“Hide & Seek” - Weekly Blog # 880

 

 

Mike Lipper’s Monday Morning Musings

 

“Hide & Seek”

 

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

 

                             

 

Friday’s Victory Signal?

After an extended period of stock price declines, prices shot up on Friday. The “Bulls” hoped it was the beginnings of a “V” shaped recovery, but some market analysts were skeptical. A strong move often ends when there is a 10 to 1 ratio between buyers and sellers, which was the case with Friday’s 10 to 1 ratio.

 

The Wall Street Journal publishes “Track the Markets: Winners and Losers” in their weekend edition. It tracks the moves of 72 index, currency, commodities, and ETFs weekly. It may be worth noting that only 35% rose for the week.

 

The Second Focus

The media, and therefore most of the public focus on daily price changes. Even with the growth of trading-oriented hedge funds and the conversion of former securities salespeople into fee-paid wealth managers, the portion of the assets invested in trading is less than the more sedate investment accounts invested long-term for retirement and similar institutional accounts. My focus is on the second type, which includes wealthy individuals.

 

The Current Administration is Ignoring Us

The first step in security analysis courses often starts with reading what the government puts out in order to develop a foundation for an investment policy. The current administration is the most transactional in memory. The President, Vice President, and Sectaries of Treasury and Commerce made and lost money on market price changes. This has forced me to find other sources to build our long-term investment philosophy.

 

Inevitable Recessions

Studying both recorded history and our own lives, it tells us that life does not move in straight lines, but in cycles of irregular frequencies and amplitudes. Simplistically, we can divide these movements into good and bad periods. However, an examination of the periods reveals differences in how each period affects us. The differences and how they affect us depends on where we begin each cycle, the magnitude and shape of the cycle, and any surprises along the way.

 

Both up and down cycles are caused by imbalances within their structures, which often occur due to other imbalances known or unknown. Most importantly, any study of cycles indicates they happen periodically and surprise most participants. Even with detailed histories of cycles they can be difficult to predict, although the root cause of most cycles is extreme human behavior.

 

While some cycles are caused by natural weather-related events, most economic cycles are caused by envy and/or too much debt. I am perfectly comfortable predicting a recession will hit us, but don’t know for sure when it will occur. (In a recent discussion with a small group of senior and/or semi-retired analysts, they felt there was a 65% chance of a recession within 12 months.)

 

The fundamental cause of cycles is often the result of people reaching for a better standard of living through excessive use of debt, which often results in a struggle to repay debt and interest. At some point the growing federal deficit, combined with growing consumer debt, as evidenced by credit card delinquencies, will force a decline in spending. Reduced spending will lower GDP and production. The fact or rumor of this happening is enough to bring securities prices down.

 

Confusing Hide and Seek

Hiding is not the solution to avoiding a loss of purchasing power, both actual and supposed. Cash is the only true defense, although it is not a defense against inflation which reduces the purchasing power of most assets. However, the biggest long-term loss from hiding is foregoing future potential high returns.

 

Our Approach

I believe a cash level no larger than one year’s essential spending should cover the crisis bottom. Most of the remaining capital should be devoted to seeking out substantial total returns that can produce multi-year gains.

 

Where are these Gems?

Bargains are usually hidden in plain sight. One example might have been the fourth quarter 2024 purchase of European equities, which were priced for a European recession. However, European equities actually generated expanded earnings from Southeast Asia, Latin America, and Africa. (In a recent discussion with one of the largest investment advisers negative on investing in Europe. Their views were based on their continent’s own economics, while paying insufficient attention to companies growing profitably in the aforementioned regions)

 

Thus far in the first quarter I have been lucky enough to own both SEC registered mutual funds and European-based global issuers. (It took patience because earlier performance periods were not good.) This shows the need to be courageous when seeking future bargains. 

 

We would appreciate learning your views.

