wknd notes: Humanity's Inexorable Ascent

“The US is experiencing a remarkably positive set of economic circumstances,” said Jay Powell. “There’s really no reason to think this cycle can’t continue for quite some time,” continued the Fed Chairman. “We’re a long way from neutral Fed Funds at this point, probably.” Unemployment returned to the 1969 low of 3.7%, spurred by an unprecedented late-cycle fiscal stimulus. Q3 earnings are expected to grow 19.3% on 6.3% revenue growth. “We may lift rates past neutral,” said Powell. And despite the abundance of fabulous news, the S&P 500 closed the week -1.0%, as 10yr bond yields jumped 17bps to 3.23%.

Overall: “President Trump’s leadership is working. China wants a different American President,” declared Mike Pence, firing up his base into the mid-terms home stretch. “Chinese security agencies have masterminded the wholesale theft of American technology,” continued our VP. “Worst of all, China has initiated an unprecedented effort to influence American public opinion, the 2018 elections, and the environment leading into the 2020 presidential elections,” Pence explained. “Beijing is also using its power like never before. China now spends as much on its military as the rest of Asia combined, and is prioritizing capabilities to erode US military advantages on land, at sea, in the air, and in space,” he warned, without mentioning that America’s annual military budget exceeds the combined spend of China, Russia, Saudi Arabia, India, France, Britain and Japan. America’s 2018/2019 budget deficit is forecast at $985bln (22% of the $4.4trln federal budget). We’ll borrow those $985bln dollars, spend $610bln on our military, pay $390bln in interest on our $16trln debt, and still come up $15bln short. A decade of 0% interest rates allowed America to borrow without consequence. Payback time is just starting. Next year’s interest expense will be a stunning 50% higher than 2017 thanks to rising interest rates and still-expanding budget deficits. Interest payments on the US federal debt will overtake Medicaid expenditures in 2020 and our entire military budget in 2023. The CBO forecasts $915bln in annual interest expenses by 2028. “Understanding the Chinese propaganda efforts is going to be key,” advised our vice president, spinning voter’s attention away from the threats within, to those from without. And on cue, the story broke across countless media outlets, an outrage first discovered in 2015 but conveniently surfacing just now: “Chinese Spies Snuck Chips Into CIA, US Military, Commercial Servers, Leaving Them Open To Infiltration And Compromising America’s Technology Supply Chain.”

Week-in-Review (expressed in YoY terms): Mon: Japan PMI unch at 52.5, Japan business sentiment slides for 3rd consecutive quarter, South Korea PMI +1.4 to 51.3, Indonesia CPI -0.3 to +2.9%, Fitch downgrades 20 Turkish banks, Brent crude hits $85/barrel (5yr highs), EU finance ministers warn Italy to abide by budget rules, Italian 10yr yields +15bps to 3.29% (4yr highs), German retail sales +1.6%, US/Canada agree on Nafta deal (Canada dollar and rate hike expectations jump), US ISM -1.5 to 59.8, Musk settles with SEC (stock +17%), S&P +0.4%; Tue: Aussie rates unch at +1.5%, Indonesian rupiah 20yr low, Putin back plan to de-dollarize Russian economy, EU PPI -0.1 to +4.2%, Bolsonaro jumps in Brazil polls (currency and Bovespa surge), S&P downgrades GE 2-nothes to BBB+, S&P flat; Wed: Aussie building approvals -13.6% (home prices -5.6%), Saudi Arabia hits record oil output, Putin implements pension reform in defiance of protesters, Turkish CPI +6.6 to +24.5% (PPI +46.2%), US ends 1955 treaty with Iran, US ISM services +2.9 to 61.6 (record high), S&P +0.1%; Thur: IEA warns that Opec failing to lift global supply, India cuts oil taxes to ease consumer anger over rising prices, Italy publishes 2.4% deficit forecast for 2019 (declining to 2.1% in 2020 and 1.8% in 2021), Mexico rates unch at +7.75% (CPI +4.9%), US factory orders jump most in 11mths, US charges 7 Russians with hacking, Elon Musk mocks the SEC in tweet, 10yr bond yields jump to 3.21% (7yr highs), S&P -0.8%; Fri: Chinese president of Interpol reported missing in China since Sept, Nobel peace prize awarded to 2 human rights activists for fight against sexual violence, Saudi Arabia’s MBS “we’re working to hold oil prices down,” UK home prices -1.2 to +2.5%, US employment +134k (unemployment rate -0.2 to 3.7% - 1969 low), average hourly earnings +2.8%, S&P -0.6%; Sat/Sun: Kavanaugh confirmed as Supreme Court justice, Pompeo meets North Korea’s Kim in Pyongyang, Brazil first-round presidential elections, US Q3 earnings season kicks off next week (consensus earnings growth +19.3%, revenue growth +6.9%)

