Preparing for a Recession - Weekly Blog # 843

 

         

 

Mike Lipper’s Monday Morning Musings

 

Preparing for a Recession

 

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

 

             

 

Learning from Wartime

When US Marines embark on a troop ship, they are instructed to wear less than comfortable life jackets. This sense of preparedness was one of the things I learned as a Combat Cargo Officer training fellow Marines for potential conflict. This preparation for the probability of danger to our economy, including client and personal investment portfolios, is what I hope to highlight in this blog.

 

Recessions are inevitable because humans prefer optimism to pessimism, expanding debt to leverage the oncoming good times. Politicians have learned that it is not a good vote-generating strategy to disappoint voters with actions. This has been the strategy for a large number of US Administrations from both parties, where they increase private and public debt without building up reserves. Consequently, history suggests we have not repealed recessions, we just don’t know when they will occur. Furthermore, we don’t know if the oncoming recession will be cyclical and largely a correction in prices, or a more painful structural recession with significant businesses collapses requiring lifestyle changes.

 

Don’t Abandon Ship by Massive Selling, But Get Your Lifejacket Ready

As a midshipman in training on the Battleship New Jersey, I was assigned to serve watch as the sole crew member in the crow’s nest, the very highest point on the ship. I was to report anything I saw as dangerous by phone. At one point I saw some round metal objects that looked like tin cans through my binoculars and excitedly reported it to the deck officer. This caused some commotion. Luckily, the old Salt of the deck officer recognized me as a landlubber and didn’t put the ship in an emergency condition. He understood that it probably was a tin can and not an unidentified destroyer known to Ship sailors as tin cans. In viewing what may be ahead for markets and economies, I will remember my midshipman experience and be careful with my language.

 

This is What I See for You to Evaluate

• The Conference Board reported that the University of Michigan survey showed a large drop in its measure of Consumer Confidence. It came close to the low of 2020.
• Perhaps as a preparatory move, 100,000 tech workers have been laid off year-to-date. (I don’t know how many are still unemployed.)
• New capital goods orders (non-defense except aircraft), were expected to gain +0.1% but actually declined -0.6%.
• A number of large public companies are cutting employment by selling products or divisions. The interesting thing is the breadth of companies taking these steps: AIG, Morningstar, Interpublic.
• Several mutual funds that performed well in the first quarter have cut back holdings weighted over 5%. Some of the stocks cut back were Berkshire Hathaway, TSMC, and AIG. (All held in personal accounts.)
• In the latest week, 55% of the stocks on the NYSE rose vs only 49% on NASDAQ. Remember, the NASDAQ is considered more speculative than the “Big Board”. Only 38% rose in the latest Saturday WSJ list of weekly prices for market indices, currencies, commodities, and ETFs.
• Two well-established mutual fund management companies with long-term orientations are expecting dramatic changes. Capital Group expects to see a meaningful rise in price volatility. (If this happens, there will likely be a rise in direct trading between major institutions.)  The other group is Marathon, who is concerned about the expected growth prospects of all aspects of “AI”. There is not enough planned construction for all elements of AI and what is required for the rest of the economy/society. There is a need for innovation and increased efficiency.
• Year-to-date through June 27th, there were four investment sectors that produced average returns exceeding the +15.51% earned by the average S&P 500 Index fund. (You may be able to get the one day that is missing, which didn’t have much impact.)

 

Investment Peer Groups Performing Better than S&P 500

Large-Cap Growth    +20.42%

Science & Tech      +17.91%

Energy MLP          +17.69%

Equity Leverage     +16.29%

 

There were 1222 funds in these four groups.

 

Question: How are you going to recognize the next recession?

 

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The Rhyme Curse -Weekly Blog # 838

 

         

Mike Lipper’s Monday Morning Musings

 

The Rhyme Curse

 

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

   

       

   

^{Analysts, lawyers, and accountants spend much of their careers relying on history to protect themselves and their organizations. I have often said, cut an investment analyst and a historian will bleed. Mark Twain is incorrectly identified with the following quote “History does not repeat itself, but it rhymes.”  To select the most useful rhymes, you should select from all past observations as an “AI” search would do, rather than just using the most useful observations. For example, in reviewing the number of years between the S&P 500 “all-time highs”, including 1929. There were 15 such occurrences, but they were of different durations: 25, 6, 5, 3, and 1-year durations). The most common period was one year, with 6 out of 15 periods being 1-year durations. In attempting to pick a relevant number of years, you should look at other factors. I would pick periods of rising government deficits. The center of this array is 5-6 years, suggesting a cyclical recession and possible periods of stagflation. A longer duration would imply a structural recession.}

