“Things are Seldom What They Seem” - Weekly Blog # 718

 

Mike Lipper’s Monday Morning Musings

“Things are Seldom What They Seem”

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

This is the title of a song by WS Gilbert of Gilbert & Sullivan in the operetta H.M.S. Pinafore. The title seems appropriate to thinking about investing today. In gathering research to reach my conclusion, I excluded positives that led to a bullish conclusion, but not because it’s unlikely. To the contrary, most investors tend to be optimistic, their views are documented by investment and political pundits. Consequently, another similar voice is hardly additive. Seeing potential negatives is not a popular exercise, although it’s useful in bringing balance to one’s views. To be perfectly clear, the vast bulk of my investments are invested in stocks and equity funds for the long-term, even beyond my life. I hope the majority will pay off in total return, comprised of price appreciation and growing dividends. The biggest problem today is that very few investments generate income sufficient to meet reasonable future expenses after inflation and taxes. The inability to meet current and future expenses from dividend and interest payments is a sign of a highly priced market.

Critical International Competition

Our geopolitical discussions are often based on Ukraine or China, with these conflicts placing the Western world at a disadvantage, regardless of our greater wealth. The current administration is playing checkers, where one needs to get up close to the opponent to eliminate one of the opponent’s pieces. The Russian leader appears to be an excellent chess player. The goal in chess is to capture the opposing king, using players that have different capabilities and proximity. Our Chinese competitor believes time is on their side and is building a greater level of self-sufficiency. Both appear to be capable executors of tactics and strategies based on a lifetime of work and success. By comparison, many members of our cabinet and senior staff were chosen based on their identity and political views.

Earlier this week at an investment committee meeting I mentioned that Russia had already accomplished its real mission, sponsoring disunity among European NATO members. Both German and to a lesser extent Italian business leaders wanted to maintain close relations with Russia and China. While I still believe this is the way they play global chess, there is a contrary action on the horizon. One of the main political parties in Sweden, concerned about the fluidity of Russian troop movements, wants to join NATO. With Sweden’s technological strength and good military, it could more than make up for the potential loss of Ukraine. Whether this happens or not, the mere fact that it could, is an example of “things are seldom what they seem”.

Guessing the Future is Difficult

As securities analysts, we used to say the one saving grace of weather forecasters is that they made us look good by comparison. (In terms of weather, I should point out, the less than optimum choice of the date for the Allied landings in France was a correct judgement by Ike, which differed from the German Army’s conclusion.)

Each year, the accuracy of the Congressional Budget Office’s (CBO) budget revenue projections is compared to its past record. In fiscal year 2021 the projection was too low by 15%, three times the normal error rate of 5%. Outlays were too high by 4%, twice their normal miss rate. These projections were calculated after some midcourse corrections in March. The purpose of showing these misses is another example of skilled statisticians falling to Mr. Gilbert’s song title. 

I don’t have similar numbers for analyst misses in terms of sales and earnings for the same period. My guess is the private sector error rate was equal or more than the CBO’s. My concern, particularly for high P/E stocks with double digit earnings multiples, is that errors can start “to be real numbers” This may be particularly true if one wants to invest for periods of ten years or more.

Two Different Voices

This is the season where politicians and corporate managements tell us how good things are and will be with their fourth quarter and annual earnings announcements. Actions by consumers and investors are saying something different, with consumer spending in December slightly below November. It is possible consumers shifted to earlier holiday buying due to fear of shortages, although a recent walk through The Mall at Short Hills, a ritzy shopping center, did not reveal ebullient shoppers. This suggests very little business capital was used to expand capacity vs filling out the supply chain, although there was probably some inventory building on the industrial side. 

In terms of net buying of mutual and ETF fund shares, it was dominated by the buying international funds and the redemption of domestic equity funds.

Views on a Recession

Merrill Lynch market analysts believe the quickest way to a recession is a Wall Street Crash. Jeremy Grantham, a manager that has been early but correct, put out a very dire point of view in a piece titled “LET THE WILD RUMPUS BEGIN”. He portrayed a bursting of the US Extravaganza, taking stocks, bonds, commodities, and housing down to at least their base price levels. Barron’s headlined an article “The Countdown to The Next Recession Already Has Begun”. This article pointed to rising fed rates bringing on a recession in 2024.

