Early Stages of a New Grand Cycle? - Weekly Blog # 781

 

Mike Lipper’s Monday Morning Musings

Early Stages of a New Grand Cycle?

 

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

 

 

 

Travelers Note:

Many who speak of future seminal changes don’t recognize where they are. This is understandable, as it is difficult to identify where we are in the development of trends, let alone where we are going.

 

Whether or not you agree with my perceptions, they may be useful to you in gauging where we are in the progress of time. Please share your views with me. You can’t avoid thinking about the future if you invest in securities. But by not investing at all you are letting others decide you and your family’s fate. No investment isn’t an investment.

 

Reliance on History

The main tool we have in thinking about the future is our perception about our collective past. We selectively use our less than completely accurate perceptions of the past in projecting our futures. While our learned or experienced views of the future can be helpful, they won’t give us a completely accurate map of the future.

 

The worst remembrance that some seniors have is a period labeled the “Great Depression”. In thinking about the future, my analytical training suggests that this is a useful model for the worst that might befall us. We hope we can survive a similar period and therefore we can deal with whatever may come.

 

Where are We?

Remember this question when traveling with young children? We may remember a partially inaccurate statement from a nearby authority-figure making a guess. This was not an attempt to misinform, but a quick estimation of what was known or believed. We do the same today in addressing the future, using a selection of factoids that lead to a satisfactory conclusion. I follow this learned pattern.

 

When I look at the array of information before us today, the following elements are part of my thinking:

• The best single predictor of the future by a mass of decision-making people is the general price trend in various US markets, utilizing the median performance of US Diversified Equity  Funds (USDEF). Measuring from the peak on 2/19/20 to last Thursday, there was a compound gain of +5.93%. (True, from a subsequent bottom on 3/23/20 the gain was +23.31%.) However, for the last 2 years the average USDEF lost -1.14%. These are pretax and pre-inflationary returns. Obviously, retirement capital during this period was not augmented by positive real performance. For the last 52 weeks, results were even worse -6.59%. In the current year through Thursday, 7 out of 108 fund peer groups lost money, with the same number gaining over +10%. I am guessing the median fund probably produced about +5%, adding little to retirement accounts after taxes and inflation.
• Perhaps the most depressing news came over the weekend in a NY Times column titled “Why Money Market Funds are now Leading the Pack”. They are referring to money funds attracting more assets than any other type of fund. This is typical of a bottom, which comes at the end of investment cycle before a new cycle begins.
• These two elements suggest a lot of investors, both individual and institutional, expect a lengthy period of stagflation. We have had two extended periods of stagflation, during the depression and during portions of the 1970s and 1980s.
• Today we are seeing two types of behaviors we saw during the Depression.
• Empty apartments or floors being temporarily used for parties or other short-term uses.
• Broadway shows picturing past happier times.
• Last week 8.8% of NASDAQ listed stocks hit new lows vs. 2.9% for the NYSE. The NASDAQ led the NYSE on the way up and is still up +17.15% year to date. We should consequently expect it to lead going down.
• There are another two Depression era trends currently reappearing. A speed up in the replacement of CEOs and new ways of doing business. Apple* is an example of the latter. They are offering a cash savings account, not an insured deposit relationship. During the Depression, FDR started the FDIC to protect the bank assets of small depositors. While most people thought the accounts were backed directly by the government, losses were socialized by the remaining banks when the FDIC bailed out the banks. (This privatized the loss in the same way JP Morgan did in the 1907 Trust company panic.) Apple’s current move is backed by Apple, the largest company by US market capitalization. 

*Shares in Apple and Berkshire Hathaway are owned in personal and client accounts. Apple shares are the largest public investment owned by Berkshire Hathaway.

• Inflation is caused by excess demand not being consumed by the domestic economy. Throughout history wars have contributed to inflation, as the government spends money not supplied by the domestic economy. Spending on climate change, poverty, and similar expenditures also add to inflation. Short-term interest rates only directly impact short-term borrowing, having only a modest impact on national inflation.

 

Working Conclusion

While it is not absolutely certain we will have a major economic decline, it shouldn’t be discounted.

 

After depressions there is always an expansion to look forward to.

 

Thoughts?

 

 

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Best Bet: More Sweaters and Parkas vs Overcoats - Weekly Blog # 708

 

Mike Lipper’s Monday Morning Musings

Best Bet: More Sweaters and Parkas vs Overcoats

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

I don’t like to lose bets, especially investments bets. That being said, I am highly confident those in the northern hemisphere will suffer a colder winter than expected. The streams of cold weather from Asia which flow over North America and Europe are moving south this year and will bring a colder winter to the US. (This contradicts “global warming” or climate change predictions.) The second and preventable driver is the need for politicians to be re-elected.

The only game that counts in Washington DC is getting elected, which importantly is based on money deployed from all sources. Despite food prices reflecting rising transportation costs, the central government is determined to hurt the states supplying energy for heating. Three states in particular are being targeted: Wyoming, West Virginia, and Texas. The first two are the leading exporters of coal to the rest of the nation, with Texas being the leading exporter of oil and gas. (Natural Gas is a major source of heating for much of the northern portions of the country.) These three states have significant Republican majorities, both in terms of votes and more importantly political contributions.) 