 

 

 

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News & Reactions - Weekly Blog # 833

 

         

Mike Lipper’s Monday Morning Musings

 

News & Reactions

 

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

   

       

 

Current Picture

For most purposes, the single best measure of the US stock market is the Standard & Poor’s 500 Index. After four weeks of decline, year-to-date through Friday the SPX has retreated 5.94% from its high, although it is still up 5.46% from its low year-to-date. So far, it has given back more than half of its gains for 2024. For the same period the Dow Jones Industrial Average (DJIA) has 15 stocks rising and 15 falling. Probably more significantly, only 6 of 20 Dow Jones Transportation Index stocks have risen. Even more significant, only a single market index rose out of the 32 domestic and international stock market indices that S&P Dow Jones tracks weekly. Expanding the universe to include commodities, currencies, and index funds, only 26% rose this week.

 

For those who wish secondary inputs, the following facts may be of interest:

1. The bullish portion of the weekly AAII sample survey is at 38.3%. A few weeks ago, it briefly reached over 50%. (Market analysts have labeled the AAII readings a contrarian indicator, believing the index represents retail investors who are always wrong.) That is not true! While retail investors are often believed to be wrong at turning points or late to a change, they have a reasonably good long-term performance record. In this case the over 50% reading was achieved in a quick run up, which subsequently dropped to its current 38% reading. This is not far from the mathematical neutral of 33% for each of the three sub-indices. On a long-term basis they may well be correct.
2. The only large geographic region showing growth in the number of listed companies is Asia. Thus, it is somewhat surprising that both Morgan Stanley and HSBC are laying off Asian investment bankers. These are smart people.
3. Residential insurance is absent from the normal inflation calculation. While it is of no significance for renters who have seen no important increase since 2018. Homeowners over the same period have seen their insurance costs go up over 50%. (I wonder how many other omissions there are in government data,)
4. Almost all attention in the forthcoming election has been focused on the top of the ticket. To me this is unwise. Whichever candidate sits in the White House in January will be a lame duck. This President cannot help members of Congress get re-elected in 2026, 2028, and 2030. There is a reasonable chance many voters will not vote this year due to the presidential candidates. To the extent this is the case, the missing voters will come from the center of their respective parties. This will allow the fringe elements in both parties to get more power to shape congressional committees.

 

China Impacts & Questions

Whether the US likes it or not, China is becoming the nation that will impact world trade and growth. In the first quarter of 2024 China’s GDP grew 5.3%, while US GDP grew 4.6%. Something curious happened with some of the Chinese numbers. Industrial production gained +6.1% while prices fell -2.7%. We know that China is selling scrap copper and other strategic products to Russia. (This should cast some doubt on Chinese statistics and their meaning.)

 

Long-Term Considerations

The Managing Director of the International Monetary Fund (IMF) is concerned that growth in the twenty's decade will be “tepid “. Jaime Dimon, CEO of JP Morgan Chase (*), has questioned the general belief that petroleum usage will peak in 2030.

(*) A position held in personal accounts.

 

The standard M&A game is getting more imaginative, at least in the mutual fund management company arena. Amundi, the French investment manager, is selling its American fund assets to Victory Capital for a minority interest in Victory Capital. What made this deal attractive to both participants is that each gained access to the others distribution functions in their home markets, negating the need to build an independent administrative base.

 

The Managing Director of the IMF is concerned about global growth, referring to this decade as the “tepid twenties”. Her concern about growth is partially based on the low level of productivity in much of the world. I share her view, particularly focusing on the US. If you break apart the productivity gain between financial and labor, I suspect labor’s contribution would be quite low. My guess is excessive regulation and less than useful education is holding us back.

 

A recent study shows that interest in the current election is probably at a low point for youths, with only 32% of eligible youths showing any interest in the election. In 2020 it was 56% and 2008 it was 67%. Within two generations these non-voters will be in control, which happens to be when current retirement capital will be feeding some of the current beneficiaries. GOOD LUCK TO ALL.

 

Any Thoughts?

 

 

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Bullish Chatter Leaves Out Useful Info - Weekly Blog # 826

 

      

Mike Lipper’s Monday Morning Musings

 

Bullish Chatter Leaves Out Useful Info

 

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

   

 

       

Public Service Announcement

Assuming you have been unable to avoid the bullish chatter from various media pundits and investment organizations, I will not repeat the positives on investments. Instead, I will file a “minority report” of little-known negative factoids to give some balance to your thought processes.

