The small bush plane banked hard, our four children gasped at the giraffes along the airfield, a short patch of dirt on the Masai Mara, Kenya. We tracked a pride of lions, solitary leopards too, the apex predators, their prey. Each night brought roars, screams, skirmishes, deadly silence. A new killing, the cycle of life, routine, sublime. Our Masai trackers trained three years alone in the wild, a long knife, spear, beneath the heavens, acquiring nature’s lessons, wisdom. Each creature has its place, all connected, everything. Even lowly ants, which I watched with amusement, bearing their monstrous loads, in long lines, following pheromones.

Overall: The moon rose over the Masai Mara later each night, a deep red orange, and arced across Orion. At home in Connecticut, the moon crosses that constellation at quite a different point, our reality changes with position. Most things appear different depending on one’s frame of reference, which is why it is so important to introspect. And travel, explore, inquire. Last year appeared to surprise nearly everyone who studies financial markets. The global pandemic and subsequent policy response produced such a unique economic and market backdrop that what came next defied the sort of mental models which rely on the past to predict the future. The US economy was stronger than almost anyone expected as the budget deficit sustained levels seen in times of deep recession or war. A US banking crisis came as swiftly as it went. The Fed managed to quantitatively tighten while keeping financial conditions loose. The Chinese economy proved weaker than expected, and Xi Jinping’s panic reopening from the Covid lockdown failed to generate much lift. The Ukraine conflict grinded onward, well past initial expectations. Hamas failed to spark a wider regional war. Oil prices ended the year lower, and commodities in general were rather tame. US stocks ended near all-time highs, Chinese stocks near 4-year lows, and European stocks finished near 15-year highs (but still below both the 2007 peak and 2000 record). Japanese stocks made new 33-year highs but have yet to retake the 1989 summit. The 10yr Treasury yield swung wildly but ended the year exactly where it opened, concealing an early glimpse of the coming debt sustainability crisis. Crypto prices defied all expectations, with Bitcoin rallying roughly 160%. Coinbase rallied 390%. AI ignited the public imagination. It’s always useful to step back and consider what unfolded in markets versus what consensus thought should have happened. That’s where you sometimes discover the first signs of fundamental change that traders often call “tells”.

Week-in-Review: Mon: New Year’s Day Holiday, Israel CB cut 25bps as exp, S&P closed; Tue: Japan earthquake kills at least 64, Israel kills senior Hamas leader in Beirut (1st Israeli attack in Beirut in nearly 20y), Iran dispatches war ship to Red Sea after US Navy sunk 3 Houthi boats over the weekend, ASML cancels key chip making equipment shipments to China amid anger from US, ECB’s deCos says rate cuts dependent on data / uncertainty remains high, SOFR settles down after spiking heading into year end, S. Korea president pledges to scrap capital gains tax on income from financial investments, Trump sues Maine official to be reinstated as GOP candidate on primary ballot, Israel’s supreme court struck down Netanyahu’s judicial overhaul law, Israel says pulling thousands of troops from Gaza to begin a more targeted phase of combat amid increased pressure from US, China Caixin PMI mfg 50.8 (50.3e), Indonesia CPI 2.61% (2.74%e) / Core 1.80% (1.86%e), EU M3 -0.9% (-1.0%e), S&P -0.6%; Wed: FOMC mins more hawkish than Powell press conf but discussions of QT keeps an overall dovish tone/ mentions concern around easing FCI and says they see rates staying high for ‘some time’, Iran blames Israel for 2 blasts in central Iran that kills ~100 as tensions escalate – Israel and US deny Israeli involvement, Fed’s Barkin says soft landing is increasingly conceivable but in no way inevitable, Ukraine / Russia conduct first major prisoner swap since August, Trump asks SCOTUS to overturn Colorado ruling that keeps him off the ballot, Turkey CPI 64.775 (64.95%e) / Core CPI 70.64% (69.50%e), Germany unemp 5.9% as exp, US ISM mfg 47.4 (47.1e) / prices paid 45.2 (49.5e), US JOLTS openings 8.79m (8.821m exp) / quits 3.471m (3.625m prev), S&P -0.8%; Thu: explosion in Baghdad killed 2 members of Iran backed militia group as tensions remain elevated, the Islamic State claims responsibility for Iran attacks, Banxico mins show board still has concerns of upside inflation, BTFP facility continues to grow, China Caixin serv PMI 52.9 (51.6e) / Comp PMI 52.6 (51.6p), France CPI 4.1% as exp, EU final serv PMI 48.8 (48.1e) / comp 47.6 (47e), UK cons credit 8.6% (8.1%p), Germany CPI 3.8% (3.9%e), US ADP emp chg 164k (125k exp), US init claims 202k (216k exp), US final serv PMI 51.4 (51.3e) / comp 50.9 (51p), S&P -0.3%; Fri: US NFP 216k (175k exp) / unemp 3.7% (3.8%e) / AHE 4.1% (3.9%e) – strong headline numbers but some signs of softness beneath the surface, Chinese shadow banking giant Zhongzhi files for bankruptcy, China’s top diplomat Wang Yi warned that decoupling from the US would be self-defeating, N. Korea fired 200 shells near S. Korea border island, DoJ reportedly in the late stages of investigation into Apple antitrust suit, Fed’s Barkin says labor mkt moving in steady/softening pattern, Yellen declares US has achieved a soft landing, Japan cons conf 37.2 (36.5e), Germany ret sales -2% (-0.5%e), Poland CPI 6.1% (6.5%e), EU CPI 2.9% as exp / Core 3.4% as exp / PPI -8.8% (-8.6%e), Italy CPI 0.5% as exp, Brazil IP 1.3% (0.9%e), India 2024 GDP est 7.3% (6.7%e), Canada emp chg 0.1k (15k) / unemp 5.8% (5.9%e) / Hourly wage rate 5.7% (5.4%e), US factory orders 2.6% MoM (2.4%e), US ISM Serv 50.6 (52.5e) / prices paid 57.4 (57.3e), S&P +0.2%.