 

^{Historical Inputs of Relevance Today}

^{In the 1890s US Admiral Alfred Thayer Mahon wrote on geopolitics and pointed out that Great Britain, a geographically small nation, was the real leader of the world due to its naval and commercial fleets. Both Germany and Japan got the message, which was fundamental in their preparation for WWI and WWII. China once had the largest fleet in the world, before they destroyed it themselves.}

 

^{The result of this seminal work was that once Germany was able to send its battleships through the Baltic to destroy British warships, WWI became a certainty. Prior to that the German General Staff, thru visits and other studies, had focused on the campaigns of General Stonewall Jackson in the Shenandoah Valley of Virginia, demonstrating the power of using mobility against fixed forces. After it’s treatment as an “ally” during the signing of the Peace treaty and the US curtailing its oil supply, Japan recognized the need for sea power, an issue which led to Pearl Harbor. Bringing the lesson and its probable impact on our future up to date. China has the largest naval fleet in the world today, and it is still growing while the US’s fleet declines.  China has almost half of the world’s shipbuilding capacity.}

 

^{Preparing for the Future}

^{The Capital Group, one of the great mutual fund and institutional investment managers, has entered into a joint venture with KKR to produce and sell hybrid funds. JP Morgan Chase, an organization that internally studies many possible futures, is prepared for interest rates between 2% and 8%. Their CFO is prepared for the tailwinds currently helping them to switch to headwinds.}

 

^{Many Different US Markets}

^{The only US Diversified Equity mutual fund sector to rise during the week through Thursday was large-cap growth funds, which was echoed by tech sector funds. While the NASDAQ advances volume rose for 4 days in the week, the NYSE Composite Index only advanced for one day. Low volume has led to less volatility.}

 

^{What Many are Not Prepared for}

^{The average age of world government leaders is 62, with 19% in their 70s and 5% in their 80s. The median age for US senators is 65, with the House member median age being 52. The average CEO is 56. While I hope all of our leaders are in good health and remain so, I suspect the emotional strain and lifestyle choices are incidental hurdles. As they age, they often become more conservative and prefer the old way of doing things.}

 

^{Investors are not prepared for change. I am currently noticing an increase in the rate of top spot replacements. Investors should therefore be prepared for leadership changes, which almost always result in younger and more vibrant leaders. There are other changes few are ready for, like a change in the Fed and other regulatory bodies, or a change in policies. I suspect there will be changes in private investments and how they deal with the public. As usual, low-risk equity and debt not designed to survive either stagflation or a major recession will come in late the.}

 

^{Let me know what investors need to be prepared for.}

 

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Markets Are Time Frame Exchanges - Weekly Blog # 796

 

Mike Lipper’s Monday Morning Musings

Markets Are Time Frame Exchanges

  

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

 

 

 

Who is in Today’s Crowd

The bulk of investors are not currently active. August is normally a low volume month, but it appears we are not in normal times. There appears to be less conviction as to where we are going. A reasonable bet is that the majority of opinions regarding future direction are wrong.

 

This week we heard two opinions which the media suggested were in contrast with one another. Fitch lowered its credit rating on US Treasuries by one notch to AA+ from AAA, while Jaime Dimon stated that no large country has a stronger credit condition. Actually, they are probably both correct, the difference is in their function. The Chairman and President of JP Morgan Chase was reassuring depositors that the US government was currently the safest place to invest. Fitch as a credit rating forecaster, was suggesting future political battles within the US could delay the promptness of the US government in making payments on all its obligations. Both could be correct.

 

Jamie Dimon is probably correct that US government payment dates will not currently be violated. (This excludes delays in payments on various government contracts, which are not funded obligations.) Fitch raises the question as to when the political process in the future could lead to some delays. These are important concerns, but it is not the total picture as far as investors are concerned. 

 

A funder of the US government who will be repaid in devalued dollars due to high levels of inflation. An added concern is the foreign exchange value of the US dollar in a world that is increasingly measured in other currencies. Both geopolitical and economic factors may make the dollar worth less when purchasing essential items from overseas providers. (Energy, clothing, critical medical resources, etc.)

