wknd
notes


                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Our Highest Calling

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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: Our Highest Calling

“The Fed bought $130bln of bonds so far this year. And global central banks bought $300bln already,” said Biggie Too, global chief strategist for one of Wall Street’s too-big-to-fail affairs. “We have a rate shock, yet they’re still doing QE,” bellowed Biggie. “There really are just two camps now: sheepish equity longs and stubborn equity longs,” he barked. “So you gonna buy 30yr treasuries with 7% inflation? Or buy gold when the dollar is going up? Who wants to buy emerging markets when the Fed is about to tighten?” asked Biggie, working himself up, bouncing. “Maybe that’s why equities have gone from being this thoroughbred, racing beautifully around the track, to a bucking bronco – and yet no one can get off.”

Marcel Kasumovich, our head of research, published a terrific piece on the intersection of central bank digital currency, private stablecoins, financial stability, and central bank policy [click here].

Overall: Infrared tests of the ancient artwork reveal that Botticelli initially started painting Christ as a young child, hugged by his mother. But for reasons long since lost, during the year 1500 AD, the 55yr old artist entered his studio, turned the canvas upside down, started over, and produced The Man of Sorrows. From a few ounces of unremarkable paint, emerged a masterpiece, a haunting work. His earlier paintings were mainly mythological, The Birth of Venus, his most famous. Later, his work turned more Gothic, perhaps a reflection of the darkness that briefly descended on Florence. Dictatorship. Botticelli lived in a time resembling ours, rhyming, the Renaissance -- a period of breathtaking creativity, expressed with the tools of the time: brushes, chisels, pens. But even in periods that favor the uninhibited expression of human creativity, we wrestle with our eternal demons. Political conflict, rivalry, false pride, greed, stupidity. We see it manifest today in Russia/Europe, US/China, Republicans/Democrats, climate-change, crushing inequality. The Man of Sorrows changed hands over five centuries, watching our triumphs, defeats, in silence. An anonymous buyer purchased the painting in 1963. It re-emerged this week, selling for 45,400,000 dollars; a currency invented 282yrs after Botticelli died. The Sotheby’s auction price is +1,621-times the 28,000 dollars paid in 1963. Such a return is almost inconceivable. The S&P 500 in those 59yrs is +68-times. Gold +51-times. The US consumer price index is +9-times. But high art is unlike other assets, connecting us to genius, the sublime. And it reveals this truth: an asset with finite supply, but no intrinsic value, can become priceless, if only we imagine it so. Which leads back to our present Renaissance. We live in a period of utterly stunning human advance, expressed with the technological tools of our time. Today’s greatest creations will barely resemble those of the past. Yet all this is obscured from most by the distractions streaming across the newsfeeds. And our highest calling, of course, is to navigate the rising volatility, while quietly creating and investing in the treasures of tomorrow.

