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

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.”

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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.”