Mike
Lipper’s Monday Morning Musings
Reality
is Different than
Economic/Financial
Models
Editors: Frank Harrison 1997-2018,
Hylton Phillips-Page 2018
Purposes of Models
Models are designed to portray complex relationships in a simple
way. However, all too often models leave out contrary relationships. In so
doing their utility as decision-makers is greatly lessened. Academics love
models as teaching instruments, especially during time consuming classes.
Rarely do the publishers of models give the odds on their exceptions. One drawback
of blind use models is the lack of discussion on exceptions. To be a successful
portfolio manager I believe we should consider exceptions to “normal” expectations.
For example, the current administration is trying to grow
the US economy by creating measures to help manufacturing and housing. This
might have worked well in the past but may not work well this time. Why?
The top 10% of the population owns almost half the assets and
is responsible for an even larger portion of current spending. I believe most high
spenders are not generating their gains from manufacturing and probably already
own their own homes. With approximately 2/3rds of the population classified as
part of the services sector, direct aid to the manufacturing sector will not
make the spenders spend more.
Some of the big spenders are already cutting back on spending
and are selling some of their higher earnings assets. In the latest American
Association of Individual Investors (AAII) weekly sample survey, only 19% are
bullish vs 61% bearish for the next six-months. Some of the wealthiest families
are selling some of their best performing assets. (Exor*, the family holding company
for the Agnelli family, is selling 4% of Ferrari.)
*Personally owned
In the US and possibly other economies some sense that part
of the problem lies in education at the primary level and higher. In the US I
believe 40% of grade school students can’t pass a basic math test. In Estonia
they are going to begin teaching AI in their high schools.
This week we saw attention being paid to the importance of
importing selected metals. On a broader scale, people in the commodity markets are
expecting 6% inflation for “Doctor” copper.
“Happy Talk” is still driving much of the media who are celebrating
2-year Treasury yields dropping below 4% (3.99%) and 30-year Treasury yields dropping
to 4.5% this week.
None of the popular models are currently pointing to a
recession, which would give a more complete total outlook. However, I remind
investors that throughout history there have always been periodic recessions,
usually due to excess use of debt and/or government action. We have an abundance
of both currently.
Take Care
Did you miss my blog last week? Click here to read.
Mike
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