Hedge Fund CIO: "What Makes Today’s Market Unique Is That The Wall Of Worry Appears To Never End"

Submitted by Eric Peters, CIO of One River Asset Management

He considered the wall, each stone a worry, within its pattern a story. For three decades he’d been climbing. Every wall was different, a reflection of its unique history. Only at the top were they alike. From that perch, the wall-of-worry overcome, did the greatest risk appear.

When he first started studying markets in the trading pits, survivors simply said that prices top when there are no more bears, when everyone who will buy has bought. From there, all it takes to turn is a single bull who decides to sell. After all these years he’d discovered no better explanation.

The greatest example was the dot com bubble. The Y2K worry was a gigantic boulder atop that wall. On March 24th, 2000, having scrambled up and over, the last bear turned bullish, the market peaked. What makes today’s market unique is that the wall appears to never end.

No sooner do we arrive at the top then new worries arise: Trade wars, Comey, Mueller, Korea, Cold War, government shutdown, impeachment, immigration, invasion, quantitative tightening, Turkey, Venezuela, SWIFT payments, sanctions, Huawei, Mexico, Iran, Fed independence, now under assault. And everywhere, always, America’s unilateral challenge to the terms of global trade, security, economic orthodoxy.

Each new worry magically extends the rally.

In the background is the bond supply, growing inexorably, as rates decline. $13trln in global fixed income securities yield something negative. Supporting economic growth is the world’s wealthiest nation, running a 5% budget deficit while at full employment, its GDP above potential.

And with an increasingly politicized Fed acting out of sync, coming to the rescue somewhere near the top, unwilling to wait for the tumble, the biggest risk is not that we run out of self-inflicted worries to sustain the rally, but rather that today’s proactive policy fails to provide the lift we’ve come to count on, or that inflation suddenly emerges.

Perhaps both.

* * *

Centuries

“Think in centuries,” said the CIO, playing games with himself. “Will fossil fuels be our primary energy source in 100yrs?” he asked. “Of course not.” Will they dominate in 50yrs? 25yrs? What will replace them? “Will we still use paper currency in 100yrs?” he asked. “Not a chance.” But will we still have paper in 50yrs? 25yrs? How about 10yrs? What will replace it? Bitcoin, Libra, crypto-dollars? “And will global central banks maintain their independence throughout the coming 100yrs?” he asked. “Nope, Japan has practically-speaking lost theirs.”

“Will America import manufactured goods in 100yrs if they can be made here at home in robotic factories?” asked the same CIO. “They won’t.” How about in 50yrs? 25? 10yrs? How will the world’s mercantilist nations adjust? “Will the US have an impenetrable wall along its southern border?” he wondered. “Surely it will,” he said. “How will America’s society and economy be transformed by merit-based immigration?” It’s coming. “And what two things in the next 100yrs could utterly transform the world?” he asked. “Cold fusion and the Singularity.”  

Crypto

19% of humans have bought cryptocurrency, according to cybersecurity firm Kaspersky. Only 10% say they fully understand how they work. 14% of those who’ve never bought crypto claim to want to do so in the future. And this survey was conducted before this year’s dramatic recovery even started. The bear market that devastated cryptocurrencies started in Dec 2017 with Bitcoin hitting $20,000 and ended in Dec 2018 at around $3,200 (an 84% decline). 19% of crypto investors claim to have experienced hacking and 15% suffered fraud.

From the 2018 low of $3,200, Bitcoin has quietly rallied 248% to $11,137 (market cap $189bln). Ethereum is up 275% (mkt cap $32bln). Ripple +80% (mkt cap $20bln). Litecoin +506% (mkt cap $9bln). EOS +316% (mkt cap $8bln). The rally recently went parabolic, fueled by hopes that Facebook’s new Libra coin will help validate cryptocurrencies and expand their adoption. Bitcoin has recovered nearly 50% of the bear market loss, which is something stocks like Pets.com never managed to do. Crypto feels somehow different than the dot com stocks.