wknd notes: A Calm and Humble Life

“A calm and humble life will bring more happiness than the pursuit of success and the constant restlessness that comes with it,” wrote Albert Einstein on hotel stationary, at a moment of personal triumph, handing it to his humble courier. He’d just received word that he’d won the Nobel Prize for physics, but had no money. “Someday this will be worth more than a regular tip,” he told the young man, at The Imperial Hotel, Tokyo 1922. And we’ll never know its true worth to the courier, through his hard life, his darkest moments, the ravages of WWII. But it was auctioned this week for $1.6mm, sold by the courier’s nephew. Of course, Einstein predicted many things. As the decades unfold, our greatest scientists have proven them to be true. The latest is ‘gravitational waves’ - a ripple in the fabric of spacetime emanating from the collision of two black holes (in this case, 1.8bln light years away). One teaspoon of each weighed a billion tons. The cataclysm produced pure platinum, gold, and silver weighing hundreds of earths, dispersing unimaginable wealth across the cosmos, our ever-expanding money supply. These rare metals in our crust are remnants of still earlier cataclysms, echoes of an endless cycle of creative destruction, Shiva. “A human being is part of a whole, called by us the universe,” explained Albert, our guide, a seer, “All religions, arts and sciences are branches of the same tree.” And lost in our today, an infinitesimal point in time, we’re blind to the impermanence of the present. The waves that expand and contract, lifting and lowering us. Ushering unexpected change, our only constant. “He who can no longer pause to wonder and stand rapt in awe, is as good as dead; his eyes are closed,” said Einstein. “Look deep into nature, and then you will understand everything better.” 

Week-in-Review (expressed in YoY terms): Mon: China home prices +6.3% (slowest pace in 17mths), Abe wins resounding election victory (Nikkei extends 15-day winning streak), UK business survey softens, Mexican employers group pushes for 19% minimum wage increase, S&P -0.4%; Tue: Xi Jinping’s name to be added to constitution (cements position as most powerful leader since Mao), Japan flash PMI -0.4 to 52.5, Saudis announce new $500bln economic zone, Putin orders development of cryptocurrency regulations, Macron slashes wealth tax (introduces flat 30% capital gain tax), EU composite business conditions -0.9 to 55.9, Caterpillar profits jump (shares surge), UMich survey of stock bulls highest since 2000, S&P +0.2%; Wed: Aussie CPI -0.1 to +1.8% (exp +2.0%), South Africa budget a mess (deficit forecasts higher and GDP lower), Modi recapitalizes state banks with $32bln, UK auto productions -2.2%, German biz confidence record high, Brazil cuts rates 75bps to 7.5% (inflation +2.54%), Canada home prices decelerate to +11.4% (BoC rates unch), Canada rates unch (central bank mentions strong loonie), Mexico intervenes to strengthen peso, US new home sales jump most in 25yrs, US sends 3rd aircraft carrier toward Asia, Democrats funded Trump dossier, durable goods orders jump, S&P -0.5%; Thur: China Shanghai composite stock index 2yr high, Korea Q3 GDP +0.9 to +3.6% (fastest quester in 7yrs), ECB cuts QE from E60bln to E30bln mthly pace through Sept 2018 (leaves open possibility of later end date), Catalan leader rejects regional elections (raises tensions with Madrid), Italy parliament passes electoral law to limit 5-Star’s rise, Italy biz and consumer confidence rise, UK annual real earnings decline (1st time since 2014), US House republicans pass $4trln budget resolution (lifting odds of tax cut/reform), Yellen/Warsh out of race for Fed Chair, S&P +0.1%; Fri: Japan core CPI +0.7%, Brent crude above $60 (2yr high), Germany stocks record highs (French 9yr highs), Catalonia declares independence, Spain imposes direct rule over Catalonia, US Q3 GDP -0.1 to +3.0% (exp +2.5% on hurricane disruptions), core PCE inflation +0.4 to +1.3%, business fixed investment +1.5%, personal savings rate -0.4 to 3.4% (personal spending +2.4%), JP Penney profit warning (shares -25%), AMZN/MSFT/GOOG/INTC beat earnings estimates and surge (Nasdaq 100 gains $200bln mkt cap), S&P +0.8%; Sat/Sun: Mattis “North Korea threat is accelerating,” Catalan leader vows resistance to direct Madrid rule.     

