wknd
notes


                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     Prussian Generals

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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 note: Prussian Generals

“War is the continuation of politics by other means,” explained The Commander, quoting Carl von Clausewitz, the famous Prussian general and military theorist. “Von Clausewitz advocated that you continue to pound your enemy, you don’t stop a fight until you negotiate an end to it,” he added. “We tend to pause our military actions during negotiations, but Russia is doing as von Clausewitz advised. Putin is continuing to attack even as talks with Ukraine are taking place,” said The Commander. “All military leaders and strategists study von Clausewitz. And we all know our adversaries have internalized his work. Our weapons are more brutal today, but the theories are the same as when he wrote On War in the early 1800s.”

One River Digital launched our institutional indexes this week to serve as the industry standard [press release here]. Marcel Kasumovich, our head of research, published a piece that explains how these digital indexes serve an important role in client portfolios and allow investors to separate alpha from beta [market note here].

Overall:“War is the realm of uncertainty; three quarters of the factors on which action in war is based are wrapped in a fog of greater or lesser uncertainty,” wrote Carl von Clausewitz in the early 1800s. “A sensitive and discriminating judgment is called for; a skilled intelligence to scent out the truth,” continued the Prussian general and military theorist. Like so many of our greatest thinkers, von Clausewitz trained his sights on the essence of what it means to be human. He narrowed that focus to how we behave in times of conflict, which is to say, much of the time. Even now, with a full-scale war underway in Ukraine, a lesser battle has begun over inflation, and a long-simmering conflict over the dollar’s prominence as the global reserve currency is heating up. The backdrop to these conflicts is the internal division we see throughout much of the West, and this is set against the world’s authoritarians who are tightening their grip, attempting to consolidate power. These issues are inextricably woven. All times are unique, and what makes this one unlike others is the degree to which we are all connected, our world shrinking. It both raises the costs of failure and presents new opportunities, possibilities. “No one starts a war - or rather, no one in his senses ought to do so - without first being clear in his mind what he intends to achieve by that war and how he intends to conduct it,” wrote Clausewitz. And we are left to imagine exactly what the protagonists in the conflicts now underway over Ukraine, inflation, and the dollar, intend to achieve and what they are willing to undertake to claim their objectives. “If the mind is to emerge unscathed from this relentless struggle with the unforeseen, two qualities are indispensable,” wrote Clausewitz. “First, an intellect that, even in the darkest hour, retains some glimmerings of the inner light which leads to truth; and second, the courage to follow this faint light wherever it may lead.”

Week-in-Review (expressed in YoY terms): Mon: Russia asks China for military equipment / Russia attacks Ukraine military base near Poland border / US & China set to hold first talks since Russian invasion, China imposed covid lockdown in Shenzhen / Hang Seng Index has largest 1d drop since May 2020, rumors Tencent to face record fine for violating anti-money laundering rules, Iranian missile strike in northern Iraq resulted in no casualties, Nasdaq 100 closes in bear market, ECB’s Kazaks says very possible APP ends in Q3, Sen Manchin says he won’t support Sarah Raskin for Fed Reserve, India wholesale prices 13.11% (12.1%e) / CPI 6.07% (6%e), Sweden CPIF 4.5% (4.1%e), S&P -0.7%; Tue: US expressed deep concerns about China’s alignment with Russia and warned about the penalties China will face if it helps Moscow / China foreign minister says want to avoid being impacted by US sanctions over Russia, PBOC surprised market by keeping MLF rate unchanged (10bp cut exp), Saudi Arabia considering oil sales to be denominated in Yuan, Putin reportedly doesn’t see a mutually acceptable solution, ECB’s Lagarde guides toward Q3 end to APP, headlines suggested Zelenskyy indicated that Ukraine will not become a NATO member, Australia house prices 23.7% (21.9%e), China ret sales YTD 6.7% (3%e) / China IP YTD 7.5% (4%e), Indonesia expts 34.14% (40.47%e) / impts 25.43% (40%e), UK unemp 3.9% (4%e), German ZEW expectations -39.3 (5e), EU ZEW expectations -38.7 (48.6p), EU IP -1.3% (-0.5%e), US empire mfg -11.8 (6.4e), US PPI 10% as exp, S&P +2.1%; Wed: FOMC hikes 25bps as exp / DOT plot shows 7 hikes in 2022 (6 exp) / Bullard dissents to vote for 50bp hike / overall hawkish tone to meeting, China State Council vows to keep stock market stable by saying they will support capital markets/complete crackdown on Big Tech/resolve risks around property developers/and support overseas stock listings, Zelenskyy address members of US congress asking for no fly zone and more assistance / Zelenskyy says Russian positions in negotiations are starting to sound more realistic / Lavrov says hope for compromise but progress is difficult / Biden says US will provide add’l $800m in military aid to Ukraine, Riksbank gov Ingves says inflation is too high and the Bank will have to hike rates sooner than its previous timeline of 2024, BCB hikes 100bp as exp, Nickel resumed trading before being halted again due to technical issue with the new 5% daily limit, Argentina CPI 52.3% (51.7%e), S. Korea unemp 2.7% (3.6%e), Japan expts 19.1% (20.6%e)/impts 34% (26.4%e), S. Africa ret sales 7.7% (4.9%e), Poland PPI 20.7% (17.9%e), Canada CPI 5.7% (5.5%e), US ret sales -1.2% (0.3%e), US impt prices 10.9% (11.3%e) / expt prices 16.6% (14.4%e), US housing mkt index 79 (81e), S&P +2.2%; Thu: Kremlin said a report of major progress in talks with Ukraine was wrong but that discussions will continue today, BoE hikes 25bps as exp but strikes dovish tone, CB of Turkey unch as expected, CB of Taiwan surprise hiked by 25bps (0 expected), Russia said it sent $117m coupon payment on its Eurobonds to London after much speculation that they will be forced to “default” due to frozen assets, ECB’s Knot does not rule out 2 hikes in 2022, Japan machine orders 5.1% (8.7%e), Australia unemp 4% (4.1%e), Singapore Non-Oil expts 9.5% (16.5%e), EU final CPI 5.9% (5.8%e), US Philly Fed 27.4 (14.5e), US init claims 214k (220k exp), US IP 0.5% MoM as exp, S&P +1.2%; Fri: Biden makes clear to Xi that there will be consequences for anyone who supports Russia during this time / Xi says the invasion is not something they want to see but continue to condemn Russia/Putin, US warns of increased risk of Russian use of nuclear weapons, BoJ unch as expected, Russia CB unch as exp, Bullard publishes rationale on his dissenting vote (for 50bp hike on Weds), Fed’s Waller supports 50bp hike at one or multiple meetings in the near future, Citi processed Russia coupon payment thus avoiding default, Japan nat’l CPI 0.9% as exp, Sweden unemp 7.3% (7.9%e), EU Trade Balance -7.7b (-9b exp), Brazil unemp 11.2% (11.3%e), US existing home sales -7.2% MoM (-6.2%e), US leading index 0.3% as exp, S&P +1.2%.

