“No one got everything they wanted, but the American people got what they needed,” said Biden in his twelve-minute address to the nation. “We averted an economic crisis and an economic collapse,” continued the President, seated behind the Resolute Desk. “Nothing - nothing would have been more irresponsible. Nothing would have been more catastrophic.” And this whole notion of saving humanity by solving an imaginary crisis of our own creation is so preposterous to anyone not directly involved in the drama that I naturally searched for something more interesting. The Resolute was one of four British sailing ships, built with especially thick oak hulls, sent to the Arctic in 1854 to rescue a lost exploratory expedition. The four ships became locked in ice. Their crews fled on foot across the frozen ocean. They all survived, courageously, heroically, miraculously. American whalers recovered The Resolute 1,000 miles from where it had been abandoned. The US Navy repaired this sole surviving ship and returned it to England in 1856. After it was decommissioned in 1880, Queen Victoria crafted the Resolute Desk from its hull and gifted it as a symbol of goodwill. It is unlikely that in the decades ahead a head of state will send the White House a gift to commemorate the goodwill shown by America in rescuing our foreign creditors from the potentially catastrophic default they faced in 2023. No one will even remember it. What will hold their attention is the inexorable expansion of our extraordinary debt, which is set to rise from $31.4trln today to $50trln by 2030 (assuming rather benign economic and market conditions which we know rarely persist uninterrupted). And we in the private sector are commissioned to somehow, in some way, chart a miraculous path out, through ingenuity and innovation. Sparking a historic productivity boom.
Marcel Kasumovich published a terrific piece this week on asset tokenization and ties it to some of the innovative work we’re doing in carbon markets [here].
US holiday, Biden/McCarthy reached debt ceiling deal over the weekend – aims to pass House on Weds / Senate by Friday, Erdogan wins 2nd round election / talks to Simsek about FinMin role (mkt positive), ECB’s de Cos says more hikes to come, S&P closed; House Rules Committee voted 7-6 in favor of sending debt ceiling bill to a vote Weds evening, emergency meeting between BoJ / MoF/ FSA - Japan FinMin official says gov’t closely monitoring FX moves, drone attacks in Moscow denied by Ukraine, Fed’s Barkin sees evidence that demand is coming down but infl still too high, Japan jobless rate 2.6% (2.7%e), S. Kore ret sales 4% (6.4%p), S. Africa private sector credt 7.07% (7%e), Turkey trade bal -8.74b (-8.8b exp), EU economic conf 96.5 (98.8e), US Case/Shiller house prices -1.15% (-1.6%e), US cons conf 102.3 (99e), US Dallas Fed -29.1 (-18e), S&P unch; House passes Fiscal Responsibility Act to suspend debt ceiling for 2y (314 vs 117) – goes to the Senate for final passage / more dems voted for Fiscal Responsibility Act than GOP house members, Fed’s VC nominee Jefferson pushed back on mkt pricing a June hike / Fed’s Harker suggested a pause in June before add’l hikes / Fed’s Mester sees no reason to pause, ECB’s Muller expects 2 add’l hikes this yr, Thailand CB hiked as exp, S. Korea IP -8.9% (-7.8%e), Japan retail sales 5% (7.1%e) / IP -0.3% (2%e), Australia private sector credit 0.6% MoM (0.3%e), China mfg PMI 48.8 (49.5e) / serv 54.5 (55.2e), Australia CPI 6.8% (6.4%e), Japan cons conf 36 as exp, Japan housing starts -11.9% (-0.8%e), France CPI 6% (6.4%e) / cons spending -4.3% (-3.6%e), Turkey 1Q GDP 4% (3.5%e), Germany emp chg 9k (13.5k exp) / unemp 5.6% as exp, Italy CPI 8.1% (7.5%e), Germany CPI 6.3% (6.7%e), India 1Q GDP 6.1% (5%e), Canada 1Q GDP 3.1% (2.5%e), US Chicago PMI 40.4 (47.3e), US JOLTS openings 10.103m (9.4m exp) / Quits Rate 2.7%, Russia IP 5.2% (3.6%e) / ret sales 7.4% (6.5%e) / unemp 3.3% (3.5%e), S&P -0.6%; WSJ Timiraos suggests a June pause, ECB mins show concern over persistently higher inflations, ECB’s Lagarde says further hikes are still needed, ECB’s Kazaks says mkt pricing not far from where he expects terminal rate to be, Fed’s Harker says Fed should “at least skip” the June hike, SNB’s Jordan says can’t allow cor infl above 2% for too long, Japan 1Q capital spending (ex software) 10% (3.7%e), China Caixin mfg PMI 50.9 (49.5e), UK house prices -3.4% (-3.7%e), Germany ret sales -8.6% (-5.8%e), EU mfg PMI 44.8 (44.6e), Italy unemp 7.8% as exp, UK cons credit 1.6b (1.5b exp), EU unemp 6.5% as exp, EU CPI 6.1% (6.3%e) / Core CPI 5.3% (5.5%e), Brazil 1Q GDP 4% (3.1%e), US ADP emp chg 278k (170k exp), US productivity -2.1% (-2.4%e) / Unit Labor Costs 4.2% (6%e), US init claims 232k (235k exp), US mfg PMI 48.4 (48.5e), US ISM mfg 46.9 (47e) / prices paid 44.2 (52.3e), S&P +1%; US Senate votes to pass debt ceiling bill (63-36), US NFP 339k (195k exp) / unemp 3.7% (3.5%e) / AHE 4.3% (4.4%e) – weak HH survey / strong establishment survey, reports that China is working on new stimulus package for struggling property sector, ECB’s Vasle says further hikes needed / Panetta concerned about pace but thinks more hikes necessary / Makhlouf expects more hikes, Erdogan reportedly going to appoint Simsek as FinMin which will likely bring back orthodox policy, S. Korea 1Q GDP 0.9% (0.8%e) / CPI 3.3% (3.4%e) / Core CPI 4.3% (4.6%p), France IP 1.3% (1.2%e), Mexico unemp 2.82% (2.75%e), Brazil IP -2.7% (-1.7%e), S&P +1.5%.
