“We’ll send tiny racks of machines and have them in satellites, test them out, and then start scaling from there,” Google CEO Sundar Pichai said in November. Engineers scoffed at the practicality of the plan. “There’s no doubt to me that a decade or so away, we’ll be viewing it as a more normal way to build data centers,” said Sundar. And this week it was reported that Google is in talks with SpaceX for a rocket launch deal to put orbital data centers in space. Let that sink in, that’s where we are now.
Overall: The papers all wrote that Kevin Warsh now has the worst job in the world. Stuck in an impossible situation. Between Trump and a hard place. That’s ridiculous. The Fed Chairmanship couldn’t possibly suck more than being the latest IRGC commander. General Vahidi stepped into a sudden vacancy in early March. Too dovish and he is sure to get assassinated by his fellow governors, too hawkish and Mossad takes him out with a beeper. This dynamic is prolonging a war that everyone wants to end but no one seems able to exit. Being Treasury Secretary Bessent definitely doesn’t suck as much as being Vahidi. But presiding over a federal debt of $39 trillion with a $1.9 trillion budget deficit (6% of GDP) and $1 trillion in annual interest expense as bond yields soar is on par with what it was like to be Maduro back before our boys scooped him up in that track suit. Rising oil prices and inflation are not exactly as ominous as having the USS Gerald Ford anchored off the coast of Caracas. But they’re not far off when you’re managing the world’s largest debt pile, which Bessent is. At any rate, Warsh has a relatively easy job. Like his many predecessors, he’s expected to be tested by the markets early in his term, make a few enormous policy errors, and still not be fired. Compare that to investors, who are neck and neck with Vahidi for the worst job in the world. The Buffett Indicator has blown through all historical overvaluation extremes. The US stock market capitalization is 232% of GDP versus a long-term average of 80-90%, a peak of 115% at the 2007 highs, and 175% at the 2000 peak. Virtually no one has been overweight the AI-related stocks that powered this rally. And yet equities can go higher still, with humanity fast approaching the Singularity. So, everyone is chasing at the highs. Terrified. With oil, inflation, and interest rates rising - inextricably tied to Vahidi.
For Week-in-Review and Weekly & Year-to-Date market data, scroll to the bottom.
Single Point: Making a little money is easy. Making a lot of money is the opposite. Most of the time, those who make real fortunes do so by building things of value. The investors who fund them outperform their peers. Leverage helps amplify their returns (losses too). And sometimes, investors who build nothing of substance make lots of money for a period by applying reckless leverage to fairly mundane investments. It takes virtually no skill, which by definition means that many people can participate and appear successful for periods when not much changes.
Single Point II: We’re really not in that kind of period now. We’re in a time where vast fortunes are being made by builders - just look at the IPOs soon coming to market. For years, the great monopolies and oligopolies that dominate America’s stock market, repurchased their stocks and built vast hoards of cash. It seemed inconceivable that any opportunity could come along that would be both large enough and sufficiently compelling to consume that sum of capital. Then came artificial intelligence, the greatest industrial undertaking in all human history.
Single Point III: For decades, policy makers and politicians attempted to smooth the business and market cycle by intervening at the first sign of stress. It was well intentioned, though many of us would have preferred less manipulation, believing that without genuine hardship the likelihood of achieving one’s potential is vastly diminished. But on it went, and with each intervention, the risks that in a well-functioning free market economy would have resided in the private sector were transferred to the public sector. Government debt and entitlements exploded.
Single Point IV: In the years leading up to Covid, economists started talking about Secular Stagnation. It appeared that the US was losing its economic dynamism, just as Europe has for decades. Talk of Modern Monetary Theory circled through Washington DC as a mechanism to kick us out of our economic doldrums using aggressive government spending. Covid arrived, stimulus spending soared, the dollar and fiat currencies were debased as inflation surged. Government deficits rose to a new plateau. Debts surged. And the price of money rose too.
