“We’ve made very clear to China -- and many other countries have as well -- that they should not be supplying Russia with weapons for use in its aggression against Ukraine,” said Secretary of State Blinken after a meeting of G-7 foreign ministers. “It’s allowing Russia to continue the aggression against Ukraine and it’s also helping Russia overall rebuild its defense forces and defense capacity,” he said, as America works to hold the West together, while it manages its slow inward turn, and each major economic block scrambles to secure itself, as the geopolitical gears grind onward, on a little planet that is tearing itself apart.

Overall: “In a benign international environment, we trusted the global level playing field and the rules-based international order, expecting that others would do the same. But now the world is changing rapidly, and it has caught us by surprise,” said Mario Draghi, former European Central Bank Chief, speaking at the High-level Conference on the European Pillar of Social Rights. “Most importantly, other regions are no longer playing by the rules and are actively devising policies to enhance their competitive position. At best, these policies are designed to re-direct investment towards their own economies at the expense of ours; and at worst, they are designed to make us permanently dependent on them,” said Draghi, sounding an existential alarm on Europe. “China, for example, is aiming to capture and internalize all parts of the supply chain in green and advanced technologies and is securing the access to the required resources. This rapid supply expansion is leading to significant overcapacity in multiple sectors and threatening to undercut our industries,” he said. “The US, for its part, is using large-scale industrial policy to attract high-value domestic manufacturing capacity within its borders – including that of European firms – while using protectionism to shut out competitors and deploying its geopolitical power to re-orient and secure supply chains,” he said. “We have never had an equivalent “Industrial Deal” at the EU level, even though the Commission has been doing everything in its power to fill this gap. As such, despite a number of positive initiatives that are underway, we are still lacking an overall strategy for how to respond in multiple areas,” said Mario. “We are lacking a strategy for how to keep pace in an increasing cutthroat race for leadership in new technologies. Today we invest less in digital and advanced technologies than the US and China, including for defense, and we only have four global European tech players among the top 50 worldwide,” he warned, articulating the reasons why Europe is becoming even less relevant. “We are lacking a strategy for how to shield our traditional industries from an unlevel global playing field caused by asymmetries in regulations, subsidies and trade policies,” said Draghi, desperate to do whatever it takes, unlikely to make a difference.

To appreciate the profound challenges facing Europe, read the full Mario Draghi speech [here].

Week-in-Review: Mon: GS opens 4.5% higher after reporting a 28% jump in Q1 net income, TSLA falls 5.6% after announcing layoffs of 10% of workforce and two senior executives resign, US Treasury yields make new highs on blowout retail sales report, Fed’s Daly says “no urgency” to cut rates, China weakens yuan daily reference rate, Bank of Indonesia intervenes as rupee falls to record low, MSCI EM currency index makes new 2024 low, Canadian Manuf. Sales +0.7% (+0.7%e), US Empire Manuf -14.3 (-5.2e), US Adv Retail Sales +0.7% (+0.4%e), US Retail Sales Control Group +1.1% (+0.4%e), S&P -1.2%; Tue: S&P drops sharply as Fed’s Powell says policy can hold for “as long as needed,” UK Avg Wkly Earnings 5.6% (5.5%e), UK ILO Unemp 4.2% (4.0%e), Canadian Housing Starts 242.2k (243.5k e), Canadian CPI 2.9% (2.9%e), US Housing Starts 1321k (1485k e), US IP 0.4% (0.4%e), S&P -0.2%; Wed: Sec Yellen signals US will tolerate currency intervention in trilateral meeting with Japan and S Korea, US to reinstate Venezuela sanctions, Biden calls for higher tariffs on Chinese steel and aluminum, Fed’s Meister not in a hurry to cut, Fed Beige Book shows continued modest growth, Oil slides -3% after US inventories climb to 10m high, UK CPI 3.2% (3.1%e), EU CPI 2.9% (2.9%e), Aussie Unemp 3.8% (3.9%e), US Mortgage Applications +3.3%, S&P -0.6% Thu: Israel downgraded to A+ by S&P, S&P reduces outlook to negative on several private credit funds, Fed’s Williams signals no rush to lower rates, Fed’s Bostic signals patience, and Fed’s Kashkari says unchanged rates in 2024 is a possibility, ECB’s Knot says ECB is not the Fed’s “13th district” signaling comfort with ECB cuts even with the Fed pivoting away from cuts, ECB’s Nagel signals June cut, ECB’s Panetta says June may bring a rate change, Japan Tertiary Ind. Index 1.5% (0.5%e), US Jobless Claims 212k (215ke), US Philly Fed 15.5 (2.0e), US Existing Home Sales 4.19m (4.20me), Japan Natl CPI 2.7% (2.8%e), S&P -0.22%; Fri: Israel launches retaliatory strike on Iran, Sect. Blinken says US not part of Israeli strike, NVDA falls -10% on tech sector concerns, NFLX drops 9% on news it will stop reporting subscriber data, S&P closes back below 5000, Fed’s financial stability report points to persistent inflation as top risk, UK Retail Sales 0.8% (1.0%e), S&P -1.0%; Sat: Navy men’s lacrosse lost to Loyola 10-8.

