Twin Problems: Not Enough Excitement and Too Many Fears - Weekly Blog # 584

Mike Lipper’s Monday Morning Musings

Twin Problems: Not Enough Excitement and Too Many Fears

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

Stock Markets Don’t Confirm New Highs 
On the Wednesday before the July 4th US Independence Day Holiday, the US stock market indices reached new highs on low volume. On the next trading day, in a shortened session, there was no enthusiastic follow through. Is the very slight decline is a symptom of a self-correcting advance that likely curtails a significant enthusiastic response in volume? Greed is now not overcoming the sense of ennui or complacency. Those not fully participating have lots of fears, like:

• The timing and nature of a stock market reaction to the oncoming recession?
• Unattractive political leadership choices
• Global strategic issues  

These considerations and others were on my mind over the last four weeks when my wife and I visited London, Dublin, Melbourne, Uluru, and Sydney, where I talked with investment professionals and other investors.

Lessons from Uluru
Most investment types are very quick to adjust their thinking to the headlines of the day. As a brother of a US Marine Corps Reconnaissance veteran from the Korean War and my own search for appropriate long-shots, I wonder whether the right questions are being asked? In some ways the visit to Uluru helped crystalize my concerns, which made me re-think what I saw in London, Melbourne, and Sydney.

Uluru is in a desert in the Northwest Territories, in the middle of Australia. It celebrates the Aboriginal worship of the massive rock formations sacred to them. In Uluru we found a good regional airport, a bunch of modern hotels, a fleet of tour buses and crowds of tourists, both from Australia and from around the world, with a focus on tours from Japan. Hotel reservations were difficult to obtain and the entire commercial scene was an enormous bet that tourists will continue to descend on Uluru for a long-time into the future. In a somewhat similar fashion, visits to London and Sydney, as well as my experience walking around New York City, one can’t help but be impressed by the huge amount of permanent capital being invested in the continued growth of mid to high price tourism around the world.

Excess Expansions Bring Tears
I have often said that if one cuts into a securities analyst a historian will bleed. I have started to question whether this global outpouring of capital into hotels is somewhat like the gold rushes in the US, Canada, Australia, and South Africa? There were similar surges in the building of  the transcontinental railroads in the 19th century and the over 300 automobile manufacturing companies competing in US and other countries in the 20th century. Closer to the present, one could look to the “Dot-Com” and sub-prime periods for phases of euphoria.

Demand Failures
There are many ways to look at these expansions and collapses. Most attention has been directed at what proved to be unsound financial arrangements, which in some cases were fraudulent, but in all cases were the result of bad judgement. Many of the dreams of the “Dot Coms” have subsequently been delivered, but by different groups with largely overseas resources. The biggest problem for the owners of over mortgaged homes was that momentary supply exceeded demand. To me, a more important issue was the failure of demand or substitute demand. Where could the talents involved have been utilized? Where could the workers and their families have found paying jobs?

Financial Services Clues
I pay particular attention to the Financial Services businesses, where almost all the participants in this global industry are trying to present themselves as Technology companies that happen to be dealing with financial matters. I wonder if this is similar to GE and many large industrial manufacturers in the 1950s, who began divisions to be in either Atomic Energy or Computers. Currently, Financials are competing with Tech companies for both experienced and inexperienced credentialed employees. They are paying Silicon Valley wages and are trying to manage these freer spirits in a more regimented company. In the academic world, are we producing too many people to find long-term employment in Fin Tech? On Friday, the only major group to go up in price was Financials, a rare occurrence. The thinking behind this rise was that good employment numbers suggest the postponement of the expected drop in interest rates by the Fed and many Financials would gain due to level or higher interest rates.

Low Rates Produce Long-Term Troubles
Paradoxically, lower interest rates are not favorable long-term for the economy. Low rates encourage the issuance of lower quality credit loans or the renewing of loans of deteriorating borrowers. Furthermore, the lower the rates the less power the central banks have to step in and prevent major financial failures. Perhaps the most negative implication of low interest rates is that it does not address the globally growing size of the retirement capital deficit in a world when people are living longer and more expensively.

Question of the week:
Do you see excessive expansions?


   
Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/06/reduce-investment-mistakes-with-deeper.html

https://mikelipper.blogspot.com/2019/06/our-investment-mistake-is-in-labeling.html

https://mikelipper.blogspot.com/2019/06/mike-lippers-monday-morning-musings.html



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