Hedge Fund CIO: "This Is Unprecedented... No Trader Has A Model For This"

Tyler Durden's picture

It's Sunday morning, and as is customary for this time of the week, we present the best excerpts from the latest weekend note by one of our favorite market commentators, Eric Peters, CIO of One River Asset Management. Today we focus on what is currently the most controversial topic in capital markets, namely China, and how it could - and willl - impact not only the global reflation trade but risk assets across the world. Or rather, how it may, because as Peters puts it in the simplest possible terms, "no one has a model for this."

“No one has a model for this,” said the CIO.

 

“Everyone buying assets today is building somewhat plausible arguments, but they’re really all just geared to decisions made in Beijing.” 

 

The most crowded trade in the world is cognitive dissonance on China. “We need persistent increases in debt relative to GDP for the world economy to function. And since 2011, 100% of global non-financial private-sector net credit creation has occurred in China. Across the western world, it’s been zero.” Since 2008, non-financial private-sector credit has risen 20% per year in China. In the west, net credit creation occurred through rising government debt - but for that fact, our economies would’ve suffered profoundly. Instead, global asset and liability levels have grown inexorably, led by Chinese credit creation.

 

“At 20% annual credit growth, China’s asset (and liability) base doubles every 3.5 years.” Seven years ago China’s asset base was roughly $15trln. Then it doubled. And doubled again.

 

“China’s asset base today is roughly $60trln, on its way to $120trln sometime in 2020,” he laughed, his spreadsheet sprouting trees, racing to the sky. “The US asset base is $90trln. They’ll pass us in 2yrs. When we were $60trln, China was $10trln.”

 

 

A rise of this magnitude and pace is as unprecedented as its impact is ubiquitous; more CO2, fewer rhinos, higher global asset prices, lower global defaults.

 

"People believe they’re leveraged to all of these wonderful things happening in the world. But they’re simply leveraged to what happens in China.”

 

Oil prices, iron ore, copper, real estate, and today’s global cyclical recovery are all directly tied back to China. And this can all continue for a time. Or end abruptly.

 

“What makes this so difficult to model is that this’ll be the first cycle that ends based on decisions made in Beijing, not Washington or Frankfurt.”

* * *

As a bonus, here is an anecdote from Peters for all the traders out there who enjoy creating narratives to rationalize and justify each and every investment decision:

“Everyone lies,” said the Liar.

 

“And the worst form of lying is rationalization,” said the Liar. “We make up stories. We concoct intricate mythologies. All to support our views and justify our portfolios,” said the Liar.

 

“Without these fictions, it’s not possible to hold a position in the face of the uncertainty we constantly face,” said the Liar.

 

“Show me a portfolio, and convince me that it is not built upon rationalization,” said the Liar. “You can’t,” said the Liar. “And anyone who claims otherwise is a liar.”

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hedgesofnight's picture

Interesting stuff. Thanks Tyler.

BennyBoy's picture

Have the big banks get in there and bribe, bribe, bribe for positive results.

oobilly's picture

China replicated the entire us commercial banking sector in like 5 yrs.

Makes me think Ross Perot was right in 1992...duh.

Darth Rayne's picture

Fewer and fewer are controlling more and more. I am thoroughly amused that control has been lost to China. Or at least, the illusion of control.

https://davidwatkinson1.blogspot.co.uk/2017/05/why-when-and-how-update-1...

Consuelo's picture

 

 

"The most crowded trade in the world..."

Is the the 20,000 $lb. pink elephant doing circus acts in the midst of a formal (Western) wedding party, whilst everyone passes by, unwilling to take note.

 

"Make a sound in the East, strike in the West"

 

Donate Moar's picture

I like to think that everything is unprecedented.

It helps me get through the day, ya know...

In no way am I a Bible thumper and the only book I ever read was Ecclesiastes,

but it will clarify all the BS we're exposed to:

For example, it starts with:

“Meaningless! Meaningless!”
    says the Teacher.
“Utterly meaningless!
    Everything is meaningless.”


Happy Mothers Day!

Panic Mode's picture

I do think China time will become world finance center but not yet. China has massive red flag in their debts. They can't just gain control without falling hard first. When that happens, then all eyes on China. You better hope they have avian flu cured by then, no one wants China to sneeze.

A. Boaty's picture

Avian flu = hoax, i.e., an excuse to drive people away from marsh lands where they can get free protein, thus forcing them into moar "economic" activity.

Pareto's picture

 

 

“And the worst form of lying is rationalization,”

........and is the basis for every university macro-economics course.

