Odds Favor A Recession Followed Up by the Market - Weekly Blog # 881

 

 

Mike Lipper’s Monday Morning Musings

 

Odds Favor A Recession Followed Up by the Market

 

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

 

                             

 

The Art of Security Analysis

Security analysis uses science but is not science. Using past statistical history of up vs. down markets, one can calculate the odds of a down market. The odds suggest something along the lines of one down-market for four up-markets. This math does not tell us anything about the amplitude of the next up and down phases. Where the art comes into play is searching past cycles to measure the varied amplitudes and more importantly the probable causes. Market moves in the minds of market participants are often tied to economic, financial, political, climate, and other elements. There is a human need to explain phenomena, so it is natural that in most cases investors and others attach some non-market element as the cause for the moment. In truth, while it is comforting to label the movement as being caused by some external force, no two market moves that are exactly alike. We cannot absolutely prove the cause with any certainty.

 

While professional analysts look at many causes, they are not really called on to make a judgement as to what is the next element that causes the movement. Thus, professional analysts often rely on the irregular rotation of up and down-market phases in commentary. Based on this principle, I am turning bullish because I believe for whatever reason we have entered a down-market of some unknown amplitude, which will be followed by an up-market, again of unknown amplitude. History suggests, at least in the US, the odds favoring a larger gain than the prior loss. To provide comfort, analysts attempt to find reasons to support this belief, which I will do without the absolute confidence I have found the motivating force of the eventual bull market. (Subscribers are encouraged to suggest other drivers.)

 

Too Much Weight on One Side

In one edition of a supposedly learned publication, there were three articles published with the headlines listed below. What are the chances the Financial Times is wrong?

• “How Low Can the Dollar Go”
• “Trump lunches full-scale assault on American elite”
• “An all-out assault on the rule of law”

Is there any connection between the authors and editors? This concerted view reminds me of the British Crown after they outlawed slavery commercially while British merchants supported the US Confederacy. Did their support have anything to do with the import of US cotton to fill their clothing factories?

 

The Future

It seems commercial motivations override political principles, which is true today. While politicians throughout the world are concerned about factory employment, they do not favor the economically larger consumer marketplaces. I find it interesting that the two largest consumer markets are China and the US, which don’t have politically powerful unions representing them!

 

On this side of the pond, Barrons Weekly published the stock market performance of 28 national indices showing 14 European countries leading as well beating the US local markets.

 

In the US it was the first week our indices were up a bit. However, it was not true for the bulk of our stocks. Friday’s gain, particularly on the NYSE, probably had more to do with the expiration of options.

 

By definition, a stock owner is future oriented and usually expects others to pay higher price/earnings ratios for their stocks in the future. The depth of the bear market will depend on whether P/Es’s hold and if their prices decline in line with earnings or rise in a cyclical recession or collapse in a structural one. I don’t know which type we will suffer, although many of the current administration’s moves appear to be more structurally focused.

 

The World keeps on producing products and services that have the potential to change economic patterns. Three recent products come to mind:

               *New lower cost airliners

               *BYD’s fast charging batteries

               *Florida’s leading the way to lowering property taxes

What do you think?    

 

 

 

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Mike Lipper's Blog: “Hide & Seek” - Weekly Blog # 880

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“Hide & Seek” - Weekly Blog # 880

 

 

Mike Lipper’s Monday Morning Musings

 

“Hide & Seek”

 

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

 

                             

 

Friday’s Victory Signal?

After an extended period of stock price declines, prices shot up on Friday. The “Bulls” hoped it was the beginnings of a “V” shaped recovery, but some market analysts were skeptical. A strong move often ends when there is a 10 to 1 ratio between buyers and sellers, which was the case with Friday’s 10 to 1 ratio.

 

The Wall Street Journal publishes “Track the Markets: Winners and Losers” in their weekend edition. It tracks the moves of 72 index, currency, commodities, and ETFs weekly. It may be worth noting that only 35% rose for the week.

