Survival First, Before Growth - Weekly Blog # 958

 

 

 

Mike Lipper’s Monday Morning Musings

 

Survival First, Before Growth

 

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

            

 

 

Historic Lessons

The increase in current money is mostly generated by enthusiastic people who are likely to have difficulty surveying basic lessons from the cyclical world. The trick is to know which horse you are riding. Very few investors can seamlessly at once move from one horse to another without being on uncertain ground at times. That is why I recommend a working transition plan that starts with building a buying reserve capable of fluctuating in response to your view of your own situation and the price levels of specific securities.

 

Where Are We Now?

I don’t know, but we seem to be much further along in the development of the enthusiasm fueling rising markets. During the shortened Labor Day week, more stocks were sold than bought during the first three trading days. On Friday, we had a relief rally following a four-week period of small declines. Using equity mutual funds as a useful indicator, at least 85% of mutual fund sector averages fell through Thursday. There were only 15 sector averages that showed gains. Six sectors rose over 5% during the four-week period: Energy Commodities +12.80%, Agricultural Commodities +9.43%, General Commodities +8.67%, Latin American Stocks +7.82%, Precious Metals +7.54%, and Managed Futures Alternatives +5.04%. (As a group they gained from investors nervous about currencies, including the US Dollar.)

Nevertheless, there was still more enthusiasm on the NASDAQ than there was on the NYSE last week, which had 26% of its stocks rising compared to 22% on the Big Board. There was a similar patten for New Highs, with 4.1% on the NASDAQ vs 3.7% on the NYSE. (Clearly, there are a greater number of “AI” related stocks listed on the junior exchange.)

 

Building a Buying Reserve

Every investor likes the securities they hold, but unlike our children, grandchildren, and great grandchildren, we can and should rank the relative attractiveness of what we own. A position which has not recently risen should be questioned, particularly if it is selling below the price paid by a long-term corporate buyer. In terms of the rest, put what you own on a list to gradually reduce by at least 30% and up to 50%. This is particularly true if you expect to gain 10% or less over the next year from today’s price.

 

What To Do with the Reserve Cash?

Today, unless you are a skilled fixed income trader, do not own any bonds longer than 2 years in maturity. Remember, the purpose of the reserve is to give you buying power when the opportunity is right. It is probable the sale of the fixed income buying reserve will lead to a small acceptable loss when you sell to free up cash to buy future big winning opportunities.

 

Until the general market breaks, if any new name added does not rise within the first nine months of ownership it should be sold. You can use the tax loss to reduce the taxes you incur by selling some winnings to add to your reserve. (You can repurchase the name 31 days later if there is a new reason to buy it.)

 

Please let me know if you like this approach so I can learn.  

 

 

 

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This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932

 

 

 

Mike Lipper’s Monday Morning Musings

 

This week’s Dichotomy/Bifocals Needed

 

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

 

 

 

1 week = 1 month, or 1 or more years

From this investor’s viewpoint, the previous five trading days could be seen as a great dichotomy. Seventy seven percent of NYSE stock prices declined and 66% of NASDAQ stocks. Additionally, the US dollar rose in price to 100.362 on Friday from 97.70 on Thursday!!

 

The stock price decline was supported by a sharply increased bearish reading in the American Association of Individual Investors (AAII) sample survey looking 6-months ahead, which rose to 46.4% from 35.5% the prior week. There was only a slight fall in the bullish six-month prediction which fell to 31.9% from 33.1% the prior week. Large publicly traded companies continued to report little to no hiring to offset those retiring.

 

One might have thought that worries about inflation would have had more impact, with the ECRI industrial price indicator rising to 130.99% from 126% the prior week. The index was up 9.59% for the last 12 months, but that didn’t seem to retard the jump in the dollar on Friday.

 

If one listened to the advocates of The President, the move in Friday’s dollar pointed to good times ahead. Other factors they mentioned were part of the reason the majority sold stocks this week, including on the last day of the week. We therefore have a dichotomy, which is a condition that can’t last or perhaps requires a different analysis?

