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Eric Peters: ‘Fed Isn’t Just Delaying The Inevitable Reckoning…It’s Making It Worse’

Eric Peters: ‘Fed Isn’t Just Delaying The Inevitable Reckoning…It’s Making It Worse’

As investors in the US and around the world confront the fact that the Federal Reserve is never really out of ammo, One River Asset Management Founder Eric Peters joined Erik Townsend for an interview on Townsend’s weekly MacroVoices podcast, which features in-depth interviews with portfolio managers and prominent figures in the wealth-management industry.

Markets finally rebounded last week after the fastest, most brutal selloff in modern history, a selloff that was inspired by the realization that half the world would need to stop to prevent millions from dying and hospitals from being absolutely overwhelmed like they were in Wuhan.

Fueling the enthusiasm, late last week, just before Peters’ interview, the Fed unleashed its latest program: a $2.3 trillion program that expanded liquidity to small businesses and municipalities alike – or at least that’s how Jay Powell marketed it.

With the Fed’s balance sheet on its way to $6 – and then $8 – trillion, Townsend asked Peters what he suspects will be the ultimate result of Powell & Co’s repeated interventions in credit markets, interventions that the market has come to depend on, especially now.

Whether or not the central bank’s decision is setting us up for an even more dramatic reversal later on no longer seems like a matter of speculation. The rapidity with which the market unraveled in March – erasing three years’ worth of artificially inflated gains in three weeks – is evidence of what happens when artificial supports finally give way, leaving chaos in their wake.

But at this point, actually swallowing the medicine is almost too painful a prospect to contemplate. Peters pointed out that it wasn’t just stocks that crashed. At points, corporate debt and gold have gotten hammered – the selling hasn’t been constrained to stocks.

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

Hedge Fund CIO: Will The Fed Ever Be Held Accountable For Turbocharging Inequality That Poisons America

Hedge Fund CIO: Will The Fed Ever Be Held Accountable For Turbocharging Inequality That Poisons America

“I do solemnly swear that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; and that I will obey the orders of the President of the United States and the orders of the officers appointed over me, according to regulations and the Uniform Code of Military Justice. So help me God,” pledged the 2.7mm young, courageous American soldiers that our Commanders-in-Chief sent to Iraq and Afghanistan Since 2001. Over 6,900 of them died there. Over 52,000 have been wounded. Bush, Obama and Trump spent over $6 trillion. 480,000 Iraqis, Afghanis and Pakistanis died, half civilians. Millions were displaced. Who is accountable? What are the consequences?
 
Overall

“This airplane is designed by clowns who in turn are supervised by monkeys,” wrote one of Boeing’s employees, referring to their 737 Max. “I don’t know how to fix these things… it’s systemic. It’s culture. It’s the fact we have a senior leadership team that understands very little about the business and yet are driving us to certain objectives,” wrote another. “I still haven’t been forgiven by God for the covering up I did last year. Can’t do it one more time, the pearly gates will be closed,” wrote another. Boeing is our mightiest manufacturing exporter. A symbol of American greatness. Boeing’s board held the CEO accountable, fired him. The consequence for the catastrophe of his leadership? He walked away with $61mm in compensation.

Carlos Ghosn held an absurd press conference to clear his name, having fled Japan in box barely big enough to contain his greed and shamelessness. Set against Adam Neumann’s $1.7bln golden parachute, Ghosn perhaps believes Japanese consequences are overly harsh.

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

Hedge Fund CIO: “The Biggest Market Player Is 15x Leveraged; That’s Why When It Starts Going Wrong, You’re Out”

Hedge Fund CIO: “The Biggest Market Player Is 15x Leveraged; That’s Why When It Starts Going Wrong, You’re Out”

“Wanted to make sure you’re seeing this,” texted a PM from one of those multi-manager monstrosities.

“8 standard deviation move in the Momentum Factor in 5-days,” he added. I heard his heart pounding all the way from Australia.