 

Layoffs Continue

Most publicized layoffs are from durable goods producing companies. It is the service providers that really drive the US economy, contributing over 70% to GDP when the service functions of manufacturers are included. When service companies encounter economic difficulties, they tend to cut back gradually rather than in lump sums. They are also less unionized and tend to provide fewer announcements. I therefore tend to pay more attention to the layoffs of service companies. That is why when Expedia announced this week that it is reducing its workforce by 9% it is worth paying attention. It is probably the tip of the iceberg above the waterline.

 

Rare Counter News

The senior strategist for JP Morgan Chase suggests we are in a period of Stagflation (slowly rising prices and wages). The clue to this analysis is the most prominent portrait in the White House main room where the current President meets foreign dignitaries and congressional leaders. It is no accident; the current White House occupant’s favorite President was FDR. In the second half of his term which converted a cyclical recession into a period of stagflation.

 

When the Public are Invited into what was Formerly Private, Beware!

Private lending has historically been conducted exclusively between a single borrower and a small number of financial institutions; all without the “benefit” of government review. Some financial firms are now offering pieces of private credit to the “unwashed” public. It is not only because some members of the public have accumulated cash, but also possibly due to federally sponsored inflation. Some believe there is now more risk in private credit than in the past.

 

Speculators are Buying More Than Institutions

In the latest week, 39% of the shares traded on the NYSE were at rising prices, with 60% on the NASDAQ going up. I suspect there was more institutional volume on the “Big Board”, with some having a longer-term outlook than the public or their advisers.

 

Be Careful of Labels

Many market prognosticators currently worry about the size of the gains chalked up by large “growth” companies, advocating for a switch to small caps. As someone who has invested in both individual small caps and more significantly in funds invested in smaller caps, I am concerned that the data used to support their long-term desirability is faulty.

 

Compared to larger stocks there is a problem with the data due to survivor bias, both for the winners and losers. Some wonderful or seemingly wonderful companies have had their history cut short by being acquired. At times, some of these companies are sought after because of apparently superior products, leadership, or customer base.

 

The sellers believe that the price paid compensates them for giving up some of their potential gains, but it also assumes it reduces their business and personal risks. Many performance histories capture their partial performance for the extended period in the published record, as the history of bankrupt companies is kept in the small-cap record. Additionally, the significance of the bankruptcy record is diminished due to their prices typically being much smaller than most acquired companies.

 

This data concern should not rule out investing in small-caps, although it suggests small-caps are neither a plus nor a minus for selection. Similarly, college selection should not be based solely on first grade class ranking.

 

Stock Selection vs. Portfolio Management

There are many ways to win or lose a football or baseball game. Some variables deal with the play of a particular contest, while others must consider the season, player development, audience development, funding needs, and the career progress of key individuals. Sounds complex!

 

A similar set of puzzles are used to solve the issues of stock selection and portfolio management. In this country, a large portion of the population has an opinion on how the game should have been played, at least for the audience. Predictability improves as one lengthens the time from a single game to a season. For companies, factors like the number of years, loyalty development, and careers might be important. In the fullness of time the last two periods are the long-term payoffs for the real winners, who are small in number but rich in experience and profits. For the most part, success can only be achieved through experience. There is very little written about how to achieve success.

 

Turning to successful long-term investing, the same complexities exist.  These are the problems I face in my life work. Producing these weekly blogs is one way I hope to think through the issues. Unlike some great investors, I limit my focus to individual equities and funds, excluding fixed income, commodities, and critical sources not in English.

 

You Can Help by Sharing Your Experiences, Particularly When You Believe I Am Wrong. 

 

 

 

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Mike Lipper's Blog: Caution: This Time Is Different - Weekly Blog # 825

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“SMART MONEY” Acts Selectively - Weekly Blog # 819

 

Mike Lipper’s Monday Morning Musings

 

“SMART MONEY” Acts Selectively

 

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

  

 

 

Dull Week with Some Clues

The stock market from mid-December through this Friday was flat, except for an early bubble in January. (I suspect the NASDAQ price surge resulted from the replacement of some holdings sold for tax purposes in the fourth quarter.) Market analysts suggest a flat price pattern might represent the smart money either accumulating or distributing meaningful positions. This suggests prices will either move up sharply or fall rapidly after a period of time. I will attempt to examine what I perceive as clues to future major moves.

