“The tenant downstairs wants to take over the whole building,” said the real estate broker. “We’re not moving, we absolutely love our office and have 3yrs left on the lease,” I replied. “The tenant asked if you would consider putting a price on it,” said the broker. Not everything in life has a price, just most things. And good business is about remaining scrappy, always, forever. So we imagined a big number, doubled it to equal 5yrs of rent, and told the broker our offer was non-negotiable, fill-or-kill. Days passed. “They’ve agreed to pay 70% of your offer,” said the broker. “Well, it was non-negotiable. So we’ll refresh the offer,” we replied. I increased our original price by 20%, non-negotiable, fill-or-kill. Days passed. “The tenant has one question,” said the broker, “If they accept your new offer, will you then move it higher yet again?” But of course, for traders, our word is our bond. That’s the code. “Okay then, they accept,” said the broker. And we took profit. Moved One River headquarters to Stamford, CT.
Overall: “We must cut Russia’s revenues which Putin uses to finance this atrocious war,” said European Commission chief Ursula von der Leyen, discussing a proposal to cap the price of Russian gas. There are no easy solutions to Europe’s energy crisis, just a range of suboptimal outcomes, each of which carries unknown costs in a world growing increasingly uncertain. Making difficult decisions is always hard and subjects all involved to unintended consequences. But in a world trending toward ever greater economic integration the risk of unexpectedly bad outcomes is more muted than in periods of conflict, division, deglobalization. The reason for this is a matter of trust. When we trust that we are all competitors striving for a greater share of a more prosperous common future, the price of misjudgments and misunderstandings is relatively lower than in a world filled with real and perceived adversaries who expect the worst from one another. “We will not supply gas, oil, coal, heating oil - we will not supply anything,” said Putin in response to Ursula’s statement. In recent years, the possibility that such stark outcomes might manifest were seen by consensus as pure fancy. But those innocent times have passed, perhaps not to return for decades. The Japanese continued to cap government bond yields, intervening in markets to monetize their enormous debts. The yen extended its dramatic losses as markets prepare for another 75bp rate hike from the Fed. The US is naturally doing what it sees as in its national interest, creating a shortage of dollars, just like Russia is doing in oil and gas, grain, and fertilizer (perhaps someday we will suffer a shortage of Taiwan’s chips). Without an ample and growing supply of dollars, the global economy sputters, markets too. Then things break. In more peaceful times, the Americans rarely adjusted domestic policy to help foreigners until the overseas problem washed ashore here at home. And we are now left to wonder how such decisions will be made in a world without trust.
One River Digital’s Deputy CIO, Marcel Kasumovich, and Shaun Martinak, Portfolio Manager/Research, published an excellent paper on Ethereum’s Merge, which they liken to upgrading a rocket ship after its launch. It should happen around September 15th. To read the paper [click here].
