wknd notes: Benefit of the Doubt

“I think I can unite the conference,” said Rep. Jim Jordan, headed into the vote. “I think I can go tell the country what we’re doing and why it matters to them,” continued the Ohio congressman, the first Chairman of the Freedom Caucus, formed in 2015 by conservatives and Tea Party members. Jordan hopes to become House Speaker following McCarthy’s ouster on Oct 5. The absence of leadership in America is utterly breathtaking, and this at a time of war in Europe, the Middle East, and a looming November 17th government shutdown.

Overall: “He who knows, does not speak. He who speaks, does not know,” whispered Xi to himself, out for a long walk, alone, searching for inspiration in the ancient wisdom of Lao Tzu. Following the barbaric terrorist attack, events had followed a roughly predictable path. Yet where they would travel from here had grown increasingly uncertain. Through it all, he had remained silent, his focus turned inward, consumed by a range of domestic challenges of an increasingly unique character. Youth unemployment remained well over 20%. His nation’s fertility rate had collapsed to 1.09, presaging demographic collapse if not quickly reversed. And young people had responded to his calls for “continued struggle” by engaging in tangping, the “lying flat” movement, opting out of the rat race which had propelled China’s economy these past few decades. When taken in totality, such things suggested a profound pessimism was taking hold. But unlike the rage fueled fires of Tiananmen, or the fierce fighting in Ukraine and Gaza, today’s unrest in China was marked by deep apathy. “He who does not trust enough, will not be trusted,” continued Xi, uneasily, unsteady, quoting Lao Tzu again. Never in all human history had a state collected so much information on its citizenry. With one CCTV camera for every two people, and a vast surveillance apparatus, the Party’s eyes were literally everywhere. “Governing a great nation is like cooking a small fish – too much handling will spoil it,” thought Xi, Lao Tzu’s wisdom seeping into his conscious like a cold fog. The world looked to China to assert itself in ways commensurate with the leadership position it sought. But its fraught alliances with Russia and Iran left Xi unsure how to respond while navigating from a position of growing weakness. “Silence is a great source of strength,” he whispered, more as self-justification than for any other reason. And as he spoke the words, they sounded hollow.

Week-in-Review: Mon: US holiday, market reacts to Hamas invasion of Israel over the weekend / Israel announces largest ever mobilization of reservists (300k) / Iran denies involvement despite WSJ reports of their assistance to Hamas, Israel CB intervenes to stem Shekel sell off, US senator Schumer meets with President Xi, Fed’s Jefferson says can ‘proceed carefully’, Fed’s Logan says higher yields may mean less need to hike, Germany IP -2% (-1.5%e), EU investor confidence -21.9 (-24e), Mexico CPI 4.45% (4.48%e) / Core 5.76% (5.75%e), S&P +0.6%; Tue: Country Garden warns on default, reports of China raising budget deficit by $1T for infrastructure spending, Israel building base near Gaza to accommodate thousands of soldiers, leak detected in undersea gas pipeline off Finland / suspected sabotage being investigated, ECB’s Villeroy says ME tensions add to economic uncertainty, Fed’s Bostic  says he doesn’t think more rate hikes are needed, reports that the BOJ is going to revise up 2023 inflation expectation, Hungary CPI 12.2% (12.4%e), Turkey IP 3.1% (5.0%e), Italy IP -4.2% (-5.0%e), US NFIB 90.8 (91e), S&P +0.5%; Wed: reports that Hezbollah launched missiles at Israeli military post, Netanyahu announces unity government, Steve Scalise selected as GOP candidate for Speaker, Fed’s Kashkari says more hikes needed if economy remains resilient, Fed’s Daly indicates possibility of a new neutral rate between 2.5-3%, FOMC minutes show pre-existing concern about tighter financial concerns, Poland’s pro EU coalition gains in polls ahead of weekend vote, India to restrict sugar exports after dry weather hurt crops, Exxon agrees to buy Pioneer, Germany CPI 4.3% as exp, Brazil IPCA infl 5.19% (5.25%e), US PPI 2.2% (1.6%e) / Core PPI 2.7% (2.3%e), S&P +0.4%; Thu: US CPI 3.7% (3.6%e) / Core 4.1% as exp / Supercore 3.91% (4.06%p) – OER drives uptick, US 30y auction has large tail – sending bonds lower again, Israel continues air strikes on Gaza / reports of 300k troops amassing on Gaza border, Chinese banks rally on report of official support, ECB mins reveal a much weaker growth outlook and more balanced risks for inflation, Japan PPI 2% (2.4%e), Japan core machine orders -7.7% (-6.7%e), UK IP 1.3% (1.7%e) / mfg 2.8% (3.5%e), South Africa mfg 1.6% (2.3%e), Mexico IP 5.2% (4.5%e), India IP 10.3% (9.1%e) / CPI 5.02% (5.40%e), US init claims 209k (210k e) / Continuing claims 1702k (1675k e), S&P -0.6%; Fri: Israel calls for evacuation of northern Gaza (1.1m people) – indicating ground invasion likely soon / Iran warned Israel against their offensive - safe havens rallied as market was nervous of further escalation over the weekend, Scalise drops out of Speaker race / GOP selects Jim Jordan to replace him, Argentina CPI 138.30% (135%e), S. Korea unemp 2.6% as exp, China CPI 0.0% (0.2%e) / PPI -2.5% (-2.4%e), China expts -6.2% (-8.0%e) / impts -6.2% (-6.3%e), China Trade balance $77.71b ($70.60b e), China M2 10.3% (10.6%e) / agg financing 4.12T / (3.7T exp) / new loans 2.31T (2.5T exp),  EU IP -5.1% (-3.5%e), US U. of Mich. Sentiment 63.0 (67.0e) / 1y infl exp 3.8% (3.2%e) / 5-10y infl exp 3% (2.8%e), US impt prices -1.7% (-1.4%e), S&P -0.5%; Sat/Sun: Hezbollah claims missile strike on in northern Israel, US sending 2nd carrier group to eastern Mediterranean.