Weekly Close: S&P 500 +0.2% and VIX -0.17 at +9.80. Nikkei +2.6%, Shanghai +1.1%, Euro Stoxx +0.8%, Bovespa -0.5%, MSCI World -0.0%, and MSCI Emerging -0.8%. USD rose +3.2% vs Turkey, +1.8% vs Australia, +1.5% vs Euro, +1.4% vs Canada, +1.3% vs Brazil, +1.1% vs Chile, +1.0% vs Russia, +0.7% vs Mexico, +0.7% vs Indonesia, +0.5% vs Sterling, +0.5% vs China, +0.1% vs Yen, and flat vs India. USD fell . Gold -0.6%, Silver -1.0%, Oil +4.1%, Copper -2.1%, Iron Ore -3.8%, Corn +1.2%. 5y5y inflation swaps (EU +2bps at 1.67%, US +2bps at 2.30%, JP +5bps at 0.36%, and UK +2bps at 3.41%). 2yr Notes +1bps at 1.59% and 10yr Notes +2bps at 2.41%.

YTD Equity Indexes: Argentina +46.5% priced in US dollars (+62.4%in pesos), Austria +43.3% in dollars (+30.4% in euros), Poland +41.1% (+23.8%), Chile +40.6% (+32.9%), Hungary +35.7% (+23.9%), Czech Republic +33.5% (+15.3%), India +31.9% (+26.1%), Korea +31.9% (+23.2%), Denmark +29.9% (+18.3%), Portugal +29.8% (+18.1%), Italy +29.5% (+17.8%), HK +28.4% (+29.3%), Turkey +27.9% (+38.1%), Germany +26.5% (+15.1%), Greece +26.2% (+14.8%), Brazil +25.5% (+26.1%), Norway +25.5% (+18.9%), Netherlands +25% (+13.7%), Belgium +24.7% (+13.5%), NASDAQ +24.5% (+24.5%), Singapore +24.4% (+17.6%), Taiwan +24.2% (+15.7%), France +24.2% (+13%), Euro Stoxx 50 +22% (+11%), Finland +21% (+10.1%), Thailand +19.8% (+11.2%), Spain +19.8% (+9%), Sweden +19.1% (+9.7%), Japan +17.8% (+15.1%), Ireland +16.4% (+5.9%), Philippines +16.3% (+21.3%), New Zealand +16.1% (+17.5%), Mexico +16% (+7.8%), South Africa +15.8% (+19.4%), S&P 500 +15.3% (+15.3%), China +14.9% (+10.1%), Switzerland +13.8% (+11.7%), Malaysia +12.5% (+6.4%), Indonesia +12.3% (+12.8%), UK +11.6% (+5.1%), Israel +11.5% (+2.3%), Russell +11.1% (+11.1%), Australia +10.5% (+4.2%), Canada +9% (+4.4%), Colombia +6.4% (+6.5%), UAE -1.7% (-1.7%), Russia -2.5% (-7.3%), and Saudi Arabia -4.1% (-4.2%).

Waves: Abe wins landslide, Nikkei soars to 21yr high. Xi Jinping is named in China’s constitution, cementing his place alongside Mao, equities jump. House Republicans pass $4trln budget resolution, lifting hopes for a $1.5tlrn tax cut/reform. Despite devastating hurricanes, US Q3 GDP expands 3%, S&P 500 hits record high. VIX 9.80. Biggest Nasdaq 100 daily gain in 2yrs. Bezos becomes world’s richest man, +$10bln on Friday to a $93bln net worth. Such a stunning rise, a synchronized global triumph, unrecognizable from the 2008 cataclysm that produced so many waves. 

