wknd
notes


                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       We Demand Of Our Leaders

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The Great Transition

The Great Transition
February 27, 2022
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Until One Day The Bottom Falls Out

Until One Day The Bottom Falls Out
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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: We Demand Of Our Leaders

“Are you watching Ukraine’s President?” asked Jackson, in uniform, Facetime. We all are - the whole world. And I wonder how Zelensky’s remarkable behavior will inspire our children as they come into their own, forming ideas about how they’ll lead their lives, set the bar for themselves, and what they will demand of their leaders, as they build a better future for us all. “Zelensky is what real leadership looks like. Genuine. Inspiring everyone around him, his entire nation, even when he and his family are in real danger, fighting a far stronger adversary,” said my oldest, one of the 132-million 20-year-olds on our little planet.

Marcel Kasumovich, our head of research, published a thoughtful piece on digital assets, shifting correlations, deleveraging, and the place for such investments in institutional portfolios. Click here

Overall: “We will cause the collapse of the Russian economy,” said France’s finance minister, Bruno le Marie, international sanctions raining on Moscow like carpet bombs on Kharkiv. No doubt Bruno is right. Wars cause economic devastation, particularly in nations that lose. But they inevitably diminish our collective prosperity and well-being in ways few appreciate at their offset. Were we more aware of this fact, there would be far fewer conflicts. My alma mater estimates the post 9-11 War on Terror cost the US $8trln, which perhaps coincidentally is the rough size of the Fed’s balance sheet. The Afghanistan portion cost $2trn. Would that war have been America’s longest had politicians asked voters to fund it through tax hikes? The 7,000+ brave children we sent to fight but who never returned, and the 900,000 foreign dead, can no longer ask that question. But we can. Anyhow, it is easy to fund wars against weak adversaries in a time of structural disinflation, expanding globalization, economic optimization, hyper financialization. But that time had passed even before Ukraine’s war broke out. Structural disinflation allows governments to freely experiment with monetary magic. During inflationary periods, however, such alchemy comes at a steep cost -- in the extreme, we collectively realize money is an illusion, a mass delusion. The Russian central bank just discovered that $388bln of its $643bln in reserves are inaccessible. That’s because most reserves are deposits and securities held by Western central banks and institutions. This leaves Russia with $135bln of gold that Western dealers won’t touch, and $85bln of Chinese securities that Beijing’s state banks won’t trade. So Russia’s central bank has just $30bln in paper foreign currency with which to sustain the illusion that the ruble is real. It is hard to overstate how desperate a financial position Moscow now finds itself in. And on Saturday, Putin said, “These sanctions that are being imposed are akin to a declaration of war, but thank God it has not come to that.”

Week-in-Review (expressed in YoY terms): Mon: Ruble collapses (down ~20% on the day) as west enacts SWIFT sanctions and restricting the CB from deploying its reserves / Russia CB hiked rates to 20% and imposed capital controls (banning foreigners from selling securities in Russia), ECB’s Panetta “ECB stands ready to act”, minimal progress made as Russia/Ukraine officials meet on Belarus border, Zelensky repeated request for Ukraine to be fast tracked into the EU, Biden approval rating falls to record low, ECB’s Rehn says should fully assess implications of war before hiking too soon, Spain CPI 7.5% (7%e), Poland CPI 4.4% (3.4%p), India 4Q GDP 5.4% (5.9%e), Mexico unemp 3.71% (4.24%e), S&P -0.2%; Tue: Russia says it will continue until goals are met / 40mi long convoy approaches Kyiv, Ukraine auctions first “war bonds”, BTPs outperform on potential later end to QE, Italy CPI 6.2% (5.5%e), German CPI 5.5% (5.4%e), S&P -1.5%; Wed: Russia says ready to resume talks, Powell guides to 25bps hike in March but open to 50bps in the future, Biden closed US air space to Russia, China to suspend major activity in Moscow, Biden delivers state of the Union/ vows to control inflation, BOC hikes 25bps as exp, wheat extends to highest since 2008, EU nat gas prices set all-time high, Germany unemp 5% (5.1%e), EU CPI 5.8% (5.6%e) / Core CPI 2.7% (2.6%e), S&P +1.9%; Thur: MSCI and FTSE to remove all Russian stocks from indices, Moody’s and Fitch cut Russia to junk, Powell admits to running scenario with crude at $125/barrel, Turkey CPI 54.44% (52.5%e) / PPI 105.01% (103%e), Swiss CPI 2.2% (1.8%e) / Core CPI 1.3% (0.9%e), Hungary hikes 75bps (50bp exp), Italy unemp 8.8% (9%e), EU PPI 30.6% (27.3%e), EU unemp 6.8% (6.9%e), US unit labor cost 0.9% (0.3%e), US init clam 215k (225k exp), US serv PMI 56.5 (56.7e), US ISM serv 56.5 (61.1e), US factory orders 1.4% (0.7%e), S&P -0.5%; Fri: Russia takes over largest nuclear power plant in Europe causing a fire which is claimed to be “under control”, US NFP 678k (423k exp) / unemp 3.8% (3.9%e) / AHE 5.1% (5.8%e), Fed’s Evans sees 1.75-2% as “closer to neutral”, EU ret sales 7.8% (9.2%e), S&P -0.8%.

