“I am deeply troubled by the Federal Reserve’s rapid series of super-sized interest rate hikes, which may inflict unnecessary pain on millions of individuals and families while sending the economy into a devastating recession,” wrote Chairwoman of the House Financial Services Committee in a public letter to Fed Chairman Powell. “This week’s Federal Open Market Committee decision marks the fourth consecutive mega rate hike by the Fed, resulting in the highest federal funds rate since before the 2008 global financial crisis and the fastest set of rate hikes by the Fed in four decades. Enough is enough,” continued Maxine Waters. And this level of political pressure has started with unemployment rising just 0.2% to 3.7%.
Overall: “The last thing I’ll say is that I would want people to understand our commitment to getting this done and to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon,” said America’s central bank chief, speaking to journalists, having just hiked interest rates another 75bps. “I control those messages,” explained Jay Powell. “That’s my job.” And indeed, it is. In 1977, Congress set the Federal Reserve’s goals: maximum employment, stable prices, and moderate long-term interest rates. Our politicians did not tell central bankers how to achieve these goals. Neither did they quantify how much short-term pain they would be willing to bear in the pursuit of this mandate, nor did they make clear over what time horizon they would measure success. And naturally, in such an infinitely complex system, there is no singular way to achieve these sensible goals. So, we appoint central bankers we believe will have the judgement required to navigate the labyrinth. But of course, the maze is always changing. So the Fed strategies must adapt to our present circumstances. What worked during globalization and peace is now largely obsolete. That’s obvious. But what is not yet clear is how the actions of our central bankers and politicians are eroding our collective faith in the value of money. In recent decades, central bankers and politicians grew increasingly aggressive in rescuing speculators from financial folly. Then Covid happened. And they created more money than anyone could possibly imagine. Presto. Magic. Everyone got something. Now we’re forgiving student debt. Newsweek just reported 63% of Americans support federal inflation relief payments. This is before politicians fund vital projects in the decade ahead: military, infrastructure, environment, inequality. And now Powell’s job is to navigate a labyrinth, unlike any in American history, in a quest to restore meaning to money.
One River won the HFM US Performance Award in Volatility for our Risk Responders strategy, which combines our Systematic Trend, Alternative Markets Trend, and Dynamic Convexity strategies into a single capital efficient strategy. To see it, [click here].
Marcel Kasumovich and Shaun Martinak published a piece this week on the emergence of green shoots in digital asset fundamentals. To read it [click here].
MacroVoices dropped a podcast this week where I discussed the transition from a mean-reversion paradigm to a reflexivity paradigm. My talk starts at the 8:25 mark. To listen [click here].
Week-in-Review (expressed in YoY terms): Mon: Lula wins narrow victory over Bolsonaro in Brazilian presidential election / Bolsonaro yet to concede, Japan used $42b of reserves on Oct intervention (approx. double the first round of intervention), US considering tax on energy co’s windfall profits, ECB’s Visco says futures moves should be gradual due to growth pictures / de Cos says policy should be decisive, Russian suspends grain export deal following drone attacks on its Black Sea fleet, Japan IP 9.8% (10.5%e) / retail sales 4.5% (4.1%e), Australia ret sales 0.6% MoM (0.5%e) / Private sector credit 9.4% as exp, China mfg PMI 49.2 (49.8e) / non-mfg PMI 48.7 (50.1e), Japan cons conf 29.9 (30.5e) / housing starts 1% (2.4%e), S. Africa private sector credit 9.74% (8.27%e), Germany ret sales -0.6% (-3.4%e), Italy 3Q GDP 2.6% (2%e), UK net cons credit 0.7b (1b exp), EU CPI 