“Right now, people’s wages are being eaten up by inflation,” said Jay Powell. “So what you want to do is you want to have inflation stable and then have a very strong labor market where the biggest wage gains are going to the people at the bottom end of the spectrum,” continued the Fed Chairman. No doubt that’s right. With the pendulum now retreating from peak inequality, there are two ways to narrow the divide. The fastest, of course, is through making the wealthy poor, or at least less rich in real terms, which started this year in earnest and has a very long way to go. The preferable way is to raise the poor. To sustainably lift low earners requires our economy to become more productive, so laborers receive a higher share of the nation’s economic pie. An economy that is deglobalizing will become less productive, at least for some years. So the rebalance must come through a shift in the distribution of America’s economic pie from capital owners to laborers, which lifts inflation, shrinks corporate profit margins, and lowers multiples. This week’s intervention by Democrats in Congress to limit our rail worker’s negotiation ability demonstrates that even our labor-friendly party does not have the stomach for the resurgence of union power. “And we had that at the end of the very long expansion that ended with the pandemic. That’s not what we have now. Now, for most workers, wages are being eaten up by inflation,” explained Powell, nervous, without the tools to mediate this rising conflict. “That’s not true at the bottom end, where wage increases are higher than inflation, a good thing. But if you want to have a sustainable, strong labor market where real wages are going up right across the wage spectrum, especially for people at the lower end, you’ve got to have price stability,” he explained, unsure how to achieve it given the arc of this pendulum. “And until we restore that, we can’t, we can’t get back to that place where we, where we kind of were for the two years before the pandemic hit.”
Marcel Kasumovich, Deputy CIO of One River Digital, published an interesting piece on macro conditions as seen through our propriety Macro Pulse index, and how it intersects with digital asset prices. To read it, [click here].
Week-in-Review (expressed in YoY terms): Mon: China protests over Covid lockdowns spread, Fed’s Williams say labor demand & inflation higher than expected, Fed’s Bullard says market is underpricing Fed hikes, ECB’s Knot says ‘bit of a joke’ to talk of over-tightening, China developers can sell shares again, OPEC+ considering production cuts, ECB’s Lagarde doesn’t think we’ve reached peak inflation, Canada CA bal -11.1b (-4b exp), US Dallas Fed mfg activity -14.4 (-21e), S&P -1.5%; Tue: China says current covid strain is less potent / accelerating vax roll-out for elderly / adjusts restrictions for Zhengzhou, OPEC+ leaning to flat production decision, Germany / Qatar sign 15-year LNG deal, NATO foreign ministers meet in Bucharest / Turkey shows signs of softening on stance against Finland / Sweden NATO membership, BOE Gov Bailey says UK bond mkt “not back to normal” despite beginning to sell gilts bought during recent emergency action, Biden urges congress to block nat’l rail strike, Japan ret sales 4.3% (5.1%e), Japan unemp 2.6% (2.5%e), Turkey trd bal -7.87b (-8b exp), Sweden ret sales -7.7% (-5.4%p), Swiss 3Q GDP 0.5% (1%e), Taiwan 3Q GDP 4.01% (4.1%e), S. Africa unemp 32.9% (33.5%e), UK cons credit 7% (7.1%p), Italy PPI 33.7% (52.9%p), Brazil IGPM infl 5.9% (6.13%e), Spain CPI 6.6% (7.1%e), Germany CPI 11.3% as exp, Canada 3Q GDP 2.9% (1.5%e), US CS home prices 