Four Lessons Discussed - Weekly Blog # 877

 

 

Mike Lipper’s Monday Morning Musings

 

Four Lessons Discussed

 

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

 

 Farmers’ Experience Led to the Crash

Is 1930 a preview of 202x? To set the stage, the 1920s were a period of transition and economic expansion. America and most of the industrial world enjoyed meaningful economic progress spurred on by the encouragement of increased debt. Governments, companies, individuals, and farmers used the resources of others to leverage their assets with increasing debt, fulfilling their perceived needs at ever increasing rates. The lessons of the 50-years before WWI were distant memories.

 

Due to WWI mobilization, women entered the workforce in increased numbers. The returning military found farm work too hard and too poorly paid on the farms. Financial communities, which had extensive experience with debt and leverage, found vast new markets for the financial skills of banks and others. Thus, the missing manpower was replaced by expensive machines and chemicals, which led to farmers owning leveraged machines and farms.

 

The age-old problem with leverage is the cost-price spread abruptly narrows. In a world becoming increasingly more global, international trade becomes the fulcrum-point of the fluctuating cost-price spread. To protect those in the middle from price swings, tariffs and other restrictive measures were introduced.

The US consumer desired ever-increasing amounts of food, with much of it imported from lower cost countries. To protect home-grown crops, additional costs and restrictions were placed on imports. Exporting countries fought back by lowering their prices to a point where domestically produced products could not compete effectively. Consequently, domestic farmers got their elected politicians to impose tariffs on imports, like the Smoot-Hawley tariff that President Hoover was reluctant to do. (It was repealed three years later) Other nations reacted by imposing their own tariffs on US exports, which was a contributing cause for WWII. 

 

What will be the impact of the proposed Reciprocal Tariffs being proposed? Despite what is being said, it seems unlikely consumers will avoid some or more of the cost.

 

Learning from Uncle Warren

This weekend Berkshire Hathaway (*) published its results for the 4th quarter and all of 2024, along with a well thought out discussion. The company has four main revenue sources for the heirs of its shareholders. Berkshire has total or partial ownership of over 180 private companies and a smaller but better-known portfolio of quite large publicly traded companies. They also have an increasingly large portfolio of short-term US Treasuries, which increase in value as interest rates rise.

 

The difference between what their insurance companies charge and their eventual payout is called a “float”. In the most current period all earnings asset categories rose, except for the holdings of the publicly owned securities which declined because of sales. The total portfolio rose and is selling very close to its all-time high. Considering the company announced it is being managed for the benefit of today’s shareholder heirs; it is extremely appropriate to occasionally reduce its near-term market risks. (It is worth noting, the remaining two lessons in this blog suggest caution is warranted.)

(*) Owned in Personal and Client accounts

 

The Leading Mutual Funds Suggest US Risk

Each week I look at over 1500 SEC registered mutual funds, as well as many more in the global world. Usually, a number of different drivers describe the leaders of the week.

 

The list below shows the investment objective assigned to the fund:

Precious Metals Equity           21.04%

Commodities Precious Metals      11.86

International Large-Cap Value     8.60

International Mid-Cap Value       8.54

Commodities Base Metals           8.34

International Large-Cap Growth    8.24

Commodities Agriculture           8.15

Warren Buffet, among others, is concerned that the US government may cause the value of the US dollar to drop.

The year-to-date winners are not investing in the US.

 

“Debt Has Always Been the Ruin of Great Powers. Is the U.S. Next?”

 Above is the title of Niall Ferguson’s article in Saturday’s Wall Street Journal where he introduces Ferguson’s Law, which was crafted in 1767. The law states “that any great power that spends more on debt service than on defense risks ceasing to be a great power.” According to the author, debt service includes repayment of debt and defense includes all costs to maintain the military. The US has just passed this milestone, but it would take an extended period to fundamentally break the Ferguson Law.

 

Working Conclusion

Be careful and share your thoughts, particularly if you disagree.

 

 

 

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Mike Lipper's Blog: Recognizing Change as it Happens - Weekly Blog # 876

Mike Lipper's Blog: A Rush to the 1930s - Weekly Blog # 875

Mike Lipper's Blog: More Evidence of New Era - Weekly Blog # 874

 

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Recognizing Change as it Happens - Weekly Blog # 876

 

 

 

Mike Lipper’s Monday Morning Musings

 

Recognizing Change as it Happens

 

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

 

 

 

Perspective is Difficult to Read

When gazing out a window while traveling in a car or a plane the view constantly changes, while the view within the vehicle remains constant, similar to the internal changes we experience while investing. Many of us are aware of both the outer world and our own investment perspective, although we are often unaware of the changes in people next to us. Rarely do we focus on factors impacting our own thinking during our travels.