Week-in-Review (expressed in YoY terms): Mon: US holiday, Liz Truss elected UK prime minister, Germany to spend EU 65b on third energy relief package (1.7% of GDP), euro dips below 0.99 for first time in over 20y, PBOC cuts FX reserve ratio by 2% pts to alleviate pressure on currency, OPEC+ agrees to cut output by 100k bpd, California declares grid emergency / warns of blackouts amid heat wave, VW to move forward with Porsche IPO despite market weakness, NS1 flows don’t return as announced last week, Chengdu lockdown extended, Ukraine nuclear plant (controlled by Russia) disconnected from power source again after UN watchdogs exit, China Caixin PMI serv 55 (54e) / composite 53 (54p), Turkey CPI 80.21% (81.2%e) / Core CPI 66.08% (65.5%e) / PPI 143.75% (144.61%p), EU final PMI serv 49.8 (50.2e) / comp 48.9 (49.2e), EU investor conf -31.8 (-26.8e), S&P closed; Tue: PBOC continues to lean against currency weakness with stronger than exp fixings, RBA hikes 50bp as exp, PM Truss expected to announce GBP40bn energy aid package for businesses / 130bn to cap household bills below GB 2k, Japan fin min Suzuki reiterates that they are watching currency closely, Germany to keep 2 nuclear plants running, ECB’s Kazaks says big recession could slow hikes, Germany factory orders -13.6% (-13.4%e), US S&P serv PMI 43.7 (44.2e) / comp 44.6 (45e), US ISM serv 56.9 (55.3e), S&P -0.4%; Wed: Oil falls below $85 for first time since Jan, BoC hikes 75bp as exp / says more to come, Poland CB hikes 75bp as exp, GBP falls to weakest level vs USD since 1985 / JPY falls to lowest level since 1998 despite verbal jawboning (BOJ notably silent), Chengdu to extend lockdown, Fed’s Brainard says in it for as long as it takes to curb inflation, Chile CB hikes 100bp (75bp exp), US told Israel that Iran nuclear deal unlikely soon, Putin says NS1 can reopen if turbines available, China expts 7.1% (13.0%e) / impts 0.3% (1.1%e) / trd balance 79.39b (92.7b exp), Germany IP -1.1% (-2.1%e), Sweden IP 7.8% (-1.3%p), Norway IP 1.8% (2.3%p), Hungary IP 6.6% (2.9%e), Taiwan expts 25% (11.6%e), / impts 3.5% (8.7%e), Italy ret sales 4.2% (1.3%p), EU final 2Q GDP 4.1% (3.9%e), S&P +1.8%; Thur: Queen Elizabeth II passes away, ECB hikes 75bps as exp / slashes growth outlook and raises infl outlook / Lagarde signals further hikes over next several meetings, Japan’s MOF/BOJ/FASA hold 3 way meeting amid dramatic JPY weakening, US mortgage rates jump to highest rate since 2008 (5.89%), RBA’s Lowe suggested a slower pace of future hikes, Fed’s Evans open to 50 or 75bp, SNB’s Jordan cites benefits of strong CHF in fighting infl, Mexico CPI 8.7% (8.685e) / Core CPI 8.05% (8.06%e), US cons credit 23.8b (32b exp), S&P +0.7%; Fri: ECB scrutinizing banks readiness for Russia gas stoppage, EU energy minister meeting yields little concrete results but agree that the EU should take steps to intervene – no details / commission to propose measures next week, Fed’s Waller backs another significant hike in Sept, BoE reschedules MPC meeting for 9/22 (from 9/15) due to Queen’s passing, Kuroda says sudden moves in FX increase uncertainty and are undesirable, China CPI 2.55 (2.8%e) / PPI 2.3% (3.2%e) / New CNY Loans 1.25t (1.5t exp) / M2 12.2% as exp, Brazil IPCA infl 8.73% (8.68%e), Canada emp chg -39.7k (+15k exp) / unemp 5.4% (5%e), US chg in net worth $-6.1t in 2Q, Russia CPI 14.3% as exp / 2Q GDP -4.1% (-4%e), S&P +1.5%.
Manufacturing PMI (high-to-low): Hungary 57.8 (previous month 58.0), Switzerland 56.4 (previous month 58.0), India 56.2 (previous 56.4), US 52.8 (previous 52.8), Vietnam 52.7/51.2, Netherlands 52.6/54.5, Norway 52.3/54.01, Brazil 51.9/54, Indonesia 51.7/51.3, Russia 51.7/50.3, South Africa 51.7/52.7, Japan 51.5/52.1, Hong Kong 51.2/52.3, Sweden 50.6/52.5, France 50.6/49.5, Singapore 50/50.1, Spain 49.9/48.7, China 49.5/50.4, Germany 49.1/49.3, Austria 48.8/51.7, Greece 48.8/49.1, Canada 48.7/52.5, Mexico 48.5/48.5, Italy 48/48.5, South Korea 47.6/49.8, Turkey 47.4/46.9, UK 47.3/52.1, Czech Republic 46.8/46.8, Taiwan 42.7/44.6, Poland 40.9/42.1. Services PMI: Sweden 59.4/58.1, India 57.2/55.5, China 55/55.5, Ireland 54.7/56.3, Brazil 53.9/55.8, Australia 53.3/51.7, France 51.2/53.2, UK 50.9/52.6, Spain 50.6/53.8, Italy 50.5/48.4, Russia 49.9/54.7, Japan 49.5/50.3, Germany 47.7/49.7, US 43.7/47.3.
