Dusted off an anecdote from late 2018, exploring the preconditions for what has started to unfold in markets, politics, policy (see below). It’s often good to step back, survey the landscape. The dynamics that brought us here were decades in the making. And it would be unprecedented if this cycle shift lasts less than ten years.
Back in January with full weekend notes. All the best, E
Week-in-Review (expressed in YoY terms): Mon: South Africa omicron cases surge but hospitalizations remain very low, PBOC cuts RRR 50bps, BOE Broadbent strikes a dovish tone, Saudi Arabia hikes the price of crude, Fauci says omicron severity is “encouraging”, US announces diplomatic boycott of the Beijing Olympics due to China’s human-rights abuses, Ukraine president Zelensky says capable of fighting off an attack from Russia, S&P +1.2%; Tue: RBA unch as exp, Biden/Putin have video conversation – Biden threatens economic sanctions if Russia invades Ukraine, EU travel restrictions unlikely due to omicron, Evergrande debt holders yet to receive coupon payment despite end of grace period, UAE switches its weekend to Sat/Sun from Fri/Sat, Australia house prices 21.7% as exp, China expts 22% (20.3%e) / impts 31.7% (21.5%e), S. Africa 3Q GDP 2.9% (3.8%e), German ZEW 29.9 (25.4e), EU final 3Q GDP 3.9% (3.7%e), US unit labor cost 9.6% (8.3%e), S&P +2.1%; Wed: third booster shows evidence of being effective against omicron, Brazil CB hikes 150bps as exp, UK looks to impose more restrictive measures as omicron spreads rapidly, BoC unch as exp – removed “transitory” from inflation description, Scholtz takes over as German chancellor, RBI on hold as expected, Erdogan reiterates support of lower interest rates, Brazil ret sales -7.1% (-6.2%e), Russia CPI 8.4% (8.35%e), S&P +0.3%; Thur: Evergrande officially labeled a defaulter for the first time, China hikes FX reserve requirement ratio to stem currency strength, study finds omicron to be 4.2x more transmissible than delta, US senate blocks Biden’s vaccine mandate for private sector workers, Hungary hiked 20bps as exp (5th time in less than 1m), China CPI 2.3% (2.5%e) / PPI 12.9% (12.1%e) / agg financing 2.61T (2.696T exp), Mexico CPI 7.37% (7.24%e), US init claims 184k (220k exp), S&P -0.7%; Fri: US CPI 6.8% as exp / core CPI 4.9% as exp, Turkey CB intervened for third time this month – lira unch by the end of the day, Peru CB hiked 50bps as exp, US Senate passed a fast track measure to raise the debt ceiling, France to not participate in diplomatic boycott of Beijing games, Japan PPI 9% (8.5%e), Norway CPI 5.1% (4.6%e), Turkey exp infl 21.39% (15.61%p), UK IP 1.4% (2.2%e), Italy IP 2% (3.3%e), India IP 3.2% (3.7%e), Mexico IP 0.7% (1.8%e), Brazil IPCA infl 10.74% (10.9%e), Canada capacity utilization 81.4% (83%e), US UofM 70.4 (68e) / 1y infl 4.9% (5%e) / 5-10y infl unch at 3%, S&P +1.0%; Sat: Navy beats Army 17-13.