“Guys who defended positions in the Q4 selloff all got fired, so the message is real clear – when things start getting weird, take immediate corrective action.” And I imagined the quiet panic consuming firms that leverage their capital at multiples that would make a Lehman risk manager blush.

Hedge Fund Arrowgrass to Return Capital, Close After Fresh Redemptions

“I’m more convinced than ever that one of these days, this kind of 8 standard deviation event is going to crash the market,” he texted, having puked his position without the slightest idea why the move had even started.

  • Factor Definitions (Momentum): Momentum is the empirically observed tendency for rising asset prices to rise further and falling prices to keep falling. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average excess return of about 1% per month. Momentum signals (e.g., 52-week high) have been shown to be used by analysts in their buy and sell recommendations. The existence of momentum is a market anomaly, which finance theory struggles to explain.
  • Factor Definitions (Value): The value factor is based on a belief that stocks that are inexpensive relative to some measure of fundamental value outperform those that are pricier. the best-known work on the value factor was carried out by Fama and French in their 1992 paper (The cross-section of expected stock returns), which concluded that low price-to-book ratio was the most predictive definition of value.

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

“Judging By Bond Markets, Economic Armageddon Is Just Around The Corner”

“Judging By Bond Markets, Economic Armageddon Is Just Around The Corner”

“Judging by bond markets around the world, economic Armageddon – or something awfully close to it – is just around the corner.” – SocGen, September 5, 2019

“It’s difficult to describe markets,” said the CIO, reflecting on his decades of trading. “For what seems like forever, markets behaved in ways that reflected shifting expectations about central bank activity, economic trends, and profit potential, but that’s changing,” he said. “Now markets shift direction on a tweet then reverse on some comment. And nearly all of it is political.” But even politics are different now.

“Yet through it all, global interest rates are collapsing like an economic calamity looms.” 

* * *

“It is a bowl of water that might help put out a fire that has just started,” said young Jimmy Sham, describing Carrie Lam’s withdrawal of Beijing’s extradition legislation. “But it is now useless in the face of what has become a forest fire,” continued Jimmy, one of many leaders in Hong Kong’s burning rebellion. Naturally, the government hopes that by meeting the protestor’s principal demand, cries for further action will soften.

But that’s not how crowds work. Hong Kong’s emboldened freedom fighters have another four demands to go. Behind them lay more still. And far in the distance, beyond the event horizon, lay their ultimate objective, barely spoken of today, democratic revolution in China.

“Public discontent extends far beyond the bill,” conceded Carrie Lam, exuding a manufactured calm, withdrawing the bill, “It covers political, economic and social issues, including problems relating to housing and land supply, income distribution, social justice and mobility.” No doubt she’s right.

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

Eric Peters: Are We Better Off For Knowing The Truth

Eric Peters: Are We Better Off For Knowing The Truth

“Our company will do everything possible to earn and re-earn trust and confidence,” said Boeing’s CEO, humbled, motivated, forced to face the facts. Data from the two 737 Max 8 black boxes had recorded the tragedies with perfect precision. “The goal is to ensure accidents like these never happen again.”

Across the planet, governments, airlines, and passengers had little doubt Boeing will now fix the problem. That’s the beauty of black boxes. They don’t lie. They don’t betray. They hold no allegiances, ideologies. They simply tell the truth.

Of course, speaking truth to power is exceedingly difficult, and the people who do, take great personal risks. Consequently, most are unusual individuals, complicated, controversial. Assange was arrested on the Ecuadorian embassy steps. Poor Khashoggi left his embassy in pieces. Snowden remains exiled in Russia.

Are we better off for having heard their truths? Depends who you ask. Most people only like to hear truths they already hold dear. And many only hear truths from those they like. They reject truths from those they despise, and often embrace deceits from loved ones. 

Which is what paralyses governments when societies become politically polarized. This process is self-reinforcing, driving divided nations toward crisis, conflict. At which point, the overwhelming majority return to their senses, forced to face the black box truth of their undeniable reality.

Understanding central banking is even more complex, because it’s not clear that there is an immutable truth. And financial markets are hardest of all. Because no sooner does something appear unambiguously true, then the collective market conscience betrays the believers.

