Mike Lipper’s Monday Morning Musings
Tis the Season to be Mislead
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Standard Review and Outlook
I have written and read many reviews and outlooks over my career, both as an investor and a fiduciary manager. These documents are interesting and represent the most positive thinking of the writer, editor, supervisor, key sales people and compliance officials. Most spend a good amount of space describing the immediate past, with a slight alibi for under performance. For the most part the outlook is an extension of current conditions, likely to turn out to be benign. Those who know me would expect a contrary point of view. I hope not to disappoint. Even if I am wrong, some of these views will give depth to the more popularly expressed views.
Career Risks
This may well be the first outlook to start with this topic, but it hopefully will cause professional investment people and senior politicians to focus their actions on reducing the chances of repeating their 2018 performance, or worse. The best that than can be said about last year is that the results were reasonable considering the prior good times when waves of enthusiasm carried stock prices and political popularity to new highs. In some respect we have come back to earth. The only problem with the small net progress made in 2018 is that it reduced the longer-term growth rate, which is the underpinning of our current position and its remuneration.
Faced with the somewhat disappointing results of 2018 there is a natural drive to do something to improve results. In most cases this translates to committing more assets to short-term solutions, often by reducing reserves. While 60 of the 72 prices representing stock market indices, currencies, commodities, and ETFs rose last week, there may have been an excess investment of reserves, which is often a precondition of both bear markets and recessions. These asset allocation shifts don’t cause bear markets and recessions, they just make them more painful. Let’s place this microscope on three careers to raise some concerns.
Investment Professionals
Over time most professional investment people have delivered good performance relative to client’s actual constraints. In a period when most security prices rose in tandem with market indices or sector indices, passive vehicles looked to be more attractive than active choices. (This view was reinforced as commission brokers became fee charging investment advisors). Recently, instead of a steady increase in the number of new firms, hedge funds and mutual funds, the opposite has been happening. Organizations are merging to get control of assets that are no longer being won through sales efforts. In the merger, one of the back offices is eliminated and the best of the investment and sales people are retained. Even with this group of survivors, once their guaranteed employment period ends there will likely be a second round of layoffs. By the way, there is no evidence that the ultimate client is better off after these mergers. Seeing the prospect of this on the horizon, current employees may elect to push more aggressive strategies, even after a ten-year expansion.
Publicly-Traded Corporate Executives
Many corporate C suites are like the old fighter squadrons where there were bold or old pilots, but no bold old pilots. Often, the executives that rise to the top have more political skills than vision and help select boards of a similar nature. Most of the Fortune 500 CEOs are in their corner chair for five years, which is generally not long enough to go through a recession and a recovery. Thus, they tend to opt for capital preservation rather capital growth. This is not new, which is the reason why wise entrepreneurial companies with much less in assets outgrow their larger competitors. New technology’s disruptive forces wait for no one and some foreign companies may have what it takes to win business away from slower moving behemoths. Often, being a little bit bold is insufficient to hold off competitors. At some point boards, with or without activist sponsorship, demand a bold replacement or sale of the company.
Political Leadership
Both the “Big Two” (US and China) are trying to keep their expansions growing to protect their employment base. Further, in the US the opposition party is led by individuals older than the US President. Both leaders would prefer to focus on the longer term, but they are being forced to prolong and accelerate current growth. This is the trap that will increase the pain when the economic slump occurs, as happened in Ancient Rome, to Louis XIV and to Herbert Hoover/ Franklin Delano Roosevelt. Economic and military wars lead to deficits and tax increases, where opposite measures might cushion the decline and accelerate the speed of the recovery. But this kind or restraint would necessarily need to accept a slowdown, along with the political risk of a rise in unemployment, which would need to be managed.
If !!!
If corporate and political leaders are slow to support a decelerating economy, they might put off the inevitable recession by finding new and younger leadership.
Watch Emerging Market Bond Yields
Franklin Templeton (Franklin Resources*) 2019 outlook was entitled Distortion, divergence, and diversification. This thoughtful piece had three themes and was written by their head of equities, chief investment officer of Templeton Global Macro, and CIO of Multi-Asset Solutions:
- The state of the world which investors have become accustomed to will change, with low correlation and low probability of outcome.
- Local-currency emerging markets are showing the highest level of undervaluation.
- Opportunities exist globally, as disparities narrow between the US and other countries.
I was particularly interested in a chart of two-year bond yields which compared the US yield of 2.8% with Mexico 8.5%, India 7.2%, Indonesia 7.3%, South Africa 6.2%, and others. My interest is that these countries are represented in equity mutual funds we own long-term for clients and personal accounts.
(*) Owned in a financial service fund and personal accounts that I own.
Question of the week:
What return do you need in 2019 for it to be a considered a good year?
Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2018/12/2018-lessons-should-be-learned-weekly.html
https://mikelipper.blogspot.com/2018/12/cash-is-four-letter-word-weekly-blog-556.html
https://mikelipper.blogspot.com/2018/12/news-focus-may-drive-investment-success.html
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A. Michael Lipper, CFA
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