 

The Second Focus

The media, and therefore most of the public focus on daily price changes. Even with the growth of trading-oriented hedge funds and the conversion of former securities salespeople into fee-paid wealth managers, the portion of the assets invested in trading is less than the more sedate investment accounts invested long-term for retirement and similar institutional accounts. My focus is on the second type, which includes wealthy individuals.

 

The Current Administration is Ignoring Us

The first step in security analysis courses often starts with reading what the government puts out in order to develop a foundation for an investment policy. The current administration is the most transactional in memory. The President, Vice President, and Sectaries of Treasury and Commerce made and lost money on market price changes. This has forced me to find other sources to build our long-term investment philosophy.

 

Inevitable Recessions

Studying both recorded history and our own lives, it tells us that life does not move in straight lines, but in cycles of irregular frequencies and amplitudes. Simplistically, we can divide these movements into good and bad periods. However, an examination of the periods reveals differences in how each period affects us. The differences and how they affect us depends on where we begin each cycle, the magnitude and shape of the cycle, and any surprises along the way.

 

Both up and down cycles are caused by imbalances within their structures, which often occur due to other imbalances known or unknown. Most importantly, any study of cycles indicates they happen periodically and surprise most participants. Even with detailed histories of cycles they can be difficult to predict, although the root cause of most cycles is extreme human behavior.

 

While some cycles are caused by natural weather-related events, most economic cycles are caused by envy and/or too much debt. I am perfectly comfortable predicting a recession will hit us, but don’t know for sure when it will occur. (In a recent discussion with a small group of senior and/or semi-retired analysts, they felt there was a 65% chance of a recession within 12 months.)

 

The fundamental cause of cycles is often the result of people reaching for a better standard of living through excessive use of debt, which often results in a struggle to repay debt and interest. At some point the growing federal deficit, combined with growing consumer debt, as evidenced by credit card delinquencies, will force a decline in spending. Reduced spending will lower GDP and production. The fact or rumor of this happening is enough to bring securities prices down.

 

Confusing Hide and Seek

Hiding is not the solution to avoiding a loss of purchasing power, both actual and supposed. Cash is the only true defense, although it is not a defense against inflation which reduces the purchasing power of most assets. However, the biggest long-term loss from hiding is foregoing future potential high returns.

 

Our Approach

I believe a cash level no larger than one year’s essential spending should cover the crisis bottom. Most of the remaining capital should be devoted to seeking out substantial total returns that can produce multi-year gains.

 

Where are these Gems?

Bargains are usually hidden in plain sight. One example might have been the fourth quarter 2024 purchase of European equities, which were priced for a European recession. However, European equities actually generated expanded earnings from Southeast Asia, Latin America, and Africa. (In a recent discussion with one of the largest investment advisers negative on investing in Europe. Their views were based on their continent’s own economics, while paying insufficient attention to companies growing profitably in the aforementioned regions)

 

Thus far in the first quarter I have been lucky enough to own both SEC registered mutual funds and European-based global issuers. (It took patience because earlier performance periods were not good.) This shows the need to be courageous when seeking future bargains. 

 

We would appreciate learning your views.

 

 

 

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Mike Lipper's Blog: Reality is Different than Economic/Financial Models - Weekly Blog # 878

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Separating: Present, Renewals, & Fulfilment - Weekly Blog # 879

 

 

 

Mike Lipper’s Monday Morning Musings

 

Separating: Present, Renewals, & Fulfilment

 

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

 

 

 

 First Priority

Determining the motivation of the client and the account’s heirs is key to understanding the performance of most investment accounts. When asking the real investment account decision-maker about the driving motivation, it is often singular even though multiple other motivations are listed. (It often takes many discussions to reach the effective truth. Over time and changing situations the driving motivations may change.)

 

With most individuals, critical decisions are based on selected discussions with highly respected individuals, which may change over time due to changing circumstances. Most often these individual decision advisers are not revealed to the “hired hands” of the portfolio manager. All too often the unofficial managers express their opinions based on their own experience, which may have little relevance to the long-term needs of the account. These accounts are effectively managed by people known and unknown to the professional manager. Thus, the crucial job for the professional is to communicate effectively with those having meaningful influence on the account. Not an easy job.

