Mike
Lipper’s Monday Morning Musings
Recession/Depression
Risk Assumptions
Editors: Frank Harrison 1997-2018,
Hylton Phillips-Page 2018
One intelligent betting task at the New York racetracks,
where I learned basic analysis, was to guess the rough size of the gap between
the betting pool odds and the probabilities. Only if the self-assessed
probabilities were significantly larger than the crowd-determined payment odds, was it a sound wager. I try to apply the same approach to investing in stocks
around the world. The easy part is determining the payment odds, which are
based on two factors. The popularity shown in the market and guessing the
quality of the current stock bulls, which is much more difficult. In general, more
retail buying equals lower quality. This is not to equate brains with capital,
but the amount of research done. There is an inverse correlation between the amount
of media pundit space devoted to an investment and the probability of them being
correct. That is not to say the pundits are dumb, they are limited by space and
time and that limits their ability to handle complexity.
Determining probabilities often rests on the number of
separate supporting elements. This is difficult because unpopular views
normally have fewer supporting elements and are more complex. (If this happens
then that will happen or at least improve the possibility of it happening.)
I have found that a search of history is useful in searching
for probabilities. As there are no axiomatic rules, sometimes something will
happen and sometimes it will not. The trick is to try to understand what caused
the different outcomes. In dealing with history, we are lucky to have both
written and geological records from around the world. From those records it is
apparent there are similarities in what drives many critical trends, no matter the
place or time-period.
Causes of Recessions
No one wishes for a recession, although we should expect one
or at least the possibility of one. When a recession does occur, it is generally
a surprise, and most are unprepared for it. In the beginning most don’t
recognize they are experiencing a period of decreasing ability to make
purchases and the ability to promptly pay debts. Hopefully, the economic
community recognizes it soon after the nadir of the recession. The academic
community only declares “official” notice of a recession after full recovery of
lost resources.
In every recession I have studied, the critical realization
of being in a recession occurs when the level of current earnings makes it
difficult or temporarily impossible to repay what is owed on time. The squeeze on
repayment is caused by an overly optimistic belief in current earnings and the
absence of sufficient reserves. These conditions in turn are caused by
imprudent personal, business, non-profit, and government decisions. Other
causes are sloppy executions, which cause incomplete and wrong actions. Greed
also drives actions without regard to consequences. There also appears to be an
increase in fraud during a recession.
Causes of a Depression
Depressions are relatively few but longer lasting. For the
most part they are caused by attempts to
structurally pull the economy out of a recession. Typically, the leader of the
government sees that the problems facing society are structural and immediately
seeks to fix the problem.
In the US we have had four activist presidents who wanted to
structurally change how we operate. These are Andrew Jackson, Thedore and
Franklin Roosevelt, plus the current occupant of the White House. These leaders
attempted to change many things but ran into opposition from the minority who used
the Constitution and courts to block the changes. In addition, their actions created
other problems for the country and globally after their terms.
Curren t Conditions
The following elements suggest there are problems ahead. My
lens is primarily fixed on market analysis, not economic analysis. (This is due
to belief that the market is primarily focused on the perception of future
markets and not how past economic data impacts it.)
- For the past 2 weeks there have been more declining than rising stock prices on the NYSE and NASDAQ.
- For the last two weeks, the AAII sample survey shows only 32.6% and 31.6% bearish for the next 6 months.
- Tech stocks listed globally fell last week.
- Only 25% of weekly prices reported in the Saturday Wall Street Journal rose, the remaining 75% declined.
- Last week through Thursday, my old firm reported that only three mutual fund peer groups out of 104 competitive leagues showed average gains - Dedicated Short +7.80%, Health/Biotech +0.98%, and Indian Regional +0.55%.
My Working Wager
Between now and next Presidential election, the odds on a
recession are 60%, with the odds of a depression before 2035 at 50%. (Remember
the market rises about 80% of the time.)
Your thoughts, please.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Risks Are Rising Thru the Clouds - Weekly Blog # 915
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Lipper's Blog: The Inevitable Recession - Weekly Blog # 914
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Lipper's Blog: Biggest Investment Hurdle: Complexity - Weekly Blog # 913
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