wknd notes: Silence is a source of great strength

“Silence is a source of great strength,” whispered Xi to himself, quoting Lao Tzu. His nation had won the first leg of a decade-long race. Western newspapers had run hysterical headlines, announcing his remarkable achievement. The People’s Bank of China was the first central bank to issue digital currency. But Xi Jinping remained silent, calculating. “To see things in the seed, that is genius,” continued Xi, still quoting Lao Tzu, proud, admiring his icy eyes in the mirror. In 2015 a group of brilliant young engineers travelled the world to promote a nascent technology that would someday make the issuance of central bank digital currencies a possibility. Beijing listened, launching a furious race with itself, in silence. Two short years later, China had a prototype for a national digital currency. The ninth floor of the Desheng International Center was established as the central bank’s Digital Currency Institute. The US was aware. We just didn’t see the promise, holed up in our hegemony. Instead, we spent recent years threatening adversaries with economic sanctions, denying them access to the global dollar payment system. We even sanctioned allies when they failed to bend the knee. And this encouraged alternatives to the dollar. “Do the difficult things while they are easy and do the great things while they are small,” whispered Xi, a gentle smile, he loved Lao Tzu. It had been little more than a year since the virus had spread through his wet market. And quickly infecting the planet, it amplified the essence of humanity’s strengths and weaknesses, forcing each nation to face its reflection. And as the great western powers looked upon themselves aghast, Xi took Hong Kong. Taiwan would be next. This much was now obvious to all. Inevitable. And his top scientists pioneered quantum entanglement encryption. Landed a lunar rover on the moon’s dark side. So many other achievements. “A leader is best when people barely know he exists, when his work is done, his aim fulfilled, they will say: we did it ourselves,” whispered Xi, and got back to work. 

Week-in-Review (expressed in YoY terms): Mon: India’s daily covid cases breach 100k, Johnson pushes a new UK reopening plan, Putin signs bill allowing him to run for 2 more terms, Singapore retail sales 5.2% (6.5%e), Turkey CPI 16.19% (16.2%e), US services ISM 63.7 (59e), US durable goods -1.2% (-1.1%e), S&P +1.4%; Tue: RBA unch as exp, PBOC asks major lenders to curb loan growth, Australia/NZ announce quarantine free travel bubble, US congress clears path for further budget reconciliations (able to pass bills without bipartisan support), Iran nuclear deal talks begin, IMF update world growth projection to 6.4% (5.1% prev), Yellen calls for minimum corporate tax rate, Japan household spending -6.6% (-5%e), China services PMI 54.3 (52.1e), Italy unemp 10.2% (8.9%e), EU unemp 8.3% (8.1%e), Brazil composite PMI 45.1 (49.6p), Russia CPI 5.8% as exp, S&P -0.1%; Wed: RBI announced add’l QE measures, EU/UK regulators found possible link between AZ vaccine and blood clots but continue to support its use as benefits outweigh risks, Biden’s tax plan increases corporate tax to 28% (from 21%) / targets foreign earnings, ECB’s Knot says taper could start in Q3, Biden bumped up his goal to get all U.S. adults eligible for a vaccine by two weeks to April 19, little new info in FOMC minutes, EU composite PMI 53.2 (52.5e), US mortgage apps -5.1% (-2.2%p), US cons credit growth 27b (2.8b exp – highest since Nov 2017), S&P +0.2%; Thur: UK covid variant becomes most common in the US, Powell reiterates that inflation will be transitory, ECB’s Knot addressed risks of a recovery fund delay, ECB’s Holzmann alluded to a 3Q PEPP assessment at the end of 2Q, Japan cons conf 361 (35.5e), Taiwan CPI 1.26% (1.35%e), EU PPI 1.5% (1.3%e), Mexico CPI 4.67% as exp, US initial claims 744k (680k exp), S&P +0.4%; Fri: Prince Philip passed away, US considering sending battleship to Black Sea in response to Russian troops massing on Ukraine border, GM is the latest car manufacture to halt production due to chip shortage, China CPI 0.4% (0.3%) / PPI 4.4% (3.6%e), Swiss unemp 3.3% (3.6%e), German IP -6.4% (-2.3%e), France IP -6.6% (-1.2%e), Italy retail sales -5.7% (-6%e), Norway CPI 3.1% (3.4%e), Brazil IPCA infl 6.1% (6.2%e), Canada emp +303.1k (+100k exp) / unemp 7.5% (8%e), US Core PPI 3.1% (2.7%e), S&P +0.8%.