Manufacturing PMI (high-to-low): India 54.9 (previous month 56), Russia 54.6 (previous mth 53.8), Hungary 52.8 (previous 52.2), Indonesia 52.2/51.7, Mexico 52/52.5, Norway 51.7/50.1, Greece 51.3/50.9, Hong Kong 51.3/50.1, China 50.8/50.7, Singapore 50.5/50.3, South Korea 49.9/50, South Africa 49/50, Vietnam 48.9/47.3, Sweden 48.8/49, Brazil 48.4/49.4, Japan 47.9/48.3, US 47.4/46.7, Poland 47.4/48.7, Turkey 47.4/47.2, Taiwan 47.1/48.3, UK 46.2/47.2, Spain 46.2/46.3, Canada 45.4/47.7, Italy 45.3/44.4, Netherlands 44.8/44.9, Germany 43.3/42.6, Switzerland 43/42.1, France 42.1/42.9, Austria 42/42.2, Czech Republic 41.8/43.2. Services PMI: India 59/56.9, Russia 56.2/52.2, UK 53.4/50.9, Ireland 53.2/54.2, China 52.9/51.5, Spain 51.5/51, Japan 51.5/50.8, US 51.4/50.8, Brazil 50.5/51.2, Sweden 50/48.5, Italy 49.8/49.5, Germany 49.3/49.6, Australia 47.1/46, France 45.7/45.4.

Weekly Close: S&P 500 -1.5% and VIX +0.90 at +13.35. Nikkei -0.3%, Shanghai -1.5%, Euro Stoxx -0.5%, Bovespa -1.6%, MSCI World -1.7%, and MSCI Emerging -1.9%. USD rose +5.4% vs Ethereum, +2.5% vs Yen, +1.8% vs Sweden, +1.8% vs South Africa, +1.7% vs Russia, +1.5% vs Australia, +1.3% vs Chile, +0.9% vs Turkey, +0.9% vs Canada, +0.9% vs Euro, +0.8% vs Indonesia, +0.7% vs China, +0.4% vs Brazil, and +0.1% vs Sterling. USD fell -2.3% vs Bitcoin, -0.5% vs Mexico, and -0.1% vs India. Gold -1.1%, Silver -3.2%, Oil +3.0%, Copper -2.2%, Iron Ore +3.4%, Corn -2.2%. 10yr Inflation Breakevens (EU +5bps at 2.00%, US +6bps at 2.23%, JP -1bp at 1.17%, and UK +5bps at 3.53%). 2yr Notes +13bps at 4.38% and 10yr Notes +17bps at 4.05%.

2024 Year-to-Date Close: Argentina +13% priced in US dollars (+13.5% priced in pesos), Colombia +7.6% priced in US dollars (+8.3% in pesos), Philippines +2.5% in dollars (+2.8% in pesos), Denmark +1.7% in dollars (+2.8% in krone), Hungary +1.5% (+1.4%), Saudi Arabia +1.5% (+1.5%), Turkey +1.1% (+2.1%), Czech Republic +1% (+1.7%), UAE +0.9% (+0.9%), Malaysia +0.8% (+2.3%), Finland +0.6% (+1.7%), Greece +0.4% (+1.4%), Indonesia +0.2% (+1.1%), India +0% (-0.1%), Russia -0.4% (+1.2%), Spain -0.5% (+0.6%), Israel -0.5% (+1.3%), Norway -0.6% (+1.2%), Thailand -0.7% (+0.9%), Italy -0.8% (+0.3%), Belgium -0.8% (+0.3%), Switzerland -0.8% (+0.4%), UK -0.9% (-0.6%), Portugal -1% (+0%), Canada -1.1% (-0.1%), Austria -1.2% (-0.1%), Venezuela -1.4% (-1.2%), S&P 500 -1.5% priced in dollars, New Zealand -1.7% (-0.2%), MSCI World -1.7% priced in dollars, Mexico -1.9% (-2.1%), Germany -2% (-0.9%), Brazil -2% (-1.6%), Netherlands -2.1% (-1%), China -2.2% (-1.5%), Ireland -2.2% (-1.1%), Euro Stoxx 50 -2.3% (-1.3%), Singapore -2.5% (-1.7%), France -2.7% (-1.6%), Japan -3% (-0.3%), HK -3% (-3%), Australia -3.1% (-1.3%), NASDAQ -3.2% priced in dollars, Chile -3.4% (-2.4%), Poland -3.6% (-2.4%), Taiwan -3.6% (-2.3%), Russell -3.7% priced in dollars, Sweden -4.4% (-2.4%), Korea -4.8% (-2.9%), South Africa -5.5% (-3.3%).

