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.

* * *

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.

* * *

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.”


Anteater Sun, 10/15/2017 - 18:31 Permalink

"They're both worth 1.2bln pound coins."Uhhh, no, they're worth only what the Next Greater Suckerwill pay. They're not fungible, they're not currency, you can'tpay rent, buy gas, buy groceries or pay utilities with CCs.You can't go to a bank or post office and trade them for cash.The only way you can cash them out is to find a sucker.So no, they're not 'worth' 1.2bln pound coins.They're vaporware, promising 'untold riches', but only as longas you can find an untold rich person stupid enough to buy.  

adr Sun, 10/15/2017 - 18:31 Permalink

99.9% of what constitutes the global "economy" today has no value. The vast fortune of the 1% was not earned, it was conjured out of thin air and granted to those in the club. The majority of the American people have no value because skills have been replaced by tasks. It takes no skill to perform most jobs and therefore those workers are essentially worthless. When Home Depot has to hold clinics on how to use a hammer and nails, the country is fucked. 

Giant Meteor adr Sun, 10/15/2017 - 18:39 Permalink

GDP is represented by 40 + % of all manner financial fuckery ..Not to channel Kevin Philips too heavily here, but I'd say that is not a net positive development for the muddle class plebians ..Certainly not for the great unwashed assetless plebes, and other assorted debt serfs  ..

In reply to by adr

kochevnik adr Sun, 10/15/2017 - 18:54 Permalink

Nobody owns anything in USA as all gains of the colony are deeded to European aristocrats. That is why you only have title to your land, house and car. Title is only a receipt. Deed of ownership stays safely abroad. Corollary: all transactions inside USA have no net value, as system automatically sends ownership abroad

In reply to by adr

YourAverageJoe adr Sun, 10/15/2017 - 19:30 Permalink

Yes, and those that do know how to use tools will be the masters of the realm. Thats my plan anyway.I'm watching craigslist for machine tools for a retirement shop.I think in the future the only machinists to be found will be 70+ and few kids will be interested in watching metal being cut.

In reply to by adr

Endgame Napoleon adr Sun, 10/15/2017 - 19:38 Permalink

What about all the highly paid managers who take lengthy and frequent babyvacations, just like their momma-clique underlings who would be described as “unskilled” task performers? From the pay grade, we must conclude that the managers are skilled, but aren’t skills needed at work, not at baby travel soccer, etc.?

In reply to by adr

homebody Sun, 10/15/2017 - 18:40 Permalink

No value!  Look at how many are getting into the web site business - the sites that produce nothing.  Pitch hotels price comparisons,  pitch auto price comparisons, pitch retirement home comparisons, pitch home repair tradesman service comparisons, pitch hiring services - all do nothing - no physical inventory, hardly any staff, all no production for the country.  And I thought you could not sell air or bullshit to the sheeple.    

pigpen Sun, 10/15/2017 - 18:51 Permalink

Bitcoin and digital advertising. How can all of this stuff be worth trillions.I'm doing my part to destroy digital advertising model and use brave browser or ublock origin on all my devices regardless of operating system and by default blocks all malware, advertising and tracking.Time for everybody to revalue their attention and render digital advertising useless.Run all social media apps out of the brave browser and block all advertising even in YouTube.Cheers,Pigpen

Creepy_Azz_Crackaah Endgame Napoleon Sun, 10/15/2017 - 20:57 Permalink

He also was the CEO (I believe) of Mozilla (Firefox) who was fired for having Christian beliefs. He, in his private life, contributed to an effort for 1 man/1 woman marriage. That was beyond the pale for the leftist nutjobs working on Firefox. FIRED!!!I use Brave now. It still needs some cleaning up but it does a great job of cutting out the crap on web pages, and it's not Firefox.

In reply to by Endgame Napoleon

masrdavy Sun, 10/15/2017 - 18:54 Permalink

Weightless value will continue to grow in popularity for as long as there is a network up and running and a population control event on schedule that grants a reduction of at least one third of life on earth 

exartizo Sun, 10/15/2017 - 19:00 Permalink

Dear Mr. Peters,

imagine if you can, a very Large Mirage.

into which are put all the shiny weightless assets you mention.

then say:

"Poof!!! They're Gone!!!"

and you'll get the exact right asset valuation you're looking for, you fucking idiot.

because, remember, as I've said sooooo many times on ZH over the past few years.

All asset valuations are HORRIBLY mispriced.

Now go back to your Ivy League Bullshit tower and leave the real world reality based folks to figure out how to deal with it.


A ZH Reader

Drop-Hammer Sun, 10/15/2017 - 19:02 Permalink

Satan's greatest deceit was to make people believe he does not exist.  The jew's greatest deceit was to make us believe that their hot air, spin, and financial/economic voodoo have value.  

NemesisteM Sun, 10/15/2017 - 19:20 Permalink

The futurist Ray Kurzweil has a time line for 2036 I believe when the easily mineable silver will be depleted.  Humanity and the exponential population growth lives off finite resources.  Without cheap oil our population wouldn't be near what it is now.  Profit margins driven off cheap extraction of raw materials.  The party will not continue indefinitely.  The human parasite will strip the world for as long as the planet sustains, and the parabolic curve has a nasty long way down when the roller coaster reaches its peak. All it takes is one geomagnetic storm or an EMP strike to bring down the grid.  Intrinsic value takes on a new meaning at this point. And value can only be measured by necessity. Human necessity is ever changing yet intrinsic value never changes.  Gold is a store of value but isn't very useful.   Meanwhile silver has thermal conductive and anti microbial properties that make it essential to human health and technology.  History has overvalued the wrong metal all along.  And that is why there is such a strong drive by TPTB to keep it undervalued through ETF derivatives and manipulations.  That will also come to an end when easy extraction is no longer available.  

tmosley NemesisteM Sun, 10/15/2017 - 19:40 Permalink

I don't think Ray is a dumbassed doomer.What is "easily minable" in 2036 will include anything at both unfathomable depths as well as most of the asteroids in the solar system, along with the surface of the moon and Mars, and maybe even parts of Mercury.Oil can be synthesized from the air if you have enough electricity. Thorium will provide it for cheap. Fission even moreso.

In reply to by NemesisteM