wknd notes: A Minute of Silence

“The administration wrestled with what to do,” said Mara. “A speech seemed out of place, perhaps a minute of silence before the game was better, they were unsure.” On Dec 14th, 2012 a shooter entered Sandy Hook Elementary in Newtown with an assault rifle, 10 high-capacity clips. He slaughtered 20 children, 6 adults. America did nothing. “It’s right to honor them with a minute of silence,” said Jackson, preparing to battle Newtown for the Connecticut State Football Championship on the shooting’s 7th anniversary – their players are survivors, their town too. “I agree, it’s important, but winning is not a somber thing,” I said, uncomfortable with how that sounded. “I can separate the two,” said Jackson, nodding, eyes intense. “Darien’s student section will not be wearing our town colors,” said Mara, wiping tears away. “They’re wearing green, Sandy Hook’s.”

Overall: “We have agreed to a very large Phase One Deal with China. They have agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more. The 25% Tariffs will remain as is, with 7 1/2% put on much of the remainder,” tweeted Trump. “The Penalty Tariffs set for December 15th will not be charged because of the fact that we made the deal. We will begin negotiations on the Phase Two Deal immediately, rather than waiting until after the 2020 Election. This is an amazing deal for all. Thank you!” continued America’s commander in chief. And that’s not all. No sooner had Pelosi’s House unveiled two articles of impeachment than they approved Trump’s USMCA trade deal with Canada and Mexico. It’s now certain that the House will impeach the President (on Wednesday) and the Senate will not. But the lifting of uncertainty was not confined to the US. Boris Johnson’s Conservatives won a resounding 80 seat Parliamentary majority, assuring that Britain will get Brexit. Trump called for a “massive new UK trade deal” to smooth the path. Christine Lagarde, at her first ECB press conference, signaled an intention to maintain monetary accommodation far into the future. Chairman Powell made it clear that he too plans to keep interest rates very low through at least 2020. In fact, the only thing that went remotely wrong this week was the UN COP 25 Climate Talks, which succumbed to the unfortunate fact that greenhouse gasses cannot be reduced by central bank easing. But as uncertainty faded in nearly everything else that supposedly matters, the S&P 500 hit new all-time highs (+26.4% YTD), which is a remarkable accomplishment given that 92% of this year’s gain can be attributed to price/earnings multiple expansion.

Week-in-Review (expressed in YoY terms): Mon: China exports -1.1%, mass protests in HK over weekend are largely peaceful, China claims all the Uighurs in detention camps have “graduated” and been released, US Dept of Justice internal watchdog report says the FBI was legally justified to open investigation into Trump campaign but is critical of mistakes made in getting surveillance warrant, Paul Volcker dies at 92 (Sunday), S&P -0.3%; Tue: Saudi Aramco’s share price jumps 10% after IPO, Turkey vows to retaliate over any US sanctions in response to purchases of Russian-made missile systems, Argentina’s Peronists return to power with Macri’s handover to Fernandez (inflation is over 50%, poverty is over 40%), US House unveils two articles of impeachment, Trump and House Democrats agree to ratify USMCA trade deal, S&P -0.1%; Wed: Aung San Suu Kyi defends Myanmar against genocide charges at ICJ, Israel dissolves parliament and calls for March 2nd election (3rd in 12mths), French prime minister unveils plans to reform pensions, US CPI +2.1% (core unch at +2.3%), Fed leaves rates unch at 1.50-1.75% (median rate forecast for 2022 falls -0.3 from Sept meeting to +2.10% now), S&P +0.3%; Thur: Palladium hits record on South Africa power cuts (40% of global palladium supply and 75% of platinum is from SA), Turkey cuts rates 200bps to 12.00%, ECB rates unch at -0.50%, Lagarde says monetary policy will remain accommodative for a long time, EU industrial production -0.3 to -2.2%, Swiss rates unch at -0.75%, Berlin criticizes America’s sanctioning of German companies building Nord Stream 2 pipeline, Trump tweets “Getting VERY close to a BIG DEAL with China. They want it, and so do we!”, US PPI +1.1% (core +1.3%), Trump attacks Greta Thunberg on twitter for her environmental activism, unemployment claims surge 49k to +252k, S&P +0.9%; Fri: China/US agree to Phase One trade deal (forestalls new tariffs, reduces some existing tariffs and expands agricultural purchases), Boris Johnson wins resounding 80 seat majority (Corbyn’s Labour trounced), Scotland’s first minister Sturgeon said vote provides mandate for another independence referendum, US House judiciary approves articles of impeachment (abuse of power and obstruction of justice), Lighthizer says China commits to $40bln annual agricultural purchases (previous record less than $30bln), S&P flat; Sat/Sun: UN COP 25 climate talks spill over into weekend as no agreements reached, Newtown beats Darien 13-7 in Connecticut State Football Championship (connecting on a Hail Mary with 1.5 seconds left).              

