Hope all goes well… “Elon is a genius bro,” said my Uber driver, who rents a Tesla from Hertz for $360/wk, drives 7-days straight, saves $100/wk in gas, earns as much as a Harvard grad back when they could still get Wall Street jobs. “GM makes a new car with better range, and Elon’s like - I’ll double that bro.” I smiled. “I’m a risk taker. I made dumb mistakes. Lost big. But now I study, take calculated risks, you know?” I nodded, caught his eye in the rearview. “That’s right, you know what I’m saying. I don’t work no J.O.B. - Just Over Broke.” I’d never heard that and laughed approvingly. Which further fired him up. “Yeah, you know, don’t work no J.O.B. bro!” said the kid, half my age, a fellow New Yorker, hustling, about to get a monster tip.
Overall: “We hit the companies to maximum effect,” said UAW President Shawn Fain in a Facebook livestream. GM and Stellantis had just agreed to provide a 25% wage increase to United Auto Workers members, matching the same offer by Ford to end the six-week strike. The gains are valued at more than four times those won in the last UAW contract in 2019 and provide more in base wage increases than Ford workers have received in the past 22 years. The deal will reinstate major benefits lost during the Great Recession, including cost-of-living allowances. Some lower paid workers will receive an immediate 85% wage increase. This is the sort of thing that happens in a relatively free market when capital owners have extracted such a large share of the nation’s economic spoils that labor revolts. Government workers got a 4.6% raise this year. And 70mm Social Security recipients received an 8.7% benefit increase in 2023. Such gains are mechanical, mathematical, removing the need for union strikes to extract more money. The cost is simply added to the Federal deficit, which is funded through the issuance of bills and bonds, the supply of which is expanding at an accelerating rate. Politicians can dampen the trajectory of this parabolic trend. Theoretically. In practice, they are the ones responsible for its remarkable shape. And after six weeks of paralysis in the republican congress, a new House Speaker was selected, hailing from Louisiana, the 3rd most federally dependent state government in the union. Ahead of what will be the most chaotic presidential election in modern history, Mike Johnson will lead, having circulated an amicus brief - signed by more than 100 Republican lawmakers - and filed it in a Texas court case to contest the 2020 election results in four swing states. It thus seems unlikely that our politicians will be focused in 2024 on restoring our national finances to a sustainable trajectory. There will be no Union boss to fight that fight. Only bond markets, which are ultimately built upon faith. And this is fading.
Week-in-Review: Mon: Nikkei reports the BOJ will discuss raising the YCC ceiling at next weeks’ meeting, US 10y surpasses 5% briefly (first time since 2007), Israel carries out airstrikes while holding off on ground invasion / Hamas releases two more hostages, Israel CB unch and lowers GDP forecast, Ackman tweets that he covered short bond position citing geopolitical and economic vulnerabilities, EU cons conf -17.9 (-18.2e), US Chicago Fed activity 0.02 (-0.14e), S&P -0.2%; Tue: Xi visits PBOC (first time publicly), Tom Emmer latest GOP Speaker nominee for 4hrs before pulling out after Trump campaigned against him, Hungary CB cuts 75bps (50bp exp), ECB lending survey shows further tightening in standards and further decline in loan demand, MSFT beats / GOOG misses, UK cons conf -28.1 (-27e), EU mfg PMI 43.0 (43.7e) / serv 47.8 (48.6e) / comp 46.5 (47.4e), UK mfg PMI 45.2 (44.7e) / serv 49.2 (49.3e) / comp 48.6 (48.5e), US mfg PMI 50.0 (49.5e) / serv 50.9 (49.9e) / comp 51 (50e), S&P +0.7%; Wed: China’s NPC approved additional RMB1tn issuance for 4Q - effectively increasing 2023 central fiscal deficit to 3.8% from 3% (the first intra year deficit increase since 2000), loyal Trump supporter Mike Johnson elected House speaker, Chinese