wknd notes: Unwilling To Take A Profit or Loss

“We strongly caution actors external to the Western Hemisphere against deploying military assets to Venezuela, or elsewhere in the Hemisphere, with the intent of establishing or expanding military operations,” warned national security advisor John Bolton as Russian military cargo planes dropped 100 Special Forces and 35 tons of unidentified cargo onto Venezuela. “We will consider such provocative actions as a direct threat to international peace and security in the region,” added Bolton. As American’s remained transfixed by Jussie Smollett.

Overall: “I have a better education than them, I'm smarter than them, I went to the best schools; they didn't. Much more beautiful house, much more beautiful apartment. Much more beautiful everything. And I'm president and they're not,” declared Trump at his Michigan MAGA rally, refusing to take profit on the trade. You see, Mueller found him innocent of Russian collusion. And while the report stopped short of exonerating him for obstruction, Mueller’s overall ruling was an enormous windfall. A typical trader would take at least some profit, selling into the euphoria, rising above it all, extending a hand to broaden his base. “Trump is going to go full-animal on his political opponents now that he’s no longer in the shadow of Mueller’s investigation,” predicted Bannon, the President’s former Chief Strategist. Steve’s usually right. And as Trump ordered OPEC to lower oil prices, his economic advisor Larry Kudlow and Federal Reserve nominee Stephen Moore called for an immediate 50bp interest rate cut from the Fed - desperate to fire up the economy heading into 2020. “The Democrats have to now decide whether they will continue defrauding the public with ridiculous bulls**t, partisan investigations or whether they will apologize to the American people and join us to rebuild our crumbling infrastructure and bring down the cost of health care and prescription drugs,” taunted Trump. And as his MAGA crowd went wild, replacing “Lock Her Up” with “AOC Sucks”, Democrats entered the five stages of grief: denial comes first, followed by anger, bargaining, depression, acceptance. And naturally, it would be so much easier if the Dems could just take a loss. But in today’s internecine conflict, with tribes fighting for absolute victory or utter defeat, no one seems willing to extend a hand, take a profit or a loss and move onward, upward, as The United States of America. 

Week-in-Review (expressed in YoY terms): Mon: German business confidence +0.9 to 99.6, Mueller report finds no Russia collusion (does not exonerate Trump on obstruction), S&P -0.1%; Tue: China’s Xi visiting Europe (signs E30bln Airbus purchase and 15 other commercial deals), Turkish overnight market rates surge to 330%, Portugal 2018 budget deficit -0.5% of GDP (down from -11.2% in 2011 and lowest in 45yrs), Argentine peso hits all-time low, Trump nominee to Fed (Stephen Moore) says “Fed should immediately cut rates 50bps,” House fails to override Trump veto of border wall national emergency, Case-Shiller home prices -0.5 to +3.6% (slowest gain in 6yrs), S&P +0.7%; Wed: Chinese Q1 industrial profits -14% (largest fall in decade), NZ central bank likely to cut rates in 2019, Turkish overnight market rates surge to 1,200%, German chipmaker Infineon sees weak global growth, German 10yr auction -0.5% (2.6x oversubscribed), US homebuilders make upbeat forecasts on lower mortgage rates, Fed Funds futures show 75% of US 2019 rate cut, 10yr treasury yield 2.34% (16mth low), trade deficit tightens from 10yr record, S&P -0.5%; Thur: HKMA $500mm FX intervention to strengthen HKD ($2bln recent total intervention), EU business lending +0.3 to +3.7% (household lending +0.1 to +3.3%), Mexico rates unch at 8.25%, US pending home sales -4.9% (14th straight mthly decline), Trump tweets to Opec “World markets are fragile, price of oil too high,” Kudlow “China trade negotiations could last for months,” US Q4 GDP revised -0.4 to +2.2%, Q4 core PCE +0.1 to +1.8%, S&P +0.4%; Fri: Chinese equities +3.8% on renewed trade-talk optimism (surged +29% in Q1 – best since 2014), Japan unemployment -0.2 to 2.3%, Parliament reject’s May’s deal for 3rd time, EU Commission “No-deal Brexit is now a likely scenario,” London Q1 home prices -3.8%, German unemployment -0.1 to 4.9% (30yr low), Larry Kudlow “Fed should immediately cut rates 50bps,” Trump threatens to close southern border next week unless Mexico halts illegal immigration, Lyft IPO prices at $24bln valuation (closes +9%), Mueller report to be publicly released mid-April, core PCE inflation -0.2 to +1.8% (personal spending and income softer than expected), S&P +0.6%; Sat/Sun: Trump cuts aid to El Salvador/Guatemala/Honduras, Beto launches presidential campaign, Bannon speculates that Harris/Beto ticket most likely to beat Trump, Turkish local elections