Weekly Close: S&P 500 +0.4% and VIX +1.87 at +19.32. Nikkei +4.3%, Shanghai -0.7%, Euro Stoxx +1.0%, Bovespa +1.4%, MSCI World +0.6%, and MSCI Emerging +1.5%. USD rose +5.6% vs Ethereum, +3.0% vs Bitcoin, +2.3% vs Chile, +1.4% vs Australia, +0.8% vs Sterling, +0.7% vs Euro, +0.7% vs Turkey, +0.6% vs Sweden, +0.5% vs Indonesia, +0.2% vs Yen, +0.1% vs China, and flat vs India. USD fell -3.1% vs Russia, -1.5% vs South Africa, -1.3% vs Brazil, -0.4% vs Mexico, and flat vs Canada. Gold +5.2%, Silver +5.4%, Oil +5.9%, Copper -1.6%, Iron Ore -1.1%, Corn +0.3%. 10yr Inflation Breakevens (EU +3bps at 2.27%, US +2bps at 2.34%, JP flat at 1.23%, and UK -1bp at 3.80%). 2yr Notes -3bps at 5.06% and 10yr Notes -19bps at 4.61%.

Year-to-Date Equities (high to low): Argentina +90.5% priced in US dollars (+276.4% priced in pesos), Hungary +28.7% priced in US dollars (+27.7% priced in forint), NASDAQ +28.1% in dollars, Greece +23.4% in dollars (+25.8% in euros), Denmark +19.8% (+22.4%), Poland +18.4% (+16.7%), Italy +16.9% (+19.1%), Ireland +13.3% (+15.5%), Taiwan +13.2% (+18.7%), S&P 500 +12.7%, Russia +11.1% (+48.2%), Spain +10.1% (+12.2%), Mexico +10% (+1.9%), MSCI World +10% in dollars, Brazil +9.9% (+5.5%), Japan +8.5% (+23.8%), India +8.4% (+9.1%), Czech Republic +7.3% (+12%), Germany +7% (+9.1%), Euro Stoxx 50 +7% (+9%), France +6.1% (+8.2%), Netherlands +4.5% (+6.5%), Venezuela +4% (+114.4%), Switzerland +3.9% (+1.6%), Korea +2.5% (+9.8%), UK +2.3% (+2%), Sweden +1.3% (+7.2%), Saudi Arabia +1.3% (+1%), Indonesia -0.1% (+1.1%), Norway -0.3% (+11.2%), Canada -0.5% (+0.4%), Turkey -0.9% (+47.3%), Chile -1% (+9.8%), Austria -1.2% (+0.7%), Colombia -1.2% (-13.2%), Russell -2.4% in dollars, Singapore -4.2% (-2%), China -5.6% (0%), Philippines -6.4% (-4.6%), Portugal -6.8% (-5%), Belgium -7% (-5.2%), UAE -7.1% (-7.1%), Australia -7.5% (+0.2%), New Zealand -8.9% (-1.8%), Malaysia -10.1% (-3.4%), South Africa -10.1% (+0.3%), HK -10.2% (-9.9%), Finland -13.6% (-11.9%), Israel -15% (-4.1%), and Thailand -17.1% (-13.1%).