Weekly Close: S&P 500 -1.0% and VIX +2.70 at +14.82. Nikkei -1.4%, Shanghai +0.0%, Euro Stoxx -1.8%, Bovespa +3.8%, MSCI World -0.9%, and MSCI Emerging -3.6%. USD rose +4.4% vs South Africa, +3.1% vs Chile, +2.4% vs Australia, +2.0% vs Sweden, +1.9% vs Indonesia, +1.8% vs India, +1.6% vs Russia, +1.6% vs Bitcoin, +1.3% vs Turkey, +0.7% vs Euro, +0.6% vs Mexico, +0.2% vs Canada, and flat vs Yen. USD fell -5.2% vs Brazil, -1.0% vs Ethereum, -0.7% vs Sterling, and flat vs China. Gold +0.9%, Silver -0.1%, Oil +1.0%, Copper -1.6%, Iron Ore flat, Corn +3.2%. 5y5y inflation swaps (EU -1bp at 1.69%, US -4bps at 2.40%, JP flat at 0.27%, and UK +2bps at 3.54%). 2yr Notes +7bps at 2.89% and 10yr Notes +17bps at 3.23%.

Manufacturing PMI (high-to-low): US 59.8 (previous 61.3), Netherlands 59.8 (prev 59.1), Switzerland 59.7/64.8, Norway 55.7/60.5, Sweden 55.2/52.5, Austria 55/56.4, Canada 54.8/56.8, Hungary 53.8/56, UK 53.8/53, Germany 53.7/55.9, Greece 53.6/53.9, Czech Republic 53.4/54.9, France 52.5/53.5, Japan 52.5/52.5, Singapore 52.4/52.6, India 52.2/51.7, Mexico 51.7/50.7, Vietnam 51.5/53.7, Spain 51.4/53, South Korea 51.3/49.9, Brazil 50.9/51.1, Taiwan 50.8/53, Indonesia 50.7/51.9, Poland 50.5/51.4, Italy 50/50.1, China 50/50.6, Russia 50/48.9. South Africa 48/47.2, Hong Kong 47.9/48.5, and Turkey 42.7/46.4. Services PMI: Ireland 58.7/58, Sweden 56.6/57.1, Germany 55.9/55, France 54.8/55.4, Russia 54.7/53.3, UK 53.9/54.3, US 53.5/54.8, Italy 53.3/52.6, Spain 52.5/52.7, Australia 52.5/52.2, India 50.9/51.5, Japan 50.2/51.5, Brazil 46.4/46.8.

2018 YTD Equity Indexes: Norway +14.5% priced in US dollars (+15.7% in eruos), UAE +13.8% in dollars (+13.8% in dirham), NASDAQ +12.8%, Saudi Arabia +10.7% (+10.7%), S&P 500 +7.9%, Colombia +6.5% (+8.3%), Russell 2000 +6.3%, Israel +3.5% (+8.5%), Japan +3.5% (+4.5%), Mexico +1.2% (-2.6%), Russia +0.3% (+16.2%), Finland -0.2% (+4.2%), New Zealand -0.5% (+9.7%), Portugal -0.6% (+3.8%), Thailand -2.7% (-1.9%), Czech Republic -2.9% (+2.3%), Malaysia -3.2% (-1.1%), France -3.4% (+0.9%), Canada -4.8% (-1.6%), Netherlands -5.1% (-0.9%), Taiwan -5.2% (-1.2%), Switzerland -5.4% (-3.6%), Austria -5.7% (-1.5%), Sweden -6.6% (+3.7%), UK -7.8% (-4.8%), Australia -8% (+2%), Brazil -8.1% (+7.7%), Euro Stoxx 50 -8.6% (-4.5%), Singapore -8.8% (-5.7%), Germany -10.2% (-6.2%), Italy -10.8% (-6.9%), Belgium -11.2% (-7.3%), HK -11.5% (-11.2%), Spain -11.8% (-7.9%), Ireland -12.2% (-8.3%), Denmark -13% (-9%), Korea -13.1% (-8.1%), Chile -14.1% (-5.5%), Hungary -14.1% (-6.2%), Poland -15% (-8.4%), India -15.7% (-2%), China -19.2% (-14.7%), Indonesia -19.5% (-9.8%), Greece -21.3% (-17.9%), South Africa -23.2% (-8.1%), Philippines -23.7% (-17.3%), Turkey -49.3% (-17.7%), and Argentina -50.7% (+0.3%).

