“Not sure how many years I got left in me,” he said, climbing our way up “25 Short”, its summit at 9,975 feet, Grand Teton towering above us. “I’d like my kids to be old enough to see the work I do, to understand what mountain rescue really is, to appreciate my commitment to service,” he said, twenty years my junior. The two of us sharing stories, the sun hot, air cold. He told me about a good friend, hunting guide, taken by a grizzly, freak attack, the gruesome recovery operation. “It’s meaningful work but being there for people on the worst day of their lives adds up. I think we each have a limit, and there’s only so much we can bear.”

Overall: “We’re far from neutral now,” said America’s Fed Chairman to the Senate Banking Committee. All those rent-seekers stacked up with commercial real estate holdings nodded in violent agreement. That of course includes the nation’s regional banks, which continue to succumb to the power of their systemically important rivals, now so big that they cannot possibly be allowed to fail. And this has turned America’s banking behemoths into for-profit wards of the state, recipients of an unspoken but ironclad insurance policy that underwrites catastrophic losses and adds them to the national debt. “Interest rates right now are well into restrictive territory. They’re well above neutral,” added Chairman Powell without, well, sharing his definition of the word ‘well’. And truth be told, no one really knows the definition of ‘neutral’ when it comes to interest rates. Economic PhDs will generally tell you that the neutral real interest rate is 0.50%. Their level of confidence is inversely proportional to the amount of capital they have at risk in markets -- which would have been Newton’s Fourth Law had he bothered to study the art of economics. Those of us less academically gifted, who must resort to taking risk for a living, lack the conviction of Nobel Laureates. We see that there are times in an economic cycle when 0.50% real rates stimulate growth, and times when they restrict economic activity. Sometimes neutral rates have no effect at all. Which is to say that the economic impact of real rates simply depends. Like now when signals are far from uniform. Stock markets hit all-time highs despite collapsing commercial real estate, crypto and gold prices are soaring to records, massive government stimulus programs like the IRA are cranking up, student debt is being forgiven in successive waves, unemployment is near record lows, core inflation is starting to rise again, and the budget deficit is around 6% despite robust GDP growth. All of which screams that a 0.50% real rate is preposterously low to everyone but economic PhDs.

Week-in-Review: Mon: China Premier Li Qiang won’t hold usual post-NPC press briefing, Fed’s Bostic says cut won’t be back to back, SCOTUS says Trump can appear on presidential ballots this year, BTC surge continues – flirting with ATH, Israel delayed sending delegation to Cairo for ceasefire talks for 2nd day, S. Korea says N. Korea hacked semiconductor firms to steal intel, S. Korea IP 12.9% (10.0%e), Japan Capital spending 16.4% (2.8%e), Turkey CPI 67.07% (66.00%e) / Core 72.89% (71.90%e), Swiss CPI 1.2% (1.1%e), S&P -0.1%; Tue: NPC offers little surprise to market as GDP targets kept unch around 5% and deficit target of 3%, Apple falls after reports of 24% drop in Chinese iPhone sales in the first 6w of the year, Gaza ceasefire talks end without a breakthrough, BTC reaches all time high above 69k, Tokyo CPI 2.6% (2.5%e), S. Korea GDP 2.2% as exp, EU PMI serv 50.2 (50.0e) / comp 49.2 (48.9e), S. Africa GDP 1.2% (0.9%e), US PMI serv 52.3 (51.4e) / comp 52.5 (51.4e), US Factory orders -3.6% (-2.9%e) / Durable goods orders -6.2% (-6.1%e), S&P -1%; Wed: Powell reiterates that the Fed is no rush to cut but likely to come later this year, Trump and Biden all but lock up nominations after successful Super Tuesday results / Nikki Haley drops out of the race, BoC unch as exp / suggests its too early to consider cuts, Egypt devalues ccy and hikes rates 600bp to secure add’l $8b from IMF, NYCB announces over $1b capital raise after falling more than 47% intraday, S. Korea CPI 3.1% (3.0%e), Australia GDP 1.5% as exp, Hungary IP -4.1% (-3.5%e), EU Ret sales -1.0% (-1.3%e), Brazil IP 3.6% (3.0%e), US ADP 140k (150k e), US JOLTS job openings 8863k (8850k e), Poland Base rate 5.75% as exp, S&P +0.5%; Thu: ECB unch as exp / Lagarde indicated the ECB may ease in June, Biden orders military to build temporary port off Gaza to ramp up delivery of aid, Biden proposes $5k tax credit to middle class first time home buyers in SOTU, Malaysia CB rate unch as exp, Mexico CPI 4.40% (4.42%e), US Trade balance -$67.4b (-$63.5b e), US Initial claims 217k (216k e) / Con’t claims 1906k (1880k e), S&P +1%; Fri: US NFP 275k (200k exp) / unemp 3.9% (3.7%e), China raises $27b for its largest chip fund to counter US curbs, US congress passes $460b funding deal to avoid shutdown, Peru CB rate 6.25% (6.00%e), Germany PPI -4.4% (-6.6%e), Hungary CPI 3.7% (3.9%e), EU GDP 0.1% as exp, Canada Net change in emp 40.07k (20.0k e) / Unemp rate 5.8% as exp, S&P -0.7%; Sat: Navy men’s lacrosse loses to Lehigh University 12-10.

