wknd
notes


                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  Get Me Someone Strong

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There's Time To Rest When You're Dead
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The Standard Model Has Broken

The Standard Model Has Broken
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The Opposite of Mean Reversion

The Opposite of Mean Reversion
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The Case for Quantum Change (redux)

The Case for Quantum Change (redux)
March 27, 2022
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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: Get Me Someone Strong

Hope all goes well… “This old paramedic waved me away and yelled -- Get me a man, someone strong, I need help immediately,” said Olivia, my 18-year-old, a certified EMT, a volunteer first-responder. “He’s the most sexist of all the guys I have to deal with. I looked him in the eye and said -- Don’t worry, I got this,” continued Liv, recounting her latest 911 emergency call. “After we lifted the patient onto the stretcher, he was heavy for sure, but no problem, I said to the paramedic -- I’m not going to Army because I’m weak.” And I smiled, laughed. “He was totally shocked, confused -- Wait, what, you’re joining the army?” said Liv. “So I told him -- I’m headed to West Point in June – It felt good to let him know that.”

Dusted off an Anecdote from 10yrs ago about biding your time and embracing the only competition that really matters (see below).

Marcel Kasumovich, One River’s Head of Research, published an interesting piece on the shifting correlations between equities and digital assets, evolving macro regimes, the austerity that the older generations is imposing on the young, and the importance of playing the long game [click here].

Overall:“One thing is certain: To be effective, the Fed will have to inflict more losses on stock and bond investors than it has so far,” said Bill Dudley, former Fed President, saying bluntly what his active-duty central bankers barely dare whisper. “Market participants expect higher short-term rates to undermine economic growth and force the Fed to reverse course in 2024 and 2025 - but these very expectations are preventing the tightening of financial conditions that would make such an outcome more likely,” explained Dudley, scratching the surface of the disquieting predicament the Federal Reserve now finds itself in. And because the world’s developed-market central banks adopted US policy in recent decades, the Fed’s quandary is now a global phenomenon. “This would mean hiking the federal funds rate considerably higher than currently anticipated. One way or another, to get inflation under control, the Fed will need to push bond yields high and stock prices lower,” Dudley said. Cooling an over-heated, capacity-constrained, hyper-financialized economy, in a time of deglobalization and war, without first tightening financial conditions is proving rather difficult. Like all complex problems, this one took decades to create. Back when the US economy had less debt and leverage, when financial assets had lower valuations, and when wealth was less concentrated, the ups and downs of the real economy drove financial markets. In such a world, the Fed quite easily used conventional rate policies to influence our behaviors to achieve their objectives. When those became less effective, they introduced unconventional policies, and forward guided their intentions to become highly predictable. The effect was the hyper-financialization of our economy. Now, with such high levels of debt, leverage, valuations, and wealth-concentration, it is financial markets that drive the real economy, not the other way around. We have never experienced a modern economic cycle that looks anything like this. And Dudley may be right in his prescription. But if it is one thing, it is certainly not certain.

Week-in-Review (expressed in YoY terms): Mon: Macron beat Le Pen by 4pts in 1st round of French Election / 3rd place finisher Melanchon suggested his supporters NOT vote for Le Pen without endorsing Macron, covid cases in Shanghai and across China continue to worsen despite severe lockdowns, Ukraine said Russian missile strikes destroyed Dnipro airport (4th largest city), Russian Railways was ruled to have defaulted after missing bond payment, Israel CB hiked 25bp (15bp exp), TWTR says Musk will NOT join board, Fed’s Evans says 50bp in May is “perhaps...highly likely”, China CPI 1.5% (1.4%e) / PPI 8.3% (8.1%e), China new loans 3.13T (2.75T exp), Turkey unemp 10.7% (11.2%p), Mexico IP 2.5% (4.2%e), S&P -1.7%; Tue: US CPI 8.5% (8.4%e) / Core CPI 6.5% (6.6%e), Biden allows sales of higher ethanol gasoline (E15), Putin says peace talks turned to a dead end situation / iterates that he is confident his Ukraine operation targets will be met, Japan fin min says “closely watching currency moves, including recent yen weakening,” Japan PPI 9.5% (9.2%e), UK unemp 3.8% as exp, Turkey IP 13.3% (7.5%e), German ZEW expectations -41 (-48.5e), US NFIB 93.2 (95e), S&P -0.3%; Wed: RBNZ hiked 50bps (25bp exp) / NZD sold off due to dovish comments regarding flexibility of future hikes, BoC hiked 50bp as exp / cites increasing risk expectations of elevated inflation becoming entrenched, USDJPY trades above 126 – 20yr highs, China’s State Council indicates RRR to be cut imminently, President Biden announced plans to expand the size and scope to an $800 million military package for aid to Ukraine, Japan Machine orders 4.3% (14.3%e), Japan M3 3.1% (3.2%e), China exports 14.7% (12.8%e) / impts -0.1% (8.4%e), UK CPI 7% (6.7%e) / Core CPI 5.7% (5.3%e) / RPI 9% (8.8%e), Italy IP 3.3% (0.9%e), UK house prices 10.9% (10.1%e), US PPI 11.2% (10.6%e), S&P +1.1%; Thur: Russia threatened to deploy nuclear weapons in and around the Baltic Sea region if Finland and Sweden join NATO, ECB unch as exp – affirmed ending APP in Q3 / Lagarde warns the war may cause record infl to climb further but provided no further discussion on a new crisis tool to control peripheral spreads, hawkish Singapore CB (MAS) decision to raise policy band, BOK hiked rates +25bps as expected, Turkey CB unch as exp, Musk makes unsolicited bid to buy TWTR for $43b, Argentina CPI 55.1% (53.9%e), Singapore 1Q GDP 3.4% (3.8%e), Australia emp change 17.9k (30k exp) / unemp 4% (3.9%e), Sweden CPIF 6.1% (5.6%e), Hungary CB unch as exp, S. Africa mining production -6% (-0.1%e), US retail sales -0.1% MoM (0.1%e), US import prices 12.5% (11.9%e), US init claims 185k (170k exp), US UofM 65.7 (59e) / 1y infl exp 5.4% (5.6%e) / 5-10y infl exp unch at 3%, S&P -1.2%; Fri: Good Friday = quiet markets, China cuts RRR 25bps (and 50bp for some small banks) – market had come to expect 50bp cut / China 1y MLF unch (10bp cut exp), Russian war ship sinks in black sea – Ukraine says it hit it with missile, Russia retaliates with missile strikes on Kyiv, 8th Russian general confirmed to have died in battle, Russia bans Boris Johnson and other senior UK officials from entering Russia, Israel CPI 3.5% (3.7%e), US empire mfg 24.6 (1.0 exp), S&P closed.

