As a follow up to Eric Peters’ comments on the Fed’s ongoing tightening strategy (which he ascribed to the Fed’s questionable desire to “subdue Wall Street“), the One River Asset Management CIO has some observations on what happens next, which roughly echo what Citi’s Matt King said last week: “the QE era is ending” and as a result, while before last week’s meeting “everyone assumed that the moment the VIX hits 20, they’ll come to the rescue. Now, no one can be sure.”
From his latest weekend notes:
“Can they do it? Should they?
“Last week was the end of the QE era,” he said. “Central banks will turn into net sellers of assets in the coming 2-3 years.”
The printing and buying will continue for some time, but the turn is now in sight.
“The Fed will start unwinding. The Canadians said they want to tighten. The UK had a hawkish meeting. China is deleveraging. The ECB is tip toeing toward the exit.” Only the Japanese still sound dovish.
“Before yesterday’s Fed meeting, everyone assumed that the moment the VIX hits 20, they’ll come to the rescue.” And now, no one can be sure.
And as a bonus, some additional observations on where in the business cycle we are currently:
“We’re so clearly late-cycle,” said the CIO. “The only thing that’s really missing is inflation.” US CPI had just surprised on the downside, declining 0.3 to +1.9% (core -0.2 to +1.7%).
“But perhaps it’s all very simple, things often are.” Q2 GDP is rebounding from the typical Q1 doldrums.
“Maybe this is inflation. Perhaps this is what late-cycle inflation looks like in a heavily indebted world.” Unemployment is 4.3%. The Fed sees it headed toward 4.0%. “Maybe we’re already past the peak. It may be that this was as good as it gets.”
Finally, an anecdote from Peters on disruption:
“They took everyone to the cleaners, they were everywhere,” said Lithium, handsfree on Highway One. “They were vertically integrating, they had economies of scale, the ability to pressure people politically, change local ordinances, extract tax breaks,” he continued, downshifting from ludicrous gear. “They abused workers, they had welfare recipients working in their stores, who turned around and spent their paychecks where they worked.” That’s the story of Walmart. “That’s what ‘getting there’ looks like.” In today’s winner-take-all world, that’s the destination of choice. “Investors miss the big picture on how this game really works,” explained Lithium, banking a turn at a buck-twenty.
“There’s a valley of death that every company has to cross.” Few firms in the world have a better plan and a better man than Tesla, and even it may not make it across. “We love everything about Musk. But he has no plan to turn the corner. His only hope is to ‘get there.’ It’s another damn the torpedoes model.” Bezos adopted the same strategy.
“Amazon has executed better than anyone, and yet it’s had a couple 90% drawdowns along the way. If investors can’t fathom a 90% Tesla drawdown they’re insane.” Musk may have to cross the valley of death a few times before getting there.
“Uber is imploding. It’ll hemorrhage and slowly die now.” Kalanick is no Bezos or Musk. “You simply have to ‘get there’ for these models to work.” And some companies that ‘get there’ may find themselves unable to monetize the model at the end. “Netflix is starting to get there. Amazon is arguably not there yet; though you can’t imagine anyone catching them.
Even Google could be toppled. And so many others will fail,” said Lithium. “It’s an interesting time to invest. And very dangerous. So much capital destruction lies ahead.”
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