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

Fake News? How About No News?

Fake News? How About No News?

Trump gets flak for characterizing the mainstream press as purveyors of Fake News. But what about no news at all?

Isn’t lack of coverage even worse than biased coverage?

Well, how much news have you heard or read about the gilets jaunes – or “yellow vest” – protests in France? CNN hasn’t got anything on its main page today (Jan. 9). Neither did NBC or CBS. Lots of the usual – endless – carpet-chewing coverage of Trump, though. And also of such important stories as “Want to Pay off Your Mortgage? Try Frugal Minimalism.”

You might think France, a major western European country, coming unglued – and on the verge of its government outright banning “unauthorized” criticism of its actions – might at least be  . . .  well,  news.

Instead, nothing.

Which is very interesting, given what the yellow vests are protesting. This being chiefly the purposely punitive taxes on fuel – diesel especially – imposed by the French President, Emmanuel Macron. In the name of “climate change” – but really in the name of squeezing average Frenchmen (and women) out of their cars. These taxes – already extortionate and brutally regressive – were on track to increase the cost of a gallon of fuel to more than $7.

This brought the French not to their knees – but to the streets. The yellow vests – which are reflective jackets every French motorist is required by law to keep in their vehicle, to be worn in the event of an emergency – were donned for a different kind of emergency.

And Macron buckled. The tax hike has been rescinded. But did you read about it?

Probably not – unless you went out of your way to look for it. Mainstream press coverage of this effective protest has been as scanty as its coverage of the reason for the yellow vest protests – which by the way continue, notwithstanding Macron’s retreat.

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

Eric Peters: “America Has Begun To Use Its Economic And Military Might To Take What It Wants”

Stockholm:“How should we think about inflation?” asked the Strategic Asset Allocation Committee. “Is inflation something that should have been much lower were it not for such low interest rates and so much QE? Because if that is so, won’t policy normalization cause deflation? Or has QE created disinflation? Because if it has, won’t its reversal create inflation? How will politics affect inflation? And what should we think of Trump? Who will come next? A socialist? Is Fed independence under attack? And what are we to make of your trade conflict with China?”

Stockholm II:“Our conflict with China is about far more than a trade deficit,” I explained. “It is about slowing China’s rise, economically, militarily. Confronting them on intellectual property, market access.” The committee agreed. “US and EU policy, business, and military circles all seem to believe that this is necessary, overdue, but many are offended by our approach.” The Swedes agreed. “What would have happened if the US had tried to coordinate its European allies to confront China in a multi-lateral way?” I asked them. “Nothing,” they said. And I agreed.

Stockholm III: “US markets are priced for roughly 2% or less inflation every year for 30yrs,” I said. In a world of extraordinary debt, rising deficits, and impossible entitlement liabilities, pricing low and stable inflation when governments print money seems a poor bet.

“Electorates are voting for higher wages, greater income security, less trade and immigration – more balanced division of economic profits between labor and capital. And if the current parties do not deliver this result, they will be replaced by parties that will lift inflation through socialist redistribution.”

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

Eric Peters: “If US Stocks Finally Crack, Most People Will Conclude We’re Headed Into Another Depression”

Hypothetical

“I was asked to lay out the case for the US being mid-cycle,” said my favorite strategist. “Residential housing is 4% of GDP now, that’s consistent with past recessionary levels. So perhaps it jumps to 8%,” he continued.

“Equipment and machinery spending is just 6% of GDP.” Pretty consistent with previous recessions. “So maybe both expand, and incomes rise.” Which leads to higher inflation and shrinking profit margins. “Then perhaps the Fed tolerates rising prices which means that nominal growth remains strong even if real growth rates slow,” he postulated.

“So in that case, workers do better, and companies are worse off on a relative basis. But in that 7% nominal GDP world, inflation might mask the pain well enough to allow stocks to sail through,” continued my favorite strategist.

