wknd notes: Rapid Unplanned Disassembly

“Starship SN10 landed in one piece!” tweeted Elon, his magnificent rocket having returned in one piece, gently set down, a Goldilocks landing. And no sooner had the world’s most inspiring risk taker tweeted in celebration then a methane leak set off a chain reaction, a devastating explosion, an awesome fireball eclipsed only by Musk’s ambition. The starship was sent careening through the air, crashing back, obliterated – RUD in Musk parlance (Rapid Unplanned Disassembly). “RIP SN10, honorable discharge,” he tweeted minutes later, moving on, inspiring entrepreneurs across the globe to boldly pursue their dreams, undeterred by the longest of odds. Stress-testing their creations. Pursuing anti-fragility through the embrace of volatility. “We think our current policy stance is appropriate,” said Fed Chairman Powell nervously, a scent of methane in the air, Treasury yields surging, repo rates jumping to 4.25%, credit ETFs trading at discounts to their net asset values. “If we do see what we believe is likely a transitory increase in inflation, where longer-term inflation expectations are broadly stable, I expect we will be patient about making any changes to policy,” added Powell, without articulating the rising risks of systemwide RUD should longer-term inflation expectations start broadly rising. But Jerome is unlikely to be around for that stage. He will have passed the greatest experiment in monetary history to a successor. And lost in the transition from one Chairman to another is the objective of the mission itself. Because you see, today’s monetary magicians do only one thing; pull future prosperity to the present. They produce nothing. For that we rely on entrepreneurs, who take calculated risk in pursuit of material progress. And we pray they improve our prospects faster than bankers pull them to the present. “Tests are about improving our understanding and development of a fully reusable transportation system,” explained SpaceX. “One that is designed to carry both crew and cargo on long-duration interplanetary flights, and help humanity return to the Moon, and travel to Mars and beyond.”

Week-in-Review (expressed in YoY terms): Mon: RBA doubled the QE purchases in the 5-7y bucket, Myanmar has deadliest day of protests (18), China’s Inner Mongolia bans crypto mining, US begins distributing J&J vaccine after weekend FDA approval, Warren proposed a tax on fortunes over $50m, Trump hints at 2024 run, Fauci warns of the new NY covid strain, Sarkozy sentenced, China PMI falls to 9m low 50.6 (51e), Swiss retail sales -0.5% (4.7%p), EU PMI 57.9 (57.7e), Italy CPI 1% (0.7%e), Poland retail sales -10.9% (-4.5%p), German CPI 1.6% as exp, US ISM 60.8 (58.9e), S&P +2.4%; Tue: RBA unch but says ready to adjust QE in response to market conditions, France approves AZ vaccine for elderly (u-turn), China's top banking regulator said foreign market bubbles may burst, China plans to inoculate 40% of population by June, US/EU sanction Russian officials over Navalny, Germany announces plan to unwind covid restrictions, S.Korea IP 7.5% (5.9%e), German retail sales -8.7% (1.7%e), EU Core CPI 1.1% as exp, S&P -0.8%; Wed: Biden says US will have enough shots for all adults by end of May (2m earlier), ECB said there is no need for drastic action to curb bond yields, Merck to help produce J&J vaccines, Texas fully reopens/lifts mask requirements, Australia 4Q GDP -1.1% (-1.9%e), Turkey CPI 15.61% (15.40%e), Swiss CPI -0.4% (-0.6%p), Brazil 4Q GDP -1.1% (-1.6%e), US ADP 117k (205k exp), S&P -1.3%; Thur: 38 dead in Myanmar protests, Powell avoids quelling the bond sell off, OPEC+ surprises market by maintaining supply curbs, RBA lets Aussie yields exceed YCC levels, Dems cap stimulus checks to incomes less than $80k (prev $100k), US House cancels meetings due to possible assault on capitol, S. Korea CPI 1.1% (1%e), Australia trade balance A10.14b (largest ever), Japan cons conf 33.8 (30e), EU unemp 8.1% (8.3%e), EU retail sales -6.4% (-1.2%e), US initial claims 745k (750k exp), S&P -1.3%; Fri: China announces “above 6%” growth target, Italy blocked the export of AZ vaccine to Australia, Pope visits Iraq, Democrats agree that $300/week unemployment benefit will end in September – paving way for senate passing stimulus bill, Kuroda said a widening range for 10y yield target of 0.2% is off the table for this month's policy review, Tokyo extends lockdown 2w, Singapore retail sales -6.1% (-2.5%e), Brazil IP 2% as exp, US NFP 379k (200k exp) / unemp rate 6.2% (6.3%e) / AHE 5.3% as exp, S&P 2.0%; Sat/Sun: Senate passes $1.9trln stimulus (heads back to the House).

