Aphoristic as usual, below we share some excerpts from the latest weekly letter to clients by Eric Peters, CIO of One River Asset Management, in which he discusses walls of worry, the real un-risk out of Europe, desperate oil investors, and North Korean geopolitics.
“People focus on their greatest fears,” said Eagle, circling over Gotham at dawn. “But the greatest risks are never in our field of vision.” To the east, a terrifying ball of fire rose on the horizon. “Now that China is aligned with America, North Korea is no longer World War III. At worst, it’s a horrible few days.” The sun rose further, glorious, giving. “What if the French elections mark a pause in event risk?” asked Eagle, a spring day unfolding below. “What if the real risk is a global synchronized expansion? And the normalization of European interest rates?”
“America’s economy slowed during its election,” observed Eagle, soaring. “An economic burst is on its way.” Far below, ants scurried along Wall Street, carrying crumbs. “But look closely, the European PMIs today are extremely strong.” Manufacturing PMIs hit 4yr highs defying Le Pen’s anti-European rhetoric, and Melenchon’s 100% tax threats. “If European growth during the election was so strong, what will happen once the uncertainty lifts?” asked Eagle. Overseas investors sold $120bln of EU equities in 2016. They’ve repurchased just $30bln.
“If there’s one thing that worries me, it’s that I don’t know what to worry about,” continued Eagle. “While the catalyst that sparks a bear market is usually unknowable, the dominant vulnerability for a market is usually visible.” Morning rays reflected off the Atlantic. A trillion diamonds, blinding light. “In 2007-08 the US financial system was riddled with cancer. In 2011, Europe’s banks were obviously sick, vulnerable.” And Eagle squinted, circling. “There’s nothing obvious now, except perhaps the coming Fed balance sheet reduction.”
* * *
Pit and Pendulum: “Everything that the smartest fundamental oil bulls said would happen has happened,” wrote Poe, cruel smile, a razor-sharp blade swinging through the dank chamber. “And yet here we find ourselves with oil prices at $46, down 14% on the year.” Energy investors screamed in the darkness, terrified, tied to the floor - chanting desperate prayers for OPEC intervention. Saudi princes lay beside them, chained flat, hearts racing, dreams of their Aramco IPO turning to nightmares. The arc of the pendulum, through the darkness, panic.
* * *
“We’re early in the new President’s direction with North Korea,” said the senior military officer, reflecting on his decades of war games and exercises in the Pacific theatre. “We’re changing tactics and it’s pressurizing the situation,” he explained.
“The added pressure is causing new reactions.” Kim Jong-Un claimed he was the target of a CIA assassination attempt. That’s an example of the “dear leader” reacting to pressure. “Our President sets policy and strategic objectives, such as the removal of North Korea’s nuclear weapons, and assigns tasks to government departments - including the Department of Defense - to develop plans to execute his strategy.
“Contingency plans are continually developed and updated for the expected and unexpected…the unexpected seems to always happen.” Every six months the U.S. and South Korea conduct large military exercises. The logistical complexity is staggering.
America has 28.5k troops in South Korea, plus 150k civilian citizens working and living there. Those citizens would have to be evacuated from the country in wartime, along with those of our allies and partners who might request assistance – the number of evacuees might reach over 1 million. One-half of South Korea’s 50mm citizens live in Seoul – 30 km from North Korea’s artillery dug into the mountains overlooking the city. With a North Korean army of one million troops, South Korea’s devastation would exceed anything seen since World War II.
“We don’t want a war, nor necessarily regime change in the north. We break their regime and we own the place, including the immense reconstruction. The humanitarian disaster would exceed anything seen in modern history.” Imagine 24 million already malnourished North Korean refugees. “If there is ever any real conflict it would likely be many months to years away.” And he smiled. “Unless something goofy happens, and accelerates everything.”