“I thought it was critical that there not be any doubt, none whatsoever, about US support for Ukraine in the war,” said President Biden, standing in Kyiv, escalating America’s conflict with Russia in dramatic fashion. “The Ukrainian people have stepped up in a way that few people ever have in the past,” he added, still reeling from Kabul’s flash-fall. Our commander-in-chief announced $500mm of additional military assistance. Shells for howitzers, anti-tank missiles, air surveillance radar. But no new advanced weaponry. At least not yet. Russia’s military has been shockingly ineffective against tiny Ukraine. One can only imagine the depth of Moscow’s humiliation had the full force of America’s most advanced military technology been brought to bear. It is not unreasonable to assume the destruction of Russia’s military would have been absolute. The risk, of course, is that this conflict goes nuclear. And yet, Biden is beginning to act as if Russia lacks the willingness to take that existential step. With the rapid speed of our technological advances, it’s possible we have attained the power to limit Putin’s ability to strike. At any rate, nations only feel threatened by those they respect. And the US increasingly appears have lost all regard for Russia. America’s real threats now emanate from within. The succession of financial and economic crises that erupted in recent decades were papered over by our central bank. Following the pandemic, monetary and fiscal policy were coordinated to magically sustain economic growth without many of us even working. Inflation is the mortal enemy to this kind of policy coordination. Unsurprisingly, it appeared. Our central bankers now claim that there should be no doubt, whatsoever, that they remain committed to bringing it back down to 2%. But inflationary dynamics are not easily understood. Both economic growth and price gains are defying economist’s forecasts. And it is unclear whether our central bankers and politicians will be willing to inflict the pain required to win a war they started with themselves.
Week-in-Review: Mon: US holiday, Biden surprise visit to Ukraine / announces add’l $500m aid package, Israel CB hikes 50bp (25 exp), ECB’s Rehn says hikes likely to be finished in summer, SNB vice chairman Schlegel says still willing to be active in FX markets, Sec of State Blinken says China is considering giving Russia weapons but adds they “haven’t crossed the line yet”, China urges the world to stop the “Ukraine today, Taiwan Tomorrow” rhetoric, PM Kishida announced $5.5b in fresh aid for Ukraine, Sweden CPI 11.7% (11.8%e), Russia 2022 GDP -2.1%, EU cons conf -19 as exp, S&P closed; Tue: Japan 10y rises above 0.5% cap (first time since Jan), Putin suspends participation (but doesn’t exit) in New Start Treaty (nuclear arms restrictions), RBA mins show they considered 50bp hike at last meeting, Riksbank’s Floden doesn’t want a weak SEK / Ohlsson says could have supported a larger hike, Walmart cautious on consumer outlook, Wang Yi meets with Putin / Xi likely to meet Putin in coming months as China reportedly looks to increase its efforts to end the war, Fed’s peak rate expectations reach new high (above 5.35%), EU mfg PMI 48.5 (49.3e) / serv PMI 53 (51e) / comp 52.3 (50.7e), Canada CPI 5.9% (6.1%e), US mfg PMI 47.8 (47.2e) / serv 50.5 (47.3e) / comp 50.2 (47.5e), US existing home sales 4m in Jan (4.1m exp), S&P -2%; Wed: RBNZ hikes 50bp as exp / 75bp was considered (hawkish) / pace of forecasted hikes slowed (dovish), Fed minutes show a “few” favored a 50bp hike at past meeting / mention of easing FCI could lead to more hikes, ECB’s Villeroy says markets may have overshot recently in pricing hikes, BoJ’s Tamura says policy review needed at some point, S. Africa’s Eskom cuts 7k MW from nat’l grid (new record cut) / S. Africa’s budget shows large debt relief for Eskom, BOJ conducted