Manufacturing PMI (high-to-low): Switzerland 62.6 ( previous month 63.8), Netherlands 60.6 (previous mth 60.1), US 58.6 (prev 57.6), Sweden 58.6/62.2, Germany 58.4/59.8, Austria 58.4/61.5, Italy 58.3/58.3, UK 58/57.3, Greece 57.8/57.9, France 57.2/55.5, Spain 56.9/56.2, Canada 56.6/56.2, Czech Republic 56.5/59, Norway 55.9/56.3, India 54.9/54, Poland 54.7/54.5, Taiwan 54.3/55.1, Vietnam 54.3/53.7, South Korea 53.8/52.8, Hungary 53.2/50.9, Japan 52.7/55.4, Indonesia 51.2/53.7, South Africa 50.9/50.9, China 50.4/49.1, Turkey 50.4/50.5, Singapore 50.2/50.6, Brazil 49.6/47.8, Russia 48.6/51.8, Mexico 48/46.1, Hong Kong 42.9/48.9. Services PMI: Sweden 68/68.6, Ireland 61.8/56.2, UK 60.5/54.1, Spain 56.6/46.6, US 56.5/51.2, Germany 55.8/52.2, France 55.5/53.1, Italy 52.8/48.5, Russia 52.1/49.8, India 51.8/51.5, China 50.2/51.4, Japan 44.2/47.6.

Weekly Close:S&P 500 -1.3% and VIX +4.39 at +31.98. Nikkei -1.9%, Shanghai -0.1%, Euro Stoxx -7.0%, Bovespa +1.2%, MSCI World -1.3%, and MSCI Emerging +0.0%. USD rose +44.8% vs Russia, +5.0% vs Sweden, +3.1% vs Euro, +3.0% vs Mexico, +2.8% vs Turkey, +1.5% vs South Africa, +1.4% vs Sterling, +1.2% vs India, +0.8% vs Ethereum, +0.4% vs Chile, +0.1% vs Indonesia, +0.1% vs Canada, and flat vs China. USD fell -3.9% vs Bitcoin, -2.0% vs Australia, -1.7% vs Brazil, and -0.6% vs Yen. Gold +4.2%, Silver +7.4%, Oil +26.3%, Copper +10.1%, Iron Ore +15.4%, Corn +15.0%. 5y5y inflation swaps (EU +28bps at 2.11%, US +14bps at 2.60%, JP -9bps at 0.62%, and UK +3bps at 4.03%). 2yr Notes -9bps at 1.48% and 10yr Notes -23bps at 1.73%.

Feb Mthly Close:S&P 500 -3.1% and VIX +5.32 at +30.15. Nikkei -1.8%, Shanghai +3.0%, Euro Stoxx -3.4%, Bovespa +0.9%, MSCI World -2.7%, and MSCI Emerging -3.1%. USD rose +26.7% vs Russia, +4.1% vs Turkey, +1.6% vs Sweden, +1.0% vs India, +0.2% vs Sterling, and +0.1% vs Euro. USD fell -6.5% vs Bitcoin, -6.2% vs Ethereum, -3.0% vs Brazil, -2.7% vs Australia, -0.8% vs China, -0.8% vs Mexico, -0.3% vs Canada, -0.3% vs Chile, -0.1% vs Indonesia, -0.1% vs Yen, and -0.1% vs South Africa. Gold +5.8%, Silver +8.6%, Oil +10.7%, Copper +3.0%, Iron Ore -10.4%, Corn +10.6%. 5y5y inflation swaps (EU +2bps at 1.87%, US +3bps at 2.55%, JP -4bps at 0.65%, and UK -1bps at 3.94%). 2yr Notes +25bps at 1.43% and 10yr Notes +5bps at 1.83%.