 

NYSE and NASDAQ stocks declined for four of five days in the latest week. The DJIA rose for three days and the more professionally followed Dow Jones Transportation Index fell for three days. As a contrarian measure, analysts watch the latest weekly summary survey published by the American Association of Individual Investors (AAII). In the latest survey, participants raised their 6-month bullish prediction to +48.6 % or double their bearish guess of +24.2%. (Lucky for those who work in the market and those who live off of it. Individual investors have a good long-term record. From a contrarian viewpoint following them has value, because they are wrong at critical turning points.)

 

The number of publicly traded companies has been dropping for many years, mostly due to acquisitions, not failures. In 2023 there were 15,766 IPOs vs 17592 the year before. More significantly, the money raised dropped to $170 billion from $242 billion.

 

There are several thoughtful columnists who occasionally focus on financial history. John Authers of Bloomberg wrote “America is disinflating…disappointingly slowly.” He believes a major future expansion would require more problems than are currently visible. James Mackintosh of the WSJ warns investors that the market goes up and usually produces satisfactory returns in most 20-year periods. There are a few times it does not. (It’s important to remind investors that there can be times when investors won’t be bailed out in a given 20-year period. I wonder if that is why 30-year bonds and mortgages were created.) I believe he would have more confidence in recoveries if interest rates were set by the market and not by government fiat.

 

One problem with many economists, both within and outside government, is that they do not have enough appreciation for lessons learned from Asia and the Middle East. For example, we don’t seem to appreciate the products and technology that came to the West along the Silk Road. The following is a list of products or services that traveled the series of trans-Asian roads:

 

Silk, Hemp, Cotton, Wool, Paper (Paper Money). Fireworks (Explosives). Gunpowder, Tea, Horses, and algebra from India.

 

Working Conclusions

Recognizing that I don’t know what the future will bring, I turn to my investment/betting framework for a relatively conservative perspective. For the time period ended early 2025, I suggest there is a 60% chance of a significant US equity decline. The decline will perhaps be in the neighborhood of 20%, with an outside 50% chance of a full depression with an 80% drop. There are also two other possibilities at 20% each. First, a 5-7-year period of stagflation, and second, a 20% chance of below 4% GDP growth.

 

For estate planning purposes with a 30-year outlook, expect equity returns to be in the 5-9% range.

 

Your Thoughts?

 

 

 

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Mike Lipper's Blog: Solo Messaging is Meaningless - Weekly Blog # 818

Mike Lipper's Blog: Our Wishes & Perspectives - Weekly Blog # 817

Mike Lipper's Blog: Dangers “Smart Money” & Thin Markets - Weekly Blog # 816

 

 

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Our Wishes & Perspectives - Weekly Blog # 817

 

Mike Lipper’s Monday Morning Musings

 

Our Wishes & Perspectives

 

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

  

 

 

Wishes

Our wishes are the most basic of all, that you and yours will be happy and safe in the new year. The safety we wish for includes your physical, emotional, and financial safety.

 

Current and future safety are linked as we transition through the number of future periods. The number of future periods depends on the number of futures you are concerned about. As we manage money for people and institutions, we look both at the near and longer-term impacts.

 

In reading the rest of this blog, don’t focus on whether or not you agree with our conclusions. Focus instead on the logic that makes it possible for the conclusions to materialize.  

 

Each of us is perceptively different, as we have diverse elements of responsibilities, net assets, and personalities. Consequently, each investor should make his/her own personal decision. I am interested in learning how you reached your decision, as I contemplate new topics to write about. 

 

Guides to the Future

Every analyst is in some respect a historian. Since we don’t know what the future will bring, we search the past for clues about what the future holds. I find the following three quotes useful when thinking about the future.

 

“History doesn’t repeat itself, but it often rhymes.”

 Mark Twain

 

“Those that fail to learn from history are doomed to repeat it.”                           

Winston Churchill

 

“Too often we enjoy the comfort of opinion without the discomfort of thought.”