Week-in-Review (expressed in YoY terms): Mon: US pulls families of diplomats out of Ukraine / US says Russia has no intention of de-escalating – puts troops on alert, Russia CB announces suspension of FX intervention that are meant to reduce volatility, US equities rallied ~4.5% off the midday lows to finish marginally higher on the day, 39 Chinese military planes flew into Taiwan’s airspace, US suspends 44 flights from China in response to Chinese restrictions on US carriers over testing protocols, Turkey advised lenders not to distribute dividends after the lira’s slump eroded cash balances, Iran rejected humanitarian preconditions for a nuclear deal, Singapore CPI 4% (3.7%e), Taiwan IP 9.98% (9.5%e), EU mfg PMI 59 (57.5e) / serv PMI 51.2 (52e) / comp PMI 52.4 (52.6e), UK mfg PMI 56.9 (57.6e) / serv PMI 53.3 (54e) / comp 53.4 (54e), Israel unemp 4.3% (4.4%p), US mfg PMI 55 (56.7e) / serv 50.9 (55.4e) / comp 50.8 (57p), S&P +0.3%; Tue: Singapore CB will raise appreciation of the SGD band, Ukraine says no reason to expect open invasion by Russia, Hungary CB hiked 50bps (only 30bps exp), US 5y auction results in record low dealer allotment, Biden outlines actions that could be taken against Russia in the event of an invasion of Ukraine, Pfizer/Biontech begin clinical trial of omicron focused vaccine, S. Korea 4Q GDP 4.1% (3.9%e) / 2021 GDP 4% as exp, Australia CPI 3.5% (3.2%e) / trimmed mean 2.6% (2.3%e), US CS home prices 18.29% (18%e), US cons conf 113.8 (111.2e), US Richmond fed 8 (14e), S&P -1.2%; Wed: FOMC unch as exp / Powell strikes hawkish tone as he opens the door to hiking rates every meeting and highlights that the economy is not the same as it was during 2015-2018 hiking cycle, BoC unchanged despite 25bps hike expected – cites omicron as rationale for waiting 1 meeting to hike, Chile CB hikes 150bps (125bps exp), IMF cuts 2022 growth forecast to 4.4% (from 4.9%), Supreme court justice Stephen Breyer to retire, 3rd round of Italian presidential election remains inconclusive, US urges citizens to leave Ukraine, Sweden PPI 20.1% (18.1%p), Brazil IPCA infl 10.2% (10.05%e), US wholesale inv 2.1% MoM (1.2%e) / retail inv 4.4% MoM (1.5%e), US new home sales 11.9% MoM (2.2%e), Russia PPI 28.5% (29%e), S&P -0.2%; Thur: Russia says US’s formal response failed to address demands to prevent NATO expansion but did indicate there is room for continued talks, Russia / Ukraine agree to have new round of talks in 2w, USD makes fresh highs post hawkish FOMC meeting on Weds – EURUDS through 2021 lows, S. Africa CB hikes 25bps as exp, HK lowers quarantine from 21 to 14 days, UK scraps mask mandate, Moderna clinical trial injects first doses of a new HIV mRNA vaccine, front month US Nat Gas futures go parabolic to the topside as weather forecasts force rampant buying, N. Korea first 2 more missiles (6 tests this month – most active month ever in terms of weapons tests), New Zealand CPI 5.9% (5.7%e), Australia impt prices 5.8% QoQ (1.4%e) / expt prices 3.5% (-2.6%e), German cons conf -6.7 (-8e), US init claims 260k (265k exp), US durable goods orders -0.9% MoM (-0.6%e), US 4Q GDP 6.9% (5.5%e), US Core PCE 4.9% as exp, US pending home sales -6.6% (-4%e), S&P -0.5%; Fri: Putin tells Macron he wants to work with the West to avoid conflict / Russian foreign min says US response contained “rational elements” even though some key points were ignored / US pentagon says Russia could invade with very little warning / says increase of blood supply to the border area is evidence that an attack by Russia in imminent, Hungary PM Orban plans to visit Moscow to secure gas amid conflict, BoJ’s Kuroda says no need to change YCC or steepen yield curve, Lunar new year in Asia begins (through next week), Argentina says they reached an understanding with IMF about restructuring debts, Apple’s strong beat supports US equity market, France 4Q GDP 5.4% (4.9%e), German impt prices 24% (26.2.%e), Sweden GDP 6.2% (5.5%e) / unemp 8% (8.2%e) / ret sales 3.3% (9.3%e), Spain GDP 5.2% (4.4%e), HK GDP 4.8% (5%e), German GDP 1.4% (1.8%e), EU cons conf unch at -8.5 / eco conf 112.7 (114.5e), Italy PPI 27.8% (27.3%p), Brazil unemp 11.6% (11.7%e), US employment cost index 1% (1.2%e), US pers income 0.3% MoM (0.5%e) / pers spending -0.6% as exp, US PCE deflator 4.9% (4.8%e), US UofM 67.2 (68.8e) / 1y infl exp 4.9% as exp / 5-10y infl exp 3.1%, S&P +2.4%.

