Hope all goes well… Dusted off an anecdote from Nov 2016 following a conversation with one of our industry greats about disruption, destruction, adaptation, outperformance (see below). Hope you had a great summer break. Enjoy the rest of your Labor Day. See you next Sunday with full weekend notes. All the very best, Eric
Week-in-Review: Mon: UK holiday / lowest US equity volume of the year, China lowers stamp duty / slows IPO / asks mutual funds to avoid selling equities in latest measures to curb equity market weakness, ECB’s Holzmann says likely need to hike in September, over the weekend at JH BOJ’s Ueda says infl still below 2% target, Evergrande fell 79% after 17m trading halt, EU M3 -0.4% (0.0%e), US Dallas Fed mfg -17.2 (-19e), S&P +0.6%; Tue: rumors of sooner than expected RRR cut from China, court rules in favor of Greyscale in case against SEC’s Bitcoin ETF decision, JOLTS miss causes sharp fixed income rally / supports risk assets, RBA’s new Gov Bullock expects to make decisions month to month for the foreseeable future, Japan unemp 2.7% (2.5%e), Mexico 2Q(final) GDP 3.6% (3.7%e), US Consumer Confidence 106.1 (116.0e), US JOLTS Openings 8.827m (9.5m exp), US Case Shiller Home Prices -1.17% (-1.6%e), S&P +1.5%; Wed: OpenAI predicted to make $1b in annual rev, BoJ’s Tamura (hawk) says could see clarity on inflation in Q1 / could remove NIRP, Coup in Gabon cancels recent disputed presidential elections, Hurricane Idalia makes landfall along FL west coast, S. Africa reveals largest budget deficit since 2004, Chinese gov’t asked banks to inspect books of large shadow bank – sparking fears of greater concerns, Australia building approvals -8.1% MoM (-0.5%e), Australia CPI 4.9% (5.2%e), EU consumer conf unch at -16, Germany CPI 6.4% (6.3%e), US ADP 177k (195k exp), US 2Q (second) GDP 2.1% (2.4%e) / US Personal cons 1.7% (1.8%e), Russia Unemployment Rate 3.0% (3.1%e) / ret sales 10.5% (9.5%e), S&P +0.4%; Thu: China announces nationwide mortgage stimulus measures / announces child and elderly care tax deductions, ECB’s Schnable gives balanced speech but acknowledges stagflation concerns in slight shift in historically hawkish tone, Russia agrees with OPEC+ on more oil supply cuts, BOE’s Pill suggests extended pause (despite significant hikes priced in), Banxico announces it will phase out its FX hedging program that began in 2017 to stem MXN weakness, S. Korea IP -8.0% (-6%e), Japan ret sales 6.8% (5.5%e) / Japan IP -2.5% (-1.4%e), Australia private sector credit 5.3% (5.5%p), China mfg PMI 49.7 (49.2e) / serv 51 (51.2e) / comp 51.3 (51.1p), Japan housing starts -6.7% (-1.3%e), France CPI 5.7% (5.4%e), Turkey 2Q GDP 3.8% (3.1%e), Germany unemp 5.7% as exp, Italy unemp 7.6% (7.4%e), Italy CPI 5.5% (5.6%e), EU CPI estimate 5.3% (5.1%e) / Core 5.3% as exp, EU unemp 6.4% as exp, India 2Q GDP 7.8% as exp, US init claims 228k (235k exp), US Personal inc 0.2% MoM (0.3%e) / Spending 0.8% (0.7%e), US PCE Deflator 3.3% as exp / core PCE 4.2% as exp, US Chicago PMI 48.7 (44.2e), S&P -0.2%; Fri: US NFP 187k (170k exp) / unemp 3.8% (3.5%e) / AHE 4.3% as exp – rise in unemp largely attributed to big jump in participation rate, China lowers FX RRR in latest effort to step CNH weakness, ECB’s Villeroy says options are open for Sept / ECB’s Vujcic admitted economic activity is slowing faster than expected, Fed’s Bostic says there are reasons that may mean R* is higher, India says dependence on Russian oil will decrease with new cost visibility from Gulf nations, Japan capital spending 4.5% (8.3%e) / company profits 11.6% (-0.1%e), China Caixin mfg PMI 51 (49e), UK house prices -5.3% (-4.9%e), EU (final) PMI mfg 43.5 (43.7e), Brazil 2Q GDP 3.4% (2.7%e), Canada 2Q GDP -0.2% (1.2%e), US mfg PMI 47.9 (47e), ISM mfg 47.6 (47e) / prices paid 48.4 (44e), S&P +0.2%.
Weekly Close: S&P 500 +2.5% and VIX -2.59 at +13.09. Nikkei +3.4%, Shanghai +2.3%, Euro Stoxx +1.5%, Bovespa +1.8%, MSCI World +2.5%, and MSCI Emerging +1.0%. USD rose +2.0% vs Mexico, +1.8% vs Russia, +1.5% vs Brazil, +1.2% vs South Africa, +1.0% vs Ethereum, +0.8% vs Chile, +0.7% vs Turkey, +0.5% vs Bitcoin, +0.1% vs Euro, and +0.1% vs India. USD fell -0.8% vs Australia, -0.4% vs Indonesia, -0.3% vs China, -0.2% vs Yen, -0.1% vs Sweden, -0.1% vs Sterling, and -0.1% vs Canada. Gold +1.4%, Silver -0.1%, Oil +7.2%, Copper +1.8%, Iron Ore +3.4%, Corn -1.3%. 10yr Breakevens (EU -1bp at 2.31%, US -7bps at 2.26%, JP -2bps at 1.12%, and UK +4bps at 3.78%). 2yr Notes -20bps at 4.88% and 10yr Notes -6bps at 4.18%.