 

Now may be a good time to review what is happening to those close to us, and even more importantly to ourselves. The following list of items crossed my consciousness this week, causing me to consider changes to our investments. In no particular order:

 

1. While I am aware of the US stock market trading volume growing, the rate of change between the 2 stock markets is telling. Over the last 12 months trading volume on the NYSE has grown +8.03%, while the NASDAQ has grown +57.39%. This indicates that there are two very separate markets. This was confirmed by Thompson Reuters’*, an old Canadian/British firm, through their actions this week. They moved their US listing to the “junior” exchange, which they identified as the home of technology companies.
2. The AAII sample survey had only 28.4% of their participants being bullish for the next 6 months, while 47.3% were bearish.
3. The Economic Cycle Research Institute (ECRI) industrial price index was up +6.44% over the past 12 months.
4. The Chinese marriage rate has dropped -20.5%.
5. JP Morgan Chase* announced layoffs for next year.
6. International Mutual Funds were the best performing group this week for the first time in a long time, led by large-cap growth funds.
7. The Financial Times is asking how big Walmart* can get.
8.  Until we actually see the final legislation and/or a court ruling, one wonders how the US will be governed. The US executive branch of government is in the courts for changes they’d like to make, after legal challenges.

I wonder how much longer the four international political leaders (Putin, Xi, Trump, and Moodi) will remain in power.

(* Owned in client or personal accounts.)

 

We are at a period in history where multiple large changes are occurring somewhat simultaneously, with significant consequences for winners and losers. Time is a scarce resource and that creates a sense of urgency among the participants. The following events bear close scrutiny as the outcome will be consequential for all.

• Change in US government – The power dynamic is being challenged in Washington DC and the courts, with a clear understanding that power could revert to the old order after the mid-term elections. So, Republicans recognize that change must be accomplished within the next two years. If the Republicans are successful, the country will likely see smaller government with some power ceded to the states. Smaller government should come with smaller costs, a plus for the national debt situation.
• Global government dynamics – Many governments around the world are grappling with similar ideological dynamics as those seen in the USA and are nervous about what might come next. This was on full display at the Munich Security Conference this week. The potential for trade wars could intensify significantly.
• Two wars have the potential to conclude this year, Gaza and Ukraine. Not all are likely to be happy with the outcome. Nor will there be unanimity among those shepherding the negotiation. Rebuilding will be costly in both locations, with no clear indication of who will pay and what deals will be struck to compensate those investing the money.
• Significant technological changes are likely in the next few years, with AI, robotics, and automation at the center of these changes. There will likely be big losers and winners, where the first mover advantage could be quite significant.
• An energy renaissance is likely, as the new technology driven future requires substantially more power than what it is replacing. The green revolution will not likely provide adequate solutions for the energy shortages. Natural gas and nuclear power seem to be the likeliest winners, as they provide the most consistent baseloads and the smallest CO2 emissions.    

Each of these bullet points has the potential to be disruptive. Having them all occur at roughly the same time will make for a challenging investment environment. While traders may be able to trade successfully, the odds favoring investing are declining for the next several years.

 

I would like to hear contrary views.

 

 

 

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

Mike Lipper's Blog: A Rush to the 1930s - Weekly Blog # 875

Mike Lipper's Blog: More Evidence of New Era - Weekly Blog # 874

Mike Lipper's Blog: Roundtable Discussion - Weekly Blog # 873

 

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A. Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

A Rush to the 1930s - Weekly Blog # 875

 

Mike Lipper’s Monday Morning Musings

 

A Rush to the 1930s

 

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

 

 

 

Historic Background

The President comes from a Brooklyn Democrat real estate family background. Many of his actions are similar to FDR’s moves in the 1930s. Like FDR, he is running into opposition from the courts. As with FDR, he wants to lower the value of the dollar. FDR raised the price of the dollar by 60% for non-US citizens and residents, the impact of which contributed to a worldwide depression and was a cause of WWII.

 

In the US

The job market is cooling, and the investment market is changing. As noted by George Gatch of JP Morgan Chase “more than half of total flows into the asset management industry comes from the wealth management segment which is now driven by brokerage firms shifting their sales forces to fee earning investment advisers from formerly registered representatives. While some of these advisers will manage this money through the dictates of the firms, a number of the advisers will act more independently”. (Whether this may increase the likelihood that these assets become more or less “sticky”, we will see.)

 

Equity markets in the US have become less homogenous than in the past. For example, in last week’s trading 48% of NYSE stock prices declined, while 52% declined on the NASDAQ. The volume of trading on the NASDAQ is about 7 times that of the “big board”. (This is a bit misleading as there is more intra-dealer trading to maintain position sizes in the over-counter market.)

 

Historically, one of the least reliable predictions comes from the American Association of Individual Investors (AAII) weekly sample survey. Over the last 3 weeks bearish investors have risen to 43% from 29%, while the bulls have dropped to 33% from 43% and are now a minority.