firm SMIC used equipment purchased from ASML to make advanced chip for Huawei smart phone, Israel says it will delay ground invasion so US can get air defenses in place to protect its own troops / UN chief says “deeply concerned about violations to humanitarian law in Gaza”, Meta beats but says economy is very uncertain, Australia CPI 5.4% (5.3%e) / Trimmed mean 5.2% (5%e), Germany IFO exp 84.7 (83.5e), EU M3 -1.2% (-1.8%e), US New home sales 759k (680k e), Russia IP 5.6% as exp, S&P -1.4%; Thu: ECB unch as exp / notes big fall in Sept CPI but says rate cut talk ‘totally, totally premature’ / no discussion of balance sheet, US 3Q GDP 4.9% (4.5%e) / private demand not as strong, Israel made limited ground raids into Gaza / US asks Israel to delay to help secure release of more hostages / Israel says it killed Hamas’s deputy head of intelligence, Yellen says higher rates reflect stronger growth not deficits, CBRT hikes 500bp as exp, Chile cuts 50bps (75bp exp), AMZN beats / AWS rev misses, S. Korea 3Q GDP 1.4% (1.1%e), Japan PPI serv 2.1% (2%e), S. Africa PPI 5.1% (5%e), Brazil IPCA infl 5.05% (5.04%e), Mexico unemp 2.88% (2.93%e), US core PCE index 2.4% (2.5%e) / Personal consumption 4.0% as exp, US Durable goods 4.7% (1.9%e), US init claims 210k (207k e) / Continuing claims 1790k (1740k e), S&P -1.2%; Fri: Biden meets with China’s FM Wang Yi and discuss summit next month btwn Biden/Xi, US forces strike two facilities in eastern Syria linked to Iran, Speaker Johnson confirms aid for Israel and Ukraine will be considered separately, ECB’s Muller says EU is in stagnation, Germany’s Scholz warned EU leaders about bloc’s spending/fiscal situation, former Chinese Premier Li Keqiang died of heart attack at 68, Tokyo CPI 3.3% (2.8%e) / Core CPI 3.8% (3.7%e), Italy cons conf 101.6 (105.2e), Russia CB hikes 200bp (100bp exp), US personal inc 0.3% (0.4%e) / spending 0.7% (0.5%e), US PCE deflator 3.4% as exp / Core 3.7% as exp, US UofM final sentiment 63.8 (63e) / 1y infl exp 4.2% (3.8%e) / 5-10y infl exp 3% as exp, S&P -0.5%.
Weekly Close: S&P 500 -2.5% and VIX -0.44 at +21.27. Nikkei -0.9%, Shanghai +1.2%, Euro Stoxx -1.0%, Bovespa +0.1%, MSCI World -1.8%, and MSCI Emerging -1.6%. USD rose +1.5% vs Sweden, +1.1% vs Canada, +0.7% vs Turkey, +0.4% vs Indonesia, +0.3% vs Sterling, +0.3% vs Euro, +0.2% vs India, and flat vs China. USD fell -12.9% vs Bitcoin, -9.7% vs Ethereum, -2.5% vs Russia, -0.9% vs Chile, -0.9% vs South Africa, -0.7% vs Mexico, -0.4% vs Brazil, -0.3% vs Australia, and -0.1% vs Yen. Gold +0.2%, Silver -2.6%, Oil -2.9%, Copper +2.3%, Iron Ore +2.6%, Corn -3.0%. 10yr Inflation Breakevens (EU -8bps at 2.26%, US -4bps at 2.43%, JP +6bps at 1.29%, and UK -5bps at 3.79%). 2yr Notes -7bps at 5.00% and 10yr Notes -8bps at 4.84%.
Year-to-Date Equities (high to low): Argentina +64.2% priced in US dollars (+224.4% priced in pesos), Venezuela +34.9% priced in US dollars (+178.1% in bolivars), Hungary +32% in dollars (+28.6% in forint), Poland +26.6% (+22.3%), Greece +25.3% (+26.8%), NASDAQ +20.8%, Russia +16.2% (+49.7%), Italy +13.7% (+15.1%), Denmark +12% (+13.8%), Brazil +9.8% (+3.3%), Mexico +9% (+1.1%), Czech Republic +8.8% (+12.4%), Ireland +8.5% (+9.9%), Taiwan +8.1% (+14.1%), S&P 500 +7.2%, Spain +7.1% (+8.4%), MSCI World +5.3% in dollars, Euro Stoxx 50 +4.6% (+5.8%), India +4.4% (+5.2%), Germany +4.2% (+5.5%), Japan +4% (+18.8%), France +3.7% (+5%), Netherlands +2.4% (+3.7%), Colombia +0.1% (-14.9%), Saudi Arabia -0.4% (-0.7%), Switzerland -1.8% (-3.8%), UK -1.9% (-2.2%), Portugal -2.6% (-1.5%), Chile -3.7% (+5.8%), Indonesia -3.7% (-1.3%), Korea -4% (+3%), Austria -4.5% (-3.4%), Norway -5.6% (+7.4%), Canada -5.7% (-3.3%), Sweden -6.3% (+0.3%), Turkey -7% (+39.9%), Russell -7.1%, China -7.9% (-2.3%), Singapore -7.9% (-5.8%), UAE -9.6% (-9.5%), Australia -9.8% (-3%), Philippines -11.1% (-9.2%), Malaysia -11.1% (-3.6%), Belgium -12.2% (-11.1%), HK -12.3% (-12%), South Africa -13.7% (-4.7%), New Zealand -14.1% (-6.2%), Finland -16.7% (-15.7%), Thailand -20.3% (-16.8%), Israel -23.6% (-11.3%).
