“So will they change all the maps now Dad?” asked Charlie. “Too soon to say at this stage, wars are notoriously unpredictable, and this one just started,” I explained. “Okay, but if Russia conquers Ukraine, will they just change the maps,” he asked, not yet freed from the illusion of certainty, stability. “Borders are always changing Charlie, especially in Europe. It’s the bloodiest place on earth. They’ve been killing each other forever. I’ll show you an amazing video that illustrates the shifting borders since 400 BC.” To see it click [here]. “Like the Crusades? We learned about those,” said my youngest. “Yeah, they’re part of the insanity.”
Overall: “I am here. We are not putting down arms,” said Zelensky, standing in Kyiv, live streaming to his countrymen. “We will be defending our country, because our weapon is truth, and our truth is that this is our land, our country, our children, and we will defend all of this,” continued Ukraine’s brave young President. “That is it. That's all I wanted to tell you. Glory to Ukraine.” Western intelligence agencies identify Zelensky as Putin’s #1 target for assassination. His family #2. “The fight is here. I need ammunition, not a ride,” declared Zelensky, rejecting Biden’s offer to be evacuated. 43mm Ukrainians watched. 143mm Russians. 330mm Americans. 447mm Europeans. 1.45bln Chinese. Truth be told, most of our little planet’s 8bln watched as Zelensky played a remarkably weak hand with courage. David to Putin’s Goliath. In a world numbed by the cowardice of our politicians, such a display by the young Ukrainian reminded us of what we seem to have lost. What it means to lead. The power of one. Such individuals hold the potential to reshape history in unexpected ways. And as the Ukrainians rose to expel Russian invaders, western politicians were led by Zelensky, drawn to ratchet up their shamefully weak initial sanctions. Putin, of course, must now win at all costs and is therefore at his most dangerous. We will soon discover if he is insane, or simply ruthless. “If Western leaders do not provide assistance, then tomorrow war will knock on your doors,” warned Zelensky, appalled by the West’s timidity in imposing meaningful consequences. Construction for the Nord Stream 2 pipeline started a year after Putin annexed Crimea in 2014. The unwillingness of the West’s politicians to call for shared near-term sacrifice to ensure long-term security and prosperity has created monsters. In Europe. Asia. Our climate. The financial system too. And we have entered a decade when, like it or not, we will be pressed to confront these problems of our own creation.
Week-in-Review (expressed in YoY terms): Mon: Presidents’ Day holiday in the US, Putin recognize the independence of separatist regions of Ukraine (Donbas region) and agrees to send peacekeepers there, UK announced end to all covid restrictions, Chinese regulators advise banks to examine exposure to Ant Group as regulatory crack down on Chinese tech companies intensifies, Australia demands investigation into why Chinese war ship shined a laser at surveillance plane, China keeps prime rates unch as exp, German PPI 25% (24.4%e), EU mfg PMI 58.4 (58.7e) / serv PMI 55.8 (52.1e) / comp PMI 55.8 (52.9e), S&P closed; Tue: Germany says will halt certification of Nord Stream 2, western allies announce sanctions on Russia for breaking international law / US puts restrictions on Russian sov debt, Fed’s Bowman has open minds to the size of rate hikes, Hungary hikes 50bps as exp, Thailand raises covid alert to level 4, US Case Shiller 18.56% (18.1%e), US mfg PMI 57.5 (56e) / serv PMI 56.7 (53e) / composite PMI 56 (52.5e), Richmond Fed 1 (10e), S&P -1.0%; Wed: EU joins US in putting restrictions on Russia sov debt, RBNZ delivered a hawkish 25bps hike / formally announced QT, BOE’s Bailey continues to strike dovish tone / BOE’s Broadbent says further policy tightening is needed, UK declares state of emergency, Biden / Putin meeting canceled, Blinken / Lavrov meeting canceled, ECB’s Holzmann expects 2 hikes by year