wknd
notes


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wknd
notes

Each Sunday morning for over a decade, One River’s CIO, Eric Peters, has published “Wknd Notes.” It is an unorthodox take on markets, politics, and policy that’s widely read across our industry and within global policy/political circles. Eric has written for as long as he has traded and the discipline is part of his investment process. Drawing on wide-ranging, multi-disciplinary research, historical study, and discussions with interesting characters throughout the world, Eric collects those things he finds most thought-provoking each week and distills them into a concise letter. At times the ideas and views are consistent with his own, but just as often, they challenge his positions and it is this openness to opposing views that helps him maintain a flexible mind in the search for emerging opportunities and risks. His writing is a reflection of how he thinks, and as such it is as focused on identifying the right questions to ask as it is on seeking answers. The publication of this work is Eric’s way of exchanging ideas/information and developing dialogue with a network grown over his thirty-one-year career.

wknd notes: Squeezing Scarce Resources

Kishida’s cabinet formally adopted a policy to extend the life of its nuclear plants beyond the self-imposed sixty-year limit. Japan’s engineers had originally put a cap in place for all sorts of safety-related reasons. But times change, risks change, societies too. With the Ukraine war reshaping the global energy map, Japanese memories of energy shortages in the run up to WWII apparently outweigh more recent scars from Fukushima. And besides, when you count sixty years in the life of a nuclear power plant, you probably shouldn’t count the time it was turned off for maintenance. Right? It’s odd that the engineers who counted sixty in the first place overlooked that. But whatever. If you strip out the years these nuclear reactors were on vacation, you can extend their sixty-year life to seventy. Presto. New capacity. Japan also announced $152bln in green transformation bonds to build new nukes, renewables, etc. Kishida’s government announced that $1.14trln in public/private investment will be needed over the coming decade. But Japan was not alone, of course. Macron is trying to extend the life of France’s work force past the age of sixty-two. Apparently, when the policy was first implemented, French engineers failed to take into consideration maintenance and vacation time. Were you to add this downtime back in, the productive life of a French worker would extend to something north of a century. But unlike Japan’s nuclear reactors, French workers can strike and vote, so Macron sought only an extra two years. Hundreds of thousands are now striking, which if properly counted would push out the work life of a French worker another ten years. And these are the sorts of manipulations that will be more common now that the world is transitioning from decades of financial over-engineering to a world of squeezing scarce resources out of a globalized economy that was over-optimized for peak profitability.

 

Week-in-Review: Mon: Fed’s loan officer survey shows further tightening in conditions, Fed’s Bostic says strong payrolls may mean higher peak rates, US to apply 200% tariff on Russian aluminum, BOE’s Mann says risk of under-tightening worse than over-tightening, Summers says ‘soft landing’ in US looking more likely, China/Australia trade officials meet for first time since 2019, Turkey/Syria struggling to get aid to area’s devastated by earthquake / halts oil flow through key pipeline, Japanese markets responded to increased rumors that Amamiya (dovish) is going to be named next BOJ gov, Indonesia 4Q GDP 5.01% (4.92%e), Germany factory orders -10.1% (11.6%e), EU ret sales -2.8% (-2.7%e), S&P -0.6%; Tue: RBA hikes 25bp as exp / hawkish tilt reiterated, Fed’s Powell says payrolls shows why disinflation will take time but generally keeps to post-FOMC (dovish) message, Fed’s Kashkari still wants terminal at 5.4%, Germany lifts the number of tanks it’s sending to Ukraine, HK/Mainland China traffic doubles to highest level since Covid as border fully reopened, Japanese wage growth rises to 26y high (4.8% vs 2.5%e), MSFT unveils OpenAi powered Bing search, Germany IP -3.9% (-1.6%e), US trade balance -$67.4b MoM (-$68.5b exp), US consumer credit $11.565b ($25b exp), S&P +1.3%; Wed: RBI hiked 25bp as exp / maintained hawkish stance (kept door open for more hikes), Biden delivers SOTU with little surprises / continued to urge resolution to debt ceiling, Manheim used car prices increase, China signals may be willing to soften stance on Taiwan and roll back ban on Taiwanese food imports, Turkey resumed oil flows through Ceyhan pipeline after shut down post-earthquake, Fed’s Williams says terminal rate in low 5s remains reasonable / Waller says rates could stay higher longer than the market thinks, ECBs Knot says another 50bp might be needed in May / Guindos says market may be too optimistic on disinflation /Kazaks sees no reason to stop after March, BOC minutes reveal a pause was considered in January, large buyer of Feb 4050 SPX put (~$20m of premium in 7 day option), Russia ret sales -10.5% (-8.6%e), S&P -1.1%; Thu: Riksbank hikes 50bp (as exp) / revised rate path higher (hawkish) / announced faster balance sheet rundown, Mexico CB hikes 50bp (only 25bp exp), ECB’s Nagel favors ‘resolute action’ to tackle infl, Russia wealth fund to sell all EUR assets, S. Africa declares state of disaster amid energy crisis, Disney beats / plans to cut 7k jobs in restructuring, Germany CPI 9.2% (10%e), Mexico CPI 7.91% as exp / Core CPI 8.45% (8.44%e), Brazil IPCA infl 5.77% (5.81%e), US init claims 196k (190k exp), S&P -0.9%; Fri: multiple sources report Kazuo Ueda to be nominated as next BOJ gov on 2/14 – big surprise as Amamiya declined the role, US shoots down “unidentified object” over Alaska, Russia to cut oil production by 500k bpd in response to price caps, China new loans reach highest on record (4.9T (4.2T exp)), premium on SPX 4050 feb puts doubled (~$43m), Russia CB unch as exp, US sanctions 6 firms connected to Spy Balloon, Japan PPI 9.5% (9.7%e), China CPI 2.1% as exp / PPI -0.8% (-0.5%e), UK IP -4% (-5.2%e) / mfg prod -5.7% (-6.1%e), Norway CPI 7% (6.5%e) / Core CPI 6.4% (6%e), Turkey unemp 10.3% (10.2%p), Hungary CPI 25.7% (25.2%e), China 4Q CA $106.8b (144.3b prev), Mexico IP 3% (2.1%e), Canada emp change 150k (15k exp) / unemp 5% (5.1%e), US UofM sentiment 66.4 (65e) / 1y infl exp 4.2% (4%e) / 5-10y infl exp 2.9% as exp, Russia CPI 11.77% (11.63%e), S&P +0.2%.