“You think about that hypothetical and it’s possible,” he said. “But then you listen to what the companies are saying, and you walk away with the sense that there’s just no way.” Homebuilding stocks are -30% from the January highs.

“If you just look across the spectrum, interest-sensitive equities are screaming late-cycle.”

“Making the mid-cycle case raised my conviction that we’re late-cycle,” he said. “America’s fiscal boost masked the natural cycle dynamics.” The US is the outlier. In dollar terms, of the major markets, only American stocks are higher on the year.

So if US stocks catch up and crash from here, what happens next?” he asked rhetorically. “I think most people will conclude we’re headed into another depression. But I think there will be great things to buy. Probably in the places that are already crashing and burning.”

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

Hedge Fund CIO: “Some See Parallels Between Today And The Late-1930s, Which Led To World War II”

The future is unknowable. Yet never has capital been so concentrated in strategies that depend on the future closely resembling the past. The most dominant of these strategies requires bonds to rally when stocks fall. For decades, both rose inexorably. And a new array of increasingly complex and illiquid strategies depends on a jump in volatility to be followed by a rapid decline of equal magnitude. They appear uncorrelated until they are not.

Virtually every investment portfolio measures risk by utilizing some combination of volatility and correlation, both of which are backward-looking and low. But the present is knowable. The past too. And the multi-decade trends that carried us to today produced levels of inequality rarely seen.

Low levels of inflation, growth, productivity, and volatility are features of this cycle’s increasingly unequal distribution. But cycle extremes produce pressures that reverse their direction.

On cue, an anti-establishment political wave washed away the globalists, with promises to turn the tide. Such change is nothing new, just another loop around the sun.

Now signs of a cycle swing abound; shifting trade agreements, global supply chains, military dynamics, immigration, wage pressures, polarization, nationalism, tribalism.

To an observer, it’s neither right nor wrong, it simply is. Some see parallels between today and the late-1930s, which led to World War II. We also see parallels with the mid-1960s, which led to The Great Inflation.

What comes next is sure to look different still. But investment strategies that prospered from the past decade’s low inflation, growth, productivity and volatility will face headwinds as this cycle turns.

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

Eric Peters: “People Assume That Stocks Always Rise Over Time. They’re Wrong”

This week on the MacroVoices podcast, host Erik Townsend welcomed Eric Peters, the CEO and CIO of One River Asset Management, for a discussion about the long-term future of the US economy, and how demographics, the expanding US debt, and the waning influence of central banks will impact growth, inflation and – most importantly – markets.

Peters

After a brief discussion about the future of USD hegemony, and the factors that could lead to the dethroning – so to speak – of the dollar, the two plunged into a discussion about one of the most vexing issues of the modern US economy: Why sub-4% unemployment hasn’t driven a runup in inflation back toward levels witnessed before the financial crisis.

We’ve all looked at the stats, and we’re now at an unemployment rate in the US of sub-4% – 3.8%–3.7%. I think what a lot of people focus on is if the participation rate were back where it was pre-2008 you’d end up with an unemployment rate that had an 8 handle or something like that. So that’s what people are referring to. But making comparisons like that is difficult because a lot of things are changing. The US labor force is shrinking because people are getting older. There is the opioid issue. And this disability issue. Which are difficult to really handicap in terms of how big an impact that’s having on the US labor force.

Up until recently, the actions of central bankers have been much more important to markets in a general sense than the behavior of politicians. But that’s about to change…

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

Eric Peters: “China’s Best Play Is To Let The US Stock Market Crash”

As excerpted from the latest Weekend Notes from One River CIO, Eric Peters.

China’s best play is to let the US stock market crash,” said the CIO. “Trump is right, they can’t win a trade war.” So they won’t try. “But Xi can consolidate if things get rough in terms of markets, but for Trump it is the opposite.”  The US is far more exposed to a bear market.

“And just like US debt ceiling standoffs or just about any political standoff for that matter, the game is that things always have to get worse before they get better.” And he sighed, deeply. “But I truly hate having to trade by playing game theory. It’s just an awful way to live your life.”

