The Course to Explain Last Week - Weekly Blog # 787

 

Mike Lipper’s Monday Morning Musings

The Course to Explain Last Week

 

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

  

 

 

Understanding Your Location

Almost all the news events of the last week are better understood if you appreciate the critical functions created by geography. At one time a whole course on geography was part of an early primary education, followed by a course on economic geography in middle school. These courses were pushed out to make room for social topics better fitting the educational establishment’s political views. No wonder so many of the current population were misled by the actions last week.

 

Where the Cities Are?

As populations grew, many benefitted from the values offered by schooling, medical services, education, entertainment, and political practices in towns and cities. Early cities were mostly found around strategic waterways, oceans, seas, lakes, and rivers. It’s no coincidence downtown locations attracted merchants and others. For hundreds of years financial and merchandise centers grew up around seaports such as New York, Boston, London, and Tokyo. To this day, the largest city in most countries and states remain these centers. Not surprisingly, to counterbalance the political powers of these cities, some political forces established state and national government sites away from the commercial centers e.g., Albany, Annapolis, Brasilia, Canberra, Sacramento, and Washington D.C.

 

We are all aware The President of the United States compromised and signed legislation into law on Saturday. He temporarily raised the debt limit and modified the growth and make up of appropriations. The result was only possible because DC has a different power currency than the dollar-based currency driving the rest of the country.

 

The power currency as exercised on Capitol Hill represents votes in the Senate and House, with the occasional interaction of the Presidency and Supreme Court. If their currency was in the commercial world, it would have been fairly easy to measure the dollars to be spent or not to be spent. This weekend both the Democrats and Republicans are claiming great victories. The problem is that the math is questionable, as are the policing impacts on the agreements. Regardless of the academic debate, the value of the concessions were too small.

 

There will possibly be a longer lasting victory benefiting society in the future, as these bills were passed by votes from “centralists” on both sides who resisted the impassioned pleas from the extreme members of their parties. We can build on the small progress made this week to make larger changes in the future, as long as those in the center learn to trust and respect the centrist members of the other party. While I have not done the analysis, my guess is that most who voted to pass these bills came from commercial backgrounds and are used to working to get compromises.

 

A Much Bigger Issue Was Not Discussed

Whether we like it or not, we are all globalists. Most of the threads in our clothes and some of our favorite foods come from overseas. The producers of these goods, as well as the militaries of our allies are paid in US dollars to protect us. We also sell a lot of our products and services to them. The US represents roughly ¼ of world trade. Problem is, the US dollar is the medium of exchange for ½ to 90% of currency exchanges depending on how you measure it. The US dollar is currently the most trusted currency. This translates into the lowest cost to buy products and services relative to other currencies who must pay a premium for the same purchases. This is an extraordinary privilege.

 

The privilege is not granted by an authority, but by the perceived purchasing power of the dollar through a collection of transactions each minute of each day. In general, it is assumed the relative purchasing power is stable compared to other currencies.

 

Perceptions are normally slow to change, but they can move at the speed of communication through transactors in a 24-hour marketplace. In a microcosm of how the market can work, examine the run on the SVB. Most of the loans and deposits were from the “silicon-valley” venture-oriented community. Many of these companies had critical shareholders who were active participants in the community, something the bank and regulators did not fully appreciate. I suspect the run on that bank was started by a few comments within this high-pressure group. The daily foreign-exchange community is much, much larger than SVB’s critical players, although it could follow the same communication, concentration, and contagion pattern. (There is no single Federal Reserve Bank for currencies.)

 

Possible Causes

Most powerful trends initially move at glacial speeds, until they take-off in hypersonic movements. The slow deterioration essentially reflects a slow growing decline in confidence and is often a collection of small actions. Some examples are listed below:

• A poorly executed withdrawal from Afghanistan by more isolationist new leadership.
• A shared belief that China permitted COVID to escape.
• Domestic pump priming and an unwise explosion of cash generation, unleashing inflation on the world.
• A weak response to a border war, with the inability to rapidly supply US Tanks and F-16 planes for coming offensive in Ukraine.
• In addition to government management problems, US industry leaders like JP Morgan, Goldman Sachs, Apple, and even the SEC, have had management issues that led to public errors. These are not confidence builders.

 

Barron’s Suggest Another Concern

In a four-page article in this week’s Barron’s they suggest loosely regulated non-bank financial organizations could have surprising credit issues. If you add up all the credit and equity extended to individuals, businesses, and organizations, it is about equal in size to the assets/liabilities of the regulated banks. Insurance companies, retirement plans, private capital providers, family offices, investment advisers, and brokerage firms have some narrow regulatory oversight. However, there is no single body reviewing the impact of bailout capital on the broader global economy.

 

I am not sure I want to see a super-agency overseeing the non-bank financial sector. However, it might be useful to have coordinated data collection and similar transaction management principles.

 

Conclusion:

I am unclear as to what the intermediate future will look like and appreciate any thoughts.