YTD Equity Indexes (high-to-low):Brazil +19.9% priced in US dollars (+9.2% priced in reais), Colombia +16.3% priced in dollars (+9.3% in pesos), UAE +14.1% (+14.1%), Chile +14% (+7.7%), Saudi Arabia +13.2% (+13.1%), South Africa +6.3% (+1.9%), Indonesia +4.4% (+5.3%), Thailand +2.8% (+0.9%), Singapore +2.4% (+3.3%), Malaysia +1.9% (+2.3%), Argentina +1.8% (+7.2%), Philippines +1.2% (+3.1%), Canada +0.2% (+0.8%), Turkey -0.2% (+7.2%), Norway -1% (+0.5%), Mexico -2% (+0.1%), Australia -3.2% (-4.5%), Taiwan -4.2% (-2.6%), China -4.7% (-5.3%), Israel -5.2% (-1%), HK -6.6% (-6.4%), New Zealand -6.7% (-6.8%), UK -7.5% (-5.4%), India -8.7% (-6.4%), Venezuela -8.9% (-12.8%), MSCI World -9%, S&P 500 -9.2%, Japan -9.4% (-9.7%), Portugal -9.7% (-5.9%), Korea -10.9% (-8.9%), Russell -10.9%, Greece -11.7% (-8%), Switzerland -12.6% (-12.2%), Czech Republic -14.1% (-8.4%), Spain -14.4% (-11.4%), Denmark -14.4% (-11.4%), NASDAQ -14.9%, Belgium -16.3% (-12.8%), France -18.7% (-15.3%), Netherlands -19.2% (-15.8%), Germany -20.4% (-17.6%), Euro Stoxx 50 -20.6% (-17.3%), Italy -20.7% (-17.9%), Ireland -22% (-18.7%), Poland -23.2% (-15.7%), Finland -24.1% (-21.4%), Austria -24.2% (-21.5%), Sweden -24.4% (-17.9%), Hungary -26.7% (-20.7%), and Russia -41.1% (-34.8%).

Crack: “Finance doesn’t live in a vacuum,” said the Plumber on all fours, looking beneath the sink for the origin of a little leak. “There is no tidy scientific controlled experiment. The knock-on effects from sanctions in Russia are a stark reminder. European banks crashed more than 30% in the past three weeks, including a steep 19% decline last week. Credit default spreads are widening sharply in response. The strains emerging in European banks are tied partly to US dollar funding markets. Russia’s acrimonious exit from the financial system is not a spectator sport. It raises risks to broader financial instability.”

Crack II: “Interbank borrowing costs have jumped relative to overnight interest rates, surging to 35bps at the 3-month tenor from 5bps earlier in the month,” mumbled the Plumber, flashlight tucked between his teeth. “This is on-par with past warning signs of global strain: 2008 ahead of the financial crisis; 2011 into the European crisis; 2016 ahead of the global recession; 2018 in the repo shock; and 2020 into the pandemic. Market participants are on high alert,” explained the Plumber, my go-to-guy whenever the global financial pipes start to creak and bang.

Crack III: “Is it the next Great Financial Crisis?” asked the Plumber rhetorically. “No. Fighting yesterday’s war is futile. The GFC, like the Great Depression before it, was “Great” by way of incompetence more than shock. The role of the US dollar in the global financial system was poorly understood. The response was to build tools to repair this blind spot – the Fed was the central bank to the world, not just the US. It was very different from past experiences. Dollar funding crises in emerging markets were opportunities to instill orthodox economic programs in exchange for US dollar financing; this was a tell-tale signal for the private sector to buy EM equity assets at a steep discount.”

