“We’ve been looking for the enemy for some time now,” read the quote below an eerie photograph of young men, huddled tightly on a field, the fog thick, two floodlights high above. “We’ve finally found him.” It was an Instagram post for Navy Lacrosse. “We’re surrounded.” The photograph was from Monday’s practice, wet, cold, dark. “That simplifies things.” They chose a fitting quote, from the Marine’s most decorated officer, General “Chesty” Puller. The season opener was today, Jackson’s final year, Co-Captain. Navy won 19-6.

Overall: “I don’t have a stance on that,” answered Jay Powell, the reporter asking whether he’d seek a third term. “It’s not something I’m focused on,” continued the Chairman. “This year is going to be a highly consequential year for the Fed and for monetary policy, and we’re all of us very buckled down, focused on doing our jobs.” Welcome to the intersection of policy and politics in an American election year. “I think he’s going to do something to probably help the Democrats,” Trump told Fox, according to excerpts of an interview to be aired today (Sunday). “It looks to me like he’s trying to lower interest rates for the sake of maybe getting people elected, I don’t know,” added the presumptive Republican candidate. Trump nominated Powell in 2018 and then turned against his Fed chair, calling for lower rates to temper the economic damage caused by his trade wars with China and Europe. “My only question is, who is our biggest enemy, Jay Powell or Chairman Xi?” tweeted Trump in August of 2019, pressuring his central banker to supercharge the economy and secure re-election, with CPI at 1.7%, 2-year treasury notes yielding 1.65%, and 10-years at 1.52%. Back in those days, like most days, the S&P 500 was trading at an all-time high. Fast forward less than five years to today and the S&P 500 is 41% higher. Chinese stocks are 17% lower. Gold is +13%. Oil is +10%. The dollar index is unchanged. Bitcoin is 330% higher, SEC lawsuits and all. Not a shock really. Afterall, US government debt surged from $16.6trln to $26.8trln, a gain of 61%. America’s annual budget deficit is up roughly 70%, while interest costs have soared. And heading into the election, we have a good idea of Biden’s profligate policy mix, which is unlikely to differ much under Trump. And we can quite easily imagine the pressure he’d put on the Fed Chair. America’s politicians are searching for the limit. We’re getting closer to finding it. And that will simplify things.

Week-in-Review: Mon: Treasuries QRA comes in lower than expectations ($760b vs $815b exp), Evergrande receives liquidation order from HK court, 3 US troops killed (34 wounded) by Iran backed group drones over wknd, Houthis targeted a US warship, Netanyahu says still gaps but progress made on 2m cease fire in exchange for the release of all hostages, ECB’s Villeroy suggest ECB could cut at any time this year / Kazimir says June more likely than April for a cut, Musk announces first human received implant from Neuralink, US Dallas Fed mfg activity -27.4 (-11e), S&P +0.8%; Tue: China 10y yields push to 20y lows, Hungary CB cuts 75bps (100bp cut exp), Saudi Aramco abandons plans to boost oil output capacity, ECB’s Lagarde says we are not there yet but are on disinflationary trend, GOOG missed on advertising business / MSFT cloud growth disappointed despite solid earnings, Japan unemp 2.4% (2.5%e), Australia ret sales -2.7% MoM (-1.7%e), S. Africa private sector credit 4.94% (4.1%e), Germany 4Q GDP -0.2% as exp / France 0.7% as exp / Italy 0.5% (0.2%e) / EU 0.1% as exp, EU cons conf 96.2 (96.1e), Mexico 4Q GDP 2.4% (3%e), US Case Shiller house prices 5.4% (5.8%e), US cons conf 114.8 as exp, US JOLTS 9.026m (8.75m exp) / Quits 3.392m (3.524m prev), S&P -0.1%; Wed: FOMC unch as exp / Powell says March cut unlikely / cut requires greater confidence that infl is sustainably moving towards 2%, NY Community Bancorp reports much weaker earnings due to higher provisions related to CRE – inciting fears of recent regional bank stress, Chile CB cuts 100bp (as exp), Columbia CB cuts 25bp (50bp exp), Brazil CB cuts 50bp as exp, Aramco planning to sell as many as $10b worth of new shares as soon as February, judge voids Musk’s $55b pay package, China said US may abandon Taiwan if Trump wins, China PMI mfg 49.2 (49.3e) / serv 50.7 (50.6e), France CPI 3.4% (3.6%e), Germany unemp 5.8% (5.9%e) / ret sales -4.4% (-1.9%e) / CPI 3.1% (3.2%e), Italy unemp 7.2% (7.5%e), US ADP emp change 107k (150k e), Canada Nov GDP 1.1% (1.0%e), US ECI 0.9% (1%e), US Chicago PMI 46 (48e), S&P -1.6%; Thu: BOE unch as expected / 2 votes for a hike drove a hawkish tone despite statement moving to more neutral stance, Hungary’s Orban decided not to block EU’s $54b aid to Ukraine, OPEC+ to decide to extend output cuts into Q2 by early March, Qatar said Israel agreed to a deal to pause its war in Gaza / Hamas is still considering the proposal, META and AMZN beat handily / AAPL disappointed on weak China sales, BTFP program stabilizes following recent changes, China Caixin PMI mfg 50.8 as exp, EU Unemp 6.4% as exp, US init claims 224k (212k e), US unit labor cost 0.5% (1.2%e) / productivity 3.2% (2.5%e), Canada PMI mfg 48.3 (46.5e), US final PMI mfg 50.7 (50.3e), US ISM mfg 49.1 (47.2e) / prices paid 52.9 (46.9e), S&P +1.25%; Fri: NFP 353k (185k exp) / unemp 3.7% (3.8%e) / AHE 4.5% (4.1%e) – big beat, US begins retaliatory strikes in Syria following the attack in Jordan, Turkish CB governor Erkan resigns amid defamation campaign / deputy gov Fatih Karahan to replace her, Fed’s Bowman says not yet at the point where cuts are appropriate, META adds $197b in mkt cap – largest 1d mkt cap gain ever, Trump says he would NOT reappoint Powell, N. Korea fires 4th barrage of cruise missiles in past two weeks / Kim Jong Un says stepping up ‘war preparations’, US UofM sentiment final 79 (78.9e) / 1y infl exp 2.9% as exp / 5-10y infl exp 2.9% (2.8%e), S&P +1.1%; Sat: US/UK launch strikes on Houthis.