Single Point V: Decades of intervention mitigated the risk of deeply destructive recessions but increased the risk of a catastrophic depression. By transferring risks that naturally occur in a market economy from many private sector actors to a solo actor (the public sector), the risk of a single point of failure rose. As a government’s deficits and debt increase, inflation ultimately follows. And in a crisis accompanied by inflation, where the government balance sheet is the source of risk, it is unable to rescue the economy with rate cuts, QE and deficit spending without sparking an inflationary spiral.
Single Point VI: The single point of failure risk has never been greater. Recognizing this risk is different from knowing it will be realized. It’s a profoundly difficult situation. One of the most remarkable aspects of America and our economy is how every once in a while, we develop some new technology and use it to reinvent how we operate, escaping the predicaments we face. It produces prosperity to pay for our financial sins. It’s what’s gotten us here. It fuels our optimism as a nation. AI is the technology that may save us, and the stakes have never been higher.
Anecdote: “Want to know how to jump over a bike rack?” asked Bulldog, back in early 2013. I was telling him about my plans to start One River. When I make a big decision, I always kick it around with people I respect. “Okay, listen carefully, there’s only one way to do it,” he grunted. I pictured a jumbled bike rack from my days at university. “You run as goddamn fast as you possibly can and you jump over it with everything you got - to hell with the consequences, that’s how you do it. And you might still fail, but that’s the only way.” I love Bulldog. “If you don’t run as fast as you possibly can, then you are definitely going to get wrecked. FUBAR. Might as well not even try.” He’s right of course. And I’ll never forget it. There are certain times in life and in risk-taking that are best managed using well-constructed hedges. But not all times. Knowing one from the other is a big part of the art of life. America is in one of those bike rack moments now. It’s almost as if the country has been waiting for this moment for decades. Our government has been intervening for all these years to keep the economic wheels spinning in the hope that some new innovation comes along to lift productivity and bail us all out. Our monopolies have been deepening their war chests for the day when they can build something to rival the railroad boom. Now they’re all in, pushing well past their free cash flow, leveraging up their balance sheets to win an existential race. The Trump administration in particular is making the bet that the only way over the rack is an all in commitment, full speed ahead, no hesitation whatsoever. And no one involved can afford to hedge in the slightest. We clear the rack and it’ll be amongst America’s greatest economic triumphs. And if we don’t, FUBAR.
Good luck out there,
Eric Peters
Chief Investment Officer
One River Asset Management
Week-in-Review: Mon: US existing home sales 4.02m (4.05m e). China CPI 1.2% (0.9%e), PPI 2.8% (1.8%e). Hormuz remains largely blocked as US and Iran unable to reach deal to end conflict. South Korea’s presidential policy chief Kim Yong-Beom proposes “citizen dividend” funded by excess profits from AI industry taxes. S&P +0.2%. Tue: US CPI 3.8% (3.7%e), Core 2.8% (2.7%e). Mexico IP NSA -1.3% as exp. South Korea unemp rate SA 2.8% (2.7%e). US FDA Commissioner Makary resigns. CME partnering with Silicon Data to create futures market for computing power. S&P -0.2%. Wed: US PPI final demand MoM 1.4% (0.5%e). Eurozone GDP SA 0.8% as exp. US Federal Reserve to buy about $10B in Treasury bills over the period ending June 11, marking a 75% pullback over a two-month span and signaling the Fed is confident in the funding markets. US Senate confirmed Kevin Warsh as Fed Chair. Venezuelan government announced $179B debt restructuring process. S&P +0.6%. Thu: US init jobless claims 211k (205k e). UK GDP 1.1% (0.8%e). China Money Supply M2 YoY 8.6% (8.5%e). Japan PPI 4.9% (3.0%e). Xi warns Trump of potential conflict over Taiwan at China and US summit and also signaled that China is moving toward greater openness in meeting with US business leaders. Cerebras Systems Inc shares jumped 68% in trading debut after raising $5.5B in the year’s largest IPO. AI data centers buildout drives 76% power bill jump on largest US grid. S&P +0.8%. Fri: US emp mfg 19.6 (7.2e), IP MoM 0.7% (0.3%e). US Fed names Powell Chair Pro Tempore until Warsh is officially sworn in. OpenAI to partner with Plaid to give consumers financial advice. SpaceX said to plan public IPO filing as soon as next Wednesday. Snap and Google settle school social media addiction suit ahead of trial. S&P -1.0%.
