Are Investors Seeing a Change? Politicos Are Not - Weekly Blog # 919

 

 

 

Mike Lipper’s Monday Morning Musings

 

Are Investors Seeing a Change?

Politicos Are Not

 

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

 

 

 

Was the latest week instructive?

During the low volume week: the DJIA fell -0.51%, the S&P 500 fell -1.07% and the NASDAQ fell -1.69%. One does not know a trend is over until a meaningful reversal of direction has occurred, which quite possibly was the case this week. On the NASDAQ there were more decliners than gainers, unlike the “Big Board” where there were more gainers. However, since the April 8th bottom, the NASDAQ Composite Index has led the US general stock market, gaining +51.92% compared to +37.02% for the S&P 500 and +28.72% for the DJIA.

 

The supporters of the political party that currently occupies leadership in both chambers and the White House cheer these recoveries but appear to ignore other data. For example, real private non-residential fixed income investments, excluding data centers, have been flat since 2020 and is far behind 2023 prices.

 

The Real Problem is Bad Debt Creation

For the “bulls” to be proven right, a large portion of the public’s uninvested money must be corralled to invest in the economy, in sufficient amounts necessary to generate the tax revenues required to support government spending and address the growth of the deficit. Instead, they are doing this by removing the Controller of the Currency and the leverage lending guidelines of the Federal Deposit Insurance Corporation (FDIC), which they felt were too restrictive. To add more fuel to risk capital they are encouraging retail investors to put some of their retirement income savings into private debt investments, even though there has been an increase in bankruptcies over the last four years.

 

Economic Tailwinds

Optimist believe the economy should have the wind at its back in 2026 due to the following positive events resulting from the “Big Beautiful Bill”. However, it remains to be seen whether these events translate into additional stock market gains or if these events are already reflected in current market prices. Some of these events could also be negatively impacted by Supreme Court decisions on tariffs.

• A relatively large number of taxpayers will see tax reductions in 2026, with some seeing tax refunds early in the year.
• Reduced regulations should decrease the cost of doing business and speed up the introduction of products to market.
• The reshoring commitment of over $18 trillion in manufacturing capacity should boost construction and the jobs required for that task.
• AI capacity construction should continue throughout most of 2026.
• Energy capacity construction will likely increase in 2026, with the introduction of small-scale nuclear power and construction of a new natural gas pipeline from Pennsylvania to New York.
• The House of Representatives passed a $900 billion military budget, which includes pay raises and an increase in defense spending. This bill still needs to go through the Senate before it becomes law. Some of these funds will be used to retool the military for modern warfare, which includes increased use of AI and unmanned vehicles.

Various underwriters are predicting that equity markets will generate double digit rates of return. On a long-term basis this is extremely difficult to do and can only be achieved by accepting the risk of periodic losses. By year end the year the S&P 500 Index could see its third consecutive year of annual gains exceeding 20%. Only once, from 1995-1998, has the market seen a 4-year period of consecutive annual gains of 20%.

 

Bottom line: Be Careful

 

 

 

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

Mike Lipper's Blog: On The Way To Casualties & Eventually Riches - Weekly Blog # 918

Mike Lipper's Blog: Was it the week that wasn’t? - Weekly Blog # 917

Mike Lipper's Blog: Recession/Depression Risk Assumptions - Weekly Blog # 916

 

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

 

 

Possible Major Change, Missed by Media - Weekly Blog # 696

 

Mike Lipper’s Monday Morning Musings

Possible Major Change, Missed by Media

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

Isabella’s Jewels

Few knew or noted that Queen Isabella of Spain “hocked” her jewels to pay for Christopher Columbus’s three ship voyage to “America”. While it was known in limited circles that the world was not flat and land masses existed beyond the horizon, they were not accepted and were not even in the thoughts of rulers and important people until substantial “risk capital” was put up.

The media’s attention last week was primarily devoted to the tragic death of ten US Maines, three enlisted service people, including a naval corpsman at the Kabul airport and its implications for the forced US withdrawal from Afghanistan. Most of the world missed the discussions between the Taliban and the Afghanistan poppy growing framers. The Taliban ruled there will soon be no cultivation of drug producing poppies, a devastating blow to farming income and Taliban tax revenue! They suggested other “cash” crops. They did not indicate who would provide capital and skills to develop large scale mining of Rare Earths and other minerals. Clearly, if this were to happen it would have an impact similar to the Spanish discovery of Latin American gold, which led to two hundred years of currency inflation.