 

The correct analysis is a condition that possibly occurs to seniors. That is the need to get corrective eyewear (glasses or implants). Perhaps we need to use one set of lenses for short distances and one for long or perhaps use bifocals.

 

We could be drawing close to the time when we will know whether the short-term optimistic view or the longer-term more pessimistic view followed by optimism is correct.

 

Watch the S&P 500

There are four major US stock market indices quoted in the press. The Dow Jones Industrial Average (DJIA) consists of just 30 stocks weighted by their stock prices, whereast he Standard & Poor’s 500 is weighted by market capitalization. The NASDAQ Composite is also capitalization weighted of about 500 stocks, although some stocks don’t have public records for five and ten years. The Russell 2000 Index is small-cap focused and suffers from a significant number of companies reporting losses. For analytical and investment purposes, most large financial institutions use the S&P 500 Index.

 

The S&P 500 Index closed at 6,632 on Friday, the lowest price in over four months. Market analysts believe a further decline of more than 3% will make a near-term market rise above its former high of 7,002 difficult for an extended period. The reason for this is, many of the investors who bought stocks before the decline will try to breakeven on the way up, making progress slow. 

 

Question: What do you think?

 

 

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How Much Longer Can We Avoid Thinking About the Long-Term? - Weekly Blog # 923

 

 

 

Mike Lipper’s Monday Morning Musings

 

How Much Longer Can We Avoid

Thinking About the Long-Term?

 

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

 

 

First Week 2026

Using the performance of equity mutual funds, it was a great week with average gains of more than +2%. If repeated for each week of the year it would produce returns of over 100%. Even the value of the US dollar rose a bit during the week. That was the delusional news! What’s even worse, the average commodity fund invested in gold and other precious metals rose +4.02%. Funds owning stocks of gold and other precious metal mining companies gained +5.32% on average through Thursday. The latter can suffer mining risks, labor strikes, and raised taxes. Historically, gold has been a hedge against the value of a currency, particularly the US dollar. There is also a small industrial market for gold in the electronics market, which might be in the region of $1,000 an ounce. How much demand for gold jewelry is really demand for a convenient way to pass on its monetary value? I don’t know. Part of the demand for gold as a use in the crypto world is not known by me. All told, I suspect over half of the value of gold is as a substitute for the US dollar.

 

What Is The Value Of The US dollar?

Something is worth what someone is willing to pay for it. Currently, it appears to be about $0.99 cents, up from $0.96 cents. However, the critical question is its worth in the future. That appears to be what someone is willing to pay for it, delivered today or on a specific date and quantity in the future.

 

According to a paper prepared by the National Bureau of Economic Research. Twenty-five years ago, people believed the US fiscal budget looking forward 10 years would be $5.9 Billion, with all public debt paid off by 2006. The readers of the One Big Beautiful Bill Act now project a 2054 debt to GDP ratio of 199%, incorporating temporary provisions. Net interest payments would rise to 6.3% from 3.2% today. (I don’t know how to impact these numbers with the increase in gambling.  In first 11 months of 2025, total sports gambling in New Jersey was $67 Billion. The rise of non-securities backed gambling, particularly among the young, appears to be on the rise.)

 

Why Should We Care?

Even with the increase in retail securities markets investing, institutional investors set the prices of fixed income securities and many large-cap stocks. Most money invested through 401k and similar retirement accounts are invested in mutual funds or SMAs. Insurance companies, endowments, and other institutional investors may increase their investment in foreign securities, which will impact domestic stock prices. Both domestic and foreign controlled investors may shift some of their investment focus if the dollar becomes weaker.

 

Leaders Increasingly Think Globally

Foreign leaders have increasingly thought globally in determining their strategies. Our main adversaries, China, Russia, and North Korea are strategists, whereas the US tends to view the world as tacticians through domestic glasses and the next election time scale. Luckily, many of our domestic commercial leaders are increasingly thinking strategically.

 

Strategies Going Forward

Going forward, we should recognize that the world is changing at a rapid rate and we need to change with it. Old rules and strategies will change. We must be careful.