 

The Second Motivation

The owner of the account should understand that there is a second motivation operating in practically all situations. The prime motivation of the investment manager is to continue the relationship with the present controller of the account, which includes the periodic renewal of the relationship. The relationship rests primarily on the communication skills of the manager in reaching the expected satisfaction level. This is a two-part job, where the first task is setting and updating expectations. The second task is delivering the expected return and communicating the proper expectation. This is again a two-fold job, with the first task satisfying the adjusted needs of the account in absolute return terms. The next part is where many managers fall down, the artform of selecting appropriate comparisons. This is where my biases enter. I do not believe a managed account should be compared to a list of securities selected by a manager. It should instead be compared to a fund portfolio with real expenses and diversification requirements, similar to the account itself.

 

The Most Important Motivation

Most of the money in the United States is managed directly or indirectly for “retirement needs”, which has lengthened over time. “Retirement” can include the institutional needs of academic, medical, and cultural institutions. What makes these accounts challenging is the receipt of money near term to meet future needs, which may not be well-defined in the current period.

 

Currently, the biggest hurdle in managing long-term money is the new economic/financial situation, which is different from the recent past. Most of the time change moves relatively slowly, which allows the participants time to adjust their actions to the pace of change. However, there are some brief periods of even more rapid change where it is difficult to catch up and adjust to the radical changes. I believe we have entered such a period and expect to have more difficulty predicting the future. For a period, we will likely be out of step with the fundamental changes likely to occur.

 

What is Changing?

The following elements of change surfaced last week.

• Weekly S&P sector performance: S&P Finance +2.80% vs -4.01% for S&P Tech.
• Goldman Sachs will soon cut 3-5% of its Vice Presidents.
• Schroders will lay off 200 employees to refocus and improve profit margins. They will also cut their Executive Committee by half, which is 44% family owned.
• There are $3 trillion ageing and unsold private equity deals. (Retail investors are taking risks in Private Equity that exceed public investing protections.)
• The US has not seen so much restructuring in the Federal Government, Corporations, Energy, and Retail since the Depression.
• The AAII weekly sample survey’s 6-month bullish prediction is now 19.3% vs 57.3%. (The lowest I have seen, which is often wrong at turning points)
• Global financial communities are developing new instruments that can be leveraged.
• With copper and coffee commodity prices going up, I am not surprised the Fed is holding off on lowering interest rates.
• There is probably more to the reluctance in naming a bank supervisor than we know.

 

We know that history does not repeat (exactly), but it does rhyme. There is an incomplete comparison one could make with the 1930s, but I hope it isn’t so.

 

 

 

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Mike Lipper's Blog: Reality is Different than Economic/Financial Models - Weekly Blog # 878

Mike Lipper's Blog: Four Lessons Discussed - Weekly Blog # 877

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Reality is Different than Economic/Financial Models - Weekly Blog # 878

 

 

 

Mike Lipper’s Monday Morning Musings

 

Reality is Different than

Economic/Financial Models

 

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

 

 

Purposes of Models

Models are designed to portray complex relationships in a simple way. However, all too often models leave out contrary relationships. In so doing their utility as decision-makers is greatly lessened. Academics love models as teaching instruments, especially during time consuming classes. Rarely do the publishers of models give the odds on their exceptions. One drawback of blind use models is the lack of discussion on exceptions. To be a successful portfolio manager I believe we should consider exceptions to “normal” expectations.

 

For example, the current administration is trying to grow the US economy by creating measures to help manufacturing and housing. This might have worked well in the past but may not work well this time. Why?

 

The top 10% of the population owns almost half the assets and is responsible for an even larger portion of current spending. I believe most high spenders are not generating their gains from manufacturing and probably already own their own homes. With approximately 2/3rds of the population classified as part of the services sector, direct aid to the manufacturing sector will not make the spenders spend more.