Giant Meteor's picture

Rational lies, or , irrational lies, as whichever the case may be, same result  ..

It has been over used, but it is worth repeating, this is not going to end well ..

On the other hand, end it must, and the only question will be, what does the world resemble afterwards ..

Yukon Cornholius's picture

When was the last time the Rothschilds had a losing year?

Giant Meteor's picture

Well that is a good point ..

When asked the question, magic 8 ball spit this back out ..

http://www.independent.co.uk/news/uk/home-news/rothschild-loses-libel-ca...

 

Anarchyteez's picture

The meeting of the turd and fan blade is near.

A. Boaty's picture

One does not need a rationalization to stack PMs. A store of value makes its own argument.

Arnold's picture

Mr Boaty, That was a completely rational narrative.

Pithy is the best part.

Cordeezy's picture

China prints the most money so they win!

www.escapeamazon.com

LittlePinkTaco's picture

Jim Rogers is having his grandchildren learn Chinese. Probably a good idea!

Government needs you to pay taxes's picture

Is there a happy ending at the end of this Chinese monetary massage?  I think not.  

assistedliving's picture

catching a flt to Dallas w/ the Mrs.   OVerbooked; long lines.  In walks that midget w/ his tall blonde squeeze in

their motorcycle get up.  Walks right up to the front.  Guy says something to him and he says "relax, you'll all get on the plane"

Fuck Jim Rogers

miki's picture

no one had a computer model for the breakup of the soviet union, so no one has the model for what could happen to china, who the fuck knows anything there are no truths mathematical or otherwise there are only fashions

Disgruntled Goat's picture

"More CO2" implies the author has a Climate Change agenda, meaning he is an elitist fucking retard, meaning I stop reading right there.

Government needs you to pay taxes's picture

The libtard response of (brainless) choice is always some form of 'you are stupid and I am really smart'.  I wonder, can one be smarter than a speeding bullet? ;) 

GoldHermit's picture

One thing to remember about China – gold goes in but never comes out. They have a very specific plan for the end game and I have rationalized that by stacking .

Quinvarius's picture

A billion people coming out of the stone age want stuff.  And we transplanted our entire manufacturing sector to China so they could have stuff.  The question is, why would anyone on earth think comparing the US to China is apples to apples?  We have clearly been in obvious economic decline for at least 16 years while China has been doing the exact opposite.  Yes.  You have spreadsheets for this.  You should stop putting the US on them as some kind of benchmark--At least until Trump's first term is over.

Boing_Snap's picture

Hmmm debt has made slaves out of the US, are the bankers attempting to make slaves of China? Opps hold on they're already slaves, are they now super slaves?

Harry Lightning's picture

If you need a model for this you should not be a trader. Its really quite self evident what will happen. If China slows it debt creation, the rest of the world has a drop off in both demand and liquidity growth needed to fiannce whatever economic activity is occuring. So prices of commodities should fall to reflect the falling demand, and earnings of public companies should contract to some degree. If the Central Banks replace the liquidity deficit caused by the pull back in Chinese credit creation, then global stock prices should not suffer as much as if the Central Banks do not replace that liquidity. So the exercise then reduces down to a Central Bank watch, which will tell the equity tradr which way the stock markets will move.

Debt markets will be more difficult, as there will be competing forces of fundamentals and liquidity. The liquidity forces have been in control of US debt markets since the end of 2015, which was the last time that monthly real rates of return for long-dated maturities exceeded the long term average real rate of return for those securities. If long end yields continue to trade significant below the trailing 12 month Consumer Price Index plus about 250 basis points, then you know that the liquidity injection to replace Chinese credit creation is enough to keep the bond market in homeo stasis. If you see real rates starting to rise, you will know that the Central Banks are declining to replace all of the liquidity deficit, which would be bad for debt market prices.

So if the debt markets tell us that liquidity is not being replaced, then we should assume that fundamentals will drive the train. Commodity markets will then become the canary in the coal mine for equity prices, and as long as commodity prices are falling in the presence of rising bond yields, stock prices inevitably will have to fall. And they will keep falling until the trends in comodities and debt begin to reverse.

Now tell me why anyone needs a model to figure that out ?  

OpenThePodBayDoorHAL's picture

QE4, 5, 6, then 7 and 8 etc., CBs exchanged $1T in magic free money for assets in Q1 alone. Stagflation, with no Volcker in sight.

saveUSsavers's picture

FUMIGATE THE LYING COCKROACHES