Weekly Close: S&P 500 +2.7% and VIX -0.64 at +16.69. Nikkei -0.3%, Shanghai -1.0%, Euro Stoxx +1.2%, Bovespa +2.1%, MSCI World +2.4%, and MSCI Emerging -0.6%. USD rose +1.9% vs India, +1.5% vs Russia, +1.5% vs Bitcoin, +0.9% vs Sterling, +0.3% vs Indonesia, and +0.1% vs Turkey. USD fell -2.2% vs Sweden, -1.7% vs Ethereum, -1.2% vs Euro, -0.9% vs Yen, -0.8% vs Chile, -0.7% vs Mexico, -0.5% vs Brazil, -0.4% vs South Africa, -0.4% vs Canada, -0.2% vs China, and -0.2% vs Australia. Gold +0.8%, Silver +1.1%, Oil -3.1%, Copper +0.8%, Iron Ore -0.0%, Corn +3.0%. 5y5y inflation swaps (EU +2bps at 1.57%, US -4bps at 2.36%, JP +1bps at 0.34%, and UK -11bps at 3.69%). 2yr Notes -3bps at 0.16% and 10yr Notes -6bps at 1.66%.

Manufacturing PMI (high-to-low): Germany 66.6 (previous month 60.7), Switzerland 66.3 (prev mth 61.3), US 64.7/60.8, Netherlands 64.7/59.6, Sweden 63.7/61.8, Austria 63.4/58.3, Taiwan 60.8/60.4, Norway 60.43/57.48, Italy 59.8/56.9, France 59.3/56.1, UK 58.9/55.1, Canada 58.5/54.8, Czech Republic 58/56.5, Spain 56.9/52.9, India 55.4/57.5, South Korea 55.3/55.3, Poland 54.3/53.4, Vietnam 53.6/51.6, Indonesia 53.2/50.9, Brazil 52.8/58.4, Japan 52.7/51.4, Turkey 52.6/51.7, Greece 51.8/49.4, Russia 51.1/51.5, Singapore 50.8/50.5, China 50.6/50.9, Hong Kong 50.5/50.2, South Africa 50.3/50.2, Hungary 48.7/49, Mexico 45.6/44.2. Services PMI: Sweden 61.3/62.5, US 60.4/59.8, Australia 58.7/55.8, UK 56.3/49.5, Russia 55.8/52.2, India 54.6/55.3, Ireland 54.6/41.2, China 54.3/51.5, Germany 51.5/45.7, Italy 48.6/48.8, Japan 48.3/46.3, France 48.2/45.6, Spain 48.1/43.1, Brazil 44.1/47.1.

YTD Equity Indexes (high-to-low): Venezuela +37.6% priced in US dollars (+121.3% priced in bolivar), UAE +20.1% in US dollars (+20.1% in dirham), Chile +18.8% in dollars (+18.7% in pesos), Saudi Arabia +15.3% (+15.2%), Sweden +15.2% (+20%), Russell +13.6%, South Africa +13.6% (+13%), Taiwan +12.9% (+14.4%), Canada +12.4% (+10.3%), Netherlands +11.2% (+14.2%), Austria +11.1% (+14.7%), Norway +10.5% (+9.5%), Singapore +10.4% (+12%), S&P 500 +9.9%, Euro Stoxx 50 +9% (+12%), France +8.2% (+11.1%), NASDAQ +7.9%, UK +7.6% (+7%), Germany +7.5% (+11%), Greece +7.3% (+10.2%), Ireland +7.1% (+10%), Mexico +7% (+8.1%), Italy +6.4% (+9.9%), Belgium +6% (+8.8%), Israel +5.9% (+8.2%), Korea +5.9% (+9%), Australia +5.2% (+6.2%), HK +5.1% (+5.4%), Finland +3.9% (+7.3%), Czech Republic +3.8% (+6.3%), India +3.7% (+6.1%), Spain +3.3% (+6.1%), Hungary +3% (+4.1%), Thailand +2.9% (+8.1%), Japan +2.1% (+8.5%), Russia +2% (+6%), Poland +1.8% (+4.1%), Switzerland +0.2% (+5%), Denmark -0.8% (+2.5%), China -1% (-0.6%), Indonesia -2.4% (+1.5%), Malaysia -3.6% (-0.9%), Portugal -4.1% (-1.5%), New Zealand -5.9% (-4%), Philippines -9.3% (-8.3%), Brazil -9.6% (-1.1%), Argentina -13.2% (-4.6%), Colombia -13.8% (-8.1%), and Turkey -14.1% (-5.7%).

