“We’re going to decide whether we are going to grow our way out of this debt burden or not,” said Scott Bessent, one of the great macro thinkers, investors, strategists, on Nov 4th. “And I think we can. Through deregulation, energy independence and dominance in the US, and a growth mindset,” continued Trump’s nominee for Treasury Secretary. “I feel very strongly that this is the last chance to grow ourselves out of this,” said Bessent, confident, determined, the stakes higher than ever. “I also feel strongly that we’re in the midst of a great realignment, a Bretton Woods type of realignment in global policy and global trade.”
Shared my thoughts on one of the leading crypto podcasts - Empire - early this week [here]. The financial system is going to be rebuilt on crypto rails. Post-election, the market is in an explosive repricing with BTC +30%. And now the incoming Treasury Secretary is supportive of crypto.
Overall: “The war has acquired elements of a global character,” said Vladimir Putin in a rare, televised address. Biden had authorized the use of long range ATACMS to strike deep within Russia’s borders. The UK approved the use of Storm Shadow missiles, which Ukraine quickly used to strike Russian military commanders and their North Korean allies who have now joined the fight. The Kremlin answered the West’s escalation with the launch of an Oreshnik missile which it claimed traveled 10x the speed of sound. Before the launch of this hypersonic weapon that is somewhere between difficult and impossible to intercept, Russia’s military sent a message to the West to announce the use of the new system. With tensions this high, communication is in everyone’s best interest. Israel hit an apartment block in Beirut with a powerful bunker buster bomb that rocked the city, as that conflict rages on. And of course, speculation about a Chinese takeover of Taiwan is ever present. Within America’s borders, Trump continued to pick his key players so that he can hit the ground racing ahead on Jan 20th. Corporate CEOs attempted to weigh each appointment, handicapping the probability of mass deportations, trade tariffs, tax cuts, deregulation, political retribution, respect for rule of law. Government employees considered the depth and breadth of the coming DOGE cuts. Doctors, drug makers, and insurance companies contemplated the changes sure to come. The few Fed governors who were still under the illusion of their independence questioned how much longer it would continue. The Dems scrambled, the breakdown of that party into factional fighting having barely begun. The most vulnerable amongst them began their retreat. Gensler announced his resignation, effective on Trump’s inauguration. And we investors and traders wondered whether this is all the storm before the calm, or the calm before the storm.
Week-in-Review: Mon: Biden allows Ukraine to strike Russia with US-made long-range missiles. Underwater 1,200km fiber optic cable between Finland and Germany cut; both countries suspect foreign sabotage. G20 Summit begins in Rio. Oil production cut in Norway and Kazakhstan due to power outages and maintenance. ECB’s Makhlouf needs ‘overwhelming’ evidence to back a 50bps rate cut in Dec. Trump’s social media company in advanced talks to buy crypto trading venue Bakkt. S&P +0.4%; Tue: Ukraine strikes deep inside Russia with US-made ATACMS missiles. Putin revises Moscow’s nuclear doctrine to consider attack from nonnuclear country backed by nuclear power as joint attack. Howard Lutnick picked by Trump to run commerce department. US recognizes opposition leader González as president-elect in Venezuela. Iran discusses capping stocks of highly enriched uranium with UN. BoE’s Bailey warns against ‘lingering persistence of wage pressure’. Bank of Italy governor calls for rapid ECB rate cuts. RBA minutes showed support for restrictive policy until inflation targets are met. Iran says failure to retaliate would be ‘an invitation to war’ to Israel. Hong Kong court sentences 45 pro-democracy activists to up to 10 years in prison. Eurozone CPI 2.0% as exp / Core 2.7% as exp, US Housing starts 1311k (1334k), Canada CPI 2.0% (1.9%e), S&P +0.4%; Wed: Ukraine fires British Storm Shadow missiles at military targets in Russia. US to provide anti-personnel landmines to Ukraine. Indian billionaire Adani charged by US federal prosecutors for bribery. Far right leader Le Pen threatens to bring down the French government on budget dispute. BoE Deputy Governor believes the country to be on track for ‘low and relatively stable’ inflation. Archegos founder Bill Hwang sentenced to 18 years in prison. FTX co-founder and CTO Gary Wang avoids prison time after plea deal. Minimum wage in Turkey to rise by 44% to match inflation. UK CPI 2.3% (2.2%e) / core 3.3% (3.1%e), RPI 3.4% as exp, Indonesia interest rate 6.00% as exp, South Africa CPI 2.8% (3.0%e) / core 3.9% as exp, S&P +0.0%: Thur: Putin says Moscow fired new hypersonic missile, which can carry a nuclear head, at Ukraine. US hits Russia’s Gazprombank with sanctions. ICC issues arrest warrants for Israeli and Hamas leaders. Citadel’s Griffin says Trump’s tariff plan would put US on path to ‘crony capitalism’. Gary Gensler to step down as SEC chair in January. Matt Gaetz withdraws as Trump’s nominee for Attorney General. Bolsonaro and 36 others to face criminal charges for alleged coup plot. US Jobless claims 213k (220k e) / Cont claims 1908k (1880k e), US Leading index -0.4% (-0.3%e), Mexico Ret sales -1.5% (-1.2%e), Benchmark interest rates in Turkey 50.0% as exp / South Africa 7.75% as exp / Egypt 27.25% as exp, S&P +0.5%; Fri: Germany revises down economic growth as it heads into its first two-year recession since the early 2000s. UK and EZ business activity falls abruptly. Trump picks Scott Bessent as Treasury Secretary. Trump’s hush money sentencing is postponed indefinitely by judge. Bitcoin reaches an all-time high at $99,000. Amazon invests further $4bn in AI start-up Anthropic. German GDP YoY -0.3% (-0.2%e), UMich Cons. Sent Idx 71.8 (73.9e), US Mfg PMI 48.8 as exp / Servies 57 (55e), Flash Composite PMIs France 44.8 (48.1e) / Germany 47.3 (48.3e) / EZ 48.1 (49.8e) / UK 49.9 (51.8e), S&P +0.4%.
