wknd
notes


                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      wknd notes: Rapid Unscheduled Disassembly

wknd notes: Navigating the Decade Ahead

wknd notes: Navigating the Decade Ahead
May 07, 2023
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wknd notes: Our Need For Worthy Competitors

wknd notes: Our Need For Worthy Competitors
April 30, 2023
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wknd notes: Celebrating Those Rare Dissenters

wknd notes: Celebrating Those Rare Dissenters
April 16, 2023
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wknd notes: Life's Greatest Risks Emanate From Within

wknd notes: Life's Greatest Risks Emanate From Within
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wknd
notes

Each Sunday morning for over a decade, One River’s CIO, Eric Peters, has published “Wknd Notes.” It is an unorthodox take on markets, politics, and policy that’s widely read across our industry and within global policy/political circles. Eric has written for as long as he has traded and the discipline is part of his investment process. Drawing on wide-ranging, multi-disciplinary research, historical study, and discussions with interesting characters throughout the world, Eric collects those things he finds most thought-provoking each week and distills them into a concise letter. At times the ideas and views are consistent with his own, but just as often, they challenge his positions and it is this openness to opposing views that helps him maintain a flexible mind in the search for emerging opportunities and risks. His writing is a reflection of how he thinks, and as such it is as focused on identifying the right questions to ask as it is on seeking answers. The publication of this work is Eric’s way of exchanging ideas/information and developing dialogue with a network grown over his thirty-one-year career.

wknd notes: Rapid Unscheduled Disassembly

“As if the flight test was not exciting enough, Starship experienced a rapid unscheduled disassembly before stage separation,” tweeted SpaceX. The largest rocket ever developed by humanity, engineered to carry orders of magnitude more cargo to and from deep space than any previous vehicle, had just exploded 24 miles above Earth’s surface. The whole world watching. Nasa’s director publicly congratulated SpaceX. Journalists who don’t like Elon and who have never built anything of substance wrote cheeky articles. “With a test like this, success comes from what we learn, and today’s test will help us improve Starship’s reliability as SpaceX seeks to make life multi-planetary,” continued the Twitter feed. Central bankers watched distractedly from a distance, absorbed in their increasingly futile efforts to pull future prosperity to the present. Politicians jockeyed for advantage, playing their clever games to divide the economic spoils of their nation’s economies. While hungry young people throughout the world stood in awe at what is possible for risk-taking immigrants who make it to America. “Congrats @SpaceX team on an exciting test launch of Starship!” tweeted Elon, his engineers cheering, euphoric, their magnificent creation obliterated, but their knowledge compounding, advancing. And generations of our youth who have been raised to fear failure watched one of the richest people on the planet lead by example in his unique way. Calm, outwardly unruffled, aware that anything worth doing carries a high probability of failure. “Learned a lot for next test launch in a few months,” tweeted the native South African, an American. A polymath, an engineer, builder, entertainer, artist, dreamer. Who has learned that our highest form of art is a life lived to the absolute fullest. “Such a great day in so many ways.”

 

Shaun Martinak published an informative piece on tokenomics and their influence on digital asset prices [click here].

 

