wknd notes: Markets Need A Watcher

“Marvel is a cornucopia of fantasy, a wild idea, a swashbuckling attitude, an escape from the humdrum and prosaic,” said Stan Lee, artistic genius, RIP. “It’s a serendipitous feast for the mind, the eye, and the imagination, a literate celebration of unbridled creativity, coupled with a touch of rebellion and an insolent desire to spit in the eye of the dragon,” continued the father of Spider Man, Black Widow, The Hulk, Iron Man, Black Panther, so many others. My favorite is Uatu, The Watcher, sent to observe the human race. Which is what Stan did. Holding up a fantastic mirror, in the hope that we see our true reflection.

Overall: “As kids, we loved fairy tales. They’re about things bigger than life: giants, witches, trolls, dinosaurs, dragons, imaginative things,” whispered Stan Lee from the grave. “Then you grow older and stop reading fairy tales, but you don’t ever outgrow your love of them,” continued the father of Marvel’s super heroes and villains, each in existential need of the other. While Stan dedicated his genius to comics, we mortals created heroes and villains of our own. The characters that most transfix us are both. The fallen hero, a villain. The reformed villain, a hero. Mark Zuckerberg fell this week. Earth’s 5th richest person, a supremely awkward 34yr old, archetypal Harvard dropout-turned-founder, a millennial hero. “Reading a story and wondering what will come next for the hero is a pleasure that has lasted for centuries and will always be with us,” explained Stan Lee. Zuckerberg created a machine. And commanded his machine to connect us all. But in time, the machine enslaved Mark, and hiding in plain sight as a hero, together they built humanity’s most powerful surveillance system. It preyed on our thoughts, amplified our biases, lusts, envies, fears, hatreds. Fueled animosity. They concealed its abuse. And when confronted, in his moment of truth, our hero failed to right his wrong, and instead turned to Washington operatives. Who conspired to stoke anti-Semitic conspiracy theories, deflecting attention to George Soros – a market villain, who broke the Bank of England in 1992, but has since dedicated his vast fortune in pursuit of freedom, justice, equality, transparent government. “If you’re writing about a powerful character, unless you give him vulnerability, he won’t be as interesting to the reader,” explained Stan. And across the planet, as the machines enslaved us, our leaders transmogrified into sensational heroes and villains, fantastic conflicts erupted, good versus evil, and our reality became indistinguishable from a comic book.

Week-in-Review (expressed in YoY terms): Mon: Infineon chipmaker warns and Apple falls sharply as component suppliers cut forecasts, oil jumps on pledges of Saudi cuts, GE CEO “feels urgency to sell assets to strengthen balance sheet,” California wildfires rage, US veterans day, S&P -2.0%; Tue: Merkel backs Macron’s call for building a European army, German economic confidence 2yr lows, EU nationals working in UK fall 132k over 12mths (fastest pace on record), Italy rebuffs EU Commission on budget (yield spreads widen), Mnuchin and Chinese Vice Premier Liu He resume trade talks, crude oil falls 7% on reports Saudis not honoring production cuts, Amazon chooses NYC and Virginia for new split headquarters, Trump attacks/mocks Macron on Twitter, S&P -0.2%; Wed: Chinese retail sales -0.7 to +8.6% (fixed asset investment +5.5%, industrial output +5.9%, real estate investment +9.7%), Theresa May gets approval for Brexit deal, UK CPI unch at +2.4%, German QoQ GDP declines for first time since 2015, Bundesbank warns financial system unprepared for a recession, EU industrial output softens to +0.9%, Mexico’s central bank deputy governor and head of oil regulator both step down (2wks before AMLO sworn in), US CPI +0.2 to +2.5% (core CPI -0.1 to +2.1%), natural gas prices +18% on cold weather, S&P -0.8%; Thur: Aussie employment +42k (unemployment rate unch at 5.0%), Indonesia hikes 25bps to +6.0% (6th hike in 2018), Putin vows continued coordination with OPEC, Turkey unemployment +0.5 to 11.1%, ECB’s Couere “Bitcoin is the evil spawn of the financial crisis,” Brexit plan and May’s leadership imperiled as 6 UK ministers resign, Mexico hikes rates 25bps to 8% (CPI +4.9% vs +3.0% target), Nvidia warns on fading sales to crypto miners, PG&E shares plunge on California fire liability (-64% since Camp fire started), S&P +1.1%; Fri: China cut treasury holdings $13.7bln to $1.15trln in Sept, North Korea tests new tactical weapon, Germany/France to outline EU budget on Monday, Kemp beats Abrams in Georgia recount, Fed’s Clarida “we’re close to the neutral range on rates,” Pfizer hikes drug prices in defiance of Trump, S&P +0.2%; Sat/Sun: CIA concludes MbS ordered Khashoggi murder, French fuel price protests.

