Deeper Thoughts - Weekly Blog # 715

 

Mike Lipper’s Monday Morning Musings

Deeper Thoughts

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

Governments Manipulate Markets More Than Markets Manipulate Governments

Warning: Some of your basic beliefs will be challenged by the following analysis. Accept what you will. The value of this blog is the path of analysis, which may cause you to think differently about some matters.

Finally, a Wake-Up Call

In the first trading week of 2022, the US stock market experienced an unexpected downdraft on relatively light volume. Normally, the first week of the year is one when pension funds and other retirement accounts (401k) make their annual commitments to equities, usually giving the market an upward bias. Why not this year? Two possible clues emanate from the yield on 10-Year US Treasuries and NASDAQ Composite prices. They both often lead US markets in direction, which in turn tends to lead most global markets.

While the New York Stock Exchange (NYSE) experienced more up volume in 4 of 5 days, the NASDAQ experienced more downside volume in 3 of 5 days. The NYSE up volume may result from the annual commitment of retirement accounts. The NASDAQ’s higher percentage of new lows, 16.4% vs 7.6%, uncovers some disturbing results. About 20% of NASDAQ stocks have fallen into “bear market” patterns. (As regular subscribers know, I use the NASDAQ price performance as a leading indicator, partially due to the relative absence of passive investors in that market. While I have no data to support my view, NASDAQ investors hold their positions for shorter periods due to more buyouts and bankruptcies.)

From a broader perspective, the rise in 10-Year Treasury yields to 1.77% may be even more significant. Over the weekend, the Bloomberg news crawl indicated European investors being shook by the drop in US Treasury prices. I believe this was mostly the concern of European central banks, excluding the Swiss National Bank. (The SNB has been investing in US stocks to cover the pain caused by the rising value of the Swiss Franc. Their largest position is a meaningful investment in Apple *.) The play in UST paper, until this week, has been the strength of the dollar. Even when hedged, its net yield was better than most other government debt. I believe many European accounts needing dollar debt have gravitated to non-government bonds.

(*) Owned in personal accounts

The decline in US government paper was long overdue. While probably still the safest large currency, the credibility of this Administration’s word is a growing concern. s Most rational global investors were shaken by the way the US retreated from Afghanistan, leaving many people promised entry into the US stranded. Currently, our use of words rather than military force to protect the people of Ukraine downgrades belief in the US. The Administration’s Anti-Trust efforts to buy union votes at the expense of commercial capital is also a worry. 

Almost All to Blame for Growing High Inflation

For political reasons, many governments look to solve social problems through central control. Led by politicians with no real-world experience they utilize top-down thinking. This is called socializing the problem, which requires money from the “well-off” to keep the unfortunate barely above water. Charity has been part of the world since the organization of religions. One biblical view is that it is far better to teach someone to fish (profitably), than to feed them fish. If governments truly wanted to help, they could arrange tax structures to encourage charity, with some constraints on charitable organizations.

Instead, today’s political leaders follow the ancient Roman political practice of providing bread and circuses (games) to keep the lower classes quiet. Over time, the costs of this strategy led to raising taxes. High taxes took money out of the commercial economy and led to underspending on military and other vital services. These choices led to a weakened state that was overrun by The Barbarians. Almost every global empire has fallen due to a similar pattern of political leadership, high taxes and a weak military.

There are two ways of reducing financial wealth, taxes and devaluation through inflation. The Romans did it by reducing the amount of gold and silver in their coinage, we are doing it through higher prices. Milton Friedman stated, “inflation is always and everywhere a monetary phenomenon”. Inflation accelerates with a shortage of critical goods and services. Many governments pay lip service to solving society’s ills by borrowing today and repaying later, in money devalued by inflation. Both the current and prior Administrations have practiced this policy. 

The financial history of Donald Trump was massive borrowing with debt often settled at below face value. By the time Trump built his Casinos in Atlantic City, he was already running out of sources of credit, which led him to depend on Deutsch Bank. (As some of his debt was publicly traded, an analyst in a Philadelphia brokerage firm wrote a report questioning the soundness of the debt. Trump tried to get the analyst fired using his bully tactics but luckily, he was not successful. His major Casino went bankrupt and its debt trades at junk prices today. As President, he grew the size of our National Debt with the clear intention of buying it back at below face value.

The current Administration seeks to increase its union workers voter support, mostly in Northern states. The party in power is simultaneously trying to reduce the economic power of other states through taxes, tariffs, contracts, and anti-trust policies. They hope people will not see the devaluation of their hard-earned money in the financial press, although they will see higher prices at the grocery store. Much of the inflation results from the cost of transportation of goods and services, with the price of oil rising from below $20 to about $80 a barrel. This was caused by closing pipelines, preventing drilling on federal lands, and other such measures. Consequently, the US is no longer energy-independent and relies on expensive foreign oil being shipped into the US.

Six Day Tally

I don’t know what future prices and fund net asset values will be. However, the dichotomy in results through Thursday is cause for concern. These results exclude a further significant decline on Friday. The following list of comparisons may be of interest to those trying to make sense of the US stock market:

1. The JOC-ECRI Industrial Price Index performance year over year is +32.15%.
2. The AAII sample survey summary predicts no direction, with bullish, bearish, and neutral all about 33%.
3. The Barron’s Confidence Index projection of future performance shot way up, favoring bonds over stocks.
4. 2/3rds of weekly WSJ prices for stocks, bonds, ETFs, currencies, and commodities fell.
5. While the NASDAQ declined -4.53%, S&P Small-Caps only fell -1.23%.
6. The average Value fund rose +0.98%, while the average Growth fund fell -3.65%.
7. Only 2 of 31 fixed income fund peer averages rose.
8. Only 1 of the 25 largest equity funds rose. 
9. In December, 8 of 11 equally weighted S&P sectors beat the capital weighted indices. Only 10 of 50 S&P global indices gained 20% or more in 2021.

This suggests to me that 2022 is going to be a difficult year. 

What do you think?

  

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2022/01/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2021/12/are-investors-taking-too-much.html

https://mikelipper.blogspot.com/2021/12/mike-lippers-monday-morning-musings.html

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