Introduction
One of the college
textbooks that I vaguely remember made a big thing of people being either inner
or outer directed. In truth, I suspect that each of us are in different
ratios at different times and conditions. Over the last six to eight weeks
there have been many trumpet calls trying to lead us into new and/or strong
beliefs in answering our needs for outer-direction. Being a skeptic by nature I
am recoiling from these attempts to lead me and others.
Different
Inputs for Trading and Investing
As we can not avoid
being influenced by some outside influences, I try to be selective. I regularly
quote Jason Zweig, one of the better
students of investment behavior. In his latest column in the weekend edition of
The Wall Street Journal, he cautions about the influence of
others on investment decisions. He acknowledges that many want the comfort of
going along with the popular mood of the time. One of the ways I control my
investment urges is to identify what it is I am trying to accomplish. If
near-term success is important, other's opinions that support the current
momentum can become dominant. If I am focusing on building a long-term oriented
portfolio of securities and funds, I am much more likely to search for counter
trends.
You can do a little bit
of both if you segregate your money and your actions. In our four sub-portfolio
approach, TIMESPAN L Portfolios®, we are very conscious of both
momentum and counter trend investing. The Operational Portfolio to pay bills in
the next one or two years needs to be cautiously sensitive to momentum. The
Replacement Portfolio is very much oriented in replacing the capital that has
been used to pay current bills along with the almost certainty of some market
reversals. The Endowment Portfolio is designed to generate capital for those
that are currently alive. This portfolio accepts periodic down markets, but
essentially is focused on investing wisely for the long-term. The Legacy
Portfolio needs to recognize much of what is expected won't happen as intended.
Thus the Legacy Portfolio will include investments that are part of the
disruptions that regularly occur. In this way one can use your outer directed
and inner directed instincts.
Symbols
Political and religious leaders going back to Biblical times used concrete symbols to convey the abstract, unseen power. Remember the Golden Calf, the grandeur of Rome, staged events in Nazi Germany. To some extent various inaugurals and marches serve the same purpose, that of a symbolic message to convey outer-direction to the masses. As with most symbolic promises, the deliveries will be different. This is particularly true today when new interpretations will change the more current views of symbols. Bottom line: enjoy the massive pageantry, but expect severe modification.
Upsides for Stocks Possible
Though we have had a long, but mild expansion, is there room for more economic expansion in the US and elsewhere before historic limits lead to a bear market for stocks? Without predicting it, a look at the data says it is possible. According to government sources we are currently operating at about 75% of industrial capacity when other booms topped out at close to 83%. Also only 57% of working age population is actively working when recently close to 60% were working. However, if one looks deeper, there are a number of doubts. Most importantly we are no longer a heavily weighted goods producer dependent on domestic industrial capacity to turn out these goods. Further, I suspect that we are actually using a significantly higher percentage of modern capacity. Where there is scope for substantial expansion is in vastly improving our transportation capacity of airports, roads, rails, harbors, etc. These will require long lead time efforts and probably will depend directly or indirectly on private financing.
Actually one of the retarding factors to increased production is finding qualified, honest, high energy workers with appropriate skills. Thus there is a need for a massive infrastructure investment into schooling at all levels with the hope that it will lead to useful human education. This is a huge necessity throughout the developed world. We need smart, reliable workers' earnings to pay for our expanding healthcare costs as well as the need for protection domestically and internationally. The US could be a leader on this front, but we will have to move fast.
Much of the future will need to serve two new unaccounted for masters. The first are the growing number and money of the consumers. While management and labor are often represented in some of the halls of power, the consumer is not. We need to respect and serve the consumers. The second growing power who is critically involved with effectively serving the consumer is the corporate state. While their first loyalty will be to their customer bases, they will also serve their multinational owners and lenders. The consumers will increasingly buy what they feel is good for them and not where it is produced. The consumers and the owners will focus on what is good for them and use governments to help or at least not hinder them.
At the moment the symbols for this new world are not apparent to me.
Symbols
Political and religious leaders going back to Biblical times used concrete symbols to convey the abstract, unseen power. Remember the Golden Calf, the grandeur of Rome, staged events in Nazi Germany. To some extent various inaugurals and marches serve the same purpose, that of a symbolic message to convey outer-direction to the masses. As with most symbolic promises, the deliveries will be different. This is particularly true today when new interpretations will change the more current views of symbols. Bottom line: enjoy the massive pageantry, but expect severe modification.