10.7% (10.3%e) / Core CPI 5% as exp, EU 3Q GDP 2.1% as exp, Mexico 3Q GDP 4.2% (3.3%e), US Chicago PMI 45.2 (47.3e) / Dallas Fed -19.4 (-17.4e), S&P -0.7%; Tue: rumors of China forming a “reopening committee” – targeting end of covid zero policy by spring 2023, RBA hiked 25bp as exp, ECB’s Lagarde says ECB rates have further to rise, BOE completes first active gilt sales, China Caixin PMI 49.2 (48.5e), Indonesia CPI 5.71% (5.98%e) / Core CPI 3.31% (3.4%e), UK house prices 7.2% (8.2%e), Brazil IP 0.4% (0.5%e), US mfg PMI 50.4 (49.9e), US JOLTS job openings 10.717m (9.75m exp), US ISM mfg 50.2 (50e) / prices paid 46.6 (53e) / emp 50 (48.7p), S&P -0.4%; Wed: FOMC hikes 75bp as exp / statement suggests slower pace of hikes looming but Powell reiterates peak rates likely higher than Sept forecasts – slower pace of hikes but higher peak rate seems likely, Kuroda talks about more flexible YCC in the future and highlights Japan is no longer in deflationary environment in testimony to parliament, Russia restarts grain deal after backing out over wknd, N. Korea fires 23 missiles after US/S. Korea military drills, Spain hikes minimum wage by 10%, S. Korea CPI 5.7% as exp / Core CPI 4.8% (4.5%e), Australia building approvals -5.8% MoM (-10%e), Germany trade bal 3.7b (1.4b exp), Germany unemp 5.5% as exp, EU final PMI mfg 46.4 (46.6e), US ADP emp chg 239k (185k exp), Russia ret sales -9.8% (-9%e) / unemp 3.9% as exp, S&P -2.5%; Thu: BOE hikes 75bps (1 vote for 50bp / 1 vote for 25bp) / says mkt pricing of terminal rate is too high / sees UK recording its longest recession in a century – inflation hitting 0% in 3y, Norges bank hikes 25bp (50bp exp), China Caixin serv PMI 48.4 (49e) / comp PMI 48.3 (48.5p), Turkey CPI 85.51% (85.6%e) / Core CPI 70.45% (72%e) / PPI 157.69% (151.5%p), Italy unemp 7.9% (7.8%e), EU unemp 6.6% as exp, US trade bal -73.3b (-72.2b exp), US Unit labor costs 3.5% (4%e), US init claims 217k (220k exp), US serv PMI 47.8 (46.6e) / comp PMI 48.2 (47.3e), US ISM serv 54.4 (55.3e), S&P -1.1%; Fri: US NFP 261k (193k exp) / unemp 3.7% (3.6%e) / AHE 4.7% as exp / participation rate 62.2% (62.3%e), more signs of China reopening following Sholz / Xi meeting (ending flight suspensions, BioNTech vaccines available to foreign residents), Germany factory orders -10.8% (-7.2%e), France IP 1.8% (1.2%e), EU final PMI serv 48.6 (48.2e) / comp 47.3 (47.1e), EU PPI 41.9% as exp, Canada employment chg 108.3k (10k exp) / unemp 5.2% (5.3%e) / hourly wage rate 5.5% (5.1%e), S&P +1.3%.
Manufacturing PMI (high-to-low): Hungary 56.4 (previous month 49.6), India 55.3 (previous mth 55.1), Switzerland 54.9 (prev mth 57.1), Norway 53.1/50.3, Indonesia 51.8/53.7, Brazil 50.8/51.1, Russia 50.7/52, Japan 50.7/50.8, Vietnam 50.6/52.5, Mexico 50.3/50.3, United States 50.2/50.9, Singapore 49.7/49.9, South Africa 49.5/49.2, Hong Kong 49.3/48, China 49.2/48.1, Canada 48.8/49.8, South Korea 48.2/47.3, Greece 48.1/49.7, Netherlands 47.9/49, France 47.2/47.7, Sweden 46.8/48.9, Austria 46.6/48.8, Italy 46.5/48.3, Turkey 46.4/46.9, UK 46.2/48.4, Germany 45.1/47.8, Spain 44.7/49, Poland 42/43, Czech Republic 41.7/44.7, Taiwan 41.5/42.2. Services PMI: Sweden 56.9/55.1, India 55.1/54.3, Brazil 54/51.9, Japan 53.2/52.2, Ireland 53.2/54.1, France 51.7/52.9, Spain 49.7/48.5, UK 48.8/50, China 48.4/49.3, US 47.8/49.3, Germany 46.5/45, Italy 46.4/48.8, Russia 43.7/51.1.
Weekly Close: S&P 500 -3.3% and VIX -1.20 at +24.55. Nikkei +0.3%, Shanghai +5.3%, Euro Stoxx +1.5%, Bovespa +3.2%, MSCI World -2.1%, and MSCI Emerging +4.7%. USD rose +2.1% vs Sterling, +1.2% vs Indonesia, +1.0% vs Russia, and +0.1% vs Euro. USD fell -6.8% vs Ethereum, -4.5% vs Brazil, -2.9% vs Bitcoin, -1.7% vs Chile, -1.4% vs Mexico, -1.3% vs South Africa, -0.9% vs China, -0.9% vs Australia, -0.9% vs Canada, -0.7% vs Yen, -0.4% vs Sweden, -0.1% vs Turkey, and flat vs India. Gold +2.3%, Silver +8.9%, Oil +4.8%, Copper +7.8%, Iron Ore -2.4%, Corn +0.1%. 5y5y inflation swaps (EU +1bp at 2.37%, US -4bps at 2.60%, JP +2bps at 0.90%, and UK +6bps at 3.63%). 2yr Notes +24bps at 4.66% and 10yr Notes +14bps at 4.16%.