Boo: “The strategy for the discoverers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering and recognizing opportunities when they present themselves,” wrote Nassim Taleb. “So, I disagree with the followers of Marx and those of Adam Smith: the reason free markets work is because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or ‘incentives’ for skill. The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can.”
Boo II: Taleb popularized the portfolio hunt for Black Swans. With fiscal largess, widening wars, political paralysis, generational friction, sticky inflation, rising real interest rates, and increasing demand for hedges, now is an obvious time to open one’s mind to possible futures that are still priced as if highly improbable, impossible. Policy makers remain rather relaxed, feeding their swans, seeing only white. And should a black bird suddenly appear, they know they’ll quickly declare another unforeseen “shock” and return to the comfort of unorthodox policies.
Boo III: Are we sleepwalking into a banking crisis? The recent break in market correlations is providing an early-warning signal. Go back to March. Small banks were strained by a self-reinforcing deposit flight. The Federal Reserve invoked emergency measures using 13(3) of the Federal Reserve Act - tossing out Halloween candy to all the frightened regional bankers, all those little trick and treaters. Boo! The spirit of section 13(3) addresses a financial crisis or extreme market malfunction, a Black Swan. March reminded us the Fed feels it must act, immediately.
Boo IV: The Bank Term Funding Program (BTFP) was created to stem bank liquidity strains. It was expected to be temporary - yet, it is proving sticky, rising to new highs last week. That’s a bad sign for shareholders - the BTFP is replacing low-cost deposits with high-cost Fed funding. Regional bank equities have quietly slipped to within a whisker of Spring lows. Markets hinted at the latest break in market correlations back then, too. Hedges like gold and bitcoin were negatively impacted by banking strains but have recovered despite rising real interest rates. Boo!
Boo V: Commercial bank deposits declined more than $100bln for the 3wks ending Oct 18, to within a sliver of April lows. Boo! The Fed 13 (3) put is alive and well - if this turns into another bank run, ‘they’ll just do more,’ say the fearless. No doubt that’s what they’ll do, and then pray markets behave. Different from past cycles, the Fed is deeply in the hole – its accumulated losses for Treasury are $105bln and growing by nearly $1bln/day. Hunting for trades to profit from the possibility that markets revolt is exactly the swan collecting exercise that Taleb describes.
Boo VI: In past cycles, fiscal prudence made it easy for extraordinary actions from central banks. Now, an attempted return to monetary orthodoxy has raised Fed financing costs, interest payments made mostly to large banks. Like in Europe’s 2011 debt crisis, fiscal, monetary, and banking policies are now joined at the hip in the US. Loose fiscal policy has captured central banks, and central banks have captured struggling commercial banks. And this year’s doubling of budget deficits with record low unemployment is obviously untenable. But then, so is austerity.
Anecdote: The Chrysler Building sparkled in the distance, a magnificent Art Deco skyscraper, completed in 1930, the Great Depression unfolding. They paid $2.5mm for the land back then, the value of money erodes through time. Most things do. Chrysler is now Stellantis, a conglomerate, the world’s 4th largest automaker. Its market cap is $57bln. I was standing high in the GM Building, on the corner of 5th Ave & 59th, speaking with a friend about risks, opportunities. GM completed the white marble tower in 1968 and had a showroom in the lobby. Its market cap is now $37bln. Apple was founded in 1976, eight years after the building opened, and now has a flagship store in the basement. Apple’s market cap is $2.63trln. I’d driven my Tesla to the meeting, handsfree for much of the ride. Elon has yet to build a tower, just Gigafactories. Tesla was founded in 2001, its market cap is $659bln. Humanity pays handsomely for its innovators, builders, risk takers. It penalizes corporate babysitters, coupon clippers, safety seekers. The rise and fall of companies, nations, empires - these are the things we bet on, as our fortunes come and go. Stocks, bonds, currencies, commodities, derivatives, they’re all just instruments we use to place wagers on these shifts. Anyhow, we were discussing the possibility that the US is approaching a time when investors might lose faith in the sustainability of its fiscal trajectory. Were that to happen while inflation remained elevated, the ability of the Fed to intervene would be limited, probably ineffective, perhaps counterproductive. I’ve traded a few such markets during the early 1990s Exchange Rate Mechanism (ERM) crisis, and the moves are extraordinary, ferocious, terrifying. With the global reserve currency, US markets and the people who trade them, have never experienced something like this. Politicians and policy makers arrogantly dismiss such risks, and act accordingly, recklessly, which naturally lifts their probability. And the thing to watch for now is a simultaneous rise in bond yields, decline in equities, decline in the dollar, jump in gold, bitcoin.
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.