Some always enlightening thoughts from the latest weekly letter by Eric Peters, CIO of One River Asset Management
Hope all goes well… “Total fiasco, utter circus!” cried the CIO. “KGB videos, golden showers, kompromat, and his temper tantrum over that CNN reporter,” he continued, breathless. “Single worst press conference for a world leader in history. The $2bln Dubai deal. That random pile of manila folders. The dopey lawyer. Gimmicks, conspiracies, rambling bluster. We didn’t learn a single thing about policy. For the sake of our nation, pray The Donald sticks to Twitter.” And he paused, collected himself. “But the thing that upsets me most is that it didn’t spark a big enough correction to let me back into all my favorite Trump trades.”
“The Central Intelligence Agency will absolutely not resume using banned interrogation techniques, such as waterboarding, if ordered to do so by President Trump,” explained Mike Pompeo, The Donald’s already-insubordinate nominee for CIA chief. But it’s only insubordination if our new Commander-in-Chief were to send those bearded-boys to the water-board. To get elected he said “torture works,” America should institute “harsher techniques.”
He said lots of things. He said almost everything. Which allowed us to see in him whatever we wanted, both good and bad, without knowing a single thing for sure. And naturally, every investor hopes he didn’t mean half of what he said.
“China building of islands and putting military assets on those islands is akin to Russia taking Crimea from Ukraine,” declared Rex Tillerson, our PEOTUS’s already-assertive nominee for Secretary of State, pledging to block the Beijing Boys from their newly built bases. In one sentence, he angered the Russians, infuriated the Chinese, and placated our senators. The last time America threatened Asian shipping lines, Japan attacked Pearl Harbor. Which couldn’t possibly be what Trump wants.
But life gets more complicated when you transition from running to governing. More people get involved. The law of unintended consequences blossoms. “If you were to ask me three years ago, four years ago, when unemployment was still high and the economy was still digging out of a hole, I would have said, sure, fiscal policy would be great to help expedite getting back to full employment,” said SF Fed President Williams, challenging The Donald’s infrastructure agenda. “But today I don’t think we need short-term fiscal stimulus. What we need is really better policies, investments in the long-term health of the economy.”
And we carried on trading. Searching for the right prices. Reading into increasingly complex and contradictory comments whatever we want to believe.
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“No one makes money in the chop,” said the CIO. “People make money on big moves.”
Trump held his press carnival, markets swung wildly. “The Yen was at 117 two days ago. Now it’s 114. Tomorrow it may trade 117. Will anyone make money?” A few will, most won’t.
“Nearly 100% of trading returns last year were made between November 8th and December 15th.” The dollar rallied 13% versus the Yen in that time. Ten-year treasury yields jumped 80bps. The Russell 2000 jumped 18%. Markets trended in uninterrupted fashion; a perspiration-free ride for the well-positioned.
“Those kinds of big moves are mandatory for hedge funds to make real money.” A few people profited from Japanese interest rates last year. Some nimble punters made money on Brexit. Trump provided the third real opportunity.
“You can’t make money in this business slicing nickels, you need to find $1,000 bills. Because prudent risk management precludes you from running positions at 100% of your fund assets, which means that even if you catch a 10% move, maybe you make 2% or 3% returns.” When you get really lucky, a Trump trade comes along, you’ve got the right positions, they correlate highly and you collect a few 2-3% profits at the same time.
“So the only question that really matters in this business is this: What’s the next big move?” he explained. “It’s probably a continuation of the Trump trade,” he said, pausing, considering the pain of 2016. “Last January, people were convinced the renminbi would blow up.” But it promptly rallied +3%, stopping most people out. If you held tough, or re-engaged the trade, you made a fortune. The renminbi fell -8% from those highs.
“The thing is, consensus trades have a nasty habit of working, just not exactly when you want them to.”