“I like to do the kind of analysis that involves looking at one group of companies that are starting to make money,” continued the same CIO. “And then from that observation, I can make reasoned forecasts about how their improving fortunes will impact others, and so on and so forth.” The same process works in reverse of course. Economies have a way of spiraling up and down, like corkscrews. “I like the kind of analysis that captures the actions of tens of thousands, or millions of people.” And he sighed, again. “But now, we’re just trading late night tweets.”

And a bonus anecdote from Peters’ note

“The polls say I won the debate,” said the candidate, “but you and I know all about polls.” Perry Parker’s a good friend, we worked together for a decade, buying low, selling high. And having won in finance, he headed home to give back to Mississippi. When the 3rd congressional district seat opened up he made a bid.

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

What We Can Do…

What We Can Do…

Until enough people’s minds are changed about coercion and collectivism, resistance is futile. The debate will continue to be about how much should be stolen from whom and for what purpose – rather than about whether anything should be stolen by anyone for any purpose.

As things are, many people believe it is ok to steal from others – provided the stealing is done on their behalf by other people (these are called “tax collectors”) and the stolen goods are called by pleasant but intellectually dishonest, morally evasive names (examples include Social Security, welfare, foreign aid, grants and so on).

Using this technique of doublethink, people are able to do things to other people – or urge they be done to other people, on their behalf – without feeling ashamed or guilty, as they would if they were to do these things themselves, personally.

This “surgical excision” of the psychologically normal human revulsion for other-than-defensive violence and for the use of violence to take things from others is the keystone of the coercive collectivist system. Dislodge it and the whole edifice collapses.

It is that simple – and that hard.

Simple, because the moral principle is already established.

Excluding psychological defectives – the relatively small population in every society that does not feel ashamed or guilty about the use of violence (these people are called “criminals”) most people do feel ashamed and guilty when they steal or resort to violence.

And hence, most people do not steal or resort to violence.

It is a broadly accepted moral principle that theft and violence are wrong things; that those who steal and threaten to harm others in order to get what they want are not good people. This is half the battle, already won.

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

Eric Peters: “The Next Market Cleanse Will Be Sharp, Deep, Fast And Feel Like The End Of The World”

Eric Peters: “The Next Market Cleanse Will Be Sharp, Deep, Fast And Feel Like The End Of The World”

The latest weekend note by Eric Peters, CIO of One River Asset Management, is his latest masterpiece in lyrical, stream of consciousness, financial analysis, and can be broadly divided into to broad parts: his latest take on financial markets analyzing the build up of disequilibrium which eventually culminates with discrete “flushes” that reset the system; how bold investors inevitably give up on financial sense and logic long (or just) before said flush takes place, and what this upcoming Minsky Moment could mean for the future. We have excerpted from this section in the current note, as for the remainder of his weekend observations – which deal with tectonic macro and geopolitical shifts – we will follow up in a subsequent post.

Anecdote: “The most common example is a ball sitting atop a hill,” she said, polished accent, hint of condescension. “Locally stable, but one nudge and it’s all over.”

She drove terribly fast, discussing Minsky Moments; the idea that persistent stability breeds instability. “Naturally each cycle is different in key respects, and that’s because you’re far better at preventing past problems from recurring than new ones from arising.”

I smiled, amused, insulted. “Despite knowing this all too well, you humans remain inexplicably fixated on the rearview mirror. And this blinds you to all manner of hazards ahead.”

She initiated a few perfect turns of the Tesla, dodging a squirrel or two, tumbling, unhurt. “The source of instability in this cycle is your dissatisfaction with ultra-low bond yields.” $8trln of sovereign debt carries a negative yield, still our central bankers buy. “You should logically respond to this historic rise in valuations across asset classes with a reduction in your expectations for future returns.” I nodded. “But instead you respond with indignation.”

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

 

One River CIO “We’re Willing Participants In Our Own Demise”

One River CIO “We’re Willing Participants In Our Own Demise”

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”

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…

Olduvai IV: Courage
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Olduvai II: Exodus
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