 

Looking beyond the next few years the picture looks less promising due to aging populations in the US and around the world. Both the US government and private sector are failing to build up the reserves necessary to pay retirees likely to have health issues. Historically, the next generation utilizes their working years to pay for their own retirement and the care of their seniors. That is not happening now. Many workers currently spend all they earn and do not focus on long-tern cash generation.

 

Other Disturbing News of the Week

1.  The current President looks to FDR as a great, if not the greatest, president. FDR believed his greatest achievement was the National Recovery Act of 1933 requiring competitors to meet and agree to wage rates for their employees. The higher the better. The act was ruled unconstitutional by the Supreme Court.

2.  The UAW is demanding the “Big 3” give their workers a 40% increase. (This is the same union that forced the US auto companies and their suppliers to raise wages, leading to an increase in foreign manufactured car imports and a decline in US auto exports.

3.  One investment adviser called to my attention an article by Bob Kirby, the great salesman from the Capital Group. His article, written in 1975, showed how each generation fails to learn from the past. Bob earned enough during his lifetime to endow 5 scholarships at leading universities, hoping to correct this situation. Caltech was a recipient of one of these Robert Kirby scholarships.

4.  Xi, the Chinese Leader, measures national success in terms of technical self-sufficiency.

5.  For the past week only 2 of the 31 Dow Jones-Standard & Poor’s market indices were up, these were select micro and internet services.

6.  Only 5 of the 72 price indices published by the WSJ each Saturday were up this week. Three were energy and two were currencies. Wheat and corn were the two biggest losers.

7.  A US Navy Petty Officer was caught supplying detailed photographs of an attack amphibious ship to a Chinese agent. (One of the many difficulties facing an amphibious landing on Taiwan is the lack of amphibious ships and their training. Over 60 years ago I served on such a ship as a USMC Combat Cargo Officer.)

8.  Last week, volume in NYSE stocks declined 59% vs. 62% for the NASDAQ.

9.  Major advertising agencies are cutting their estimates for the rest of this year because their clients are cutting budgets.

 

Conclusions

The Fitch credit rate cut was not the only bearish news that caught my attention last week. The comparisons with the FDR led Depression is a bit unnerving. What is clear is that while the bulk of the US focuses on the general movement of the dollar, many in Washington are focused on the probability of votes, particularly at the top of the tickets.

 

What are you seeing and believing?

 

 

 

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TOO MANY HISTORIC LESSONS - Weekly Blog # 786

 

Mike Lipper’s Monday Morning Musings

TOO MANY HISTORIC LESSONS

 

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

 

 

 

Are we looking in the wrong direction?

The most important task for any analyst is guessing the future direction his/her enterprise should take. The standard approach is to review history. The problem with that approach is most history is written by the surviving winners and told to us by scribes who feel the need to make history interesting, clear-cut, and supportive of the commerce of the payor of the scribe. I have played that role. My problem is that for myself and my accounts the picture is not clear, particularly now.

 

Current Picture

Today’s blog is being written on the Saturday of the weekend before the grand compromise of the US Debt Limit/Tax Expenditure Legislation. We should never have been put in this position! Our elected leaders have had full knowledge of the twin conflicts of debts and expenditures for many months. Hopefully a tactical compromise will be announced within days.

 

There is however a more depressing structural problem facing us. These two problems have been with us ever since our leaders first determined what amount to spend for the perceived benefit of the governed and where to get the money. I am sure there are written Middle and Far Eastern texts, but the first I know of came from the ancient Roman Republic.

 

Rome conquered the known civilized world through the strength of its Roman Legions and superior engineering. The money to accomplish this came from taxing citizens, effectively the free residents of the city of Rome. Citizens elected the Senate who then passed these taxes. These senators had political skills, which they used to get the votes for their leadership. They induced citizens to vote for them by providing “Bread and Circuses”, or in other words food from conquered lands and mass entertainment.  As long as the Senate provided these in sufficient quantity, they remained in power. Upon failing to do so they were replaced by emperors who felt the political need to continue some of the “bribes”.

 

To keep the food supply growing the Empire continued its military conquests, enabling them to award the legionaries the captured farmland which benefitted from the Roman roads and aqueducts. However, the fidelity of the farmers declined over time, as did the quality of their military skills. Consequently, the Empire was overrun by the barbarians.