 

Please share your thoughts.

 

 

 

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Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

 

 

 

Mike Lipper’s Monday Morning Musings

 

Misperceptions: Contrarian & Other

Viewpoints: Majority vs Minority

 

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

                             

 

 

Every day through the popular press, pundits in or out of political positions express views that our current information will lead to a happy conclusion. Occasionally it will happen and contrarians like me acknowledge that it can and may happen, but the odds it will happen are only 30% to 50%, like the odds a favorite horse winning at the racetrack. By definition, the reward for winning will be the lowest of all horses in the competition. Contrarians can select a different horse with potentially higher rewards by choosing to wager against the majority.

 

Currently, it appears to this contrarian that it’s a particularly good time to take a contrary view of the intermediate period of the US stock market. The primary reason for this view is the bullish feelings presented in the popular press with such shallow thinking.

 

The US Stock Market is Going Up

The weekend press is full of similar statements because the Standard & Poor’s 500 Index (S&P 500) rose a small amount on Thursday. (This gain was given back on Friday when 390 S&P 500 issues declined. More significantly for the week, 54% of the stocks declined on both the NYSE and the NASDAQ.)

 

US Tariffs Announced

The President or White House Personnel announced import duty rates with a limited number of the countries, which in theory would slow the growth of the expected rising deficit. (The higher tariffs likely to be charged on exports from these countries is not known for an obvious reason.) The President is well versed on restrictions imposed on US exports by each trading partner, which are labeled as “non-tariff trade barriers”. These include the following list:

Administrative & bureaucratic border delays

Censorship

Foreign exchange & controls

Import deposits

Capital movement regulations

Licenses

Localization requirements

Standards

Quotas

“Voluntary” export restraints

 

I don’t know of any summing up of the cost of the above barriers, or others not identified. I have seen knowledgeable estimates that are roughly twice the size of the tariffs. President Trump started the whole discussion about tariffs to get high-level meetings with some of the “right” people around the negotiating table in order to deal with the “NTB” issues imposed by various individual countries. As this has not yet happened, I wonder if we have seen a final answer to both the tariff and non-tariff trade barrier issues.

 

Markets Are Not Waiting

Businesses and investors must execute global trades and make investment decisions every day in the absence of firm conclusions to these and other questions. The US dollar relative to other principal currencies has fallen about 12% in 2025, with more expected. This week, Barron’s quoted a participant saying, “The days of the world letting America live beyond its means are rapidly coming to an end.”

 

The Wall Street Journal (WSJ) publishes the price movements of various securities indices and commodity prices each Saturday. This current week 61% of the prices declined. It appears many purchasers of goods and services are not demonstrating an inability to act but are instead unwilling to transact under today’s conditions and outlook.

 

Please let me know what you are thinking.   

 

PS

Some of our subscribers may have known my brother Arthur, who passed away peacefully Sunday afternoon. He led a long productive life helping many people on both coasts and two oceans.

 

 

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Selective Readings of Data - Weekly Blog # 892

 

 

 

Mike Lipper’s Monday Morning Musings

 

Selective Readings of Data

 

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

                             

 

 

Assumption

I assume as a careful reader of these musing one cannot avoid the “happy talk” produced by most of the media. For balance, as a public service for my blog readers, I’ll focus on data and other information supporting the other side.

 

Long-Term

Jaime Dimon, the CEO of JP Morgan Chase, was recently quoted as follows: “If we are not the pre-eminent military and pre-eminent economy in 40 years, we will not be the reserve currency…” He is pleading with you to develop four views that he considers critical to a sound investment philosophy. They are the importance of military standing, economic position, having a forty-year view (the bulk of institutional and individual money is invested for long periods), and the significance of being the sole reserve currency.) I will be happy to discuss your views on these questions.

 

Others’ Views Focused on the Short-Term

Recently, 17 well-known investment advisors made estimates of the Standard & Poor’s 500 Index 2025 closing price. Nine estimates were higher and eight lower. The lowest was JP Morgan Chase, 13% below Friday’s close. (Of all the various stock market indices, I believe the S&P 500 Index is the best to gage the level of the market. On Friday it only gained one tenth of 1%, showing the stickiness of the movement.) Morgan Stanley is expecting the US dollar to drop 9% over the next year.

