attempts to briefly normalize policy they have remained at zero or lower ever since. Government debt exploded in that time, with annual deficits and stimulus packages becoming so commonplace they lost their effectiveness. The central bank bought nearly half the 1.4 quadrillion Yen of government debt that mounted, a stunning 260% of GDP. And yet, through it all, core prices in Japan’s economy remain almost identical today as they were when its zero-interest-rate experiment began. For decades, it seemed everyone lost money trading Japanese bonds, which moved in counter-intuitive ways. They called the inexorable government bond rally the “Widow-Maker.” Traders with the highest IQs tend to have the least-disciplined risk management, so they suffered most profoundly. In the years preceding the pandemic, economists claimed they definitively understood how and why Japan’s disinflation developed, persisted, and then manifested in other nations. Secular Stagnation. Perhaps they did actually figure it out. But no sooner had the economists named their magnificent mental model then the world started to change -- which of course is the only durable model in all of economics. There are others that tend to work too. Like when major central banks are tightening, while others are easing, volatility rises until something breaks badly, at which point policy makers panic. Another model that seems to hold is that highly intelligent economists and central bankers generally believe they understand inflation, as if it is a mathematical equation. And even though inflation appears when they least expect it, and fails to manifest when they most anticipate it, they remain remarkably confident in their ability to predict it.

Week-in-Review (expressed in YoY terms): Mon: Beijing cases surge, PBOC cut the forex RRR to stem CNH decline, Macron defeated Le Pen in France’s presidential election, Blinken and Austin have unannounced visit to Kyiv / US pledged add’l $700m in aid for Ukraine, Musk to acquire TWTR for $44b, BoC Macklem dials back prospects of 75bp hike and calls for 50bp, former Japan PM Abe says raising rates would be a mistake, Spain PPI 46.6% (41.2%p), UK business optimism -34 (-15e), US Chicago Fed 0.44 (0.45%e), US Dallas Fed 1.1 (5e), S&P +0.6%; Tue: PBOC reiterates pledge to support the economy, Russian foreign min Lavrov warns of nuclear conflict after Ukraine launched missiles into Russian mainland, Russia to cut gas supply to Poland and Bulgaria, Japan fin min Suzuki watching weak JPY “with vigilance” / denies intervention was discussed with Yellen at recent meeting, Hungary CB hikes 100bp as exp, ECB’s Kazaks says room for 3 hikes this year and July hike possible/reasonable, MSFT beats earnings, US Durable goods 0.8% MoM (1%e), US Case Shiller home prices 20.2% (19.2%e), US cons conf 107.3 (108.2e), US Richmond Fed 14 (9e), S&P -2.8%; Wed: Gazprom confirms cut gas to Poland and Bulgaria due to non-payments in RUB / threatens to do the same to other European nations, Lagarde guides to July end of APP, EURUSD makes new 5y low, FB missed but better than feared / added more users than expected, Google missed earnings est, Australia CPI 5.1% (4.6%e) / trimmed mean CPI 3.7% (3.4%e), German cons conf -26.5 (-16e), Sweden PPI 24.5% (19.3%p), US wholesale inv 2.3% MoM (1.5%e), US pending home sales -8.9% (-8.1%e), Russia ret sales 2.2% (-1.2%e) / unemp 4.1% (4.5%e) / IP 3% (-1.7%e), S&P +0.2%; Thur: BoJ unchanged and reinforced unlimited support of YCC / pushed USDJPY to 5y high, Riksbank delivers a hawkish surprise and hikes by 25bp while also announcing the start of passive QT in 3Q22, Germany committed to EUR payments for Russian gas (not RUB), AMZN missed earnings est, Apple beat est and announced new $90b share buyback, Australia expt prices 18% QoQ (11%e) / impt prices 5.1% QoQ (7%e), Germany CPI 7.8% (7.6%e), US 1Q GDP -1.4% (1.0%e) / Personal cons 2.7% (3.5%e) / Core PCE 5.2% QoQ (5.5%e), US init claims 180k as exp, US KC fed 25 (35e), S&P +2.5%; Fri: Russia cut key rate by 300bps (100bp cut exp), China Politburo commits to Covid Zero policy but promised to boost economic stimulus and support growth of platform companies, Erdogan meets with MBS in Saudi Arabia signaling stronger ties since the murder of Khashoggi, Shanghai reports first increase in cases in 6 days, Australia private credit 7.8% (8%e), Australia PPI 4.9% (3.7%p), German impt prices 31.2% (28.6%e), UK house prices 12.1% (12.6%e), Italy GDP 5.8% as exp, Germany GDP 3.7% (3.6%e), Poland CPI 7.4% (5.5%p) / GDP 11.9% (5.9%p), EU CPI 7.5% as exp / Core CPI 3.5% (3.2%e), Italy PPI 46.5% (41.3%e), Canada GDP 4.5% (4.1%e), US personal inc 0.5% (0.4%e) / personal spending 1.1% (0.6%e), US PCE Deflator 6.6% (6.7%e) / Core PCE deflator 5.2% (5.3%e), US Chicago PMI 56.4 (62e), US UofM 65.2 (65.7e) / 1y infl exp 5.4% as exp, S&P -3.6%.

