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With the world’s focus falling on Beijing this week, where president Xi Jinping give a glowing account of China’s future during the 19th Party Congress, boasting that “the banner of scientific socialism with Chinese characteristics is now flying high and proud for all to see,” not all are impressed by China’s vision of the world in which China sees itself as increasingly taking over from the US as the world’s superpower. And it’s not just stories about China’s neverending behind the scenes bailouts of anything that may telegraph a hard landing for the economy (as decribed in “China’s Government Is Expected To Buy 24% Of All Residential Real Estate For Sale In 2017“); it’s the country’s entire financial system, which Kyle Bass has been shorting for nearly two years now but which he has failed to recognize now holds the entire world hostage: if it goes, so does the global financial system, unleashing a worldwide depression the likes of which have not been seen.

Here is Eric Peters, CIO of One River Asset Mgmt, explaining why everyone is wrong about the $35 trillion Chinese financial system, and yet how Beijing has figured out a way to become a parasite on the global financial system, resulting in an outcome in which “we’re willing participants in our own demise.”

Excerpted from One River’s latest Weekend Notes:

Eric Peters: “This Is The Nightmare Scenario For The Next Fed Chair”

October 15, 2017

Eric Peters: “This Is The Nightmare Scenario For The Next Fed Chair”

While we will have much more to share from the latest weekend letter by One River’s Eric Peters shortly, we found the following section on inflation vs asset bubbles – a topic which BofA’s Michael Hartnett has been focusing extensively on in the past year and which serves as the basis for the “Icarus Rally” – particularly notable as it explains all of today’s comments from Janet Yellen and other central bankers, discussing why it is only a matter of time before inflation returns, as the alternative, as Peters’ explains, is a world in which yields simply refuse to go up, leading to a nightmare scenario for the next Fed chair, who will be forced to pop the world’s biggest asset bubble.

Excerpted from the latest weekend notes by One River CIO, Eric Peters:

“Why are we not experiencing deflation?” he asked. “How can the top five stocks in the Nasdaq reduce US GDP but we feel better off?” he asked. “Why are Americans buying no more cars today than in 1978 when our population is 100mm higher?” he asked. “Why compare today to a world of combustion engines when we have so many more interesting things to do without moving an inch?” he asked.

“And why do central banks create endless bubbles to restore an inflation rate from that ancient time?” he asked. “Why is that not the right question?”

“Global profits are rising, unemployment is falling, growth is up, wages too,” said the strategist.

“Yet bond yields seem unable to jump.” US 10yr bond yields are 2.27%, Germany 0.40%, Japan 0.05%. “The cyclical surprise is that the Phillips curve finally kicks in, just as everyone gives in.” US unemployment is 4.2%, a 17yr low. Germany 3.6%, a 37yr low. Japan 2.8%, a 23yr low. “And the biggest structural surprise is that technology has rendered wage inflation a phenomenon for the history books.”

…click on the above link to read the rest of the article…

Eric Peters On Tipping Points: “It All Worked Incredibly Well, Until It Blew Up”

October 1, 2017

Eric Peters On Tipping Points: “It All Worked Incredibly Well, Until It Blew Up”

Two years ago, long after we first suggested that the transformation of VIX from a measure of implied market volatility to a reflexive instrument that can be traded – and thus influence the underlying assets whose volatility it was supposed to measure – allowed the VIX to serve as the “fulcrum security” for broad asset manipulation, first the FT, then the WSJ confirmed what we said, namely that pervasive market manipulation was not only possible, but took place on a regular basis, courtesy of the VIX (see “Conspiracy “Fact” – VIX Manipulation Runs The Entire Market” and “Another Rigged Market: Scientific Study Finds Systemic VIX Auction Manipulation“).

Today, one of our favorite hedge fund commentators, One River Asset Mgmt CIO Eric Peters, discussed various market “tipping points” in his latest weekly notes, which emphasized why volatility is no longer a “measurement”, as much as a “target.” More his latest Sunday anecdote:

“When a measure becomes a target, it ceases to be a good measure,” said the Englishman, stepping outside of himself.

“That’s Goodhart’s Law.” Charles Goodhart observed that central banks measured money supply, and found certain M1 growth rates to be optimal. But once they targeted that optimal range, M1 lost its value as a measure.

