Mike
Lipper’s Monday Morning Musings
This Was The
Week That Was,
But Not What Was
Expected
Editors: Frank Harrison 1997-2018,
Hylton Phillips-Page 2018
No one really knows which of the new administration’s critical
rules and regulations will become law. Both presidential candidates have
announced and unannounced wishes, but both are unlikely to get another term. They
will have little ability to help various members of Congress win the ’26 or ’28
elections.
Unless there is a one-sided sweep of both Houses for the
same party, the odds favor majorities in the single digits. While the rest of
the world might think Congressional leaders will be able to command political
discipline, both parties are split into multiple groups depending on the
particular issue. Furthermore, in the Senate there are members who see themselves
sitting in the White House after the ’28 elections. Looking beyond the intramural games of the
next four years, there are two elements of news that should be of importance to
those of us selecting assets to meet the needs of longer-term investors.
The Declining Dollar
The CFA Institute Research & Policy Center conducted a
global survey of 4000 CFAs concerning the future value of the US Dollar. The
survey was conducted from 15 to 31 of July 2024. They published their findings
in a white paper titled “The Dollar’s Exorbitant Privilege” (This is what the
French President called the dollar years ago.)
A supermajority of respondents believe that US government spending
is not sustainable. Only 59% of US Treasury investors believe the US can continue
to borrow using Treasuries. (I remember there was a time when we created a
special class of Treasuries for the Saudi Arabia, with an undisclosed interest rate).
Neither of the two Presidential Candidates have announced any plans to reduce
the deficit and both are unannounced pro-inflation. The respondents expect the
dollar to be replaced by a multipolar currency system no later than fifteen
years from now.
Some investors already recognize the risk in the dollar.
Bank of America’s brokerage firm noted this week that 31% of their volume was
in gold and 24% in crypto, as a way to reduce total dependence on the dollar.
One long-term investor diversifying his currency risk is Warren Buffett. After
doubling his money in five Japanese Trading companies, he is now borrowing
money in Yen.
Berkshire Hathaway’s 10Q
As a young analyst I became enamored by their financial
statements, long before I could afford to buy shares in Berkshire. In the 1960s
I felt a smart business school could devote a whole semester to reading and
understanding the financial reports of Berkshire. It would teach students about
equity investments, bonds, insurance, commodities, management analysis, and how
politics impacts investment decisions. (It might even help the professors learn
about the real world)
On Saturday Berkshire published its third quarter results
with a relatively concise press release, which was top-line oriented. As is required
by the SEC it also published its 10Q document, which was over fifty pages long.
Ten of those pages were full of brief comments on each of the larger
investments. This is what hooked me, although I could not purchase most of
their investments because they are not publicly traded. Their comments were in
some detail, covering sales, earnings, taxes paid, expense trends, and
management issues. The comments gave me an understanding of how the real
economy is working. (Along the way I was able to become comfortable enough to
buy some shares in Berkshire, and it is now my biggest investment.)
The latest “Q” showed that in nine months they had raised their
cash levels to $288 billion, compared to $130 billion at year-end. At the same time, they added $50 billion to investments.
Perhaps most significant was that they did not repurchase any of their own publicly
traded stock. A couple of years ago at a private dinner with the late and great
Charley Munger, I asked him if I should value their private companies at twice
their carrying value (purchase price + dividends received). Charley counseled
me that everything they owned currently was not a good investment. As usual he
was correct. In this quarter’s “Q” there were a significant number of
investments that declining earnings or lost money. (I still believe they own
enough large winners on average where doubling their holdings value would be reasonable.)
If one looks at the operations of a number of industrial and consumer product
entities, they themselves conduct substantial financial activities in terms of
loans and insurance.
Is Warren Buffett’s Caution Warranted?
Some stocks have risen so high that they may have brought some
gains forward, potentially reducing future gains. One way to evaluate this is to
look at the gains achieved by the leading mutual fund sectors: Total Return
Performance for the latest 52 weeks are shown below:
Equity Leverage 61.16%
Financial Services 46.38%
Science & Tech 44.13%
Mid-Cap Growth 41.28%
Large-Cap Growth 40.30%
I don’t expect all to be leaders in the next 52 weeks, as the
three main indices (DJIA, SPX, and the Nasdaq Composite) have “Head & Shoulders”
chart patterns, which often leads to a reversal.
Question: What Do You Think?
Did you miss my blog last week? Click here to read.
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