Weekly Close: S&P 500 -3.3% and VIX +5.19 at +33.40. Nikkei -0.9%, Shanghai -1.3%, Euro Stoxx -0.6%, Bovespa -2.9%, MSCI World -0.7%, and MSCI Emerging -2.0%. USD rose +4.2% vs Ethereum, +3.7% vs Brazil, +2.9% vs Sweden, +2.7% vs Bitcoin, +2.6% vs Australia, +2.3% vs Euro, +2.1% vs Sterling, +1.7% vs Chile, +1.6% vs China, +1.2% vs South Africa, +1.1% vs Canada, +1.0% vs Indonesia, +1.0% vs Mexico, +0.9% vs Yen, and +0.8% vs Turkey. USD fell -1.2% vs Russia, and -0.1% vs India. Gold -1.2%, Silver -5.1%, Oil +2.6%, Copper -4.2%, Iron Ore +1.6%, Corn +3.1%. 5y5y inflation swaps (EU flat at 2.43%, US -6bps at 2.75%, JP -2bps at 0.73%, and UK flat at 4.11%). 2yr Notes +5bps at 2.72% and 10yr Notes +3bps at 2.94%.

April Monthly Close: S&P 500 -8.8% and VIX +12.84 at +33.40. Nikkei -3.5%, Shanghai -6.3%, Euro Stoxx -1.2%, Bovespa -10.1%, MSCI World -8.4%, and MSCI Emerging -5.7%. USD rose +19.3% vs Bitcoin, +17.6% vs Ethereum, +8.3% vs Chile, +8.1% vs South Africa, +6.6% vs Yen, +6.0% vs Australia, +5.0% vs Euro, +4.9% vs Brazil, +4.6% vs Sweden, +4.5% vs Sterling, +4.2% vs China, +2.8% vs Mexico, +2.7% vs Canada, +1.2% vs Turkey, +0.9% vs Indonesia, and +0.9% vs India. USD fell -15.4% vs Russia. Gold -2.2%, Silver -8.4%, Oil +6.3%, Copper -7.3%, Iron Ore -0.1%, Corn +11.0%. 5y5y inflation swaps (EU +22bps at 2.43%, US +11bps at 2.75%, JP +18bps at 0.73%, and UK +10bps at 4.11%). 2yr Notes +38bps at 2.72% and 10yr Notes +60bps at 2.94%.

YTD Equity Indexes (high-to-low): Saudi Arabia +21.9% priced in US dollars (+21.7% priced in rials), UAE +18.8% priced in US dollars (+18.8% in dirham), Turkey +16.5% in dollars (+30.8% in lira), Brazil +15.8% (+2.9%), Colombia +13.7% (+10.7%), Chile +11.5% (+10.9%), Indonesia +7.9% (+9.8%), Singapore +4.8% (+7.5%), South Africa -1.3% (-2.4%), Norway -1.3% (+4.8%), Venezuela -1.6% (-4.1%), Malaysia -2% (+2.1%), Thailand -2.2% (+0.6%), Australia -2.8% (-0.1%), Mexico -3.1% (-3.5%), Portugal -3.1% (+4.6%), Canada -3.5% (-2.2%), Israel -4% (+2.6%), India -4.1% (-1.4%), Greece -4.3% (+3.3%), UK -5.1% (+2.2%), Argentina -5.8% (+5.7%), Philippines -7.9% (-5.5%), Spain -8.2% (-1.5%), HK -10.4% (-9.9%), Denmark -10.7% (-4.2%), Switzerland -11.4% (-5.8%), MSCI World -11.5%, Belgium -11.7% (-4.7%), Czech Republic -11.9% (-6.5%), S&P 500 -13.3%, New Zealand -14% (-8.8%), Taiwan -14.4% (-8.9%), Korea -14.5% (-9.5%), France -15.4% (-8.7%), Russell -17%, Germany -17.3% (-11.2%), Italy -17.3% (-11.3%), Netherlands -17.4% (-10.9%), Japan -18% (-6.8%), Euro Stoxx 50 -18% (-11.5%), Finland -19.2% (-13.4%), China -19.5% (-16.3%), Ireland -19.6% (-13.2%), Austria -20.7% (-14.9%), NASDAQ -21.2%, Sweden -21.4% (-14.9%), Hungary -22.1% (-14.3%), Poland -23.7% (-16.7%), Russia -31.8% (-35.4%).