 

Unfavorable Conditions

Retail investors of all sizes are being told to invest in private investment vehicles, including private equity. These investments represent some 30% of the M&A market. History suggests the public buyers come into many trends last.

 

Currently, there are 7.5 million unfilled job openings. Employers can’t find suitable workers. I believe many potential employees lack sufficient motivation, discipline, and/or integrity for these jobs. This is leading to a low growth rate in labor productivity.

 

The employees themselves are one reason for these conditions at commercial, government, and nonprofit institutions. Due to the slow growth of our society there are pressures at all levels of management to improve labor productivity. Managers strive for efficiency, defined as output divided by input. The simple way to do that is to assign generated revenue to each worker. This is relatively easy to do for line employees, by leaving out the supervisors. The next step is to reduce the number of supervisors. This creates efficiency. However, supervisors create most of the worksite culture, which leads to product and service quality.

 

In just about every sector of modern life we are experiencing a decline in the quality of the products or services we receive. However, as a result of employers not hiring more experienced quality supervisors, this has led to customer dissatisfaction, lower customer/client loyalty, lower sales, and fewer recommendations. Employers should be hired for effectiveness, which would reduce costly mistakes and improve relationships.

 

Two World Realties

As long as we have politicians and their advocates chanting happy talk about the economy while employers cut back on hiring, we are going to experience a dichotomy in the investment world. We can hope for the best but should be prepared for the worst.

 

The Form Does Work

As many subscribers already know, I count my former time at the New York racetracks as a critical learning experience. Consequently, the running of the Belmont Stakes, which was run early Saturday evening, is very important to me. The race is now one quarter mile shorter than the traditional 1½ miles, which means its long history of winning times is no longer relevant to racing analysts (handicappers).  From a betting/investment standpoint, the job of the analyst is to evaluate the odds of a particular horse winning vs the odds posted on the tote boards. These odds are derived from the amount of money invested on each horse, including taxes and fees paid to the track. The smaller the odds, the more popular the payoff selection on the winning horse. In many ways this is similar to the most popular investments in the marketplace. It is important to remember that the most popular bets, called favorites, win a minority of the time. But they do win more often than the less popular bets.

 

The first three horses crossing the finish line at the Belmont Stakes were the same three horses finishing in that order at the Kentucky Derby. Thus, the history of these horses proves to be a good predictor. Can stock buyers count on a similar phenomenon in picking stock investments? It is occasionally possible, but not all the time.

 

If using lessons learned at the racetrack seems a bit odd, think about Ruth and I attending a New Jersey symphony concert on Sunday afternoon. This featured two great classical performers, Xian Zhang, conductor and Conrad Tao, pianist. They impressively played Sergei Rachmaninoff’s second piano concerto. This piece was a breakthrough work marking Rachmaninoff emerging from a three-year depression. The length of the depression could be a useful guide to an investment depression, unless the government lengthens the period of the depression, as FDR did in 1937.

 

Thoughts?      

 

 

 

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It Doesn’t Feel Like a Bull Market - Weekly Blog # 866

 

 

Mike Lipper’s Monday Morning Musings

 

It Doesn’t Feel Like a Bull Market

 

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

 

 

 

 

If not Convincingly Up, Maybe Down

With most US stock price indexes near their all-time peaks in the latest week, why are only 37% of stocks in the S&P 500 rising? Forty-six percent of the stocks on the NASDAQ market rose during this period. (The NASDAQ market has more speculative stocks, like technology and smaller financials.  While not strictly comparable, NASDAQ volume has risen +15% year over year, while NYSE volume contracted -19%.)

 

Warning Light

Could it be that investors are sensing a coming decline. Looking at other data series, the US dollar may have peaked. The more economically sensitive Dow Jones Transportation Index has also completed two-thirds of a typical reversal chart pattern.