 

While we do not use commodities as investments, we do follow their prices, which are traded in very professional markets. Of particular importance is the price of copper, which has risen recently. This echoes the increase in the ECRI industrial price index, which rose this week for a +4.97% year over year gain.

 

An Unexpected Turnaround

Long-term investors often examine the potential for a totally unexpected turnaround. I have no reason to expect this change and can think of many reasons for it being improbable. However, the implications are so large that it is intriguing.

 

The two largest economies in the world are the US and China. Many believe the US will continue to grow for the foreseeable future. I have not seen any “expert” who is bullish on China. Nevertheless, through ancient times China was one of the wealthiest countries in the world. Many Chinese work hard and are world class business and intellectual leaders. The Chinese capital markets appear to be in disarray and are suffering meaningful deflation. I recognize that the level of trust between the two world leaders makes cooperation difficult, but the potential value of cooperation for both participants is enormous. Perhaps, our grand or great grandchildren will solve this rich puzzle.       

 

 

 

 

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

Mike Lipper's Blog: More Evidence of New Era - Weekly Blog # 874

Mike Lipper's Blog: Roundtable Discussion - Weekly Blog # 873

Mike Lipper's Blog: New World Rediscovered - Weekly Blog # 872

 

Did someone forward you this blog?

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A. Michael Lipper, CFA

 

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More Evidence of New Era - Weekly Blog # 874

 

Mike Lipper’s Monday Morning Musings

 

More Evidence of New Era

 

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

 

 

 

For some time, I have viewed US and global markets as having entered a “New Era” phase. As with any transition, until it is complete it is possible the trend will not finish and reverse to the old happier trend. The self-appointed job of this analytical observer is to regularly make observations as I see them.

 

The Rise of the Investment Manager

Independent custodians who are also not investment managers are losing influence with the owners of capital. I see assets leaving bank custodian/ investment managers and going primarily to investment managers who custody their own assets or contract out the custodian function. One clue is this week’s announcement that the head of JP Morgan Chase trading is joining an independent hedge fund. Insurance companies have been reducing their direct management of institutional equity assets and hiring independent equity managers.

 

At the World Economic Forum it was recently noted that the number of individual Trillionaires will shortly grow from one to five, if not more. This is more a function of concentration than growth in the market. Part of the problem is the growth of business investment being small to flat after the impact of inflation. One of my concerns is the anticipated AI flows going into various “sales channels” and making them more efficient, rather than increasing the number of units sold. One disturbing factor is the size of the global R&D budgets, excluding inflation, being relatively flat over the last five years.  

 

US Education a Particular Problem

Global growth is often the result of a better educated workforce. While the US has the largest and most expensive “educational” system in the world, it is not producing a workforce that measures up on the world stage. (The reason for the quotes around education is that in the US we have substituted education for schooling, which uses “social promotion” or teaching to pass the test rather than teaching students how to think logically.) Mike Bloomberg, the former Mayor of NYC, points out that only 67% of 8th graders scored at the basic or better reading level, the lowest level since 1962. What I find more distressing is that only 60% of 4th graders pass a basic math test. This is not going to help over half the US population in the “AI” world.

 

Investors are Worried

In the latest week of generally bullish projections 51.7% of the stocks trading on the NYSE went down, which was surpassed by the NASDAQ where 58.2% declined. The regularly published sample survey of the members of the American Association of Individual Investors (AAII) showed 41% being bullish, down from 43.4% the prior week. What may be more significant is the percentage of those being bearish rose to 34.0% from 29.4% the week earlier.

 

Walking Around Analysis

I know a number currently unemployed people of all ages with good resumes and work histories, who are having difficulty getting hiring interviews. Fewer and fewer companies are hiring. When I walk through high-end shopping malls, I find the better stores understaffed. When speaking to operating people in profit and non-profit organizations, they say they are experiencing measurable declines in operational efficiency. They point to their organizations and/or their suppliers being hollowed out by absent workers of all levels from senior management to first level people.

 

One wonders how long growth in the economy and markets can continue with a poorly educated workforce who all too frequently are absent from work. In the near future companies will have little alternative other than to use AI to compensate for this decline in productivity. The tragedy will be the millions of uneducated and unmotivated employees left on the sideline because they can’t compete. Education in America is desperately in need of a solution, hopefully a new administration claiming to be in search of excellence can deliver it.  

 

As an analyst I suspect the interim results this year will disappoint.

Please tell me if I’m wrong.

 

 

 

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

Mike Lipper's Blog: Roundtable Discussion - Weekly Blog # 873

Mike Lipper's Blog: New World Rediscovered - Weekly Blog # 872

Mike Lipper's Blog: Navigating a New Investment Landscape Amid Political and Structural Challenges - Weekly Blog # 871

 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.