Eric Peters:”From Here Do You Want To Remain Long Crap? And Short Quality?”
It is Sunday which means Eric Peters, the CIO of One River Asset Management, has published his latest weekly assortment of anecdotes and vignettes selected from the life of a hedge fund manager (always in the 3rd person), which today focuses on the quandary facing the Fed (hiking rates hurts Wall Street, but does it help Main Street?), portfolio positioning (does mean-reversion spell the end of the two best trades of the year, long EM and equities), trapped central banks and the Stockholm Syndrome (the inability by Sweden and ECB to tighten even as they forecast economic growth) and China’s ongoing nationalization of its financial system. In a subsequent post we will also present his 4 anecdotes on the life of a CIO from the perspective of everyday events.
So without further ado, here is Eric Peters with his latest weekend notes.
“The irony is that the people who are least sensitive to interest rates are the most affected by low interest rates,” said the CIO. “In most cycles, the collapse in interest rates would have sparked a massive real estate cycle, driven particularly by those who need loans.” But not this time.
“The real activity has been in places like NYC where people are least in need of mortgages.” But their wealth has exploded indirectly through low rates via the rise in asset prices. “I wouldn’t bank on that lasting for much longer, though I’m not sure what’s next.”
“The real economy hasn’t gotten over-leveraged as a result of low rates,” continued the same CIO. “But the financial economy sure has.” Corporate debt issuance, share buybacks, financial engineering of all stripes. “But what is the Fed going to do? Hike rates to hurt rich people?” he asked.
“Maybe that helps restore a sense of social fairness over a 20yr timeframe, but I’m not sure that it helps anyone in the near-term.” He fired up his Ferrari, heading to the Hamptons. “High rates hurt Wall Street, but how do they help Main Street?”
“Examine portfolios that have worked,” said the CIO. “And then mean-revert them to see how they make you feel.” Dogs of the Dow was a well-known example of a mean-reversion system. “Long emerging markets and long equities are the portfolios that have worked this year.” Short bonds and long dollars are the 2017 losers. “So do you still want to be long EM and equities from here? And do you want to be short bonds and long dollars?” Sometimes it’s helpful to look at the world simply. “From here, do you want to remain long crap? And short quality?”
Sweden’s central bankers left overnight rates at -0.50% and forecast no hikes until Q3 2018. They did, however, lift 2017 GDP forecasts +1.0 to +3.2% and 2018 GDP +0.3 to +2.7%. Industrial production is surging +5.3% annually, and services output is rising +4.1%. Inflation is right on target at 2%. The economy is booming. Real rates are deeply negative, in desperate need of normalization.
But you see, European central bankers have set overnight rates at -0.40%. And the Swedes are hostage to fears of a strong krona.
“China completely renationalized its financial system,” said the CIO. “They turned their backs on markets.” For a time, the PBOC had come to accept the West’s belief in the wisdom of free markets. No more. “They closed their capital account and have no plans to even reconsider the decision until 2020.” Perhaps much later.
“Allowing markets to determine exchange rates and interest rates is not part of Chinese culture.” No nation in Asia really believes in free floating financial markets.
“They can continue running this game until they open up.”