 

Too Much of a Good Thing

Another flashing warning light is the enormous amount of money made over the last 10 years. (Using total return data on mutual funds and index funds, the following categories have doubled their pretax money in the 10-years through last Thursday: Large Growth, Large Value, Small Cap Growth, Small Cap Value, S&P 500, and S&P 400. The range for these averages was between 2.35X and 2.01X. I have added Financial Services funds which gained 3.57X). I believe that in addition to portfolio earnings growing, there has been multiple expansion. P/E Ratios can move up and down faster than earnings. It is this concern that leaves some of us worried.

 

Others Are Worried

The Depression, which many economists believe started in 1933, actually started at least 5 years earlier in the farmland. Agricultural prices were dropping due to imports, which eventually led to the US putting up a tariff wall. Currently, the farming community, their suppliers, and financial supporters are worried. Some in the farming community expect income to drop 25% in 2025.

 

The stock market would be wise to pay attention to high-quality US bonds, whose yields have risen +116 basis points over the last year compared to a rise of +44 basis points for middle quality bond yields.  (Yields up bond prices down.)

 

Stock market investors who know their history should likewise be concerned about farm prices. Historically, the sharpest analysts following these trends come from the 4 major agricultural trading houses. One of these is Cargill, who has just announced plans to lay off 5% of its workforce. A glance at the 2024 electoral college map reveals the red team dominating the middle of the country. A similar situation forced a Presidential change in 1932, which some believe was a contributor to WWII.

 

Have we Entered a New Market Cycle?

Do many people recognize a change underway early in the long march to a different environment? I believe a change may be underway, but I don’t know where we are going.

 

I recognize that beneath the surface the two major engines driving the world are the USA and China. Both are not as healthy as they portray, with productivity doing poorly when adjusted for inflation. One example is the US significantly leading the world in medical spending, while life expectancy trails behind Japan, France, Canada, and Germany.

 

We are not Allowed to Think Creatively

For the most part our governance and educational systems are highly regimented to reproduce exactly what was or is. This has been difficult for me to recognize. Consider the amount of mathematical thinking in this blog, which comes from being taught to learn from the text or copying from the past.

 

Our systems are designed to produce copycats, or at least controllable members. We do not try very hard to generate creativity. In college we were taught what worked in the past. I only had one critical exam in all things management accounting, where 50% of the final test was “What’s wrong with Accounting?”. This caused me to recognize that GAAP accounting is designed to avoid lawsuits, not to help make investment decisions. These lawsuits might be brought against investment bankers and various marketers. The closest I got to seeing this was during a Security Analysis course with the famed Professor David Dodd of the famed Graham and Dodd, but only during one portion of the course. The lesson was a real eye-opener when we turned to valuing a company in bankruptcy. The first thing we were instructed to do was reconstruct the GAAP accounting by valuing what was salable and at what price. Only a portion of the inventory could be sold, and it was valued after disposal cost. Buildings and land could be valued up or down, depending on use. Finally, there was the cost of shutting down, including appropriately taking care of the employees.

 

I never learned to be a DaVinci, but I came close by watching what Steve Jobs at Apple did. (Even though I currently own the stock, I do not recommend ownership, except for very narrow purposes.) What Jobs created and Tim Cook built and marketed brilliantly was creating new uses for existing technology. I suspect much of what Jobs created came from his studies of Asian religions. Today, it is interesting to see a surprising amount of creativity coming from foreign-born people working for US corporations or investment capital.

 

Question: What have you done creatively?  

