“Drift. Apathy. Distrust,” barked Biggie Too, feeling it, already in a groove. “Frustration. Irritation. Uneasy anticipation,” continued the chief global strategist for one of Wall Street’s Too-Big-To-Fail affairs. “Biggie got this deep dark feeling he’s way too early,” whispered Too, lips pursed, right at home in 3rd person. “We lost our faith in politicians and the media. Institutions. Now we’re losing trust in science, our scientists, Biggie sees them cracks spreading,” said Biggie, pointing to his bank of screens, Fauci getting Fox’d. “And yet, through it all we still have absolute trust in the Fed,” said Biggie, squinting. “Guess this thing goes and goes until our central bankers get humiliated too. When we discover inflation ain’t transitory.”
Overall: “Our current market prices reflect market and trading dynamics unrelated to our underlying business,” wrote AMC’s management to the SEC, seeking approval to issue more shares, of which he controls an unlimited supply. The meme stock had jumped nearly 100% in a single day, extending gains this year to +2,850%. At nearly 8-times its pre-pandemic high, AMC’s price has diverged far from reality if there is even such a thing. Oil prices jumped yet again, extending this year’s rally to over 40%. OPEC responded by increasing output, over which it has an outsized influence, trying to roughly match supply to our reopening reality. Unlike equity, which can be created as easily as fiat currency in infinite quantities at the click of a mouse, the production of commodities is a far more difficult affair. Capital intensive. With varying lead and lag times that reflect real world realities. And this makes their prices especially sensitive to both the quantity and velocity of fiat. Now into our second year of 15% federal deficits, funded for free by newly created dollars, those things which are hardest to produce are generally rising faster than others. So far this year, consumer prices have leapt at a +6.2% annualized pace. With the Federal Reserve able to buy as many bonds as needed to hold 2-year yields at 0.15%, a level wildly disconnected from reality, real interest rates are now deeply negative. National housing prices are rising at the fastest pace in recorded history: +20% from this time last year, with sales surging +35%. Over that one-year span, the S&P 500 has risen +40%. In 2021, it is rising at a +30% annualized pace (+12.6% year-to-date). Such is the magic of money illusion. And this, of course, is the unstated aim of the latest stage in our experiment. But its success relies on wages outpacing these various metrics, if the system is to trend back toward equilibrium. But year to date, average hourly earnings have risen at a +3.4% annualized pace.
Week-in-Review (expressed in YoY terms): Mon: US/UK Holiday, PBOC increased reserve ratio for FX holdings (7% vs 5%p) – first time since 2007 – sends signal of discomfort with CNY appreciation, China relaxes child allowance to three, OECD revised global growth to 5.8% this year (4.2%p), Israeli politician wrangle coalition to oust Netanyahu, JBS (world’s largest meatpacking co) suffered ransomware attack, SK IP 12.4% (11.5%e), Japan IP 15.4% (16.9%e) Japan re sales 12% (15.2%e), China mfg PMI 51 (51.1e), Turkey GDP 7% (6.3%e), India GDP 1.6% (1%e), S&P closed; Tue: RBA unch as exp, OPEC+ forecasted a tightening market ahead, Australia mfg PMI 60.4 (59.9p), China Caixin mfg PMI 52 as exp, UK house px 10.9% (9.4%e), Swiss GDP -0.5% (-0.2%e), Turkey PMI 49.3 (50.4p), Italy unemp 10.7% (10.1%e), EU unemp 8% (8.1%e), EU CPI 2% (1.9%e), S. Africa unemp 32.6% (33.5%e), Brazil GDP 1% (0.5%e), US mfg PMI 62.1 (61.5e), US ISM mfg 61.2 (61e), S&P flat; Wed: Erdogan calls for lower interest rates to slow inflation, WHO approves China’s Sinvac vaccine, Fed announced it will start selling off their credit ETF holdings, Yellen and Chinese Vice Premier Liu He held talks for first time, Biden reversed Trump policy by suspending drilling leases in the arctic, S. Korea CPI 2.6% as exp, Australia GDP 1.1% (0.6%e), German retail sales 4.4% (10.1%e), EU PPI 7.6% (7.5%e), Brazil IP 34.7% (36.9%e), S&P +0.1%; Thur: Biden to propose a 15% tax floor rather than raise corporate tax rate to 28% in exchange for infrastructure deal with republicans, Russia announced it plans to cut USD holdings in its wealth fund to zero (currently $65b of the $186b), global food prices jumped in May at fastest pace in a decade, China Caixin services PMI 55.1 (56.2e), Turkey CPI 16.6% (17.25%e) / PPI 38.3% (364%e), EU service PMI 55.2 (55.1e), US ADP emp change 978k (650k exp), US init jobless claims 385k (387k exp), US services PMI 70.4 (70.1e), US ISM Services 64 (63.2e), S&P -0.4%; Fri: Biden prohibits investment in 59 Chinese defense companies, Yellen attends G7 in London, EU bans Belarusian airlines from flying over the bloc or landing in its airports, RBI unch / increases QE, Singapore ret sales 54% (58.6%e), EU retail sales 23.9% (25%e), Canada emp change -68k (-25k exp) / unemp 8.2% as exp, US NFP 559k (675k exp) / unemp 5.8% (5.9%e) / AHE 2% (1.6%e), S&P +0.9%.
