wknd
notes


                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Re-Imagining the Power of Fiat

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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: Re-Imagining the Power of Fiat

I take late-summer off from writing weekend notes. Reading more, recharging. And I’m working on a longer-form piece about a favorite strategy for the wild decade ahead. A scalable opportunity whose star is rising. Something overlooked, unloved. Be back with it in early September.

In the meantime, dusted off an anecdote from 2017 about China. How it has re-imagined the vast power of fiat in ways the West has yet to properly grasp. It helps explain their assault on both foreign listings and digital assets. All the best, E

Week-in-Review (expressed in YoY terms): Mon: China clamps down further on education companies as the government continues to target the private sector, UK cases fall for 5th day (to 29k per day), China vice foreign min Feng says US/China relationship is in stalemate, BTC trades above 40k for first time since mid-June after speculation that Amazon will soon accept digital ccy as payment, Tesla reports 8th straight qtr of profit, Israel carried out airstrikes against Hamas in retaliation of incendiary balloons, US New home sales -6.6% MoM (3.5%e), US Dallas Fed 27.3 (31.6e), S&P +0.2%; Tue: Chinese equities continue to struggle, US deputy sec of state Sherman met with China foreign min Yi with little progress noted, North and South Korea reconnected a hotline that had been severed by the North last year, Hungary CB hiked 30bp (20bp exp), China industrial profits (20% (36.4%pUS Case Shiller home prices 16.99% (16.33%e), US cons conf 129.1 (123.9e), US Richmond fed 27 (20e), S&P -0.5% ; Wed: Fed unch while mentioning the start of tapering discussions (as exp), Sydney lockdown extended 4w, US Senate agrees to begin consideration of bipartisan infrastructure package, Australia CPI 3.8% (3.7%e), UK house prices 10.5% (11.9%e), Canada CPI 3.1% (3.2%e), S&P flat; Thur: German inflation 3.8% (3.2%e) - highest since 1993, US 2Q GDP 6.5% - fully recovers GDP loss from covid pandemic although shy of expectations (8.4%), Biden requires federal employees to be vaccinated (or tested regularly), China will continue to allow companies to go public in the US as long as they meet listing requirements / China securities regulatory commission vice chair held a call stating that recent actions were targeting a specific (education) industry and not intended to hurt other companies, Peru’s new president Castillo mentioned rewriting the constitution and appointed radical cabinet members, Qatar passed law allowing first legislative elections in Oct, Amazon lowers sales estimates, Robinhood IPO flounders (-8.4%), S. Africa Private Sector Credit -0.54% (0.40%e), France PPI 7.5% (7.2%p), Sweden 2Q GDP 10% (0%p), S&P +0.4%; Fri: Amazon revenue miss weighs on global equities, Chinese authorities focus on anti-monopoly supervision of ride-hailing firms, SEC pauses IPO registrations for Chinese firms while working on new risk-disclosure guidance, evidence found that China significantly increasing nuclear arsenal, Evergrande’s crisis deepened as court froze assets of subsidiary, Fed’s Bullard says wants to see tapering done by end of 1Q 2022, Delta variant likely causes more severe illness and spreads as easily as chickenpox according to internal CDC presentation, Fed RRP facility sets record of $1.04T, Treasury starts special measures to avoid breaching debt limit, Israel to give 3rd booster shot of Pfizer vaccine to those over 60, Tong Yink-kit sentenced to 9y as the first person sentenced under the National Security Law imposed by China, S. Korea IP 11.9% (9.6%e), Japan IP 22.6% (20.7%e) / ret sales 0.1% (0.2%e), Australia private credit 3.1% (2.4%e) / PPI 2.2% (0.2%p), France 2Q GDP 18.7% (17.5%e) / CPI 1.6% (1.4%e), Spain 2Q GDP 19.8% (18.9%e) / ret sales 1.4% (10%e), Italy unemp 9.7% (10.6%e), Taiwan 2Q GDP 7.47% (6.65%e), German 2Q GDP 9.2% (9.6%e), Italy GDP 17.3% (15.6%e), HK 2Q GDP 7.5% (7.8%e), EU unemp 7.7% (7.9%e) / CPI 2.2% (2.0%e) / 2Q GDP 13.7% (13.2%e) / unemp 7.7% (7.9%e), Mexico 2Q GDP 19.7% (19.8%e), Brazil unemp 14.6% (14.5%e), US pers income 0.1% MoM (-0.3%e) / spending 1% (0.7%e), US core PCE deflator 3.5% (3.7%e), US UofM 81.2 (80.8e) / 1y infl exp 4.7% (4.8%e), S&P -0.5%

Weekly Close: S&P 500 -0.4% and VIX +1.04 at +18.24. Nikkei -1.0%, Shanghai -4.3%, Euro Stoxx +0.0%, Bovespa -2.6%, MSCI World -0.1%, and MSCI Emerging -2.6%. USD rose +0.3% vs Australia, +0.2% vs Brazil, and flat vs India. USD fell -16.7% vs Bitcoin, -11.8% vs Ethereum, -1.7% vs South Africa, -1.2% vs Turkey, -1.1% vs Sweden, -1.1% vs Sterling, -1.0% vs Russia, -1.0% vs Mexico, -0.8% vs Euro, -0.8% vs Yen, -0.7% vs Canada, -0.5% vs Chile, -0.3% vs China, and -0.2% vs Indonesia. Gold +0.6%, Silver +1.2%, Oil +2.3%, Copper +0.6%, Iron Ore -15.7%, Corn +0.3%. 5y5y inflation swaps (EU +8bps at 1.67%, US +5bps at 2.37%, JP +8bps at 0.16%, and UK flat at 3.79%). 2yr Notes -1bp at 0.19% and 10yr Notes -5bps at 1.22%.