The game of war often relies on misleading the enemy regarding your intensions. In Washington this is done by a friendly media focusing on stimulus, even though it is a major contributor to inflation. While inflation is the cruelest tax on the poor, those in power believe the loss of some votes in the city districts won’t endanger the city progressives.

There are already a lot of predictions regarding the sharp rise in the cost of heating this winter. Landlords, already having difficulty collecting rents, may cut the amount of heat. Non-profits, including government bodies without actual or equivalent “rainy-day” funds, may face similar problems. Schools in low-income areas may similarly have shortages of students, teachers, and administrators.

Many of the aggrieved or their representatives will appeal to the media for help in sweaters (inside) or parkas (outside). Those appearing in overcoats will be considered tone-deaf, no matter how well intentioned.

Faulty Responses

Many of the shivering responders shown on television will emphasize the spike in heating costs causing an increase in “common colds”. The number of non-workers will be blamed on “acts of God”, due to shifts in northern wind blasts. They will not likely admit that part of the problem was self-administered, either out of The White House or Capitol Hill. By curtailing the capital generation of energy producing industries the government has caused the US to be an energy importer. It is no longer the net energy producer and exporter it was two years ago. They did this by causing pipelines to close, or not be built at all. Furthermore, in a stretched global market for oil, bureaucrats are increasing the industry’s burden by holding price investigations.

Multiple Year Transitory

As is often the case, economists look at the top-down government numbers of goods produced or shipped for problems, not the services or labor required. In their calculation of supply chain shortages, they fail to recognize the nature of the labor shortage. Not only are entry level workers missing, skilled workers and competent/trustworthy supervisory employees in service functions are also in short supply. (A good bit of these absences can be attributed to "educational" sector unions from pre-nursery through PhD programs.) These issues will not be addressed in the coming cold winter.

Long-Term, the Federal Reserve is Trapped

The favorite tactic of those in Washington is to change the rules if they are losing. Members of Congress are trying to make various economic/government financial agencies into social arbiters, including the Fed. Neither the Fed nor their supervised banks are equipped or authorized to perform these functions.

To the extent central governments want to spend a lot of others’ capital on controlling climate conditions, they will sponsor increased spending. This will result in both the Fed and the debt market increasing global debt massively. One wonders whether present low interest rates will become generational lows. Will higher rates drastically change the allocation of credit to the detriment of consumers at the low end?

Causes of Inflation

Inflation is caused by having too much money and borrowing power relative to the level of goods and services on offer. By itself it would be self-correcting through changes in price, including foreign exchange. However, when central banks create more money than their economies can immediately use, it leads to inflation. This is exactly what has been happening, so much of the current inflation has been caused by stimulus (bribes) payments. Thus, governments are a source of inflation.

Investing Choices

Perhaps the only wise reason to own securities today is the belief that the managers of some companies will be able to grow dividends above average inflation after taxes. 

If you have other reasons let us know. 

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

https://mikelipper.blogspot.com/2021/11/lessons-from-london-mistakes-repeated.html

https://mikelipper.blogspot.com/2021/11/do-you-believe-congratulations-are-in.html

https://mikelipper.blogspot.com/2021/10/mike-lippers-monday-morning-musings.html

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A. Michael Lipper, CFA

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Reduce Investment Mistakes with Deeper Observations - Weekly Blog # 583

Mike Lipper’s Monday Morning Musings

Reduce Investment Mistakes with Deeper Observations

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

Loss Reporting and Analysis
One of the most useful exercises from the track is making a report on losing bets. Often in reading these reports it becomes clear that I overlooked or didn’t value an observation highly enough. This type of oversight is common with all investors and analysts. This blog utilizes some observations from our visit to Australia plus some additional insights from pouring over the Barron’s Market Lab data and current news events.

Crowding, Protection or a Bigger Target
Crowding for protection vs. becoming an enriched target for predators? One evening at sundown we watched waves of 13-inch fairy penguins unite and stream ashore, forming columns to enter breeding and birthing locations hidden on land. We have seen similar patterns in Africa, where hordes of zebras and other animals gather. In each case there is a lesson that there is safety in numbers. The predators tend to be solo or are in such small numbers that they can’t eat them all, when the group is found, some will not survive.

As I have often said, the art of investing is somewhat like a narcotic, its effects make it difficult to avoid thinking about investing. When I see a large crowd gather together and move as a group, I can’t help thinking of investors crowding into the limited space of a single investment or sector. The problem is that by gathering together they have created an appealing target for predators, who only need to attack a very limited number of victims to fulfill their needs. Several brokerage firms have been producing lists of crowded trades, which can be very specific and include market segments like US Treasuries of specific maturities or other investments in a crowded trade condition. Year to date through June 27th, 2019, only 4 of the 21 US Diversified Equity Fund investment objective averages gained 20% or more and in the sector funds universe only the two tech categories gained more than 20% (A crowded target for the press and politicians.) To some degree the FAANG* and BAT** stocks represent crowded trades and some of them are showing signs of peaking, which may be temporary.