Weekly Close: S&P 500 +0.1% and VIX +1.24 at +18.43. Nikkei -2.1%, Shanghai -1.1%, Euro Stoxx -0.9%, Bovespa -3.7%, MSCI World -0.3%, MSCI Emerging -2.5%, Bitcoin -1.2%, and Ethereum -4.0%. USD rose +3.4% vs Brazil, +2.5% vs Sweden, +2.3% vs Sterling, +2.1% vs Chile, +1.9% vs South Africa, +1.6% vs India, +1.4% vs Euro, +1.3% vs Australia, +1.3% vs Yen, +0.9% vs Mexico, +0.5% vs Canada, +0.5% vs Indonesia, +0.3% vs Turkey, and +0.2% vs China. USD fell -1.7% vs Russia. Gold -3.6%, Silver -4.1%, Oil (WTI) +10.5%, Oil (Brent) +7.9%, NatGas (US) +7.4%, NatGas (EU) +13.6%, Power (EU) +8.6%, Copper -0.02%, Iron Ore -0.3%, Corn -3.3%. 10yr Inflation Breakevens (EU +8bps at 2.28%, US +5bps at 2.51%, JP +28bps at 2.24%, and UK +12bps at 3.57%). 2yr Notes +19bps at 4.07% and 10yr Notes +24bps at 4.59%.
YTD Equity Index Returns: Korea +71.1% price din US dollars (+77.8% priced in won), Taiwan +41.6% priced in US dollars (+42.2% priced in Taiwan dollars), Norway +33.2% priced in US dollars (+22.9% in krone), Israel +28.8% in dollars (+17.9% in shekels), Hungary +25.3% (+18.6%), Turkey +20.3% (+27.6%), Japan +20.2% (+22%), Brazil +19% (+10%), Thailand +16% (+20.5%), NASDAQ +12.8%, Russell +12.5%, Portugal +10.5% (+11.5%), Poland +10.2% (+12.1%), Mexico +9.8% (+5.7%), Finland +9.1% (+10.3%), Austria +8.8% (+10%), S&P 500 +8.2%, Italy +8.1% (+9.3%), Singapore +7.9% (+7.4%), Vietnam +7.4% (+7.7%), MSCI World +7% in US dollars, China +6.9% (+4.2%), Belgium +6.7% (+7.7%), Canada +6.6% (+6.7%), Australia +6.2% (-1%), Malaysia +6.2% (+3.6%), Netherlands +5.3% (+6.2%), Greece +5% (+5.9%), Saudi Arabia +4.7% (+4.8%), Sweden +2.6% (+5.3%), UK +1.7% (+2.7%), Colombia +1.2% (+1.6%), Spain +0.9% (+1.8%), HK +0.7% (+1.3%), Switzerland +0.2% (-0.4%), Euro Stoxx 50 -0.3% (+0.6%), Chile -1.3% (-0.6%), South Africa -1.7% (-1.1%), New Zealand -2.8% (-4.3%), UAE -3.2% (-3.2%), Germany -3.3% (-2.2%), France -3.3% (-2.4%), Denmark -4.4% (-4%), Philippines -5.7% (-1.3%), Ireland -6.2% (-5.4%), Czech Republic -7% (-5.6%), Argentina -7.6% (-11.3%), India -15.2% (-9.5%), Indonesia -25.7% (-22.2%).
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.