We May Not Be Hedged Against What We Thought 

Suppose we have a $1,000,000 portfolio invested 90% in stocks and 10% in long bonds. If any of the thoughts expressed above materialize and stocks and bonds both drop at least 10%, you now have $900,000 portfolio. While you continue to be hedged against a relative decline of one of two asset classes, you are not hedged against the loss of $100,000. If you look at the purchasing power of your money, both inflation and foreign exchange could reduce the purchasing power of your investments.

Working Conclusion

Be prepared for a difficult market that will reset values, possibly for a few years. At the same time, maintain long-term positions for future generations. They will need it, because it is possible the world will restructure in an unfavorable way, but at least they will have a start.    

  

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2022/01/two-critical-questions-weekly-blog-717.html

https://mikelipper.blogspot.com/2022/01/current-causes-of-concern-weekly-blog.html

https://mikelipper.blogspot.com/2022/01/deeper-thoughts-weekly-blog-715.html

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Two Critical Questions: - Weekly Blog # 717

 

Mike Lipper’s Monday Morning Musings

Two Critical Questions:

I.  Can Performance Replace Diversification and Create Too Much Risk?  

II.  Is January 2022 the Beginning of the Bear Market?

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

Are the Answers Linked?

The youth of today, with all their expensive schooling, are at a distinct disadvantage. They have not studied ancient history or the leaders and common people living through those periods. In their limited time, if they could study just two periods, they might find relevant answers to questions with implications for today. The development and collapse of the Roman Empire and some of the structural causes of WWI. 

As this is an investment blog, I won’t teach history in detail. The following is a list of historical topics with significant implications for today. They may help answer the two questions asked:

1. The tension between a divided Roman Senate and the leadership of the strongest state in the world.
2. The most technological roads and viaducts also helped weaken defenses.
3. The rising costs of “gifts to the people” became necessary bribes, reducing military spending.
4. While a lose collection of German tribes eventually ran over Rome, they could not agree on how to govern their conquest.
5. Compared to the cohesion of other European countries, Germany was late in unifying and did not have nearby land to grow.
6. The Holy Roman Empire, based in Vienna, was structurally weak.
7. France lost 25% of their young men in the Franco-German War, the most productive people in their country.
8. Making the loser pay for the winners’ costs through reparations failed, and in so doing ignited global inflation, leading to many autocratic governments, including the US.

The Positive and Destructive Power of Performance

(Historical Notes: In the mid-1960s, I was one of the very few securities analysts focused on what were called conglomerates. As an analyst, my research I sold to financial institutions, largely in the US, but also in the UK, Continental Europe, and Canada. Consequently, I became conscious of multi-industry companies in their countries too. My early analysis focused mostly on US auto parts and bicycle parts manufacturing companies, then gravitated to electronics companies, particularly those with defense and aircraft applications.)

From the beginning of recorded history, the danger of relying on a single or a few similar clients was clear. (Shakespeare’s “The Merchant of Venice” demonstrates the risk of a merchant’s wealth being tied up in a single voyage.) To avoid such risks, the more enterprising merchants evolved into merchant banks, with multiple clients in multiple trades. Famous Scottish trusts developed investment vehicles for the wealthy and lower classes, investing not only in voyages, but also in a wide array of stocks and bonds. They paid attention not just to investment performance, but also to the longevity of their businesses.

A handful of Boston Law firms began as custodians for the wealth of ship captains on their Asian voyages. They developed documents hoping to limit the risk of total disaster by minimizing the risk in stocks, investing the remaining assets in supposedly super-safe bonds. It was out of this colonial heritage that Boston based firms developed the first US mutual funds, utilizing their successful Balanced Funds business.

The Boston law firms had their own security analysts and portfolio managers until at least the 1960s. Their legal documents proscribed diversification rules to lower the risk of total loss during hard times. Thus, the need for diversification came into usage in the institutional asset management business and appealed to insurance companies who had similar rules.