Weekly Close: S&P 500 +1.2% and VIX -2.77 at +13.71. Nikkei -1.9%, Shanghai -0.4%, Euro Stoxx +0.8%, Bovespa +1.8%, MSCI World +0.0%, and MSCI Emerging -1.4%. USD rose +1.8% vs Mexico, +1.7% vs Russia, +1.3% vs Sterling, +0.9% vs Yen, +0.7% vs Euro, +0.6% vs Indonesia, +0.4% vs Brazil, +0.3% vs India, +0.1% vs Sweden, and flat vs South Africa. USD fell -3.3% vs Turkey, -3.2% vs Ethereum, -2.3% vs Bitcoin, -0.6% vs Canada, -0.2% vs Australia, -0.1% vs China, and flat vs Chile. Gold -1.7%, Silver -2.1%, Oil +2.1%, Copper +2.9%, Iron Ore +2.4%, Corn -5.8%. 5y5y inflation swaps (EU -6bps at 1.35%, US -3bps at 2.24%, JP +2bps at 0.12%, and UK -8bps at 3.55%). 2yr Notes -6bps at 2.26% and 10yr Notes -3bps at 2.41%.

March Mthly Close: S&P 500 +1.8% and VIX -1.07 at +13.71. Nikkei -0.8%, Shanghai +5.1%, Euro Stoxx +1.7%, Bovespa -0.2%, MSCI World +0.4%, and MSCI Emerging -0.5%. USD rose +4.4% vs Brazil, +4.4% vs Turkey, +3.8% vs Chile, +3.0% vs South Africa, +1.7% vs Sterling, +1.4% vs Euro, +1.3% vs Canada, +1.2% vs Indonesia, +0.8% vs Mexico, +0.6% vs Sweden, and +0.3% vs China. USD fell -6.6% vs Bitcoin, -3.8% vs Ethereum, -2.2% vs India, -0.5% vs Yen, -0.3% vs Russia, and flat vs Australia. Gold -1.8%, Silver -3.4%, Oil +4.4%, Copper -0.4%, Iron Ore -5.5%, Corn -3.6%. 5y5y inflation swaps (EU -13bps at 1.35%, US -5bps at 2.24%, JP +1bp at 0.12%, and UK +2bps at 3.55%). 2yr Notes -25bps at 2.26% and 10yr Notes -31bps at 2.41%.

Q1 Quarterly Close: S&P 500 +13.1% and VIX -11.71 at +13.71. Nikkei +6.0%, Shanghai +24.0%, Euro Stoxx +12.3%, Bovespa +8.6%, MSCI World +11.2%, and MSCI Emerging +8.2%. USD rose +5.3% vs Turkey, +5.0% vs Sweden, +2.2% vs Euro, +1.1% vs South Africa, +1.1% vs Yen, and +1.0% vs Brazil. USD fell -9.8% vs Bitcoin, -7.3% vs Ethereum, -5.2% vs Russia, -2.4% vs China, -2.2% vs Sterling, -2.1% vs Canada, -2.1% vs Chile, -1.1% vs Mexico, -1.0% vs Indonesia, -0.9% vs India, and -0.7% vs Australia. Gold -0.1%, Silver -3.2%, Oil +28.0%, Copper +10.7%, Iron Ore +13.9%, Corn -6.6%. 5y5y inflation swaps (EU -25bps at 1.35%, US +10bps at 2.24%, JP +5bps at 0.12%, and UK -7bps at 3.55%). 2yr Notes -23bps at 2.26% and 10yr Notes -28bps at 2.41%.

YTD Equity Index Returns: China +27% priced in US dollars (+23.9% in renminbi), Colombia +19.5% in dollars (+17.2% in pesos), NASDAQ +16.5%, Greece +15.2% (+17.6%), Canada +14.6% (+12.4%), Russell +14.2%, Italy +13.9% (+16.2%), New Zealand +13.4% (+11.7%), S&P 500 +13.1%, Saudi Arabia +12.3% (+12.3%), HK +12.1% (+12.4%), Denmark +11.9% (+14.1%), Russia +11.6% (+5.4%), Switzerland +11.2% (+12.4%), France +10.8% (+13.1%), Belgium +10.5% (+12.8%), Australia +10.3% (+9.5%), UK +10.3% (+8.2%), Netherlands +10.3% (+12.5%), Ireland +9.8% (+12%), Euro Stoxx 50 +9.4% (+11.7%), Portugal +8.9% (+11.2%), Israel +8.8% (+5.3%), Norway +8.7% (+7.3%), Austria +8.4% (+10.5%), Taiwan +8.2% (+9.4%), Brazil +7.8% (+8.6%), India +7.6% (+7%), Thailand +7.4% (+4.8%), South Africa +7.3% (+7.6%), Germany +7.1% (+9.2%), Sweden +6.5% (+10.3%), Czech Republic +6.4% (+8.9%), Finland +6.4% (+8.5%), Indonesia +6.4% (+4.4%), Spain +6% (+8.2%), Philippines +5.8% (+6.1%), Japan +5.6% (+6%), Singapore +5.3% (+4.7%), Chile +5.2% (+3%), Mexico +5.1% (+3.9%), Hungary +4.4% (+6.5%), UAE +3.8% (+3.8%), Korea +2.8% (+4.9%), Poland +1.4% (+3.4%), Malaysia -1.5% (-2.8%), Turkey -3.4% (+2.8%), and Argentina -3.9% (+10.5%).