S&P 500 +1.8% and VIX -3.35 at +14.60. Nikkei +2.0%, Shanghai +0.5%, Euro Stoxx +0.2%, Bovespa +1.5%, MSCI World +0.1%, and MSCI Emerging -1.1%. USD rose +4.8% vs Turkey, +1.0% vs Russia, +0.5% vs China, +0.3% vs Indonesia, +0.1% vs Euro, and flat vs Chile. USD fell -2.9% vs Ethereum, -1.4% vs Australia, -1.4% vs Canada, -0.9% vs Sterling, -0.7% vs Bitcoin, -0.7% vs Brazil, -0.6% vs South Africa, -0.5% vs Yen, -0.4% vs Mexico, -0.4% vs Sweden, and -0.3% vs India. Gold +0.3%, Silver +1.7%, Oil -1.3%, Copper +1.2%, Iron Ore +6.2%, Corn +0.8%. 10yr Inflation Breakevens (EU -13bps at 2.28%, US -5bps at 2.20%, JP -4bps at 0.94%, and UK -2bps at 3.68%). 2yr Notes -6bps at 4.50% and 10yr Notes -11bps at 3.70%.
S&P 500 +0.2% and VIX +2.16 at +17.94. Nikkei +7.0%, Shanghai -3.6%, Euro Stoxx -3.2%, Bovespa +3.7%, MSCI World -1.2%, and MSCI Emerging -1.9%. USD rose +8.1% vs Bitcoin, +7.8% vs South Africa, +6.7% vs Turkey, +5.8% vs Sweden, +3.1% vs Euro, +2.8% vs China, +2.2% vs Yen, +2.2% vs Indonesia, +1.8% vs Ethereum, +1.7% vs Australia, +1.4% vs Brazil, +1.1% vs India, +1.0% vs Sterling, +0.3% vs Chile, +0.2% vs Russia, and +0.2% vs Canada. USD fell -1.7% vs Mexico. Gold -1.8%, Silver -6.5%, Oil -11.1%, Copper -6.5%, Iron Ore -8.4%, Corn +1.5%. 10yr Inflation Breakevens (EU -3bps at 2.32%, US -3bps at 2.18%, JP +19bps at 0.94%, and UK +9bps at 3.69%). 2yr Notes +40bps at 4.41% and 10yr Notes +22bps at 3.65%.
Greece +31% priced in US dollars (+31% priced in euros), Argentina +28.5% priced in US dollars (+74.6% priced in pesos), NASDAQ +26.5% in dollars, Mexico +22.3% in dollars (+9.8% in pesos), Ireland +21.8% (+21.8%), Poland +19% (+14.3%), Taiwan +18.4% (+18.2%), Hungary +17.8% (+9.3%), Germany +15.3% (+15.3%), Chile +14.2% (+7.5%), Italy +14.2% (+14.2%), Russia +14% (+26.2%), Euro Stoxx 50 +14% (+14%), Spain +13.2% (+13.2%), Japan +13.1% (+20.8%), Korea +12.4% (+16.3%), France +12.3% (+12.3%), Czech Republic +11.8% (+9.5%), S&P 500 +11.5%, Netherlands +11% (+11%), Denmark +10.3% (+10.5%), Brazil +9.3% (+2.6%), MSCI World +8.8% in dollars, Switzerland +8.2% (+6.7%), Sweden +8.2% (+12.2%), Saudi Arabia +5.4% (+5.1%), UK +5.1% (+2.1%), Canada +4% (+3.3%), Russell +4%, Portugal +3.4% (+3.4%), Venezuela +3.4% (+61%), India +2.8% (+2.4%), China +1.8% (+4.6%), Austria +0.4% (+0.4%), Indonesia +0.1% (-3.2%), Colombia -0.7% (-10.7%), New Zealand -1.1% (+3.6%), Philippines -1.4% (-0.8%), Australia -1.6% (+1.5%), Belgium -1.9% (-1.8%), Singapore -3.2% (-2.6%), HK -4.6% (-4.2%), Finland -5% (-5%), South Africa -6.2% (+7.5%), UAE -7.9% (-7.9%), Thailand -8.6% (-8.2%), Norway -9.9% (+1.2%), Israel -10.4% (-4.7%), Malaysia -11.1% (-7.6%), and Turkey -16.9% (-7.2%).
