We are Never Fully Prepared - Weekly Blog # 845

 

         

 

Mike Lipper’s Monday Morning Musings

 

We are Never Fully Prepared

 

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

 

 

The Lessons of Saturday, July the 13th

One self-appointed mission of the weekly blog is to make subscribers aware of potential negatives absent from the content of various media pundits and financial sources. We are not predicting bad things happening but will offer some contrast to the regular diet of “happy talk” from most other sources. In evaluating the bulk of normal inputs, I think it is useful to consider the possibility that some things will not have happy outcomes.

 

Coming from my real educational experience at the racetrack, where the most favored horses win more often than those with longer odds. The betting returns on winning favorites are smaller than those of longer shots winning. Consequently, a sophisticated bettor will often have a smaller win vs loss record but will walk away from the track with more money by selectively picking horses with higher odds. However, betting on every non-favorite usually produces losses in aggregate.

 

To prevent such a result, one must be selective in taking high odds bets and avoid improbable long shots. Thus, I was totally unprepared for Saturday’s distressing news of an assignation attempt which caused two deaths, two wounded, and most importantly the near death of Presidential candidate Donald Trump.

 

As with many tragedies there are immediate losses and potential longer-term impacts. Luckily there was just one immediate death along with two seriously wounded casualties, as well the death of the assassin. Our hearts go out to the innocents.

 

The longer-term implications are possibly numerous and far reaching. Unfortunately, in America we have periodically had both failed and successful assignations of prominent politicians. Hopefully, we can rid our culture of these tendresses.

 

I do not know if the attempt on the President’s life will have any impact on his choice for Vice President. Furthermore, we don’t know if the American voters will change their choice for President this fall, or if it will have impacts on our foreign friends and foes.

 

The impact on me personally will be to focus on the possibilities rather than the probabilities in looking at the future.

 

Things that Could Change the future

1. The results of the weekly sample survey of the American Association of Individual Investors (AAII) are viewed by some market analysts as a contrary indicator. I find it useful in gaging the short-term views of this group of smaller investors. (The survey occurred prior to the assassination attempt on Saturday.) The change in the bullish swing over the last two weeks was almost twice as pronounced as the bearish swing, 41.7% to 49.2% (+7.5%) vs 26.1% to 21.7% (-4.4%), respectively. Perhaps more significant, the bull score was more than twice as large as the bear score (49.2% vs 21.7%). This could be the result of a difference in the makeup of the sample participants. A difference of this magnitude is an extreme condition and is unlikely to be maintained.
2. Too many investors believe the market can be understood by following the S&P 500, which is a collection of eleven industry groups that move quite differently from each other. Over the last ten calendar years the monthly low points of the eleven industry groups have rarely coincided.
3. The number-nerds have great faith in US government compiled data. In an article in the NY Times, which regularly has errors. The Times produced an article with the headline “US Economic Data Integrity May Be at Risk, a Study Finds”. The article quotes a study by the American Statistical Association proclaiming the risk of future errors increasing due to government departments and agencies being squeezed by budget issues, particularly due to the lack of funding for research. I remember this problem well. In the early 1960s I was a junior analyst assigned to tracking the steel industry. I reported to the Director of Research who came to the bank as an economist from the government. One day I went to him and suggested the steel industry data was worthless in guiding investment decisions. “How could that be, it came from the government”. I suggested the eight companies in the data file were quite different. Some had to ship their products many miles to customers while others had very little shipping costs, causing large differences. Based on this factor alone those companies were better investments, Chicago over Pittsburgh. I consequently created my own subsector groups for selection purposes.
4. The CEO of JP Morgan Chase was traveling on the day it released its quarterly earnings announcement. He usually participates and I felt his input could be more important than some short-term numbers.

 

Two Chinese Inputs Could Be Significant

1. Chinese troops are holding military exercises with Belarus on the Polish border. (I wonder whether this could be the result of Finland and Sweden joining NATO, and possibly Ukraine?
2. Later this month the Chinese are holding the 3rd Plenum, where the following topics may be discussed, with some yet to be determined:

a.  Can officials restore faith in the economy?

b.  How will officials look to forge China into a tech superpower?

c.  Do foreign companies have a future in China?

d.  How will China address growing geo-economic risks?

e.  Can officials fix the government broken revenue model?

f.  How will the Party respond to China’s demographic decline?

g.  How will China try to manage the great transition?

 

 

Are you prepared for the pace and depth of changes?       

 

 

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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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Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.