wknd notes: Propagating Inequality

Dusted off an old anecdote about inequality and the powerful forces that propagate it (see below). I wrote it just 2yrs ago, summer of 2017, when Argentina issued a $2.75bln 100yr bond at a 7.9% yield (40bps above the average US State Pension Plan target return). And despite having defaulted eight times in their 200yr history, the Argentina 2117 issue was gobbled up. Those bonds now trade at 38 cents. Another restructuring has begun. How time flies… I give myself a break from writing each August to get some altitude, find a little space. See you again next Sunday (from Singapore) with full weekend notes. 

Week-in-Review (expressed in YoY terms): Mon: China’s renminbi hits 11yr low (-3.8% in August), Greece to fully lift capital controls Sept 1st (ending 4yr policy), Amazon fires rage as G7 offers de minimis support (Brazil’s Bolsonaro insults Macron’s wife), Trump says China called and wants to make a deal (stocks soar), US durable goods orders rise for 2nd month (non-defense orders weak), S&P +1.1%; Tue: China denies it called Trump to make a deal, S&P -0.3%; Wed: South Korea’s fertility rate drops to new developed-world low of 0.98 births per woman vs 2.1 births to maintain stable population (US fertility rate 1.77, Japan 1.43), De Beers diamond sales plunge -44% (-26% YTD), emerging market FX index hits record low, Italian yields hit record low on optimism for new EU-friendly governing coalition, UK’s Johnson suspends Parliament to avoid Oct 31 show-down over no-deal Brexit (Queen approves the suspension), Argentina announces it will postpone payments on short-term bonds for 6mths while it pushes for “voluntary re-profiling” of its debt, Mexico cuts 2019 GDP forecast -0.6 to a range of +0.2% to +0.7%, US 2yr-10yr yield curve inverts by 7bps (most inverted since 2007), wkly mortgage applications -6.2% (new home purchases at 2011 levels), Gillibrand ends candidacy, S&P +0.7%; Thur: China makes accommodating statements on trade dispute (global equities soar), Hungary’s forint hits record low versus euro, S&P issues “selective default” rating on Argentina, Brazil Q2 GDP jumps +0.4% QoQ (avoids recession), DOJ watchdog censures Comey over memo leaks, US Q2 GDP revised -0.1 to +2.0% (consumer spending revised +0.4 to 4.7%), S&P +1.3%; Fri: China arrests HK pro-democracy lawmakers and activists, Japan unemployment 2.2% (27yr low), India to merge numerous state banks to combat effects of slowing GDP, EU CPI unch at +1.0% (core +0.9%), EU unemployment unch at 7.5% (Germany 3%, Greece 17.2%), Euro hits 2yr low versus US dollar, German mthly retail sales post biggest drop in 2019, Fitch issues “restricted default” rating on Argentina, US consumer confidence hits lowest level since Trump presidency on trade conflict, S&P +0.1%; Sat/Sun: HK demonstrations turn violent with protestors throwing Molotov cocktails, Argentina begins restructuring $101bln debt, next tranche of US trade tariffs on $125bln imports set to begin Monday (next tranche set for Dec 15th), Hurricane Dorian rising to Cat 5 headed for Florida/Georgia.          

Weekly Close: S&P 500 +2.8% and VIX -0.89 at +18.98. Nikkei 0.0%, Shanghai -0.4%, Euro Stoxx +2.2%, Bovespa +3.5%, MSCI World +2.1%, and MSCI Emerging +1.1%. USD rose +14.0% vs Ethereum, +7.6% vs Bitcoin, +2.6% vs Sweden, +1.5% vs Euro, +1.3% vs Turkey, +1.0% vs Russia, +0.9% vs Sterling, +0.9% vs China, +0.8% vs Yen, +0.7% vs Mexico, +0.5% vs Brazil, +0.4% vs Chile, +0.3% vs Australia, and +0.2% vs Canada. USD fell -0.4% vs India, -0.4% vs South Africa, and -0.1% vs Indonesia. Gold -0.5%, Silver +5.3%, Oil +2.2%, Copper +0.9%, Iron Ore +1.3%, Corn +0.5%. 5y5y inflation swaps (EU -5bps at 1.21%, US +10bps at 1.99%, JP flat at 0.11%, and UK +1bp at 3.67%). 2yr Notes -3bps at 1.51% and 10yr Notes -4bps at 1.50%.

