wknd notes: Building Inefficiencies, Bifurcated Markets
Eric Peters
Founder/CEO/CIO of One River Asset Mgmt. and CEO of Coinbase Asset Management
“The bubble is beginning,” bellowed Biggie Too, chief global strategist for one of Wall Street’s Too-Big-To-Fail affairs. “The Fed’s going to cut rates when it shouldn’t,” he barked. Global Trade War thumped in Biggie’s headphones. The beat rhymed with that 1998 tune, Long Term Capital. “This is the start of the dollar collapse,” said Too. “This is the start of inflation -- that’s what gold and emerging markets are trying to tell us.” Biggie closed his eyes and saw flashes of this week’s historic inflows into government bond funds, investors rushing to hedge their stocks just as they exploded higher. “This bubble’s gonna be a big one, not a long one, but a big one…real big,” hummed Too. “Then the Fed will go one step too far, spreads will blow out, and POP!”
Overall: “Warriors in golden armor shall never return home until they defeat Trump from America,” wrote the Huawei engineer on their internal message board, “This is about China having an independent communications technology industry.” Ren Zhengfei, Huawei’s founder/CEO deployed his 10,000 developers to round-the-clock shifts. “After every storm, there is a rainbow. We expect every one of you to stay confident, remain dedicated, and diligently fulfill your duties,” commanded Zhengfei. “We are ahead of the US - if we were behind, there would be no need for Trump to strenuously attack us,” he said, noting that Huawei had stockpiled 3mths of components and was racing to replace US supply chains. Google warned the White House that banning Huawei from using Android in their mobile devices threatened US national security by ensuring the development of a competing operating system open to Chinese surveillance. “Some circles have even called it the first technological war of the emerging digital era,” observed Vladimir Putin, no stranger to western conflict. Putin then announced Huawei will build out Russia’s 5G national network. Rainbow Rare Earths, an obscure stock with African mines, jumped 38% in a day, as investors rushed to hoard shares in companies that produce the rare minerals vital to high tech and military applications. China produces 80% of these rare earths and has threatened to cut exports. And as the world’s CEOs, Prime Ministers, Autocrats, Dictators, Generals, Admirals, and Presidents rushed to develop redundancy across each vital area of their activities, 17 automakers sent a letter to our President. Their CEO warned that the breath of America’s plan to loosen emission standards would be opposed by environmentally progressive states led by California, and that this would split the US into two discrete markets. Supplying such a bifurcated auto market would create inefficiency, “untenable instability and lower profits.”
Week-in-Review (expressed in YoY terms): Mon: China launches FedEx investigation (latest trade war escalation), DOJ opens antitrust investigation on Google/Facebook/Apple, Bullard “Fed may need to cut rates soon,” Trump visits UK (hints at US/UK trade deal if UK leaves EU), US ISM -0.7 to 52.1 (lowest since Oct 2016), 2yr yields hit 2017 lows, S&P -0.3%; Tue: Tiananmen 30yr anniversary, China warns citizens over risk of US travel, Aussie unemployment +0.2 to 5.2%, EU CPI -0.5 to +1.2% (core -0.5 to +0.8%), Fed’s Powell “ready to act as appropriate to sustain the expansion,” US factory orders -0.1 to +1.0% (slowest since Trump election), S&P +2.1%; Wed: Japan 2yr yields fall 3bps to -0.22%, Taiwan announces $2bln US military purchase, Aussie Q1 GSP -0.5 to +1.8% (slowest since 2009), Brussels warns Italy it’s in breach of EU budget rules, EU composite PMI +0.3 to 51.8, UK services PMI +-.6 to 51.0, IMF warns US/China trade conflict to lower 2020 GDP -0.3%, US ADP payrolls +27k (lowest since 2010), Fed Funds futures price 33% probability of June rate cut (66% odds of 3 cuts in 2019), Fed’s Beige Book “economic activity expanded at a modest pace, a slight improvement over the prior quarter – the outlook is solidly modest but positive,” Commerce Dept warn “China halt to rare-earth metal exports would cause significant shocks,” S&P +0.8%; Thur: German industrial orders +0.6 to -5.3%, Draghi lifts 2019 GDP forecast +0.1 to +1.2% (lowers 2020 and 2021 by -0.2 to +1.4%), Draghi lifts 2019 CPI forecast +0.1 to +1.3% (2020 CPI +1.4%, 2021 +1.6%), Trump “Iran is failing as a nation,” March mthly exports to China +$300mm to $38bln (imports from China +$2.1bln to $29.4bln), S&P +0.6%; Fri: Huawei agrees to build Russian 5G network, Putin “US economic raiding could lead to global conflict,” Canada employment +27.7k (unemployment rate -0.3 to record low of 5.4%), Canada hourly wages +0.3 to +2.8%, US payrolls +75k (exp +175k), unemployment rate unch at 3.6% (hourly wages +3.1%), labor force participation unch at 62.8%, S&P +1.1%; Sat/Sun: Trump calls off Mexico tariffs.
