What will the Future Bring? - Weekly Blog # 769

 

Mike Lipper’s Monday Morning Musings

What will the Future Bring?

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

 

 

 

The Present?

When asked about the direction of the market pontificators usually respond with their thoughts for the next market period, usually a day, month, or possibly a year. The typical answer will either be an extrapolation of the present trend or a single reversal of that trend.

 

Most dollars invested in the market are for retirement or other long-term periods. I try to address the long-term investment environment, not short-term trading decisions. That the market appears to be in a “melt-up” phase on relatively low volume, or the percent of falling stocks on the NYSE is 27% vs 34% for the NASDAQ is not particularly helpful for a ten year or longer period of future retirement. (January is the month when many retirement plans get a contribution, which is why transaction volume is above average.)

 

The Future?

A person asking questions about the future is naïve. The future will be a collection of cycles, and most importantly there will be no certainty of what the final phase of the final cycle will be. Nevertheless, my job as an investment manager is to determine the odds of the most dominant characteristics of the average cycle in the extended period occurring.

 

My bias is to rely on the analysis of past cycles, recognizing that there is no guaranty of any specific view happening. One of the various histories I think through is the history of interest rates, including their apparent impact on future prices.

 

A highly respected London money manager recently gave me a book that helped me to think about interest rates from the earliest recorded history up to the present. I finished the book on my return from a business trip to Florida. The book is “The Price of Time, The Real Story of Interest by Edward Chancellor.

 

I tend to read with an ever-present pen underlining what appears to be important. The following are some of the more useful quotes or paraphrased views:

 

Quotes and Paraphrases

1. Benjamin Franklin said that Time is Money (Implying that one can use interest payments to buy some time, other people’s time.)
2. Interest arose from some combination of need and greed.
3. Finance allows people to transact across time.
4. Interest is required to determine the value of long-lasting assets. (Stated or Implied)
5. Capital value and interest rates are inversely related.
6. Cheap credit allows households to take on too much debt.
7. Ultra-low interest rates contribute to a decline in productivity growth, asset price bubbles, rising debt levels, and inadequate savings which widen inequality.
8. As confidence in paper currency begins to evaporate, money flows out of a country. (Flows into European, Chinese, and Latin American securities is increasing.)
9. Credit is an indication of one man’s trust in another.
10. When interest rates are pushed too low credit takes off and bad investments abound. (An indebted President pushes for lower rates.)
11. Ultra-low interest rates keep Zombie companies on life support, resulting in the survival of the least fit.
12. Becoming rich is a choice between consumption today vs tomorrow. (Some of today’s rich started out poor.)
13. Elevated stock prices imply lower future prices. (Speculators invest on their belief in future prices. When those prices are reached it may usher in lower growth and prices in the future.)
14. When liquidity dries up, credit spreads widen.
15. Financial stability is destabilizing (eventually).
16. Financial repression serves as a tool of political repression.
17. When countries have relatively high levels of financial development, economic growth tends to be faster in the following 10 to 20 years.
18. Unconventional monetary policies have forested the worst kind of inequality.

 

I ask for your thoughts on these notes as to their utility or where you disagree.

 

 

 

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Mike Lipper's Blog: Confession: Numbers Don’t Tell All - Weekly Blog # 768

 

Mike Lipper's Blog: My Outlook: Nervous Balances - Weekly Blog # 767

 

Mike Lipper's Blog: Next Election vs. Future Generations - Weekly Blog # 766

 

 

 

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Confession: Numbers Don’t Tell All - Weekly Blog # 768

 

Mike Lipper’s Monday Morning Musings

Confession: Numbers Don’t Tell All

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

 

 

 

As a numbers-oriented person I must confess that numbers don’t reveal all critical information about a situation. For instance, future risks. The bearish financial press is focused on future profit margins shrinking on declining sales in the coming recession.

 

The real likely risk ahead of us is what an economic recession will mean to us personally. As Warren Buffet said, it will be revealed which swimmers are naked when the tide goes out. So too will we find out which companies are overextended when the economic pie shrinks.

 

The problem facing the management of companies, governments, non-profits, and individuals is the reduction of expenses. Rarely are expenses reduced proportionately to the actual decline in revenues, or the expected “top line”.  Expenses are cut either by judgement or happenstance. The cuts can impact the three “S” s on which future relationships are based. Products/services and future sales are based on their perceived Success in use, whereas Service is based on the ease of the relationship and the Safety of the user.