Weekly Close: S&P 500 +0.7% and VIX -0.99 at +12.63. Nikkei +2.9%, Shanghai +1.9%, Euro Stoxx +1.1%, Bovespa +1.3%, MSCI World +1.0%, and MSCI Emerging +3.6%. USD rose +3.2% vs Bitcoin, +2.9% vs Ethereum, +0.7% vs Yen, and +0.5% vs Turkey. USD fell -1.9% vs Chile, -1.4% vs Sterling, -1.4% vs Mexico, -1.3% vs Russia, -1.1% vs Sweden, -0.7% vs Brazil, -0.7% vs China, -0.7% vs Canada, -0.6% vs South Africa, -0.5% vs Euro, -0.5% vs India, -0.5% vs Australia, and -0.3% vs Indonesia. Gold +1.1%, Silver +2.3%, Oil +1.2%, Copper +1.3%, Iron Ore +0.7%, Corn +1.2%. 5y5y inflation swaps (EU +5bps at 1.28%, US -2bps at 2.05%, JP flat at 0.11%, and UK -6bps at 3.54%). 2yr Notes -1bp at 1.61% and 10yr Notes -2bps at 1.82%.

YTD Equity Index Returns: Greece +41% priced in US dollars (+45.3% priced in euros), Russia +39.9% priced in dollars (+26.5% in rubles), NASDAQ +31.6%, Israel +30.9% (+21.6%), Ireland +27.3% (+31.2%), S&P 500 +26.4%, New Zealand +25.2% (+27.6%), Switzerland +23.8% (+23.7%), Taiwan +23.8% (+22.6%), Italy +23.7% (+27.3%), Canada +22.6% (+18.7%), Germany +22.2% (+25.8%), Denmark +21.8% (+25.5%), Russell +21.5%, France +21.4% (+25.1%), Japan +21.2% (+20%), Euro Stoxx 50 +20.7% (+24.3%), Brazil +20.6% (+28.1%), Netherlands +19.9% (+23.6%), Sweden +19.8% (+25.7%), Belgium +17.8% (+21.3%), China +17% (+19%), Portugal +16.4% (+20%), Australia +16.4% (+19.4%), UK +14.2% (+9.3%), Colombia +13.2% (+19.3%), Austria +12.1% (+15.4%), Hungary +10.7% (+16.9%), Turkey +10.2% (+21%), India +9.7% (+11.3%), Mexico +9.6% (+6.3%), Philippines +9.5% (+5.5%), Spain +8.7% (+12%), Czech Republic +8.7% (+10.8%), Thailand +8.5% (+0.6%), Norway +8.2% (+12.2%), HK +7.6% (+7.1%), South Africa +6.9% (+8.1%), Finland +6.8% (+10%), Singapore +5.3% (+4.7%), Indonesia +3.6% (+0%), UAE +2.5% (+2.5%), Saudi Arabia +2.3% (+2.3%), Korea +0.8% (+6.3%), Poland -3.7% (-1.7%), Malaysia -7.1% (-7.1%), Chile -13.2% (-4.3%), Argentina -23.6% (+21.4%).