 

The political lesson for today is that bribery works as long as it continues to increase.

 

There is another lesson, this time from The American Revolution. One of the rallying cries of the colonials was “no taxation without representation”. They got around that issue by placing tariffs (taxes) on imports, and later through the power of inflation reduced the future value of the dollar.

 

In an aging world all governments need to address the increasing requirements of the elderly. China is under pressure to raise the retirement age from 50 for women and 60 for men. We have seen the difficulty France is having in attempting to raise its retirement age by just by two years.

 

Two Different Views

In general, the evolving political views of many Americans parallels their investment views. One group wants the government to be funded by taxes on the “rich” to pay for their growing needs. The second group wants to be able to provide for their families and their needs with their own funds, sharing equitably with those less fortunate.  In most cases the first group believes it will benefit as the economy continues to grow. The second group believes it will be increasingly difficult to create sufficient economic growth to meet everyone’s needs.

 

The second group sees the following signals as anti-growth:

1. Labor productivity is growing less than inflation.
2. Well established investment bankers and law firms are selling out, partially due to the views of the dominant partners.
3. The following financial firms, after studying the issue, are meaningfully reducing the number of staff in tech and operations: Wellington, Capital Group, and JP Morgan.
4. Some Private Equity firms are selling positions at a discount.
5. Consumers have shifted their buying habits from Best Buy to Costco.
6. Shortage of landlords.

 

Search for Conclusions

Please let us know your opinion on whether this is a time to buy risk assets to be sold in one to five years.

 

We close this Memorial Day blog with a quote from Theodore Roosevelt “We must dare to be great; and we must realize that greatness is the fruit of trial and sacrifice and high courage.”

 

 

 

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Week Divided: Believers vs Investors - Weekly Blog # 762

 

Mike Lipper’s Monday Morning Musings

Week Divided: Believers vs Investors

 

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

            

             

 

You Are What You Read

Early last week US stock market indices rose gently. The pundits’ view inflation as having peaked globally, with “factory gate and commodity prices, shipping rates and inflation expectations have begun to subside”. The Federal Reserve is expected to reduce the acceleration of interest rates shortly.

 

Meanwhile, Washington was simultaneously trying to avoid a national rail strike by imposing additional costs on the railroads. These costs would be imposed on all using freight delivered by rail and would encourage others to raise labor demands, which if successful would lead to higher prices.

 

If there is going to be a recession, believers think it will be short-lived and shallow.

 

What causes Inflation?

Inflation is created by demand exceeding available supply. Rarely it is caused by free markets working on their own.

 

Our current inflation started with the last two Presidents who for political reasons flooded the economy with grants. These grants were beyond the immediate need of the unfortunate who required help. This approach is hardly new, it was implemented in ancient Greece and Rome and is still practiced in numerous countries today. These grants avoid the laws prohibiting bribery but encourage dependence on elected officials or parties.

 

On day one the current administration went even further by restricting supply. They first killed the pipelines then implemented regulations forcing providers to raise prices to cover government mandated expenses.

 

To avoid taking responsibility for inflation the Government turned to the Fed, utilizing it as a hammer to beat down the rate of inflation. The Fed was like a person given only a hammer to build a home, they only had the ability to use interest rates to curtail demand.

 

Business leaders eventually recognized that curtailed demand would likely lead to lower revenues and consequently started to cut back on their current and future labor force.

 

One example of this is the broker/dealer community. While an index of publicly traded broker/dealers is close to its all-time high, leading firms are laying people off. Evidenced of this can be seen in a recent statement by the CEO of Morgan Stanley. (Stock is held in our financial services fund)

 

This message is being read and acted upon. ADP in their latest survey indicated that private sector employment is at the lowest it has seen in two years. (Also held in our financial services private fund)

 

What Does the Data Say?

While both concurrent and lagging indicators are slowly rising, the leading indicator is dropping.

 

IBES, via Refinitiv, is predicting S&P 500 net income will show a -3.6% decline in the fourth quarter. The first three quarters in 2023 will be +0.7%, -0.9%, and +3.5%, respectively.

 

Bank of America’s reminds us that December will most likely be an up month. Nevertheless, they predict a global recession, the reopening of China, and re-shoring in Europe and the US in 2023.

 

Two Other Views

Market indices are being influenced by their leading components. The Dow Jones Industrial Average (DJIA) is the best performing index. It is both closest to its former high and has the biggest gain from its most recent low. The DJIA performance has been driven by its goods producing and selling companies, which are not normally its best investments.