Weekly Close: S&P 500 +3.8% and VIX -11.98 at +18.69. Nikkei +1.5%, Shanghai +1.6%, Euro Stoxx +2.8%, Bovespa +2.6%, MSCI World +3.3%, and MSCI Emerging +1.1%. USD rose +16.4% vs Bitcoin, +11.3% vs Ethereum, +1.3% vs Turkey, +0.8% vs India, +0.6% vs Yen, +0.1% vs Chile, and flat vs Euro. USD fell -2.4% vs Australia, -1.8% vs Mexico, -1.0% vs Sweden, -0.9% vs Canada, -0.8% vs Brazil, -0.7% vs Russia, -0.7% vs South Africa, -0.3% vs Sterling, -0.2% vs Indonesia, and -0.1% vs China. Gold +0.1%, Silver -1.3%, Oil +8.2%, Copper +0.5%, Iron Ore +4.5%, Corn +1.0%. 5y5y inflation swaps (EU -3bps at 1.88%, US +3bps at 2.48%, JP +3bps at 0.43%, and UK -6bps at 3.90%). 2yr Notes +7bps at 0.66% and 10yr Notes +14bps at 1.49
YTD Equity Indexes (high-to-low): UAE +76.1% priced in US dollars (+76.1% priced in dirham), Argentina +38.2% priced in US dollars (+66.8% in pesos), Israel +31.9% in dollars (+27.2% in shekels), Czech Republic +30.3% (+36.8%), Saudi Arabia +25.9% (+25.9%), Austria +25.5% (+36.3%), S&P 500 +25.5%, Taiwan +22.6% (+21%), NASDAQ +21.3%, India +20.9% (+25.2%), Canada +20.4% (+19.8%), MSCI World +18.5% (+18.5%), Norway +18.3% (+23.3%), Netherlands +16.8% (+26.2%), France +16.6% (+25.9%), Russia +16% (+14.3%), Denmark +15.7% (+25.5%), Switzerland +13% (+17.8%), Sweden +12% (+23.5%), Russell +12%, Hungary +11.7% (+21.5%), Mexico +11.2% (+16.2%), Italy +10.7% (+20.2%), South Africa +10.4% (+20.2%), UK +9.7% (+12.9%), Poland +9.4% (+19.9%), Euro Stoxx 50 +9.4% (+18.2%), Indonesia +8.7% (+11.3%), China +8.2% (+5.6%), Venezuela +7.5% (+337.2%), Singapore +6.9% (+10.3%), Finland +6.6% (+15.7%), Belgium +6.4% (+14.9%), Germany +4.9% (+13.9%), Australia +4.1% (+11.6%), Greece +2.8% (+11.1%), Ireland +2.6% (+10.8%), Portugal +0.8% (+8.8%), Thailand -0.3% (+11.7%), Korea -3.3% (+4.8%), Philippines -3.8% (+0.7%), Spain -4.1% (+3.5%), Japan -5.6% (+3.6%), New Zealand -7.2% (-1.8%), Chile -11% (+5.5%), HK -12.4% (-11.9%), Malaysia -12.7% (-8.5%), Colombia -15.2% (-3.4%), Brazil -16.6% (-9.5%), Turkey -26.1% (+37.8%).
Anecdote (Oct 2018): The future is unknowable. Yet never has capital been so concentrated in strategies that depend on the future closely resembling the past. The most dominant of these strategies requires bonds to rally when stocks fall. For decades, both rose inexorably. And a new array of increasingly complex and illiquid strategies depends on a jump in volatility to be followed by a rapid decline of equal magnitude. They appear uncorrelated until they are not. Virtually every investment portfolio measures risk by utilizing some combination of volatility and correlation, both of which are backward-looking and low. But the present is knowable. The past too. And the multi-decade trends that carried us to today produced levels of inequality rarely seen. Low levels of inflation, growth, productivity, and volatility are features of this cycle’s increasingly unequal distribution. But cycle extremes produce pressures that reverse their direction. On cue, an anti-establishment political wave washed away the globalists, with promises to turn the tide. Such change is nothing new, just another loop around the sun. Now signs of a cycle swing abound; shifting trade agreements, global supply chains, military dynamics, immigration, wage pressures, polarization, nationalism, tribalism. To an observer, it’s neither right nor wrong, it simply is. Some see parallels between today and the late-1930s, which led to World War II. We also see parallels with the mid-1960s, which led to The Great Inflation. What comes next is sure to look different still. But investment strategies that prospered from the past decade’s low inflation, growth, productivity and volatility will face headwinds as this cycle turns. Those strategies that suffered should enjoy tailwinds. That’s how cycles work. And we know the 1940s was a strong decade for Trend performance. The 1970s was the best decade for Trend in 150yrs. And following cycle turns in both the 1930s and 1960s, the world became a profoundly volatile place.
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, 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.