(*) Facebook, Amazon, Apple, Netflix, Google. (**) Baidu, Alibaba, and Tencent)

Unrest in Southern China
Australia’s largest trading partner is China and thus anything to do with China is of great interest to Australians. With the cooperation of the Chinese authorities, the National Gallery of Victoria has beautifully prepared an extensive exhibit on “The Terracotta Warriors”. These unique sculptures of a large military force meant to protect the self-proclaimed First Emperor of China in his afterlife. As an accomplished horse breeder, he conquered all other tribes and ruled for only 14 years until his death. The Emperor was named Chin and his name became that of the nation he founded by simply adding an “a”. He introduced numerous measurement systems that were used throughout his empire and while he was a genius in many respects, he was also very brutal.

Upon his demise he was replaced by the Han dynasty, which lasted for 400 years. They seized control by leading the first of several revolutions, starting in the south. The first emperor in the new dynasty was much kinder and introduced farming as distinct from nomadic life. Today, the Han people are still among those that dominate China. One cannot help thinking that the present leadership of China must be aware of this history and consequently are concerned about the unrest in the southern part of their country.

What the Stars Tell us About Ourselves
On two separate occasions we went into the desert with a group of tourists to gaze at the stars, constellations and planets. Initially we waited “for the stars to come out”, which was an inaccurate statement of fact, but correct from the viewers standpoint. Later, the intervening clouds disappeared, and the stars became visible. We were informed that other stars would move into our view later that evening, which was again an inaccurate comment. This is exactly what the ancients thought until Copernicus began his scientific study leading to the realization of a round earth, although it’s actually an elliptical shape bulging at the equator. This again was an observational point of view, not the correct recognition that the earth is rotating on its axis. From an analytical perspective, investors and politicians should understand that we live in a relative world where useful measurements include both relative changes and absolute movements.

Conflicting Information on Climate Change
Formerly, investors spoke of “global warming” but now refer to it as climate change. This raises the issue of the regular rotation of climatic change. For example, the Danes farmed in Greenland for 300 years, even though geological studies show that water occupied much of the land mass we know today. As with most scientific studies, we are coming up with conflicting information that should be considered in the data mix.

We were told for example that the southern coast of Australia is receding due to the rising waters from Antarctica. The increase in ice around Antarctica has led to the dumping of cold water into the stream that circulates around the ice mass. This in turn has forced the warm water trapped below the ice to move out and attack the southern coast of Australia. However, on Australia’s north coast the land mass is growing, effectively moving the continent slowly north! I am not properly trained to deal with the conflicting evidence, but I can recognize that conflict exists.

There is no question that countries have not enforced enough barriers to coastal building. That is not new in my home state of New Jersey and is something that has been a legal matter since before the American Revolution. Waterfront property is almost always sought after. How much climate change is a function of human activity remains uncertain, at least in my mind?

Separating Pollution from Climate Change
What is certain is that human activity bears major responsibility for pollution, which can be addressed. Years ago, Pittsburgh was almost always clouded with smog from the burning of coal in steel production. With the cooperation of locals, they were eventually able to bring about brighter skies. Progress, albeit slow, is being made to reduce smog from autos in the Los Angeles Basin. The Chinese people and government have in some cases taken draconian steps to address their pollution problems, while other countries remain further behind.

It would be useful to separate the discussion of pollution reduction and the elimination of climate change, because the facts and history are quite different.

Current Inputs
One of the difficulties in determining useful inputs in periods of controversy is what to believe. The Washington Post did a good job of identifying the gross exaggerations coming out of the two democratic beauty contest evening panels, although they are not an altogether unbiased source. There were similar unrealistic statements on the other side too, which left me wondering if we have discovered a useful indicator: Veracity is inverse to volume? (It has generally worked in stock and manager selection.)

Observations on Tariff Chatter

1. 80% of the Consumer Services stock segments have risen year to date, but just 20% of the materials segment have. This suggests that stock buyers believe the consumer sector can absorb the tariffs, but the demand for materials is looking questionable.
2. The Dow Jones Transportation index is rising at a faster rate than the Industrial average. The stocks in the transportation index largely carry freight, which appear to be rising more than the decline in energy stocks. Transportation shares also attract more professional investors and less individual buyers.
3. The announcement of the restarting the tariff discussions was silent on the real, long-term concerns of the participants. Tariffs were supposed to be a method to get the critical discussion started on defense issues like the South China Sea, critical technology required for global leadership, and enforcement procedures.

Conclusion
Future spending is the reason that people save/invest. My bet is that in the long run carefully chosen equities and equity funds will be productive.


   
Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/06/our-investment-mistake-is-in-labeling.html

https://mikelipper.blogspot.com/2019/06/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2019/06/on-right-learning-from-left-weekly-blog.html



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Copyright © 2008 - 2018
A. Michael Lipper, CFA

All rights reserved
Contact author for limited redistribution permission.