John F. Kennedy

 

Two Thoughts on the meaning of 2023

It was a discordant year, with the equity markets rising on a weighted basis (measured by market indices). The economy was flat when inflation is taken into consideration (GDP through November +3.03% and CPI +3.16%. The number of units sold was flat, with higher prices and margins). Large and smart employers are laying people off while sales are still satisfactory.

 

Split Political Structure in 2024

The current Senate and House are run nominally by different political parties, with a larger than usual number of members announcing their retirements. This suggests it will be difficult to see many controversial laws passed. The Supreme Court will likely continue to question the authority of the administrative government. It will also be difficult to get an expanded spending package passed. (Even if something gets passed, the US will join most other governments trying to tap the bond market at reasonable rates, likely crowding out commercial and municipal needs.)

 

There is an invasion on the southern border of the US. Is this an economic “fifth column”? (During the Spanish Civil War, the winning Loyalist General referred to his group of saboteurs in Madrid as his fifth column.) They were more important in capturing the capital than the four military columns he had surrounding it. (The importance of this war should be important to the US, as the Spanish War supplied new tactics used by the German Army and Airforce in WWII.) Millions of illegal immigrants have crossed the US border.  My guess is that one military division of 20,000 could be persuaded to follow the commands of a known enemy.

 

The bulls believe the market has begun a new bull market phase, or at least a continuation with new leadership. Their bet is on a rotation away from mega-caps to small-caps. Selected small caps stand a better chance than others, particularly services companies who can help corporations and consumers lower their costs through the application of technology and selected imports. Some of these small companies could be attractive acquisition candidates, providing leadership to tiring large corporations. The math could be described as 5 (large) + 1 (small) = 6+4 or a combined 6 that becomes 10. The risk to an institutional sized buyer in the small-cap market is that these stocks are much less liquid than their normal large-cap investments. Consequently, they must take a much larger portion of the available stock.

 

2025-26 Opportunities

To score the winning shot, one must follow Wayne Gretzky’s dictum of not skating to where the puck is, but to where it will be. I’m suggesting this is how you should build a portfolio today, as the present occupant of the White House will either not be there, or a second Mrs. Wilson will be managing a lame-duck Presidency.

 

The biggest change will be in Defense spending, a shift from the faulty diplomacy of sending unimpressive Cabinet members to negotiate unsuccessfully. We must reverse the quiet disrespect of our outmoded military, symbolized by the lack of other nations joining our Red Sea patrol efforts. The declining value of the US dollar is another indication of the perceived lack of respect for our current leadership. The money for new defense spending will come from curtailing spending on social tasks and redirecting it to prepare for a fight in a two-front war. Thus, I suggest selecting investments to accomplish the goal of protecting the US and our interests.

 

Let me hear your thoughts. 

 

 

 

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Mike Lipper's Blog: Dangers “Smart Money” & Thin Markets - Weekly Blog # 816

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A Terrible Week - Weekly Blog # 772

 

Mike Lipper’s Monday Morning Musings

A Terrible Week

 

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

 

 

 

A Blogger’s Point of View

Everyone reacts to stimuli based on their physical, financial, and emotional perspective. Considering these filters, I had a rough week. While I almost always have views, I try to base them on facts. I found little in the way of published facts supporting or completely opposing my views. Therefore, to quote my arts photographer, I opened up my aperture to give more credence to a widened field of inputs. Some may refer to these as collateral notions, but in the absence of convincing evidence they will have to do.

 

Quality of Information

In the US Marine Corps, we were instructed to value our inputs in terms of accuracy and creditability when planning to engage the enemy. I find this type of information missing from most publicly available statements about the future, although there are occasionally some pre or post warnings to be found. This week there were two such notices concerning topics about future budgets and pandemics.

 

The Congressional Budget Office (CBO) regularly publishes estimates about future budgets related to Gross Domestic Product (GDP) and the Demographic outlook. (One problem with both studies is that accuracy in the past has been wide of the mark. In spite of that, they presented a single number answer in their projections. I question the precision and credibility of the single number. For example, their stated deficit for 2023 is $1.4 Trillion and between ‘24 and ’33 it will average $2 Trillion. As this is perhaps the single most important number for those who pay their salaries, I would be more impressed with a range and a description of what might cause the difference. Personally, I would doubt an estimate in the exact center of the range.)