 

To an important degree the way customers feel about the product or service is dependent on the quality and quantity of known or unknown people they deal with at the firm and/or its distribution system.

 

The transaction price of most companies and practices are sold is leveraged over the resale value of its hard assets by its perceived reputation value. This is an attempt by the marketplace or ballot box to determine the sum total of the three “S” s. Thus, the impact on the absolute and relative value of its reputation is critical when it becomes necessary to cut people.

 

During the past holiday shopping season, it was easy to rank the service and inventory levels of various merchants through store visits. It was a little more difficult gauging the service levels provided by these service companies, particularly financial and health services. Much more difficult, but perhaps more important, is gauging the safety for the customer performed by service companies. Banks have announced employee cutbacks, hospitals are having difficulty finding qualified nurses and medical techs, certain military branches are understaffed in critical units, and law firms are reducing staff. These levels of safety should impact a company’s ultimate worth.

 

We don’t know what additional risks we are taking as consumers by relying on formerly reliable service providers whose staff support is shrinking. While I don’t know the risks, I do know that I am my accountant and back-office people are already spending more time reviewing the statements sent to us. I suspect the cost to me is much greater when a professional firm has an error or omission than when the wrong size of a garment is received at a store.

 

The following statistics suggest to me that I need to pay increasing attention to the details of safety than in the past:

 

Possible Warning Signs

1. The decreasing value of the US dollar relative to other currencies. This will likely raise the cost or reduce the quantity of what I buy.
2. There is a dichotomy between the level of transactions in the NYSE and the NASDAQ. Compared to a year ago, NYSE volume is down -14%, while NASDAQ volume is up +2%. Last week NYSE prices rose while NASDAQ prices fell. With many older company stocks generally flat for a year or more, the outlook for making money in these stocks looks limited. Some “growth stocks” are finding their sales more cyclical than in the past and the demographics are not promising.
3. China’s business capital returns are declining. Growth in global trade has been heavily dependent on Chinese export earnings. If they become smaller as the rest of the world slows, it is likely that export earnings will decline and result in lower imports.

 

Self-Appointed Mission

Bernard Baruch, a friend of my grandfather, labeled himself a speculator at a congressional hearing. He then explained to members of the House that the term speculator comes from the Latin term “to see far”. I use a speculative focus on the future for me and my clients. Part of looking at the future is identifying different possibilities. I take my marching orders to spot both “bull” and “bear” cases.  

 

My blogs often warn of problems, as Mr. Baruch did. However, I think the time for a new “bull” market is coming. Hopefully, we will make enough adjustments to our society/economy so that we won’t need to go through stagflation to adjust.

 

I lack the ability to see the future. Hopefully, a few subscribers to these blogs will have some thoughts they are willing to share about the next major “bull” market. (Please don’t focus on inflation and interest rates which are old news, they are attributes, not causes.) Help!!

 

 

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

Mike Lipper's Blog: My Outlook: Nervous Balances - Weekly Blog # 767

 

Mike Lipper's Blog: Next Election vs. Future Generations - Weekly Blog # 766

 

Mike Lipper's Blog: Bear Market, Recessions, Reinvestment - Weekly Blog # 765

 

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

 

 

My Outlook: Nervous Balances - Weekly Blog # 767

 

Mike Lipper’s Monday Morning Musings

My Outlook: Nervous Balances

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

 

 

 

Nervous Dilemma Positioning

My traditional allocation of stocks and bonds being close to a 70/30 split is somewhat misleading. A significant minority is in actively managed stock mutual funds with a financial services or international focus, often Asian. Financial services need a better label, so as to include two stocks of companies that are building their own portfolios that behave similar to variable annuities, Berkshire Hathaway and Apple. (The reason to call them annuities is that they are both primarily managed to produce long-term earnings, rather than current earnings.)

 

Financial services holdings as a group are also expected to fully participate in the growth of the US and International economies. In general, their strength is not in making loans, but in making money with equity. Consequently, one might characterize my equity investments as a combination of growth and value in more classical terms. This is appropriate as most companies have spurts of growth and value.

 

Time Horizons

For both my professional and personal/family accounts I start by designing portfolios built on an understanding (guess) of when and at what frequency the proceeds of the account will be delivered.