Oct Mthly Close: S&P 500 +8.0% and VIX -5.74 at +25.88. Nikkei +6.4%, Shanghai -4.3%, Euro Stoxx +6.3%, Bovespa +5.5%, MSCI World +7.1%, and MSCI Emerging -3.2%. USD rose +13.1% vs Russia, +2.7% vs Yen, +2.7% vs China, +2.4% vs Indonesia, +1.8% vs India, +1.5% vs South Africa, +0.5% vs Turkey, and flat vs Australia. USD fell -14.0% vs Ethereum, -4.3% vs Brazil, -3.3% vs Bitcoin, -2.6% vs Sterling, -2.6% vs Chile, -1.6% vs Mexico, -1.5% vs Canada, -0.8% vs Euro, and -0.5% vs Sweden. Gold -1.9%, Silver +0.6%, Oil +9.3%, Copper -0.3%, Iron Ore -17.7%, Corn +1.6%. 5y5y inflation swaps (EU +33bps at 2.34%, US +51bps at 2.66%, JP -6bps at 0.83%, and UK -37bps at 3.52%). 2yr Notes +20bps at 4.49% and 10yr Notes +22bps at 4.05%.
YTD Equity Indexes (high-to-low) as of Nov 4: Turkey +61.3% priced in US dollars (+127% priced in lira), Brazil +24.4% priced in US dollars (+12.7% priced in reais), UAE +23.5% in dollars (+23.5% in dirham), Argentina +17.6% (+81.2%), Chile +11.5% (+21.2%), Saudi Arabia +1.3% (+1.4%), Mexico +0.4% (-3.9%), Indonesia -2.8% (+7.1%), Singapore -3.9% (+0.2%), India -5.2% (+4.4%), Portugal -9.3% (+4.1%), Norway -10.7% (+4.1%), Thailand -12.4% (-1.9%), Canada -14.2% (-8.4%), Greece -14.2% (-1.6%), Venezuela -15.4% (+53.2%), UK -16.8% (-0.7%), South Africa -16.9% (-6.4%), Australia -17.9% (-7.4%), Israel -18.7% (-6.5%), Malaysia -19.6% (-8.2%), Russell -19.8%, Spain -20.1% (-8.8%), Denmark -20.8% (-9.6%), S&P 500 -20.9%, France -21.8% (-10.3%), MSCI World -22.4% priced in US dollars, Switzerland -23.1% (-16.2%), Czech Republic -23.4% (-14.3%), Philippines -24.1% (-13.2%), Euro Stoxx 50 -25.2% (-14.2%), Italy -25.3% (-14.9%), China -25.4% (-15.6%), Germany -25.7% (-15.3%), New Zealand -25.7% (-13.8%), Japan -26% (-5.5%), Netherlands -26.6% (-15.8%), Belgium -27.2% (-16.4%), Finland -27.6% (-17.5%), Ireland -27.9% (-17.3%), Colombia -29.5% (-11.8%), Austria -29.8% (-19.9%), HK -31.4% (-30.9%), Sweden -31.6% (-17.4%), Russia -31.7% (-43.1%), Hungary -32.5% (-16%), NASDAQ -33%, Korea -33.2% (-21.1%), Poland -35.2% (-24.5%), Taiwan -38.5% (-28.5%).
Biggie Too: “Wanna know what would make Biggie’s job easy?” barked Biggie Too, slipping into 3rd person like a warm bath. “On Valentine’s Day, non-farm payrolls is -250k, unemployment is above 4%, Powell says enough is enough, the S&P 500 troughs at 3300, and up we go,” bellowed Biggie, Chief Global Strategist for one of Wall Street’s Too-Big-To-Fail affairs. “The end of the bear market gets given to Biggie, wrapped up in a red bow.” Then Biggie went quiet. Agitating himself. “But Biggie doesn’t get gifts. Not for Valentine’s Day. Not for Christmas. Biggie doesn’t even get damn birthday cards.”