Weekly Close: S&P 500 +0.8% and VIX -1.19 at +27.66. Nikkei -2.9%, Shanghai -4.6%, Euro Stoxx -1.9%, Bovespa +2.7%, MSCI World -2.3%, and MSCI Emerging -4.2%. USD rose +15.8% vs Ethereum, +4.1% vs Bitcoin, +3.3% vs South Africa, +2.7% vs Australia, +2.6% vs Sweden, +1.9% vs Chile, +1.7% vs Euro, +1.6% vs Mexico, +1.5% vs Canada, +1.4% vs Yen, +1.1% vs Sterling, +0.8% vs India, +0.7% vs Turkey, +0.5% vs Russia, +0.4% vs China, and +0.3% vs Indonesia. USD fell -1.3% vs Brazil. Gold -2.3%, Silver -7.7%, Oil +2.5%, Copper -4.3%, Iron Ore +5.5%, Corn +3.2%. 5y5y inflation swaps (EU -2bps at 1.82%, US +9bps at 2.48%, JP +3bps at 0.63%, and UK +9bps at 3.99%). 2yr Notes +16bps at 1.17% and 10yr Notes +1bp at 1.77%.

YTD Equity Indexes (high-to-low): Colombia +11.5% priced in US dollars (+8.4% priced in pesos), Chile +10.6% priced in US dollars (+5.4% in pesos), Brazil +9.9% in dollars (+6.8% in reais), Saudi Arabia +8.1% (+8%), Hungary +5.5% (+4.2%), Turkey +4.4% (+6.8%), Argentina +3.6% (+5.7%), UAE +3.3% (+3.3%), Singapore +3.3% (+3.9%), South Africa +1.8% (0%), Philippines +1.6% (+1.8%), Greece +1.3% (+3.5%), HK +0.7% (+0.7%), Indonesia +0% (+1%), UK +0% (+1.1%), Czech Republic -0.9% (-1.1%), Thailand -1.4% (-1.1%), Austria -2% (-0.6%), India -2.1% (-1.5%), Spain -2.6% (-1.2%), Taiwan -3.2% (-3%), Canada -3.3% (-2.3%), Norway -3.8% (-1.7%), Malaysia -3.8% (-3%), Italy -4.3% (-2.9%), Israel -4.3% (-1.7%), France -4.6% (-2.6%), Poland -4.9% (-3.5%), Venezuela -4.9% (-5.1%), Germany -5% (-3.6%), Ireland -5.3% (-3.3%), Euro Stoxx 50 -5.7% (-3.8%), Portugal -6.2% (-4.2%), Mexico -6.7% (-4.9%), S&P 500 -7%, Japan -7.3% (-7.2%), Switzerland -7.7% (-6%), China -7.7% (-7.6%), Finland -7.9% (-6.5%), Belgium -8% (-6.1%), MSCI World -8.6% (-8.6%), Netherlands -8.7% (-6.7%), Australia -9.9% (-6.1%), Sweden -10.2% (-6.3%), Russia -11.7% (-7.9%), NASDAQ -12%, Korea -12% (-10.6%), Russell -12.3%, New Zealand -13.1% (-9.1%), Denmark -13.7% (-12.4%).

Brave New World: “I remember when Obama said the US was out of money,” said Warren Mosler, father of Modern Monetary Theory (MMT). “He and Clinton went to Beijing to make sure the Chinese would finance their health care plan,” he continued. “Paul Ryan ran around saying the US will be the next Greece and fall to its knees at the IMF.” Begging for a bailout. “Then there was Krugman, the New Keynesians too, they thought higher deficits would naturally lead to higher interest rates,” said Mosler. “All of them - every single one - was dead wrong.”