Weekly Close: S&P 500 +1.7% and VIX -0.90 at +15.24. Nikkei -0.9%, Shanghai -1.9%, Euro Stoxx +1.1%, Bovespa +1.0%, MSCI World +1.5%, and MSCI Emerging +0.2%. USD rose +4.4% vs Russia, +1.2% vs Euro, +0.7% vs Sterling, +0.7% vs Chile, +0.6% vs Sweden, +0.4% vs Mexico, +0.4% vs Turkey, +0.3% vs Yen, +0.3% vs China, +0.2% vs Brazil, +0.1% vs Indonesia, and +0.1% vs India. USD fell -10.3% vs Bitcoin, -8.4% vs Ethereum, -0.8% vs Canada, -0.6% vs Australia, and -0.4% vs South Africa. Gold +5.5%, Silver +3.0%, Oil +6.5%, Copper +0.6%, Iron Ore +3.5%, Corn flat. 10yr Inflation Breakevens (EU -1bp at 1.84%, US +1bp at 2.35%, JP +2bps at 1.39%, and UK +1bp at 3.53%). 2yr Notes +7bps at 4.38% and 10yr Notes -4bps at 4.40%.
Market Moves Since Nov 4th (pre-election): S&P 500 +4.5% and VIX -6.74 at +15.24. Nikkei +0.6%, Shanghai -1.3%, Euro Stoxx -0.1%, Bovespa -1.1%, MSCI World +3.0%, and MSCI Emerging -3.8%. USD rose +5.5% vs Russia, +4.4% vs Euro, +3.4% vs Sterling, +3.3% vs South Africa, +3.3% vs Chile, +2.9% vs Sweden, +2.1% vs China, +1.7% vs Yen, +1.7% vs Mexico, +1.3% vs Australia, +0.8% vs Indonesia, +0.6% vs Turkey, +0.5% vs Canada, +0.4% vs India, and +0.4% vs Brazil. USD fell -30.5% vs Bitcoin, and -26.2% vs Ethereum. Gold -1.2%, Silver -3.9%, Oil +0.3%, Copper -7.6%, Iron Ore +1.8%, Corn +1.2%. 10yr Inflation Breakevens (EU -2bps at 1.84%, US +8bps at 2.35%, JP +14bps at 1.39%, and UK -5bps at 3.53%). 2yr Notes +21bps at 4.38% and 10yr Notes +12bps at 4.40%.
2024 Year-to-Date Equity Index Close (high to low): Argentina +91.6% priced in US dollars (+137.9% priced in pesos), NASDAQ +26.6% priced in US dollars, S&P 500 +25.1% in US dollars, Taiwan +20% in US dollars (+27.7% in Taiwan dollars), MSCI World +18.8% in US dollars, Russell +18.7% in dollars, Israel +17% in dollars (+20.9% in shekels), Hungary +14.8% (+31.2%), Canada +14.7% (+21.4%), HK +13.2% (+12.8%), Singapore +13.1% (+15.6%), Malaysia +12.3% (+9.3%), South Africa +10.3% (+9.4%), Czech Republic +10.1% (+20%), Turkey +9.4% (+27.8%), Spain +8.7% (+15.4%), Germany +8.6% (+15.3%), India +8.4% (+10%), China +7.6% (+9.8%), Belgium +7.4% (+14%), Norway +5.7% (+15.8%), Netherlands +5.3% (+11.8%), Australia +5.2% (+10.6%), UK +4.9% (+6.8%), Japan +4.1% (+14.4%), Italy +3.9% (+10.4%), Ireland +3.3% (+9.7%), Greece +2.1% (+8.4%), New Zealand +1.9% (+10.8%), Colombia +1.6% (+16.5%), Thailand +1.2% (+2.2%), Euro Stoxx 50 -0.3% (+5.9%), Saudi Arabia -1.2% (-1.1%), Switzerland -1.2% (+5.2%), Philippines -1.3% (+5.1%), Denmark -2.4% (+3.7%), Austria -3.2% (+2.8%), UAE -3.6% (-3.6%), Poland -4.3% (+1.3%), Indonesia -4.4% (-1.1%), Sweden -4.6% (+4.9%), Chile -5.5% (+5.9%), France -9.4% (-3.8%), Finland -10.9% (-5.3%), Korea -13.6% (-5.8%), Portugal -15.4% (-10.2%), Brazil -19.7% (-3.8%), and Mexico -27.3% (-12.1%).
