wknd notes: Crowds and Counterintuition

Dusted off a Jan 2018 anecdote about crowds and counterintuition (see below). It’s something I think about during booms, to maintain balance, mental preparedness. Time to start thinking in ways we haven’t. 2020 changed the world. The coming ten years will be profoundly different from the past decade. It’s hard to imagine a more exciting environment for the game we all play - and my imagination doesn’t suck. I’ll be spending December writing a longer piece on something disruptive, emerging, important. Let you know when it’s done. 

Week-in-Review (expressed in YoY terms): Mon: US reports its 12-millionth covid case, California enacts a curfew to slow covid spread, Astrazeneca/Oxford vaccine 70% effective, Eurozone PMI falls to 45.1 (vs 50p and 45.6e), US PMI better than expected 57.9 (vs 56.3p), S&P +0.6%; Tue: Trump tweets permission for WH to begin transition but refuses to concede, Biden names Yellen Treasury Secretary, Israel/Saudi Arabia “secret meeting” to signal unity, German IFO 90.7 (vs 92.7p and 90.2e), US home prices +6.57% (5.18%p and 5.30%e), the DJIA tops 30k, S&P 1.6%; Wed: RBNZ Orr pushes back against likelihood of negative rates, Carrie Lamb’s annual policy address cements China’s tightening grip on Hong Kong, Salesforce rumored to purchase Slack, US durable goods orders 1.3%MoM (0.8%e), Univ of Mich sentiment indicator 76.9 (77e and 77p), US real spending +0.5% MoM (0.3%e), US initial unemployment claims rise for second week in a row, Fed minutes leave open the possibility of QE adjustment in Dec, S&P -0.2%; Thur: Trump pardons Michael Flynn, AstraZeneca likely to conduct additional efficacy trial, Bank of Korea unch, Riksbank expands QE, Bitcoin -10% after flirting with all-time high, Trump signals he will give up power if electoral college votes for Biden, S&P closed (Thanksgiving); Fri: More than 300 people sentenced to life in Turkey for involvement in 2016 coup attempt, French protests continue around new security bill banning social media posts about law enforcement with a “malicious purpose,” India 3Q GDP -7.5% YoY (-8.2%e) signaling first recession in decades, half day for US equity markets, S&P 0.3%; Sat/Sun: PA judge denies Trump campaign appeal.

Weekly Close: S&P 500 +2.3% and VIX -2.86 at +20.84. Nikkei +4.4%, Shanghai +0.9%, Euro Stoxx +0.9%, Bovespa +4.8%, MSCI World +2.0%, and MSCI Emerging +1.7%. USD rose +10.6% vs Bitcoin, +2.3% vs Turkey, +0.8% vs Chile, +0.4% vs Ethereum, +0.2% vs China, and +0.2% vs Yen. USD fell -1.5% vs Sweden, -1.2% vs Brazil, -1.2% vs Australia, -1.0% vs South Africa, -0.9% vs Euro, -0.8% vs Canada, -0.5% vs Indonesia, -0.3% vs Russia, -0.2% vs Mexico, -0.2% vs Sterling, and -0.1% vs India. Gold -4.5%, Silver -6.4%, Oil +7.2%, Copper +3.3%, Iron Ore +1.4%, Corn +1.7%. 5y5y inflation swaps (EU +8bps at 1.22%, US +2bps at 2.19%, JP +3bps at 0.11%, and UK +13bps at 3.59%). 2yr Notes -1bps at 0.15% and 10yr Notes +1bps at 0.84%.

YTD Equity Indexes (high-to-low): NASDAQ +36% priced in US dollars, Denmark +32.1% priced in US dollars (+23.4% priced in krone), Korea +25.5% in dollars (+19.8% in won), Taiwan +21.2% (+15.6%), Sweden +20% (+9.3%), China +18.3% (+11.7%), Japan +17.9% (+12.6%), Finland +17% (+9.7%), New Zealand +14.7% (+10%), S&P 500 +12.6%, Russell +11.2%, Portugal +9.3% (+2.7%), Netherlands +7.7% (+1.2%), Germany +7.4% (+0.7%), Ireland +7.1% (+0.6%), Switzerland +5.8% (-1.1%), Australia +3.9% (-1.2%), Saudi Arabia +3.7% (+3.6%), India +2.6% (+6.6%), Canada +1.9% (+2%), Malaysia +1.7% (+1.2%), Italy +1.4% (-4.9%), Euro Stoxx 50 +0.3% (-5.8%), Belgium +0.1% (-6%), France -0.3% (-6.4%), Israel -1% (-4.8%), Norway -1.4% (-0.9%), Argentina -1.9% (+32.8%), UAE -2% (-2%), HK -4.1% (-4.6%), South Africa -4.3% (+4.3%), Poland -6.7% (-7.8%), Philippines -8.2% (-13.1%), Spain -8.7% (-14.2%), Mexico -9.3% (-3.7%), Indonesia -9.7% (-8.2%), Thailand -10% (-9%), Czech Republic -10.2% (-13.2%), Singapore -10.9% (-11.4%), Turkey -11.6% (+16.1%), Austria -13% (-18.4%), Chile -13.5% (-11.8%), Greece -14.4% (-19.6%), UK -15.2% (-15.6%), Russia -15.8% (+3.2%), Hungary -16.8% (-14.7%), Brazil -27.9% (-3.9%), Colombia -30.9% (-24.2%).

Anecdote (Jan 14, 2018): Hate crowds. Love fresh air. Long runs, sunshine, storms, horizons. Solitude. Altitude. So, when we moved the firm from California’s mountains to Connecticut’s flats, I promised to avoid tight spaces, low ceilings, rush hours. “How many people are here tonight?” I asked the ma?tre d’, entering the private dining room. “Twenty-three at last count,” he answered to my horror. “Terrific, vodka tonic, three limes, keep ’em coming.” One of my favorite Too-Big-To-Fail economists was hosting the idea dinner and I’d reluctantly said yes. Discussion started with his review. The US economy grew 3% in 2017, finishing the year closer to 5%. Boom. The $1.5trln tax cut ensures a storming 2018; twenty-two heads nodded in harmony. I admitted to having no real opinion about that economic forecast but accepted they were all probably right. Which I’m proud to say reflects maturity. You see, in my early years, if twenty-two people said boom, I said bust. They said bear, I said bull. Mechanistically, blindly. That lonely, painful approach works periodically, sometimes spectacularly. But with experience comes an appreciation for subtlety. I came to realize the crowd is usually right, particularly about things that don’t matter (like the economy and its connection to financial asset prices). The two are correlated, either positively or negatively, often counterintuitively, erratically. Identifying which direction this correlation runs is art, not science. Generally, when economies look worst, financial assets are great investments. When economies look best, they’re bad. Plus, markets lead economies, just not always. And it’s so perplexing that scientists resort to forecasting something concrete, like GDP, and cling to it, pretending it matters. Anyhow, all twenty-two people were unabashedly bullish on the S&P 500. They expected a 2018 melt-up, fueled by fresh buying, as other people ascend the wall of worry built 10yrs ago. And they’re probably right, but I just kind of wondered who all those other people are?

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.