Market and economic actors adjusted their behavior to game the M1 system. So central bankers shifted to M2, then M3, and M4.

“Investing is obviously not a science, but if it were, we would say that you can’t act on something and observe it at the same time.” French colonialists discovered this in rat infested Hanoi, when they offered a bounty for killing rodents. To receive the reward, the Vietnamese were required to produce severed tails. Soon thereafter, tail-less rats scurried throughout the city. The bounty hunters removed their tails and released them to the filthy sewers to breed. Boosting their bounty.

…click on the above link to read the rest of the article…

The Four-Wheeled Patriot Act

September 8, 2017

The Four-Wheeled Patriot Act

Whenever Congress does something unanimously (or nearly so) you can rest assured it’s in their interests, not ours.

The USA Patriot Act comes to mind.

Another is the Safely Ensuring Lives Future Deployment and Research in Vehicle Evolution Act – aka the SELF DRIVE Act – which was rubber stamped through Congress the other day. This is the law that exempts automated cars from the safety requirements that apply to autonomous cars – that is, the cars which are independent of government control and controlled by us.

Just as the Patriot Act was written, not to “fight terrorism,” but to make it easier for government to terrorize us, by circumventing or simply ignoring the Bill of Rights.

Same operating principle behind both.

There is irony – and malevolence – here.

Irony, because the same government that endlessly croons about “safety” – when it suits – is willing to back burner safety when it suits. If a car company dared to even suggest that it might be a good idea to install air bag Off switches in new cars (and it would be a very good idea, if safety is a concern, given how dangerous air bags are; not can be, but are) that company would be the focus of great abuse if not threatened prosecution.

Meanwhile, the SELF DRIVE Act will exempt automated cars from the necessity – under laws that apply to autonomous cars – of having things like steering wheels and brake pedals and other controls by which a human might intervene to save himself in the event the automated car makes a mistake.

It is presumed automated cars will never make a mistake, that their systems and technology are immune to defects, wear and tear and so forth.

…click on the above link to read the rest of the article…

Eric Peters: “We Are About To Reach The Top Of The Wall Of Worry… And Then Look Down”

July 10, 2017

Eric Peters: “We Are About To Reach The Top Of The Wall Of Worry… And Then Look Down”

Following up on Eric Peters’ contrarian comments about “technological disruption”, in which he said that “we should be careful not to overlook the possibility that today’s disruptive technology companies may be not much more than mechanisms to drive wages down to subsistence levels”, in the One River CIO’s latest letter, Peters reverts back to his familiar, macro self with the following brief allegory on recent events, which as always cuts through the noise to highlight what is important, in this case that “the chasm between policy and reality has never been wider” which he says “matters little, until you arrive at the top of the wall of worry. And then look down.”

Here are the choice excerpts from his latest letter:

“Absolutely,” answered Trump, as sure as sure can be. You see, the reporter had asked if Mexico would pay. She couldn’t help herself, we’re fixated by walls. We need them; to build, to topple, to scale.

They define us, give us purpose. Walls surround us, they’re everywhere, literally, metaphorically.

“We are showing that the world doesn’t have to go 100 years back in time,” announced Tusk, symbolically isolating America, while breaking down the wall that separates Europe and Japan.

“The deal is the birth of the world’s largest, free industrialized economic zone,” said Abe, shaking hands, the barrier surrounding his little island crumbling.

But of course, the most formidable walls exist in our delicate minds. Steel and stone structures all succumb to determined efforts to overcome them; the Iron Curtain, Berlin Wall, Great Wall.

But self-doubt is another matter entirely, a barrier towering above all others, the greatest obstacle ever created. In its shadow stands worry. But this wall can be climbed. And eight years into a historic bull market, we’re approaching the top.

…click on the above link to read the rest of the article…

“It’ll Be An Avalanche”: Hedge Fund CIO Sets The Day When The Next Crash Begins

June 25, 2017

“It’ll Be An Avalanche”: Hedge Fund CIO Sets The Day When The Next Crash Begins

While most asset managers have been growing increasingly skeptical and gloomy in recent weeks (despite a few ideological contrarian holdouts), joining the rising chorus of bank analysts including those of Citi, JPM, BofA and Goldman all urging clients to “go to cash”, none have dared to commit the cardinal sin of actually predicting when the next crash will take place.