Week-in-Review: Mon: PBOC keeps 1y MLF unch at 2.75% as exp / injects 20b RMB (less than exp), SX5E sets new highs since 2007, Speaker McCarthy proposes extending debt ceiling if spending is frozen at last year’s level, ECB’s Kazaks says May could be 25 or 50, Taiwan to buy 400 US anti-ship missiles / China to conduct ‘major military actions’ in the Yellow Sea, ECB’s Lagarde acknowledges that tighter credit conditions means ECB will have to hike less, Singapore non-oil expts -8.3% (-19.4%e), India wholesale prices 1.34% (1.6%e), Brazil eco activity 3.03% (2.8%e), US empire mfg 10.8 (-18e), US NAHB housing mkt index 45 as exp, S&P +0.3%; Tue: China 1Q GDP 4.5% (4%e), Fed’s Bostic favors 1 more hike then pause / Fed’s Bullard wants 5.5%+, ECB’s Lane sees another hike In May after being non-committal previously during banking stresses, RBA minutes tilt hawkish / mention population growth & public sector wages as possible reasons to resume hikes, a Chinese lab conducting coronavirus research faced a series of biosafety problems in Nov 2019 – increasing chances that Covid19 started in a lab accident, G7 vows to continue backing Ukraine / Putin visits troops in occupied areas of Ukraine, Ueda ruled out any need to change key accord with gov’t for now, Old Dominion settles defamation case against FOX for $787m, China IP 3.9% (4.4%e) / ret sales 10.6% (7.5%e) / unemp 5.3% (5.5%e), Germany ZEW exp 4.1 (15.6e), US housing starts 1.42m (1.4m exp), Canada CPI 4.3% as exp / Core Trim CPI 4.4% as exp, S&P +0.1%; Wed: Report suggests BoJ may be wary of tweaking YCC so soon after banking crisis, Fed’s Beige Book mentions moderating price/wage pressures, Hungary CB deputy Virag signaled possible lowering of rate, India surpasses China as most populous country, 2022 US tax receipts are soft causing for some to bring forward the date at which the gov’t can’t meet its debt obligations, Brazil releases fiscal bill which disappointed expectations, UK CPI 10.1% (9.8%e) / Core CPI 6.2% (6%e) / RPI 13.5% (13.3%e), UK House prices 5.5% (5.1%e), EU final CPI 6.9% / Core CPI 5.7% as exp, Brazil IP -2.4% (-2.1%e), S&P flat; Thu: US philly Fed misses big, China 1y LPR 4.3% and 5y 3.65% as exp, Fed’s BTFP & discount window loans rise a bit after 3 weeks of falls, US looking to reveal China investment curbs in May, BoE’s Tenreyro stays dovish despite strong wage & CPI prints, Fed’s Mester wants to hike above 5% and then see what credit conditions are like, Senate Majority leader Schumer expressed cynicism that McCarthy’s debt limit proposal would pass the Senate, TSMC beats / ATT misses, Germany PPI 7.5% (9.8%e), France mfg conf 101 (103e), Taiwan expt orders -25.7% (-18.6%e), Mexico ret sales 3.4% (4.2%e), US init claims 245k (240k exp), US philly Fed -31.3 (-19.3e), US Leading index -1.2% (-0.7%e), EU consumer conf -17.5 (-18.5e), S&P -0.6%; Fri: ECB’s de Guindos said that “core inflation remains very sticky” / ECB’s Visco says should proceed cautiously due to growth and financial stability risks, Taiwan is worried the US is going too far in its rhetoric about reliance on TMSC amid tensions with China, SCOTUS puts abortion pill restrictions on hold, UK cons conf -30 (-35e), Japan CPI 3.2% as exp / Core CPI 3.8% (3.6%e), UK ret sales -3.2% (-3.1%e), EU PMIs mfg 45.5 (48e) / serv 56.6 (54.5e) / comp 54.4 (53.7e), US PMIs mfg 50.4 (49e) / serv 53.7 (51.5e) / comp 53.5 (51.2e), S&P +0.1%; Sat: Army beat Navy 11-6 in Men’s Lacrosse.

 

Weekly Close: S&P 500 -0.1% and VIX -0.30 at +16.77. Nikkei +0.2%, Shanghai -1.1%, Euro Stoxx +0.4%, Bovespa -1.8%, MSCI World -0.1%, and MSCI Emerging -1.1%. USD rose +9.9% vs Ethereum, +9.1% vs Bitcoin, +2.9% vs Brazil, +1.2% vs Canada, +1.0% vs Indonesia, +0.7% vs Chile, +0.3% vs China, +0.3% vs India, +0.3% vs Yen, +0.2% vs Australia, +0.2% vs Turkey, +0.1% vs South Africa, and +0.1% vs Euro. USD fell -0.3% vs Sweden, -0.2% vs Mexico, -0.2% vs Sterling, and flat vs Russia. Gold -1.3%, Silver -1.6%, Oil -5.5%, Copper -2.9%, Iron Ore -7.6%, Corn -3.2%. 10yr Inflation Breakevens (EU +2bps at 2.41%, US -2bps at 2.29%, JP +8bps at 0.69%, and UK +2bps at 3.79%). 2yr Notes +8bps at 4.18% and 10yr Notes +6bps at 3.57%.

 

Year-to-Date Equities (high to low): Czech Republic +24.1% priced in US dollars (+17.9% priced in koruna), Greece +22.5% priced in US dollars (+19.5% in euros), Ireland +22.4% in dollars (+19.4% in euros), Mexico +21.1% (+11.8%), France +20% (+17%), Italy +20% (+17%), Euro Stoxx 50 +19.1% (+16.2%), Denmark +17.5% (+14.8%), Spain +17.3% (+14.4%), Germany +16.9% (+14.1%), Argentina +16.7% (+43.9%), NASDAQ +15.3%, Netherlands +13.4% (+10.6%), Poland +13% (+8.6%), Sweden +11.1% (+9.9%), Taiwan +10.7% (+10.4%), Switzerland +10.3% (+6.8%), Russia +9.6% (+22.6%), Hungary +9.4% (+0.7%), UK +9.1% (+6.2%), MSCI World +8.4% priced in US dollars, Korea +7.9% (+13.8%), Portugal +7.7% (+5.1%), S&P 500 +7.7%, China +7% (+6.9%), Japan +6.9% (+9.5%), Saudi Arabia +6.8% (+6.5%), Austria +6.7% (+4.1%), Canada +6.7% (+6.7%), Belgium +6% (+3.4%), Chile +5.8% (-0.7%), Indonesia +3.7% (-0.4%), Singapore +2.5% (+2.2%), Australia +2.2% (+4.1%), South Africa +1.7% (+8%), Russell +1.7%, Colombia +1.7% (-5.5%), Finland +1.1% (-1.4%), HK +0.9% (+1.5%), New Zealand +0.4% (+4%), Brazil -0.3% (-4.9%), Philippines -1.1% (-0.7%), India -1.9% (-2.7%), Venezuela -2.8% (+41.1%), Malaysia -5.6% (-4.9%), UAE -5.6% (-5.7%), Thailand -6% (-6.6%), Norway -6.2% (+1.2%), Israel -9.5% (-6.1%), and Turkey -12.3% (-9%).

