Hedge Fund CIO: “Never In Human History Have So Many Things That Weigh Nothing Had So Much Value”
Returning to the world of investing and market commentary one week after surgery, One River’s CIO Eric Peters touches on some of the most topical issues, including his latest take on bitcoin and money in particular, and the definition of value (which is increasingly more weightless) in general, the deflationary impact of tech on prices and wages and what the Fed’s inflation target should be in this “new normal”, recent trends in R&D spending, and, of course volatility.
Below we present select highlights from Peters’ latest letter:
“Imagine 3,500 elephants,” said Andrew Jones, Exchequer Secretary to the Treasury. “Or consider 900 double decker buses.” And at least one bored American did. “That is the rough weight of the 1.2bln coins the UK public has handed in over the past six months.” You see the British have introduced a new twelve-sided pound coin, replacing the little round bloke they’ve had since 1983 (no longer legal tender effective today). This reminds us that money is whatever we all agree it is, or what we’re told it is.
Naturally, the people who print our money tell us it is something real, tangible, weighty. Like an elephant, a bus, or even gold. But it’s not. Money is an illusion, swirling in the ether. Imagine 290k Bitcoin ($5,856 record high this week), or consider 4.7mm Ethereum. They’re both worth 1.2bln pound coins, but weigh less than 3,500 elephants. They weigh nothing.
In fact, never in human history have so many things that weigh nothing had so much value, fueled such vast fortunes. Data weighs nothing. Knowledge weighs nothing. Software weighs nothing. Algorithms weigh nothing. And as the singularity approaches – that point when artificial intelligence surpasses all human intelligence – we struggle to fathom its infinite weight, uncertainty.
As humanity transitions from weight to weightlessness, it seems the gravity that once tethered asset prices to earth is losing its grasp. Perhaps the profound power of weightlessness will accrue in extraordinary commercial ways (and profits) to the companies with the infrastructure to harness it – maybe this is what we are beginning to see. Or perhaps, it is simply that after a decade of unprecedented monetary meddling, our bankers have broken the bond of fiat, shattering the illusion.
And the conditions prompting people to exchange their round blokes for block chains are the same conditions leading people out of money into stocks.
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Destiny: Asia now accounts for 42% of global R&D (public plus private), North America 29% and Europe 21%. 25yrs ago, the US invested roughly 2.5% of GDP on research and development. Today we devote 2.7%, equal to $475bln/yr. China invested 0.7%/GDP in R&D in 1992, but tripled that to 2.1% today, equal to $410bln in PPP dollars. The EU invests 2.0% today, $388bln. Japan invests 3.6% today, $180bln. Germany 2.9%, $110bln. South Korea 4.3%, $91bln. France 2.3%, $60bln. UK 1.7%, $45bln. Russia 1.2%, $43bln. Brazil 1.2%, $35bln. Taiwan 3.0%, $33bln. Italy 1.3%, $27bln. Canada 1.6%, $26bln. Australia 2.1%, $23bln. Turkey 1.0%, $15bln. Sweden 3.2%, $14bln. Switzerland 3.0%, $13bln. Israel 4.0% (global leader), $13bln. Mexico 0.9%, $9bln. South Africa 0.7%, $5bln. Indonesia 0.1%, $2bln. Saudi Arabia 0.3%, $2bln. Vietnam 0.2%, $0.8bln. and Iran 0.7%, $0.7bln.
Destiny II: Corporate R&D stats are hard to pin down but Amazon led the world in R&D last year with roughly $16.1bln spent. Google $13.9bln, Volkswagen $13.6, Intel $12.7bln, Samsung $12.5bln, Microsoft $12.3bln, Roche $11.4bln, Merck $10.1bln, Apple $10bln, Novartis $9.0bln, Johnson & Johnson $9bln, Huawei $8.4bln, General Motors $8.1bln, Toyota $8.0, Pfizer $7.8bln, Ford $7.1bln, Daimler $6.5bln, Oracle $6.2bln, Facebook $5.9bln, Cisco $5.7bln, Honda $5.5bln, IBM $5.4bln, Eli Lilly $5.2bln, Qualcomm $5.1bln, General Electric $4.8bln, Boeing $4.6bln, Celgene $4.5bln, Bristol-Meyers $4.6bln. Tesla spent just $2.8bln in cumulative R&D in the past 7yrs, turning the auto industry on its head. And Alibaba just announced a $15bln 3yr R&D budget.
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Anecdote: “Every single trading decision leads to another,” said Roadrunner. “And when you get offsides in a market, it’s difficult to get back in sync,” explained the biggest market maker in equity volatility. “So I spend my quiet hours going back in time, revisiting the series of events and decisions that led me to the present.” The world rushed past us, a never-ending flow, and I recalled a point far upstream when we first met. A decade ago, early in his journey, with his stake, ambition. “I have lots of traders now, who often get themselves tangled in things. I see so much. I try to help, but often with very little information, without the context, the history.”
Having survived 2008 with capital intact and hubris diminished, he embraced exchange traded volatility products. “When my traders struggle, I get drawn into their markets, their books, the chain of events that led them to their present. I help them see things within, and learn things myself.”
VIX futures traded 4k contracts per day in 2008. Today they trade 300k. The VXX (VIX ETF) didn’t exist in 2008, and now trades 100mm shares on a busy day, as much as the SPY (S&P 500 ETF).
“The source of my success is in reliving the past, then applying that to the future. And I’ve learned that markets turn two weeks from my point of greatest pain; I’m always max long volatility two weeks before it bottoms.”
We laughed, because of course, if you’ve learned to know when you’re too early then you should never be too early. “You can’t fully escape yourself, but you can learn to manage the consequent losses better because you see them approaching. And then when the turn comes, you understand it, you know it, you’re ready. You’ve seen the future unfold in the past.”