A Moment: “When I stand up, I puke, I don’t know why,” said Jackson through tears, still on a knee at the 30yd line, gasping for breath. Darien High School and Newtown were tied 7-7 in the Football Championship with 3 seconds remaining. “I did everything possible Dad, it wasn’t enough.” It had been a surreal game from the moment the stadium fell silent to honor the 26 people killed 7yrs ago in the shooting. A dreamscape. Thick fog swirling under powerful lights. In the final second, that fog lifted, Newtown’s quarterback connected on a 36-yard pass and won.

Obviously Not Obvious: “A lot of people have started talking about how we are moving away from monetary dominance to fiscal, and thus inflation will start rising,” said the CIO. “Even Germany is seen to be cracking,” he said. We were talking about asset allocation, which was an easier exercise back when the 10yr treasury yield was double today’s 1.82% and the Shiller PE ratio was half today’s 30.38. “But it’s not a guarantee. Japan had an extraordinary fiscal deficit for decades. They ended up with no inflation, no GDP growth and no asset price appreciation.” 

Obviously Not Obvious II: “So is this just a prescription for no growth in asset prices?” asked the same CIO. “Are we now consigned to zero growth in all asset classes? Or is there an asset allocation that makes sense?” he added. “Some people are arguing for a reflation model. Adding commodities to their portfolios.” Dusting off those playbooks that investors haven’t used since the 1970s. “But what if you have to pull out the interwar playbook from the 1930s? What if we are at that point in the cycle where the next material move is massive capital destruction?”

Obviously Not Obvious III: “Would you simply put your money in cash and take it out of stocks and bonds?” asked the CIO. “No one alive knows how to navigate that kind of market - one where the politics tear the economic fabric and conflict roils markets so dramatically that the only thing to do is focus on preservation.” What if it’s not as simple as a monetary handoff that leads to massive fiscal expansion and reflation? “Predictions that seem obvious are obviously not obvious. How do you build a probability tree for what comes next? What’s the output?”

Change: “If today’s modern transportation did not exist but was proposed - it would be rejected as crazy,” said GM’s CEO of driverless. “It’s powered by fossil fuels that will pollute our air. It will congest our cities to the point of inciting rage. Its human operators will be fallible, killing 40k Americans (more than 1mm globally) every year. The equipment will mostly sit unused, occupying prime real estate, driving up housing costs. If you’re young, old, or disabled, then you can’t use it. And for those who can, the privilege will cost $9k/yr and suck up 2yrs of your life.”

Change II: An alien visits earth in 2050 and observes humanity’s technology and manufacturing capabilities. It discovers nearly every manufactured good we consume is produced by smart machines. Much is 3D printed. Which is why global trade in manufactured goods is close to non-existent. Afterall, why would we build factories in China only to have their robots build our products, when our robots can do the same while retaining our profits? Oil is no longer really used, shipped. World trade is comprised of services, tourism. The transition started in 2020.

Anecdote: “I’m having so much fun,” said one of our industry’s greatest, eyes alight. “I’m at that point in life where I do nothing out of a sense of obligation,” he added. “I explore whatever interests me, supported by an intelligent, passionate team and an abundance of data.” We were discussing the world, building meaningful relationships, lives of purpose, businesses. “When it appears that no data exists, they scour ancient manuscripts to build our own sets, it’s just incredible,” he said. “I became interested in the nature of reserve currencies. And you know that I believe things repeat, so I decided that I’d learn everything I could about the history of their rise and fall. That naturally led me to learn everything I could about the rise and fall of empires, and so we started with a comprehensive history of the past 500yrs. But that then led to exploring the rise and fall of dynasties, which pushed us to extend our analysis to the past 1,000yrs,” he said. “We have a model for what is happening today, a rising power, an incumbent one. China, America. The great nations are preparing for conflict, for war. That is not to say that there will be a war - that outcome is not preordained - but preparations are driving what we see unfolding geopolitically.” Throughout history, the self-sufficient have held a distinct advantage in conflict. “The other problems in the world – inequality, unfunded pension/healthcare liabilities, indebtedness - are not easily fixed but they’re mostly solvable in a variety of ways, through monetization, creative accounting,” he said. “But we are on the verge of major change. The policies of the past 30yrs or so that led us to this point have largely run their course. And now something new will arise.”    

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.