unscheduled bond purchases as 10y yield exceeded 0.5% cap for 2nd day, Japan PPI 1.6% (1.5%e), Australia wage prices 3.3% (3.5%e), US mortgage app -13.3% (-7.7%p), Russia IP -2.4% (-2.5%e), S&P -0.2%; Thu: Turkey CB cuts 50bp (100bp exp), NVDA strong earnings/guidance, BoE’s Mann (hawk) says more tightening needed / pivot not imminent, Israel CB gov convened emergency meeting of the financial stability committee, Singapore CPI 6.6% (7.1%e) / Core CPI 5.5% (5.7%e), Taiwan IP -20.5% (-11.25%e), Hong Kong CPI 2.4% (2.1%e), S. Africa PPI 12.7% (12.8%e), EU final CPI 8.6% as exp / Core CPI 5.3% (5.2%e), US 4Q GDP (2nd) 2.7% (2.9%e) / Core PCE 4.3% (3.9%e), US init claims 192k (200k exp), S&P +0.5%; Fri: BoJ gov nominee Ueda offers no surprises at Diet testimony / lent support for current policy, US PCE 5.4% (5%e) / Core PCE 4.7% (4.3%e), Blinken says China probably approved dual-use items to Russia, US and Europe announce new sanctions against Russia / US to announce new $2b in security assistance to Ukraine, ECB’s Nagel suggests ECB may need significant rate hikes into 2Q, 1y anniversary of Russia’s invasion of Ukraine, S. Africa added to FATF’s ‘gray list’, China proposes cease-fire between Russia and Ukraine so they can discuss 12-point peace proposal, Japan CPI 4.3% as exp / Core CPI 3.2% (3.3%e), UK cons conf -38 (-43e), Germany 4Q GDP (final) 0.9% (1.1%e) / retail sales -6.2% (-7.6%p) / cons conf -30.5 as exp, Mexico 4Q GDP 3.6% (3.5%e), Brazil IPCA infl 5.63% (5.59%e), US personal inc 0.6% (1%e) / spending 1.8% (1.4%e), US new home sales 670k (620k exp), US UofM 67 (66.4e) / 1y infl exp 4.1% (4.2%e) / 5-10y infl exp 2.9% as exp, S&P -1.1%; Sat: G20 fin min meeting fails to end in official communique due to impasse over language on Russia’s war on Ukraine – backwards step after an agreed upon statement at November’s meeting.
Weekly Close: S&P 500 -2.7% and VIX +1.65 at +21.67. Nikkei -0.2%, Shanghai +1.3%, Euro Stoxx -1.4%, Bovespa -3.1%, MSCI World -2.6%, and MSCI Emerging -2.8%. USD rose +4.7% vs Chile, +3.2% vs Ethereum, +2.3% vs Australia, +2.2% vs Bitcoin, +2.1% vs South Africa, +1.7% vs Yen, +1.4% vs Euro, +1.3% vs China, +1.2% vs Russia, +1.0% vs Canada, +0.8% vs Sterling, +0.7% vs Brazil, +0.5% vs Sweden, +0.3% vs Mexico, +0.2% vs Turkey, and +0.1% vs Indonesia. USD fell -0.1% vs India. Gold -1.8%, Silver -4.2%, Oil -0.3%, Copper -3.7%, Iron Ore +2.6%, Corn -4.2%. 10yr Inflation Breakevens (EU +13bps at 2.45%, US +1bp at 2.38%, JP -1bp at 0.69%, and UK +4bps at 3.53%). 2yr Notes +20bps at 4.82% and 10yr Notes +13bps at 3.95%.
Year-to-Date Equities (high to low): Greece +17.9% priced in US dollars (+19.7% priced in euros), Czech Republic +16.1% priced in US dollars (+15.5% priced in koruna), Mexico +15% priced in dollars (+8.7% in pesos), Italy +12.1% in dollars (+13.8% in euros), Ireland +11.6% (+13.3%), Argentina +11.2% (+22.9%), Taiwan +10.3% (+9.7%), Spain +10.1% (+11.8%), France +9.3% (+11%), NASDAQ +8.9%, Austria +8.8% (+10.5%), Euro Stoxx 50 +8.5% (+10.2%), Germany +7.6% (+9.2%), Russell +7.3%, Sweden +7.1% (+8%), Hungary +6.8% (+3.4%), Netherlands +6.7% (+8.3%), China +4.8% (+5.8%), UK +4.4% (+5.7%), Chile +4.1% (+1.3%), MSCI World +4% priced in US dollars, Korea +3.9% (+8.4%), Canada +3.6% (+4.3%), S&P 500 +3.4%, Denmark +3.3% (+5%), Philippines +3% (+1.8%), Belgium +2.7% (+4.3%), Australia +2.4% (+3.8%), Switzerland +2.2% (+4.2%), Finland +2.1% (+3.7%), Indonesia +1.7% (+0.1%), Japan +1% (+5.2%), New Zealand +0.6% (+3.8%), HK +0.5% (+1.2%), Poland +0.3% (+2.8%), Singapore +0.1% (+1%), Russia -1.1% (+2.5%), Portugal -1.6% (-0.1%), Brazil -2% (-3.6%), South Africa -2.1% (+5.9%), Saudi Arabia -2.9% (-3.1%), Thailand -3% (-2.1%), Norway -3.2% (+2.6%), UAE -3.5% (-3.4%), Venezuela -3.6% (+37.3%), Malaysia -3.7% (-2.6%), India -3.9% (-3.5%), Israel -6.5% (-3.4%), Colombia -7% (-7.2%), Turkey -9% (-8.2%).