end / ECB’s Villeroy emphasized the need for flexibility, Fed’s Bostic says must move off emergency stance, Canada moved to “unfreeze” the bank accounts of the “Freedom convoy” protestors, EU CPI (final) 5.1% as exp, Brazil IPCA infl 10.76% (10.63%e), S&P -1.8%; Thu: Russian troops invade Ukraine / Putin vows to demilitarize Ukraine and replace its leaders, Brent crude hits $105/barrel, Russian equities fall over 30% / global equities stage a midday rebound with US indices finishing materially higher on the day, western allies respond with more sanctions targeting ~80% of Russian banking sector (but not closing off SWIFT), ECB Holzmann says Ukraine conflict may delay stimulus exit, Fed’s Mester acknowledges Ukraine situation as a factor in determining the appropriate pace to remove accommodation, US 4Q GDP Annualized 7% as exp / personal cons 3.1% (3.4%e), S&P +1.5%; Fri: Putin calls for Ukrainian soldiers to overtake Zelensky’s govt, US sanctions Putin and Lavrov (largely symbolic), Biden nominates Ketanji Brown Jackson to the supreme court, Fed’s Waller noted that if data continues to run hot then could be a strong case for 50bp hike in March, ECB’s Lane acknowledged the risk of stagflation as result of the Russia/Ukraine war – could shave 0.3-0.4% off GDP and drive 2022 inflation much higher, Xi urged Putin to negotiate, Moody’s downgrades Russia sov credit rating, CDC eases mask guidance for those vaccinated, German impt prices 26.9% (23.7%e), Sweden PPI 19.8% (20.1%p), German 4Q GDP 1.8% (1.4%e), France CPI 4.1% (3.7%e) / cons spending -2.1% (-1.8%e), US personal inc 0% (-0.3%e) / personal spending 2.1% (1.6%e), US PCE Deflator 6.1% (6%e), US durable goods orders 1.6% (1%e), Russia IP 8.6% (7.2%e), US pending home sales -9.1% (-1.8%e), US UofM 62.8 (61.7e) / 1y infl exp 4.9% / 5-10y infl exp 3%, S&P +2.2%; Sat/Sun: EU and US agree to disconnect some Russian banks form SWIFT, Putin puts nuclear deterrent on special alert, cash runs at Russian banks (ATMs run out of cash), Ukraine announces talks with Russia at Belarus border.
Weekly Close: S&P 500 +0.8% and VIX -0.16 at +27.59. Nikkei -2.4%, Shanghai -1.1%, Euro Stoxx -1.6%, Bovespa +0.2%, MSCI World -0.1%, and MSCI Emerging -4.9%. USD rose +7.3% vs Russia, +4.6% vs Ethereum, +2.4% vs Bitcoin, +1.3% vs Sterling, +1.2% vs Turkey, +0.8% vs India, +0.5% vs Euro, +0.5% vs Yen, +0.3% vs Indonesia, +0.3% vs Mexico, +0.3% vs Brazil, +0.1% vs South Africa, and +0.1% vs Chile. USD fell -0.7% vs Australia, -0.3% vs Canada, -0.1% vs China, and -0.1% vs Sweden. Gold -0.6%, Silver -0.1%, Oil +1.5%, Copper -0.9%, Iron Ore -11.9%, Corn +0.5%. 5y5y inflation swaps (EU +8bps at 1.83%, US +12bps at 2.46%, JP +10bps at 0.70%, and UK -1bps at 4.00%). 2yr Notes +10bps at 1.57% and 10yr Notes +3bps at 1.96%.
YTD Equity Indexes (high-to-low): Brazil +16% priced in US dollars (+7.9% priced in reais), Colombia +11.8% priced in US dollars (+7.5% in pesos), Chile +10.2% in dollars (+3.6% in pesos), Saudi Arabia +9.1% (+9%), UAE +7.5% (+7.5%), South Africa +5.9% (+1%), Singapore +4.9% (+5.5%), Indonesia +4.1% (+4.7%), Thailand +3.8% (+1.3%), Greece +2.5% (+3.8%), Turkey +0.8% (+5.1%), Argentina +0.7% (+5.4%), Malaysia +0.5% (+1.5%), Philippines +0.5% (+1.3%), UK +0.3% (+1.4%), Norway -0.9% (-0.1%), Mexico -1.2% (-1.3%), Canada -1.4% (-0.6%), HK -2.8% (-2.7%), Czech Republic -3.2% (-3%), Spain -3.2% (-2.6%), Taiwan -4.2% (-3.1%), China -4.6% (-5.2%), India -4.8% (-4%), Portugal -6.4% (-5.2%), Italy -6.4% (-5.8%), France -6.8% (-5.6%), Australia -6.9% (-6%), Israel -6.9% (-2.3%), Belgium -7% (-5.8%), Venezuela -7.1% (-11%), MSCI World -7.8% (-7.8%), S&P 500 -8%, Switzerland -8.2% (-6.9%), Japan -8.5% (-8%), Ireland -8.8% (-7.6%), Euro Stoxx 50 -8.8% (-7.6%), Germany -8.9% (-8.3%), Russell -9.1%, Hungary -9.6% (-9.8%), Austria -9.8% (-9.2%), Netherlands -9.9% (-8.8%), New Zealand -10.2% (-8.5%), Korea -10.8% (-10.1%), Denmark -12.2% (-11.6%), Finland -12.3% (-11.7%), NASDAQ -12.5%, Poland -14.5% (-12.8%), Sweden -15.1% (-11.5%), and Russia -41.1% (-34.8%).