10.43% (10.55%e), US cons conf 100.2 (100e), S&P -0.2%; Wed: Powell signals slower pace of hikes and more cautious approach to hikes in the future / need substantially more evidence of inflation declining / “very plausible” path to a soft landing, Guangzhou lifts lockdowns / China covid official says it’s a new phase, Riksbank’s Floden says policy is ‘restrictive’, Fed’s Beige Book implies global economy flat to up slightly, EU infl softer for first time in 18m 10% vs 10.4%e, US senate passes bill protecting same sex marriage, Australia CPI 6.9% (7.6%e) / Trimmed Mean CPI 5.3% (5.7%e), Australia private sector credit 9.5% as exp, China mfg PMI 48 (49e) / serv 46.7 (48e) / comp 47.1 (49p), Turkey 3Q GDP 3.9% (4.4%e), France CPI 7.1% (7%e), Germany unemp 5.6% (5.5%e), Italy CPI 12.5% (12.1%e), Brazil unemp 8.3% (8.5%e), India 3Q GDP 6.3% (6.2%e), US ADP emp chg 127k (200k exp), US 3Q GDP (2nd) 2.9% (2.8%e), Chicago PMI 37.2 (47e), US pending home sales -36.7% (-35.2%e), US JOLTS job openings 10.334m (10.25m exp), Russia ret sales -9.7% (-12%e) / unemp 3.9% (4.1%e), S&P +3.1%; Thu: S. Africa president Ramaphosa found to have violated constitution / rumored to be considering resigning, Russian foreign minister Lavrov defended drone strikes/missile attacks on Ukrainian civilian infrastructure, China’s top covid official Sun did not mention zero covid policy in a speech / talked about weakening variant and getting more vaccinated, BOJ’s Noguchi (strong dove) says shift in long held deflationary environment is beginning to materialize, Japan capital spending 9.8% (6.4%e), China Caixin PMI mfg 49.4 (48.9e), Germany ret sales -6.6% (-2.9%e), UK house prices 4.4% (5.8%e), Swiss CPI 3% as exp) / Core CPI 1.9% as exp, EU mfg PMI 47.1 (47.3e), Italy unemp 7.8% (8%e), EU unemp 6.5% (6.6%e), Brazil 3Q GDP 3.6% (3.7%e), US PCE Deflator 6% as exp / Core PCE 55 as exp, US init claims 225k (235k exp), US mfg PMI 47.7 (47.6e), US ISM mfg 49 (49.7e) / prices paid 43 (45.9e) / emp 48.4 (50e), S&P -0.1%; Fri: US NFP 263k (200k exp) / unemp 3.7% as exp / AHE 5.1% (4.6%e), ANC allies of S. African President Ramaphosa voiced their support for him amid the panel review that said he violated the constitution, EU leaders near an agreement on Russian oil price cap ($60/barrel), BOJ new board member Tamura said appropriate to conduct a review of monetary policy at the right time – joining a growing number of people discussing the possibility of review of policy, ECB’s Lagarde says must convince public that inflation will be brought down in a timely manner, ECB’s Nagel says mkt has sufficient resilience to handle passive QT, Peru’s congress approves impeachment proceedings against President Castillo, S. Korea CPI 5% (5.2%e) / Core CPI 4.8% (4.5%e), US vehicle sales 14.14m MoM (14.5m exp), Norway unemp 1.6% (1.7%e), EU PPI 30.8% (31.7%e), Canada emp chg 10.1k (10k exp) / unemp 5.1% (5.3%e), S&P -0.1%.
Weekly Close: S&P 500 +1.1% and VIX -1.44 at +19.06. Nikkei -1.8%, Shanghai +1.8%, Euro Stoxx +0.6%, Bovespa +2.7%, MSCI World +1.1%, and MSCI Emerging +3.5%. USD rose +2.5% vs South Africa, +2.0% vs Russia, +0.7% vs Canada, +0.3% vs Mexico, and +0.2% vs Turkey. USD fell -7.1% vs Ethereum, -4.3% vs Chile, -3.5% vs Yen, -3.3% vs Brazil, -2.5% vs Bitcoin, -1.6% vs Indonesia, -1.6% vs China, -1.5% vs Sterling, -1.3% vs Euro, -1.1% vs Sweden, -0.6% vs Australia, and -0.4% vs India. Gold +2.3%, Silver +7.6%, Oil +4.9%, Copper +6.1%, Iron Ore +2.3%, Corn -3.7%. 5y5y inflation swaps (EU +7bps at 2.38%, US +2bps at 2.60%, JP flat at 0.90%, and UK -5bps at 3.43%). 2yr Notes -18bps at 4.27% and 10yr Notes -19bps at 3.49%.