Manufacturing PMI (high-to-low): Switzerland 69.9/69.5, Netherlands 69.4/67.2, Sweden 66.4/69, Austria 66.4/64.7, UK 65.6/60.9, Germany 64.4/66.2, Italy 62.3/60.7, Taiwan 62/62.4, Czech Republic 61.8/58.9, United States 61.2/60.7, Spain 59.4/57.7, France 59.4/58.9, Norway 58.51/58.93, Greece 58/54.4, Poland 57.2/53.7, Canada 57/57.2, Indonesia 55.3/54.6, South Korea 53.7/54.6, Brazil 53.7/52.3, South Africa 53.2/53.7, Vietnam 53.1/54.7, Japan 53/53.6, Hungary 52.8/51, Hong Kong 52.5/50.3, China 52/51.9, Russia 51.9/50.4, India 50.8/55.5, Singapore 50.7/50.9, Turkey 49.3/50.4, Mexico 47.6/48.4. Services PMI: Sweden 71.7/66.6, US 70.4/64.7, UK 62.9/61, Ireland 62.1/57.7, Spain 59.4/54.6, Russia 57.5/55.2, France 56.6/50.3, China 55.1/56.3, Italy 53.1/47.3, Germany 52.8/49.9, Brazil 48.3/42.9, Japan 46.5/49.5, India 46.4/54.
Weekly Close: S&P 500 +0.6% and VIX -0.34 at +16.42. Nikkei -0.7%, Shanghai -0.3%, Euro Stoxx +0.8%, Bovespa +3.6%, MSCI World +0.6%, and MSCI Emerging +1.5%. USD rose +1.2% vs Turkey, +0.8% vs Bitcoin, +0.8% vs India, +0.4% vs China, +0.2% vs Sterling, +0.2% vs Euro, +0.1% vs Mexico, +0.1% vs Indonesia, and +0.1% vs Canada. USD fell -3.4% vs Brazil, -2.6% vs Ethereum, -2.4% vs South Africa, -0.8% vs Chile, -0.5% vs Russia, -0.4% vs Sweden, -0.3% vs Australia, and -0.3% vs Yen. Gold -0.6%, Silver -0.5%, Oil +4.1%, Copper -3.3%, Iron Ore +9.8%, Corn +3.8%. 5y5y inflation swaps (EU flat at 1.60%, US -2bps at 2.40%, JP +4bps at 0.33%, and UK -2bps at 3.70%). 2yr Notes +1bps at 0.15% and 10yr Notes -4bps at 1.56%.
YTD Equity Indexes (high-to-low): Venezuela +40.2% priced in US dollars (+282.5% priced in bolivar), UAE +30.9% priced in dollars (+30.9% priced in dirham), Austria +25.4% in dollars (+26.7% in euros), South Africa +23.7% (+13.3%), Saudi Arabia +23.2% (+23.1%), Canada +21.4% (+14.9%), Norway +21.2% (+17.4%), Sweden +20.1% (+21.2%), Hungary +20% (+14.8%), Poland +19% (+17.3%), Russia +18.5% (+15.8%), Taiwan +18% (+16.4%), Czech Republic +17.1% (+14.7%), France +16.8% (+17.4%), Russell +15.8% (+15.8%), Netherlands +14.7% (+15.3%), Argentina +14.6% (+29.2%), Mexico +14.6% (+14.6%), Euro Stoxx 50 +14.5% (+15.1%), Italy +13.8% (+15%), UK +13.5% (+9.4%), Germany +13.2% (+14.4%), Finland +13% (+14.2%), S&P 500 +12.6% (+12.6%), India +12.3% (+12.1%), Belgium +12.3% (+12.9%), Spain +12% (+12.6%), Ireland +11.6% (+12.2%), Brazil +11.5% (+9.3%), MSCI World +11.4% (+11.4%), Australia +11.4% (+10.8%), Greece +10.9% (+11.4%), Singapore +10.6% (+10.8%), Korea +10.4% (+12.8%), Israel +10.2% (+11.7%), NASDAQ +7.2% (+7.2%), Denmark +7.1% (+8.2%), Thailand +6.9% (+11.2%), HK +6.2% (+6.2%), Switzerland +6.1% (+8.1%), China +5.6% (+3.4%), Chile +0.4% (+1.2%), Indonesia -0.1% (+1.4%), Japan -0.6% (+5.5%), Portugal -1.4% (-0.9%), Philippines -4.1% (-4.8%), New Zealand -4.4% (-4.5%), Malaysia -5.5% (-3%), Turkey -16.7% (-3%), Colombia -17.6% (-13.4%).