Manufacturing PMI (high-to-low): Sweden 61.6 (previous month 62.5), Switzerland 61.3 (previous 59.4), US 60.8/58.7, Germany 60.7/57.1, Taiwan 60.4/60.2, Netherlands 59.6/58.8, Brazil 58.4/56.5, Austria 58.3/54.2, India 57.5/57.7, Italy 56.9/55.1, Czech Republic 56.5/57, Norway 56.12/52.49, France 56.1/51.6, South Korea 55.3/53.2, UK 55.1/54.1, Canada 54.8/54.4, Poland 53.4/51.9, Spain 52.9/49.3, Turkey 51.7/54.4, Vietnam 51.6/51.3, Russia 51.5/50.9, Japan 51.4/49.8, Indonesia 50.9/52.2, China 50.9/51.5, Singapore 50.5/50.7, South Africa 50.2/50.8, Hong Kong 50.2/47.8, Hungary 49.4/54.5, Greece 49.4/50, Mexico 44.2/43. Services PMI: Sweden 62.7/59.6, US 59.8/58.3, Australia 55.8/54.3, India 55.3/52.8, Russia 52.2/52.7, China 51.5/52, UK 49.5/39.5, Italy 48.8/44.7, Brazil 47.1/47, Japan 46.3/46.1, Germany 45.7/46.7, France 45.6/47.3, Spain 43.1/41.7, Ireland 41.2/36.2.

Weekly Close: S&P 500 +0.8% and VIX -3.29 at +24.66. Nikkei -0.4%, Shanghai -0.2%, Euro Stoxx +0.9%, Bovespa +4.7%, MSCI World +0.1%, and MSCI Emerging +0.5%. USD rose +2.2% vs Mexico, +1.7% vs Ethereum, +1.6% vs Yen, +1.6% vs Chile, +1.6% vs South Africa, +1.5% vs Brazil, +1.4% vs Turkey, +1.3% vs Euro, +1.2% vs Sweden, +0.7% vs Sterling, +0.5% vs Indonesia, +0.4% vs China, and +0.3% vs Australia. USD fell -2.6% vs Bitcoin, -0.6% vs Canada, -0.6% vs India, and -0.3% vs Russia. Gold -2.0%, Silver -5.3%, Oil +7.5%, Copper -0.0%, Iron Ore +1.0%, Corn -0.3%. 5y5y inflation swaps (EU +8bps at 1.43%, US +10bps at 2.32%, JP -11bps at 0.17%, and UK -3bps at 3.64%). 2yr Notes +1bp at 0.14% and 10yr Notes +16bps at 1.57%.

YTD Equity Indexes (high-to-low): UAE +12.8% priced in US dollars (+12.8% priced in dirham), Venezuela +11.6% priced in dollars (+83.3% in pesos), Russell +11%, South Africa +10.2% (+15.5%), Chile +9.4% (+12.8%), Taiwan +8.4% (+7.6%), Norway +8% (+7.5%), Austria +7.5% (+10.9%), HK +6.7% (+6.9%), India +6.6% (+6.8%), Saudi Arabia +6.4% (+6.4%), Canada +6.3% (+5.4%), Sweden +4.9% (+9.3%), Thailand +4.6% (+6.5%), Singapore +4.3% (+6%), Russia +4.1% (+3.8%), UK +3.9% (+2.6%), Turkey +2.7% (+4.4%), S&P 500 +2.3%, Netherlands +2% (+4.7%), Indonesia +1.9% (+4.7%), Australia +1.6% (+1.9%), France +1.5% (+4.2%), Korea +1.5% (+5.3%), Belgium +1.4% (+4.1%), China +1.3% (+0.8%), Ireland +0.8% (+3.4%), Euro Stoxx 50 +0.6% (+3.3%), Japan +0.3% (+5.2%), Czech Republic +0.3% (+3.9%), NASDAQ +0.2%, Italy +0.1% (+3.3%), Spain +0% (+2.6%), Greece -0.6% (+2%), Hungary -0.8% (+2.9%), Israel -0.8% (+2.1%), Finland -1.2% (+1.9%), Mexico -1.4% (+5.2%), Germany -1.6% (+1.5%), Poland -2.2% (+1.1%), Malaysia -2.9% (-1.7%), Philippines -4.8% (-3.6%), Switzerland -6% (-0.9%), New Zealand -7.4% (-7%), Denmark -9.6% (-6.8%), Colombia -11.9% (-6.5%), Portugal -11.9% (-9.6%), Brazil -12.1% (-3.2%), and don’t cry for me Argentina -14.1% (-7.8%).