Manufacturing PMI (high-to-low): India 56.9 (previous month 56.5), Greece 55.7 (previous mth 54.7), Russia 54.7 (previous 52.4), Brazil 54.1/52.8, Indonesia 52.7/52.9, Mexico 52.3/50.2, Hungary 52.2/50.1, Norway 51.9/51.1, Spain 51.5/49.2, China 50.9/50.8, South Africa 50.8/49.2, South Korea 50.7/51.2, Singapore 50.6/50.7, Vietnam 50.4/50.3, Turkey 50.2/49.2, Canada 49.7/48.3, Hong Kong 49.7/49.9, Netherlands 49.3/48.9, Sweden 49/47.1, Italy 48.7/48.5, Taiwan 48.6/48.8, Poland 47.9/47.1, United States 47.8/49.1, UK 47.5/47, Japan 47.2/48, France 47.1/43.1, Czech Republic 44.3/43, Switzerland 44/43.1, Austria 43/43, Germany 42.5/45.5; Services PMI: India 60.6/61.8, Spain 54.7/52.1, Brazil 54.6/53.1, Ireland 54.4/50.5, UK 53.8/54.3, Australia 53.1/49.1, Japan 52.9/53.1, China 52.5/52.7, US 52.3/52.5, Italy 52.2/51.2, Russia 51.1/55.8, Sweden 50.5/51.5, France 48.4/45.4, Germany 48.3/47.7.

Weekly Close: S&P 500 -0.3% and VIX +1.63 at +14.74. Nikkei -0.6%, Shanghai +0.6%, Euro Stoxx +1.1%, Bovespa -1.6%, MSCI World +0.8%, and MSCI Emerging +0.5%. USD rose +1.9% vs Turkey, and +0.6% vs Brazil. USD fell -13.9% vs Ethereum, -10.1% vs Bitcoin, -2.0% vs Yen, -2.0% vs South Africa, -1.6% vs Sterling, -1.5% vs Australia, -1.2% vs Mexico, -1.1% vs Sweden, -0.9% vs Euro, -0.7% vs Russia, -0.7% vs Indonesia, -0.6% vs Canada, -0.5% vs Chile, -0.1% vs India, and -0.1% vs China. Gold +4.3%, Silver +5.1%, Oil -2.5%, Copper +0.8%, Iron Ore +3.4%, Corn +3.5%. 10yr Inflation Breakevens (EU -4bps at 1.97%, US -4bps at 2.28%, JP -4bps at 1.20%, and UK -4bps at 3.53%). 2yr Notes -6bps at 4.48% and 10yr Notes -11bps at 4.08%.

2024 Year-to-Date Close: Denmark +17.7% priced in US dollars (+19% priced in krone), Japan +13.6% priced in US dollars (+18.6% priced in yen), Turkey +13.4% in dollars (+22.6% in lira), Ireland +9.2% (+10.5%), Greece +9.1% (+10.4%), Italy +8.8% (+10.1%), Euro Stoxx 50 +8.5% (+9.7%), Netherlands +8.3% (+9.5%), S&P 500 +7.4% in dollars, Taiwan +7.4% (+10.3%), Philippines +7.3% (+7.6%), Colombia +7.3% (+8.7%), NASDAQ +7.2% in dollars, MSCI World +7% in dollars, Russia +5.8% (+7%), France +5.2% (+6.4%), Germany +5.1% (+6.3%), Saudi Arabia +5.1% (+5.1%), Israel +4.8% (+4.4%), Hungary +4.6% (+9%), India +4.1% (+3.5%), Malaysia +3.7% (+5.9%), Argentina +2.9% (+7.8%), Russell +2.7% in dollars, Poland +2.1% (+2.2%), Sweden +2% (+3.8%), Canada +1.6% (+3.7%), China +1.2% (+2.4%), Spain +0.9% (+2%), Indonesia +0.5% (+1.5%), Australia +0.2% (+3.4%), Switzerland +0.1% (+4.6%), Czech Republic -0.2% (+3.5%), UK -0.3% (-1%), Belgium -0.4% (+0.7%), Korea -1.3% (+0.9%), New Zealand -1.4% (+1.3%), Austria -2.8% (-1.6%), UAE -3.6% (-3.6%), Mexico -3.6% (-4.3%), Finland -3.7% (-2.6%), Singapore -3.8% (-2.9%), Norway -3.8% (-0.9%), HK -4.2% (-4.1%), Thailand -5.4% (-2.1%), Chile -6.3% (+2.3%), South Africa -7% (-4.5%), Brazil -7.7% (-5.3%), Portugal -10.9% (-9.9%), and Venezuela -13.5% (-12.8%).