Transparency: “We are making three material changes to our portfolio,” said the investor, one of North America’s largest pools of public pension capital. “I’m curious whether others are considering similar adjustments,” he asked, high ceilings, mostly glass, transparent. “We’re substantially downsizing our government bond portfolio, the first change. We’re exiting China entirely, and for good, we have little exposure left anyway, and I’m sure that’s fairly consensus, but that’s number two.” I nodded, waiting for the finale.
Transparency II: “The third is to significantly increase global public equity beta and fund it by reducing commitments to private equity,” continued the same investor. “We’ve been very large in private equity for decades, and generated strong returns, but we’re now shifting. Are others doing the same?” I shook my head and smiled, because you see, this is the kind of shift that in time will produce a quantum change in market behavior. And that’s a process we see as having started in 2020 and is likely to play out for the remainder of this decade, perhaps longer.
Build: “When we started One River in 2013, I decided to build a range of strategies as opposed to launching a flagship fund the way most firms do,” I said to the investor, high ceilings, mostly glass, transparent. “A suite of strategies would allow our clients to use our products to tilt their portfolios, complete them, and we could combine our strategies to deliver customized solutions,” I explained. “Having multiple strategies would also allow us to stay true to the investment principles for each; so that each could be used in precise ways to meet very specific objectives.”
Build II: “It was harder than expected to build a business with multiple strategies,” I continued, telling the One River story. “Each strategy had fewer assets than if we had one fund, so our operating expenses were higher, complexity too. We stared into the abyss a couple times.” Every entrepreneur does. “Then in 2020, we delivered very large gains to our clients when they most needed them and gave them liquidity in the depths of the crisis.” Our sizable outflows turned into even larger inflows. “Then came our crypto investments, which started an incredible chapter.”
Build III: “The bet we made in 2014 that codifying our discretionary investment principles into systematic strategies would produce unique return streams has really paid off,” I said. Systematic volatility and trend-following, including combinations of them, are nearly all our roughly $3bln aum today. “And now that we have the business scale I always wanted, and long tracks, we’re ready to combine what we do best into a single flagship strategy - a portfolio that’s resilient to adverse market environments, and that we expect to compound at higher rates than equities.”
Anecdote: “Here’s the challenge for this group,” I said to our investment and solutions teams in late-2023, all of us around the big table, crowdsourcing. “For years, investors asked us to combine our strategies into a portfolio they could allocate to and forget.” We never have. “It’s now time.” They nodded. “Use any combination of our existing strategies. Include equity beta. It must be highly liquid, it should outperform public and private equity over the medium to long-term, and it needs to do that reliably with smaller max drawdowns and a higher Sharpe.” That kicked off a process. A path emerged. We published the first whitepaper on the topic in January titled Convexity, Correlation, and Compounding [here] that described the foundation of our answer to the challenge. Then in May we published The Convexity (Re)Balancing Act [here] that explored optimal methods for rebalancing the various building blocks of our new portfolio. And in October we published the third and final installment titled The Absurdity of Certainty [here] which provided a quantitative analysis of the optimal size for this solution in a typical institutional portfolio. We modeled how our new portfolio would have performed using live track records for the various strategies we use to build it. And estimated how it would have performed using our strategy backtests starting in 2007. We analyzed its behavior in the GFC, the European debt crisis, the 2015 Chinese devaluation, Covid, the 2022 risk-parity breakdown, the major bull markets too. And we thought about how we would expect it to perform in the most important time horizon of all. The future. We considered how this portfolio would mitigate the risk of as many left tails as we could imagine in the decades ahead. And how it would capture gains in the bullish right tails that optimists expect will manifest. It met all the objectives. We call it the One River Total Portfolio. And it goes live on January 1st.
Good luck out there,
Eric Peters
Chief Investment Officer
One River Asset Management
Disclaimer
Weekend Notes is intended for use by accredited investors and qualified eligible clients. Futures, forward and options trading is speculative, involves substantial risk of loss and is not suitable for all investors. This information is not a solicitation for investment.
The information and opinions contained in the material include various forms of performance analysis, security characteristics and securities pricing estimates for the securities addressed. The Information is illustrative and is not intended to predict actual results which may differ substantially from those reflected in the Information. Any performance analysis contained herein is based upon assumptions about future market values which may prove to be different from the assumptions.
Results are based upon mathematical models that use inputs to calculate results. As with all models, results may vary significantly depending on the value of the inputs given. Inputs to these models include, but are not limited to, interest rate assumptions, collateral assumptions and default assumptions.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEIN G MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RE SULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.