Weekly Close: S&P 500 +1.4% and VIX +0.59 at +13.85. Nikkei +1.1%, Shanghai -6.2%, Euro Stoxx +0.0%, Bovespa -1.4%, MSCI World +1.0%, and MSCI Emerging +0.3%. USD rose +2.7% vs Chile, +1.2% vs Brazil, +1.0% vs Russia, +1.0% vs Australia, +0.7% vs Turkey, +0.6% vs Euro, +0.6% vs South Africa, +0.6% vs Sterling, +0.5% vs Sweden, +0.2% vs China, +0.2% vs Yen, and +0.1% vs Canada. USD fell -4.0% vs Bitcoin, -2.2% vs Ethereum, -1.0% vs Indonesia, -0.2% vs India, and -0.1% vs Mexico. Gold +0.9%, Silver -0.3%, Oil -7.3%, Copper -0.8%, Iron Ore -2.8%, Corn -0.8%. 10yr Inflation Breakevens (EU -1bp at 1.95%, US -8bps at 2.21%, JP -12bps at 1.21%, and UK +2bps at 3.52%). 2yr Notes +2bps at 4.37% and 10yr Notes -12bps at 4.02%.

Jan Mthly Close: S&P 500 +1.6% and VIX +1.90 at +14.35. Nikkei +8.4%, Shanghai -6.3%, Euro Stoxx +1.4%, Bovespa -4.8%, MSCI World +1.1%, and MSCI Emerging -4.7%. USD rose +5.7% vs Chile, +4.2% vs Yen, +3.7% vs Australia, +3.2% vs Sweden, +2.7% vs Turkey, +2.5% vs Indonesia, +2.0% vs Euro, +2.0% vs Brazil, +1.8% vs South Africa, +1.7% vs Ethereum, +1.4% vs Canada, +1.4% vs Mexico, +1.0% vs China, and +0.3% vs Sterling. USD fell -0.9% vs Bitcoin, -0.2% vs India, and -0.2% vs Russia. Gold -1.2%, Silver -3.8%, Oil +5.6%, Copper +0.4%, Iron Ore +1.1%, Corn -4.9%. 10yr Inflation Breakevens (EU -2bps at 1.93%, US +7bps at 2.25%, JP +9bps at 1.27%, and UK +3bps at 3.51%). 2yr Notes -4bps at 4.21% and 10yr Notes +3bps at 3.91%.

2024 Year-to-Date Close: Argentina +38.3% priced in US dollars (+41.6% priced in pesos), Turkey +12.5% priced in dollars (+16% in lira), Colombia +4.7% in dollars (+6.9% in pesos), Denmark +4.6% (+7.3%), Hungary +4.5% (+7.7%), Greece +4.4% (+7.1%), NASDAQ +4.1% in dollars, S&P 500 +4% in dollars, Russia +2.7% (+4.1%), Philippines +2.6% (+4%), MSCI World +2.5% in dollars, Japan +2.5% (+8%), Netherlands +1.9% (+4.5%), Malaysia +1.4% (+4.3%), Ireland +1.4% (+4%), India +0.8% (+0.6%), Euro Stoxx 50 +0.3% (+2.9%), Mexico +0.2% (+1.5%), Saudi Arabia -0.4% (-0.4%), Czech Republic -0.6% (+3.1%), Poland -0.7% (+1.4%), UAE -1.3% (-1.3%), Canada -1.3% (+0.6%), Italy -1.4% (+1.2%), Taiwan -1.4% (+0.7%), Germany -1.6% (+1%), France -1.9% (+0.7%), Austria -2.4% (+0.2%), Switzerland -2.4% (+0.9%), Indonesia -2.6% (-0.5%), UK -2.6% (-1.5%), Spain -2.9% (-0.4%), Finland -3.1% (-0.5%), New Zealand -3.1% (+1.4%), Israel -3.2% (-2%), Russell -3.2% in dollars, Australia -3.4% (+1.4%), Singapore -3.7% (-1.9%), Belgium -5% (-2.5%), Korea -5.3% (-1.5%), Sweden -5.5% (-1.2%), Thailand -6% (-2.2%), South Africa -7.1% (-3.8%), Venezuela -7.4% (-6.4%), Brazil -7.5% (-5.2%), Norway -7.7% (-2.9%), HK -9% (-8.9%), Portugal -9% (-6.6%), China -9.4% (-8.2%), and Chile -10.3% (-3.3%).