 

Some of the big spenders are already cutting back on spending and are selling some of their higher earnings assets. In the latest American Association of Individual Investors (AAII) weekly sample survey, only 19% are bullish vs 61% bearish for the next six-months. Some of the wealthiest families are selling some of their best performing assets. (Exor*, the family holding company for the Agnelli family, is selling 4% of Ferrari.)

*Personally owned

 

In the US and possibly other economies some sense that part of the problem lies in education at the primary level and higher. In the US I believe 40% of grade school students can’t pass a basic math test. In Estonia they are going to begin teaching AI in their high schools.

 

This week we saw attention being paid to the importance of importing selected metals. On a broader scale, people in the commodity markets are expecting 6% inflation for “Doctor” copper.

“Happy Talk” is still driving much of the media who are celebrating 2-year Treasury yields dropping below 4% (3.99%) and 30-year Treasury yields dropping to 4.5% this week.

 

None of the popular models are currently pointing to a recession, which would give a more complete total outlook. However, I remind investors that throughout history there have always been periodic recessions, usually due to excess use of debt and/or government action. We have an abundance of both currently.

 

Take Care    

 

 

 

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Mike Lipper's Blog: Four Lessons Discussed - Weekly Blog # 877

Mike Lipper's Blog: Recognizing Change as it Happens - Weekly Blog # 876

Mike Lipper's Blog: A Rush to the 1930s - Weekly Blog # 875

 

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Four Lessons Discussed - Weekly Blog # 877

 

 

Mike Lipper’s Monday Morning Musings

 

Four Lessons Discussed

 

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

 

 Farmers’ Experience Led to the Crash

Is 1930 a preview of 202x? To set the stage, the 1920s were a period of transition and economic expansion. America and most of the industrial world enjoyed meaningful economic progress spurred on by the encouragement of increased debt. Governments, companies, individuals, and farmers used the resources of others to leverage their assets with increasing debt, fulfilling their perceived needs at ever increasing rates. The lessons of the 50-years before WWI were distant memories.

 

Due to WWI mobilization, women entered the workforce in increased numbers. The returning military found farm work too hard and too poorly paid on the farms. Financial communities, which had extensive experience with debt and leverage, found vast new markets for the financial skills of banks and others. Thus, the missing manpower was replaced by expensive machines and chemicals, which led to farmers owning leveraged machines and farms.

 

The age-old problem with leverage is the cost-price spread abruptly narrows. In a world becoming increasingly more global, international trade becomes the fulcrum-point of the fluctuating cost-price spread. To protect those in the middle from price swings, tariffs and other restrictive measures were introduced.

The US consumer desired ever-increasing amounts of food, with much of it imported from lower cost countries. To protect home-grown crops, additional costs and restrictions were placed on imports. Exporting countries fought back by lowering their prices to a point where domestically produced products could not compete effectively. Consequently, domestic farmers got their elected politicians to impose tariffs on imports, like the Smoot-Hawley tariff that President Hoover was reluctant to do. (It was repealed three years later) Other nations reacted by imposing their own tariffs on US exports, which was a contributing cause for WWII. 

 

What will be the impact of the proposed Reciprocal Tariffs being proposed? Despite what is being said, it seems unlikely consumers will avoid some or more of the cost.

 

Learning from Uncle Warren

This weekend Berkshire Hathaway (*) published its results for the 4th quarter and all of 2024, along with a well thought out discussion. The company has four main revenue sources for the heirs of its shareholders. Berkshire has total or partial ownership of over 180 private companies and a smaller but better-known portfolio of quite large publicly traded companies. They also have an increasingly large portfolio of short-term US Treasuries, which increase in value as interest rates rise.

 

The difference between what their insurance companies charge and their eventual payout is called a “float”. In the most current period all earnings asset categories rose, except for the holdings of the publicly owned securities which declined because of sales. The total portfolio rose and is selling very close to its all-time high. Considering the company announced it is being managed for the benefit of today’s shareholder heirs; it is extremely appropriate to occasionally reduce its near-term market risks. (It is worth noting, the remaining two lessons in this blog suggest caution is warranted.)