Crack IV:“But in the GFC, the numbers were implausibly large for a such a strategy,” explained the Plumber, no one better in the world. “New tools were needed and the Fed’s cross-currency swap line with foreign central banks was arguably most important. It brought the USD discount window to foreign banks through foreign central banks. And last week, the Fed cross currency swap lines were drawn, quietly appearing in Fed weekly balance sheet data. European banks need US dollars, and they are getting them from the Fed via the ECB. They couldn’t into the GFC because the tool didn’t exist.”

Crack V: “The shortfall of US dollar funding comes at a time when reserve balances with Federal Reserve Banks – excess reserve liquidity in a former name – are $3.9195bln,” said the Plumber, surprising me by not calculating it to the nearest penny. “This is a staggeringly large number, near record highs. Excess reserves would rarely rise above $10bln before the GFC, a time when reserve scarcity drove efficiency in funding markets. No more. The trauma of the GFC led the Fed to build tools to ensure a GFC repeat will not happen.”

Crack VI: “But that doesn’t make today’s tightening in credit conditions irrelevant, and it will be much harder to see a proactive policy response now,” said the Plumber. “Inflation is the big difference between past funding squeezes and the current one. In past periods, inflation was a footnote on the list of policy concerns for the Fed. Now, it is the headline act. President Biden declared “getting prices under control” as the top priority in his State of the Union address last week. And inflation expectations, rising sharply since the European conflict, are taking their cue from a shortage of energy and commodities, not the shortage of US dollars in global funding markets. This is different. It will limit the Fed pivot and move the “Fed put” much deeper out of the money.”

Anecdote: “Just a couple things today,” I said at One River’s internal risk meetings. “The first is an observation. Of the many Russia and Ukraine experts who dedicated decades to the study of the region, Putin, other key players, not even one expected this outcome,” I said. “Rarely when it comes to geopolitics does that happen. And when it does, it means we are entering a period of extraordinary uncertainty. So, while it is always important to approach markets and our portfolios with a great degree of humility, it is utterly critical to do so now. Don’t fool yourself into believing you can war-game this out. No one can, not even the key players, it is far too complex. People often like to say they have open minds. But the truth is very few people are capable of processing rapid change of this scale. Their thinking is anchored to the recent past, a decade, two at most. This applies equally to investors and political leaders. Therefore, we must remind ourselves that very few people who are interacting with markets and determining policy are capable of fully internalizing the range of new possibilities we must now consider. At one end of the spectrum of outcomes is a coup that replaces Putin, followed by an ending of hostilities. At the other is a nuclear conflict. There are many other possibilities we have not even considered. And during this period, assume that we will have to process information that is wildly inaccurate, intentionally deceptive, truces that come and go, cyber warfare, biological too, random volatility, etc. Our portfolios and risk management should reflect this – both market and operational risk. The second thing to keep in mind is that often in periods of great change, some very odd market behaviors appear, and these can foreshadow powerful trends that will soon emerge. The Yen is particularly weak when it would normally be a safe haven. The Chinese Renminbi is stable when it would typically be weak. Emerging market equites are surprisingly steady, Asia too. Stay attuned to unusual market divergences, prices that move in counter-intuitive ways. They don’t always lead to great opportunities, but they are the places to start looking.”

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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“So will they change all the maps now Dad?” asked Charlie. “Too soon to say at this stage, wars are notoriously unpredictable, and this one just started,” I explained. “Okay, but if Russia conquers Ukraine, will they just change the maps,” he asked, not yet freed from the illusion of certainty, stability. “Borders are always changing Charlie, especially in Europe. It’s the bloodiest place on earth. They’ve been killing each other forever. I’ll show you an amazing video that illustrates the shifting borders since 400 BC.” To see it click [here]. “Like the Crusades? We learned about those,” said my youngest. “Yeah, they’re part of the insanity.”