Three Worlds: “America’s yield curve inversion can mean one of three things,” said the CIO. “We’re either living in a world of secular stagnation and investors worry that central banks no longer have sufficient policy tools to spur growth and inflation,” he continued. “Or the economy is simply sliding toward recession and the inversion will persist until the Fed panics and spurs a recovery,” he said. “Or we’re living in a world, where the market is moving in ways that defy historical norms because of global QE. And if that’s the case, the curve is sending a false signal.”

Three Worlds II: “If we’re sliding toward recession, then it seems odd that credit markets are holding up so well,” continued the same CIO. “So keep an eye on those,” he said. “And if the curve is sending a false signal due to German and Japanese government bonds yielding less than zero out to 10yrs, then the recent Fed pivot and these low bond rates in America may very well spur a blow-off rally in stocks like in 1999.” A dovish Fed in 1998 (post-LTCM) and 1999 (pre-Y2K) provided the liquidity without which that parabolic rally could have never happened.

Three Worlds III: “But if investors believe America is succumbing to the secular stagnation that has gripped Japan and Europe, and if they’re growing scared that global central banks are no longer capable of rescuing markets, then we have a real problem,” said the CIO. “Because a recession is bad for markets, but not catastrophic provided that central banks can step in to spur recovery. But with global rates already so low, if investors lose faith in the ability of central banks to do what they have always done, then we’re vulnerable to a stock market crash.”

Sovereignty: Turkish overnight interest rates squeezed to 300% on Monday. Then 600% on Tuesday. By Wednesday, they hit 1,200%. Downward pressure on the Turkish lira, and the government’s efforts to punish speculators fueled the historic rise. Erdogan allegedly wants to limit lira loses ahead of today’s elections. The pressures that drove the currency lower were mainly of Turkish origin. Of course, the Turks have every right to their own economic policies, but they must bear the consequences. That’s what comes with being a sovereign state.

Sovereignty II: The Greeks and Turks are neighbors. The Turks began negotiations to join the EU in 2005, with plans to adopt the Euro after their acceptance. Those negotiations stalled in 2016. As they look across the border at their Greek neighbors now, and see their interest rates stuck at -0.40%, are they envious? Perhaps. But having witnessed the 2011 Greek humiliation, would the Turks be willing to forfeit sovereignty for the Euro’s stability and stagnation? And how do the Greeks (and Italians) feel about having forfeited their sovereignty?

Anecdote: “Only optimists start companies,” I answered. The Australian superannuation CEO had asked if I’m an optimist or pessimist. “I see the potential for technological advances to produce abundance in ways difficult to fathom. But I also see the chance of something profoundly dark,” I continued. He observed that people seemed consumed by the latter but spend so little time on the former. “That’s good. Humans are wonderful at solving problems of our own creation. The more we worry, the less goes wrong,” I said. So he asked what worries me most? “Not the displacement of human labor by machines, we can solve the resulting social challenges. I worry that the only thing Americans seem to agree on now is that China is our adversary.” And pressing, he asked me to list the things I admire about China. “Okay. I admire China’s work ethic, drive, ambition, economic accomplishments. They’ve overtaken us in many advanced scientific fields. I admire that very much.” He smiled and asked me to carry on. “I’m grateful for their competition. It makes us better. And I admire that they’ve evolved communism to make it work while all others failed. The world is better with diversity of thought, philosophy – diversity increases resiliency, robustness. And democratic free-market capitalism will grow stronger with a formidable competitor.” He smiled. “But China’s system values the collective over the individual. We value the opposite. And I’m concerned the two systems cannot peacefully coexist now that we’re the world’s two largest economies. I don’t want to live under their system, I don’t want their vision of the future for my children. They probably feel the same way. Both views are valid but incompatible, and increasingly in conflict,” I explained. He nodded and said, “I don’t want that for our children either.” 

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.