Mike Lipper’s Monday Morning Musings
Surprises & Policies
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Surprises
One of the most curious things about most humans is that they are surprised by surprises. Perhaps it is my Marine Corps training, being a student of history, or just having a contrarian streak, but I always expect surprises. Without knowing the details, I know that I will live and operate in periods of uncertainty. Below are two lists: Elements of uncertainties and reactions.
Surprises Reactions
Prices (Inflation) Ignore (As long as Possible)
Quality (Improvements?) Go with the flow
People (Unexpected behavior) Resist
Taxes (Words worse than rates) Attempt to escape
Current Surprises
My friend Byron Wein publishes a list of forthcoming surprises each year. Below are three surprises that are already known but not being considered by most investors and their advisors. Thus, their lack of reaction is the real surprise.
Rising Prices (Inflation)
For several weeks I have been noting the almost parabolic price increase in the JOC-ECRI Industrial Price Index. This week it reached +23.80% compared to a year ago. This phenomenon is supported by the mid December price of coiled sheet steel, which was $900/ton compared to $700/ton in mid-November. The price of Aluminum is nearing its two-year high. (With Coke Cola cutting the number of brands it sells in half, they are likely to try to pass on the increased costs of aluminum cans to consumers. An example of inflation at the supermarket level) In Asia there is a major shortage of shipping containers for exports. (I assume that means the rental price of shipping containers is up significantly.)
Many top-down thinkers in Washington and in the securities markets believe that central governments and their agencies can control their economies, exemplified by the following 2017 quote:
“Would I say there will never, ever be another financial crisis? Probably that would be going too far. But I do think we’re much safer, and I hope that it will not be in our lifetimes, and I don’t believe it will be”
This was said by Janet Yellen and I believe it was part of her effort to be reappointed Chair of the Federal Reserve. Let’s hope in her new post she has learned to have more respect for forces she does not control.
The third surprise is the not much discussed probable immunity to COVID-19 after receiving the vaccine. Because of the newness of our collective experiences, the most learned of medical experts say there may be a 5-7 month immunity. Let us hope they are being conservative; however, even doubling the initial estimate suggests a very different world than most are expecting.
I am not suggesting I can make intelligent guesses as to how these three surprises will work out, but I am noting that these along with other uncertainties need to be considered in making day-to-day investment and other decisions.
Where Are We?
Far too many military and business battles were lost when one of the combatants used out of date positioning. As I cannot avoid being a global consumer and investor, I must look at both the US and other markets for our clients. Because we invest in mutual funds for our clients, we pay a great deal of attention to their results. Again, somewhat surprising is that various market pundits seem to be unaware of two current relationships.
Each week I review fund performance for numerous periods, including the 1, 4, 13, 52-week and year-to-date period results, which are compared with various equity asset allocations. While the average S&P 500 index fund has produced positive results in each of those time periods, they have underperformed the average US Diversified Equity fund, the average Sector Equity fund, and the average World Equity fund. (This has not been the case for longer periods.)
What has caused this change? The data gives us a clue. The popular way to display results is asset weighted. We also review performance averages that are not asset weighted and include the median fund’s performance. What we discovered for large-cap, medium-cap, and small-caps is that larger funds are doing better than their peers in almost every period. Why is that? Larger funds tend to have lower costs and often have more aggressive portfolios. Advisors and salespeople find that performance momentum makes an easier sale than a belief in different leadership over the next market period, which is less risky due to current performance leaders often being more volatile.
Another example of it being beneficial to pay attention to size is in commodities. The number of contracts by large speculators, commercial hedgers, and small traders are tabulated each week and large speculators are often successful. In the latest week, the aggregate large speculator reduced very large long holdings, except for positions in gold, silver, T bonds, and the Yen. This seems to indicate that speculators are betting on non-currency related inflation. A few portfolio managers, while bullish on their stock portfolios for 2021, believe there could be as much as a 10% drop in their stock portfolios in the first part of the year. (This may be related to concerns over the new administration having difficulty getting their program started.)
US vs. the Rest of the World
Our economy and stock market structure are different than the Rest-Of-The World (ROW). The following tables highlight key differences:
GDP % of World Trade Market Cap % of World
China 19% 9%
US 16% 44%
ROW 51% 30%
S&P 500 MSCI World
Information Technology 26% 21%
Financials 10% 13%
The Wisdom of Charlie Munger
One of the highlights of Berkshire Hathaway’s (*) annual meeting are the brilliantly phrased but somewhat laconic comments to questions that Warren Buffett spends too much time discussing. Charlie, a student at Caltech while he was in the Army Air Force during WWII, sat for a zoom interview for Caltech Associates. The following is my edited review of his 22 comments. (I will be pleased to send his full comments if desired.)
(*) Position held in our private financial services fund and personal accounts.
Selectively edited comments as follows:
- Avoid being stupid consistently rather than trying to be very intelligent.
- Technology is a killer as well as an opportunity.
- American companies are like biology, all individuals die as do all species, it is just a question of time.
- I try to keep things as simple and fundamental as I can
- A successful life requires experiencing some difficult things that go wrong.
- We are in unchartered waters regarding the rate we are printing money.
- “Who would have guessed a bunch of communist Chinese run by one party would have the best economic record the world has ever seen.”
- “I don’t think Caltech can make great investors out of most people.” Great investors, like great chess players, are born to be in the game.
- “You have to know a lot, but partly it’s temperament, deferred gratification (willingness to wait); a combination of patience and aggression. Know what you don’t know”
- One needs to be fanatical to succeed.
Question: Which of Charlie’s statements do you agree or disagree with?
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/12/searching-for-surprises-weekly-blog-659.html
https://mikelipper.blogspot.com/2020/12/an-investment-dilemma-with-possible.html
https://mikelipper.blogspot.com/2020/11/mike-lippers-monday-morning-musings_29.html
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