 

Time Travelers: “I like sci-fi, but prefer time travel stories to dystopian superintelligence ones,” said Lindsay Politi, our inflation portfolio manager, early one morning, our Bloomberg’s aglow. “Maybe that’s why I still think the better sci-fi tale playing out in real time is happening in the financial markets, not in Silicon Valley with its latest AI advances. Interest rates are the price of time, so, in a way, last decade’s monetary policy experiment was really a time distortion experiment. Crossing the zero bound in interest rates, like exceeding the speed of light with matter, causes our sense of time to become unfixed. Future values and present values converged and became indistinguishable. Time became irrelevant,” said Lindsay. 

 

Time Travelers II: “Financial valuation, at its core, is about valuing future cash flows,” continued Lindsay. “Taking interest rates near or below zero across almost all-time horizons completely distorted the idea of time in that cash flow valuation process. It compressed present values and future values to the point of being nearly identical. Being able to pretend that time doesn’t matter is alluring but completely unhinged from reality. Distorting the pricing of time doesn’t make time irrelevant, even if it seemed that way for a while, and having to consider time again as an extremely relevant variable is destabilizing for today’s markets, quite literally.” 

 

Time Travelers III: “Now that time matters again, we’re starting to realize that a lot of money we thought was on hand is trapped in the future,” said Lindsay. “You hear it all the time from the house you no longer want to sell because the mortgage rate is too low, to the PE deal you’re holding longer than you anticipated. Good or bad, people have all kinds of financial holdings they thought they’d be trading in the present but it’s now too expensive not to hold well into the future. It is creating all kinds of unexpected illiquidity and distortions. It’s not that the capital doesn’t exist. It’s just that it exists in a different time than we thought it did. And inflation is a catalyst that exposes these time distortions.”

 

Time Travelers IV: “All this trapped capital means inflation will be worse than most think,” said Lindsay. “There are supply issues, capital investment is needed to resolve them, but that capital is locked up in investments that we now realize are much longer term than originally anticipated. Negative and zero interest rates are so distorting that even a slight move away from that was always going to create a substantial shift towards value of the present -- liquidity, cash, current cash flow, etc. Inflation itself is all about time preference for the present, wanting the ability to buy today before it’s more expensive tomorrow. This natural shift towards wanting assets and consumption in the present creates an inherent inflationary push that’s hard to anticipate. It means that prices rebound more quickly on dips than we expect.”

 

Anecdote: “Credit started tightening six to nine months ago,” said the developer, a close friend, entrepreneur, with large residential projects across the nation. “It started with the money center banks,” he continued. “This pushed us to regional banks for our latest projects, but then SVB happened.” The market froze. “The lender for our latest 30-story project in a tier-one city backed out, so we scrambled, and spoke with well over 100 banks. Not one will provide financing.” His firm is a leader in their market niche. A strong track record. “The Fed is going to have to inject liquidity and slash rates to break this financing freeze on new construction.” Not only have higher rates failed to push home prices down materially, but they are now reducing new supply. “And here’s something I’ve never seen. When we start a new project, we take out a construction loan. We rush to finish the project, start renting the apartments, repay the loan, and refinance at a lower rate.” The new loans typically have less risk and thus a lower rate than the original construction loans, which are structured with 3yr maturities plus an option to extend for 2yrs. “But now, we have legacy construction loans with a 4.0%-4.5% interest rate, and we’ll extend those out for the full five-year term even though the projects are complete. If we paid them back and refinanced with permanent debt, the rates would probably be 6.5% fixed with no pre-pay option or 8.5%-9.0% floating. There’s no way anyone is going to pay back those low-rate loans that were originated before the hiking cycle.” This is a new dynamic for banks. Their low-rate loans are being extended at the same time their deposit base is shrinking. “We developed properties right through the 2008 cycle. What’s unfolding now is something else, new construction is going to hit the wall. The dramatic pace of interest rate increases has flipped everyone upside down,” he said, well-positioned. “Happy to sit on vacant lots. I can be patient.” 

 

 

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.

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