wknd
notes


                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Dressed in Overalls and Looks Like Work

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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 note: Dressed in Overalls and Looks Like Work

Hope all goes well… “Biggie’s bearish and annoying, ignored,” bellowed Biggie Too, 3rd person. “That’s how the crowd treats Biggie when these cycles get started, when stocks are still at their highs and Biggie turns bearish,” said the chief global strategist for one of Wall Street’s too-big-to-fail affairs, one of only a few such cats to call this market right. “Biggie’s bearish and they congratulate, kiss Biggie’s ring -- that’s step Number Two,” barked Biggie, slipping into a slow groove, hands in the air holding two fingers up. “Step Number Three -- Biggie stays bearish, and the crowd hates Biggie,” said Too, sharing Biggie’s Three-Step Market Manual. “If we can’t bounce after being down seven weeks in a row, something’s seriously wrong with this market. But you gotta get to Number Three before the big bottom is in. And Biggie’s still stuck somewhere in step Number Two – getting lotta praise, no haters, no hate mail. Not yet.”
Overall: “Achieving price stability, restoring price stability, is an unconditional need,” said Jerome Powell. “Something we have to do because really the economy doesn't work for workers or for businesses or for anybody without price stability. It’s the bedrock of the economy really,” added the Fed Chairman. “If that involves moving past broadly understood levels of ‘neutral’ we won't hesitate to do that,” he said, calm, threatening. “We will go until we feel we are at a place where we can say ‘yes, financial conditions are at an appropriate place, we see inflation coming down.’” It’s been decades since a Fed Chairman told investors to sell rallies until inflation cools or something breaks. US equities closed the week lower again, a historic run, but devoid of panic. It’s a market re-price, not a fracture, a break, at least not yet. “It’s in everyone’s interest for both the US and EU to make investments in a coordinated way that deepens the entire ecosystem of the semiconductor supply chain,” said US Commerce Secretary Raimondo, unveiling initiatives in high-tech, AI, industrial standards, and global food security. “It will be good for both industry and national security,” she added, as the US and Europe retreat to a fractured world of trading blocs, security alliances. Echoes of Europe’s disastrous dependency on Russian energy exports are found in the West’s reliance on Taiwanese semiconductors and Chinese technology, rare earths. “We intend to exclude Huawei and ZTE from our 5G networks,” said Canada’s Industry Minister Francois-Philippe Champagne, joining the rest of the Five Eyes intelligence sharing network. “Providers who already have this equipment installed will be required to cease its use and remove it under the plans we’re announcing today.” Beijing banned senior officials from owning overseas assets or stakes in foreign entities, whether directly or through spouses, children. Xi naturally wants to insulate his politicians from Western influence/sanctions in a conflict. The most consequential redrawing of global relations since WWII has begun. So far it has produced a re-price, not a market fracture. At least not yet.
Sarah Schroeder, a terrific addition to One River Digital’s Research and Portfolio Management team, published an interesting piece on the volatility we see across technology stocks and digital assets [click here].
Week-in-Review (expressed in YoY terms): Mon: Finland/Sweden confirm they will apply to NATO, China cuts mortgage rates for 1st time buyers, India bans wheat exports, UK says Russia has lost 1/3rd of its forces, ECB’s Villeroy sees consensus for normalizing policy now, China MLF unch as exp, German foreign minister Baerbock expects EU to impose Russian oil sanctions, slowdown in China's retail / factory data in April weighs on risk sentiment, Japan PPI 10% (9.4%e), China 1y MLF unch at 2.85% / IP -2.9% (0.5%e) / ret sales -11.1% (-6.6%e), Brazil debt:GDP 58.2% (57.2%e), US empire mfg -11.6 (15e), S&P -0.4%; Tue: Shanghai reports no new covid cases for 3rd day, Powell says Fed will keep pushing until inflation comes down in a convincing way, ECB’s Knot doesn’t exclude bigger rate moves if justified by data, RBA mins showed discussion of greater than 25bp hike in May, Musk says he’ll proceed with TWTR take