 

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Investors Not Traders Are Worried - Weekly Blog # 856

 

Mike Lipper’s Monday Morning Musings

 

Investors, Not Traders, Are Worried

 

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

Investors are concerned that their US dollar capital could be insufficient to completely fulfill their important responsibilities. Not all their concerns will be successfully addressed, many of them will likely continue to be problems for capital owners and beneficiaries. A short list of the visible problems follows in no particular order:

1. The number of voluntary and non-voluntary retirees is growing in many developed western countries. They are growing faster than the number of workers eliminated by “AI’s” future impact. In the US today there are four workers for every retiree. It used to be nine.
2. The American privilege of having the most valuable currency is fading. One Presidential candidate wishes for a lower value, while both advocate for disguised inflation that will reduce the value of US currency. This will lead to higher interest rates on debt sold to overseas buyers.
3. One of the ways the wealthy protect themselves is by reducing cash holdings in favor of investing in various forms of art. “The Art Market Is Tanking” according to WSJ’s front-page article on auction prices and volumes.
4. Increasingly, investors and corporations are using exports and foreign investments to escape local regulations and taxes. Globally, 128,000 millionaires plan to move their domicile in 2024.
5. The Fed’s reduction in interest rates is unlikely to lead to a “soft-landing”, unless fresh capital is invested in plant/equipment.
6. Forty three percent of the stocks in the Russell 2000 are unprofitable. Unless the contemplated government grants to new start-ups is run by the SBA or a similar agency, it will lead to large scale losses of family and friends’ capital.
7. The CFA Institute conducted a survey of 4000 CFAs regarding their current view of the market/economy. The findings which will be published shortly are distinctly negative in terms of their outlook. (CFAs earn their designation by passing three rigorous academic type exams. It is worth considering that 4000 CFAs responded to the questions, compared to roughly 1000 in various WSJ and other polls. While there are a number of CFAs that work for brokerage/investment bankers and hedge funds, I guess over half the poll participants work for financial institutions. Most of their clients are more long-term oriented than the clients of many brokers, investment bankers, and hedge funds.)

                                                                                             

Hopefully these views will raise questions and disagreements that subscribers can share with me.  

 

 

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Our Self-Appointed Mission - Weekly Blog # 846

 

         

 

Mike Lipper’s Monday Morning Musings

 

Our Self-Appointed Mission

 

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

 

 

 

“The World Turned Upside Down” 

“The World Turned Upside Down” played as the British Army marched off the Yorktown battlefield, ending the last military action of the American Revolution.

 

The Sunday announcement caused me to kill the draft of the intended blog for this week. 

  

With the letter announcing the end of President Biden’s campaign for a second term and his endorsement of Vice President Kamala Harris for President, the whole focus of what is important to investors changed. These events made me contemplate the meaning of the British army signaling the end of their military operation in America on October 19th, 1781. 

 

The rest of the world recognized that the US had become a world power one hundred and ten years later, on the 10th of December 1895, when the peace treaty ending the Spanish American War was signed. The US became a Pacific power for a while with their occupation of the Philippines. During the time from the end of the American Revolution and the end of the Spanish American War there were other wars, including the bloody Civil War. 

 

While I cannot determine what the critical events will be, or when they will happen, I expect it won’t be a smooth process. The Democrats are likely to form a circular firing squad. The Senate will be the center of power, surrounded by Governors, the money groups, and others who can make things happen from a protected position in the final run.      

 

Somewhat later the Republicans are likely to have their own internal battles between their top-down and bottom-up factions. 

 

While foreign governments and their internal forces were already influencing US activities and having an impact on US actions, it is more the case now. In the past it was the Europeans who played this role. Now the Asians will be the change agents. With President Trump’s desire for a weaker US dollar, he will have to successfully deal with China and Japan’s internal problems and also their trade with us. They are the two largest holders of dollars. China has grown twice as fast as the US for some time, although they are now close to a contraction. Due to changes in government philosophy, Japan needs to increase international trade. 

 

There is an increasingly large gap between the politically oriented stock market players and operating business managements. Quite possibly, the enthusiastic market players are going to wait to see how the following events play out, the attempted assassination of President Trump, the withdrawal of President Biden for his second term, and his endorsement of his Vice-President to replace him.

 

The US growth rate of consumer sales has been in decline for some time, causing executives to cut employment and dispose of less attractive operations. Companies have also had to juggle prices, quality, and the packaging of smaller quantities at old prices. 

 

Preview: 

I was preparing a piece on asset sector fund performance that I hope to finish if the world settles down. Past performance will likely be an aid in future selection. Perhaps next week. 