Weekly Close: S&P 500 +4.4% and VIX -2.41 at +16.30. Nikkei +1.4%, Shanghai -2.4%, Euro Stoxx +2.3%, Bovespa +0.8%, MSCI World +2.8%, and MSCI Emerging +0.5%. USD rose +7.7% vs Bitcoin, +5.6% vs Ethereum, +2.5% vs South Africa, +0.1% vs China, and flat vs Mexico. USD fell -2.6% vs Chile, -1.8% vs Canada, -1.5% vs Euro, -1.1% vs Brazil, -1.0% vs Sweden, -1.0% vs Russia, -0.9% vs Australia, -0.8% vs Sterling, -0.3% vs India, -0.1% vs Turkey, -0.1% vs Yen, and flat vs Indonesia. Gold +2.6%, Silver +3.1%, Oil +1.3%, Copper -0.2%, Iron Ore -3.3%, Corn -2.7%. 5y5y inflation swaps (EU -6bps at 1.23%, US -5bps at 2.06%, JP flat at 0.12%, and UK +7bps at 3.70%). 2yr Notes -7bps at 1.85% and 10yr Notes -4bps at 2.08%.
Manufacturing PMI (high-to-low): Hungary 57.9 ( previous 55.1), Norway 54.42 ( prev 54.02), Greece 54.2/56.6, Sweden 53.1/50.9, India 52.7/51.8, Netherlands 52.2/52, United States 52.1/52.8, Vietnam 52/52.5, Indonesia 51.6/50.4, France 50.6/50, China 50.2/50.2, Brazil 50.2/51.5, Spain 50.1/51.8, Mexico 50/50.1, Singapore 49.9/50.3, Russia 49.8/51.8, Japan 49.8/50.2, Italy 49.7/49.1, UK 49.4/53.1, South Africa 49.3/50.3, Canada 49.1/49.7, Poland 48.8/49, Switzerland 48.6/48.5, Taiwan 48.4/48.2, South Korea 48.4/50.2, Austria 48.3/49.2, Hong Kong 46.9/48.4, Czech Republic 46.6/46.6, Turkey 45.3/46.8, Germany 44.3/44.4. Services PMI: Ireland 57/54.7, Germany 55.4/55.7, Sweden 53.3/53.9, Spain 52.8/53.1, China 52.7/54.5, Australia 52.5/46.5, Russia 52/52.6, Japan 51.7/51.8, France 51.5/50.5, UK 51/50.4, US 50.9/53, India 50.2/51, Italy 50/50.4, Brazil 47.8/49.9.
YTD Equity Index Returns: Greece +31.7% priced in US dollars (+33% priced in euros), Russia +23.5% in dollars (+15.2% in rubles), NASDAQ +16.7%, Canada +16.3% (+13.3%), Switzerland +15.4% (+15.7%), S&P 500 +14.6%, Australia +13.5% (+14.1%), New Zealand +13.4% (+14%), Portugal +13.3% (+14.4%), Germany +13.1% (+14.1%), China +12.9% (+13.4%), Russell +12.3%, France +12.3% (+13.4%), Israel +11.8% (+7.3%), Brazil +11.8% (+11.3%), Netherlands +11.7% (+12.8%), Ireland +11.6% (+12.7%), Euro Stoxx 50 +11.5% (+12.6%), Italy +10.1% (+11.1%), Thailand +10.1% (+5.7%), Norway +10.1% (+8.6%), Denmark +9.9% (+10.9%), India +9.8% (+9.3%), Colombia +9.4% (+10%), UK +9% (+9%), Saudi Arabia +8.8% (+8.8%), Philippines +8.2% (+6.9%), Spain +7.1% (+8.2%), South Africa +6.9% (+11.2%), Japan +6.6% (+4.3%), Sweden +6.2% (+11.2%), Czech Republic +6% (+6.4%), Austria +5.9% (+6.9%), Belgium +5.6% (+6.6%), Hungary +4.6% (+5.2%), Taiwan +4.4% (+7%), HK +4.2% (+4.3%), Mexico +4% (+4%), Finland +3.8% (+4.7%), Singapore +3.2% (+3.2%), Poland +2.2% (+2%), Indonesia +1.9% (+0.2%), UAE +1.8% (+1.8%), Argentina -1.2% (+17.7%), Malaysia -2.8% (-2.4%), Chile -2.8% (-3%), Korea -4.1% (+1.5%), Turkey -6.5% (+2.8%).
Negotiators: “To negotiate successfully with foreign states you need to look at things from their perspective,” said the former ambassador and national security council member. “So when negotiating with China over North Korea - where we denied Pyongyang 90% of aid and 30% of oil - we tried to look at it through China’s eyes. They don’t want a Korean war, a flood of refugees,” she said. “So you take that negotiation approach. And if all else fails, I’d could always say: Okay…but you never know what President Trump will do. You just never know.”