From a historical perspective this has great appeal to the Taliban. Almost 1000 years ago Genghis Kahn, in his capture of Afghanistan, diverted rivers and possibly some canals that created the agricultural wealth of the country. From that point to today, the people of Afghanistan have been pessimistic regarding their future.

If this were to happen, it would justify the many empires that tried to control “the world island” (Eurasia) by controlling Afghanistan. In modern times Russia, China, and Britain, saw the strategic importance of the country.  Historically, the US answer developed by Admiral Thayer Mahon advocated for controlling the world by controlling the seas, particularly those that were narrow.

Perhaps the good Admiral’s view should be updated to suggest the control of “space” will control the world. I am not only thinking of space as a place to launch the bombardments of earth. I am also thinking the control of space leads to control of communications. This brings the discussion back to “rare earths” and our ability to communicate, either short or long range. 

Other Voices with Other Concerns

Three thoughtful articles you should consider in setting your long-term investment strategy. The first is the lead article in the WSJ weekend section, about the Administration’s radical broadening of Anti-Trust litigation and regulation. The Anti-Trust legislation protects the consumer, but also includes suppliers and employees, with no protection from a vastly enlarged government sector. These efforts, whether successful or not, will take up a lot of executive time and expense but is unlikely to add to business profitability. Another consideration is whether these matters will alter where business and consumption take place. My guess is we will see a more active US Supreme Court.

A second article which raises concerns is a review of work done by a well respected academic, Niall Ferguson, concerning the path “The American Empire” will take as it loses relative global power, which won’t be pleasant or quiet. Whether he is right or not, the mere thought should be considered, not only from where we choose to live but also where and how we invest.

Barron’s cover story this week is entitled “How to Invest in China Now”, which describes various methods and securities to accomplish this goal. A much more difficult article would have been how to avoid investing in anything not significantly influenced by China. To me, impacted investments include US Government Bonds, local real estate, and domestic service companies. My personal investments are largely invested in the US but are hedged with a collection of mutual funds that invest in China directly or indirectly.

Data Points Casting Future Shadows

1. The Office of Management & Budget (OMB) is predicting 4th quarter inflation of 4.8%. Let’s hope they are wrong. I am more concerned by the slope of the curve than the actual number.
2. Despite the average Precious Metals Commodity fund declining 7% year-to-date, the median commodity fund has risen 23%.
3. In the same period the S&P 500 has gained 20%. (One of the more successful corporate pension funds used to go to cash whenever the market rose by 20%.)
4. The 40-year rate of gain in GDP is 3.1%, but it’s only 2.1% since the recession of 2008-9.
5. In the latest fund data collection week, taxable bonds grew assets $6.7 billion, tax-exempt funds $1.9 billion, and money market funds $0.7 billion. Equity funds had $6 billion in redemptions. (The week ended before Friday’s market.)
6. 86% of weekly price indicators published in The Wall Street Journal rose
7. A personal observation is that the intensity of price increases is moderating and shifting from goods to services.

Traditionally, after the next two weeks businesses will publicly or quietly assess their fourth calendar quarter sales, firming up their budgets for the forthcoming year. My guess is third quarter percentage gains, while good, will be less than the second quarter and will follow a similar pattern in the fourth quarter. Furthermore, there will likely be some delivery short falls in the quarter, both because of transportation issues and other supply-chain hurdles.

2022 comparisons with the current year are likely to be somewhat positive but not great, unless delayed fourth quarter sales come in early during the first quarter. The mid-term Congressional election may cause some shoppers and investors to be cautious.

My views based on history look tame. What do you think?

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

https://mikelipper.blogspot.com/2021/08/another-but-discouraging-look-at-market.html

https://mikelipper.blogspot.com/2021/08/mike-lippers-monday-morning-musings-are.html

https://mikelipper.blogspot.com/2021/08/mike-lippers-monday-morning-musings_8.html

Did someone forward you this blog? 

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.