Weekly Close: S&P 500 -1.6% and VIX +0.78 at +18.14. Nikkei -2.6%, Shanghai +3.1%, Euro Stoxx -2.2%, Bovespa +3.4%, MSCI World -1.8%, and MSCI Emerging +0.5%. USD rose +21.7% vs Ethereum, +16.0% vs Bitcoin, +1.1% vs Sterling, +0.3% vs Brazil, and +0.2% vs Mexico. USD fell -2.9% vs Russia, -2.5% vs South Africa, -2.3% vs Turkey, -2.0% vs Chile, -1.4% vs Australia, -0.9% vs Yen, -0.9% vs Sweden, -0.8% vs India, -0.7% vs Euro, -0.5% vs Canada, -0.4% vs Indonesia, and -0.3% vs China. Gold +1.0%, Silver +1.8%, Oil -5.1%, Copper +3.9%, Iron Ore -4.1%, Corn -1.4%. 5y5y inflation swaps (EU -2bps at 1.68%, US -3bps at 2.33%, JP -1bp at 0.20%, and UK +4bps at 3.62%). 2yr Notes -12bps at 2.80% and 10yr Notes -12bps at 3.06%.

2018 YTD Equity Indexes: UAE +14.9% priced in US dollars (+14.9% in dirham), Saudi Arabia +6% in US dollars (+6% in riyals), Norway +5.1% in dollars (+8.3% in euros), NASDAQ +5%, S&P 500 +2.3%, Brazil +2.3% (+15.9%), New Zealand +1.7% (+4.9%), Colombia +1.5% (+7.6%), Israel +1% (+7.9%), Russell -0.5%, Russia -1.9% (+12.5%), Japan -5% (-4.8%), Czech Republic -6.5% (+0.2%), Finland -6.6% (-1.6%), Thailand -7.5% (-6.8%), Switzerland -7.6% (-5.1%), Malaysia -8% (-5%), Portugal -8% (-3.1%), Hungary -8.4% (-0.1%), Netherlands -8.9% (-4.1%), India -9.8% (+1.4%), France -10.2% (-5.4%), Canada -10.9% (-6.5%), Taiwan -11.3% (-7.9%), Australia -11.3% (-5.5%), Indonesia -11.5% (-5.4%), Singapore -11.7% (-9.4%), HK -12.7% (-12.5%), Austria -13% (-8.4%), UK -13.5% (-8.8%), Sweden -13.6% (-4.9%), Euro Stoxx 50 -13.8% (-9.2%), Chile -14.2% (-6.7%), Spain -14.4% (-9.8%), Denmark -15.7% (-11%), Belgium -15.8% (-11.3%), Mexico -15.9% (-14.3%), Germany -16.7% (-12.2%), Italy -18% (-13.6%), Korea -19% (-15.2%), Ireland -19.3% (-15%), Poland -20% (-13%), Philippines -21.2% (-17.2%), South Africa -22.7% (-12.7%), China -24% (-19%), Greece -26% (-22%), Turkey -42.4% (-18.8%), and Argentina -46.4% (+3.5%).

Stan Lee: The Watchers are the oldest and most advanced race in the cosmos. Eons ago, these immortals felt it their duty to spread knowledge to benefit lesser races. Their first attempt, on planet Prosilicus, included sharing atomic technology. When they returned, the natives were incinerated by nuclear war. The Watchers vowed to never again meddle. Instead, they passively observe and record events for those who will come after the universe ends. Uatu is the Watcher assigned to Earth and in times of great need, can’t help but break his race’s solemn vow.