July Monthly Close: S&P 500 +2.2% and VIX -0.93 at +15.83. Nikkei -0.2%, Shanghai -0.7%, Euro Stoxx +1.4%, Bovespa +0.5%, MSCI World +1.4%, and MSCI Emerging -0.1%. USD rose +18.5% vs Ethereum, +5.5% vs Bitcoin, +4.0% vs South Africa, +3.1% vs Australia, +3.1% vs Euro, +3.1% vs Sweden, +2.8% vs Canada, +2.8% vs Sterling, +2.5% vs Turkey, +2.4% vs India, +1.7% vs Chile, +1.5% vs Indonesia, +1.4% vs Yen, and +1.4% vs China. USD fell -4.8% vs Brazil, -0.4% vs Russia, and -0.1% vs Mexico. Gold -7.1%, Silver -6.4%, Oil +10.3%, Copper -8.3%, Iron Ore +15.1%, Corn +7.9%. 5y5y inflation swaps (EU -1bp at 1.59%, US -11bps at 2.35%, JP +1bp at 0.33%, and UK -6bps at 3.69%). 2yr Notes +11bps at 0.25% and 10yr Notes -13bps at 1.47%.

YTD Equity Indexes (high-to-low): UAE +45% priced in US dollars (+45% priced in dirham), Saudi Arabia +26.8% priced in US dollars (+26.7% in riyal), Austria +20.8% in dollars (+25.2% in euros), Sweden +20.5% (+26.4%), Canada +19.1% (+16.4%), Taiwan +17.6% (+17.1%), Netherlands +17.1% (+20.8%), S&P 500 +17%, Russia +16.9% (+14.7%), Czech Republic +16.9% (+17.7%), South Africa +16.1% (+15.6%), Mexico +16% (+15.4%), Finland +15.9% (+20.1%), France +15.6% (+19.1%), Poland +14.7% (+18.6%), Denmark +14.3% (+18.4%), MSCI World +14.1% (+14.1%), NASDAQ +13.8%, Hungary +13.8% (+15.6%), Norway +13.1% (+16.3%), Russell +12.7%, Belgium +12.5% (+16%), Argentina +12.1% (+28.8%), Euro Stoxx 50 +11.7% (+15.1%), Israel +11.5% (+12.4%), UK +10.8% (+8.9%), India +10.8% (+12.7%), Switzerland +10.3% (+13.2%), Italy +10.1% (+14.1%), Ireland +9.5% (+12.9%), Germany +9.3% (+13.3%), Singapore +8.7% (+11.4%), Australia +7.1% (+12.2%), Greece +6.5% (+9.8%), Korea +5.4% (+11.4%), Spain +4.2% (+7.5%), Brazil +2.6% (+2.3%), China -1.2% (-2.2%), Indonesia -1.4% (+1.5%), Portugal -4.1% (-1.1%), Thailand -4.4% (+5%), Chile -4.8% (+1.8%), HK -4.9% (-4.7%), Japan -6.5% (-0.6%), New Zealand -6.7% (-3.8%), Malaysia -12.5% (-8.1%), Philippines -15.6% (-12.2%), Turkey -16.7% (-5.7%), and Colombia -24% (-14%).

Anecdote (Oct 2017): “China’s financial system is a hermetically sealed snow globe,” he said. “They’ve built a system to resemble ours on the surface but scratch it and you discover something altogether foreign.” China has banks. They lend money. But pierce the patina and you find a vast subsidy machine, with no cold-blooded allocation of capital. There are no defaults to speak of, just bailouts, no reckonings. “The appearance of a modern financial system allows western financiers to pretend one exists. We are willing dupes in this charade.” Throughout history failing nations have turned to printing presses to arrest their decline. It has led to ruin. Always. But never has an emerging superpower used the printing press to turbo charge growth, dominate industries. The Chinese have reimagined the vast power of fiat. And they’re wielding it to build a 21st century nation atop the history’s greatest credit boom. The fate of this debt is uncertain, but the extraordinary infrastructure is not. “Ask any portfolio manager if they invest their personal wealth in Chinese debt? Not one will answer ‘Yes.’ But before long, we’ll all own Beijing’s bonds in our 401k.” The Chinese understand the agency problem in western asset management. We invest other people’s money, not our own. So they’re muscling their way into global indexes. Where passive flows will race to hit Chinese benchmarks, without anyone making a decision at all. We’re willing participants in our own demise. First, they exploited the west’s corporate fixation on short term profits, granting market access in exchange for local design/production, usurping our intellectual property. Next, they’ll exploit our financial system deficiencies to fund their unprecedented credit excess. “We continue to think of banking and finance though our own narrow lens. But the Chinese see an entirely different system. And they know that Rome was not built by bankers. It was built by force.”

Good luck out there,

Eric Peters

Chief Investment Officer

One River Asset Management

Greenwich, CT

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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