 

My particular situation is that I have a younger and healthy wife, with the fourth generation of the family begun. We are also committed to supporting the operational needs of a limited number of non-profits that Ruth and I have been involved with, both as volunteers and donors.

 

Short or Deep Recession?

I tend to look at various down periods through the late reporting of real net income (inflation/foreign exchange adjusted). Where possible, I prefer to use net operating income. Since 1970 the US has suffered 8 major declines of real reported income (-15% to -41%), with a median decline of about -28.5%.

 

The popular view today is that if we have a declared recession, it will be short and small. As someone who learned about odds at the New York racetracks I am nervous with popular views. Their payoffs are too small compared to the pain endured in the prior decline.

 

One theory of economic/market history is that declines are caused by imbalances, which are addressed during the recovery. If that pattern is followed in the next recovery, we may not yet have gone down enough. We need more time before the correction begins.   

 

The current path of major central banks is to follow the Federal Reserve Bank in attacking the supposed major cause of inflation with the only thing they can, short-term interest rates. The best definition of inflation is too many dollars chasing too few goods/services. The last two administrations contributed to these excess dollars, which were officially used to cushion the public’s loss of pre-COVID income with grants. (This was similar to the ancient Romans using bread and circuses to bribe people.) They are still at it!! This will make the Fed’s job more difficult and expensive.

 

Fewer people working should also drop the level of demand. However, despite all the increased regulation and required business spending, there are approximately 1.7 employees wanted for each current worker. This has created a situation where job switchers earn more than those who stay put. (If one really wanted to eliminate excess demand you could simply reduce restrictions on business.)

 

Thus, a shallow recession could be shorter if the federal government wasn’t playing both sides against the middle. This may happen later this year with their hope of a meaningful recovery by Election Day 2024.

 

Assuming this case, financial markets could start up as soon as economic indicators hit a bottom, with smaller declines. Which could happen this year. If this were to happen, our 70% equity stock fund portfolio would produce a nice but not great return. One area to consider for investment are funds that have lost money over the last 10 years through January 12. In general, these funds were victims of a strong US dollar. Included are funds invested in commodities, emerging markets based in local currencies, Latin Americas, and precious metals.

 

Second through Fourth Generations

While a recovery based only on lowering inflation and interest rates will generate returns for my wife and me, it would have little impact on succeeding generations, including various long-lasting charities.

 

The larger and longer-term problems that will reduce returns for succeeding generations will not be addressed by the level of interest rates. Most of these problems are related to people rather than numbers. These problems could be expressed as “Better for customers, workers, and owners”.

 

Below is a brief list of imbalances that should be addressed:

1.  Quality of leadership in each sector and operating unit of society, including levels of governments, segments of health and medical, education, and non-profits.

2.   Middle-class income as a percent of national income returning to levels of the past.

3.   Measured and productive population growth.

4.   Appropriate education for current and future needs.

5.   Governments of the people, by the people, and for the people.

 

Perhaps for the benefit of succeeding generations the appropriate investment strategy should include less exposure to risk until there is a deep enough decline to correct for imbalances.

 

Please tell me what you think?

 

 

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

Mike Lipper's Blog: Next Election vs. Future Generations - Weekly Blog # 766

 

Mike Lipper's Blog: Bear Market, Recessions, Reinvestment - Weekly Blog # 765

 

Mike Lipper's Blog: Week in Conflict Leads to Buy List - Weekly blog # 764

 

 

 

Did someone forward you this blog?

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Michael Lipper, CFA

 

All rights reserved.

Contact author for limited redistribution permission.

Next Election vs. Future Generations - Weekly Blog # 766

 

Mike Lipper’s Monday Morning Musings

Next Election vs. Future Generations

 

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

 

  

  

Time Horizons

Behavioral, political, and investment strategies should be selected based on a measurement period, acceptance of errors, and compound returns. While rarely identified, these three factors often control the success of a chosen strategy.

 

Many people are currently very short term oriented, distinct from the expressed time frame driving the Founding Fathers of the US expressed in the Declaration of Independence and Constitution.

 

Four examples of this shortened time focus are:

1.  Selection of Leaders in political, military, health, and corporate sectors. We unfortunately pick leaders with political skills rather than courage to lead in a different direction, with the focus is on the next election or selection. Both Henry Kissinger and Jaime Dimon have written about the lack of foresight in the world’s political and business leadership. (I would slightly disagree. Autocratic leaders seem to be playing chess rather than checkers, which is what our elected or selected leaders are doing.)