Overall: “I am here. We are not putting down arms,” said Zelensky, standing in Kyiv, live streaming to his countrymen. “We will be defending our country, because our weapon is truth, and our truth is that this is our land, our country, our children, and we will defend all of this,” continued Ukraine’s brave young President. “That is it. That's all I wanted to tell you. Glory to Ukraine.” Western intelligence agencies identify Zelensky as Putin’s #1 target for assassination. His family #2. “The fight is here. I need ammunition, not a ride,” declared Zelensky, rejecting Biden’s offer to be evacuated. 43mm Ukrainians watched. 143mm Russians. 330mm Americans. 447mm Europeans. 1.45bln Chinese. Truth be told, most of our little planet’s 8bln watched as Zelensky played a remarkably weak hand with courage. David to Putin’s Goliath. In a world numbed by the cowardice of our politicians, such a display by the young Ukrainian reminded us of what we seem to have lost. What it means to lead. The power of one. Such individuals hold the potential to reshape history in unexpected ways. And as the Ukrainians rose to expel Russian invaders, western politicians were led by Zelensky, drawn to ratchet up their shamefully weak initial sanctions. Putin, of course, must now win at all costs and is therefore at his most dangerous. We will soon discover if he is insane, or simply ruthless. “If Western leaders do not provide assistance, then tomorrow war will knock on your doors,” warned Zelensky, appalled by the West’s timidity in imposing meaningful consequences. Construction for the Nord Stream 2 pipeline started a year after Putin annexed Crimea in 2014. The unwillingness of the West’s politicians to call for shared near-term sacrifice to ensure long-term security and prosperity has created monsters. In Europe. Asia. Our climate. The financial system too. And we have entered a decade when, like it or not, we will be pressed to confront these problems of our own creation.

Week-in-Review (expressed in YoY terms): Mon: Presidents’ Day holiday in the US, Putin recognize the independence of separatist regions of Ukraine (Donbas region) and agrees to send peacekeepers there, UK announced end to all covid restrictions, Chinese regulators advise banks to examine exposure to Ant Group as regulatory crack down on Chinese tech companies intensifies, Australia demands investigation into why Chinese war ship shined a laser at surveillance plane, China keeps prime rates unch as exp, German PPI 25% (24.4%e), EU mfg PMI 58.4 (58.7e) / serv PMI 55.8 (52.1e) / comp PMI 55.8 (52.9e), S&P closed; Tue: Germany says will halt certification of Nord Stream 2, western allies announce sanctions on Russia for breaking international law / US puts restrictions on Russian sov debt, Fed’s Bowman has open minds to the size of rate hikes, Hungary hikes 50bps as exp, Thailand raises covid alert to level 4, US Case Shiller 18.56% (18.1%e), US mfg PMI 57.5 (56e) / serv PMI 56.7 (53e) / composite PMI 56 (52.5e), Richmond Fed 1 (10e), S&P -1.0%; Wed: EU joins US in putting restrictions on Russia sov debt, RBNZ delivered a hawkish 25bps hike / formally announced QT, BOE’s Bailey continues to strike dovish tone / BOE’s Broadbent says further policy tightening is needed, UK declares state of emergency, Biden / Putin meeting canceled, Blinken / Lavrov meeting canceled, ECB’s Holzmann expects 2 hikes by year end / ECB’s Villeroy emphasized the need for flexibility, Fed’s Bostic says must move off emergency stance, Canada moved to “unfreeze” the bank accounts of the “Freedom convoy” protestors, EU CPI (final) 5.1% as exp, Brazil IPCA infl 10.76% (10.63%e), S&P -1.8%; Thu: Russian troops invade Ukraine / Putin vows to demilitarize Ukraine and replace its leaders, Brent crude hits $105/barrel, Russian equities fall over 30% / global equities stage a midday rebound with US indices finishing materially higher on the day, western allies respond with more sanctions targeting ~80% of Russian banking sector (but not closing off SWIFT), ECB Holzmann says Ukraine conflict may delay stimulus exit, Fed’s Mester acknowledges Ukraine situation as a factor in determining the appropriate pace to remove accommodation, US 4Q GDP Annualized 7% as exp / personal cons 3.1% (3.4%e), S&P +1.5%; Fri: Putin calls for Ukrainian soldiers to overtake Zelensky’s govt, US sanctions Putin and Lavrov (largely symbolic), Biden nominates Ketanji Brown Jackson to the supreme court, Fed’s Waller noted that if data continues to run hot then could be a strong case for 50bp hike in March, ECB’s Lane acknowledged the risk of stagflation as result of the Russia/Ukraine war – could shave 0.3-0.4% off GDP and drive 2022 inflation much higher, Xi urged Putin to negotiate, Moody’s downgrades Russia sov credit rating, CDC eases mask guidance for those vaccinated, German impt prices 26.9% (23.7%e), Sweden PPI 19.8% (20.1%p), German 4Q GDP 1.8% (1.4%e), France CPI 4.1% (3.7%e) / cons spending -2.1% (-1.8%e), US personal inc 0% (-0.3%e) / personal spending 2.1% (1.6%e), US PCE Deflator 6.1% (6%e), US durable goods orders 1.6% (1%e), Russia IP 8.6% (7.2%e), US pending home sales -9.1% (-1.8%e), US UofM 62.8 (61.7e) / 1y infl exp 4.9% / 5-10y infl exp 3%, S&P +2.2%; Sat/Sun: EU and US agree to disconnect some Russian banks form SWIFT, Putin puts nuclear deterrent on special alert, cash runs at Russian banks (ATMs run out of cash), Ukraine announces talks with Russia at Belarus border.