 

 

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American Voters Win & Lose - Weekly Blog # 830

 

         

Mike Lipper’s Monday Morning Musings

 

American Voters Win & Lose

 

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

   

   

    

Probable Real Winner in November

While it is unknown which candidate will be elected President, the probable real winner is the American voter. Unfortunately, victory comes at the price of worse government.

 

In almost every poll taken, it is clear most voters are unenthusiastic about the numerical winner. If the number of unenthusiastic and non-voters were aggregated, they would likely represent the majority of the country. For all intents and purposes, based on todays’ perceptions, the occupant of the White House will be a “lame duck”. The President will have limited influence on those occupying seats in Congress for 2026 and 2028. As most Americans prefer Congress pass very little legislation, they are the likely winners in 2024.

 

However, the voters are also losers. While members of Congress will either wear red or blue uniforms, but in meeting rooms they will split into numerous caucuses. As the number of voting groups goes up, compromises will produce the weakest bills. More importantly, none of the splinter groups will have national campaign chests or the talent of the national committees. Odds are the US structure will look similar to  the less efficient European Parliaments. A factor likely to slow international agreements.

 

Chairman Powell Attempts to Teach Economics

In the press conference following Chairman Powell’s testimony before the Houses of Congress, he indicated that interest rates are unlikely to be the main weapon used to bring down inflation. Furthermore, he said it is possible the “Fed” is likely to raise interest rates under certain conditions.

 

This pronouncement came as a rude shock to those viewing control of short-term interest rates as controlling inflation and the economy. The Board of the Federal Reserve System made it unanimously clear that the causes of inflation are multifaceted and that control of short-term high-quality rates would not control inflation.

 

The rate of inflation is an inexact measure of the rate of change in prices, as there are many influences on the aggregate level of price changes. These influences can be ranked and put into three broad groups, governments, private sectors, and natural forces.

 

Their impact on inflation is not well-understood. Too much attention is focused on government-imposed income taxes. Also important are business taxes, estate formation and related taxes, and regulations of permitted actions. Additionally, State, Municipal, and foreign taxes can also be inflationary. Changes in demographics, climate, technology, and wars also have an impact, which is beyond the purview of the Fed and Congress. While there are a few more narrowly focused inflation measures, they are not generally used in making decisions. Bottomline, inflation should not be treated as a single number of any precision.     

 

News That May Impact Security Prices

1. 16 states still have employment rates below pandemic levels, with New York and California leading the list.
2. We don’t measure the flight from the US dollar correctly, as we don’t include the purchase of Bitcoin, Gold, Manhattan Real Estate, and other hard commodities requiring the exchange of dollars.
3. Narrowing high yield spreads.
4. EPS growth leveraging revenue growth.
5. The ratio of AAII Bullish views to Bearish is near a record 2.2 times.
6. Private Capital is short of opportunities and talented staff.
7. Defaults are expected to grow.
8. Trading liquidity to dry up with a switch to smaller caps.

           

Please share your reactions so we can learn.                                              

 

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Worth vs Price Historically - Weekly Blog # 821

 

Mike Lipper’s Monday Morning Musings

 

Worth vs Price Historically

 

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

 

Merchants Needed

Despite what many believe is the oldest profession, growers and herders were the first tribes to survive. As both tribes frequently had more of their own product than necessary, they needed to exchange their excess production with members of the other tribe. Both tribes were skilled in their own production but did not fully understand the other tribe’s costs. Initially, the agreed price was in terms of quantities between the two commodities (x sheep for y bales of cotton).

 

Fairly quickly, solely mathematical terms of exchange (3x for 5y) became insufficient in terms of defining the starting quantity and conditions of transfer. The exchanging parties often did not know or trust the other party. Thus, there was a need for a middleman to determine an agreed price between buyer and seller. The middleman would necessarily be known or recognized by the would-be traders as someone who could be reasonably trusted and was capable of developing accepted terms of trade.

 

With buyers and sellers geographically separate, both in terms of distance and possibly language, the value of a somewhat trusted third party became even more important. Still further elements became essential, a recognized type of money, or later, credit.

