wknd
notes


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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: A Thing For Numbers

Zu Chongzhi was exposed to astronomy and mathematics as a child living in the Liu Song Dynasty. A time of turmoil, uncertainty, opportunity. The young man discovered he had a special thing for time, numbers, and devoted his remarkable life to their study. In 525AD he calculated that one earth year equaled 365.2428148 days, which is very close to our contemporary value of 365.2421988. He interpolated a calculation for the volume of a sphere, and calculated pi so accurately that his approximation became standard for 800yrs. To record the intermediate results of his endless calculations, Zu Chongzhi used a pile of wooden sticks, laid out in unique patterns. The pace of human progress has since accelerated. 2,519 years after Zu Chongzhi died, Google announced quantum supremacy, solving a mathematical problem in 200 seconds that would have taken the world’s fastest supercomputer 10,000 years to execute. Just 2 years later, the Chinese named their quantum computer the ZuChongzhi. It just solved a problem 100-times more difficult than what Google tackled. China’s quantum computer has 66 qubits, but the team used only 56 for this experiment, which implies that its performance may be exponentially higher. So much work to stabilize such systems is still to be done. So it is. And in other news, Beijing tightened the screws on Didi and their big tech companies. Exerting their dominance over data, while signaling to the US that they will not be brought to bear for defending their interests. The Americans seemed distracted, withdrawing from a $1trln Afghan fiasco. Their financiers consumed by silly debates, like whether inflation is passing or permanent, while the deficit has soared 15% two years running, fully funded by the central bank. And their politicians fighting as always, actively eroding the very source of the nation’s strength – democracy.

Week-in-Review (expressed in YoY terms): Mon: holiday – quiet markets, Russia linked hackers target 1k companies with ransomware, NBP Glapinski says inflation is “not worrying”, China orders Didi to be taken off app stores after $4.4b US IPO, OPEC+ abandons discussions over production cuts, Israel study says Pfizer vaccine 64% effective at preventing infection but 93% effective at preventing serious illness, Bezos last day as Amazon CEO, Australia ret sales 0.4% MoM (0.1%e), China Caixin Services PMI 50.3 (54.9e), Singapore ret sales 79.7% (65%e), France IP 20.5% (21.7%e), Turkey CPI 17.53% (16.8%e) / PPI 42.89% (41.4%e), EU composite PMI 59.5 (59.2e), Israel CB unch as exp, S&P closed; Tue: RBA unch / mild taper starting after September / no hikes until 2024, Bolsonaro popularity at lowest point amid rumors of vaccination related corruption, ECB to host special GC meeting to discuss Strategy Review, UK Health minister warns cases could jump to 100k/day (from 28k today), China says will increase supervision of Chinese firms listed outside country, Hungary ret sales 5.8% (7%e), Taiwan unemp 4.15% (3.72%e), EU ret sales 9% (8.2%e), US Services ISM 60.1 (63.5e), US Markit composite PMI 63.7 (63.9p), S&P -0.2%; Wed: FOMC mins show tapering discussions kicked off but remain vague, China signals impending RRR cut, Haiti president Moise assassinated, Iran said it has started producing enriched uranium metal as fuel for a research reactor, “Ever Given” owner asked to pay $550m for the ships blockage of the Suez Canal, Eric Adams officially wins NYC democratic mayoral primary, Japan leading index 102.6 (102.7e), German IP 17.3% (17.7%e), Italy ret sales 13.3% (10.8%e), Taiwan CPI 1.89% (2.25%e), Brazil ret sales 16% (17.5%e), Russia CPI 6.5% (6.4%e), S&P +0.3%; Thur: ECB strategy review adopts an inflation target of 2% with the allowance of overshooting (ie AIT lite), Japan announces no spectators at Olympics, global covid death toll tops 4m, Africa records 251k/week covid cases – worst week since pandemic began, Japan bankruptcies -30.64% (50.31%p), Swiss unemp 3.1% (2.9%e), Malaysia CB unch as exp, Hungary CPI 5.3% (4.9%e), Mexico CPI 5.88% (5.87%e), Brazil IPCA infl 8.35% (8.41%e), US init claims 373k (350k exp), S&P -0.9%; Fri: China cuts RRR by 0.5% – net net ~1T yuan released, Fed’s Daly says Fed will hike rates only after tapering completed, IMF approves $650b allocation to help poor countries recover from pandemic, US added Chinese/Iranian/Russian entities to its blacklist over human rights abuses, Taliban claims they now control 85% of the country now that the US has pulled out of Afghanistan, ECB’s Weidmann says ECB won’t deliberately seek higher inflation, Pfizer to seek FDA emergency authorization for a 3rd covid booster jab, China CPI 1.1% (1.2%e) / PPI 8.8% as exp / New loans 2.12T (1.85T exp) / M2 8.6% (8.2%e), Norway CPI 2.9% as exp, UK IP 20.6% (21.6%e), Italy IP 21.1% (24.8%e), Canada emp change 230.7k (175k exp) / unemp 7.8% as exp, S&P +1.1%