Yoda: “Trading this AI theme is like trading natural gas,” said Yoda, high in the Rockies. “You can speculate on the price of natural gas all you want in the spring and summer, because there’s no way for you to have any real idea how much you’ll need come the winter,” he said, having cut his teeth in that market so many decades ago. “That’s why every winter, unless it’s freakishly cold, natural gas is cheapest in January, February, March.” Last autumn natural gas traded $3.50. In February it hit $1.50. “So once you understand that, what is happening in AI makes sense.”

Yoda II: “These companies buying all these Nvidia chips today won’t realize the full benefits for years,” continued Yoda. “It’s not that it’s an illusion, it’s real. The compute and global infrastructure are in the process of being upgraded,” he said. “And until we really know what it all means, it can trade at any price. This is springtime, summertime,” said Yoda. “But once they can actually model what this all means, who will make how much money, then it’s all over. That’ll be the end. Winter for natural gas. Sure, it’s 32 degrees, but so what, we knew that.”

Boom: “Everyday I’m surprised by how fast power consumption is growing,” said the entrepreneur. I was checking in. He had put this theme on my radar last June, when he said, “Take any application, add AI, and you need 7x-50x the compute power. AI is a black hole; it’ll suck money out of everything else and into its vortex. The arms race between industry giants is a 20 on a scale of 1-10.” He had called for brownouts in the coming years for certain major metropolitan areas in the US. “This is bigger than I could have ever imagined,” he said Friday.

Boom II: “It makes you scratch your head and wonder how we ended up in this situation. How were the projections that far off,” said the Chairman of Georgia’s Public Service Commission. Industrial electricity demand in Georgia forecasted over the coming decade has jumped 17x in the blink of an eye. Each state has its own story. In 2019 the 9yr forecast for new electricity demand across the entire US was 256k gigawatt hours. In 2020 it dropped to 182k. In 2021 it jumped to 277k. In 2022 it fell to 221k. At of the end of 2023, it surged 150% to 564k.

This Time: “Longer still,” said the CIO. He was very early to the idea that the uniqueness of the post-Covid economy would humble those who use past cycles to forecast the future. “Take every projection you hear and keep pushing it out,” he said. “To get a real recession now, we’d need 7% overnight rates, this cycle is so different. Biden’s IRA multipliers are just kicking in. TSMC is going to get $5bln to build a chip plant, but they’ll spend $35bln,” he said. “The fact that the outright depression in commercial real estate has not yet spilled over into the rest of the economy, or the broader market, tells you how different this cycle is from any before it.”

Anecdote: “The last time the debt as a share of GDP was this large was in 1945-1946, at the end of World War II,” wrote Daniel Wilson and Brigid Meisenbacherat from the Economic Research Department at the Federal Reserve Bank of San Francisco. I was grinding through my stack, piled high with white papers. “Over the following three decades, the debt-to-GDP ratio steadily fell, reaching roughly 25% by 1975,” continued the San Fran Fed report [see here]. I have growing conviction that in the coming 2-5 years we’re going to face a US debt sustainability crisis, sparking a major global market event. I’ve observed that when people from within our institutions raise an alarm, knowing it would be far easier for them to remain quiet, we’re getting closer. “That 30-year decline contrasts sharply with the projected 30-year increase in the debt-to-GDP ratio, reaching 172%, over 2024 to 2054, according to the latest current Congressional Budget Office projections.” Wilson and Meisenbacherat point out that the Fed projects a longer-term real Fed Funds rate of 0.50%. And their median projection for long-run real GDP growth is 1.8%. They highlight that the CBO, however, forecasts a lower 1.5% real GDP growth rate, and a longer-term real interest rate on US debt of 2.0%. “In this case, slow economic growth relative to interest rates would exert modest upward pressure on the debt ratio, primarily from higher interest payments,” they wrote. “The main source of the long-run upward pressure on the primary deficit is spending on mandatory programs such as Social Security and Medicare. Current legislated formulas used to determine spending per recipient for Social Security benefits and government health-care programs, especially Medicare, combined with the projected aging of the population, point to large increases in spending for these programs as a share of GDP. This pressure was absent after WWII because the overall US population was younger and because Medicare was not enacted until 1965.” And with no political party willing adjust these programs, it is increasingly likely the market will force change.

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.