(*) Owned in Personal and Client accounts

 

The Leading Mutual Funds Suggest US Risk

Each week I look at over 1500 SEC registered mutual funds, as well as many more in the global world. Usually, a number of different drivers describe the leaders of the week.

 

The list below shows the investment objective assigned to the fund:

Precious Metals Equity           21.04%

Commodities Precious Metals      11.86

International Large-Cap Value     8.60

International Mid-Cap Value       8.54

Commodities Base Metals           8.34

International Large-Cap Growth    8.24

Commodities Agriculture           8.15

Warren Buffet, among others, is concerned that the US government may cause the value of the US dollar to drop.

The year-to-date winners are not investing in the US.

 

“Debt Has Always Been the Ruin of Great Powers. Is the U.S. Next?”

 Above is the title of Niall Ferguson’s article in Saturday’s Wall Street Journal where he introduces Ferguson’s Law, which was crafted in 1767. The law states “that any great power that spends more on debt service than on defense risks ceasing to be a great power.” According to the author, debt service includes repayment of debt and defense includes all costs to maintain the military. The US has just passed this milestone, but it would take an extended period to fundamentally break the Ferguson Law.

 

Working Conclusion

Be careful and share your thoughts, particularly if you disagree.

 

 

 

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Mike Lipper's Blog: Recognizing Change as it Happens - Weekly Blog # 876

Mike Lipper's Blog: A Rush to the 1930s - Weekly Blog # 875

Mike Lipper's Blog: More Evidence of New Era - Weekly Blog # 874

 

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Recognizing Change as it Happens - Weekly Blog # 876

 

 

 

Mike Lipper’s Monday Morning Musings

 

Recognizing Change as it Happens

 

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

 

 

 

Perspective is Difficult to Read

When gazing out a window while traveling in a car or a plane the view constantly changes, while the view within the vehicle remains constant, similar to the internal changes we experience while investing. Many of us are aware of both the outer world and our own investment perspective, although we are often unaware of the changes in people next to us. Rarely do we focus on factors impacting our own thinking during our travels.

 

Now may be a good time to review what is happening to those close to us, and even more importantly to ourselves. The following list of items crossed my consciousness this week, causing me to consider changes to our investments. In no particular order:

 

1. While I am aware of the US stock market trading volume growing, the rate of change between the 2 stock markets is telling. Over the last 12 months trading volume on the NYSE has grown +8.03%, while the NASDAQ has grown +57.39%. This indicates that there are two very separate markets. This was confirmed by Thompson Reuters’*, an old Canadian/British firm, through their actions this week. They moved their US listing to the “junior” exchange, which they identified as the home of technology companies.
2. The AAII sample survey had only 28.4% of their participants being bullish for the next 6 months, while 47.3% were bearish.
3. The Economic Cycle Research Institute (ECRI) industrial price index was up +6.44% over the past 12 months.
4. The Chinese marriage rate has dropped -20.5%.
5. JP Morgan Chase* announced layoffs for next year.
6. International Mutual Funds were the best performing group this week for the first time in a long time, led by large-cap growth funds.
7. The Financial Times is asking how big Walmart* can get.
8.  Until we actually see the final legislation and/or a court ruling, one wonders how the US will be governed. The US executive branch of government is in the courts for changes they’d like to make, after legal challenges.

I wonder how much longer the four international political leaders (Putin, Xi, Trump, and Moodi) will remain in power.

(* Owned in client or personal accounts.)

 

We are at a period in history where multiple large changes are occurring somewhat simultaneously, with significant consequences for winners and losers. Time is a scarce resource and that creates a sense of urgency among the participants. The following events bear close scrutiny as the outcome will be consequential for all.

