wknd notes: The deeper we dig into inequality, the more likely will be calls to abolish capitalism

“We’re not even thinking about thinking of raising rates,” declared America’s Fed Chairman, all but eliminating uncertainty about the Fed policy path through 2022. The S&P 500 had completed a historic recovery from the pandemic lows to trade higher on the year, its price utterly disconnected from today’s economic devastation. But markets never discount today, they discount tomorrow. And no sooner had they taken a little peek at what prices looked like back on January 1st then they began to plunge. Some blamed signs of a viral resurgence, though that had swirled for days. Others blamed Millennials whose day-trading resembles the dot.com mania. And a few blamed General Milley, America’s top-ranking general, who apologized for joining the President on his ill-fated march to St. John’s Church. You see, the generals have turned their backs on Trump over his response to demonstrators. The NFL has too; its commissioner apologized for having opposed taking a knee. Even NASCAR banned the Confederate Flag. And as Trump’s re-election prospects tanked, expectations for a dramatic restructuring of America’s economy soared. Efforts to rebalance the division of profits between capital and labor is demanded by a riotous Main Street. But this terrifies Wall Street, which has worked for years with Republicans, Democrats, CEOs and the Fed to extract an ever-increasing share of national prosperity for those who control capital. This imbalance is central to today’s tumult. “If we held back because we think asset prices are too high - what would happen to those people who we are legally supposed to be serving?” asked Powell rhetorically, unsuccessfully defending himself from a rising chorus of critics who see the Federal Reserve as amplifying inequality. For decades, the central bank accommodated the financialization of the world’s largest economy. Now that the process is largely complete, even a modest market wobble threatens to devastate the real economy. And Powell is now helpless, caught in a trap of the Fed’s making.

Week-in-Review (expressed in YoY terms): Mon: World Bank forecasts 2020 global GDP -5.2% (rich countries -7.0% and poor nations -2.5%), US formally entered recession in Feb, Democrats propose a “Justice in Policing” act, Colin Powell sharply criticizes Trump in scathing interview (adding to Mattis criticism), S&P +1.2% (higher on year); Tue: Japan machine tool orders -52.8%, North Korea severs communications with South Korea, OECD calls for “extraordinary policies” to address “long-lasting economic scars” on low-skilled and informal workers, German imports -16.5% (exports -24%), France unveils $17bln aerospace rescue plan, France forecasts 2020 GDP -10%, George Floyd funeral, S&P -0.8%; Wed: Turkey March unemployment 13.2% (Q1 GDP +4.5%), House Judiciary Committee hearings on police brutality begin, Fed leaves rates unchanged (forecasts 2020 GDP -6.5% and 2021 GDP +5.0%), Powell “we’re not even thinking about thinking of raising rates,” US coronavirus infections pass 2mm, Trump refuses to consider re-naming American military bases with Confederate General’s name, Tesla hits $1,000, Nasdaq passes 10,000, S&P -0.5%; Thur: Syria endures 5th day of protests (al-Assad sacks his prime minister), Russian official covid-19 cases surpass 500k, WHO warns the pandemic is accelerating in Africa, UK April GDP -20.4% (annual 2020 GDP forecast to fall -11.5%), US unemployment claims +1.5mm (prev +1.9mm), General Milley apologized for his presence with Trump at the St. Johns Church, S&P -5.9%; Fri: Beijing shuts parts of city due to covid-19 outbreaks, Lebanese protests over economic hardship resume, Italian prosecutors question Conte on covid-19 response efforts, French police march in protest to being scapegoated, EU industrial production -28% in April (Italy -43%), Los Angeles movie studios reopen, Oregon and Utah pause their re-openings on rising covid-19 cases, Florida and Texas report their highest daily infections (NY continued to decline), S&P +1.3%; Sat/Sun: Trump switches Tulsa Oklahoma rally from June 19th to the 20th, French BLM rally turns violent in Paris, London far-right protests turn violent (100 arrested), Atlanta police chief resigns after officer kills African-American, CDC warns US is not out of the woods.

Weekly Close: S&P 500 -4.8% and VIX +11.57 at +36.09. Nikkei -2.4%, Shanghai -0.4%, Euro Stoxx -5.7%, Bovespa -1.9%, MSCI World -5.0%, and MSCI Emerging -0.9%. USD rose +3.2% vs Chile, +3.2% vs Mexico, +2.6% vs Bitcoin, +1.8% vs Indonesia, +1.8% vs Brazil, +1.7% vs Russia, +1.6% vs Ethereum, +1.5% vs Australia, +1.3% vs Sweden, +1.2% vs Canada, +1.2% vs South Africa, +1.0% vs Sterling, +0.6% vs Turkey, +0.4% vs India, +0.3% vs Euro, and flat vs China. USD fell -2.0% vs Yen. Gold +2.9%, Silver +0.1%, Oil -6.2%, Copper +3.2%, Iron Ore -1.4%, Corn -0.5%. 5y5y inflation swaps (EU -5bps at 1.03%, US -10bps at 1.75%, JP flat at -0.23%, and UK -6bps at 3.54%). 2yr Notes -2bps at 0.19% and 10yr Notes -19bps at 0.71%.