Dark Forest: “Sorry to tell you, but there are no aliens,” said the intelligence analyst. “The Tic Tac videos, balloons, UFOs - they’re not aliens,” he said. “We’re all alone here, it’s just us.” For those of us who read Cixin Liu, China’s brilliant Sci-Fi author, the notion that we are alone is extremely comforting. Cixin turned me onto the Dark Forest hypothesis, which postulates that while there may be many alien civilizations out there, we see no sign of them because they are silent and paranoid, lest they alert others to their existence and invite invasion, annihilation.
Dark Forest II: “What we see is our next generation military technology,” continued the intelligence analyst. “We all see what the Ukrainians did to Russia’s military using battlefield technology that we would generally consider obsolete relative to our state of the art,” he said. “But America’s actual state of the art is one or two generations ahead of what the public sees today,” he said, which was simultaneously comforting and terrifying. “It is not in our interest to show our adversaries how far advanced our capabilities have grown.”
Dark Forest III: “Look carefully at this chart,” said the technology investor. It was the kind of curve I’ve seen often, an upward sloping trend that accelerates through time. On the vertical axis was the computing power used to train artificial intelligence systems. The horizontal axis was time, going back to the early 1950s. “I know you’re thinking you’ve seen this kind of chart before, it’s a classic hockey stick. But here’s the thing, it’s a logarithmic chart, it should not curve upward. This kind of growth is almost impossible for the human brain to comprehend.”
Dark Forest IV: ChatGPT has had the steepest adoption of any technology in history. It hit 1mm users in five days. Within 2mths, it crossed 100mm users. It is estimated to have 1bln users by the end of the year. It is a remarkable technology, and while we can have no certainty about how it will change the world, there is no doubt that the arc of its influence is only just starting. Governments will lag far behind in regulating it. We don’t yet know what will happen when it gets connected to the internet. And ChatGPT is 2-3 generations behind state-of-the-art AI.
Dark Forest V: “Time is the one thing that can’t be stopped. Like a sharp blade, it silently cuts through hard and soft, constantly advancing. Nothing is capable of jolting it even the slightest bit, but it changes everything,” wrote Cixin Liu, in The Dark Forest. “Staying alive is not enough to guarantee survival. Development is the best way to ensure survival,” said Cixin. “Do you know what the greatest expression of regard for a race or civilization is? Annihilation. That’s the highest respect a civilization can receive. They would only feel threatened by a civilization they truly respect.”
Anecdote: “Innovation is a creative solution to a difficult problem,” said Marcel Kasumovich, Deputy CIO of our digital business. “Users decide its use cases, not the architects,” he continued, the two of us talking about the arcs that lead to big longer-term opportunities. “Think of the internet. It was the solution to a defense problem, spurred by a beach-ball sized satellite, Sputnik, circling the earth and sending radio signals,” he said. “If the Soviets could do that, the US telecommunications network and its singular point of failure would be at risk.” New agencies were formed to focus on space technologies – including the Advanced Research Projects Agency (ARPA). “In 1962, a solution was proposed – a ‘galactic network’ of computers that could speak to one another. It would decentralize and de-risk the communications network,” said Marcel. Soon after, ARPAnet was created. It took nearly a decade for two computers to communicate with one another. Institutions were slowly added to the network. And the rules followed. Regulation is always a follower. Innovators work within the spirit of regulatory principles and guide the rules. Like in 1983, when the Transmission Control Protocol/Internet Protocol provided a common set of rules for how computers communicate worldwide. “It was the birth of the modern internet. And it worked so well that it almost broke. Network nodes were no longer under centralized control, and a surge in demand slowed transmission speeds to a grind.” A network of engineers solved that problem, and many others later. The internet raced from 28,000 nodes to one billion. All without an “inventor,” unlike the technological advancements before it. “It was a decentralized innovation whose governing rules adapted to its use cases. It rhymes with what’s ahead for digital asset markets. And the internet is our grounded context for digital asset regulation.”
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.