Red Buttons: Russia has 6,255 nuclear weapons, followed by the US with 5,500. China has 350, France 290, the UK 225. Pakistan has 165 warheads to defend itself from India, with 156. Israel is estimated to have 90 nukes. North Korea is believed to have enough fuel to build 40-50 nukes. Iran is headed there too. We detonated Little Boy over Hiroshima in 1945 and killed 150,000. It had the force of 15,000 tons of TNT. The average nuke today contains the force of 100,000 tons. Many are far larger. One such weapon dropped on New York City would kill an untold number.
Fat Fingers: Vladimir Putin controls Russia’s arsenal. Biden is America’s commander-in-chief. Xi Jinping rules over China, potentially for life. There’s Macron of course. Boris Johnson too. Imran Khan is Pakistan’s Prime Minister, although Arif Alvi is its President and commander-in-chief. Modi is India’s Prime Minister and regularly engages in petty skirmishes with two nuclear-armed neighbors. Naftali Bennett is Israel’s PM. Kim Jong-un leads North Korea with ten stubby fingers. And who could forget Ali Khamenei, Supreme Leader of Iran for life.
Lonely: One thing uniting humanity is the belief that the majority of earth’s 14,000 nuclear weapons are controlled by men who are mentally unstable and unfit to wield such awesome power. Some of us believe 100% of these weapons are controlled by such people. Barely a person on the planet would choose a nuclear war, yet we created a system that empowers others to do just that, on a moment’s notice. An alien would likely observe that such a concentration of power is a gross failure of any species. Perhaps it’s a stage of development that few, if any, advance beyond. Maybe that’s why we have not been visited.
Inevitable: Absolute power corrupts absolutely. But not all power is absolute. So we observe gradations of corruption, usually corresponding to the degree to which power is concentrated. The Catholic Church is reluctantly confronting its decades of unforgivable sin, buried beneath bureaucracy. Whole industries have done the same. Big tobacco. The Sackler’s Purdue Pharma opioid epidemic. And corruption is contagious. So those nations that fight against it and honor the rule of law outperform others. But even in such societies, the battle is never won. We have come to accept that there is no better system. But nothing in human affairs is inevitable.
Impermanence: Money is central to all modern human activity, yet it is an illusion. Central banks operate with governments to distort its value at will. The concentration of their power is as breathtaking as it is difficult for the citizenry to comprehend. While it is generally wielded with the best intentions, the impact on us all are profound. Since Lehman failed, global central banks have purchased $23.3trln of financial assets, lifting to new highs the fortunes of those who already had wealth, so that US private sector financial assets are now 6.3x GDP (up from 2.8x in the early 1980s). Such a societal choice was never put to a vote. And this system, like all systems we have created, is surely impermanent.
Anecdote: “The world as we have created it is a process of our thinking — it cannot be changed without changing our thinking,” wrote Einstein. Like much of his work, it contains many layers. And as with all things profound, the observation is timeless. Einstein helps us understand how we can have such deeply divided nations. They are in fact different realities, created by their respective inhabitants, as vivid to one group as the other. Only by opening our minds and changing our thinking can we connect the two. But Einstein also challenges us to examine our collective beliefs. One assumed truism is that the world must operate with centralized power structures. Tribes, kingdoms, empires, nation-states; we experimented with them all. And armies, religions, universities, corporations, financial exchanges, central banks. Atop each sits a King or Queen, President or Pope, choose your title, the function holds. Naturally, we have various methods of selecting leaders, and ways to empower or restrain them. We’ve also explored a variety of structures to distribute economic output. Feudalism, capitalism, socialism, communism. Some believe passionately in one or the other, but we all accept the broad structure because we assume the world cannot operate at scale without a central authority, a clearinghouse to mediate our disputes, set our standards, define domestic laws, international too. And enforce them. It is hard to imagine a world without centralized authority. But for the first time in human history, a new technology allows us to build decentralized accounting systems we can all trust. This is a stunning breakthrough upon which entirely new governance systems can be built. Bitcoin was the pioneer. Its success has spawned countless new applications, some more decentralized than others. The innovation has barely just begun and now attracts the brightest young minds across the world, allowing them to think about new, more inclusive ways to organize. Venture capital has followed. Speculators. The frenzy itself is breathtaking. And when we look back, 100-years hence, we will surely see this as the period when we began a great transition, even if today, we cannot yet quite imagine the world we will have created.
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, 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.