Manufacturing PMI (high-to-low): Netherlands 68.8 (previous month 69.4), Austria 67 (previous 66.4), Switzerland 66.7 (prev. 69.9), Sweden 65.8/66, Germany 65.1/64.4, UK 63.9/65.6, Czech Republic 62.7/61.8, Italy 62.2/62.3, Norway 60.8/58.52, United States 60.6/61.2, Spain 60.4/59.4, Poland 59.4/57.2, France 59/59.4, Greece 58.6/58, Taiwan 57.6/62, Canada 56.5/57, Brazil 56.4/53.7, Hungary 54.7/53.1, South Korea 53.9/53.7, Indonesia 53.5/55.3, Japan 52.4/53, Hong Kong 51.4/52.5, China 51.3/52, Turkey 51.3/49.3, South Africa 51/53.2, Singapore 50.8/50.7, Russia 49.2/51.9, Mexico 48.8/47.6, India 48.1/50.8, Vietnam 44.1/53.1. Services PMI: Sweden 67.4/71.3, US 64.6/70.4, Ireland 63.1/62.1, Spain 62.5/59.4, UK 62.4/62.9, France 57.8/56.6, Australia 57.8/61.2, Germany 57.5/52.8, Italy 56.7/53.1, Russia 56.5/57.5, Brazil 53.9/48.3, China 50.3/55.1, Japan 48/46.5, India 41.2/46.4.

Weekly Close: S&P 500 +0.4% and VIX +1.11 at +16.18. Nikkei -2.9%, Shanghai +0.1%, Euro Stoxx +0.2%, Bovespa -1.7%, MSCI World +0.2%, and MSCI Emerging -2.7%. USD rose +4.0% vs Brazil, +1.9% vs Russia, +1.8% vs Chile, +1.0% vs Canada, +0.5% vs Australia, +0.5% vs Mexico, +0.3% vs Sweden, +0.1% vs China, and flat vs Bitcoin. USD fell -3.0% vs Ethereum, -0.8% vs Yen, -0.6% vs Sterling, -0.4% vs Turkey, -0.2% vs South Africa, -0.1% vs India, -0.1% vs Euro, and flat vs Indonesia. Gold +1.2%, Silver -1.5%, Oil -0.7%, Copper +1.5%, Iron Ore +1.2%, Corn -11.1%. 5y5y inflation swaps (EU flat at 1.58%, US -10bps at 2.24%, JP -15bps at 0.16%, and UK flat at 3.69%). 2yr Notes -2bps at 0.22% and 10yr Notes -6bps at 1.36%.

YTD Equity Indexes (high-to-low): UAE +38% priced in US dollars (+38% in dirham), Saudi Arabia +24.6% in US dollars (+24.6% in riyal), Taiwan +20.1% (+19.9%), Austria +19.4% (+23.6%), Canada +18.9% (+16.2%), Sweden +18.2% (+23.7%), Russia +17.4% (+17.2%), S&P 500 +16.3% (+16.3%), Norway +15.8% (+17.2%), Russell +15.5% (+15.5%), Poland +14.4% (+17.7%), France +14.2% (+17.6%), NASDAQ +14.1% (+14.1%), South Africa +13.9% (+10.7%), Netherlands +13.8% (+17.2%), Hungary +13.6% (+14.5%), Mexico +13.4% (+12.9%), Finland +12.3% (+16.3%), Belgium +12.2% (+15.5%), UK +11.9% (+10.2%), Denmark +11.6% (+15.5%), Euro Stoxx 50 +11.2% (+14.5%), Czech Republic +10.7% (+12.5%), Germany +10.4% (+14.4%), India +10% (+12.2%), Italy +8.8% (+12.7%), Israel +8.4% (+10.7%), Ireland +8.4% (+11.7%), Switzerland +8.1% (+12%), Singapore +7.6% (+10.1%), Australia +7.4% (+10.4%), Argentina +6.7% (+21.8%), Korea +6.5% (+12%), Spain +5.5% (+8.7%), Greece +4.9% (+8.1%), Brazil +4% (+5.4%), China +2.2% (+1.5%), HK +0.2% (+0.4%), Portugal -1% (+2%), Thailand -1.3% (+7.1%), Indonesia -2.1% (+1%), Chile -3.2% (+1.7%), Japan -4.6% (+1.8%), New Zealand -5.7% (-3.1%), Philippines -8.3% (-4.3%), Malaysia -10.4% (-6.6%), Colombia -19.7% (-10.1%), Turkey -19.9% (-6.7%).

Viva: “Revolutions are defined by the revolutionaries,” said Marcel Kasumovich, our head of research. “History may find them after the fact, but we are living with them in real time. It started with Satoshi’s anonymity. This is part of the revolutionary design. Components of the Bitcoin protocol were invented long before Satoshi brought it together in a single, stable protocol. Adam Back created hash-cash that is the currency unit of the Bitcoin protocol. Satoshi is the Picasso, the creative genius, transforming buckets of paint into an enduring philosophy. Perhaps Satoshi understood there was no timetable for success. It could take days, years, or decades to inspire a generation. The anonymity of Satoshi allows the group to live forever. We are all Satoshi.”

