wknd notes: Innovation, invention, risk taking, entrepreneurialism

“For complex reasoning tasks this is a significant advancement and represents a new level of AI capability,” wrote OpenAI, describing its latest model release. “Given this, we are resetting the counter back to 1 and naming this series OpenAI o1.” Such is the pace of advancement (and hype) in AI that we need to rebase our calibrations. o1 answered 78% of PhD-level science questions accurately, compared to 56.1% for GPT-4o and 69.7% for human experts, which confirms that o1 is way smarter than I am. But for some reason I feel I’m probably more intelligent, at least for now. Even if I couldn’t tell you without the help of o1 the precise difference between smarts and intelligence.

Overall: “For the first time since the Cold War we must genuinely fear for our self-preservation,” Draghi told reporters, working himself up into another ‘whatever-it-takes” frenzy. “And the reason for a unified response has never been so compelling and I am confident that in our unity we will find the strength to reform,” said Mario, far from confident, his long-awaited report on EU competitiveness hot off the press. But of course, the stock market provides objective, real-time analysis on national competitiveness, and the European benchmark equity index is now just slightly above where it was at the 2007 market high. Equities are priced in nominal terms though, and the EU consumer price index is roughly 52% higher since 2007. Which means that European equities have fallen 30% in real terms from where they were 17yrs ago (excluding dividends). Relative to where they were at the 2000 highs, European stocks are worth about half what they were nearly 25yrs ago in real terms. By the same measure, Chinese stock prices are -67% in real terms from the 2007 nosebleed highs (+44% in real terms since 2000 – just before its WTO entry). And the S&P 500 is +60% in real terms from the 2007 highs (+107% from the 2000 highs). As a general observation, the US invents, China builds, the EU regulates. And the stock market does an admirable job at indicating which of those activities you want to prioritize, if the goal is to aggressively increase overall national prosperity. But the EU’s goal was never really that. That union was formed to avoid another disastrous continental war, which has been a recurring theme since well before the first Italian started shaving coins. The European project as it is currently constituted has narrowly achieved this primary objective, but at the cost of more chronic economic stasis. Naturally though, national weakness invites discontent from within and aggression from without. Which is where Europe finds itself today. It’s a healthy reminder for Americans, as we enter our political season, to stay true to our system and to that which has led to our greatness. Innovation, invention, risk taking, entrepreneurialism.

Week-in-Review: Mon: Draghi calls for 800b EUR new industrial strategy, gov’t purchases 3.4m barrels to replenish SPR, Hungary PM Orban shakes up cabinet by merging economy and finance ministries – creating a new ministry with broader mandates, PBOC and Norges Bank sign memorandum of understanding to enhance information exch and economic cooperation, Japan (final) 2Q GDP 2.9% (3.2%e) / Deflator 3.2% (3.0%e), China PPI -1.8% (-1.5%e) / CPI 0.6% (0.7%e), Mexico CPI 4.99% (5.06%e) / Core 4.00% as exp, S&P +1.2%; Tue: Fed proposes cutting capital requirement for largest bank by 50%, EU court deals blow for tech companies in tax ruling, China / US indo-pacific commanders hold first call, Harris baits Trump off message in presidential debate / Taylor swift endorse Harris, UK/US warn Iran against supplying Russia with ballistic missiles, US consumer credit $25.452b (10.4b), China Expts 8.7% (6.6%e) / Impts 0.5% (2.5%e), Germany CPI 2.0% as exp, UK unemp 4.1% as exp, Hungary CPI 3.4% (3.6%e), Italy IP -3.3% (-1.8%e), US NFIB 91.2 (93.6e), Brazil IPCA infl 4.24% (4.27%e), S&P +0.5%; Wed: US CPI 2.5% as exp / Core CPI 3.2% as exp, Mexico passes judicial reform despite rampant protests, BOJ’s Nakagawa (dove) warns of upside risk to infl outlook, China asks carmakers to keep key EV tech at home, Fed’s Bostic cleared of insider trading probe, Putin asks gov’t to look to limit exports of key minerals (nickel / titanium / uranium) in retaliation for western sanctions, South Korea Unemp rate 2.4% (2.6%e), UK IP -1.2% (-0.1%e) / mfg prod -1.3% (-0.1%e), Mexico IP 2.1% (0.8%e), S&P +1.1%; Thu: ECB cuts 25bp as exp / cuts growth forecast for every year through 2026 – Lagarde says growth risks tilted toward downside, S. Korea aims to end short selling ban on all stocks in March, US/UK considering lifting missile restrictions for Ukraine, Argentina CPI 236.7% (235.8%e), Japan PPI 2.5% (2.8%e), Brazil Ret sales 4.4% as exp, India CPI 3.65% (3.47%e) / IP 4.8% (4.6%e), US Jobless claims 230k (226k e) / Cont claims 1850k as exp, US PPI 1.7% as exp / Core PPI 2.4% as exp, S&P +0.8%; Fri: China approves plan for first hike to retirement age (63 for men / 58 for women) since 1978, Former Fed Dudley sees strong case for 50bp in Sept / WSJ’s Timiraos opens the discussion of 25 vs 50bp after mkt moved towards 25bp post CPI, PWC banned for 6m for auditing failures on Evergrande, Russia CB surprises with 100bp hike, EU IP -2.2% (-2.3%e), China M2 6.3% (6.2%e), China agg financing 21.9T ( 21.875T exp), Brazil eco activity 5.3% (4.8%e), US impt prices 0.8%? (0.9%e), US UofM 69 (68.5e) / 1y infl exp 2.7% (2.8%e) / 5-10y infl exp 3.1% (3%e), S&P +0.5%.??