Nov Monthly Close: S&P 500 +5.4% and VIX -5.30 at +20.58. Nikkei +1.4%, Shanghai +8.9%, Euro Stoxx +6.8%, Bovespa -3.1%, MSCI World +6.8%, and MSCI Emerging +14.6%. USD rose +23.7% vs Ethereum, +20.9% vs Bitcoin, +0.9% vs Indonesia, +0.2% vs Brazil, and flat vs Turkey. USD fell -7.2% vs Yen, -6.3% vs South Africa, -5.7% vs Australia, -5.2% vs Chile, -5.0% vs Euro, -4.9% vs Sweden, -4.9% vs Sterling, -2.9% vs China, -2.7% vs Mexico, -1.6% vs India, -1.6% vs Canada, and -1.3% vs Russia. Gold +6.3%, Silver +12.9%, Oil -5.7%, Copper +11.3%, Iron Ore +15.5%, Corn -4.3%. 5y5y inflation swaps (EU +1bp at 2.35%, US -3bps at 2.64%, JP +7bps at 0.90%, and UK -10bps at 3.42%). 2yr Notes -17bps at 4.31% and 10yr Notes -44bps at 3.61%.
YTD Equity Indexes (high-to-low): Turkey +89.7% priced in US dollars (+167.2% priced in lira), UAE +24.3% priced in US dollars (+24.3% priced in dirham), Argentina +24.2% priced in dollars (+103.2% in pesos), Chile +18.7% in dollars (+22.8% in pesos), Brazil +13.9% (+6.8%), Venezuela +9.7% (+158.9%), Singapore +4.1% (+4.3%), Mexico +1.2% (-3.8%), Portugal -0.4% (+7.8%), Indonesia -0.9% (+6.7%), India -1.4% (+7.7%), Saudi Arabia -4.2% (-4.1%), Thailand -4.9% (-1%), Norway -6% (+4.4%), Greece -6.5% (+1.2%), UK -7.2% (+2.3%), South Africa -7.4% (+1.8%), Australia -8.4% (-1.9%), Canada -9.4% (-3.5%), Denmark -9.4% (-2.6%), Malaysia -10.4% (-5.5%), Spain -10.5% (-3.8%), France -12.9% (-5.7%), Euro Stoxx 50 -14.5% (-7.5%), S&P 500 -14.6%, Israel -14.8% (-7%), Germany -14.9% (-8.5%), Switzerland -15.2% (-13%), Netherlands -15.3% (-8.4%), MSCI World -15.4% priced in dollars, Russell -15.7%, Italy -16.3% (-10%), Philippines -16.5% (-8.9%), New Zealand -16.6% (-10.7%), Japan -17.5% (-3.5%), Finland -18.7% (-12.6%), Belgium -19.5% (-12.9%), HK -20% (-20.2%), Ireland -20.2% (-13.6%), Czech Republic -20.3% (-15.9%), China -21.9% (-13.3%), Austria -22.7% (-16.9%), Sweden -23% (-12%), Hungary -24.5% (-9.7%), Colombia -25% (-12.1%), Korea -25.2% (-18.2%), Taiwan -25.5% (-17.8%), Poland -26% (-18.9%), NASDAQ -26.7%, Russia -31.3% (-42.4%).
Wandering: “Everyone has been traumatized by something unexpected,” he said, the two of us catching up, wandering, our regular free-form talks. “So they try to organize their lives and create structures that they feel give them control,” continued the CIO, a brilliant investor. “But there is no such thing as certainty, only the illusion of having the ability to control our destiny.” Last year at this time, markets priced the Fed Funds rate would be 1% now, rising gradually to 2.25%. And last month, SBF was seen by many as a savior savant. We fill our lives with fantasy.
