Mike Lipper’s Monday Morning Musings
Respecting the Opposition & Market
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Competition Lessons
As a competitive fencer, I regularly fenced men who were better than me. For the most part they had longer arms and were probably better athletes, a real advantage in fencing. I was determined to score as many touches as possible to win matches. The first thing I had to learn was to respect my opponents’ skills and physical advantages. I thus developed what boxers call counterpunching moves. These mental attitudes followed me into the world of investing, where they are called contrarian.
Applications
I believe it would be extremely foolish as an American who served in the US Marine Corps to not identify China as a strong and growing opponent, one whose moves should be respected. Despite having fund investments in China for clients and myself, I am forced to acknowledge China currently having the most prudent central banker. Despite apparently coming out of COVID-19 first, it is retarding its growth by squeezing the non-bank financial providers, who are major providers of loans to the tertiary sectors of their slowing economy. The service sector and light manufacturers have recently grown faster than the rest of their economy but have little in the way of collateral available to be pledged. (Over the centuries there have been numerous Chinese commercial collapses.) As China’s economy has been a major importer of goods and services from the US and the rest of the world, a slowdown in China can create problems here and elsewhere. Unlike other countries attempting to fuel their recoveries, they are delaying going after credit growth outside the banking system. The authoritarian power structure is attempting to get ahead of a problem that has caused disruptions in the past.
A second application of the respect principle is to acknowledge the lessons of the stock market. The most consistent market lesson being the teaching of humility. Below are three historic examples of what may be its future progress:
- A new bull market riding an economic expansion fueled by government spending.
- A third term of Obama’s lack of progress.
- A second coming of FDR’s elongation of an economic recession into a depression.
I don’t know which path or combination of paths we will take, but I am prepared to be uncomfortable. Contrarian investing is uncomfortable and human beings take comfort in conformity. Contrarian investors must exercise patience, but as Saint Augustine said, “Patience is the companion of wisdom”, hopefully we have enough.
Current Confused Pictures
Hopefully, Positives
- A new generation of investors providing quick liquidity to the less liquid.
- Exchange Traded Products readily available to make directional bets.
- Equity Mutual Fund Holders redeem on average at 4.2 years.
- VIX readings dropping to 17.32 from 46.8 last March.
Perhaps, Negatives
- JOC-ECRI change in a year +88.47%
- Current performance of S&P 500 too high historically. Since 1926 it has averaged +10.3%. Do yearly returns need to decline below normal?
% Change Years
72 1
20 2
15 5
12 10
- Over the last year, 12 major currencies rose vs the US$ and 2 declined. Below are the top 2 currencies increasing vs the US$ and the two that declined.
Australia +24.4% Korea -2.3%
Singapore +23.0% Hong Kong -0.3%
Interesting 12-month numbers for Standard Poor’s 500
13.34% Average S&P 500 Fund
13.61% Average of 30 largest S&P Funds
13.91% Gross performance of the stocks
The average large-cap core fund gained +12.53% and probably had 1-2% in cash, suggesting the superiority of passive investing comes from being fully invested, low turnover, and low fees. This could be a good model for all investors in funds or their own accounts.
Two Post-Mortems
While there were some typos in last week’s blog, it had two observations that proved to be germane. The first being Archegos, the family office that had their equity total return swaps liquidated to meet margin calls. We mentioned both Nomura and Credit Suisse had announced expected losses from margin transactions over the weekend. What I didn’t know, was that on Friday, if not before, Goldman Sachs (*) was aggressively liquidating the collateral supporting the Archegos account, where the market action in a number of “thin” stocks was bothersome. Early trades in Asia were also quite heavy. Sometimes instincts moves faster than knowledge.
(*) Goldman Sachs is a position in our private financial services fund.
Focusing on instinct, my smart wife Ruth commented to me that not only was the price of food going up at the Supermarket, but also the price of paper goods. This was borne out Monday when it was announced that the price of cardboard boxes went up. These two instances prove that investing is not only an art form but also an active-duty sport.
What do you think?
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2021/03/the-biggest-risk-we-all-face-weekly.html
https://mikelipper.blogspot.com/2021/03/2-presidential-lessons-to-be.html
https://mikelipper.blogspot.com/2021/03/mike-lippers-monday-morning-musings.html
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A. Michael Lipper, CFA
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