On Sunday a prominent hedge fund manager, One River Asset Management’s CIO Eric Peters broke with that tradition and dared to “pin a tail on the donkey” of when the next market crash – one which he agrees with us will be driven by a collapse in the global credit impulse – will take place. His prediction: Valentine’s Day 2018.

Here is what Peters believes will happen over the next 8 months, a period which will begin with an increasingly tighter Fed and conclude with a market avalanche:

“The Fed hikes rates to lean against inflation,” said the CIO. “And they’ll reduce the balance sheet to dampen growing financial instability,” he continued. “They’ll signal less about rates and focus on balance sheet reduction in Sep.”

Inflation is softening as the gap between the real economy and financial asset prices is widening. “If they break the economy with rate hikes, everyone will blame the Fed.” They can’t afford that political risk.

“But no one understands the balance sheet, so if something breaks because they reduce it, they’ll get a free pass.”

“The Fed has convinced itself that forward guidance was far more powerful than QE,” continued the same CIO.

“This allows them to argue that reversing QE without reversing forward guidance should be uneventful.” Like watching paint dry. “Balance sheet reduction will start slowly. And proceed for a few months without a noticeable impact,” he said. “The Fed will feel validated.” Like they’ve been right all along.

…click on the above link to read the rest of the article…

Eric Peters: If Rates Ever Rise Above 3.5% “It Would Spark Massive Defaults”

April 30, 2017

Eric Peters: If Rates Ever Rise Above 3.5% “It Would Spark Massive Defaults”

Earlier today in his weekly note, One River CIO Eric Peters explained that in their attempt to overturn the natural order of the global economic “ecosystem”, what central banks have done is “stunning, unprecedented… and arrogant”, and as a result it is only a matter of time before another “peak instability” moment emerges as “it stands to reason that our volatility-selling machine will break one day. We saw a glimpse of this in 2008-09.”

And yet, as Peters concedes in a follow up note, those same central bankers don’t have any other option but to kick the can because as the CIO notes, any attempt to break the current ultra-low rate regime would “spark massive defaults.”

Incidentally, those are the same defaults that should have happened during the “near systemic reset” of 2008/2009 but the Fed, in all its wisdom, decided to kick the can at the cost of trillions in global excess liquidity, and while it bought itself some time – in the process unleashing a global deflation wave thanks to zombie companies that should not exist yet do, and every day try to undercut each other on pricing – nearly ten years later it has discovered that it has no way out, for one simple reason: there is now too accumulated debt.

Here is Peters “modelling” out why the Fed is stuck with no way out:

“When debt expands constantly relative to GDP, there’s a limit to how high interest rates can rise without causing massive defaults,” said the Model. “There’s nothing inherently wrong with defaults, they can cleanse a system, but a rise in US defaults from today’s 2.5% to 6.0% would boost unemployment by 3%.”

America’s economy is leveraged to the financial system, which includes non-capitalized liabilities; entitlements, pensions, healthcare. “US total debt/GDP is 300%, but if you include these non-capitalized liabilities, it’s more like 800%.”

…click on the above link to read the rest of the article…

Eric Peters: “If China And The World Bank Are Right, We’re Headed For A Depression”

March 12, 2017

Eric Peters: “If China And The World Bank Are Right, We’re Headed For A Depression”

“Some people blindly invested offshore and were in a rush to do so,” explained China’s central bank chief, justifying his recent capital controls.

“Some of this outbound investment was not in line with our own policies and had no real gain for China.” No doubt he’s right. The tycoons fleeing Chinese capital markets have done so selfishly. “So to regulate capital flows, I think it is normal,” concluded the central banker.

Chinese credit relative to GDP has doubled in the past decade to 300%. Which remains less than the US at 350%, but the rate of Chinese credit growth is as unsustainable as it is difficult to reverse — without tanking the economy. The tycoons are running from this dynamic. Because such loops almost always end badly.