Brave New World II: “Then two years ago, Congress passed a $2.3trln spending bill,” said Mosler. “There was no talk of tax hikes to avoid insolvency. There were no hysterical warnings of insolvency and an IMF bailout. Who was flying to China to beg for funding?” he asked, rhetorically. “All that talk had vanished. The only consideration was whether or not this unorthodox-looking policy would spur inflation,” said Mosler. “And that is exactly the goal of MMT - to shift the debate to where it belongs. This sort of grand spending can be pursued, limited only by the emergence of unacceptably high inflation.”

Brave New World III: “For decades our politicians and policy makers have been looking at the wrong risks,” explained Mosler, having developed Modern Monetary Theory in 1992. “The risk of running deficits is not that the US becomes Greece, nor is it that markets will cause our interest rates to rise uncontrollably.” The risk is very simple, singular: inflation from excess demand. “The US runs its own floating exchange rate currency. Greece and the other euro members have turned themselves into the likes of US states that can go broke. The fed funds rate will not rise unless Jay Powell raises it. It will not increase until he decides to increase it. Period. Fact.”

Brave New World IV: “We’ve finally experienced a major shift in what drives policy,” said Mosler. “We are coming to understand what our true options look like,” he said. “We can no longer claim to be unable to build infrastructure, invest in the future, our people, education. We now know we will not need an IMF bailout.” We will never need to beg China for dollars. “Had we come to terms with this decades ago, policy would have been very different. But no matter, we have finally shifted the debate from where it was to where it is now. To the truth, to reality.”

Brave New World V: “It is important to reduce inflation,” said Mosler. “But just as orthodox thinking is wrong when discussing deficits, so too are the accepted prescriptions for tempering price gains.” Market are now obsessed with rate hikes and quantitative tightening. “Here’s how to slash inflation: introduce Medicare for all, repeal all non-strategic tariffs, negotiate longer-term energy contracts, remove all financial assets as permissible collateral for commercial bank loans (a.k.a. State sponsored leverage that fuels the casino economy - elevating financial asset prices, spilling over to other prices, tying up labor, etc), limit treasury issuance to 3mth T-bills, and set a permanent 0% Fed Funds rate policy.”

Anecdote: “We are only halfway done in terms of shifting economic thinking from a flawed model,” said Warren Mosler. “While we are no longer obsessed with a false notion that the federal government will run out of money, we still misunderstand the fundamental relationship between interest rates and inflation,” he said. “Our central bankers and the armies of economists who cling to decades of failed orthodoxy continue to believe that higher interest rates reduce inflation, and lower rates spur it,” explained Mosler. “They have it backwards.” Now, such a statement from a Modern Monetary Theorist infuriates most economists, because it invalidates nearly all their PhD theses, publications, Nobel prizes, their models, their religion. Naturally, investors tend to have more open minds. And this comes down to incentive structures. The cost to an investor of being wrong is rather high, relative to the price paid by an economist. And so, perhaps, it should come as no surprise that the general forecasts for both inflation and interest rates have been wildly off for well over a decade, with hardly any serious introspection from the economics profession. Were our medical doctors to perform similarly, they would no longer have a single patient. “Interest payments are universal basic income but exclusively for people who already have money,” said Mosler. “The only thing operationally that happens when the Fed raises rates, is that the government pays more money into the economy on a net basis. It’s the most regressive possible way to conduct deficit spending -- give money to people who already have it, in proportion to how much they have,” he explained. “This is the same reason that negative interest rates are deflationary. The ECB’s negative rates have the same effect as Elizabeth Warren turning $100 into $99 with a wealth tax,” he said. “Within the economy, rate movements shift income between borrowers and savers, but there is no large net effect, just different propensities between those cohorts in terms of who spends what.” It is marginal. “So, Powell’s rate decision is really about whether the government should increase interest payments. We’re paying $540bln/yr in interest now. Should we be paying $640bln to fight inflation? It is backwards.”

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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