 

The Standard & Poor’s composite index is market capitalization weighted. Something that is most useful to investment institutions managing large single portfolios, deemed to be high quality companies.

 

The NASDAQ Composite is now made up of companies that for one reason or another don’t list on the “big board”. In terms of the number of shares traded it is the largest stock exchange in the world, followed by the London Stock Exchange. The New York Stock Exchange (NYSE) is third on the list, but probably has more capital listed than others.

 

Nevertheless, the NASDAQ often leads the US and many other exchanges in terms of performance. Perhaps it is due to the fact that it has younger and faster growing companies. (We also own its shares in our financial services fund.)

 

I pay particular attention to NASDAQ performance compared to the NYSE. I noted with some concern that the NYSE had 89 stocks achieving a new high and 44 a new low on Friday. The NASDAQ had 97 new highs and 128 new lows. Since the NASDAQ has more listed companies, I am not disturbed by the number of new highs. Unless this is an aberration, the sharp difference in the number of new lows relative to the number of new highs could be a warning. I will follow carefully

 

One of the most thoughtful large mutual fund management companies is the Capital Group in Los Angeles. It has been investing beyond US borders for many years and summed up why in the five points listed below:

1. International investing is about companies not countries.
2. A strong US dollar won’t last forever. (Dropping recently)
3. Dividend opportunities are greater outside the US
4. New economy depends on old industries
5. Not all of the best stocks are in the US

 

This is why I believe it is prudent to have some money invested beyond US borders.  

 

 

 

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Relative or Payout Returns in Periods - Weekly Blog # 725

 

Mike Lipper’s Monday Morning Musings

Relative or Payout Returns in Periods

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

Throughout life we learn that successful investing is an artform, which means that people with different perspectives view actions differently at different times. Thus, no single investment fits the needs of everyone. With that starting point, we believe successful investing is going to be different for each of us and should not be taught based only on numbers and regulations.

I believe the single most important starting point in investing is identifying the period of investment. Our current culture is very much focused on now, with the media reinforcing that view. To the extent a future period is mentioned, it is tomorrow, next week, month, or year-end. Even when we state the decision period, we don’t describe the terminal date. For example, we know that US stocks on average produce high single digit returns for long periods of time. Thus, an 8% return for 2022 could be forecast. That could be considered a good or bad return compared to alternatives. Early this week, a positive return half that size could have been acceptable. By the end of the week, any annual return below 20% would be considered dismal.

The financial and popular media place us in a relative world, making comparisons of what they believe are competitive investments. After all, stock prices are subject to the same risks and rewards! This is a gaming or gambling attitude. Most of the money we are responsible for use current investments to produce total returns for use in future periods. Consequently, we think about returns compared to the expected uses of the money, with sufficient excesses to cover periodic shortfalls. While the size of the excess pool could be based on actuarial assumptions, it is more likely to be a comfort factor. (One reason many bear market survivors don’t do well in future periods is that they carry with them the fear of even worse future markets. It is quite possible that after a large decline one should reduce the size of the excess reserves.)

PORTFOLIOS STRUCTURE

The first recommended step is to sub-divide the investment portfolio into time-focused sub portfolios. Considering the current unsettled global, political, and financial conditions, I suggest the first sub portfolio cover expected payments between now and the end of the first year of the next president. The excess over payments might be in the order of 30%, declining as stock prices decline.

The second sub portfolio should cover the period after the first, perhaps going through the expected lifetime of the principal owner. The reserve component should be no more than half the first sub-portfolio, because based on history markets generally rise 75% of the time.

The final sub-portfolio should anticipate being expended after the expected lifetime of the principal owner. The volatility reserve should be half of the second portfolio’s.

ASSINGING CURRENT MARKET DATA TO PORTFOLIOS

Caution: My investment views are for the most part contrarian to popular views. They take advantage of the historic experience that when contrarian views succeed, they have a larger payoff than popular views, whose benefits are usually already in current prices. However, contrarian expectations do not come into fruition as often as popular views.

Immediate Portfolio

The American Association of Individual Investors (AAII) six-month sample survey shows 22.5% being bullish and 49.8% bearish. Extreme readings are normally under 20% and over 50%. Market analysts use this as a contrary indicator. (When these numbers reverse, watch out.)

