Mike Lipper’s Monday Morning Musings
For Better Performance: Pick the Right Data
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Kevin Warsh Right in the Beginning
One of the first substantive moves made by the new Chairman
of the Federal Reserve Board was recognizing that the Fed has historically focused
on the wrong data to predict the future movement of interest rates. Our
fraternity of market followers and predictors (analysts and portfolio managers)
have enshrined various indices as guideposts to the future. Unfortunately, both
the Fed and “The Street” have used the same or similar indices, which largely rely
on Federal Government produced data. Chairman Warsh recognized these indices were
not particularly useful and feels it’s time to consider adding other data
points, both for the Fed and “The Street”.
For probably three generations, the amount of money devoted
to the gathering of economic activity has been declining on an inflation
adjusted basis. The decline was accelerated by the current administration through
the brief Doge period by paying a premium for retirement in various agencies.
Much of the data was gathered by low-income people in various companies, which led
to late filings and inaccuracies.
What Would Be Better
Since the beginning of time market followers have looked at
what people bought in the way of goods & services and how they invested their
money. Many of these approaches are still useful today to get a feel for the
temperature of supply and demand and to see how investments and savings are
taking place. I find this approach useful in determining the probability of future price movements.
These Are the Items I am Following
- What are companies currently doing that is uncharacteristic of what they did in the past. In the latest edition of Barron’s there is a brief article on three stocks we own for ourselves and clients: Berkshire Hathaway, Apple, and Walmart. (These are not recommendations, which should only be made with an understanding of the investor’s knowledge, experience, other securities held, and perceived needs.) Each of these companies is doing something new for them. Berkshire Hathaway is growing a collection of companies building housing communities at different price levels. Services provided by this collection of companies includes mortgage generation, real estate brokerage, and possibly a supplier of public utilities. (They have not announced an overall plan, but it is interesting that they are putting together this effort at a time when the housing market is depressed.)
- Apple’s new CEO is likely to produce new products & services, akin to what Steve Jobs did. While these new items may share some of the characteristics of existing products, they are likely to open new markets for Apple.
- Walmart is exploring the use of its communication relationship with grocery customers through paid advertising. Grocery customers are Walmart’s largest source of sales and this could lead to the largest and possibly its most profitable electronic advertising network.
Not all these new ventures will work, but the analytical key
is examining the radically new ventures smart companies are undertaking.
- The bond market in terms of timing is ahead of the stock market. Most of this year the volatility of bonds has been greater than stocks. The bond market is structured around credit conditions and the central government is theoretically deemed to be the best credit. This is true most of the time as judged by those outside of its control, with its price relative to other currencies fluctuating on perceived inflation rate concerns. The US dollar has declined in purchasing power due to inflation, as have most foreign currencies. One measure of purchasing power is the price of gold, which in our lifetime has risen from its fixed price of $35 an ounce to today’s level of $4320.50. (Remember, prices can go up as well down. On January 1st, 1980 gold sold for $850 an ounce and by June 1982 it had fallen to $300.) Gold is nevertheless a good indicator of what the market believes the future price will be. For the 5 years ended last Thursday, the average gold fund gained +25.29% per annum compared to +17.52% for the average global natural resource fund and +10.37% for the average commodities’ fund. (If inflation drops to 2% or lower, the price of gold would be expected to drop materially). This could happen sooner than the market expects considering 61% of the 72 weekly prices The Wall Street Journal reports were down for the week.
- Chicken dinners are growing and beef meals are dropping at restaurants from McDonalds to high-priced dining locations. Furthermore, the number of people in restaurants are declining, while some are closing.
- Investors sense that change is underway. In one collection of equity accounts investments have fallen by 3.5% since early September, while news from Washington remains positive. Psycho analysts tell us that people feel losses twice as much as they do gains. With me it is more like 3+%.
- We are seeing the number of people working in the financial community shrinking, and not all of it is due to “AI”.
Chairman Warsh Commented
Warsh awaits the reports from his five investigative committees
due by year-end. He has noted that instead of the Fed paying attention to
annual data, he sees change in periods as short as 3 months influencing future
actions.
As usual I seek your comments so I can learn.
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