The Problem with Two Asset Type Diversification

If the two asset types were totally uniform, one could control the risk of large losses. Losses were significantly reduced by requiring the investment of 60% in stocks and 40% in bonds, at cost. While this worked for the lawyers and their naïve clients, security selection remained a risk. Including the selection from among so-called “high-grade” stocks and bonds of different maturities and liquidity. 

Asset managers whose customers were primary interested in upside performance found the restraints too limiting, particularly during periods of inflation. To get a more appropriate measure of fund risk, I tried to group funds taking similar risks. By the end of the 1980s my firm had created over 100 separate peer groups for performance measurement purposes. There are probably an unknown number of new peer groups that would be useful today.

When I privately compare funds, I go beyond just security selection. Among the things I look for are:

• Portfolio turnover
• Whether the portfolio is collegially managed or has a single decision maker
• The size of the firm’s research effort
• Tax management
• The historical recognition of losses
• The availability of back-up people
• Trading and administrative skills available within the group

All these measures are useful in reducing investor risk. However, better relative performance in one segment can diminish the power of diversification in limiting risk.

Where Are We in 2022?

While we have only experienced three weeks of the new year, we have been confronted with a very different market and performance environment. With a lot to identify and interpret, I am using fund performance as an intermediate filter to examine what is happening. I’ve observed meaningful changes, raising questions about the normal desire to extrapolate past performance trends. I find the following significant:

1. Through Thursday, with Friday having an additional significant loss, most fund peer groups experienced single digit losses. The sole double digit loss was the e-commerce business.
2. The very few US registered mutual fund gainers have been international funds, with strength in emerging markets, commodity funds, and global energy vehicles.
3. Large-Caps have fallen less than the smaller-caps, suggesting larger-caps have earned a liquidity premium.
4. The average stock in the broad indices is down considerably more than the relevant cap-weighted index.
5. JP Morgan released a study of thematic fund performance, which was no better than the general market measures.

What Does the “Tech” Correction Mean for the Future?

(Remembering that the sole function of fluctuating markets is to produce humility in the survivors, and my assertion that I can and will be wrong, there are reasons to be concerned.) The history of peaks and bubbles shows good performance in a small minority of traded issues at the top. The good performers, in this case a limited number of large-cap tech stocks, have drained dollars out of the rest of the market.

As readers know, I view moves in the NASDAQ Composite as leadership in the entire US market. From its all-time high, the index is down 14.5%, clearly a correction. I believe the Russell 2000 is in correction as well. At some point, I guess the more senior measures will close the gap with the NASDAQ. The interesting thing is the size “off” volume at the NYSE and NASDAQ are about the same.

I have been concerned about the underlying economy showing some disturbing signs:

1. The lowest interest rates in 5000 years, until the Fed’s future small moves. The adjustable mortgage interest rate is showing some contrary trends e.g., the 3-year rate rose 12 bps this week, vs 3 bps for the 20-year.
2. Capital expenditures are being spent on supply issues rather than “greenfield” expenditures. This is indictive of a lack of confidence in the longer-term future.
3. China is having problems with a peaking workforce, although its currency is rising against the dollar.
4. The US stock market is being driven by shorter-term players, with more volume in ETFs than the more retirement oriented conventional mutual funds.
5. There is a significant trend of bank branch closures. I expect to see more retail mergers and growth in crypto-currency vehicles. The average young person has much less cash than we did at a similar age.
6. A focus-group of independents who each voted for both Biden/Obama and Trump, are concerned about crime and the way the current economy is being managed. With worries about the future, these concerns could lead to a consumer-based recession. (With rare exception, there is not a popular political leader globally, although the opposition currently lacks much support.)
7. The National Science Foundation published a report on the state of US Science & Engineering. the report shows the US losing leadership to Asia (China, Japan, and South Korea), measured in dollars expended. Considering wages are less in Asia than in the US, the Asians may be getting more for their money.

Working Conclusions

If the correction in capital-intensive Tech and Health companies accelerates, it could cause an overall decline in the stock market. Much like in the run-up to The Depression, it could cause some consumers to cut back their spending, leading to a consumer recession. It doesn’t have to happen, and the timing may be uncertain, but based on the subjects not being taught, the odds favor it. 

