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 about learning when to take a profit (see below). All the best, E
Week-in-Review (expressed in YoY terms): Mon: UK lifts all covid restrictions (“Freedom day”) despite surging cases, OPEC+ officially agrees to supply increase (400k bpd per month until 5.8m of halted output is restored), America and allies accused China of illegal cyber activity, first Capitol rioter sentenced to 8m in prison, NBER officially stated April 2020 as the end of the recession (shortest recession ever – 2m), Turkey cons conf 79.5 (81.7p), US NAHB housing mkt 80 (81e), S&P -1.6%; Tue: Bezos trip to space successful, Zuma trial postponed until August, PG&E says its equipment may have sparked the Dixie Fire – largest in CA this year, Japan CPI 0.2% as exp, German PPI 8.5% (8.6%e), HK unemp 5.5% (5.8%e), Canada HPI 16% (13.7%p), US housing starts 6.3% MoM (1.2%e), S&P +1.5%; Wed: US Senate blocks vote to begin discussions on infrastructure bill, UK wants to amend Northern Ireland protocol from the Brexit deal, Biden agrees to drop Nord Stream 2 sanctions, US deputy Sec of State will meet with Chinese officials, China considers cutting steel output, S. Korea PPI 6.4% (6.4%p), Australia ret sales -1.8% (-0.7%e), S&P +0.8%; Thur: ECB unch as expected with slight dovish shift on fwd guidance to account for the strategy review, Ukraine CB hiked 50bps unexpectedly, China rejected further investigation of covid-19 if the WHO considers a lab leak a possibility, France bus conf 113 as exp, Taiwan unemp 4.76% (4.25%e), HK CPI 0.7% (1.2%e), EU cons conf -4.4 (-2.6e), US initial claims 419k (350k exp), US Kansas fed 30 (25e), US leading index 0.7% (0.8%e), S&P +0.2%; Fri: CB Russia hiked 100bps to 6.5%, Tokyo Olympics opening ceremony kicks off, President Xi is first Chinese premier to visit Tibet in over 30y, Taliban demanded Afghan president to step aside for any future peace deal – Taliban now controls ~half of Afghanistan, China announced retaliatory sanctions over the US’s HK business warning, UK ret sales 9.7% (9.5%e), Sweden PPI 9.6% (7.9%p), Taiwan IP 18.37% (12.5%e), EU PMI mfg 62.6 (62.5e) / serv 60.4 (59.3e) / comp 60.6 (60e), Mexico ret sales 29.7% (28.5%e), Brazil IPCA infl 8.59% (8.51%e), Canada ret sales -2.1% MoM (-3%e), US PMI mfg 63.1 (62e) / serv 59.8 (64.5e), S&P +1.0%
Weekly Close: S&P 500 +2.0% and VIX -1.25 at +17.20. Nikkei -1.6%, Shanghai +0.3%, Euro Stoxx +1.5%, Bovespa -0.7%, MSCI World +0.7%, and MSCI Emerging -1.0%. USD rose +2.9% vs South Africa, +1.7% vs Brazil, +0.8% vs Mexico, +0.6% vs Chile, +0.5% vs Australia, +0.4% vs Yen, +0.3% vs Turkey, +0.3% vs Euro, +0.1% vs Sterling, +0.1% vs Sweden, and flat vs China. USD fell -8.0% vs Ethereum, -2.0% vs Bitcoin, -0.5% vs Russia, -0.4% vs Canada, -0.2% vs India, and flat vs Indonesia. Gold -0.6%, Silver -1.7%, Oil +1.3%, Copper +3.5%, Iron Ore -7.5%, Corn -1.2%. 5y5y inflation swaps (EU +1bp at 1.60%, US +5bps at 2.32%, JP flat at 0.08%, and UK +7bps at 3.79%). 2yr Notes -2bps at 0.20% and 10yr Notes -1bp at 1.28%.
YTD Equity Indexes (high-to-low): UAE +40% priced in US dollars (+40% priced in dirham), Saudi Arabia +24.3% priced in dollars (+24.2% in riyal), Sweden +20% in dollars (+27.2% in krona), Taiwan +19.5% (+19.3%), Austria +18.8% (+24%), Canada +17.6% (+15.8%), S&P 500 +17.5%, Finland +15.8% (+20.9%), Netherlands +15.5% (+20%), NASDAQ +15.1%, Russia +14.7% (+13.5%), France +13.9% (+18.3%), Mexico +13.5% (+14.1%), Czech Republic +13.4% (+15.9%), MSCI World +13.3% (+13.3%), Denmark +12.9% (+17.9%), Poland +12.9% (+17.8%), South Africa +12.6% (+13.9%), Norway +12.5% (+16.2%), Belgium +12.5% (+16.8%), Russell +11.9%, Euro Stoxx 50 +11.3% (+15.7%), India +11.3% (+13.4%), Argentina +10.4% (+26.6%), UK +9.6% (+8.8%), Hungary +9.6% (+12.9%), Germany +9.4% (+14.2%), Switzerland +8.7% (+13.3%), Israel +8.4% (+10.5%), Italy +8.2% (+13%), Singapore +7.9% (+11%), Ireland +7.7% (+11.9%), Australia +7.5% (+12.3%), Korea +7% (+13.3%), Brazil +4.7% (+5.1%), Spain +3.9% (+8%), China +2.9% (+2.2%), Greece +2.9% (+6.9%), HK +0.1% (+0.3%), Indonesia -1.1% (+2.1%), Portugal -2.5% (+1.3%), Thailand -3.1% (+6.6%), New Zealand -5.5% (-2.7%), Japan -6% (+0.4%), Chile -6.3% (+0.2%), Malaysia -10.9% (-6.4%), Philippines -12.6% (-8.7%), Turkey -20.7% (-8.5%), Colombia -23% (-12.8%).
Anecdote (Dec 2017): “Let’s step into my office,” he said. So I did. He was my boss. “The firm’s most important client needs help.” I listened, uninterested, unconcerned about clients, their problems. Barely cared about my boss. I had a game to play, solo sport, and loved it to the exclusion of all else. “They need to do a very large trade,” explained my boss. A twenty-six-year-old proprietary trader’s mind is rather primitive. Which is good and bad. Being young and dumb allows you to see things elders can’t. And take risks one rarely should. In 1992, I’d done both. “They need to buy three hundred million Mark/Lira.” Europeans established a mechanism to lock their exchange rates into narrow ranges to reduce market volatility and promote economic convergence. In theory it worked, in practice it didn’t. Politicians named it the ERM. “What would you like to do?” he asked, calm. I stood there, processing. Such a sum was extraordinary even before the ERM blew up, which it just had. For months, I’d bought options in anticipation of its demise. Honestly, it was obvious. The ERM encouraged speculators to build massive leveraged carry positions, discouraged corporations from hedging exchange rate risk, suppressing volatility and interest rate spreads everywhere. The process was reflexive. Today’s central bank volatility suppression regime resembles it and will end in spectacular fashion. All such things do. “I want to buy more!” I answered. My foreign-exchange options left me long the exact amount our client needed to buy. No other bank would sell them such a large sum. So naturally, I wanted more. “You should sell them your whole position,” he told me, firm. I couldn’t understand, it made no sense. “Big customer orders like this usually mark the highs – never forget it,” he said. I left his office angry, irate, sold my whole position. And he was right.
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.