over if its claims about bots are substantiated, China Vice Premier Liu says govt will support the tech sector, WMT misses on weak consumer (6th worst day in history), Biden lifts restrictions on Cuba, Singapore non-oil expts 6.4% (6.5%e), France unemp 7.3% (7.4%e), UK unemp 3.7% (3.8%e) / emp change 83k (4k exp), US ret sales 1% MoM (0.7%e) / IP 1.1% MoM (0.5%e) / NAHB housing mkt index 69 (75e), S&P +2.0%; Wed: ECB’s Rehn says a quick move away from negative rates is needed to prevent infl expectations from becoming de-anchored, Finland and Sweden simultaneously apply to join NATO / Turkey blocks an early move to fast-track requests, Turkish Lira falls for 10th day as sell off accelerates, US set to allow exemption that allows Russia to pay creditors in USD to expire – increasing prob of Russian default, TGT cut profit forecasts as it sees consumer spending shifts, SNB’s Jordan stands ready to act if inflationary pressures materialize, RBI announces it did ~$20bn worth of intervention in March – largest amount ever, TWTR plans to enforce Musk’s buyout agreement, US eases sanctions on Venezuela to increase oil flowing to Europe, Australia wage px index 2.4% (2.5%e), UK CPI 9% (9.1%e) / Core CPI 6.2% as exp / RPI 11.1% (11%e), EU CPI 7.4% (7.5%e), US housing starts -0.2% MoM (-2.1%e), Canada CPI 6.8% (6.7%e), Russia 1Q GDP 3.5% (3.7%e), S&P -4.0%; Thur: ECB mins note upside risks surrounding inflation had intensified, Biden meets with Finland/Sweden leaders, Lula gets married, Pennsylvania GOP senate primary too close to call, Japan expts 12.5% (13.9%e) / impts 28.2% (35%e), Australia emp change 4k (30k exp) / although strong gains in full time emp (vs part time job losses) / unemp 3.9% as exp, US Philly Fed 2.6 (15e), US init claims 218k (200k exp), US existing home sales -2.4% MoM (-2.3%e), US leading index -0.3% (0%e), S&P -0.6%; Fri: PBOC cut 5yr loan prime rate by 15bp (unexp), S. Africa CB hiked 50bp (as exp), Russia to cut gas impts to Finland starting Saturday, NYC investigates possible case of monkeypox, Shanghai issues return to office rules for some regions, S&P falls to -20% from all time high at one point / recovers into the close, US passed $40b aid package to Ukraine, ECB’s Visco supports steady rise in rates but June is too soon, S. Korea PPI 9.2% (9%p), UK cons conf -40 (-39e), Japan CPI 2.5% as expected, UK ret sales -4.9% (-7%e) / core ret sales -6.1% (-8.3%e), German PPI 33.5% (31.3%e), EU cons conf -21.1 (-21.5e), S&P flat.
Weekly Close: S&P 500 -3.0% and VIX +0.56 at +29.43. Nikkei +1.2%, Shanghai +2.0%, Euro Stoxx -0.5%, Bovespa +1.5%, MSCI World -1.8%, and MSCI Emerging +1.0%. USD rose +5.9% vs Ethereum, +3.1% vs Bitcoin, +2.8% vs Turkey, +0.3% vs Indonesia, and +0.1% vs India. USD fell -3.6% vs Brazil, -2.9% vs Chile, -2.0% vs South Africa, -1.7% vs Sterling, -1.6% vs Russia, -1.4% vs Euro, -1.4% vs Australia, -1.4% vs China, -1.2% vs Mexico, -1.2% vs Sweden, -1.0% vs Yen, and -0.7% vs Canada. Gold +1.9%, Silver +3.2%, Oil +1.5%, Copper +2.4%, Iron Ore -1.2%, Corn -0.3%. 5y5y inflation swaps (EU +4bps at 2.23%, US -12bps at 2.62%, JP +11bps at 0.85%, and UK -21bps at 3.86%). 2yr Notes flat at 2.58% and 10yr Notes -14bps at 2.78%.
YTD Equity Indexes (high-to-low): Brazil +18.2% priced in US dollars (+3.5% priced in reais), Chile +17.9% priced in US dollars (+15.7% in pesos), UAE +17% in dollars (+17% in dirham), Saudi Arabia +10.3% in dollars (+10.2% in riyals), Turkey +6.2% (+27.7%), Colombia +6.1% (+3.4%), Indonesia +2.2% (+5.1%), Venezuela +1.7% (+5.2%), Singapore +1.2% (+3.7%), Mexico -0.4% (-3.3%), Portugal -2.7% (+5.1%), Norway -4.7% (+5.8%), Thailand -5.2% (-2.1%), Canada -6.3% (-4.8%), Malaysia -6.3% (-1.2%), Philippines -7.4% (-5.3%), Australia -7.4% (-4%), UK -7.8% (+0.1%), Argentina -8.5% (+5.5%), South Africa -9% (-9%), Spain -9.2% (-2.6%), India -10.3% (-6.3%), Greece -10.8% (-3.7%), Czech Republic -11.4% (-5.8%), HK -12% (-11.5%), Israel -13% (-5.7%), Belgium -15.7% (-9%), Japan -16.2% (-7.1%), Denmark -16.6% (-10.5%), Korea -17.1% (-11.4%), Taiwan -17.2% (-11.4%), Switzerland -17.6% (-12.2%), Italy -17.9% (-11.9%), China -17.9% (-13.6%), Germany -17.9% (-12%), MSCI World -18%, S&P 500 -18.1%, France -18.6% (-12.1%), New Zealand -19.5% (-13.6%), Netherlands -20.7% (-14.4%), Russell -21%, Euro Stoxx 50 -21.2% (-14.9%), Finland -21.5% (-15.8%), Austria -22.3% (-16.6%), Ireland -22.5% (-16.3%), Russia -24.1% (-37.3%), Sweden -25.1% (-17.6%), Poland -25.7% (-19.6%), Hungary -26.3% (-17.6%), NASDAQ -27.4%.