Price: US money market fund assets hit a record high of $6trln this week. Gov’t debt hit record highs too. As did US equities, in general. Gold is near a record, US home prices too. In a highly financialized fiat monetary system, many drivers work to influence valuations. Cash flows, earnings, leverage, interest rates, money supply, its velocity, tax rates, optimism, pessimism, uncertainty, confidence, stability, volatility, and expectations about how all such things will change. Investors search for fair market value, but for a trader there’s no such thing, only price.

Price II: Money can be created in all sorts of ways in a fiat monetary system. This makes it hard to know how much there is at any given point in time. And while it makes sense that the more money lying around, the higher prices should be in the system. But sometimes, money changes hands slowly, and when this happens, prices can actually move lower no matter how much money is in the system. The inverse is also true. And this makes it even harder to determine the fair value of anything, because it requires you to have to anticipate the velocity of money.

Price III: There are periods during which the relationship between most or all the variables that investors use to determine fair value remain rather stable. Those are fairly boring times, and the people who profit the most engage in leveraged carry and mean-reversion types of strategies. Such periods give investors a false sense of confidence that market prices can be forecasted with great confidence using a range of inputs. As confidence turns to arrogance, the potential energy for a major market shift builds. Investors get short volatility. This dynamic never changes.

Price IV: The equity risk premium (ERP) is at 23-year lows. The S&P 500 earnings yield minus 3mth T-bill yields has not been this low since 2001. So, in at least one sense, the market is above fair value. But at the height of the dotcom bubble, the ERP was lower than now. So, all this tells us is that the market is overvalued, and we should not be surprised to see it become more so. No one knows whether the dotcom ERP lows represent an absolute limit. All we know from the past is that when markets move to extreme over/under-valuations, wild moves in price can happen.

Price V: If you look at a long-term S&P 500 price-to-earnings ratio, you’ll find that it swings massively. In the early 1980s, investors paid a price of roughly 7x earnings for the S&P 500. In 2001 they paid almost 50x. In 2011 they paid around 13.5x. Now they pay around 27 or so. Wall Street has created armies of analysts to forecast corporate earnings, while relatively little effort is put into forecasting the large swings in the multiple investors are willing to pay for those earnings. Because such forecasts are harder to do; they require less math and more intuition.

Price VI: For nearly 20yrs, the velocity of money declined. This prompted/allowed policy makers to create massive amounts of money without sparking inflation. No honest economist could really explain it. The Fed got ever more aggressive, searching for the limit. Then along came Covid. Velocity collapsed further, stabilized, reversed. Given that no one really knew why velocity fell, if it now rises powerfully, we’re unlikely to understand why. It won’t really matter though, all that we will need to know is that its effect on prices will dwarf any notion of value.

Anecdote: “Some get away with it longer than others,” said Yoda, high in the Rockies. “But sooner or later we all face adversity. And that’s when you find out.” I sat quietly, patient, my mentor. “That’s when we explore what’s important, how to get back on track. And if we’ve been truly tested, that track may not be the same path as before,” he said. “The way to handle our greatest challenges is to invert them, see them as experiences put onto our path to help us learn. Deep suffering is the price we pay for those lessons.” I nodded. “You know this. I’ve seen you suffer. You’re fortunate, I feel sorry for people who never do,” he said. “I’m now the best person I’ve ever been, although the way I measure myself is no longer what it used to be,” explained Yoda, with a calm honed over decades of inhuman risk taking, a sublime tolerance for extreme volatility, uncertainty. “Each loss, each mistake, each repeated error creates a small wound, a scar in our psyche, and they’re cumulative. It makes it harder to play this game,” explained the most talented and intuitive trader I’ve known. “The older you get, the harder it is. The market doesn’t care how long you’ve been doing this, how much you know, it just holds up a mirror,” said Yoda. “And when what you do isn’t working, you must accept that reality. Being constant is easy. Adapting is hard. Very hard,” he said. “The best people embrace the need to change as a challenge. This applies to every aspect of life.” Business, relationships, parenting, marriage. “We need to have the presence of mind to see such things in real time. That’s when we conquer ourselves and can conquer the world.” I smiled. Yoda. “Trading is the essence of life.”

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.