Fallujah: “It’s a monolith,” he said. “It essentially operates as a single investor, like a sovereign wealth fund,” he continued. “In fact, the US 401k and IRA savings is collectively the world’s largest SWF.” From the 1978 creation of the 401k, that pool has grown to $14trln. The early adopters were baby boomers, and their holdings dwarf all others; a combination of decades of contributions and capital gains. “The firms that help Americans invest their retirement savings use the same models. They all utilize the same inputs, and produce the same outputs.” 

Fallujah II: “Walk into Schwab, or any competitor, and ask for your target asset allocation,” he said. “You’ll discover that the dominant input is your age. It’s a robo-advisor style of investing.” The older you become the more bonds you should own relative to stocks. “They boast thousands of portfolio simulations, stress tests.” They explain how the methodology is scientifically proven and based on Modern Portfolio Theory. “But MPT requires that you build a robust framework for estimating future asset class returns and correlations. And they have no such framework.”

Fallujah III: “Without a robust framework for estimating future returns, these 401 advisors turn to the past to estimate future returns,” he explained. “Do you want to know why money is flowing into emerging market bond funds?” And I nodded. “Because the machine tells retirees that they return 13% a year.” Grandpa tucked a little Tajikistan into his portfolio last month (10yr bonds auctioned at 7.12%). Grandma loaded up on Fallujah (Iraq auction yielded 6.75%). “The largest SWF on earth is investing with no valuation model but for the rear-view mirror.” 

Free Trade: Elon sold 11k Tesla’s in China last year, his #2 market. The cars cost 2x more than in America. A 45% import tariff plus value added taxes account for most of the difference. They cost a lot to ship, batteries especially (which cost $15k-$20k per car to produce). So naturally, Elon wants to build Tesla’s in China. But they prohibit foreign-owned manufacturers, forcing him to (1) take a 50/50 local partner, to share his profits and intellectual property, or (2) build his plant in the Shanghai free trade zone, then charge him a 25% tariff. 

Free Trade II: Naturally Elon will take option #2, because he wants to keep his intellectual property to himself; although other automakers (Boeing too) have chosen the 50/50 option, undermining their future. Anyhow, Elon can export from China to Japan, Korea and Taiwan where tariffs are lower. And he’s negotiating battery supply terms. He could import his own from the US, subject to big tariffs. Or buy in China from Panasonic (Japan owned) or LG (Korea owned) but neither has been approved for the subsidies Beijing lavishes on Chinese producers.  

Anecdote: “The trajectory will be a bit like the market,” said my friend. I’d reached out, looking for direction, a path. A recent knee operation has left me on crutches. A gimp. Which is no big deal but for the fact that my long daily walks, runs or cycles are off the table for three months. Perhaps more. “The long-term trajectory is up and very rewarding,” he continued. As a young man, I filled my life with noise. Commodity pits, trading floors, airplanes, cities, hustle. People. And at age thirty-two escaped for a year, to the mountains, where I filled my time with silence. The sound was haunting, lonesome. “But there will be dips, plateaus and volatility on the way.” Vacuums frighten us. Nothingness is terrifying. At least at first. But in time, the sublime quiet of a long, strenuous trek became my destination. The majesty of a midnight journey through the snowy, moonlit forest, my hidden treasure. A mountain sunset, a miracle. The source of inspiration, fascination, strength. “Just like markets - these blips in your meditative practice are generally sowing the seeds for the next inner bull market.” Back at sea level, surrounded by so many sounds, I return to that solitude often, on a bike or on foot. And returning to that place, I find energy, clarity. Into that emptiness, all sorts of wonderful ideas appear, swirl, intermingle, connect. Spontaneously, magically. Which is why - now a sedentary, agitated gimp - I reached out to this friend for advice, instruction. He exudes that inner calm, peace, and depth, cultivated through years of quiet practice, discipline. He directed me to Jack Kornfield’s book, Seeking the Heart of Wisdom – The Path of Insight Meditation. “So stay invested…”

Good luck out there,

Eric Peters