Weekly Close: S&P 500 +3.6% and VIX -2.68 at +22.79. Nikkei +2.0%, Shanghai +2.4%, Euro Stoxx +1.1%, Bovespa +1.3%, MSCI World +1.2%, and MSCI Emerging -1.5%. USD rose +3.8% vs Chile, +1.8% vs Yen, +0.6% vs Russia, +0.4% vs China, +0.2% vs Turkey, and +0.1% vs South Africa. USD fell -5.1% vs Ethereum, -3.4% vs Bitcoin, -1.5% vs Sweden, -0.9% vs Euro, -0.8% vs Canada, -0.7% vs Sterling, -0.5% vs Australia, -0.4% vs Indonesia, -0.4% vs Brazil, -0.3% vs Mexico, and -0.3% vs India. Gold +0.3%, Silver +4.9%, Oil -0.8%, Copper +4.0%, Iron Ore +4.7%, Corn +2.9%. 5y5y inflation swaps (EU +7bps at 2.19%, US -3bps at 2.52%, JP +4bps at 0.97%, and UK +14bps at 3.90%). 2yr Notes +17bps at 3.57% and 10yr Notes +13bps at 3.32%.
YTD Equity Indexes (high-to-low): Turkey +37.6% priced in US dollars (+89.6% priced in lira), Argentina +25.9% priced in US dollars (+73.2% priced in pesos), Chile +24.2% in dollars (+30.3% in pesos), Brazil +15.5% (+7.1%), UAE +15.4% (+15.4%), Indonesia +5.9% (+10%), Saudi Arabia +4.8% (+4.9%), Singapore +0.7% (+4.5%), Portugal -0.4% (+12.8%), India -3.9% (+2.8%), Norway -7.9% (+3.6%), Thailand -8.5% (-0.2%), Mexico -9.2% (-11.7%), Canada -9.5% (-6.8%), Israel -10.6% (-0.9%), Malaysia -11.7% (-4.5%), Australia -12.8% (-7.4%), Venezuela -14.4% (+47.5%), South Africa -14.7% (-7.3%), S&P 500 -14.7%, UK -14.7% (-0.5%), Russell -16.1%, Philippines -16.7% (-7.3%), Greece -16.8% (-5.8%), China -17.8% (-10.4%), HK -17.8% (-17.2%), Spain -18.1% (-7.8%), MSCI World -18.4% priced in US dollars, Colombia -19.1% (-13.4%), Denmark -19.2% (-9%), Switzerland -19.4% (-15.3%), New Zealand -19.5% (-9.8%), Japan -20.8% (-2%), Russia -21.3% (-35.9%), NASDAQ -22.6%, France -23.3% (-13.2%), Netherlands -24.1% (-14%), Czech Republic -24.4% (-15.9%), Belgium -24.9% (-15%), Ireland -26.4% (-16.6%), Finland -26.5% (-17.3%), Euro Stoxx 50 -26.7% (-16.9%), Germany -26.8% (-17.6%), Italy -28.2% (-19.2%), Taiwan -28.4% (-20%), Korea -31.2% (-19.9%), Sweden -31.7% (-20.1%), Austria -31.9% (-23.3%), Hungary -33.4% (-19.3%), Poland -36.4% (-26.8%).
La Haine: “Illiquidity is the new leverage and flows are more important than fundamentals,” said the CIO, one of our industry’s great thinkers. “This has been our framework for considering vulnerabilities in the post-2008 world,” he said. “Following the GFC, an intended consequence of successive rounds of quantitative easing was a shift of systemic risk from banks to the asset management industry,” he explained, the Fed’s $9trln balance sheet now bloated beyond comprehension, quantitative tightening accelerating, rates rising at an unprecedented pace.
La Haine II: “Asset managers do not have flexible balance sheets -- they buy assets when they get inflows and sell assets when they have outflows,” continued the CIO, sitting high atop a prodigious pile, amassed through decades of navigating monetary mischief, financial crises, bull markets, bears. “For over a decade, QE expanded balance sheets and asset managers have only experienced inflows. In contrast, banks - if they have sufficient capital - can take on risk when others are selling assets. They can choose to flex their balance sheets.”