Aug Mthly Close: S&P 500 -1.8% and VIX +2.86 at +18.98. Nikkei -3.8%, Shanghai -1.6%, Euro Stoxx -1.6%, Bovespa -0.7%, MSCI World -2.2%, and MSCI Emerging -5.1%. USD rose +27.5% vs Ethereum, +8.8% vs Brazil, +5.9% vs South Africa, +4.8% vs Russia, +4.8% vs Mexico, +4.5% vs Turkey, +4.2% vs Bitcoin, +4.0% vs China, +3.8% vs India, +3.5% vs Chile, +1.8% vs Sweden, +1.7% vs Australia, +1.3% vs Indonesia, +0.9% vs Canada, +0.9% vs Euro, and flat vs Sterling. USD fell -2.3% vs Yen. Gold +7.2%, Silver +12.6%, Oil -4.8%, Copper -4.3%, Iron Ore -24.2%, Corn -9.9%. 5y5y inflation swaps (EU -11bps at 1.21%, US -11bps at 1.99%, JP flat at 0.11%, and UK -3bps at 3.67%). 2yr Notes -37bps at 1.51% and 10yr Notes -52bps at 1.50%.

YTD Equity Index Returns: Greece +35.8% priced in US dollars (+41.5% priced in euros), Russia +20.5% in dollars (+15.6% in rubles), NASDAQ +20%, Israel +17.8% (+11.1%), Canada +17.6% (+14.8%), S&P 500 +16.7%, Switzerland +16.7% (+17.4%), New Zealand +14.5% (+22.1%), Thailand +12.5% (+5.8%), Italy +11.8% (+16.4%), Australia +11.7% (+17%), Denmark +11.3% (+15.8%), China +11.2% (+15.7%), France +11.2% (+15.8%), Russell +10.8%, Netherlands +9.8% (+14.4%), Euro Stoxx 50 +9.5% (+14.2%), Germany +8.6% (+13.1%), Portugal +8.2% (+12.7%), Brazil +7.7% (+15.1%), Colombia +7.7% (+13.4%), Philippines +7.6% (+6.9%), Japan +7.4% (+3.4%), Taiwan +6.4% (+9.2%), Belgium +5.6% (+10.1%), UAE +5.1% (+5.1%), Indonesia +4.7% (+2.2%), Ireland +2.9% (+7.3%), Saudi Arabia +2.5% (+2.5%), UK +2.2% (+7.1%), Sweden +2.2% (+11.9%), Norway +2.2% (+6.7%), Austria +1.8% (+6%), Mexico +0.4% (+2.4%), Czech Republic +0.1% (+5.1%), South Africa -0.1% (+5.6%), Finland -0.3% (+3.9%), HK -0.6% (-0.5%), Singapore -0.6% (+1.2%), Spain -1% (+3.2%), India -1.1% (+1.5%), Turkey -4.1% (+6%), Hungary -5.3% (+1.7%), Malaysia -6.5% (-4.6%), Poland -7.2% (-1.6%), Chile -9.4% (-5.9%), Korea -11.1% (-3.6%), Argentina -48% (-18.8%).

Anecdote (June 2017): “Picketty took 400 pages to prove something that is glaringly obvious, and he under-proved it,” said The Dealer, shuffling. “Ninety-five percent of the poker room loses money to five percent of the players,” he explained, relaxed, chatting. “Redistributing ten percent of the winner’s gains after every month of play wouldn’t change that outcome.” I picked up each card, deliberately, as if it was a blessing. “But would twenty percent alter the outcome?” asked The Dealer. “It would take redistributing ninety-eight percent of winnings on a regular basis to make a lasting difference,” he said, sipping Perrier. I slugged a Bud. “So why would anyone think redistributing 20% of societal income will materially impact inequality?” In America’s early homesteader period, inequality was not such a problem. People gravitated West, staked their claim. But once the land was all accounted for, the process started – people squatted on property, resources, assets, jobs, all things of limited supply. “There’s a chasm between the power of the forces that create today’s conditions and people’s understanding of them.” Inequality is the natural state of humanity. We’re all different, unalike in myriad ways, destined for unequal outcomes. But the extent of our economic inequality is governed by the state – and America legislates wide boundaries that are self-reinforcing. “People lack the imagination to even contemplate the changes required to create a more equal America,” he said. “An 80%-100% inheritance tax should be easy if we’re serious about inequality, because that’s taxing dead people.” But we’re moving in the opposite direction. “American inequality will not diminish in the absence of World War or revolution.” So Washington spends more on military offense/defense than the rest of the world combined, and the Fed prints just enough money to maintain societal stability, economic stasis. “These cards were dealt long ago, and that’s why I buy bonds into every major decline.”

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.