Viva II: “It is not your average youth movement. It will not be defined by a noisy twitter debate or clever memes,” continued Marcel, placing this moment in historical context. “Vitalik Buterin was inspired by Satoshi, and the Ethereum protocol is going through its most profound transformation since its inception only a short six years ago. Would Satoshi have agreed with the Buterin fork? It is not the point. Splinters in the revolution are precisely part of the creative process; if you are not breaking things on the path to innovation, you are not doing it right. Then there is Stani Kulechov. A student of law in Helsinki Finland with an interest in programming who discovered the world of fintech through the lens of the Ethereum protocol and the smart contracts it could employ. ETHLend was created in 2017, and it is better known as the leading lending protocol of Aave.”

Viva III: “Aave is now the leader in decentralized finance. There is $10bln of locked capital in Aave protocols. Almost half of the $15bln in DeFi lending happens on the Aave protocol. Of the interest paid through DeFi lending, 46% is done through Aave at an annualized rate of $245mm. It is tempting to trivialize the achievement. After all, total loans and leases in the US commercial banking system are more than $10trln. But keep in mind Stani Kulechov achieved his graduate degree in law in 2018 and his interest in computer programming was cultivated as a teenager. The revolutionaries are not chasing any traditional financial institution. They are chasing a desire to make things better, and a hope for getting closer to the truth. In Kulechov’s words, “DeFi might not replace all TradFi service providers, but it will replace the software and infrastructure that TradFi is based upon”. With no hint of irony, he observes that “TradFi becomes the gateway for DeFi.””

Viva IV: “Regulation. It is the word to put shivers in the spine of any traditional institution evaluating asset allocation in the digital ecosystem. Regulation will not stand for it. Regulation will slow growth. Regulation will redistribute profit. Regulation will force decentralized agencies to be on a level playing field with centralized ones - as though traditional institutions are somehow disadvantaged from capital-starved decentralized players. It is a term used to invoke fear, and it requires far more precision in its mention. The crypto economy is regulated. Ask anybody in the money service business who is registered with FinCEN and provides thousands of monthly reports on suspicious transactions, by regulatory decree. As the crypto economy enters the mainstream, it will blend with TradFi as a matter of practicality. It must and it will.”

Viva V: “Regulation is the gateway for DeFi to enter the mainstream, and it is already happening. Last August, Aave received an Electronic Money Institution license from the UK Financial Conduct Authority, that allowed the protocol to trial services with UK citizens. Aave Pro will be released in this month, aimed at bringing institutions into the liquidity pool of decentralizing lending. Well-regarded smart contracts will add centralized tools such as whitelisting of addresses and know-your-customer provisions. These are precisely the steps that the FATF regulatory body would desire.”

Viva IV: “There is no turning back,” explained Marcel. “The technology is being tested, adopted, and admired. The revolution is happening from within institutions with leaders who see a better way. It will take time for users to see the value. After all, statues of revolutionaries are only mounted long after their work is done. But make no mistake – the people and firms who underestimate the intelligence, drive and creativity of those working on change are precisely the ones who will be, at best, left behind and, at worst, run-over by the technologies. These are not our parents’ revolutionaries.”

Anecdote: Each generation believes it can create a better world. Were it not so, we would still live in caves. Some generations thirst for change through revolution. That probably has to do with longer term economic and political cycles. But for whatever reason, amongst these revolutionary generations, some are more determined, effective. The 1960s-70s youth seemed radical, but they were far from French revolutionaries. Their actions failed to spark an inferno. My wife Mara grew up in a hippy enclave during that period. Her town sought to opt out of the system by going backward, living off the land, returning to simpler times. But history rarely turns back the clock for long. That generation never had a credible plan to replace the system with something better. Nor did it have a new technology to amplify force. The establishment knew this. The youth back then presented no real threat, just the appearance of instability. Daisies and LSD. But today’s youth have built the technologies to power revolution. Their protocols remain nascent, but if they’re allowed to flourish (or if they cannot be stopped), they will credibly replace incumbent industries that the masses have come to despise (retail banks, commercial banks, central banks, wall street, money transfer agents, credit card companies, social media companies, exchanges of every kind, censors, and the list has just started). Someday these technologies may threaten our notion of centralized government control. In the 1960s-70s, incumbents knew the revolutionaries had no credible plan. This time, revolutionary technologies are already being rolled out. They are more efficient, cheaper, faster. They cut out the middlemen. And empower the individual. Today’s incumbents are threatened with extinction. In fact, if today’s business leaders were 30yrs younger, most would be racing to build their companies/wealth in this new field of blockchain. This is what a credible revolution looks like, waged by brilliant youth, impassioned, with fantastic ideas, immense wealth, and humanity’s most powerful technologies, applied in ways that incumbents can barely understand. And it is too early to tell exactly where this new generation will lead us, only that it is to a profoundly different future.

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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