 

2.  As revealed in the recent “Varsity Blues” scandal, where some rich parents made illegal payments to get their children into well-known Universities. Their apparent motives were intended to ensure their young got admitted to these schools for bragging rights, while others utilized “legacy rights” at their own alma mater to achieve the same result. (That one’s children do not possess the appropriate credentials to be accepted into these designated schools should have been addressed years ago.)

 

3.  Almost all investment performance data in the press focuses on annual or shorter time periods. This often mirrors the investment focus of many in selecting a fund or manager. (While I can’t predict winners in future markets, I am aware that the poorest performing advisors can occasionally produce the best results in  future periods by recapturing some of the prior lost performance.)

 

4.  On Friday the Dow Jones Industrial Average (DJIA) gained some 700 points. Supposedly this was because of the questionable Department of Labor establishment survey which showed a higher number of workers than expected. (There was almost no coverage showing that only 6 out of 10 employable workers were on the job. For many years, countries with 7 out of 10 workers employed were considered the better locations for investing.)

 

Contrarian Views

The history of market prices around the world suggests that the biggest gains come from a radical change of opinion on the future performance of various securities.

 

After 15 years of the US stock market being home to many of the big winners, there is some sentiment that more global oriented companies will be winners.

 

Markets don’t have to follow nice, neat calendar periods. In the US, stock prices generally rose in October and November then declined a bit in December. It is quite possible that November represented the end of the recovery period that started in June. Suggesting Friday’s gain won’t be sustained for the month.

 

Only 10 out of 104 mutual fund equity-oriented sector averages rose in December. Utilizing securities data on a national basis, only China, Hong Kong, Japan, and Thailand gained over 1% (listed in performance order).

 

Winning the Long Game

One of the long-term reasons mutual fund investing performs better than many managed accounts with individual securities is that the fund industry developed an easy process of reinvesting distributions of income and capital gains. A number of large companies had similar reinvestment procedures in the past, although they were dropped due to lack of interest.

 

One of the lessons learned from the thrift industry is that through the magic of compounding a series of small contributions can produce meaningful returns over 12 to 30 years, particularly in a market of generally rising prices where fund holders stay in the product.   

It is often the small and simple things that lead to investment success: having patience, a long-term time horizon, taking as much emotion as possible out of the investment process, not following the herd and looking for opportunities elsewhere. While these items are simple attitudes, they are often difficult to implement in practice. Investing is an artform; therefore, one should allow for mistakes without deviating from good strategies.

 

 

 

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

Mike Lipper's Blog: Bear Market, Recessions, Reinvestment - Weekly Blog # 765

 

Mike Lipper's Blog: Week in Conflict Leads to Buy List - Weekly blog # 764

 

Mike Lipper's Blog: What does your 4.0 Profile Tell You? - Weekly Blog # 763

 

 

 

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Michael Lipper, CFA

 

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Bear Market, Recessions, Reinvestment - Weekly Blog # 765

 

Mike Lipper’s Monday Morning Musings

Bear Market, Recessions, Reinvestment

 

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

 

 

H A P P Y  N E W  Y E A R  to  All

 

 

 

An Explanation

For the very first time since publishing these blogs we suspended publication during Christmas week. While most blogs suspend publication in observations of the holidays, we normally don’t. The reason being something could impact our subscribers’ investments every day.

 

Although we mainly focus on long-term investing, each long-term investment journey starts with a first step. Thus, we scan weekly market activity in search of possible initial steps. Transaction volume during Christmas week was low and quite balanced between investors believing we are close to a change in direction and those seeing deeper problems that will take longer to solve. Thus, a relatively flat quiet market did not send signals to me.

 

This week I was faced with almost identical low volume fog. However, I noticed there was more selling than buying on the three main US markets for the week. I recalled that most non-trader investors spend their time waiting, while perhaps also worrying. With those thoughts in mind, this week’s blog is about the critical stages of long-term investing in search of future rewards: Bear Markets, Recessions, and Reinvestment.

 

People have been grappling with these issues since the beginning of recorded time. Since I was not producing a blog this week, I began reading “The Price of Time, The Real Story of Interest”. The story begins with a portion of an inscription found on an Assyrian tablet from approximately 2800 B.C. One of the first written attempts to predict the future states “…the end of the world is evidently approaching.” Therefore, take my views and those of others with a grain of salt.