Beijing: “The philosophical tug-of-war between the US and China has usual extension into policy,” said Marcel, our head of research. “While the Western word charts a path of new orthodoxy, China is sticking to a more conventional, conservative approach. The decline in the US dollar has extended to China, with bond investors racing to the yield enhancement within the currency hedge. China’s bond market is one of the few that is entirely uncorrelated with broader market – virtually no correlation to US equities or US bonds. This is the type of diversification that bond investors crave in a yield-starved world.
Beijing II: “Long gone are the days of China fretting about a stronger currency for fears of choking off the economy,” continued Marcel. “Yes, China activity is slowing through weaker global trade. The latest surveys of business conditions show that expectations for activity are very strong in both goods and services. But current trade activity is weakening sharply with exports in both goods and services contracting. Trade accounted for less than 4% of China’s growth in the past seven years. Softness in trade is a sign of things to come in global activity. China’s focus on the exchange rate is more about financial stability than economic outcomes – the recent slowdown was China’s aim, not an accident.
Beijing III: “Policy sent a market signal last week, raising reserve requirements for holding foreign exchange to 7% from 5%. This will start on June 15, and it’s the first hike in more than a decade. China is fretting more about the return of carry trades that led to unruly conditions in shadow banking as local investors resorted to financial engineering to elevate returns. This is a pre-emptive strike, a reminder to the banking system that policy isn’t asleep at the switch. There has been a sharp rise in USD dollar holdings of banks and the rise in reserve requirements is reducing liquidity available for various long-CNY trading exposures. It is a common policy signal.
Beijing IV: “We also see signals in China’s fixing rate against the US dollar. At the same time policy was tightening US dollar liquidity, the official exchange rate was set weaker than market expectations. This, too, is a signal, a reminder to the banks that policy won’t sit idle and accommodate excess speculation towards a stronger CNY. The judgment was that US dollar inflows into the banking system were there to create Chinese renminbi longs in the future. US policy is pushing for a dollar depreciation. China’s may be more hands-off on intervention, but the latest actions are a reminder this is a trend that they intend to manage.
Beijing V: “The contrast to the US is stark. The excess liquidity of US dollars is everywhere. Front-end US dollar yields across the world have converged to ultra-low levels. China 2-year paper swaps back to US dollars at zero percent. If you want China’s higher yield, you must take the currency risk. Even Brazil, with high debt and rising political risks like those seen in Peru and Chile, can borrow US dollars for 2-years at less than 50 basis points. Where do the dollars go when there is nowhere else to go? Back to the Fed. The reverse repurchase agreement – a liability to the Fed – surged to $479 billion and is set to rise further. All at a 0% interest rate.
Beijing VI: “And so goes the irony. In a world where businesses are screaming about shortages of labor and inputs to production, the surplus of US dollars in the system runs the risk of the Fed losing control of the Federal fund rates…to the downside.”
New Ideas Party: “Next week I will send to congress a bill that will make bitcoin a legal tender,” announced El Salvador’s President Bukele. There are 195 countries on the planet. El Salvador ranks 103rd in GDP. 20% comes from remittances, most of which cost recipients 10% in fees. About 1/3 of the nation lives below the poverty line. 70% have neither a bank account nor credit card. El Salvador leads in nothing really. But the President and his New Ideas Party just made it the first nation on earth to accept bitcoin as legal tender. It won’t be the last.
Anecdote: “Augmented/Virtual reality (AR/VR) is being adopted at six-times the pace that was expected one year ago,” said the scientist. “The content is good enough, the technology fast enough and the price sufficiently low for adoption curves to start turning up hard,” he continued from the valley. “This is the next platform, merging reality and fantasy into something altogether new.” Big tech is racing to develop technologies to project images from eyeglasses directly onto our retinas, advancing the integration that started decades ago with the advent of the desktop and its connection to the internet. “The images can be fun. Pokemon. Dinosaurs. Rockets. And they can be educational, allowing us to explore a 3D image of the human heart. Or commercial, projecting an image of that new Crate & Barrel couch into our actual living room before we buy it with crypto all within this AR environment. It will be indistinguishable from reality,” he said. “The technologies will allow us to reach out and interact with the space around us. Touching things we see, that don’t actually exist. And as technology improves it will allow us to interact with other people in an increasingly virtual world. You and I will have this conversation and I’ll grab a virtual globe, spin it, and choose a place we’ve never visited. We’ll both go there and explore together,” said the scientist, growing increasingly excited, speaking faster. “But because we’re both wearing glasses, and are 3,000 miles apart, we will not be able to see one another’s physical bodies. So instead we will have avatars, which are already common. But they’ll become increasingly realistic, and we’ll grow accustomed to recognizing one another’s avatars. It will feel more and more natural. Perhaps, someday, more natural than seeing one another in person. And we’ll inevitably have different avatars we use when spending time with different people. Each one, reflecting aspects of who we are, or want to be,” he said. “And this is all happening. It’s not a maybe. It’s a matter of time, and it’s coming fast. We are racing toward a new form of human reality.”
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.