The Policeman: “US security and wellbeing is at greater risk than at any time in decades,” warned the non-partisan 2018 National Defense Strategy report. “Put bluntly, the US military could lose the next state-versus-state war it fights. Russia and China are matching and even outpacing the US, and their advances complicate the Pentagon’s ability to wield the hard-power backbone of military hegemony. The credibility of American alliances - the bedrock of geopolitical stability - will be weakened as allies question whether the US can defend them; American rivals and adversaries will be emboldened to push harder.” As Uatu watched.

Stan Lee: “You know that ‘anomaly’ you remarked upon recently? That electric pulse you sense more and more consistently? The pulse that seemed to be completely random at first, but now registers with every cycle? It is what the humans call a conscience. It is what recognizes and differentiates good from evil. It took me centuries to finally figure out what it was. It took me even longer to realize that the best thing to do was simply heed it,” said Uatu. “What will you do with free will?” asked the Watcher, recording every choice we make.

The Writer: “I’ll never write again,” thought the writer, his amputated fingers scattered across the table, disconnected in a way so unnatural as to be hysterical. He laughed through terrified screams, his pain receding. The assassins had injected him. As serum swirled through his stream, Khashoggi rose above his body, admiring the masterpiece - a final act of defiance so bloody as to be impossible to wash from our collective conscience. And on Friday, the CIA confirmed what we all surely knew. MbS ordered the execution. “What will they do now?” wondered Uatu.

Stan Lee: “There are worlds beyond even those which exist in this reality and the next... Worlds not of energy and matter, but of thought and mind,” explained Uatu. “There are more realities than there are grains of sand in the universe. With each reality, there are different truths, different falsehoods,” he said. “For so it has ever been in the universe. Every ending brings forth a new beginning. And each beginning must have its end,” said Uatu, the Watcher.

The Economist: “I’m beginning to see the first signs of it,” said Greenspan, Fed Chairman from humanity’s ancient past, observing the phenomenon that our central bankers have so desperately tried to create. “You’re getting into a system now which has no outcome that’s in equilibrium other than inflation and no productivity growth,” he said, concerned that our heroic battle with disinflation will prove to be more benign than the defeat of this villain. And Uatu observed, forever curious what policy choices the humans would make. Their fate in their hands. Always.

Stan Lee: “It must be why human families everywhere gather together for meals -- so they can laugh and love and learn as each other’s lives unfold and intersect... It is elemental to them. It is the foundation of their future. It is... fantastic,” observed Uatu, the Watcher, hopelessly fond of these curious creatures, so flawed, so perfect, so vulnerable, terrifying, beautiful.

Anecdote: “What the hell Charlie?” said Teddy, “Cover up your arms while we’re eating. Those sores are disgusting.” Charlie shrugged, too accustomed to sibling ridicule to be embarrassed. “That’s what happens when you itch mosquito bites,” said Olivia (15), an authority on basically everything. “And look at your fingernails Charlie, they’re filthy, no wonder you’re infected,” said Jackson (16), always game for gang tackles. “They’re not bug bites and I don’t itch them,” declared Charlie (9), finally pissed. “You itch them in your sleep,” said Teddy (13), stripping his lifelong roommate of a defense. And while none of us believed Teddy heard Charlie itching at night, one look at the damage to his skin and it was hard to draw another conclusion. “Whatever you do Charlie, don’t touch the little one on your face,” said Mara, promising to cut his fingernails after dinner. On Charlie’s upper lip was a new sore. On his arm were another two, a few biggies dotted his legs. “Those mosquitoes really love you Chuck,” I said, and a wave of doubt washed across the table. “What if it’s something else?” asked Olivia. “Strip down Charlie,” ordered Mara. “Seriously?” he asked, nervous. “Jesus!” gasped the table in unison, his back and chest covered in circles. “Ringworm!” declared Mara. “You gotta be kidding me!” shrieked Charlie. But not one of us knew what that meant, not even Mara. Which didn’t stop her from Googling it, confirming the fake diagnosis, and treating it immediately with a fake remedy: tea tree oil. Such is the life of a 4th child, living in a home too busy to pay attention. And in a world preposterously micromanaged, eating away at our resiliency, we’re all better for it. At least that’s what Mara and I tell ourselves. “Tree tea oil? Seriously?” asked the doctor three days later, shaking her head. And Charlie laughed, prescription in hand, on the road to recovery.

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.