 

Furthermore, while the demographic study shows a decline in population, it is my guess that a good psychographic study would show an even worse outlook concerning the number of hirable people and their willingness to work.

 

Perhaps the biggest blow to the creditability of government estimates and actions are summed up in the following headline “Fauci Changes His Public Tune on Covid Vaccines”. In an article in “Cell Host & Microbe Journal, Dr Fauci wrote that vaccines against respiratory viruses provided “decidedly suboptimal” protection against infection and rarely produced durable, protective immunity. (I am not qualified to have a medical opinion. I certainly don’t know whether they hurt and probably will continue to get shots if my doctor recommends them.)

The key lesson from these inputs going back to my USMC training is to evaluate inputs based on the sources of the input. In these particular cases both were paid for by a government apparently in need of political help, meaning they should be viewed with skepticism while searching for other “facts” or properly labeled opinions.

 

Application Analysis

Investors love numbers, but often don’t apply carefully with constraints in making investment decisions. The following is both a summary of the data and my applications of the input.

1. The longer the period measured, the smaller the downside. (It is best to invest for the long term, there are very few periods of 20 years or longer where it hasn’t paid to invest in a portfolio of stocks. - Losers are not around for the full period.)
2. Historically, when an inverted 2-year US Treasury yield is higher than the ten-year yield for more than 100 trading days, 10-year yields peak. The current inversion has existed for over 160 days. (Either the old formula doesn’t work anymore, or the drop is going to be large.)
3. In the minds of investors, most stocks traded on the NASDAQ are more growth oriented than those on the NYSE and many are considered to be speculative. NASDAQ investors are not normally more patient than investors favoring NYSE issues. Additionally, there are fewer passive investors owning NASDAQ stocks. Last week 61.8 % of the shares traded on the NASDAQ fell, vs. 53.7% on the NYSE. (Speculators tend to sell more quickly than investors, as they sense price problems more quickly. – Hint, the stock market sold off later in the week because participants finally believed the Fed was probably not going to lower interest rates this year. Even though many growth stocks are not highly indebted, the larger the number of years used to value earnings growth, the higher the valuation.)
4. There are 20.8 million employees in goods producing firms and 129.6 million in service providers. (In an attempt to reduce inflation, the political establishment is focusing on the sales of goods producers instead of service providers. However, these politicians probably are more likely to be Democrats.)
5. One of the most interesting aspects of the week was the rise in John Deere’s stock price. They announced rising earnings, declining supply chain problems, lower industrial costs, and an increase in their own prices. (The timing of their price increase is curious. While I do not follow the company, a number of my old analyst friends had great respect for it. This made me think that this savvy management team might be afraid of political pressure to lower prices in the not-too-distant future and wanted to start out from a higher level.)
6. The weekend WSJ ran the following headline “Brace for the Richcession”. The article highlighted wages going up more than inflation for the poorest quintile of workers.  The other quintiles could be losing ground, not only in terms of relative wage hikes, but because their home prices and portfolios have peaked. Thus, the Richcession in the title. (I am not certain of the nature of the problems the editors were considering, but they may also sense an attempt to restructure society and therefor the economy.)
7. The biggest immediate problem facing America and other economies is China’s economy slowing down. Exports to China are critical to world trade growth.
8. I do not know how to measure it statistically, but I sense there is declining trust throughout our ecosystem. All relationships are based on trust, be they personal, political, or economic relationships. (While I and my accounts have been purposeful global investors for a long-time, as an odds-playing investor I get nervous when I see what occurred last week. One of our most speculative sectors, equity exchange traded funds (ETFs), had negative outflows of $783 million, while international ETFs had inflows of $1.9 billion. This makes sense tactically and is appropriate for hedging purposes, but it is not encouraging for our children, grandchildren, and great grandchildren.

 

Readers, please share your thoughts as to my views.     

 

 

 

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Trends: Deflation, Stagflation, or Asian? - Weekly Blog # 760

Mike Lipper’s Monday Morning Musings

Trends: Deflation, Stagflation, or Asian?