Lost Arks: “Illiquidity is creeping into credit markets,” said Indiana, the industry’s leading archaeologist, explorer. “Credit risks of the type Minsky identified have migrated from the banking system into capital markets.” Corporate borrowings through bond issuance, in turn captured in exchange traded funds, are an important part of that risk migration. “Even with the stability of credit spreads, this rate rise battered credit funds.” LQD is -6% YTD. “Fund outflows are $6.8bln YTD – the pandemic outflow from mid-Feb to mid-Mar 2020 was just $4.5bln.”

Lost Arks II: “This week saw the return of credit ETFs trading at a discount to net asset values,” continued Indiana. “Small for now, averaging less than 20 basis points in the past three days.” As liquidity in underlying assets lessens, so too does the ability of participants to provide that liquidity through ETFs. “The discounts are capturing a marginal fray in liquidity conditions, an early warning,” said Indy. “And the crown jewels of global financial markets - Treasuries - saw a surge in the cost of borrowing securities this week. Illiquidity in Treasuries rose sharply.”

RUD: The 1929 market crash sparked a chain reaction that lasted a decade, a rapid unplanned disassembly, leading humanity to WWII in 1939. US unemployment averaged 18.2% in the 1930s, CPI averaged -2.0%. The S&P 500 lost 42% in the decade (real return was -29%). The 1970s RUD produced two brutal recessions, US unemployment averaged 6.4% and CPI averaged +7.25%. The S&P 500 gave the illusion of health with a 17% gain. The real return was worse than the 1930s, with a 42% decline. In both the 1940s and 1980s, investors who had emerged from the preceding decade with their capital intact made vast fortunes, equity markets boomed.

RUD II: In 1930, the US CPI was -2.7%, the S&P 500 inflation-adjusted return was -23% (the inflation adjusted 10yr Treasury note return was +7.4%). In 1931, CPI was -8.9%, S&P 500 real return -38%, 10yr note real return 7.0%. In 1932 (CPI -10.3%, S&P 2%, 10yr 21.3%). 1933 (CPI -5.2%, S&P 58%, 10yr 7.4%). 1934 (CPI 3.5%, S&P -5%, 10yr 4.3%). 1935 (CPI 2.6%, S&P 43%, 10yr 1.9%). 1936 (CPI 1.0%, S&P 31%, 10yr 3.9%). 1937 (CPI 3.7%, S&P -38%, 10yr -2.3). 1938 (CPI -2.0%, S&P 32%, 10yr 6.4%). 1939 (CPI -1.3%, S&P flat, 10yr 5.8%).

RUD III: In 1970, the US CPI was +5.8%, the S&P 500 inflation-adjusted return was -2% (the inflation adjusted 10yr Treasury note return was +10.3%). In 1971, CPI was 4.3%, S&P 500 real return 10%, 10yr note real return 5.3%. In 1972 (CPI 3.3%, S&P 15%, 10yr -0.4%). 1973 (CPI 6.8%, S&P -19%, 10y -2.4%). 1974 (CPI 11.1%, S&P -33%, 10yr -8.2%). 1975 (CPI 9.1%, S&P 25%, 10yr -5.0%). 1976 (CPI 5.7%, S&P 17%, 10yr 9.7%). 1977 (CPI 6.5%, S&P -13%, 10yr -4.9). 1978 (CPI 7.6%, S&P -1%, 10yr -7.8%). 1979 (CPI 11.3%, S&P +6.5, 10yr -9.5%).

Anecdote: “The 19th century was defined by the formation of nation states. The US had just emerged from its UK ties, the treaty of Vienna created countries such as the Netherlands, France just had its revolution and rid itself of Napoleon, Germany unified and Italy became a nation state,” said the Dutchman, a private investor, his fortune built in the markets, trade, finance. “The 20th century was the era of the establishment of institutions, alliances, internal, global, the US Federal Reserve, the United Nations, many others in between.” International Monetary Fund, World Bank, World Health Organization, NATO, the list goes on. Programs too: Social security, Medicare, Medicaid, state pensions. Countless agencies: CIA, FBI, NSA, NASA, EPA, FDA and so on. “A number of those institutions have come under siege in recent times and the level of trust embedded in them has eroded,” said the Dutchman, images of America’s horned Shaman seared in the global consciousness. History moves slowly, then fast, all at once. We read books, watch movies, and they compress years, even decades, into tight chapters, creating the illusion that periods of great change are apparent as they unfold, obvious to those living through them. And this then allows us to ignore today’s seismic shifts even as the ground beneath our feet trembles. “This erosion of trust can also be said about the Fed at a time when the need for credibility is perhaps greater than it has ever been, which makes the trajectory for financial markets going forward particularly difficult and potentially very volatile,” he said. “And it appears that forces are now in motion that will redistribute wealth, shifting it from capitalists to the workers,” said the Dutchman, taking a moment to consider it all. “There tend to be couple decades each century when it is a victory to have preserved your real wealth. This looks to be one of them.”

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.