Hedge Fund CIO Amazed At The Absurdity Of It All
The latest weekly recap from One River Asset Management CIO Eric Peters tries to bring some sense to an increasingly absurd global economic, social and political situation, and fails, finding that the “more than absured is no longer absurd.”
From Eric Peters’ Weekly Notes
“More than absurd!” cried Jens Weidmann, outraged by Pete Navarro. Trump’s trade advisor had deliberately talked-down the dollar to boost US exports by accusing Germany of deliberately weakening the euro to boost European exports.
The argument is quite obviously absurd, because everyone’s trying to engineer a weaker currency. But according to Jens, it’s so absurd as to be more than absurd. Like lifting yourself into the air by grabbing your ass with both hands.
Germany’s current account surplus is over 8% of GDP, 2016 factory orders soared 8.1%. Absurd!
Greek unemployment hit 23%; the IMF forecasts 275% Debt/GDP by 2060. Absurd!
Germany is suffocating Europe. “Absurd!” cry German policy-makers, in more than absurd self-defense, as the Bundesbank repatriated 111 tons of physical gold from the NY Federal Reserve in 2016, and 105 tons from the Bank of France – they’re nearly complete.
“Frexit is a choice of impoverishment that threatens French jobs and savings,” warned the ECB’s Coeure. But if they don’t vote Le Pen, they’ll vote for impoverishment Hamon-style, with his 35 hours of pay for 32-hour work weeks. Or they’ll vote Fillon, with his E830k of government-financed pay for no work at all (you just need to be his wife). Or they’ll vote Macron, who sounds absurdly sensible in a frightened world screaming out for something else, without knowing quite what it is, but willing to take a risk.
“Our leaders chose globalization, which they wanted to be a happy thing. It turned out to be a horrible thing,” Le Pen screeched, to a crowd in Lyon. “It sets the conditions for another form of globalization: Islamist fundamentalism.” An imminent ISIS Paris-bombing was thwarted, the French/German 10yr bond spread widened to 72bps.
“The people are waking – the tide of history has turned,” thundered Marine. As the more than absurd is no longer absurd.
And here is a bonus anecdote from Peters:
“The UK, US and Italy have rejected the established orthodoxy of the post-1979 period,” said the CIO, in one of those English accents that make American’s feel stupid. “Prior to 1979 it was accepted that the overriding aim of economic policy should be the pursuit of full employment.” Post-1979 the only object of government policy has been the pursuit of a declining inflation rate.
“The former (full employment) bias succeeded so well it dissolved into high inflation and declining real wages. The latter (low inflation) bias succeeded so well it dissolved into deflation and zero net capital investment.”
On the one hand, it’s not clear what capitalism is without a return on capital (1979) and on the other, it’s unclear what capitalism is without capital investment (2016). “The post-Thatcher orthodoxy was designed to reduce inflation. What was not realized (except by the honest few) was that a war on inflation implied a war on developed-economy wages, and that this implied a shift in the distribution of output away from labor toward capital. Even less realized was that by stifling wage growth and reducing wage income as a share of the economy, one would stifle the economy overall.
“Voters rejected the former dispensation with the election of Thatcher and Reagan. Now they have rejected the latter.” Japan went further than any nation in the pursuit of low inflation, driving down real hourly wages for twenty years. An achievement without parallel. “The motor behind the economic outcome to which the electorate appears to object is the obsession with low inflation. In turn this is supported by an obsession with monetary policy and an anathematization of fiscal policy.” Trump says these must change.
“Whether he means it or whether he can change it is open to question. But if he does, a new world awaits as post 1979 orthodoxy is ditched.”
A new world, in which even the Fed’s second in command admits they have no idea what is about to happen next.