Biggie Too II: “Biggie is not going to get a signal we got a big low,” said Too. “Biggie is going to get a continuation of a series of lows next year, and it’s going be horrible, just horrible,” he said, not sounding terribly upset about it if I’m being honest. “And somewhere in the middle of it, something is going to break. It always does. Always.” We’ve seen the warning signs bubbling up. The UK pension LDI debacle. “You don’t hike rates this fast and not break something big. It’s coming,” said Biggie. “And listen, you’ll know when to trade the Fed pivot. It’ll be after everyone has given up on the Fed pivot.”
MMT: “The Fed and almost everyone else misunderstands how interest rates affect the economy,” said Warren Mosler, father of MMT. “Higher rates increase interest payments on gov’t debt, and these dollars get pumped into the economy,” he said. US GDP is roughly $25trln. US national debt held by the public is currently $24trln. If the average interest rate on this debt is 1%, the gov’t will pay $240bln in interest. If overnight rates stay high and the average rate on our debt stock rises to 4%, the government will pay $1trln per year. That’s ~4% of GDP.
MMT II: “The gov’t currently increases the deficit to pay interest on its debt, so higher interest rates increase the deficit and money in the system, and this lifts inflation,” continued Mossler. “If a gov’t wants to reduce demand, which I’m not saying is the problem, it should cut interest rates to 0% (keep them there forever), raise taxes, and/or cut federal spending. Lifting interest rates is the opposite of what it should do,” he said. “And raising rates pays interest only to the people in society who already have assets. It is the equivalent of Universal Basic Income for rich people.”
MMT III: “The rate hikes have sustained earnings but shifted them from the high multiple stocks into low multiple names,” explained Mosler. “The effect is a one-time decline in overall market capitalization for stocks as a whole, but once we adjust to this shift, the market heads higher to reflect the rising inflation brought on by the Fed,” he said. “Stocks will then be a good inflation hedge until something breaks.” In each cycle, something snaps. “You never know what it will be, but my best guess is that something like $300/barrel oil eventually ends this cycle.”
MMT IV: “As for policy rates, it looks like the Fed will get rates to 5% or so,” said Mosler. “Inflation bumps around between 3%-6%,” he said. “The federal deficit moves up toward 8%. Interest costs are quickly going to 3% of that and then headed higher still. Nominal GDP is probably in the range of 5%-6%,” said Mosler. “The rising amounts of money flowing into the economy from deficit spending, including things like student loan forgiveness, 8%-9% social security inflation adjustments, and infrastructure spending keeps inflation and nominal growth high. And stocks like nominal growth.”
Snap: “The UN forecasts that world population will pass eight billion next week,” said the energy executive. “One billion of us lack proper access to energy,” she continued. “And we are currently consuming 100mm barrels of oil per day.” That is double what it was 50yrs ago (still rising 1.5% per year). The IEA predicts consumption of 125mm barrels per day by mid-century if the current mix of policies continues. “India’s population will surpass China’s next year,” she said. India GDP per capita is $2,500 (China is $14,340). India is striving to catch up. “In the decades ahead, 90% of the world population will demand more energy.”
Anecdote: “Are you a good American, who knows an opportunity when he sees one, and takes it?” asked Coach late last spring. “I had no idea what he was talking about, but it was the kind of question where you know the right answer, so I nodded,” said Jackson. “I like how you played defense today, and want to move you to defensive midfield,” said Coach, knowing well that the switch is generally seen as a demotion. “I was surprised, but nodded,” said Jackson. “You have a lot to learn to become a great defensive player, you won’t see the field for the rest of the season, and there are no guarantees in life, but I got a gut feeling you’re going to be an important contributor next year. This is the right thing for the team, it’s your way to make the greatest impact. You good with it?” asked Coach. “I told him yes, of course, I wouldn’t let him down,” said my son. Jackson got his first lacrosse stick at age six. Spent fourteen years working to be amongst the top offensive midfielders in the country. At Navy he was just another All-American. “When I told my buddies, they said, sorry, what a bummer. But I was excited. Deep down, I knew Coach was right, and all that matters is seeing the field, contributing as best I can,” said Jackson. Two weeks passed. He briefly saw the field, made some plays. “Now you’ve forced me to really play you sooner than expected,” said Coach, moving him up the depth chart. “I still felt pretty disoriented out there. Defense is a different skill set, it requires an adjustment to your field sense, a new language, an awareness, and a new mindset when you work to shape the game,” said Jackson, learning the importance of remaining open, opportunistic, mentally flexible, discovering who you really are, and embracing your highest use. Like all of us who aspire to become our best selves.
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.