Anyhow, after so many years of secular stagnation fears, global investors have grown conditioned to run. They’ve been running away from fear for so long, they’ve forgotten how to run toward greed. Which has left them blindly holding over $10trln of bonds, which yield negative interest.

Now, this might make sense in a deflationary depression. But the global economy has not seen such strong synchronized cyclical growth in years. Inflation is likewise firming everywhere.

But China lowered its growth target again. As the World Bank warned that today’s strong global upswing in confidence and financial markets are not enough to pull the world out of a “low-growth trap.” If they’re right, we’re surely headed for depression. Because all this new debt requires robust economic strength to shoulder the weight.

But European debt markets are still largely priced for depression. And with JP Morgan’s CEO Jamie Dimon announcing the return of animal spirits in America’s economy, it seems more likely that this cycle ends like every other. With a blind run toward greed.

…click on the above link to read the rest of the article…

“Environmentalism” and Rabies

September 10, 2016

“Environmentalism” and Rabies

When an animal catches rabies, in the end stages, it manifest bizarre, aggressive behavior. A normally shy raccoon will charge a human, growling and frothing at the mouth.

There is only one treatment for a rabid raccoon.

How about humans afflicted with the disease called “environmentalism”?

It is a form of rabies – and much more dangerous.

California Assemblywoman Autumn Burke, for instance. This “environmentalist” (what’s the credential, exactly?) is pushing legislation that would require 15 percent of all new cars sold in California be “emissions free” by model year 2025.

This means electric cars, as only electric cars qualify as “emissions-free”… notwithstanding that they also most definitely produce emissions.

Just not at the tailpipe.

This also means catastrophe for the car industry – for car buyers. For buyers of cars that aren’t electric cars.

The price of which will skyrocket – in order to offset the losses imposed on car companies forced to manufacture and then give away vast fleets of electric cars in order to be allowed to sell any cars at all.

Electric cars only being “salable” when subsidized or “sold” at a loss.

In the past, there was a dodge.

A con, actually.

It’s the one that helped make the rent-seeking Andrew Carnegie of our time, Elon Musk – purveyor of the Tesla electric car – a very wealthy man. He sells carbon creditsto other car companies. These credits serve as flim-flam-than-you-ma’am proxies for notbuilding electric cars. GM, for instance, avoids wasting money and time designing, manufacturing and then attempting to sell (at a loss) an electric Edsel (like the ’90s-era EV1) by purchasing carbon credits from Elon for the tailpipe emissions not produced by the cars he makes. In order to offset the tailpipe emissions of the cars GM makes.

…click on the above link to read the rest of the article…

“War, Confiscation Or Redistribution” – An Anecdote On Systemic Reset

April 18, 2016

“War, Confiscation Or Redistribution” – An Anecdote On Systemic Reset

Excerpted from One River Asset Management’s Eric Peters’ comments…

Anecdote: “People work in order to convert their time into a unit of account,” he said. “We call that money, and it’s an invention that allows us to store time.”

Most people have stored little or none. So when they receive money, they quickly purchase necessities; food, shelter, health care.

“People who are able to save money inevitably purchase real estate, stocks, bonds – all of which are alternative vehicles for storing time.”

One share of Google stores 30 hours of work for the average American, or 30 minutes of copying-and-pasting formation documents for the average hedge fund attorney.

“Bill Gates has stored enough time to fund a 1bln person army for 20 years.”

As the gulf between people’s income has grown, the amount of stored time has accumulated in fewer hands.

“Wealthy people convert their hours into financial assets so that they can accumulate excess hours relative to their fellow man. But the average worker is simply thinking how to exchange hours for dollars and then exchange those for food.”

Central banks face a different problem altogether. They need to get people who’ve saved time to exchange it for something other than clever inventions that store it. They’ve largely failed. So now, everything that stores time is extremely expensive and offers little or negative return, while the pace of economic activity slows.

“The problem that we face now is that there is simply too much time that’s been saved. Another way of saying it is that there’s too much capital in the world, in too few hands.”

To restart the system, capital needs to exchange hands or be destroyed, spurring people to rebuild their store of time, rather than just save it.

“It is an elemental truth that at some point, through inflation, war, or confiscation and redistribution, this imbalance will correct, and the system will then restart.”

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