Source of Strength: Trust. It’s at the root of the financial system. “In God We Trust” is written on every piece of US dollar paper. It’s symbolic at this stage. Symbolic of periods of time where trust was eroded by crisis. Like the US civil war and the War of 1812. The motto of “in God is our trust” cut out the monarchy middleman, the innovation of being republican - loyalists trusted the monarchy as their intermediary to God. It only appeared formally in the US Coinage Act of 1864 and became a national motto during yet another crisis period in 1956 during the Cold War.

Source of Strength II: For central bankers managing fiat currencies, trust/faith are not static. So, bankers must actively respond to markets, the public, and, in the case of the US, foreign governments who embrace the dollar as an anchor. Trust is in highest demand during periods of uncertainty as everyone hunts for stability - not only financial stability but transparency and consistency in the implementation of rights. Trust in the US dollar as a reserve asset centers on faith in the rule of law. No one wants to see the rules of the game changed midstream.

Source of Strength III: The US has been at the epicenter of the world’s financial circle of trust since 1944. Then, in yet another crisis, world leaders anchored to the dollar in Bretton Woods, NH. It was a pivot away from the British pound and would take decades to reach maturity. Through a series of crises in the past three decades, the US dollar reigned supreme. Demand for dollars was never greater than in the 2008 GFC; international payments in the US dollar is now at a record high; even in crypto, the digital US dollar is the most successful use-case.

Source of Strength IV: When our politicians and policymakers take trust for granted, they erode the pillars of its foundation – integrity, reliability, honesty, and transparency. No reserve currency has lost and regained its status, and for good reason – trust is easily lost and hard to maintain, let alone regained. It is almost also surely asking too much of the US to be the only global trust watchdog. The costs are shouldered by a disappearing middle class. For reserve currency nations resource constraint is the kryptonite of global trust, and as it slips away, inflation manifests.

Source of Strength V: Markets shine in moments such as those we see today, sending signals for leaders to ignore at their peril. The US dollar is not the only refuge in periods when trust in global politics and policy is in decline. In times of extreme angst, as fear spreads, what we seek above all else is certainty; not interest rates, earnings, or promises. Resources, like energy, offer shelter in such times. But storing energy is hard. So, for most gold becomes the vessel of choice; others now find refuge in digital assets with engineered scarcity.

Anecdote: Somewhere far below, deep within a nameless mountain, enrichment tubes were spinning at 1,500 revolutions per second. We had just passed Tehran. From 39,000 feet, the rugged, dry terrain extended beyond the horizon. On the flight map to our west lay Baghdad, Damascus, Beirut, centuries of rich history, plagued by devastating wars. They say the conflict between the Sunni and Shia goes back fourteen centuries, when two men failed to agree on who would succeed the Prophet Muhammed. To our east was Kabul and its Kalashnikovs, Islamabad and its nuclear-tipped rockets, pointed east toward New Delhi which returned the favor. I was headed to the UAE, an oasis of sorts, vying to bridge east and west, tucked neatly between the Gulf, Saudi, and Oman. Beyond it sat Yemen, quietly returning to the stone age. Such things happen throughout history. My flight had departed from San Francisco where I’d spent a couple days engaged in interesting conversations about bear markets and brighter futures. One discussion focused on trust, upon which all great teams are built. I generally assess the trustworthiness of people by observing how they treat others, particularly in moments of real stress and uncertainty. Someday this is how they’ll treat me. The most trustworthy consistently give others the benefit of the doubt, even when it’s easiest to think the worst -- this a secret of success, leadership. Naturally, some people do not deserve such treatment. But if you believe that it is best to do unto others as you would have them do unto you, then your starting point should always be to think the best of others until they have clearly demonstrated their unworthiness. Our flightpath took us north over Canada, empty, barren, across the Arctic, the Barents Sea, Russia, our adversary. Many TVs were tuned into the news, horrifying images of the barbaric terrorist attack, another war, filling the plane as we approached the region. Divisions widening everywhere, internationally, domestically, senselessly, tragically.

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, converse 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.