  

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2022/01/current-causes-of-concern-weekly-blog.html

https://mikelipper.blogspot.com/2022/01/deeper-thoughts-weekly-blog-715.html

https://mikelipper.blogspot.com/2022/01/mike-lippers-monday-morning-musings.html

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Current Causes of Concern - Weekly blog # 716

 

Mike Lipper’s Monday Morning Musings

Current Causes of Concern

(I would like to be wrong)

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

In our first blog of 2022 I suggested this might be a troublesome year. While most predictors tend to forecast their wishes, it says more about them than being useful. The most useful predictions are perhaps expressed in a fanfold display, with at least three lines originating from the current origin to a future date. The graph offers at least three possible paths forward: high, medium, and low. My faulty crystal ball is not up to that model. My current outlook is negative. Perhaps it is my military training, when I assume a position of responsibility and search for all possible attack routes. Following this process, there are immediate causes for concern for our investment portfolios. (As already noted, I hope I am wrong.)

The causes for concern come from my weekly review of both data and news reports. You can interpret any or all these factors negatively or positively or view them as unimportant. I leave it up to our subscribers to make their own judgement and hopefully share their views. The concerns are listed in the order I came across them, not in order of importance. In parenthesis and in italics after each item are my worries.

1. Most commentators are focused on the expected moves by the Federal Reserve Board regarding interest rates and the disposition of their large portfolio of debt instruments. (I expect the Fed to continue its traditional role of being late in changing direction, confirming trends already in motion rather than signaling a change in direction. This view originates from the reality that the President nominates the Fed Governors, which in turn are confirmed by the Senate. This week, three people with no apparent experience of working in a bank, a commercial profitable enterprise, or managing money as a fiduciary, were nominated. Despite the Fed being an independent agency, it is very unlikely it would take a point of view opposing the President. Many investors believe rapidly rising interest rates are largely due to the accommodative policies of the Fed under the current and prior President. Inflation results from many other imbalances in the domestic and global economy. Under the current circumstances I am concerned.)
2. In the latest week through Thursday, 11 of the 25 top performing mutual funds were precious metals funds, with 7 of the 10 worst being growth-oriented funds. (The stocks in these portfolios are moving in the direction suggested by a high inflation and short-term focused stock market.)
3. One of the oldest predictive approaches to the equity market is the Dow Theory. For continuation of the current trend, it requires the Dow Jones Industrial Average and the Dow Jones Transportation Average to be going in the same direction, with each index confirming the high of the other. The Transportation index has been declining since November, while the Industrial average has gone on to make a new high. (If the professional buyers of transports believed the ordered clearing of seaports would solve rising inflation, the index would be rising.)
4. The old Journal Commerce Index of Industrial Prices continues to rise, gaining 2.7% this week. (Inflation is broader than consumer prices, transportation costs, and excess money supply growth.)
5. The Barron’s Confidence Index is predicting bond prices performing better than stock prices over the next six months. (This rarely happens and is a sign of an equity bear market)
6. Robert Lovelace, a senior official and portfolio manager of the highly respected Capital Group, pointed out that we are in the 11th year of an equity market expansion. A significant contributor to its rise being the increase in price/earnings ratios. (Earnings of companies typically change more slowly than valuations. Consequently, we can have a down market with flat to rising earnings when valuations decline.)
7. The largest contributor to global trade growth is China. Compared to the US, China is a controlled economy. Even with all its controls, results are slipping. (Without China’s need to import high quality goods, services, and energy, the exports of developed countries will decline. This is important for the US, Germany, Italy, Canada, and Australia, among others which supply imports into China.)
8. Bond owners suffered volatility risks greater than 5 years interest payments in January. (If the bond market is at risk, it is also dangerous for global stock markets. Most equities are leveraged by the amount of fixed income borrowed. There are many highly leveraged positions in high-quality bonds.)
9. Ukraine‘s unequal position versus Russia’s 100,000 troops on the border is dependent on international cooperation for a resolution. (Is Putin betting on the probability the US and others will not commit troops? The belief that curtailing Russia’s use of the SWIFT currency transfer system will be an effective deterrent, does not comprehend the historic practice of enemies at war. Enemies regularly trade with each other through third countries, as happened during WWII. The way we exited Afghanistan and left many promised entry into the US behind questions the strength of the US word.)
10. Growth in the use of Private Equity by public pension funds and wealth managers for individuals broadens the potential risk to investors, who don’t have sufficient knowledge of these investments and what can go wrong. (It is just another example of performance chasing rather than anticipation.)
11. Barron’s wrote positively of 105 stocks gaining 5.1% on average in 2021, vs the relevant averages which gained 8.4%. They were more successful with four bearish recommendations. The choices of the “experts” who participated in their annual round table also underperformed the market. (Picking investments is a difficult task. It is easier to pick winners and limit losers by choosing portfolios, but they will often fail to beat individually selected stocks that are big winners.)
12. The J.P. Morgan Chase earnings call celebrated the published numbers, while discussing each of their main activities properly outlined current problems. While it is arguably the best large bank in the world, they have possibly reached a cyclical high in many activities, which won’t return until there is some real continuing growth in many economies. The 6% drop in JPM’s price on Friday appears to be appropriate. (Perhaps JPM is topping out, like the US is doing under Putin’s judgment. Xi may share this view, considering his plans to deploy four aircraft carriers vs only one for the US in the waters near Taiwan over time.) 