 

As all life appears to be cyclical, it is appropriate to start the first blog of 2023 with a look at the cyclical behavior of bear markets, recessions, and reinvestment.

 

The commonly used term for a bear market is a 20% loss from a former high. In prior bear markets I have lost 20% of my worth, but I have not lost my source of income (paying job) or main source of cash. During 2022 we certainly experienced a bear market, but luckily not for the full year. The mistake I made in writing my blogs was trying to get ahead of the crowd by labeling what we went through as the early stage of a recession. It neither qualified as an economic recession nor was I out of work, a popular definition.

 

My problem as both a portfolio manager and blog producer is the timing of labeling a recession, as it officially gets labeled a recession long after it begins. The pending label is useful in timing and making investment decisions. However, in waiting for the “official” label, remember that stock and commodity markets generally discount the future.

 

The three types of recessions are cyclical, secular, and structural. Most recessions include elements of each type, with one dominating. The most common type is a cyclical recession, which is generally limited to a price decline from the prior bull market high. The common perception by most investors and apparently the Federal Reserve is that we are likely entering a small and short cyclical recession. (Applying my contrarian nature from the racetrack, I am doubtful that the next recession will be that simple. Historically, if I am wrong, the penalty won’t be very large.)

 

A possible hunting list for stocks might be those that performed well for many years prior to 2022 and significantly declined this past year: Apple, Microsoft, Alphabet, Nvidia, Costco, Danaher, NextEra, Adobe, UPS, Texas Instruments, SalesForce, and S&P Global. All of these stocks have suffered from pricing, delivery, and other short-term problems. These issues also appear to be fixable and seem cyclical in nature. I or our accounts own some of these issues.

 

The second most common type of recession is a secular recession, which is caused by changing elements in the foundation of society. This type of recession generally has a lasting impact on the economy. Think in terms of women working outside of the home after WWII and expanding the number of people working, changing the size of homes and gross income.

 

We may be entering a period where a large portion of the population are not qualified or prepared to work in the traditional payroll structure. The most significant change could be the US, UK, Canada, EU, and Japan failing to reproduce at a sustainable population rate. Another problematic change is US students ranking in the middle to lower range on global tests below the college level. Quantitatively and qualitatively, there is concern regarding our future leadership.

 

As we move to succeeding generations, the society and economy may adjust to these “abnormalities”. Thus, they would be considered secular changes and hopefully not structural changes.

 

I suspect these types of changes cause long-term institutions to modify their portfolios. This may be the reason the State Street Investor Confidence Index decreased to 75.9 from 90.3 in the fourth quarter. Of interest are the different global readings: North America 72.2, Asia 86.9, and Europe 102.6.

 

The third and most uncommon form of recession is caused by structural change, where the way people think about earning money changes and never goes back. Typically, these changes are driven by technologies like the steam engine, the automobile, semiconductors, or by basic changes in government, such as divorce and inheritance laws.

 

The problem I have in questioning the type of recession relates to its likely frequency and financial impact. Which in terms of severity, from most to least, are cyclical, secular, and structural. However, in terms of significance to family wealth, the order is in reverse.

 

If one believes there is an all-knowing power in the sky wanting to eventually adjust the way humans operate, it might be by using economic cycles to correct for the way we screw up our lives. Economics is the historic tool that forces us to do the right thing.

 

There are multiple imbalances in almost every sector of our society and its messenger is the economy. There is hardly any part of society today whose leadership possess superior political skills, not operational, or judgmental abilities. Since we seem unable to solve these problems ourselves, we are going to be nudged in “the right direction” by a secular or structural recession. Corrective actions won’t likely come from a short or mild recession, as that would be like putting a Band-Aid on a gunshot wound.

 

While I clearly don’t know, I am on watch and ready to adapt the right moves to protect my responsibilities.

 

 

 

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

Mike Lipper's Blog: Week in Conflict Leads to Buy List - Weekly blog # 764

 

Mike Lipper's Blog: What does your 4.0 Profile Tell You? - Weekly Blog # 763

 

Mike Lipper's Blog: Week Divided: Believers vs Investors - Weekly Blog # 762

 

 

 

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Copyright © 2008 – 2022

Michael Lipper, CFA

 

All rights reserved.

Contact author for limited redistribution permission.