Normal: The most volatile and fascinating periods in human history - including the greatest bull and bear markets - are driven by mass manias. These in turn have been fueled by the universe’s most powerful force: human imagination. Such periods are abnormal, and it appears Covid marked the very beginning of one. Enter Artificial Intelligence (AI). Eliezer Yudkowsky is an autodidact without a high school degree. He’s not normal. Check out his exchange with Chat GPT-4 [click here] and follow it to the end (10mins). Then engage with GPT-4. Glimpse a growing intelligence for yourself. Explore its imagination. And consider how it may spark ours.

Crypto:History is littered with speculative manias. South Sea bubbles. Dutch tulips. Sock puppets. After a volatile boom, they bust. Spectacularly. And that’s it. They flatline forever, done, dead. Bitcoin hit ~$69k at the Nov 2021 highs. A year later it was ~$15.5k, one of many busts. FTX had collapsed, the fraud exposed. Politicians piled on. Regulators too. Never in modern economic history has a ~$1trln asset been subjected to such a highly coordinated attack by those in power. Yet the most secure network in human history carried on, unperturbed, uninterrupted. Bitcoin is now ~$44k. A tell. Imagine what would happen if crypto and AI become conflated.

Kabuki:Nixon took us off the gold standard in 1971. It sparked a volatile/interesting decade. Politicians struggled to bolster faith in paper money. Volcker crushed inflation. Then for decades, the US pursued a somewhat sober economic policy. But with each recession, the gov’t increased its interventionism, incurring debt, cutting rates, buying bonds. Politicians danced their dance, Republicans, Democrats, it made no difference. Then came Covid. Now we run recessionary deficits in an expansion. No one in DC cares. But bond markets erupted in Oct, steepening for no reason, which sparked the Fed pivot. A multi-stage debt sustainability crisis has finally started.

Peking Acrobats: For two decades, with every Chinese slowdown, global investors feared some kind of economic/political implosion. But each time, Beijing kept the plates spinning. The economy was supposed to boom once the draconian Covid lockdowns ended. But it did not. Now youth unemployment is 20%+. The fertility rate has collapsed to 1.09. Young people are abandoning their private sector dreams and applying for government jobs in record numbers. Many are “lying flat” in quiet protest. This should not be happening. These are all tells. Xi cannot afford a social/economic implosion. So, more stimulus is coming. Sell those rallies.

Plan Bs:I travelled a ton in 2023, eyes open, hunting. After decades of integration, the world is widening its divisions, the Global South and North, East and West, payment networks, official reserves. You see it everywhere. Vast amounts of trade and manufacturing infrastructure will be stranded. Chinese factories. New structures will be built. Semiconductor fabs. What had been optimized for peaceful efficiency and profit will be hardened and backed-up for resiliency, redundancy. Nord Stream pipeline sabotage. Dollar reserves held by rivals and adversaries will shift to hard assets, new rails. A commodity bull. Non-dollar CBDC networks are racing ahead.

Anecdote:“As you know, I’ve been in the middle of every boom and bust for the past few decades,” said the investor, a unique talent, an opportunist of the highest order. “I have never seen anything like this. Not the dot com boom, not the housing bubble, not the FANGS, not even crypto compares.” We were sharing notes from our recent travels, triangulating, stalking opportunities. He was early to the data center boom that zoomed ahead after Covid and has gone parabolic with artificial intelligence. “There will be eight LLMs (large language models) developed in the US. Microsoft/OpenAI, Google, Facebook, Elon, Amazon, Oracle. Each have one. Smaller rivals will not be able to compete. And the US government will probably have two, military, intelligence,” he said. “China will have one, perhaps two, and they’ll be real contenders.” Europe is hopelessly behind, but they’ll probably have one. “The incremental demand for electricity in the US to power AI chips will be somewhere between 35 and 45 gigawatts in the coming 5yrs.” A large coal plant produces roughly 1 gigawatt. A nuclear plant is closer to 2 gigawatts. “We don’t currently have the infrastructure to produce and deliver this much power. But the competition for electricity isn’t going to slow. It’s now an unstoppable race, the stakes are too high, perhaps even existential. In the next five years, we’re going to see brownouts in major US cities, that’s the magnitude of what’s unfolding,” he said. “What we’re seeing is humanity racing to develop a new life form, it’s a competition no one can afford to lose.” The money involved means our politicians won’t stop it, nor will our rivals or adversaries. “No one knows where this leads, utopia, or dystopia. I simply hope we can coexist with a superior intelligence, even if we’re just ants which it inadvertently steps on from time to time, but usually ignores, and sometimes watches, curiously.”

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, 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.