None of these concerns need be permanent, but investors likely face some troubling times ahead. The possibility of multiple negative events unfolding simultaneously is a big concern. We have a toxic mix of increasing inflation, high valuations, extremely low interest rates, a slowing global economy, and a dangerous geopolitical environment. Having people appointed for purely political reasons is always a concern, but especially at a time like this when perspective and skill are required. 

Inflation will only be beaten by taking the necessary corrective measure to raise interest rates and slow the spending. There will be political pressure to do otherwise. Taking the corrective measures necessary will likely be painful and politically damaging, a reason it will not likely be done to the extent necessary.

Valuations will likely return to normal faster than most expect, although that’s cold comfort for most investors. A generation of investors knows only rising markets and that has led to complacency. 

What do you think?

  

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2022/01/deeper-thoughts-weekly-blog-715.html

https://mikelipper.blogspot.com/2022/01/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2021/12/are-investors-taking-too-much.html

Did someone forward you this blog? 

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

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Contact author for limited redistribution permission.

Deeper Thoughts - Weekly Blog # 715

 

Mike Lipper’s Monday Morning Musings

Deeper Thoughts

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

Governments Manipulate Markets More Than Markets Manipulate Governments

Warning: Some of your basic beliefs will be challenged by the following analysis. Accept what you will. The value of this blog is the path of analysis, which may cause you to think differently about some matters.

Finally, a Wake-Up Call

In the first trading week of 2022, the US stock market experienced an unexpected downdraft on relatively light volume. Normally, the first week of the year is one when pension funds and other retirement accounts (401k) make their annual commitments to equities, usually giving the market an upward bias. Why not this year? Two possible clues emanate from the yield on 10-Year US Treasuries and NASDAQ Composite prices. They both often lead US markets in direction, which in turn tends to lead most global markets.

While the New York Stock Exchange (NYSE) experienced more up volume in 4 of 5 days, the NASDAQ experienced more downside volume in 3 of 5 days. The NYSE up volume may result from the annual commitment of retirement accounts. The NASDAQ’s higher percentage of new lows, 16.4% vs 7.6%, uncovers some disturbing results. About 20% of NASDAQ stocks have fallen into “bear market” patterns. (As regular subscribers know, I use the NASDAQ price performance as a leading indicator, partially due to the relative absence of passive investors in that market. While I have no data to support my view, NASDAQ investors hold their positions for shorter periods due to more buyouts and bankruptcies.)

From a broader perspective, the rise in 10-Year Treasury yields to 1.77% may be even more significant. Over the weekend, the Bloomberg news crawl indicated European investors being shook by the drop in US Treasury prices. I believe this was mostly the concern of European central banks, excluding the Swiss National Bank. (The SNB has been investing in US stocks to cover the pain caused by the rising value of the Swiss Franc. Their largest position is a meaningful investment in Apple *.) The play in UST paper, until this week, has been the strength of the dollar. Even when hedged, its net yield was better than most other government debt. I believe many European accounts needing dollar debt have gravitated to non-government bonds.