 

Over time, the third parties evolved into merchant houses or merchant banks. When dealing across borders and cultures the participants were often happier if the money or credit exchanged was issued by a bank, especially if the bank backed by a government with a wealthy family behind it. At this point these transactions utilized money in the form of coins convertible into known quantities of precious metals.

 

Foreign Exchange

When the western world was ruled by Rome, the value was understood to represent an understood bundle of goods and services. This worked well when the government controlled the coinage. A problem arose when government expenses for war or extravagant expenses rose beyond an acceptable level of taxes paid. A conflict that exists today.

 

Governments addressed the problem by gradually debasing the currency, such as substituting copper and other base metals for precious metals. As governments did this differently, the purchasing power of their money became dissimilar to one another, both in ancient times and today.

 

Those who suffer from a liberal arts education are taught incorrectly that the English Magna Carta was forced by the public on the English king. The real cause resulted from the Barons revolting against the increased tax load on their land. The increased tax load was caused by the expense of the Crusades and the ransom paid for the release of their king who was held hostage in Europe.

 

Today our federal government is changing the rate of taxation and how it is applied to both income and estates. Since foreigners derive earnings from activities and trade in the United States, they react by reducing their exposure to the US dollar, reducing its value. This is currently an issue for an investment committee on which I sit. In looking at our portfolio and foreign expenses at the last meeting, I suggested we begin tracking the changing value of the dollar. It is also something I need to do in looking at portfolio selection.

 

A Historic Portfolio Change

(Please do not take this discussion as a recommendation, as that requires careful analysis of the needs of an account. T. Rowe Price is held in a personal account and some client accounts.)

 

The man, T. Rowe Price, started his investment counsel firm in 1937, a year of a few months of gains in a period of stagflation. Mr. Price was one of a few managers investing in growth stocks at the time. Sometime after the conclusion of WWII he became concerned that the inflationary habit had taken over management of the economy and by 1979 he was disturbed about how the US was doing. He started managing money to graduate from FDR’s New Deal, implementing a philosophy he called New ERA in a new fund concerned about government led inflation. In 1979 George Roach became his assistant, and I believe in 1997 he became the portfolio manager. He later became President of the firm. George kept with Mr. Prices’ concerns, but he allowed the rest of the firm to continue with their growth stock orientation, which produced a very commendable record.

 

Prior to December 2023

The T. Rowe Price New Era Fund was managed with extreme consciousness of inflation. This translated into investing in common stocks of companies expected to rise in the future as inflation rose by investing in assets, not earnings. Most followers of the New Era fund viewed it as a commodities fund because that is what the portfolio looked like.

 

Shinwoo Kim has been the portfolio manager for New Era since 2021 and has been with T. Rowe since 2009. He has proclaimed that commodities have been and are in a long bear market ever since he became portfolio manager, but that changed in December. On the first of December hea as portfolio manager of New Era affected a considerable change in its portfolio, returning it to Mr. Prices’ basic concerns.  

 

Kim feels the US has migrated to a world where inflation and excessive federal government spending is the principal driver of investments. After ten years he has concluded, and convinced the rest of his investment committee, that the commodity cycle is about to change. He expects future investments to benefit from cyclical earnings growth, which will produce better results than ownership in highly valued assets.

As a natural resource fund New Era has not done poorly, compounding at +2.97% compared to the average Natural Resources Fund’s +2.69% over the past ten years. I suspect this outcome was largely the result of its yield, not earnings or Price/Earnings expansion and/or P/E expansion. (The result was not measured against the changing value of the dollar.)

Economists have tagged the price of copper as Dr. Copper. As the price of copper has performed better than most economists over time. The use of copper by the electrical/electronic industries and construction activity gives its use a cyclical growth trend. Other structural changes expected to benefit the portfolio include Uranium and US shale production. The fund believes the long-term outlook for production in Marcellus/Utica as well as Permian is understated. Additional attractive areas for investment include industrial gases and pipelines. (This brings to mind Berkshire Hathaway- a position owned in our personal and managed accounts)

 

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.