Weekly Close:S&P 500 +6.2% and VIX -6.88 at +23.87. Nikkei +6.6%, Shanghai -1.8%, Euro Stoxx +5.4%, Bovespa +3.2%, MSCI World +5.0%, and MSCI Emerging +3.2%. USD rose +1.6% vs Yen, +0.3% vs China, +0.3% vs Indonesia, and +0.3% vs Turkey. USD fell -10.2% vs Ethereum, -4.0% vs Bitcoin, -3.5% vs Sweden, -2.6% vs Mexico, -1.6% vs Australia, -1.3% vs Euro, -1.1% vs Canada, -1.1% vs Sterling, -1.0% vs India, -1.0% vs Brazil, -0.5% vs South Africa, -0.1% vs Chile, and flat vs Russia. Gold -2.8%, Silver -4.1%, Oil -4.2%, Copper +2.5%, Iron Ore +3.5%, Corn -2.7%. 5y5y inflation swaps (EU -15bps at 2.12%, US -10bps at 2.62%, JP -1bp at 0.72%, and UK -13bps at 4.05%). 2yr Notes +19bps at 1.94% and 10yr Notes +16bps at 2.15%.

YTD Equity Indexes (high-to-low): Brazil +22.2% priced in US dollars (+10% priced in reais), Chile +19.9% priced in US dollars (+12.7% in pesos), Colombia +16.4% in dollars (+9.1% in pesos), Saudi Arabia +13.3% (+13.2%), UAE +13.2% (+13.2%), South Africa +8.6% (+1.8%), Singapore +6% (+6.6%), Indonesia +5.2% (+5.7%), Mexico +4.6% (+4.1%), Norway +4.6% (+3.8%), Turkey +3.2% (+15.4%), Canada +3.1% (+2.8%), Thailand +1.3% (+1.3%), Malaysia +0.6% (+1.5%), Argentina -0.1% (+6.7%), Australia -0.2% (-2%), Portugal -1.9% (+1%), UK -2.3% (+0.3%), India -2.3% (-0.4%), Philippines -4% (-1.6%), Venezuela -4.7% (-10.4%), Spain -5.6% (-3.4%), Israel -5.7% (-1.1%), New Zealand -5.8% (-6.6%), Greece -6.2% (-3.4%), S&P 500 -6.4%, Taiwan -6.4% (-4.2%), Belgium -6.5% (-3.8%), Russell -7.1%, Switzerland -7.2% (-5.4%), Denmark -7.6% (-5.4%), MSCI World -7.7% (-7.7%), HK -8.8% (-8.5%), Czech Republic -9.1% (-7%), Japan -9.9% (-6.8%), France -10.1% (-7.4%), Korea -10.6% (-9.1%), China -10.8% (-10.7%), NASDAQ -11.2%, Germany -11.3% (-9.3%), Euro Stoxx 50 -11.8% (-9.2%), Poland -12.6% (-8.1%), Netherlands -12.8% (-10.2%), Ireland -12.9% (-10.3%), Sweden -13.4% (-10%), Italy -13.4% (-11.4%), Finland -13.7% (-11.7%), Austria -14.9% (-12.9%), Hungary -16.9% (-13.4%), Russia -41.1% (-34.8%).