Weekly Close: S&P 500 -2.1% and VIX +1.54 at +22.70. Nikkei +0.4%, Shanghai -1.2%, Euro Stoxx -0.2%, Bovespa -1.8%, MSCI World -1.7%, and MSCI Emerging -1.3%. USD rose +8.5% vs Ethereum, +8.1% vs Bitcoin, +4.9% vs Russia, +1.7% vs Yen, +1.3% vs Sweden, +0.9% vs Australia, +0.6% vs Euro, +0.4% vs India, +0.3% vs Canada, +0.2% vs Chile, +0.1% vs China, and +0.1% vs Brazil. USD fell -0.8% vs Turkey, -0.4% vs Mexico, -0.3% vs Sterling, -0.1% vs South Africa, and -0.1% vs Indonesia. Gold +1.5%, Silver +3.5%, Oil +8.8%, Copper +0.1%, Iron Ore -0.4%, Corn +3.0%. 5y5y inflation swaps (EU +4bps at 2.38%, US +2bps at 2.75%, JP -1bp at 0.66%, and UK -1bp at 4.02%). 2yr Notes -6bps at 2.46% and 10yr Notes +12bps at 2.83%.

YTD Equity Indexes (high-to-low): Brazil +30.8% priced in US dollars (+10.8% priced in reais), Colombia +25.1% priced in US dollars (+14.5% priced in pesos), Turkey +21.4% in dollars (+34.3% in liras), Saudi Arabia +20.9% (+20.7%), Chile +19.6% (+14.1%), UAE +17.5% (+17.5%), Indonesia +9.1% (+9.9%), Norway +9% (+9%), South Africa +7.6% (-0.9%), Singapore +6% (+6.8%), Mexico +5.2% (+1.7%), Venezuela +4.1% (+0.6%), Canada +3.2% (+3%), Australia +2.9% (+1.1%), Portugal +1.6% (+7%), Thailand +0.4% (+1%), Malaysia -0.4% (+1.4%), Israel -0.5% (+3.1%), UK -0.5% (+3.1%), Argentina -0.8% (+9%), India -1.4% (+0.7%), Greece -2.3% (+2.9%), Philippines -3.9% (-1.9%), Spain -4.6% (-0.2%), Switzerland -6% (-3.1%), Czech Republic -6.3% (-3.5%), Belgium -7.1% (-2.2%), S&P 500 -7.8%, Denmark -8.3% (-4.6%), MSCI World -8.4%, HK -8.6% (-8%), New Zealand -9.7% (-8.8%), Russell -10.7%, Taiwan -11.3% (-6.7%), China -12% (-11.8%), Korea -12.2% (-9.5%), France -12.5% (-7.9%), Poland -13% (-8%), Italy -13.1% (-9.1%), Japan -14.2% (-5.9%), Netherlands -14.3% (-9.8%), NASDAQ -14.7%, Germany -14.8% (-10.8%), Euro Stoxx 50 -14.9% (-10.5%), Finland -16.5% (-12.6%), Sweden -17.8% (-13.5%), Ireland -18.5% (-14.2%), Austria -19.3% (-15.6%), Hungary -20.4% (-15.2%), and Russia -42.6% (-36%).

Anecdote July 2012: “I emptied my mind,” she explained, looking through me, returning to that mental place in the moment before her race began. I bit my lip to keep from smiling, even laughing. You see, she’s just 8yrs old, and tiny for her age, seriously, like the 1th percentile. Yet Olivia’s coach has her swim against 11-year-olds. I don’t protest. Not my style. Plus, I’m pretty certain her coach quickly realized Olivia has an inexplicably strong sense of self, loves to play up, is uninterested in competing against peers, and just isn’t wired like most. Anyhow, Olivia took her lane one minute before the race began. Couple hundred spectators surrounded the pool. “Oh, just look how teeny that girl is,” giggled the crowd. She coolly reached down, scooped handfuls of cold pool water across her skinny arms, toothpick legs, splashed her face. And focused intensely on her lane, as the older opponents observed Olivia’s unconventional ritual, amused, distracted. “Take your mark,” ordered the starter. “Pop,” and they leapt. For a 50m freestyle. Olivia hit the water last, like pretty much every race I’ve ever seen. And starting from last place she mounted her trademark challenge for 2nd to last, stalking the sick, the wounded. She finished a distant 6th. And having lost the race, but won many hearts, my little girl marched up to the Officials. Alone. Proud. Standing tall. On a natural high. “Excuse me, may I have my time?” she asked. You see, Olivia wants to win so badly it hurts. But she can’t yet. And knows it. So instead, she’s focused on her time, embracing it, improving it. Biding it. Waiting for it. You know, odds are she’ll never be much of a swimmer, but someday, she’ll make a great trader.

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, 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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