Up and down transaction volume is also something of a contrarian indicator. In the week ended Friday, the NYSE had more shares moving up than down, 20 million vs. 10 million. Normally they are more balanced. After a long period of declining prices, the next upward spike is often caused by short sellers or custodians buying to cover shorts that need to be liquidated. While the relief rally on at the “big board” gained all five days of the week, the DJ Transportation Index was up only 3 days, and the Utility Index was up only 2 days. (Unless the upward movement broadens out, the rally may not be able to sustain itself for long.)

Working Portfolio

According to a recent survey of institutional managers, growth stocks were not favored over value stocks for the first time in many years. Since 2007, the MSCI ACWI ex US Growth index has been flat (Morgan Stanley Capital International All Country). (If this view is maintained, the relative multiple of growth price/earnings ratios will decline and represent a bargain at some point. But it also may suggest that earnings will grow at a materially slower rate. Another possibility is earnings outside of US Growth companies growing faster than those in the US, along with their stock prices.

Estate Portfolios

Each week Barron’s publishes the performance of the 25 largest US Equity Oriented Mutual funds from my old shop. Only five management companies placed funds on this list: American Funds (Capital Group) - 10, Vanguard - 9, Fidelity - 3, Dodge & Cox - 2 and PIMCO - 1. The total net assets of the funds range from $125 billion for Growth Fund of America (Capital Group) down to $53.8 billion for Vanguard Wellesley/Adm. (Note: all these funds have been serving investors for many years and American, Vanguard, and Dodge & Cox have done a good job of capital preservation. This may be important to their fund holders and distributors, although at some point in the future I expect to see more capital appreciation-oriented funds on the list, at least for a while.)

In all the discussion on the availability of petroleum, politicians and US Government people forget that the Bakken reserves represent over 500 billion barrels and would last for more than 100 years at current consumption levels. I believe the combination of our fuel and refinery expertise makes this supply one of the cleanest in the world. Considering the declining number of US based refineries and the low margins in the business, there could be a temporary bottleneck that could be addressed. (Whether an investment management organization has a direct investment in energy or not, I believe a knowledgeable energy analyst is essential for a successful portfolio management business in the future.)

Question of the Week:

How much of your portfolio is focused primarily on relative returns vs meeting payout needs?

  

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

https://mikelipper.blogspot.com/2022/03/building-your-future-winning-portfolio.html

https://mikelipper.blogspot.com/2022/02/successful-investing-expects-unexpected.html

https://mikelipper.blogspot.com/2022/02/we-are-progressing-weekly-blog-721.html

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Current Causes of Concern - Weekly blog # 716

 

Mike Lipper’s Monday Morning Musings

Current Causes of Concern

(I would like to be wrong)

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

In our first blog of 2022 I suggested this might be a troublesome year. While most predictors tend to forecast their wishes, it says more about them than being useful. The most useful predictions are perhaps expressed in a fanfold display, with at least three lines originating from the current origin to a future date. The graph offers at least three possible paths forward: high, medium, and low. My faulty crystal ball is not up to that model. My current outlook is negative. Perhaps it is my military training, when I assume a position of responsibility and search for all possible attack routes. Following this process, there are immediate causes for concern for our investment portfolios. (As already noted, I hope I am wrong.)

The causes for concern come from my weekly review of both data and news reports. You can interpret any or all these factors negatively or positively or view them as unimportant. I leave it up to our subscribers to make their own judgement and hopefully share their views. The concerns are listed in the order I came across them, not in order of importance. In parenthesis and in italics after each item are my worries.