Weekly Close: S&P 500 +0.8% and VIX -0.16 at +27.59. Nikkei -2.4%, Shanghai -1.1%, Euro Stoxx -1.6%, Bovespa +0.2%, MSCI World -0.1%, and MSCI Emerging -4.9%. USD rose +7.3% vs Russia, +4.6% vs Ethereum, +2.4% vs Bitcoin, +1.3% vs Sterling, +1.2% vs Turkey, +0.8% vs India, +0.5% vs Euro, +0.5% vs Yen, +0.3% vs Indonesia, +0.3% vs Mexico, +0.3% vs Brazil, +0.1% vs South Africa, and +0.1% vs Chile. USD fell -0.7% vs Australia, -0.3% vs Canada, -0.1% vs China, and -0.1% vs Sweden. Gold -0.6%, Silver -0.1%, Oil +1.5%, Copper -0.9%, Iron Ore -11.9%, Corn +0.5%. 5y5y inflation swaps (EU +8bps at 1.83%, US +12bps at 2.46%, JP +10bps at 0.70%, and UK -1bps at 4.00%). 2yr Notes +10bps at 1.57% and 10yr Notes +3bps at 1.96%.

YTD Equity Indexes (high-to-low): Brazil +16% priced in US dollars (+7.9% priced in reais), Colombia +11.8% priced in US dollars (+7.5% in pesos), Chile +10.2% in dollars (+3.6% in pesos), Saudi Arabia +9.1% (+9%), UAE +7.5% (+7.5%), South Africa +5.9% (+1%), Singapore +4.9% (+5.5%), Indonesia +4.1% (+4.7%), Thailand +3.8% (+1.3%), Greece +2.5% (+3.8%), Turkey +0.8% (+5.1%), Argentina +0.7% (+5.4%), Malaysia +0.5% (+1.5%), Philippines +0.5% (+1.3%), UK +0.3% (+1.4%), Norway -0.9% (-0.1%), Mexico -1.2% (-1.3%), Canada -1.4% (-0.6%), HK -2.8% (-2.7%), Czech Republic -3.2% (-3%), Spain -3.2% (-2.6%), Taiwan -4.2% (-3.1%), China -4.6% (-5.2%), India -4.8% (-4%), Portugal -6.4% (-5.2%), Italy -6.4% (-5.8%), France -6.8% (-5.6%), Australia -6.9% (-6%), Israel -6.9% (-2.3%), Belgium -7% (-5.8%), Venezuela -7.1% (-11%), MSCI World -7.8% (-7.8%), S&P 500 -8%, Switzerland -8.2% (-6.9%), Japan -8.5% (-8%), Ireland -8.8% (-7.6%), Euro Stoxx 50 -8.8% (-7.6%), Germany -8.9% (-8.3%), Russell -9.1%, Hungary -9.6% (-9.8%), Austria -9.8% (-9.2%), Netherlands -9.9% (-8.8%), New Zealand -10.2% (-8.5%), Korea -10.8% (-10.1%), Denmark -12.2% (-11.6%), Finland -12.3% (-11.7%), NASDAQ -12.5%, Poland -14.5% (-12.8%), Sweden -15.1% (-11.5%), and Russia -41.1% (-34.8%).