Weekly Close: S&P 500 -3.0% and VIX +1.40 at +18.71. Nikkei -6.2%, Shanghai +1.5%, Euro Stoxx -1.2%, Bovespa -0.7%, MSCI World -2.1%, and MSCI Emerging -2.2%. USD rose +12.1% vs Ethereum, +7.9% vs Bitcoin, +2.7% vs Mexico, +2.6% vs Indonesia, +1.6% vs Brazil, +1.3% vs South Africa, +0.9% vs Yen, +0.8% vs Australia, +0.8% vs Russia, +0.7% vs Sterling, +0.5% vs Turkey, +0.3% vs Sweden, +0.1% vs India, and flat vs China. USD fell -1.5% vs Chile, -0.2% vs Canada, and -0.1% vs Euro. Gold +1.4%, Silver +1.5%, Oil -2.8%, Copper +5.4%, Iron Ore +9.2%, Corn -1.0%. 10yr Inflation Breakevens (EU +1bp at 2.15%, US +1bp at 2.41%, JP -1bp at 1.47%, and UK +1bp at 3.76%). 2yr Notes +9bps at 4.99% and 10yr Notes +10bps at 4.62%.

2024 Year-to-Date Close: Argentina +18.8% priced in US dollars (+27.9% priced in pesos), Turkey +17.7% priced in US dollars (+29.8% priced in lira), Venezuela +10.1% priced in dollars (+11.6% priced in pesos), Denmark +9.9% in dollars (+14.2% in krone), Colombia +9.6% (+11.5%), Ireland +9.2% (+13.4%), Russia +7.6% (+12%), Italy +7.6% (+11.8%), Netherlands +5.3% (+9.3%), Euro Stoxx 50 +4.7% (+8.8%), Saudi Arabia +4.4% (+4.5%), S&P 500 +4.1% in dollars, Greece +3.7% (+7.7%), MSCI World +3.5% in dollars, Czech Republic +3.2% (+9.7%), Poland +2.9% (+6%), France +2.4% (+6.4%), Taiwan +2.4% (+8.9%), Spain +2.3% (+6.2%), Malaysia +2.1% (+6.4%), Germany +2% (+5.9%), NASDAQ +1.8% in dollars, India +1.7% (+1.9%), China +1.1% (+3%), Japan +0.9% (+10.8%), Hungary +0.2% (+7.3%), Canada 0% (+4.1%), Belgium -0.6% (+3.2%), Austria -0.8% (+3%), UK -0.9% (+2.1%), Israel -3% (+2.5%), Norway -3.5% (+5.1%), Philippines -3.8% (-0.1%), Russell -3.9% in dollars, Sweden -4.1% (+4.4%), Mexico -4.1% (-2.7%), UAE -4.7% (-4.7%), Singapore -5% (-2%), HK -5.1% (-4.8%), Chile -5.4% (+2.7%), Finland -6.2% (-2.6%), Australia -6.3% (-0.3%), Switzerland -6.5% (+1.4%), New Zealand -6.9% (+0.2%), Indonesia -7.5% (-2.6%), Korea -8.7% (-2.4%), South Africa -8.7% (-4.5%), Thailand -12.6% (-5.9%), Brazil -12.9% (-6.8%), Portugal -14.9% (-11.7%).