1. Most commentators are focused on the expected moves by the Federal Reserve Board regarding interest rates and the disposition of their large portfolio of debt instruments. (I expect the Fed to continue its traditional role of being late in changing direction, confirming trends already in motion rather than signaling a change in direction. This view originates from the reality that the President nominates the Fed Governors, which in turn are confirmed by the Senate. This week, three people with no apparent experience of working in a bank, a commercial profitable enterprise, or managing money as a fiduciary, were nominated. Despite the Fed being an independent agency, it is very unlikely it would take a point of view opposing the President. Many investors believe rapidly rising interest rates are largely due to the accommodative policies of the Fed under the current and prior President. Inflation results from many other imbalances in the domestic and global economy. Under the current circumstances I am concerned.)
2. In the latest week through Thursday, 11 of the 25 top performing mutual funds were precious metals funds, with 7 of the 10 worst being growth-oriented funds. (The stocks in these portfolios are moving in the direction suggested by a high inflation and short-term focused stock market.)
3. One of the oldest predictive approaches to the equity market is the Dow Theory. For continuation of the current trend, it requires the Dow Jones Industrial Average and the Dow Jones Transportation Average to be going in the same direction, with each index confirming the high of the other. The Transportation index has been declining since November, while the Industrial average has gone on to make a new high. (If the professional buyers of transports believed the ordered clearing of seaports would solve rising inflation, the index would be rising.)
4. The old Journal Commerce Index of Industrial Prices continues to rise, gaining 2.7% this week. (Inflation is broader than consumer prices, transportation costs, and excess money supply growth.)
5. The Barron’s Confidence Index is predicting bond prices performing better than stock prices over the next six months. (This rarely happens and is a sign of an equity bear market)
6. Robert Lovelace, a senior official and portfolio manager of the highly respected Capital Group, pointed out that we are in the 11th year of an equity market expansion. A significant contributor to its rise being the increase in price/earnings ratios. (Earnings of companies typically change more slowly than valuations. Consequently, we can have a down market with flat to rising earnings when valuations decline.)
7. The largest contributor to global trade growth is China. Compared to the US, China is a controlled economy. Even with all its controls, results are slipping. (Without China’s need to import high quality goods, services, and energy, the exports of developed countries will decline. This is important for the US, Germany, Italy, Canada, and Australia, among others which supply imports into China.)
8. Bond owners suffered volatility risks greater than 5 years interest payments in January. (If the bond market is at risk, it is also dangerous for global stock markets. Most equities are leveraged by the amount of fixed income borrowed. There are many highly leveraged positions in high-quality bonds.)
9. Ukraine‘s unequal position versus Russia’s 100,000 troops on the border is dependent on international cooperation for a resolution. (Is Putin betting on the probability the US and others will not commit troops? The belief that curtailing Russia’s use of the SWIFT currency transfer system will be an effective deterrent, does not comprehend the historic practice of enemies at war. Enemies regularly trade with each other through third countries, as happened during WWII. The way we exited Afghanistan and left many promised entry into the US behind questions the strength of the US word.)
10. Growth in the use of Private Equity by public pension funds and wealth managers for individuals broadens the potential risk to investors, who don’t have sufficient knowledge of these investments and what can go wrong. (It is just another example of performance chasing rather than anticipation.)
11. Barron’s wrote positively of 105 stocks gaining 5.1% on average in 2021, vs the relevant averages which gained 8.4%. They were more successful with four bearish recommendations. The choices of the “experts” who participated in their annual round table also underperformed the market. (Picking investments is a difficult task. It is easier to pick winners and limit losers by choosing portfolios, but they will often fail to beat individually selected stocks that are big winners.)
12. The J.P. Morgan Chase earnings call celebrated the published numbers, while discussing each of their main activities properly outlined current problems. While it is arguably the best large bank in the world, they have possibly reached a cyclical high in many activities, which won’t return until there is some real continuing growth in many economies. The 6% drop in JPM’s price on Friday appears to be appropriate. (Perhaps JPM is topping out, like the US is doing under Putin’s judgment. Xi may share this view, considering his plans to deploy four aircraft carriers vs only one for the US in the waters near Taiwan over time.) 

None of these concerns need be permanent, but investors likely face some troubling times ahead. The possibility of multiple negative events unfolding simultaneously is a big concern. We have a toxic mix of increasing inflation, high valuations, extremely low interest rates, a slowing global economy, and a dangerous geopolitical environment. Having people appointed for purely political reasons is always a concern, but especially at a time like this when perspective and skill are required. 

Inflation will only be beaten by taking the necessary corrective measure to raise interest rates and slow the spending. There will be political pressure to do otherwise. Taking the corrective measures necessary will likely be painful and politically damaging, a reason it will not likely be done to the extent necessary.

Valuations will likely return to normal faster than most expect, although that’s cold comfort for most investors. A generation of investors knows only rising markets and that has led to complacency. 

What do you think?

  

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

https://mikelipper.blogspot.com/2022/01/deeper-thoughts-weekly-blog-715.html

https://mikelipper.blogspot.com/2022/01/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2021/12/are-investors-taking-too-much.html

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