Military Minds: Carl von Clausewitz’s thoughts on war: - There are times when the utmost daring is the height of wisdom. - Theory must also take into account the human element; it must accord a place to courage, to boldness, even to rashness. - Everything in war is very simple, but the simplest thing is difficult. - There are very few men, and they are the exceptions, who are able to think and feel beyond the present moment. - If we read history with an open mind, we cannot fail to conclude that, among all the military virtues, the energetic conduct of war has always contributed most to glory and success.

Miletary Minds II: The backbone of surprise is fusing speed with secrecy. - If the leader is filled with high ambition and if he pursues his aims with audacity and strength of will, he will reach them in spite of all obstacles. - If we have made appropriate preparations, taking into account all possible misfortunes, so that we shall not be lost immediately if they occur, we must boldly advance into the shadows of uncertainty. - The Statesman who, knowing his instrument to be ready, and seeing War inevitable, hesitates to strike first is guilty of a crime against his country.

Strength:“Powell developed a doctrine of projecting overwhelming force,” said The Commander, referring to Colin the General, not Jerome the Chairman, who fired last week’s tiny 25bp warning shot at a raging 7.9% inflation advance. “The idea is that there are people in the world who understand one thing, and that is power,” said The Commander. “Powell believed that the best way to avoid conflict was by making it clear to our adversaries that an act of aggression would be met with devastating force.” The Powell Doctrine led to the military buildup ahead of the 1990-91 Gulf War and emphasized ground forces together with widespread public support.

Weakness: “Kind-hearted people might of course think there was some ingenious way to disarm or defeat an enemy without too much bloodshed and might imagine this is the true goal of the art of war,” wrote Carl von Clausewitz. “Pleasant as it sounds, it is a fallacy that must be exposed; war is such a dangerous business that the mistakes which come from kindness are the very worst,” continued the Prussian. “If our opponent is to be made to comply with our will, we must place him in a situation which is more oppressive to him than the sacrifice which we demand; but the disadvantages of this position must naturally not be of a transitory nature, at least in appearance, otherwise the enemy, instead of yielding, will hold out, in the prospect of a change for the better.”

Action: “For political and social as well as for military reasons the preferred way of bringing about victory was the shortest, most direct way, and that meant using all possible force,” wrote Clausewitz. “The truth is that there are goons in this world, and they respect only one thing – strength – that’s it,” explained The Commander. “It is tempting to believe we’ve evolved past that kind of thinking, but it is wrong, we haven’t,” he said. “And this can at times create friction between politicians and military leaders, because politicians often seek to avoid conflict in the early stages, while military leaders understand that it is generally best to shut down conflict before it has even started, or at least in its earliest stages. Politicians and military commanders have the same goals, but different experiential perspectives.”

Anecdote: “Clausewitz taught that we must dismantle our enemy’s center of gravity to achieve victory,” said The Commander. “Each nation has strengths and weaknesses, and it’s natural to capitalize on weakness,” he added. “But it is critical to pick apart the strengths that make up the center of gravity,” explained The Commander. “In the case of the US, our core strengths are superior communications, logistics, and our carrier fleet.” Added to this would undoubtedly be our control of the global reserve currency and payments systems. “So it should not be a surprise that China has invested heavily in offensive space capabilities to target our communications. And they are very focused on hypersonic weapon development to neutralize our carriers.” Efforts to unseat the dollar and create an alternative global payments system is also targeting our center of gravity. “In Putin’s case, his center of gravity in this conflict is his proximity. His supply lines are short, so it’s particularly devasting for him that his army failed so badly without anyone else’s help when it came to logistics,” said The Commander. “He miscalculated Ukrainian resistance, but worse still was the misjudgment of his own forces. And what you can now see is that his army is out of practice, and perhaps the worst thing is that it lacks agility,” he said. “In business and markets, I’m sure you understand the importance of agility. Well, in warfare, agility is vital to victory. And the US has the resources to train regularly. A modern army is incredibly complex and requires regular training, exercises.” The Russians don’t have these resources and haven’t fought a major war in too long. “Putin understands his many weaknesses. He has no real ability to project force on a global basis other than nuclear. So that is why he’s directed his limited resources to those capabilities.” In the decades to come, they will be the only thing protecting his vast territories and shrinking population from 1.4bln Chinese on his southern border. “And the risk now, learning from Clausewitz, is that the weakness of Putin’s conventional force leads him to abruptly jump to a nuclear conflict. He’s a cornered rat. I wouldn’t rule anything out.”

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, drink 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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