(*) Owned in personal accounts

The decline in US government paper was long overdue. While probably still the safest large currency, the credibility of this Administration’s word is a growing concern. s Most rational global investors were shaken by the way the US retreated from Afghanistan, leaving many people promised entry into the US stranded. Currently, our use of words rather than military force to protect the people of Ukraine downgrades belief in the US. The Administration’s Anti-Trust efforts to buy union votes at the expense of commercial capital is also a worry. 

Almost All to Blame for Growing High Inflation

For political reasons, many governments look to solve social problems through central control. Led by politicians with no real-world experience they utilize top-down thinking. This is called socializing the problem, which requires money from the “well-off” to keep the unfortunate barely above water. Charity has been part of the world since the organization of religions. One biblical view is that it is far better to teach someone to fish (profitably), than to feed them fish. If governments truly wanted to help, they could arrange tax structures to encourage charity, with some constraints on charitable organizations.

Instead, today’s political leaders follow the ancient Roman political practice of providing bread and circuses (games) to keep the lower classes quiet. Over time, the costs of this strategy led to raising taxes. High taxes took money out of the commercial economy and led to underspending on military and other vital services. These choices led to a weakened state that was overrun by The Barbarians. Almost every global empire has fallen due to a similar pattern of political leadership, high taxes and a weak military.

There are two ways of reducing financial wealth, taxes and devaluation through inflation. The Romans did it by reducing the amount of gold and silver in their coinage, we are doing it through higher prices. Milton Friedman stated, “inflation is always and everywhere a monetary phenomenon”. Inflation accelerates with a shortage of critical goods and services. Many governments pay lip service to solving society’s ills by borrowing today and repaying later, in money devalued by inflation. Both the current and prior Administrations have practiced this policy. 

The financial history of Donald Trump was massive borrowing with debt often settled at below face value. By the time Trump built his Casinos in Atlantic City, he was already running out of sources of credit, which led him to depend on Deutsch Bank. (As some of his debt was publicly traded, an analyst in a Philadelphia brokerage firm wrote a report questioning the soundness of the debt. Trump tried to get the analyst fired using his bully tactics but luckily, he was not successful. His major Casino went bankrupt and its debt trades at junk prices today. As President, he grew the size of our National Debt with the clear intention of buying it back at below face value.

The current Administration seeks to increase its union workers voter support, mostly in Northern states. The party in power is simultaneously trying to reduce the economic power of other states through taxes, tariffs, contracts, and anti-trust policies. They hope people will not see the devaluation of their hard-earned money in the financial press, although they will see higher prices at the grocery store. Much of the inflation results from the cost of transportation of goods and services, with the price of oil rising from below $20 to about $80 a barrel. This was caused by closing pipelines, preventing drilling on federal lands, and other such measures. Consequently, the US is no longer energy-independent and relies on expensive foreign oil being shipped into the US.

Six Day Tally

I don’t know what future prices and fund net asset values will be. However, the dichotomy in results through Thursday is cause for concern. These results exclude a further significant decline on Friday. The following list of comparisons may be of interest to those trying to make sense of the US stock market:

1. The JOC-ECRI Industrial Price Index performance year over year is +32.15%.
2. The AAII sample survey summary predicts no direction, with bullish, bearish, and neutral all about 33%.
3. The Barron’s Confidence Index projection of future performance shot way up, favoring bonds over stocks.
4. 2/3rds of weekly WSJ prices for stocks, bonds, ETFs, currencies, and commodities fell.
5. While the NASDAQ declined -4.53%, S&P Small-Caps only fell -1.23%.
6. The average Value fund rose +0.98%, while the average Growth fund fell -3.65%.
7. Only 2 of 31 fixed income fund peer averages rose.
8. Only 1 of the 25 largest equity funds rose. 
9. In December, 8 of 11 equally weighted S&P sectors beat the capital weighted indices. Only 10 of 50 S&P global indices gained 20% or more in 2021.

This suggests to me that 2022 is going to be a difficult year. 

What do you think?

  

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2022/01/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2021/12/are-investors-taking-too-much.html

https://mikelipper.blogspot.com/2021/12/mike-lippers-monday-morning-musings.html

Did someone forward you this blog? 