Weekly Close: S&P 500 +4.0% and VIX -5.82 at +16.56. Nikkei +0.5%, Shanghai -2.2%, Euro Stoxx +1.9%, Bovespa +0.2%, MSCI World +2.6%, and MSCI Emerging +0.1%. USD rose +0.2% vs Indonesia, +0.1% vs Canada, +0.1% vs Euro, and flat vs Sterling. USD fell -5.5% vs Bitcoin, -3.9% vs Mexico, -1.9% vs Chile, -1.1% vs Ethereum, -1.0% vs Yen, -0.7% vs South Africa, -0.7% vs Sweden, -0.6% vs Brazil, -0.5% vs Australia, -0.4% vs Russia, -0.2% vs Turkey, -0.1% vs India, and flat vs China. Gold +3.4%, Silver +10.3%, Oil +1.4%, Copper +4.0%, Iron Ore +2.0%, Corn +1.7%. 10yr Inflation Breakevens (EU -2bps at 1.71%, US +5bps at 2.08%, JP -11bps at 1.19%, and UK -5bps at 3.30%). 2yr Notes -6bps at 3.58% and 10yr Notes -6bps at 3.65%.

2024 Year-to-Date Equity Index Close: Argentina +64.8% priced in US dollars (+95.5% priced in pesos), Venezuela +64.6% priced in US dollars (+68.7% priced in bolivar), Denmark +21.7% in dollars (+21.7% in krone), Malaysia +21.2% (+13.6%), S&P 500 +18% in dollars, NASDAQ +17.8% in dollars, Hungary +16.9% (+20.4%), Taiwan +16% (+21.4%), India +15.8% (+16.7%), Belgium +14.7% (+14.5%), MSCI World +14.7% in dollars, Netherlands +14.5% (+14.3%), Spain +14.4% (+14.2%), Turkey +13% (+29.7%), Germany +11.8% (+11.6%), Singapore +11.7% (+9.9%), Italy +10.8% (+10.6%), Ireland +10.6% (+10.4%), UK +10.1% (+7%), Czech Republic +10% (+11.8%), Greece +9.9% (+9.8%), Japan +9.3% (+9.3%), Canada +9.3% (+12.5%), South Africa +8.6% (+5.5%), Philippines +7.8% (+8.9%), Russell +7.7% in dollars, Indonesia +7.4% (+7.4%), Euro Stoxx 50 +7.3% (+7.1%), Switzerland +7% (+8.1%), Poland +6.7% (+4.9%), New Zealand +5.9% (+9%), Austria +5.1% (+4.9%), Israel +4.9% (+8.8%), Norway +4.8% (+10.4%), Australia +4.7% (+6.7%), Sweden +3.6% (+5.4%), Thailand +3.5% (+0.6%), HK +2% (+1.9%), Colombia +1% (+9.7%), Portugal +0.3% (+0.1%), France -0.9% (-1%), Saudi Arabia -1.1% (-1%), Finland -2% (-2.2%), UAE -2.4% (-2.4%), Chile -2.5% (+2.5%), Korea -6.1% (-3%), China -9% (-9.1%), Brazil -12% (+0.5%), and Mexico -20.3% (-9.4%).