 

Manufacturing PMI (high-to-low): India 55.4 (previous month 57.8), Hungary 55 (previous month 59.3), Russia 52.6 (previous 53), Indonesia 51.3/50.9, Hong Kong 51.2/49.6, Canada 51/49.2, France 50.5/49.2, Italy 50.4/48.5, Turkey 50.1/48.1, Norway 50/50, Singapore 49.8/49.7, Netherlands 49.6/48.6, Switzerland 49.3/54.5, China 49.2/49, Greece 49.2/47.2, Mexico 48.9/51.3, Japan 48.9/48.9, South Africa 48.7/50.2, South Korea 48.5/48.2, Spain 48.4/46.4, Austria 48.4/47.3, Poland 47.5/45.6, Brazil 47.5/44.2, US 47.4/48.4, Vietnam 47.4/46.4, Germany 47.3/47.1, UK 47/45.3, Sweden 46.8/45.9, Czech Republic 44.6/42.6, Taiwan 44.3/44.6. Services PMI: India 57.2/58.5, Ireland 54.1/52.7, China 52.9/48, Spain 52.7/51.6, Japan 52.3/51.1, Italy 51.2/49.9, Sweden 51/52.9, Germany 50.7/49.2, Brazil 50.7/51, France 49.4/49.5, UK 48.7/49.9, Russia 48.7/45.9, US 46.8/44.7.

 

Weekly Close: S&P 500 -1.1% and VIX +2.20 at +20.53. Nikkei +0.6%, Shanghai -0.1%, Euro Stoxx -0.6%, Bovespa -0.4%, MSCI World -1.3%, and MSCI Emerging -2.4%. USD rose +8.4% vs Ethereum, +8.3% vs Bitcoin, +3.2% vs Russia, +2.2% vs South Africa, +1.6% vs Indonesia, +1.6% vs Brazil, +1.1% vs Euro, +0.8% vs India, +0.2% vs China, +0.2% vs Chile, +0.1% vs Yen, and +0.1% vs Australia. USD fell -1.6% vs Mexico, -0.7% vs Sweden, -0.4% vs Canada, -0.1% vs Turkey, and flat vs Sterling. Gold -0.1%, Silver -1.5%, Oil +8.6%, Copper -1.0%, Iron Ore +0.9%, Corn +0.4%. 10yr Breakevens (EU +7bps at 2.25%, US +11bps at 2.34%, JP +6bps at 0.72%, and UK +10bps at 3.53%). 2yr Notes +23bps at 4.52% and 10yr Notes +21bps at 3.74%.

 

Year-to-Date Equities (high to low): Czech Republic +16.4% priced in US dollars (+14.9% priced in koruna), Argentina +15% priced in US dollars (+23.7% priced in pesos), Italy +14.6% priced in dollars (+15% in euros), Greece +14.4% in dollars (+14.9% in euros), Mexico +12.9% (+8.3%), Taiwan +12.5% (+10.2%), NASDAQ +12%, Spain +10.3% (+10.8%), Euro Stoxx 50 +10.2% (+10.7%), Ireland +10.2% (+10.6%), Korea +10% (+10.4%), Austria +9.7% (+10.2%), France +9.7% (+10.1%), Germany +9.5% (+9.9%), Russell +8.9%, Chile +8.8% (+2.5%), Netherlands +8.7% (+9.2%), Canada +7.7% (+6.3%), Hungary +7.6% (+5.1%), Sweden +7.1% (+7.7%), Australia +7.1% (+5.6%), Philippines +7.1% (+4.7%), MSCI World +7% priced in dollars, China +6.9% (+5.5%), S&P 500 +6.5%, HK +6.5% (+7.1%), Japan +5.6% (+6%), UK +5.4% (+5.8%), New Zealand +5.3% (+6.1%), Belgium +4.6% (+5%), Russia +4.1% (+5%), Singapore +4% (+3.4%), South Africa +3.9% (+9.1%), Switzerland +3.4% (+3.7%), Finland +3.1% (+3.5%), Denmark +3% (+3.6%), Indonesia +2.5% (+0.4%), Thailand +2.5% (-0.2%), Poland +1.9% (+4.4%), Israel +0.9% (+0.3%), Malaysia +0.2% (-1.4%), Norway -0.2% (+3.4%), Saudi Arabia -0.4% (-0.6%), Portugal -0.5% (-0.1%), Brazil -0.7% (-1.5%), India -1.2% (-1.4%), UAE -1.9% (-1.8%), Colombia -2.1% (-3.1%), Venezuela -9.9% (+26.8%), Turkey -24.5% (-24%).