 

 

 

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

Mike Lipper's Blog: TOO MANY HISTORIC LESSONS - Weekly Blog # 786

Mike Lipper's Blog: Statistics vs. Influences-Analysts vs. AI - Weekly Blog # 785

Mike Lipper's Blog: Insights From a Sleepy Week, Important? - Weekly Blog # 784

 

 

 

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Currently, Selling More Important Than Buying - Weekly Blog # 637

Mike Lipper’s Monday Morning Musings

Currently, Selling More Important Than Buying

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

July is often a low volume, relatively quiet, stock market period.  August, with its different conventions, COVID-19 progress and short-term economic signals, will likely be more lively. This is therefore the ideal time to look at portfolios with two to one hundred plus securities. Include in your analysis both all the cash that could be invested and probable cash demands well into 2021. This review is unlike the usual process of buying some new and exciting investment, where you quickly find the money for your new “almost certain winner”. However, most of the time new purchases will not drive next year’s performance, it will be more impacted by the remaining portfolio.

Remember March
Many investors feared that the one-month dramatic fall in stock indices was the opening salvo of a long, protracted “bear market”. As usual with mass fears, it did not happen for political reasons. Yet, although there was still some of the normal cleansing effect of an economic recession, it was perhaps not enough.

Record 2nd Quarter Continuing
With governments and their junior partners, the central banks, induced a strong rally occurred led by speculative forces, including the not yet dead zombies that should have been liquidated. The NASDAQ Composite gained +30.6% in the quarter and continued through Friday with another record high, gaining +4.01% just last week. Globally, the big winners were two handfuls of large-cap technology-oriented stocks. Even with the increasing levels of tension with China, their stocks are the biggest winners as an investment region thus far in 2020. Last week, 16 out of the 25 best performing SEC registered mutual funds for the week were primarily invested in the China Region. (Even within China, the controlled press warned local investors to be careful with record prices and a wave of new IPOs.) In the US markets, 75% of the weekly prices for ETFs, stock market indices, currencies and commodities were higher. Translating all this bullishness into mutual fund performance for the funds we are particularly interested in, some had gains better than 50% from the March lows. One might suggest that some investors are experiencing a sugar or other stimulant high.

Outlooks
There are as usual a myriad of outlooks depending on both direction and varying time periods. While investors should sub-divide their portfolios into different time periods based on the expected needs for their capital, they do not. Unfortunately, most investors, particularly those competing for new money, are fixated on 2020 results. This is unfortunate because I hope the future does not contain many years similar to 2020.

Six Month Positives
The AAII, usually a reliable contrarian indicator, has now flashed four straight weeks where their sample survey of member market expectations for the next six months was over 40% bearish. This number is unusually strong both in magnitude and duration. While they could be correct this time, it would be surprising.

Longer-term Concerns
Citigroup has a model identifying periods of panic and euphoria designed to predict the stock market one year into the future. It is based on tracking extreme current market behavior that will lead to a reversal the following year. The current reading from this model points to lower stock prices a year from now resulting from the short-term euphoria we have been experiencing.

Barron’s publishes a weekly chart on the movement gold mining stock prices vs. bullion prices. Recently, the price of the metal has been rising gently while the index of mining stock prices has been rising sharply, suggesting buyers of mining shares expect materially higher prices in the future. Most mining companies are highly leveraged, with operating expenses, debt, and stiff taxes. Traditionally, when the price of gold goes up, most other stocks go down. Mario Gabelli, a well-known and respected investor, expects 2021 gross margins to decline.

Recently, there has been an increase in the number of people believing that there is a reasonable chance of a ”blue wave” coming in the election, with the Democratic-Socialists winning the Presidency and both houses of Congress. If that were to happen, many believe taxpayers and consumers would forfeit twice, both with taxes and inflation rising measurably. If the “blue wave” does not materialize, it is likely that only accelerating inflation will cause the squeeze on gross margins that Mario expects. Both party’s policies will lead to an increased cost of living. Under any of the feared circumstances, the long-awaited relative price performance of some value stocks will likely improve.

The Poor History of Escaping from Cash
In the last fifty years or so, we have seen attempts to escape expected sharp gains in inflation, leading to the liquidation of some assets like cash in order to invest in “real assets”. Remember when the Japanese bought high-priced golf courses around the world to escape their inflation. They paid premium prices for classic real estate, e.g. Rockefeller Center.

For perhaps twenty years, Chinese citizens and relatives of political people have been exporting their wealth to Western countries whenever they could.

In the West, the wealthy have bid up popular pieces of art to ever higher prices. Many financial writers scoffed at the high prices paid for these foolish purchases, not recognizing that the buyers were actually selling an over-priced currency held in surplus. Perhaps this is what is in the mind of the current “goldbugs”?

My guess in all these cases, even measuring at their lower exit prices, the exporters will come out ahead of those that stayed completely in their own currency.

What to do?

1. Make a list of your current assets and resources net of obligations. Put the list in descending order as a percentage of wealth.
2. Pay particular attention to the top half of the wealth pile and ask if you would choose to have that much of your wealth so exposed today.
3. Staying with the top 50% of the list, what could negatively impact its value. Separate the list into general calamities and specific problems, e.g. labor problems combined with unfavorable governments.
4. Determine whether there are hedging or opposite vehicles for each specific risk, as well as more general risks. Energy and airlines are opposite vehicles.
5. View the costs of hedging or contrary investments as an insurance premium, much like what you might pay to fully insure your home or jewels.
6. Rearrange your assets with the potential gains and losses, including the theoretical insurance premiums. 
7. Repeat once a year.

Please share your thoughts with me on the subjects and approaches mentioned.

 

Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/07/july-4th-lesson-need-to-hire-wise-not.html

https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/06/data-driven-reactions-dangerous-weekly.html



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A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.