Upsides for Stocks Possible
Though we have had a long, but mild expansion, is there room for more economic expansion in the US and elsewhere before historic limits lead to a bear market for stocks? Without predicting it, a look at the data says it is possible. According to government sources we are currently operating at about 75% of industrial capacity when other booms topped out at close to 83%. Also only 57% of working age population is actively working when recently close to 60% were working. However, if one looks deeper, there are a number of doubts. Most importantly we are no longer a heavily weighted goods producer dependent on domestic industrial capacity to turn out these goods. Further, I suspect that we are actually using a significantly higher percentage of modern capacity. Where there is scope for substantial expansion is in vastly improving our transportation capacity of airports, roads, rails, harbors, etc. These will require long lead time efforts and probably will depend directly or indirectly on private financing.
Actually one of the retarding factors to increased production is finding qualified, honest, high energy workers with appropriate skills. Thus there is a need for a massive infrastructure investment into schooling at all levels with the hope that it will lead to useful human education. This is a huge necessity throughout the developed world. We need smart, reliable workers' earnings to pay for our expanding healthcare costs as well as the need for protection domestically and internationally. The US could be a leader on this front, but we will have to move fast.
Much of the future will need to serve two new unaccounted for masters. The first are the growing number and money of the consumers. While management and labor are often represented in some of the halls of power, the consumer is not. We need to respect and serve the consumers. The second growing power who is critically involved with effectively serving the consumer is the corporate state. While their first loyalty will be to their customer bases, they will also serve their multinational owners and lenders. The consumers will increasingly buy what they feel is good for them and not where it is produced. The consumers and the owners will focus on what is good for them and use governments to help or at least not hinder them.
At the moment the symbols for this new world are not apparent to me.
Stocks’ Biggest Worry is Bonds
If you are a regular consumer of the financial media, you would believe that stocks are bigger and more important than fixed income securities. Any careful reading of financial history will disabuse of this thought. Most financial crashes occur because a fixed income relationship is or has failed. For example most of the blame for the collapse that centered around 2008 was due to improper mortgages and their derivatives. The strain coming out of the collapse put banks and leveraged brokerage firms under extreme pressure. Congress, various Administrations and most mutual fund shops escaped blame, despite having some culpability. This was just latest chapter of runs on banks in many countries due to imprudent bank loans.
Because of this history, as primarily an investor in equity funds and individual stocks I keep an eye on any indicators of potential trouble in the fixed income world. Often the litmus paper test of some problems is that yields rise as inducements to accept some troubled paper. As previously written about in past posts coming out of the US election, there was a desire by some institutional investors to "re-risk" their portfolios. In the last week we saw two examples of this. The yields needed to move a number of European Sovereigns rose. Second, each week I look at what Barron's calls yields on best bonds, which I assume means of highest quality. In the last weeks their yields rose to 3.50% from 3.41% the week before. (Remember bond prices go down when yields go up.) The nine basis point gain compares with only three basis point increase yield for intermediate quality paper. I have not included yields on high yield bonds who are bought by those who can tolerate risk in some cases similar to stock risk.
Summary
We are becoming more cautious, but not yet bearish. We will need to pick our spots and time the purchase of stock funds with any excess cash.
Question of the week: What would cause you to change your current investment policy?
If you are a regular consumer of the financial media, you would believe that stocks are bigger and more important than fixed income securities. Any careful reading of financial history will disabuse of this thought. Most financial crashes occur because a fixed income relationship is or has failed. For example most of the blame for the collapse that centered around 2008 was due to improper mortgages and their derivatives. The strain coming out of the collapse put banks and leveraged brokerage firms under extreme pressure. Congress, various Administrations and most mutual fund shops escaped blame, despite having some culpability. This was just latest chapter of runs on banks in many countries due to imprudent bank loans.
Because of this history, as primarily an investor in equity funds and individual stocks I keep an eye on any indicators of potential trouble in the fixed income world. Often the litmus paper test of some problems is that yields rise as inducements to accept some troubled paper. As previously written about in past posts coming out of the US election, there was a desire by some institutional investors to "re-risk" their portfolios. In the last week we saw two examples of this. The yields needed to move a number of European Sovereigns rose. Second, each week I look at what Barron's calls yields on best bonds, which I assume means of highest quality. In the last weeks their yields rose to 3.50% from 3.41% the week before. (Remember bond prices go down when yields go up.) The nine basis point gain compares with only three basis point increase yield for intermediate quality paper. I have not included yields on high yield bonds who are bought by those who can tolerate risk in some cases similar to stock risk.
Summary
We are becoming more cautious, but not yet bearish. We will need to pick our spots and time the purchase of stock funds with any excess cash.
Question of the week: What would cause you to change your current investment policy?
__________
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A. Michael Lipper, C.F.A.,
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