Wandering II: “Those who can focus on the present, perform better and are generally happier,” continued my friend. “When you’re continually focused on the next thing, you’re less successful in the moment,” he said. “We all know this, and we’re trained to be present, but somehow the structure and incentives inherent in society push us to spend too much of our lives thinking about how to secure a stable future for ourselves.” The more money we accumulate, the more this tends to be the case. “Most people eventually find themselves slave to the future.”
Wandering III: “In market parlance, this phenomenon is the equivalent to selling volatility,” he said. “People view the income received from buying bonds or selling volatility to be a known quantity, a guarantee of sorts. But the reality is the certainty of such coupons is an illusion,” he said. “The truth is that buying convexity is a better way to live, because it is inherently less fragile.” But you must buy enough of it, making numerous bets, whether in entrepreneurial business-building or investing. “You must expose yourself to upside and accept the downside.”
Wandering IV: “People hate holding cash, because they forego locking into a coupon,” he said. “They think it is a drag on their portfolios, but cash is an option.” It gives you an ability to buy something in the future, even if you do not yet know what you’ll buy. “Most people dream of someday having enough money so that they can purchase enough coupons to allow them to live risk-free forever.” A bulletproof life. “But getting to a place where you no longer need to think is emotionally quite dumb. The thrill of thinking and being is what makes us human.”
Wandering V: “Building wealth requires that you take risk, buy convexity, subject yourself to uncertainty, reality,” he said. “The portfolio that awaits most people when they get to the point of having enough money is short volatility. It is buying yield. It is devoid of creativity. It is acquiring commercial properties. Covid happens, you’re financially destroyed,” he said. “Selling volatility and collecting risk premiums is what people generally do when they try to create a certain future for themselves, and it tends to work for a time, but it’s a dangerous business.”
Wandering VI: “One of the great ironies in both life and investing is that the harder you try to protect yourself from something, the more likely it is to find you,” he said. “We are best when we accept that the thing we fear most is what we must embrace,” said my friend. “And it’s often the thing that we tell ourselves most regularly that is our greatest self-deception. Mine is that I tell myself I’m bad with people. I don’t like being social and use that as justification for creating the detached life I live. The truth is probably that I fear letting people down. And everyone has such lies they tell themselves. They’re usually staring us right in the face.”
Anecdote: “It was a hoarder house, the TV blaring, a difficult scene, interesting,” said Teddy. “She was on the floor in the back room, surrounded by junk, with very little space for us to maneuver,” continued my son, seventeen, a senior. “I was the lead EMT on the call. It was my first time in charge,” he said, calm. “Everyone has a role. I had one person start chest compressions, and had Liv prepare the AED,” said Teddy, reminding me that his older sister was on the 911 call too. She had already seen a lot in her years as an EMT. “I cleared her airway and started bagging, forcing air into her lungs with the device.” Parental instincts to protect children make it hard to expose them in real ways. But this is how we grow stronger. It is difficult to know when to begin. Liv became an EMT first. Teddy followed. Mara and I supported it. “You tend to remember strange little details from traumatic scenes, and there was this Verizon commercial blasting on the TV as I kneeled over her, looking directly into her eyes, which stayed open, she wasn’t blinking.” Mara and I knew they’d experience things that few would in their lifetimes, and we hoped their support network would help them process whatever fate threw their way. The reward seemed to outweigh the risk. But of course, we couldn’t know for sure – that is the essence of real exposure. “We got back to the ambulance, and it felt strange. She was my first code. We had been taught that people die, get used to it. We’re well trained. And I got great feedback on my scene management. I learned you can do all the right things but still lose,” said Teddy. “Liv was helpful. She felt the same way after her first code, had the same realization. Knowing I wasn’t alone, and with people who can appreciate what I had gone through was helpful. But in the end, I had to process it myself. Come to terms,” he said. “Now I don’t think about it much, unless I’m having a conversation like this one,” said Teddy, looking directly at me. “Although, whenever I hear a Verizon commercial, I see her eyes.”
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.