2020 YTD Equity Index Returns: Denmark +8.3% priced in US dollars (+7.8% priced in krone), NASDAQ +6.9% priced in dollars, Taiwan -3.9% priced in dollars (-4.7% in Taiwan dollars), Japan -4.5% in dollars (-5.7% in yen), S&P 500 -5.9% in dollars, China -5.9% in dollars (-4.3% in renminbi), Switzerland -6.3% (-7.7%), Malaysia -6.8% (-2.7%), Korea -6.8% (-3%), Finland -7% (-7.2%), Portugal -7.7% (-7.8%), Sweden -9.5% (-9.2%), New Zealand -9.6% (-5.1%), Germany -9.6% (-9.8%), Netherlands -9.8% (-9.8%), Argentina -10.1% (+4.2%), Saudi Arabia -12.9% (-12.9%), Israel -13% (-12.8%), HK -13.4% (-13.8%), Canada -14.7% (-10.6%), Australia -14.8% (-12.5%), Thailand -15.3% (-12.5%), UAE -15.4% (-15.4%), Euro Stoxx 50 -15.7% (-15.8%), Philippines -16.3% (-17.1%), Turkey -16.5% (-4%), Belgium -16.6% (-16.7%), Russell -16.8%, Poland -16.9% (-13.3%), Ireland -18% (-18.1%), France -19% (-19%), Chile -19.1% (-14.7%), Italy -19.5% (-19.6%), Singapore -19.7% (-16.7%), Norway -19.8% (-11.8%), Russia -20.1% (-9.9%), Czech Republic -20.5% (-16.6%), South Africa -20.8% (-3.1%), Hungary -22.4% (-18.8%), India -23.2% (-18%), Spain -23.6% (-23.6%), UK -23.7% (-19.1%), Indonesia -24.3% (-22.5%), Mexico -26.9% (-13.5%), Austria -27.4% (-27.6%), Greece -29.4% (-29.4%), Brazil -36.2% (-19.8%), and Colombia -40% (-31.2%).

In America: We decorated an old Land Cruiser borrowed from a neighbor. Blue ribbons, some flags. Mara and I loaded the four kids and made our way to the high school for graduation. The procession assembled in a large parking lot. One graduating senior for each of the 370 vehicles. And once together, standing in truck beds, sunroofs, we rolled out, to snake our way to the ceremony. Teachers lined the high school oval. As they cheered, we honked, an excited outpouring of emotion. A day we’ll all remember, as America stumbled out of quarantine.

In America II: After the drive-by graduation ceremony, a few hundred of us rolled to the local beach. Out popped coolers. Cigars too. The girls in all white, the boys in blue gowns. What began as awkward attempts to social distance melted into an inadvertent handshake or two, which led to hugs. No masks. The police suggested people separate, but gave up, retreated. Naturally, everyone needed a picture with everyone, groups of two, ten, twenty. A more perfectly connected epidemiological model has not yet been, nor ever will be conceived. 

In America III: Mara and I snuck away to escape the graduation crowd. Our favorite spot has tables outside. They now use plastic utensils, tortilla chips in paper bags, masked staff, disinfected tables. It sucked, so we returned to the after-party, 150 people celebrating one of life’s milestones. Graduates hugged, parents too. Tears, laughs, just like in every town across America, where the chasm between our tightly regulated public lives and unregulated private existence is widening, maximizing the economic costs without materially reducing health risks.   

Broke: “When an ETF is up 10% premarket, something is seriously broken,” said CO2, breathless. “Chesapeake jumped 76% last Friday, then Monday morning there were no offers.” By Monday’s close, Chesapeake Energy, once a fracking darling, jumped another 175% for a total 2-session gain of +400%. “Quants look at names like Chesapeake with their bonds trading at $0.05 on the dollar and figure the equity is worth zero, which is correct, so they’re short.” But they got squeezed. “So then having rallied 400%, Chesapeake filed Chapter 11 after the close.”

Anecdote: Abolish is an extraordinary word whose use is on the rise. To abolish means to do away with, put an end to, annul, make void. It’s used when people grow tired of attempts to reform, when entrenched interests are unwilling to lighten their grip, or when there’s simply no middle ground, like with slavery, which was abolished at various times in different nations. America was shamefully late to end the enslavement of others. It took a devastating civil war to decide the issue. And even still, slavery casts a long, tragic shadow on the land of the free, home of the brave. Bernie Sanders proposed that we abolish billionaires. That’s a shocking proposition for those Americans who take pride in an economic system that has produced so many of them. Of course, abolishing billionaires sounds as unrealistic as most of Bernie’s 2016 policy prescriptions. Yet here we are, four short years later, with what was once the fringe now not far from center. That’s how the Overton Window shifts. At any point in time, the Overton Window reflects a range of policies that are politically acceptable to the mainstream population. For reasons that are as mysterious as anything in the universe, the Overton Window may widen or narrow, slide left or right. Today, it’s wider than at any period in our lifetimes. Almost anything seems possible, wild conspiracy theories notwithstanding. A widening array of political and economic policies are conceivable, domestically, internationally. And now there are calls to abolish the police. Such are the frustrations with a century of unsuccessful justice system reforms that we must now reimagine law enforcement. But at their core, all of today’s frustrations have an economic element. And such are the injustices that have grown within our system, that the deeper we dig into the root cause of today’s inequality, the more likely will be calls to abolish capitalism. 

Good luck out there,

Eric Peters

Chief Investment Officer

One River Asset Management

Greenwich, CT

www.oneriveram.com

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.