Leadership: There is one defensible rationale for the US to promote the use of ethanol in gasoline, and that is because it supports the vast overproduction of corn. By legislating and subsidizing this overproduction, the US maintains the planet’s greatest spare capacity for food production. In a global food shortage, farmers can repurpose US farmland, equipment, and transportation infrastructure to produce calories for human/livestock consumption. But instead, we recently approved an increase in the ethanol limit used in gasoline from 10% to 15% to ease prices at the pump and presumably buy votes. This move will amplify the global food shortage.

Leadership II: 20yrs ago, nuclear plants represented 29.5% of Germany’s power generation. Chernobyl understandably left the Germans deeply uneasy, and anti-nuclear political pressure built. Following Fukushima in 2011, the nation decided to shut all nuclear generation by 2022. At the end of 2021, Germany closed 3 of its remaining 6 plants (30 are now closed). It is difficult and costly to restart reactors, and not all of them could reasonably be restarted. But some could. Like American corn production, German nuclear production is not perfectly fungible, and won’t directly alleviate global energy shortages. But it would provide material help in this crisis.

Leadership III: Following news Indonesia halted palm oil exports, the US Dept of Agriculture urged international cooperation during the war, rather than export bans. Indonesia accounts for 60% of global palm oil production (Russia/Ukraine account for 80% of sunflower oil supply). Palm oil prices jumped 21% last year and are up 42% in 2022. The US and Europe are squandering a generational opportunity to provide global leadership by increasing food/energy production, distribution. And if we do not act rapidly, decisively, the export bans will expand, the hoarding will accelerate. A historic fracture between the rich and poor nations will unfold.

Horse Trading: “A horse, a horse! My kingdom for a horse!” cried King Richard, pathetic, villainous, desperate on the battlefield, uttering his final words in Shakespeare’s Richard III. He’d lost his mount, without which escape was impossible, death certain. In times of peace, prices of things we seek, goods and services we offer, are generally stable. The value we assign to our money is too. Naturally they are all connected, because in a well-functioning economy, the supply of goods, services and currency are abundant, in rough balance. But in times of crisis, shortage, price moves are non-linear. The Bank of England couldn’t print King Richard a horse.

Horse Trading II: Imagine a nation rapidly ageing, like Japan, although many are right behind. Europe is, even China. Picture today in this imaginary ageing nation, the prices of goods and services are generally stable, supply and demand in rough balance. But old people have almost all the money, the youth are broke. Now roll the clock forward, and there are vast numbers of elderly who require assistance with every necessity. How will that economy function? How will goods, services, and money supply achieve equilibrium in that economy? And how much will the desperate, wealthy, old people be willing to pay the young people to change their last diaper?

Anecdote: The more you think about money, the less it makes sense. That is why the topic is so alluring for the masochists amongst us, attempting to solve the unsolvable, climb the unclimbable, conquer the unconquerable. We engineer thought experiments and mental models in the hope of gaining a glimpse of some truth, the scent of something real, a money-making opportunity. Japan provides an enigma to explore. It once had a bubble so big the Emperor’s Palace was worth more than the state of California. Unreal. Impossible. But so it was. When that bubble burst, real estate and equity prices utterly collapsed. The Yen strengthened for decades. It remains stronger today than back then. Japan’s exporters carried on, managing costs lower, maintaining competitiveness. The government supported the system, running persistent deficits and in each recession announced a special stimulus. The central bank stimulated too. In 1999 the Bank of Japan reduced rates to zero, unsuccessfully lifted them a couple times, and in 2015 cut them to -0.10% where they remain. The level of government debt expanded in ways that almost everyone agreed would lead to an inflationary collapse. It did not. The Bank of Japan bought bonds, and now owns roughly 130% of GDP worth of government debt, which is half of the 260% outstanding. It also pledged yield curve control, bidding for an unlimited quantity of 10yr government bonds at a 0.25% yield. Could the central bank create money, buy all the outstanding bonds, and simply burn them? Execute a modern version of an Old Testament debt jubilee? The currency of a nation that chooses this path should weaken, as it is now doing in Japan. But might it be possible for a country to pull off such a feat without full monetary collapse? We don’t know, yet. What seems certain though, is that if you were to attempt such a bold maneuver, you would absolutely want to be the first nation to try.

Good luck out there,

Eric Peters

Chief Investment Officer

One River Asset Management

Greenwich, CT

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.

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