Aug Mthly Close: S&P 500 -1.8% and VIX -0.06 at +13.57. Nikkei -1.7%, Shanghai -5.2%, Euro Stoxx -2.8%, Bovespa -5.1%, MSCI World -2.6%, and MSCI Emerging -6.4%. USD rose +9.4% vs Ethereum, +8.1% vs Bitcoin, +5.8% vs South Africa, +5.2% vs Russia, +4.8% vs Brazil, +4.1% vs Sweden, +3.6% vs Australia, +2.4% vs Canada, +2.3% vs Yen, +1.8% vs Mexico, +1.6% vs China, +1.6% vs Chile, +1.4% vs Euro, +1.3% vs Sterling, +1.0% vs Indonesia, and +0.6% vs India. USD fell -0.9% vs Turkey. Gold -2.2%, Silver -2.1%, Oil +2.8%, Copper -5.0%, Iron Ore +2.1%, Corn -6.8%. 5y5y inflation swaps (EU -11bps at 2.29%, US -14bps at 2.24%, JP -8bps at 1.15%, and UK -2bps at 3.77%). 2yr Notes -1bp at 4.87% and 10yr Notes +15bps at 4.11%.
Year-to-Date Equities (high to low): Argentina +59% priced in US dollars (+214.1% priced in pesos), Greece +40.7% priced in US dollars (+39.8% priced in euros), NASDAQ +34.1% in dollars, Hungary +32.3% in dollars (+26.7% in forint), Poland +26.7% (+20.1%), Ireland +26.3% (+25.4%), Mexico +25% (+9.7%), Italy +21.7% (+20.9%), Denmark +18.8% (+18.3%), S&P 500 +17.6%, Spain +15.6% (+14.8%), Brazil +15% (+7.4%), MSCI World +14.7% in dollars, Germany +14.5% (+13.8%), Russia +14% (+50%), Euro Stoxx 50 +13.7% (+12.9%), Taiwan +13.6% (+17.7%), Chile +13.5% (+14%), France +13.5% (+12.7%), Japan +12.4% (+25.4%), Czech Republic +12.3% (+11.6%), Saudi Arabia +9.9% (+9.7%), Korea +9.6% (+14.6%), Russell +9.1%, Netherlands +9% (+8.3%), Switzerland +7.4% (+3.2%), India +7.4% (+7.3%), Canada +5.4% (+6%), UK +4.2% (+0.2%), Indonesia +3.5% (+1.9%), Turkey +2.4% (+46.2%), Portugal +2.4% (+1.7%), Austria +2.1% (+1.4%), Sweden +0.9% (+7%), Colombia +0.6% (-15.7%), Belgium +0.2% (-0.5%), Norway -1.1% (+7.6%), Singapore -1.5% (-0.6%), Australia -2.2% (+3.4%), Venezuela -3.2% (+85.9%), China -3.7% (+1.4%), UAE -4.2% (-4.2%), Israel -4.4% (+3.3%), New Zealand -6% (+0.5%), South Africa -6.6% (+3.2%), Malaysia -7.2% (-2.1%), HK -7.6% (-7.1%), Philippines -7.6% (-5.9%), Thailand -7.6% (-6.4%), and Finland -8.2% (-8.9%).
Anecdote (Nov 2016): “Nothing ever stays the same. Ever,” he said. “All the people you’ve known over the years,” he said, squinting, looking back through time. “How many are still in the industry?” I considered the question. So many names, faces, personalities. Most gone. “You got to be adaptable. That’s my nature. I challenge the status quo. I’m a destroyer, a disrupter.” I looked around his office, the abstract artwork all different from my last visit. “When things are going great here, I rip them apart. And my people don’t understand. They’re stunned. They ask why?” But results speak for themselves, and he’s amassed one of the world’s great fortunes. “Our data shows that the alpha available in markets has declined over the past fifteen years.” The downward decline shows no signs of abating. A vast database of buy/sell decisions made by hundreds of our field’s best trading minds doesn’t lie. Wishing away this unfortunate fact won’t work. “We need to push our alpha capture back up. But it’s not possible by doing more of what we’ve always done.” You need to innovate. Do things differently. Think differently. “The law of economics is immutable. Excess profits are competed away. It’s not happening in our industry, it’s happened.” So he’s exploring artificial intelligence. Quantitative methodologies. Blending them with traditional approaches. And runs experiments, spreading capital across a range of innovative ideas, knowing that most will fail. But not all. “This game is over as we remember it, but there may be one more act. Maybe we can be the ones to shape it. And if it doesn’t work, at least we tried,” he said, smiling, with nothing left to prove to anyone but himself. “If I can’t outperform over 90% of everyone in the world, why even try? Who wants to be mediocre?”
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, converse 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.