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2021 Lessons and a New Worry - Weekly Blog # 714

 

Mike Lipper’s Monday Morning Musings

2021 Lessons and a New Worry

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

The Mind Set

Every day is a learning opportunity, although we often don’t view it that way. While we begrudgingly accept some of our investment actions not turning out as planned, we find temporarily culprits for the cause of those mistakes. I cannot continue to blame others for my results, I must accept I contributed to those unhappy results. Over the years I have been forced to recognize that some mistakes in thinking are repeated far too often.

2021 Mistakes

First, is not keeping in mind the one truism about investing and life, that there generally will be mistakes. The only market guaranty is that it creates humility in the survivors.

Second, the appropriate way to think about a collection of futures is to assign some rough odds of being correct. The number is not as important as the recognition that you might be wrong. The general reasons we might be wrong includes the following “3 I’s league”: Incomplete analysis, Inaccurate inputs, and Indefinite time periods of success or failure.

Third, there are other rules of the game which guide our actions:

1. Recognition that the numbers we use are an abstraction of reality, not reality itself, which is full of unpredictable people.
2. In a news centric investment world, we tend to value the latest news above the flow of past information.
3. There is a search for fairness, which has never existed in the real world, particularly among new or amateur investors. In truth, life and investing is not simple or fair.
4. The following unrecognized shortening of decision times has led to much more volatility, which some confuse with risk. 

• Politicians intensely focused on the mid-term elections will try to force more stimulus payments on the portions of society likely to vote for them, not really caring about the induced inflation. Furthermore, they will attempt to raise the taxes of the capital bases in opposition. (Remember, money is the mother’s milk of politics.) 
• The investment industry has also shortened the performance period by introducing wealth management asset-based fees as an alternative to brokerage commissions. This has caused the switch to increase trading in ETFs. The sale of mutual funds, have anti-churning restrictions. 
• In 2021, for the first time, the compounded dollar impact of traded short-term options was greater than the aggregate value of shares traded. (Typical of a contrarian, I have lengthened the period for measuring investment success.) 

5.  Whether we like it or not we are all globalists by circumstance, not by choice. It impacts our lives and investments and will become even more important in the future.

Missing the Significance of Pandemics

In seeing how point 5 is likely to impact our investments, recognize that the two major variants of COVID-19 came out of China and South Africa to infect much or the world. Globalization follows the path of commodity prices, which drive both food and energy prices higher globally. Bottom line, we cannot escape the impact of globalization on our lives and investments.

Just as we used horsepower to measure the influence of internal combustion engines on society, investors are similarly using the incorrect measure to understand the power of globalization.

Last week I mentioned at least one investment manager who focused on the supply side of trade, rather than the much more popular demand side. Carrying this analysis further, China is the largest single importer. I think we should be looking at China’s impact on the exports of other countries. Germany, US, Canada, Australia, and Japan are increasingly dependent on exporting to China.

China’s domestic growth, while still a multiple of the rest of the world, is slowing down. They have been building their financial reserves, which could backstop their export earnings if they were to slow. China’s slowdown is due to their population growth declining, both in terms of the overall birthrate and the movement of rural peasants into cities. Once in the cities, the peasants find work for domestic or foreign owners and the productivity of their labor grows. (One of the issues facing the rest of the world is labor productivity not growing as fast, due to the focus on schools, rather than education and useful learning. This concern is multiplied by the Chinese being savers and soon investors, which our populations are not.)

We are correctly concerned about the Chinese growing militarily, including in space. In their long history, the Chinese have gone to war to protect their borders and critical suppliers perceived to be vulnerable to opposing forces. They, like the Japanese, don’t want to add people to their country, just their goods and services. (In the West, Rome conquered much of the known world to get slaves, which were often freed once acclimated within the Roman Empire. Europeans hope to grow their population base at a lower cost by expansion, rather than through growing their own population.)

Simultaneous slowdowns in China and the rest of the world are not likely to be bullish for the global securities markets.

Question for Subscribers: Are you worried? What Do you intend to do?      

  

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2021/12/are-investors-taking-too-much.html

https://mikelipper.blogspot.com/2021/12/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2021/12/selections-weekly-blog-710.html

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