Struggle: Our inexorable ascent, from mud to the stars. A journey guided by imagination, powered by hunger, fueled by ambition, capital. Our greatest obstacle: ourselves. So, we design institutions to safeguard against our base instincts, and they determine how production is divided, between capital and labor. There’s no perfect approach, just endless struggle, shaped by ideology, marred by corruption, colossal waste. But in our labs, human ingenuity and scientific inquiry compound. Lifting us, relentlessly, despite ourselves, throughout human history.

Struggle II: Graphene is a carbon-atom hexagonal lattice that’s just one atom thick. One gram of graphene covers a football field. Three million stacked sheets of graphene are the width of a credit card. It’s 325x stronger than steel, flexible, and 1,000x more conductive than copper. Electricity passes through graphene 250x faster than through silicon. Commercialization has eluded scientists for 14yrs since its discovery. “Graphene is just a teenager,” said a leading researcher. “Right now, we’re in the ‘trough of disillusionment’, but we’re starting to climb out.”

Struggle III: “We think of it as a race to the starting line,” said General Motor’s president. “We are moving as rapidly as we can to the point of initial deployment,” he explained, announcing a $2.75bln investment from Honda into GM’s autonomous vehicle unit. The cash infusion comes just 4mths after SoftBank’s Vision Fund invested $2.25bln in the operation. Honda’s chief operating officer, said: “We will complement GM’s strengths through our expertise in space efficiency and design to develop the most desirable and effective shared autonomous vehicle.”

Struggle IV: “Urban mobility is transforming right before our eyes,” said Boeing’s CEO. “We expect to be flying our prototype aerial taxis within the coming year,” he continued. “Operational self-flying cars could be a reality in about 5yrs time.” Boeing is working with the FAA to lay the foundation for 3D highways to relieve city congestion. “Not only do we need new vehicles, we need an ecosystem that will allow that to happen safely and reliably. So, we’re working on both the ecosystem - the regulatory framework - and the new vehicles. All of that is happening now.’’

Struggle V: Schrodinger proposed that the answer to how life emerged from inert matter might lie in the quantum realm. That was 1944. But to explore the idea required a quantum computer powerful enough to run infinitely complex simulations. This week, researchers created the first such simulation using a quantum computer. They may have created artificial life, we’re just not sure. “Our research brought these amazingly sophisticated events called ‘life’ to the realm of the atomic and microscopic world… and it worked,” said the team, unsure where this will all lead. 

Anecdote: “Why do people call ‘upstate’ New York upstate?” asked my Uber driver, grinding, we all are. “It’s a different country,” I answered. “I always like asking New Yorkers the question, and that’s usually the answer,” he said. Couldn’t quite place his accent, southern but not thick. “I was born upstate, Troy, New York, but never once been back,” I explained, surprised to hear it come out that way, another nomadic American. “You’re not from here, are you?” I guessed. “Born in Daytona Beach, moved to Richmond a few years ago,” he said. “Most people move south, why’d you move north?” I asked, sure he’d followed a girl. “You’re thinking of snow birds, they move south,” he said, ignoring my question, dodging his story, something painful. “Upstate is beautiful I hear,” he said. “Yeah, the Adirondacks are magnificent.” A memory flashed, early morning, autumn’s vibrant colors, light snow, an old barn, lake steaming, white pines, a lonely loon. But upstate is also ugly, desperately poor in places. Opioids, underbellies. The other America, the unfortunate Americans, increasingly at odds. “Everything upstate is so green. Trees, fields. At least that’s what the pictures show,” he said. “All true. But I stared out the window my whole flight down. So many old farms rolling into the Chesapeake, forests, rivers, tiny towns, dusty country roads - Virginia’s beautiful too.” He went quiet. Traffic slowed to a crawl. Flashing lights ahead. “I don’t see those things. You know what I see here?” he asked and pointed. To our right was a neglected graveyard, a cheap storage shed covered in graffiti, sagging power lines, vines, some trash. Everyday America. When it comes to anything, life, markets, you see what you want to see, you hear what you want to hear. “Yeah man, I get it.”

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.