Overalls: “Opportunity is missed by most people because it is dressed in overalls and looks like work,” said Thomas Edison. Indeed. After graduation, I headed to the pits in Chicago. A bunch of buddies went to Wall Street, investment bankers. A brilliant doctor. Lawyer turned judge. Entrepreneurs, chasing dreams, made a fortune. Some stuck with sports, lacrosse coaches. Guys joined LBO firms, now called private equity. Lately, they compete for the largest mansions on the water. One buddy built a regional auto parts warehousing distributorship. His time has come.
Overalls II: “I’m reporting from the trenches,” wrote Edison in an email, from the helm of his auto parts enterprise. “Price hikes in my world are way beyond the reported inflation rate,” he wrote, checking in. “We’re seeing a 35% to 70% increase; even 11,500% for cheap items. End-user consequences are brutal.” His firm dominates the largest metropolitan market in the US, providing every imaginable part. “I was consoling a customer who paid $129 for something that cost $90 last week, I thought of you. Guessed you’d be interested.” Edison was right. I was.
Overalls III: “This inflationary period will persist,” wrote Edison, responding to my question. “Because of the perfect storm of easily understood and valid reasons for price hikes, it will be slow for everybody in control of production/distribution to relinquish this historic opportunity to make money. Will anybody be able to tell Delphi it is time to lower their costs just because the price of gas has descended? No. Will TYC/Genera in Taiwan lower their prices because their container expense dropped from $20K to $14K? Nope. Containers cost $4,500 two years ago.”
Overalls IV: “Will my firm return to the thin margin it charged three years ago?” asked Edison, rhetorically. “Not without a fight.” In the 33yrs since graduation, Wall Street has been ascendant. Main Street has faced headwinds. Winning businesses on both streets have made fortunes to be sure, that’s how the world works. But the former has had an easier go. Now the pendulum is swinging. “I attached a letter from a small company apologizing for their 70% price hikes. It forecasts additional price hikes. And I will not lose one sale due to passing these hikes along.”  
Overalls V: “My customers complain about the price hikes, but I measure things based on whether there is a sale,” explained Edison. “They all pay the price. No one second guesses it in the end. Everyone is doing it,” he said. “We deal in inelastic markets, where someone’s car breaks down and they tell the mechanic to fix it. The mechanic doesn’t care about the price, he just wants to get the part.” He passes along the price. “We have not yet seen price increases that will come up after delivery driver and trucker contracts expire. There is pipeline inflation ahead.”
Overalls VI: “Open the attached pricing table,” wrote Edison. “It is from one of my suppliers.” I scrolled down, thousands of line items, auto parts for every brand. The furthest righthand column showed the percentage price increases. They ranged from 5% to over 80%. The average was 26%. “You’ll notice a bunch of 5% increases. Those are for items with low turnover. The reason the supplier only increased them by 5% is that it allows him to show an average price increase that is a lot lower than what we experience. It’s optics. Another example of hidden inflation.”
Anecdote: Edison shared the following letter that a small US supplier of industrial chemicals sent to all its customers earlier this month:
Dear Customer: I hope that you and your business are doing well. New price sheets are enclosed. I have been working at xxxxxxxxxx Industries for over 50 years. I have never seen anything like the current supply problems. Not with COVID-19 in 2020, not during Nixon's presidency in 1968 and 1969. Raw materials are in short supply, because good workers cannot be found, because of production line breakdowns, because of COVID-19 variant outbreaks, because the automotive industry let themselves run out of everything, because freight rates have increased and now, because of a Hitler doppelganger in Russia trying to start a World War.
The cost of metal containers has more than doubled in some cases. We can't get plastic buckets. The prices of all plastic containers have gone up sharply. The main ingredient in metal adhesive has nearly doubled in cost, and freight on the next container of it is expected to double.
Prices are up from 5% to 70% with even more increases expected. We hoped to hold our pricing until costs came back down. That was a mistake. Now we are faced with having to catch-up because prices are out of control and are apparently not coming back down.
We have not offered the usual 30-day notice of the increases because we have already been paying these higher costs. Old prices were below cost in some cases. What we are offering is 10% off the new prices until May 25. This is for one order only, in quantities similar to your usual orders. Unfortunately, if you order more than an average amount, we will have to cut back your order so that everyone can get some product. With supply running considerably behind current demand we cannot let a few customers get the lion's share. I hope you understand.
Thank you for your continued business. Best regards, xxxxxxxxx.
Good luck out there,
Eric Peters
Chief Investment Officer
One River Asset Management            
Greenwich, CT



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, drink 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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