Hedge Fund CIO: “In The Next Recession Rates Will Quickly Fall 100bps. Then Go To Zero. Then We Do MMT”

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Submitted by Eric Peters, CIO of One River Asset Management

“The market is roaring,” stated Vice President Pence, unemployment with only hit a 50yr low of 3.6%. “The President is quite interested in bringing ideas to the Fed. People with a renewed and fresh outlook. People who understand the approach for this market that he’s been putting into practice,&rdquo. “When I was in congress, we had a debate about the Fed’s mandate. It might be time to revisit this, having the Fed focus on policy, and only watching inflation,&rdquo. “This is not only not to increase interest rates, but we ought to consider cutting on them. ”

Overall:

“China is currently adding great stimulus to its market while at the same time keeping interest rates low,” tweeted Trump. Chinese fiscal stimulus this year is on track for a +4.25% jump (up from +3% in 2018). Their local authorities are authorized to issue $320bln worth of special purpose bonds to finance infrastructure this year, a +59% jump from 2018. And bank loans jumped $860bln in Q1 . Chinese 7-day interest rates are +2.55%, with real GDP growing at +6.4% and nominal GDP expanding +8.7%. Their stock market leads the world in 2019, surging +26. “Our Federal Reserve instituted a dose of tightening that is qualitative, and has lifted interest rates, even though inflation is very low. We have the potential to go up like a rocket if we did some lowering of rates, like one point, and some easing,” continued our President, fingering his iPhone. Our Federal Reserve balance sheet surged from $870bln in Aug 2007 to $4.5trln in Jan 2015 and has since contracted to $3.9trln through qualitative tightening. They hiked overnight rates to +2.5% to normalize policy, with core PCE inflation currently +1.6%. “Yes, we’re currently doing at 3.2% GDP, but with our low inflation, we might be putting major records & at exactly the same time, make our National Debt begin to look small! ” reasoned Trump, the S&P 500 +17.5% year-to-date, our national debt surpassing $22trln (slightly larger than US annual GDP). But if you subtract the debt owned by the Fed, our debt that is true is somewhat smaller than our market. And if our central bank resumes purchasing debt, while government borrowing/spending expands the market, then our true declines further still. And that is exactly where the United States of America is headed.

In the Future:

“Investing is about looking forward,” stated the CIO. “In the future, we’ll look more like today’s Europe than rsquo & we;ll look like America’s past,” he continued. “Which means our rates are at least 100bps high. ” US overnight rates are +2.5%, with 2019 nominal GDP forecast at +4.5% (200bp spread). EU rates are -0.40% with 2019 nominal GDP forecast at +3.6% (a 400bps spread).

“In the next recession, US rates will fall 100bps. Then go to zero. And we’ll just have to find out ” he said, “But that’s to MMT. ”

Splitting Atoms:

“MMT is entirely legitimate and has been embraced by Japan, even if they don’t call it by name,” stated the CIO. Japan’s debt to GDP ratio stands at nearly 250%, but the bank owns half of it and continues buying. Average interest rates are -0.10%, 10yr bond yields are -0.06%, the currency is stable and there’s barely any inflation. “Lots of people scoff at MMT because they believe it’s the equivalent of opening Pandora’s box. However, that’like denying the presence of nuclear physics because you think people can & rsquo s;t be trusted with atomic weapons. ”

“In Japan, they opted to suppress inflation to protect older people,” lasted the CIO. “The Japanese own the property and assets. So they’ve made the younger folks have to work to buy these items. ” That’s exactly what the rentier class in every society has always done and will always do. “Japan might have made different policy choices since they deployed MMT. But the structure they chose has protected the status quo, while getting the work out of folks. That’s how the world generally works. ”
 
“We are headed to MMT in the US, Europe and China,” stated the CIO. “But it’s still not clear how it&rsquo be deployed. ” In Warren Mosler’s construct, MMT is best used to run supporting investment and full employment in developing rsquo & a country;s capacity and productivity. “History tells us that the rentier class coopts coverage to enhance their position. So while MMT is a framework suited for people out of poverty rsquo, we &;re finished ll most likely be used to further expand inequality. ”
 Easy Money:

“One of the things about the last decade is that capital markets subsidized innovation,” stated the CIO. “I no longer have a car. I pay $6 for home and apologize to my driver that it&rsquo. However he says: No sweat, I get a bonus for every 10 rides. ” It’s great for consumers today but long-term value-destructive for providers of capital, even though equity markets don’that destruction is reflected by t . “And executives who ignore the line get paid in stock, and that will continue so long as top line growth is rewarded by markets. ”
 Anecdote:

“This next phase will require vision,” stated Lithium, handsfree on Highway One. “Getting here, to a place where Tesla, Uber, Lyft and their ilk are selling a great deal of stuff while burning billions was a forecastable thing,&rdquo. “If you had predicted 5yrs ago that Uber would have 4mm drivers, in a loss of $4bln per year, and people were going to love it, the only true foresight would’ve been that people were going to adore it. This was investment genius. ”

Lithium hard that is banked, the Pacific swell to his left, Malibu’s sandy cliffs to the right. “If you’re you can do virtually anything. ” You just can’t do it indefinitely. “But if you’re telling me they’re going to make a ton of money in ten or fifteen years, or they’re likely to have the transition driving. Well, that’s an infinitely greater challenge,” he said, shifting into ludicrous mode.

“For so many disruptive companies today there isn’t a scenario that is realistic. By the time firms that are ride-hailing get near profitability, you have to believe that driverless technologies will have arrived. And this will be an disruptive thing for their versions. However, you will need to believe they’ll ‘own’ driverless transportation, and there’s no strong case for why they will,” explained Lithium. “Maybe in a couple years Uber will burn off $ 2bln, then $1bln autonomous will arrive and they&rsquo. ” That’s exactly what the transition will look like. “Five years back, you knew Tesla would get here, and you’d be mad to go brief until this time arrived. However, you might also forecast that from here, it would get really hard. ” And it has.

“So here we are now, and where’s the road to profitability? Not clear. To gain in this next phase, you’ll need the vision to find out who will actually make money. ”

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