Mike Lipper’s Monday Morning Musings
July 4th Lesson: Need to Hire Wise, not Just Smart People
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Current Dilemma
Almost the entire globe is being worn down by the Coronavirus plague. We will probably only exit the current economic and political conditions and enter the “New Normal” when either effective medical treatments or vaccines are in large supply. This is a smart, but not a wise view based on history. The fatality rate currently reported (including the estimate of undiagnosed Covid-19 cases) is undeniably tragic, but is low compared to historic experiences. Conversely, public reaction has been unprecedented in size and scope.
What are the differences causing all this turmoil?
- The rampant fear of the unknown and the uncertainty of the depth and duration of the impact of the pandemic.
- The stress of the “lockdowns” caused by the shrinking of the economy and changing political conditions.
- The speed at which it has happened and its continued acceleration.
American Revolution
This blog is being written on the day after the US celebration of July 4th, Declaration of Independence. I believe this 18th century revolution, supported by a fraction of those living in the country at the time, is still impacting the world to an extent even bigger extent than Lenin’s efforts. To a large degree the American Revolution began the New Normal for most of the world. While it is still evolving, a new normal may be entering the globe, potentially impacting commerce and consequently the political sphere. Thus, it makes some sense to grasp how much time it took to complete the first phase of its new normal.
The Boston Massacre and Boston Tea Party were the first skirmishes in 1773. These were reactions to perceived unsuitable taxes and were followed by the first Continental Congress in 1774, leading to a somewhat unpopular war which ended with very appropriate march music by the surrendering British soldiers “The World Turned Upside Down”. The real revolution came to the political sphere in 1781 when the Articles of Confederation were passed, giving an unsatisfying structure to the 13 independent states. To address its deficiencies and to create a central government, the US Constitution was passed in 1788. Perhaps, more important in today’s environment is the Bill of Rights, passed in 1791. The first major test of the American experiment came in 1797 when George Washington’s second term ended in the peaceful succession to Massachusetts lawyer, John Adams. (George III, and many elsewhere in Europe predicted Washington would be crowned King, or would be replaced by a “strongman”. Similar to what has happened recently in Russia, China, and parts of Africa.)
Thus, the functioning “New Normal” took 24 years before it was viewed as secure and essentially lasted until the Civil War broke out. Most current history written about the Civil War lists slavery as being the cause of the War. This was the same issue that occupied much of the wrangling by the members of Congress in producing both the Declaration of Independence and the US Constitution. In both cases the Members concluded that they could not agree on perfect documents and accepted a compromise. What really broke the impasse was economics in the form of import tariffs, something generally not credited and one of many failures to teach accurate history.
The main source of tax revenue for the US Government until the 20th Century, excluding the federal income tax during the Civil War, was money from tariffs. These were quite favorably supported in the North, as they gave price protection to Northern manufactured goods. Those in the South saw tariffs as hurting the export of their cash crop, cotton. The southerners were already being squeezed by the declining economics of slavery. As is often the case when economics is important, it is hidden under more acceptable social causes.
Translating to Our Search for a New Normal
- I believe the various medical solutions for COVID-19 and its aftermath will take longer than expected to reach a reasonably affordable conclusion.
- The trend to work at home will evolve, but we will not see the same number of people working every day in large offices.
- There will be continued growth in shopping over the internet.
- Education will increasingly be delivered over the internet, with some necessary exceptions. Furthermore, schooling will be focused on current and particularly future employment needs.
- The military will be focused on a combination of raids and electronic warfare.
- Supply chains will be rationalized, both for security and economic advantages.
- Travel will be streamlined and made medically safer.
- Politics will revert to the former House Speaker Tip O’Neill’s view, that all politics is local.
- We will live longer and more expensively.
- My strongest view of all is that I will both be wrong and surprised.
What is taught in most business, finance, management, and economics classes, success is based on formulated planning. I have been both a reasonably successful private company entrepreneur and an investor in competitive fields. It is my belief that success is based on finding the right people and having them evolve in the right jobs.
In terms of picking successful funds to invest in over long periods of time, the skills and culture of management has been crucial to the result. One of the better ways to guess whether management will make the profitable decision is to look at how they handle the myriad of short-term details that surround any activity. Most companies have reasonably good management in particular portions of their business; however, going beyond the borders of that expertise adds to risk without the addition of new talent.
As fund investors we are believers in well-diversified portfolios of concentrated funds, when they can be found. When they cannot be found we invest in low cost broadly invested portfolios.
Where are We Now?
Short-term, until at least the election or longer if there are meaningful changes. One should recognize that in terms of stocks and stock funds the attention of the market has become more speculative, as shown below:
- In the first half of 2020, mostly in the second quarter, there have been 64 IPOs on the NASDAQ raising $19.11 billion and 33 on the NYSE raising $15.44 billion.
- While both the DJIA and S&P 500 are still below their former highs, the NASDAQ Composite has gained +13.76% year to date, including dividends.
- Precious Metals funds for the first half are up +21.76%, Global Tech funds +19.74%, Tech funds +15.56%, and Large-Cap Growth funds +11.92%. There are 21 peer groups positive for the year.
- As a contrarian indicator, this last week was the third week in a row that the AAII sample survey had a bearish reading over 40%.
- Europeans expect mid-term inflation.
- Mortgage applications are at their highest level since 2008.
- The default rate for speculative issues is 12.5%. Credit defaults are expected to rise in a prolonged recession.
- The Big Fear – a trifecta of Democratic victories. Based on history it is unlikely. If it happens, except in the case of the current administration, when has a politician delivered on campaign promises?
Long-term investors should maintain equity holdings and look to add selectively overseas. Shorten up durations on fixed income.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings-new.html
https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings.html
https://mikelipper.blogspot.com/2020/06/data-driven-reactions-dangerous-weekly.html
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