Utopia: “We added solar and wind like it was going out of style,” said the CIO of the well-regarded US fund. “We have ample land, wind in the middle of the country.” Federal subsidies make electricity almost free. “But it’s a Catch-22 where we’re adding capacity, but reliability is declining.” In Feb 2021 Texas suffered a catastrophic electrical grid failure. Renewables went offline when they were most needed. Gas turbines froze too. 4mm homes went without power. Hundreds died. “Now policymakers across the spectrum seem to be acknowledging the need for both renewables and hydrocarbons.”

Utopia II: “Back in 2018 there was a utopian vision,” continued the same CIO. “The economics were there, the physics allowed it, all we needed was political will.” Net zero could be achieved painlessly, while boosting growth. “But we’ve learned wind turbines frequently break, and don’t recycle well. They kill lots of large birds. Electric cars take a year to repair when you crash them.” The residual values are lousy when you sell them. “So now we’re asking better questions and considering the true costs and benefits. The tradeoffs. We’re growing up.”

Utopia III: “Asking good questions is always better for society,” said the CIO. “There is pushback on the dogmatic view that the future of the world hangs in the balance, and those taking the most extreme positions on the matter have been undermined by an unwillingness to consider nuclear at any price,” he said. “European banks will not fund hydrocarbons, it’s almost a religious belief at this point. But we will fund them because they’re a vital part of tomorrow’s energy mix and we can earn double-digit returns doing so.”

Utopia IV: “If we want to build BMWs using windmills, it’s going to cost a lot to do it, and historically that’s the kind of thing the government must subsidize,” said the CIO. “It’s a societal good, like building parks in cities.” It is not a purely economic decision from the private sector’s standpoint. “A chip factory is being built in Taylor Texas with $6bln in Federal subsidies. Samsung is investing more than $30bln. That’s a societal good too. Because for security reasons, we may all sleep better at night buying some of our chips from Taylor instead of Taipei. But they may well cost more.”

Utopia V: “Ultimately, these decisions are about whether we’re willing to settle for something less good in exchange for something more reliable,” continued the CIO. “If we want something as good and more reliable, it’ll cost more money. A way to think about these increased costs is a form of insurance.” Insuring our children’s futures against the risk of cataclysmic climate change. Insuring our access to advanced chips against military conflict over Taiwan. “Thinking through long-term risks is always a healthy exercise, and insuring against them sometimes requires government funding.”

Utopia VI: “Europe made some naïve choices when they went through this exercise,” he said. “Germany shut all its nuclear power plants.” Which required it to increase its dependency on cheap Russian gas, strengthening Putin’s hand, which he then played in Ukraine. “They were going the opposite way; they were essentially selling insurance instead of buying it.” This of course, is why it is vital that societies ask good questions and consider the true costs and benefits of big decisions. “And the consequence is that Europe is deindustrializing. It’s stunning.”

Anecdote: “I tried to jump into the Potomac when I was young and my mother nearly killed me,” said the CIO. “Now you could drink from our rivers if you had to, which is great, but the cleanup has meant everything is more expensive.” The Environmental Protection Agency was founded in 1970 by Nixon to protect human health and the environment. We’re all better for it. “Across an economy, we make both public and private investments. In the 1970s, we made big public investments.” The returns accrue to society, but rarely to capital owners, and often at the expense of them. “I would argue that the investments we made back then were good, but the tradeoffs we made included upward inflationary pressure and lower real rates of returns on private investments.” The S&P 500 peaked in Nov 1968 and swung in a wild range through the 1970s, ending the decade unchanged in nominal terms. In real terms, it lost roughly 50% of its value during that period. From 1980 to present, the S&P 500 is roughly 42x higher in nominal terms and 10x higher in real terms (none of these returns include dividends). It’s been a great run for capital owners since 1980. “The government will most likely continue to borrow and print to subsidize societal preferences for renewable energy and reliable supply chains,” he said. “It is near-term uneconomic in that windmills and solar plants don’t cover their costs to private investors without federal subsidies. But they satisfy our collective preferences. They help insure us against risks we see geopolitically and environmentally,” he said. “That’s why I see us headed into a 1970s-style inflation. Three, four, five percent inflation is probably where we’ll settle in.” Anything above five percent tends to see equity multiple compression. “It’s probably good for investors who measure their returns in nominal terms, but real returns will be lower looking forward, and inflation will continue to be tough for everyday people.”

Good luck out there,

Eric Peters

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.