Move On: “Congratulations on becoming the richest man in the world,” said JP Morgan to Andrew Carnegie in 1901, merging various industrial firms into US Steel. The new firm was capitalized at $1.4bln and became the world’s most valuable company (the US federal budget in 1901 was $517mm for comparison). Carnegie was born in Scotland in 1835. His mom was an impoverished weaver, disrupted by mechanized weaving. She moved Andrew to Pennsylvania. At 13 he went to work in a cotton mill, earning $1.20 for a 12hr day. Morgan paid him $492mm.

Move On II: Carnegie spent the last 20yrs of his life giving away 90% of his fortune. Beginning in 1880, he built 2,500 libraries in the US, Canada, Britain - feeding hungry young minds. The 1st was in his hometown of Dunfermline, Scotland. By his death in 1919, half the US public libraries had been built by Carnegie. Colonel James Anderson let apprentices and working boys borrow books from his personal library when Carnegie was a kid. “To him I owe a taste for literature which I would not exchange for all the millions that were ever amassed by man.”

Move On III: US Steel was so dominant that it inspired anti-trust laws. In 1943 it employed 340k workers, supporting the war effort. In 1953 it produced 35.8 million tons of steel, while Europe and Japan struggled to rebuild their productive capacity. But it was slow to innovate and relied on old technology. It now produces 14.5 million tons and is the world’s 27th largest producer. In 1991 it was kicked out of the Dow Jones Industrial Average. Japan’s Nippon Steel is trying to buy US Steel for $14.9bln. Our politicians seem to care. But America moves on.

Whatever it Takes I: Draghi in his argument for a new EU industrial strategy calls for 800bln euros of new annual investment spending. At 4.7% of GDP, it’s double the scale of the Marshall Plan relative to the size of the economy. Imagine that bureaucratic trough. And setting aside the fact that the Germans, who would have to shoulder yet more Italian debt, will never agree to anything remotely close to this, it is worth asking why Europe would turn to a former central banker to draft plans for an economic renaissance? Perhaps they misunderstand their problems.

Whatever it Takes II: In the 12yrs since Draghi’s “whatever it takes” speech [here ], Europe’s benchmark Euro Stoxx 50 index has rallied +108% ex dividends (+67% in real terms). The S&P 500 is +196% higher (+126% on a real basis). When it comes to producing real prosperity, manipulating money is never the answer. In 2012, EU GDP was $14.6trln and has grown to $18.4trln (2023). US GDP over that period has grown from $16.3trln to $27.4trln. The divergence is utterly staggering. And now, of the globe’s top 25 largest companies, just one is European [here ].

Anecdote: “We have 4% of the world’s population and the dominant economy – almost twice the size of China and 5x the next largest,” said the Chairman, an American patriot, a public servant, realist, capitalist. “US stock market cap is over $50trln, dwarfing China at $11trln and Japan at $6trln,” he continued. “For over five decades, the US has produced the next generation of great global companies.” As Nippon Steel begs our politicians to buy US Steel for $14.9bln, Nvidia’s market cap is nearly $3trln, and OpenAI is raising a fresh venture round at a $150bln valuation. “Meta started in 2004 and employs 70k people, producing $134bln in annual revenue, much of it from abroad.” Apple, Google, Netflix, the list goes on. “Silicon Valley is the world’s premier innovation hub and attracts the best and brightest from across the globe.” Technology is helping lift the world’s poor out of poverty at an unprecedented rate, and in today’s hyper-connected world, every person who comes online, becomes a customer of a US tech company. “Genentech and Amgen were once startups and are now industry leaders. Without the hundreds of billions in they’d invested in R&D, we would never been able to develop the COVID vaccines in record time,” said the Chairman. “The flywheel effects of being the world’s innovation and growth engine are breathtaking. And are strongly supported by the tax code.” Since the Revenue Act of 1921, capital gains have been taxed at a lower rate than ordinary income, providing a powerful incentive for individuals to invest in new, often risky ideas. Fueling an entrepreneurial culture, that is the source of America’s prosperity, strength, power. “Energy is vital to our enduring strength too, economic and geopolitical. We lifted US domestic oil production between 2016-2020 from 9mm barrels per day to 12mm, and natural gas production by 25%.” Biden quietly continued Trump’s energy policies, lifting oil production another 1mm barrels and natural gas 15%. “Had we not, our military and economic adversaries would have more control over the future of America and our allies,” said the Chairman. “We need a coherence across economic, national security, and energy policy that is centered on and builds upon all these strengths.”

Good luck out there,

Eric Peters

Chief Investment Officer

One River Asset Management

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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, converse 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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