La Haine III: “This shift of fragility from leverage in banks to liquidity in asset managers has occurred in tandem with a move to higher allocations to risky assets because of very low, or negative, interest rates,” continued the CIO. “Now, central banks are fighting an inflation problem they underestimated. They are forced to sharply tighten monetary policy and need to tighten financial conditions in the form of falling asset prices. The key is that the process be orderly, which it has been thus far. No dislocation yet. So far, so good.”
La Haine IV: “The first half of 2022 was a discount rate shock,” he said. “From here, as short rates march higher, investors will allocate away from risky and into risk-free assets.” Outflows expose the liquidity mismatch between the liquidity terms offered to the investor and the actual liquidity of the underlying investments. “The authorities and markets implicitly assume liquidity is plentiful and market behavior will remain orderly. We have been questioning that assumption and examining what might cause a disorderly liquidation?”
La Haine V: “I think we see the answer,” said the CIO in response to his own question. “The liquidity available to financial markets is being pincered between the forces of: (1) the Federal Reserve’s Reverse Repo Facility (RRP) facility, its interaction with central bank reserves and the level of interest rates, (2) the inflating nominal economy’s need for more of the commercial banks’ aggregate balance sheet, and (3) the reticence of commercial banks to expand their balance sheets because of regulatory pressure on them to be crisis proof in the face of an oncoming hurricane.”
La Haine VI: “And these liquidity pressures are weaponized by poor trailing 6-month portfolio performance and rising real rates, creating a genuine threat that we may be on the brink of The Great Liquidation,” explained the CIO. “La Haine is a French film,” he said, translating a passage for his unsophisticated American friend. “In it, a man falls from a 50-story building. The chap, as he falls, repeats something to himself constantly for reassurance: ‘So far so good… So far so good… So far so good.’ But the important thing is not the fall. It’s the landing.”
Anecdote: “When I was younger, an M&A titan asked me a question,” said the Chairman. “What is the half-life of a good idea on Wall Street?” he said, motioning to me for an answer. Naturally I shrugged, avoiding humiliation. “One deal,” he said, raising a finger, smiling. The Chairman was sharing his latest read on macro trends, including more evidence of a phase change. Back in early 2021 he and I shared our views of the future. We both had an intuition that something Wall Street considered to be a remote possibility would in fact manifest as an inevitability. Such setups are the foundation for all mega macro trends, so I started betting accordingly, building investment products, infrastructure for the industry. “In my discussions with corporate boards and executive teams across Wall Street and in the entrepreneurial community the engagement on blockchain and the tokenization of assets has accelerated dramatically. The focus and intensity are remarkable,” said the Chairman. “The transition from floor trading to electronic trading that took place decades ago produced a few massive winners and left many behind. In the “history rhymes” category, Wall Street is figuring out that the move to blockchain infrastructure may bring the same threats and opportunities,” he said. “And think also of the transition from analog, clunky mutual funds to automated index funds, to more tax and execution efficient ETFs. That technology-enabled evolution of retail investing produced a seismic reordering in finance, with many losers and a few enormous winners. The forward-thinkers in the asset management industry are starting to realize that once core assets are tokenized, both ETFs and the already declining traditional mutual fund offerings will be competing with lower-cost, highly customizable digital SMAs (separately managed accounts),” he said. “Tokenized asset settlement efficiencies should be able to slash the costs of delivering customized portfolios to smaller investors, further democratizing access to high-quality asset management services,” he said. “For the past couple years, when asked about my interest in crypto and blockchain, these are all the things I’d tell executive teams – and anyone else – when they asked about the future. But just recently, they have started telling me this is the future, as they scramble to craft strategies to avoid being left behind,” said the Chairman. “Now you’re seeing the big asset managers announce deals and new products in this space. That makes it clear that the race is underway. And the best firms in finance see digital success as integral to their overall success, core to their future,” said the Chairman. “There is more. The race is not only in the private sector. US dollar hegemony is not a God-given right. It is the result of many factors – the often-cited economic strength, and rule of law – but also network effects, including scale and efficiency. Technological change presents threats to scale and yesterday’s efficiency. The Treasury, the Federal Reserve and Congress should realize there is an even bigger race to win.”
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.