 

Energy Transition: Modi opened India Energy Week 2023 by forecasting a 500% increase in his nation’s natural gas consumption, without specifying a target date. He predicted India’s share of global oil consumption will increase from 5% to 11%. OPEC sees India adding 6.3mm bpd (barrels per day) of demand through 2045, when it sees daily global consumption at 110mm bpd versus 97mm bpd in 2021. From here to 2045, OPEC sees a need for $12.1trln of investment in production. India will be the largest source of incremental oil demand in that period.

 

Energy Transition II: In the 1990s, Germany had 19 nuclear power plants that produced one-third of the nation’s electricity. Only three remain, generating 6% of supply. Scholz delayed the decommissioning of one, following the Ukraine invasion. Public support for nukes has rebounded. “If someone decides to do so now,” Scholz said about building new nukes, “they would have to spend 12-18bln euros on each power plant and it wouldn’t open until 2037 or 2038. And besides, the fuel rods are generally imported from Russia. As such, one should think about what one does.”

 

Energy Transition III: China is planning to build 150 nuclear reactors in the next 15yrs, more than the rest of the world built in the past 35yrs (the US has 92 with 2 under construction, Europe 180 with 8 under construction). Beijing plans to build 30 reactors overseas, too. By 2060, China hopes to replace its 2,990 coal-fired power plants with nuclear and renewable. In the meantime, coal-fired electricity production races ahead. In 2021, China had 25 gigawatts of coal-fired plants under construction, 6.4 gigawatts in India, and 3 gigawatts in South Korea and 2.8 in Indonesia.

 

Energy Transition IV: China has 1,118 operational coal-fired power plants and is building 20-30 per year. India has 285 coal-fired plants. Together, they have 2.8bln people. The US has 225 coal-fired plants and 335mm people. Japan has 92 plants and 126mm people. Germany has 63 plants and 84mm people. All nations are in a transition. Given the long lead time to build energy infrastructure, the long-term winners will not be those that simply cut emissions fastest, but those that do so while positioning themselves to generate the lowest cost power decades into the future.

 

Commodity Traders: “The whole market is short energy,” said the CIO. “Natural gas prices came down, and it created a respite in inflation trades. It sucked people back into tech. It’s all the same trade.” China reopening will boost oil demand by at least 2.5mm bpd this year, and there’s little excess capacity. “People look at oil futures out the curve and think they contain information. But they don’t.” There are too few fundamental traders left. “Oil futures are based on CTAs. CTAs chase prices higher and lower. It’s a joke. And prices are headed much higher.”

 

Anecdote: “We spent a decade or more in equilibrium,” said the CIO. “The economy was highly indebted and overleveraged, which allowed the Fed to have a large influence over it with relatively small changes in rates.” Forward guidance and balance sheet adjustments too. “Then we went out and did Covid, handing everyone money,” he said. “To solve the problem Covid created, you needed to measure the depth of the economic hole and then fill it exactly. But with so much uncertainty, our politicians and economists overestimated the size of the hole.” They overfilled it to contain the crisis. Besides, neither party can resist an opportunity to run deficits. “So, in the end we financed a 40% GDP hole when what was needed was closer to 7%,” he said. “And this took an economy that had been balanced on a knife’s edge and pushed it miles away from anything remotely sharp.” Now, everyone is looking at the Fed’s efforts to hike rates and reduce its balance sheet and are forecasting the effects of its actions by looking through the lens of recent cycles when the economy balanced on that razor. “The truth is that there’s no way to look at this economy and forecast what comes next without contextualizing it with the fact that we filled a 40% GDP hole,” he said. “So we are going to have an economy running tight, hot, and that’s before energy markets try to digest China’s reopening.” Which will almost certainly send oil prices sharply higher into the summer driving season. “This set up is about as bad as it gets for the Fed - a hot economy and rising energy prices. But right here, right now, it still feels good. A warm winter, lower energy prices, China’s reopening hasn’t kicked in. So inflation is softening, it’s the calm,” he said. “Investors are holding onto their lazy longs. They don’t want to miss the soft landing.” It is the classic bear trap. “Remember, no portfolio does well when energy really rallies. And portfolios don’t do well when the economy is running hot. Never.” 

 

 

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.

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