“You ever see a proper blob jump,” asked the CIO. I shook my head. “Well, imagine a massive 10-meter partially inflated heavy duty bag,” I nodded. “A few big guys jump off a really high platform and land on one end of the bag, which then launches a lone guy who was lying on the other end of the bag.” Sounded like something stupid I wish I’d invented. “The little fella goes flying through the air and plunges into a lake.” Made sense. “Well, this year has been a giant blob jump for markets,” he said, an iconoclast, high atop his prodigious pile.
“The move in short rates and curve inversion convinced everyone that the big slowdown was coming,” continued the CIO. “And there was supposed to be a large liquidity drain, but between the ECB, BOJ, and then SVB, it never happened.” I nodded. “So we had an investor rush into duration in an environment where there’s ample liquidity. And that of course pushed investors back into tech stocks, turbocharged by this AI euphoria.” Which has ignited investor’s imaginations. Nivida has nearly quadrupled from the October lows to make new highs.
“But investors entered the year thinking tech was dead, and the new focus was shifting to industrial policy, commodities, hard assets,” he said. “They were positioned for recession, in defensive names.” Preparing for an earnings winter. “Sales have come down, but margins have held up relative to low expectations, and now AI gives people hope that there will be this powerful new narrative, just as growth slows, inflation comes down, and the Fed cuts rates,” said the CIO. “It is an echo from the 2021 bull market, with liquidity still ample.”
“The regional bank crisis was so acute that the impact on markets was paradoxical,” he said. “The problems that it created across the banking system will no doubt impair credit creation, and this will harm the economy, but it was so bad that it pushed the Fed into a big injection of reserves that shielded markets from what otherwise would have been a persistent drain,” he said. “And again, this then pushed investors into the names that they had abandoned, or were short, the growth names, tech. And it has narrowed the rally.”
“Few people were around for the 2000 crash,” said the CIO. “But traders generally remember the market fell hard in March that year, rallied through summer, failed to make a new high, then properly crashed,” he said. “@PauloMacro recently pointed out Juniper Networks, which peaked at a record $125 a share in early 2000, crashed to $60 in March, rallied to $200 in that summer, then really crashed.” JNPR bottomed below $4 in late 2002 (now trades $30). NVDA hit a $334 record high in late 2021, bottomed out at $112 in Oct 2022, and now trades $393.
“I struggle to see this as the start of a new bull market,” said the CIO. “Don’t overthink what is happening. This is the market screwing just about everyone.” I nodded. “The H1 recession trade didn’t happen. The China reopening trade didn’t happen. People got caught in oil, copper. Everyone was long financials.” Until they got SVB’d. “And now people have pushed out the recession to H2 and no one seems able to justify the price action of equities. But if you view this all through the lens of liquidity combined with utter conviction of an oncoming slowdown, it makes sense, even if trading it has been terrible.”
“The market is still wired for bearishness,” said the CIO, high atop his prodigious pile. “The VIX curve is still steep, the back end is quite high, and the vast majority rightly expect a recession in H2,” he continued. “To the extent that all the event risk ahead is seen to pass, you can imagine how people can get drawn back into the market. There is still ammo to propel this thing higher,” he said. “Calling the point where this liquidity window closes is hard. So you need to trade it around or hold your breath, determine at what level you want to take a stand, and play chicken.” The Nasdaq closed at 9-month highs. S&P 500 index shorts are at highs seen in 2007. Apple now has a higher market cap than the entire Russell 2000 index. “This stage should end when the liquidity backdrop turns, and we hit a critical state. The BOJ, or the ECB, one of the majors does something to push real rates higher, back-end rates. Then all the damage that is being done within the economy with overnight rates at 5% takes its toll,” he said. “You have to remember that throughout this blob jump, while excess liquidity is creating the appearance of strength, this rise in rates is working its way through the system, burning it from within.” Money is still leaving the banking system, making its way to the superior safety and yields of money market mutual funds, reverse repos. “The perfect set up is a blow off that takes the market to new highs.” The kind of move that cleans out every last short, and gets the quants limit long. “Then you get through this debt ceiling resolution, followed by heavy issuance of new treasuries. Perhaps the BOJ blinks and finally responds to its inflation, sucking liquidity out of the system,” he said. “Like that retest of the highs in the summer of 2000. That ‘lights out’ kind of moment.”
Good luck out there,
Chief Investment Officer
One River Asset Management