Negotiators II: “China is our #1 long term threat,” continued the same former national security council member. “They’re building their military. They’re investing around the world and smothering nations in debt, so that they can put in a military installation, or take control of their ports. We helped China get into the WTO. They’ve done nothing but cheat ever since. They’re stealing IP and we’re letting them. The #1 point that stopped the trade talks was IP theft. China was unwilling to be held accountable on IP theft. And that’s one issue we have to get.”
Politicos: “There are so few restraints around Donald Trump,” said the politico, his decades-long career spent in DC. “You might love him you might hate him, but in terms of talent around him and people who have juice, who will tell him not to do what he wants to do, it’s a different world than it was 18mths ago,” he added. “There’s no Mattis, there’s no McMaster, there’s no Gary Cohen - all those forces of restraint. They’re not just gone, they’ve been replaced by design by people who are much more about letting Trump be Trump. Just look at Mulvaney.”
Politicos II: “As Chief of Staff, Mulvaney is now there to let Trump be Trump, let him say what he wants to say, then build a policy and message around it,” continued the politico. “No one left is going to try and control him or control the information flow to him. And that can work fine in a non-crisis situation. But every presidency is defined by the unexpected.” Sept 11th, Katrina, a cyber-attack. “By some crisis we can’t predict. It’s then that you want the right people in the right seats to help make the right decision. But they can no longer get the best talent.”
Politicos III: “You don’t have a normal planning process in this administration,” added the politico. “They entered office without a plan. They’re in constant survival mode. The White House is simply a reaction to his impulse, instinct and mood,” he said. “Trump moves then things move around him. That’s the opposite of any other White House in memory.” Administration’s typically think themselves into slowness. “Trump threatens tariffs on Mexico, then the White House moves around it to explain it, try to give it coherence, then create policy.”
Whitepapers: The White House published a whitepaper in 2018 titled: How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World. It was 14,651 words. Here are the 186 that most matter: The Chinese government is implementing a comprehensive, long-term industrial strategy to ensure its global dominance. Beijing’s ultimate goal is for domestic companies to replace foreign companies as designers and manufacturers of key technology and products first at home, then abroad. Chinese industrial policy seeks to introduce, digest, absorb, and re-innovate technologies and intellectual property (IP) from around the world. This policy is carried out through: (A) State sponsored IP theft through physical theft, cyber-enabled espionage and theft, evasion of U.S. export control laws, and counterfeiting and piracy; (B) coercive and intrusive regulatory gambits to force technology transfer from foreign companies, typically in exchange for limited access to the Chinese market; (C) economic coercion through export restraints on critical raw materials and monopsony purchasing power; (D) methods of information harvesting that include open source collection; placement of non-traditional information collectors at US universities, national laboratories, and other centers of innovation; and talent recruitment of business, finance, science, and technology experts; and (E) State-backed, technology-seeking Chinese investment. -- Estimates of the cost to the U.S. of trade secret theft alone range between $180 billion and $540 billion annually.
Whitepapers II: One River just published a whitepaper titled: Improving the Performance and Higher Order Return Properties of the Industry’s Dominant Portfolios. It explores the benefits of 3 positive-expectancy One River overlay strategies that enhance Long-only equity, Traditional 60/40, Risk-parity, Diversified hedge fund, and Multi-factor risk premia portfolios. The overlays tend to perform best in tough, uncertain times, particularly during the worst quarterly drawdowns for these five industry portfolios, achieving a higher Sharpe, less negative skewness, smaller excess kurtosis, and a higher MAR ratio (return/max drawdown). [Click here for the whitepaper].
Anecdote: China published a government white paper June 2nd titled: China’s Position on the China-U.S. Economic and Trade Consultations. Their Vice Minister of Commerce held a press conference to discuss the matter. The paper’s position will make it hard for Beijing to stand down on a variety of issues that the US insists are vital. The white paper was 5,000 words. Here are the 250 that most matter: It is only natural for China and the US, the world’s two largest economies and trading nations, to experience some differences over trade and economic cooperation. What truly matters is how to enhance mutual trust, promote cooperation and manage differences. Historical records confirm that China’s scientific achievements and technological innovation are not things we stole or forcibly took from others; they were earned through self-reliance and hard work. Accusing China of stealing intellectual property to support its own development is an unfounded fabrication. Accusations of forced technology transfer are baseless and untenable. Every country has its own matters of principle. On major issues of principle, China will not back down. During consultations, a country’s sovereignty and dignity must be respected, and any agreement reached by the two sides must be based on equality and mutual benefit. Both China and the US should see and recognize their countries’ differences in national development and respect each other’s development path and basic institutions. China strongly opposes the recent US move to increase tariffs and must respond to safeguard its lawful rights and interests. China has been consistent and clear on its position that it hopes to resolve issues through dialogue rather than tariff measures. China will act rationally in the interests of the Chinese people, the American people, and all other peoples around the world. However, China will not bow under pressure and will rise to any challenge coming its way. China is open to negotiation but will also fight to the end if needed.
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.
Executive Vice President Corporate Strategy at SEACORP
5 年The white paper link didn’t work for me. Can you please repost the link? Thank you.