Sputnik: Putin and Ethereum’s creator met on the sidelines of the St Petersburg Economic Forum in 2017, remarking that “the digital economy isn’t a separate industry, it’s essentially the foundation for creating brand new business models.” Sputnik was the first satellite and kicked off the space race. Incredible resources will be thrown to bring the West into the digital money space race. Central bank digital currencies (CBDC) will be realties sooner than we think. The real issue is whether they will deny or ratify the stronger decentralized versions. Decentralization levels the playing field. Unleashing unrestrained creativity. It is what society demands, deserves.

Sputnik II: By Feb 2020, the People’s Bank of China had filed over 80 patents related to CBDC. Almost all were related to integrating a digital currency into the current banking infrastructure. Chinese state banks were at a massive technological handicap to private payment systems like Ali-pay. State-bank-issued CBDC will level that playing field. And in case the policy stance wasn’t clear with the suspension of the Ant Financial IPO, Alibaba was slapped with a record $2.8bln antitrust fine today. The ruling argued that monopolistic power is the great enemy of the market economy. But of course, Beijing seeks a monopoly on control.

Sputnik III: The American’s 2018 Geneva Report was titled – The Impact of Blockchain Technology on Finance. It is a brilliant account of where we were with a clear message on where we may be headed. It stated, “If I trust a central authority, I don’t need voting by multiple nodes or wasteful proof of work.” This is partly true, and was directed at private decentralized systems, like Bitcoin. This point was shared by most participants in the President’s Council of Advisors on Science and Technology two years earlier, on May 20, 2016. But what this line of criticism misses is that the greatest innovation happens beyond the confines of central authority.

Sputnik IV: Much has changed since then. Trust in central authorities eroded in the Western world. The Fed is openly aiming for an inflation overshoot. Central bankers in Europe and Canada are evaluating whether to mirror US inflation goals. Holding cash is certain to lose money. And low government bond yields ensure the same outcome in longer-term securities. Where do investors turn? To scalable, fantastical innovation. Outer space is now an asset class. Innovations in the decentralization of finance, technology that removes frictions, brutally reducing the toll costs associated with moving money, is attracting capital. Big opportunities loom. Risks too. And not just in markets. This extends to geopolitics. And global leadership.

Anecdote: “Mastering others is strength,” wrote Lao Tzu in 500 BC, “Mastering yourself is true power.” So much has changed in the centuries since, while we have not, which is why such insights are eternal. Much is now written of modern China’s mastery over its citizens. No doubt this is true. And Beijing’s dominance is often seen as a source of strength. Combined with the nation’s ambition, hard work, and sheer size, China’s ascent is unprecedented in human history. Its latest accomplishment, the Digital Yuan, will extend Beijing’s control over its citizenry in ways that are nearly absolute. For a government that seeks dominion over its citizens, there are no more powerful tools than centrally controlled digital currency, payments, communication, and surveillance. But a government with unchecked access to such tools and an insatiable desire for the mastery of others will quite obviously abuse that privilege. Not a human on earth expects anything less of Beijing. But this is not power, it is only strength. Power is in the mastering of oneself. For a nation to master itself and cultivate its greatest gifts, it must recognize that true power is decentralized, flowing from its people - their creative destruction, drive, desire, freedom. “He who does not trust enough, will not be trusted,” wrote Lao Tzu. And this illustrates the historic choice facing the US. The world will be digitized in the coming decade. This will confer extraordinary power to the world’s governments. China will prevail over every nation in the race to master individuals. But in a competition for true power, the US is far better positioned to win. Victory requires the nation to allow private, decentralized systems to flourish, and then stomach the innovative, disruptive, creative change that is sure to follow. In exciting periods of such remarkable new technologies, power will flow to those nations unafraid of their people. “When I let go of what I am, I become what I might be.”

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.