Mike Lipper’s Monday Morning Musings
Primer
on Starts of Cyclical & Stagflation
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Looking
at the current US stock market, the determination of the next important market
call is not known, at least not by me. On one side the believers think the Fed can
change inflation by controlling the interest rates. On the other side there are
pragmatists who see a much more complex world where stock and other prices can
fall meaningfully for an indefinite period.
Recognizing
that I like everyone else am a gambler, I look at how to prepare investors for
either extreme. As usual, I find an imbalance born from a “liberal arts”
education and the short form media. We have been conditioned to find an easily
understood important trend demonstrating future growth. Because of its relative
rarity, there is little knowledge concerning the downside of recessions/depressions
and stagnation. Unlike the happy talk of growth, most people don’t want to
focus on periods where people get hurt financially and emotionally.
Without
predicting a significant move to the downside, I am gambling our time by examining
the nature of possible material downsides. There is significant but not
conclusive evidence that such a period is coming. If such a period does not
come soon, at least you will have learned what to watch for in the future.
Troubling
Signals
As
with many laundry-lists, the order of observation is accidental and not meant
to signify rank of importance or order of future troubles.
- Continued short-term US Treasury rate inversion.
The 2-year rate is 4.51% which for many is attractive. This is quite competitive with stocks yielding less with uncertain futures.
- Stock prices fell for 4 days last week.
- Excluding energy earnings, other companies lost -7.1% in ’22.
Are we beginning stagflation starting with 2016?
- $2.2 billion going into international equity ETFs vs. $1.7 billion going into domestic ETFs.
- Reasons for poor earnings from a successful importer:
High and expensive customer inventory leading to low replacement sales and dollar weakness. There appears to be a switch in strategy from profit focus to cash management.
- OPEC+ did not raise prices when Russia cut production.
Quite possibly they felt that Biden was inflationary, which could reduce demand.
- China’s Belt and Road Initiative is slowing and shifting.
Need more US imports to pay for China’s exports.
- S&P Global is not issuing guidance, as the future is uncertain.
- A number of financial services companies are changing CEOs or making material changes, like Goldman Sachs.
One of our concerns is that most organizations are currently led by people with political skills, not operating skills.
- 31.6% of net ETF equity flows are in Chinese investments.
- Liquidity is declining again.
- WSJ article headline “Retailers Hesitate to Accept More Inventory” from apparel makers.
- Global Minimum taxes are inflationary.
- Wonder if the 60/40 ratio of stocks to bonds is misapplied.
Should it instead be applied to risk and less risk, with less risk defined in terms of income?
What
is the Future?
While
the gambler is forced to deal with possible changes to the present, the
speculator accepts the present as the base case to build her/his model of
preferred change. I am a combination of both, and don’t like the present or its
logical path. With that in mind I suggest the following radical changes, any of
which might change our current trajectory to a better future.
Possible,
but Unlikely Changes
Recognize
current economic problems are not a function of too little demand, but of too
little supply. Demand in the commercial world for the most part is a function
of competition and customer desires. However, in far too many transactions the
heavy hand of government dictates what the customer will buy and at what price.
It would be an interesting exercise to calculate how much government
interference costs the economy!! My guess, it’s of the same order of magnitude
as the cost to consumers of raising interest rates to somewhat ineffectively bring
down inflation. (Inflation is caused by demand exceeding supply and excessive
government grants.)
There are two other ways the government can reduce its costs and improve its services:
- In an electronic age there is precious little advantage in having major government departments and agencies located in D.C. for the ease of lobbyists and the enshrinement of the government working class.
- Government at the Federal and State/local levels are monopolists. The existence of Chartered Schools largely demonstrates that the school system can benefit from competition. I wonder whether the same could be said for hospitals and other medical institutions.
All
organized spending groups, whether for profit, non-profit, or government
agencies, could benefit from post spending analysis. We would then be able to
see what was accomplished from the spending and what lessons could be learned.
The more efficient companies, particularly serial acquirers, do this.
A
similar approach would make sense in terms of aids and grants. This should be a
requirement in regular reports to donors and citizens. I suspect the delivery
costs are greater than the benefits.
Productivity
measures have been in secular decline for many years. This is probably caused
by inefficiencies in our society rather than labor’s bargaining power.
What
are the inefficiencies you see?
Did you miss my blog
last week? Click here to read.
Mike
Lipper's Blog: Words that Trap: Growth, Value, Recession - Weekly Blog # 770
Mike
Lipper's Blog: What will the Future Bring? - Weekly Blog # 769
Mike Lipper's Blog: Confession:
Numbers Don’t Tell All - Weekly Blog # 768
Did someone forward you
this blog?
To receive Mike Lipper’s
Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com
Copyright © 2008 – 2023
Michael Lipper, CFA
All
rights reserved.
Posts
No comments:
Post a Comment