Below we present three entertaining vignettes from the latest weekly letter to investors by Eric Peters, CIO of One River Asset Management.
The first one explains how we have once again ended up “right back where we started“ but after a curious tanget: one where central bankers now believe they can “invert causation” and not only control the yield curve but stoke inflation by doing so.
“Right back where we started,” said the CIO, spinning, dizzy. “Twelve months ago we were talking about a December rate hike.” The Fed was intent on normalizing interest rates, and if the rest of the world struggled to adjust, so be it. “It was their experiment with raising real interest rates and they were telling us to expect four more hikes in 2016.”
Inflation had remained subdued ever since the 2008 crisis, but interest rates had remained lower still; leaving real interest rates negative. “Having witnessed the stock market meltdown in January, we all now know what happens when the Fed raises real interest rates while economic growth is anemic.”
But nevertheless, we’re right back at it, albeit with lower expectations for the pace of 2017 hikes. Of course the S&P 500 is now higher too; were it lower, we’d sooner see a burqa at a Trump rally than another 25bps from the Fed.
“Not only does the Fed want higher overnight rates, they want steeper yield curves too,” he explained. “Rosengren is telling people how he’d like the curve to ‘develop,’ as if it’s in the Fed’s control.”
He’s not alone. Kuroda wants the same, Europe too. “Policy makers everywhere have somehow convinced themselves that if they engineer higher longer-dated yields, then inflation expectations will rise too,” he explained. “They’re basically saying you can invert causation.”
And in today’s new reality, everything’s possible, so why not inverse causation too? You see, rising inflation expectations cause higher long-term yields, not the other way around.
“So now our central bankers will run a new experiment based on the theory which is obviously incorrect,” he said, whirling, laughing. “It’s like saying I wish I had a billion dollars, which I desperately do, and somehow a billion dollars just appeared in my bank account.”
The next anecdote explains why we now find ourselves in a world where everyone loves conspiracy theories:
“You’d think today’s technological ubiquity would eradicate the scourge of conspiracy theories,” he said. “But it appears they’re spreading.”
When people are unhappy, they suspend disbelief. And people are in a conspiracy kind of mood today. “How can Trump say, ‘You literally saw me admit I sexually assault women, but it really isn’t true and it’s actually a cabal?”
One-third of America believes that. “The greatest manifestation of this phenomenon is Brexit.” As if a withdrawal from the EU would magically solve Britain’s problems. “It’s a lie.”
“People who are miserable enough will believe any story that promises to improve their lives,” he continued. “And the remarkable thing today is that everyone is miserable; billionaires, millionaires, the middle, the poor.” The scapegoats are quite naturally bankers. They always are. To make it worse, today’s central bankers missed the crisis, then missed their own forecasts, and still fail to meet their objectives.
“We need to figure this out, because two world wars started over conspiracy theories. And things aren’t even bad right now.”
Finally, it appears we are all now maniacs, rifling through garbage.
“You watch Saturday Night Live?” asked the CIO, high atop his prodigious pile. Of course I had. “How about Colbert?” he asked. Yup. “The Daily Show?” Naturally. “Did you make it through the debate or just catch the highlights?” Watched it all. “I’m not the puppet, you’re the puppet!” he shouted, repeatedly, losing his mind.
We all are. And attempting to move on, I asked if he’d seen Norway’s $880bln sovereign wealth fund may lift its equity allocation 10-points to 70%? “What I’m saying is that I will tell you at the time. I’ll keep you in suspense. OK?” he said, addicted, tuning me out, quoting the Donald. Norway clearly knows that in a world of ultra-low or negative rates, there’s simply no way to generate their targeted returns without taking more risk. It’s a universal problem. Norway’s doing something about it.
“Oh my god, a new Trump accuser came forward,” he squealed. “That makes thirteen, possibly fourteen, but who’s counting?” Global investors are sitting on the largest percentage of cash since right after the September 11 attacks. Hard to believe when you consider we’re hovering just below all-time highs in equities.
Must be a conspiracy. The Russians. Hackers. Bankers. “Did you see Melania’s interview? And the spoof?” he asked.
Of course I had. Saudi Arabia’s oil minister called an end to the downturn, now that prices have doubled. Brazil cut rates for the first time in 4yrs.
“I feel dirty just watching, but I literally can’t stop.”
The ECB did nothing, Draghi told us to wait until December. China’s renminbi made new lows. The dollar rallied, pricing in a Clinton win — not even the Donald believes he has a chance in hell.
“I will totally accept election results… If I win!” he shrieked, refreshing his browser, a maniac rifling through garbage, like us all.