Submitted by Eric Peters, CIO of One River Asset Management

“The yield curve is screaming be prudent,” bellowed Biggie Too, Global Chief Strategist for one of Wall Street’s Too Big To Fail affairs. “But it’s not exactly like our politicians and policy makers are prudent,” said Biggie. “We got Trump talking QE4, Powell pivoting, Moore, we got Cain coming,” he said. “What the opposite of prudent?” asked Biggie, and I dared not answer. “It’s reckless. These guys are recklessly desperate,” said Too, happy with the way that sounded. “Recklessly desperate for a boom,” said Biggie. “Boom baby boom.”

“So if you gotta worry about something, you oughta worry that this market gets recklessly desperate too,” barked Biggie in baritone. “If you’re rational, you’re buying vol, taking profit. Saying I don’t know I’ll be right in 6wks, but I will be right in the next 6 quarters,” said Too. “The smart money is still stubbornly smart, like in Tokyo in 1988, and New York in early 1999,” he said. “They were right - smart is always right in the end. But smart is also always early,” said Too. “To kill this market, you’ll first need a lot less stubbornly smart,” said Biggie.

MMT:

Japan’s central bank survey showed consumer sentiment at 2yr lows. 24% of voters think economic conditions are worsening. 5% think they’re improving. Total cash earnings fell 0.8% from a year earlier. China’s slowdown has taken its toll. And as Beijing’s stimulus works its way through the system, Japan will surely bounce a bit. But Japan is planning a 2% consumption tax hike to 10% this autumn. So you can bet that somehow, someway, the treasury will keep massively issuing bonds, the central bank will buy them, and oddly, no will call it MMT.



Passive:

The 20mth process of adding 363 Chinese bonds and policy bank securities to the Bloomberg Barclays Global Aggregate started - just in the nick of time. China will become a net debtor for the first year since 1993. To finance its current account deficit, it’ll need $210bln of annual inflows every year for the next decade. That’s coming at a time when Chinese locals want their money out. Foreign holdings of Chinese bonds are $250bln but will jump to $2trln on this index inclusion. And the massive inflow won’t be driven by a single active investment decision.



News Flow:

“Bad news was good news in Q1,” said the investor. “And now we’ve switched to a good news is good news market,” he continued. “There’s no way the Fed can surprise with more dovishness now that Kudlow called for a 50bp rate cut and Trump called for QE4.” With stocks up, bond yields down, credit spreads tight, and Fed Funds futures pricing rate cuts, we’ve hit the peak of easy financial conditions in the absence of an aggressive easing cycle. “So okay, let’s accept that we get some good economic news for a while, how much upside is really left?”