 

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

            

 

Disturbing Data 

Some baseball umpires call balls and strikes as what they should be, how they see them, or what they are. Market and economic observers are like umpires. A majority tend to be in the first group, believing the next major trend will have inflation under control and stock prices rising. As a long-term investor and manager, I am caught between the latter two choices, seeing the future as presented, or as it is or will be. 

 

I am interested in what readers believe the future is likely to be. 

 

Current Data 

Government economists see an approaching pivot in the economy resulting from the only inflation tool at their disposal, interest rates to constrain demand. (Not a more useful approach of augmentation of supply i.e., more domestic energy and less restrictive regulations.) Market bulls see a stock market led by the DJIA industrials, +17.48% from its bottom, as the beginnings of a new “bull market”. I see a rally in a bear market, with the natural leader being the NASDAQ, with a gain of only +7 %. 

 

Current Data Forecasting Problems 

For most of this year the interest rate spread between 2 and 10-year US treasury bonds has been inverted, a historic predictor of recession. The current yield on the 2-year is 4.51%, which is higher than 10 and 30-year rates. 

 

The weekend edition of the WSJ showing prices of securities, commodities, and currencies was extremely volatile, with 65% declining. Furthermore, the weekly posting for the ECRI industrial price index showed a year over year decline of -12.9%. While not conclusive, these readings suggest that when our inflation ends it will begin a deflationary cycle very few are expecting. 

 

2023-2024 Views 

As to the future, I am not sure what I see.  I have respect for the very bright people at Goldman Sachs. (A holding in our private financial services fund and other accounts.) In their latest economic projection, they see US GDP only producing a +1.0% gain in 2023, increasing to +1.6% in 2024. 

 

Whenever I see a projection below 3%, I remember all the times small gains didn’t happen for operational, weather, and other unpredictable reasons. With larger gains there is room to absorb surprises. 

 

The second and more dangerous Goldman projection was the beginning of a dreaded period of stagflation. In the US, we have had two periods of stagflation lasting more than ten years. Stagflation is a period of rising inflation with generally flat profits, which could be caused by higher effective federal, state, and local taxes. While it is probably too early to adopt a stagflation portfolio strategy, it is not in my opinion too early to begin researching the composition of such a portfolio to carry one through such a period. 

 

Goldman believes there is some good news for investors in 2023 and 2024. Economically, they see China’s growth rising to +4.5% and +5.3%, respectively. They also see India’s economy growing +5.9% and +6.5%, respectively. While we have some exposure to India in our personal portfolios, it represents less than our exposure to China. This is because of the different level of efficiency and integrity, but we could be wrong. At any rate, US funds invested in the China Region were the best performers this past week. 

 

The Stock of T. Rowe Price is still Teaching 

In the last edition of the blog, I wrote about T Rowe’s stock price going up from $103.71 to $133,34 in the week. At the same time daily trading volume expanded from 1.7 to 5.5 million shares. I commented that this demonstrated the lack of liquidity for a NYSE stock. On Monday this week the stock opened at $131.02 and ended at $125.50, essentially the same level it began the week before, $125.84. The big difference was trading volume. The prior Friday it was 5.5 million shares, followed by 3.2 million shares on Monday, and 1.5 million shares on Friday. 

 

The lesson is that if you are anxious enough to raise your price you can find liquidity. Trading liquidity disappears with the absence of demand. (Some of the liquidity is supplied by the short side.) It was clearly a week where patience and discipline paid off. 

 

Beware of What you Believe 

My sharp-eyed brother reminded me that the perception of half the start-ups not making it to five years was based on a Small Business Administration study relying on data from telephone companies. Many of the start-ups were dissolved, acquired, or moved without maintaining their phone number. We are not doubting the risks involved with both small companies and start-ups. But we should always investigate the source of the data to make meaningful decisions. 

 

What is your current view of the future?   

 

 

 

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

Mike Lipper's Blog: An Informative Week with Many Questions - Weekly Blog # 759

Mike Lipper's Blog: Are You Getting Value from Numbers? - Weekly Blog # 758

Mike Lipper's Blog: Rarely Found Different Thoughts - Blog # 757

 

 

 

 

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