Red Buttons: Russia has 6,255 nuclear weapons, followed by the US with 5,500. China has 350, France 290, the UK 225. Pakistan has 165 warheads to defend itself from India, with 156. Israel is estimated to have 90 nukes. North Korea is believed to have enough fuel to build 40-50 nukes. Iran is headed there too. We detonated Little Boy over Hiroshima in 1945 and killed 150,000. It had the force of 15,000 tons of TNT. The average nuke today contains the force of 100,000 tons. Many are far larger. One such weapon dropped on New York City would kill an untold number.

Fat Fingers: Vladimir Putin controls Russia’s arsenal. Biden is America’s commander-in-chief. Xi Jinping rules over China, potentially for life. There’s Macron of course. Boris Johnson too. Imran Khan is Pakistan’s Prime Minister, although Arif Alvi is its President and commander-in-chief. Modi is India’s Prime Minister and regularly engages in petty skirmishes with two nuclear-armed neighbors. Naftali Bennett is Israel’s PM. Kim Jong-un leads North Korea with ten stubby fingers. And who could forget Ali Khamenei, Supreme Leader of Iran for life.

Lonely: One thing uniting humanity is the belief that the majority of earth’s 14,000 nuclear weapons are controlled by men who are mentally unstable and unfit to wield such awesome power. Some of us believe 100% of these weapons are controlled by such people. Barely a person on the planet would choose a nuclear war, yet we created a system that empowers others to do just that, on a moment’s notice. An alien would likely observe that such a concentration of power is a gross failure of any species. Perhaps it’s a stage of development that few, if any, advance beyond. Maybe that’s why we have not been visited.

Inevitable: Absolute power corrupts absolutely. But not all power is absolute. So we observe gradations of corruption, usually corresponding to the degree to which power is concentrated. The Catholic Church is reluctantly confronting its decades of unforgivable sin, buried beneath bureaucracy. Whole industries have done the same. Big tobacco. The Sackler’s Purdue Pharma opioid epidemic. And corruption is contagious. So those nations that fight against it and honor the rule of law outperform others. But even in such societies, the battle is never won. We have come to accept that there is no better system. But nothing in human affairs is inevitable.

Impermanence: Money is central to all modern human activity, yet it is an illusion. Central banks operate with governments to distort its value at will. The concentration of their power is as breathtaking as it is difficult for the citizenry to comprehend. While it is generally wielded with the best intentions, the impact on us all are profound. Since Lehman failed, global central banks have purchased $23.3trln of financial assets, lifting to new highs the fortunes of those who already had wealth, so that US private sector financial assets are now 6.3x GDP (up from 2.8x in the early 1980s). Such a societal choice was never put to a vote. And this system, like all systems we have created, is surely impermanent.

Anecdote: “The world as we have created it is a process of our thinking — it cannot be changed without changing our thinking,” wrote Einstein. Like much of his work, it contains many layers. And as with all things profound, the observation is timeless. Einstein helps us understand how we can have such deeply divided nations. They are in fact different realities, created by their respective inhabitants, as vivid to one group as the other. Only by opening our minds and changing our thinking can we connect the two. But Einstein also challenges us to examine our collective beliefs. One assumed truism is that the world must operate with centralized power structures. Tribes, kingdoms, empires, nation-states; we experimented with them all. And armies, religions, universities, corporations, financial exchanges, central banks. Atop each sits a King or Queen, President or Pope, choose your title, the function holds. Naturally, we have various methods of selecting leaders, and ways to empower or restrain them. We’ve also explored a variety of structures to distribute economic output. Feudalism, capitalism, socialism, communism. Some believe passionately in one or the other, but we all accept the broad structure because we assume the world cannot operate at scale without a central authority, a clearinghouse to mediate our disputes, set our standards, define domestic laws, international too. And enforce them. It is hard to imagine a world without centralized authority. But for the first time in human history, a new technology allows us to build decentralized accounting systems we can all trust. This is a stunning breakthrough upon which entirely new governance systems can be built. Bitcoin was the pioneer. Its success has spawned countless new applications, some more decentralized than others. The innovation has barely just begun and now attracts the brightest young minds across the world, allowing them to think about new, more inclusive ways to organize. Venture capital has followed. Speculators. The frenzy itself is breathtaking. And when we look back, 100-years hence, we will surely see this as the period when we began a great transition, even if today, we cannot yet quite imagine the world we will have created.

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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