• Change in US government – The power dynamic is being challenged in Washington DC and the courts, with a clear understanding that power could revert to the old order after the mid-term elections. So, Republicans recognize that change must be accomplished within the next two years. If the Republicans are successful, the country will likely see smaller government with some power ceded to the states. Smaller government should come with smaller costs, a plus for the national debt situation.
• Global government dynamics – Many governments around the world are grappling with similar ideological dynamics as those seen in the USA and are nervous about what might come next. This was on full display at the Munich Security Conference this week. The potential for trade wars could intensify significantly.
• Two wars have the potential to conclude this year, Gaza and Ukraine. Not all are likely to be happy with the outcome. Nor will there be unanimity among those shepherding the negotiation. Rebuilding will be costly in both locations, with no clear indication of who will pay and what deals will be struck to compensate those investing the money.
• Significant technological changes are likely in the next few years, with AI, robotics, and automation at the center of these changes. There will likely be big losers and winners, where the first mover advantage could be quite significant.
• An energy renaissance is likely, as the new technology driven future requires substantially more power than what it is replacing. The green revolution will not likely provide adequate solutions for the energy shortages. Natural gas and nuclear power seem to be the likeliest winners, as they provide the most consistent baseloads and the smallest CO2 emissions.    

Each of these bullet points has the potential to be disruptive. Having them all occur at roughly the same time will make for a challenging investment environment. While traders may be able to trade successfully, the odds favoring investing are declining for the next several years.

 

I would like to hear contrary views.

 

 

 

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Mike Lipper's Blog: A Rush to the 1930s - Weekly Blog # 875

Mike Lipper's Blog: More Evidence of New Era - Weekly Blog # 874

Mike Lipper's Blog: Roundtable Discussion - Weekly Blog # 873

 

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A Rush to the 1930s - Weekly Blog # 875

 

Mike Lipper’s Monday Morning Musings

 

A Rush to the 1930s

 

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

 

 

 

Historic Background

The President comes from a Brooklyn Democrat real estate family background. Many of his actions are similar to FDR’s moves in the 1930s. Like FDR, he is running into opposition from the courts. As with FDR, he wants to lower the value of the dollar. FDR raised the price of the dollar by 60% for non-US citizens and residents, the impact of which contributed to a worldwide depression and was a cause of WWII.

 

In the US

The job market is cooling, and the investment market is changing. As noted by George Gatch of JP Morgan Chase “more than half of total flows into the asset management industry comes from the wealth management segment which is now driven by brokerage firms shifting their sales forces to fee earning investment advisers from formerly registered representatives. While some of these advisers will manage this money through the dictates of the firms, a number of the advisers will act more independently”. (Whether this may increase the likelihood that these assets become more or less “sticky”, we will see.)

 

Equity markets in the US have become less homogenous than in the past. For example, in last week’s trading 48% of NYSE stock prices declined, while 52% declined on the NASDAQ. The volume of trading on the NASDAQ is about 7 times that of the “big board”. (This is a bit misleading as there is more intra-dealer trading to maintain position sizes in the over-counter market.)

 

Historically, one of the least reliable predictions comes from the American Association of Individual Investors (AAII) weekly sample survey. Over the last 3 weeks bearish investors have risen to 43% from 29%, while the bulls have dropped to 33% from 43% and are now a minority.

 

While we do not use commodities as investments, we do follow their prices, which are traded in very professional markets. Of particular importance is the price of copper, which has risen recently. This echoes the increase in the ECRI industrial price index, which rose this week for a +4.97% year over year gain.

 

An Unexpected Turnaround

Long-term investors often examine the potential for a totally unexpected turnaround. I have no reason to expect this change and can think of many reasons for it being improbable. However, the implications are so large that it is intriguing.

 

The two largest economies in the world are the US and China. Many believe the US will continue to grow for the foreseeable future. I have not seen any “expert” who is bullish on China. Nevertheless, through ancient times China was one of the wealthiest countries in the world. Many Chinese work hard and are world class business and intellectual leaders. The Chinese capital markets appear to be in disarray and are suffering meaningful deflation. I recognize that the level of trust between the two world leaders makes cooperation difficult, but the potential value of cooperation for both participants is enormous. Perhaps, our grand or great grandchildren will solve this rich puzzle.       

 

 

 

 

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Mike Lipper's Blog: More Evidence of New Era - Weekly Blog # 874

Mike Lipper's Blog: Roundtable Discussion - Weekly Blog # 873

Mike Lipper's Blog: New World Rediscovered - Weekly Blog # 872

 

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