2021 Lessons and a New Worry - Weekly Blog # 714

 

Mike Lipper’s Monday Morning Musings

2021 Lessons and a New Worry

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

The Mind Set

Every day is a learning opportunity, although we often don’t view it that way. While we begrudgingly accept some of our investment actions not turning out as planned, we find temporarily culprits for the cause of those mistakes. I cannot continue to blame others for my results, I must accept I contributed to those unhappy results. Over the years I have been forced to recognize that some mistakes in thinking are repeated far too often.

2021 Mistakes

First, is not keeping in mind the one truism about investing and life, that there generally will be mistakes. The only market guaranty is that it creates humility in the survivors.

Second, the appropriate way to think about a collection of futures is to assign some rough odds of being correct. The number is not as important as the recognition that you might be wrong. The general reasons we might be wrong includes the following “3 I’s league”: Incomplete analysis, Inaccurate inputs, and Indefinite time periods of success or failure.

Third, there are other rules of the game which guide our actions:

1. Recognition that the numbers we use are an abstraction of reality, not reality itself, which is full of unpredictable people.
2. In a news centric investment world, we tend to value the latest news above the flow of past information.
3. There is a search for fairness, which has never existed in the real world, particularly among new or amateur investors. In truth, life and investing is not simple or fair.
4. The following unrecognized shortening of decision times has led to much more volatility, which some confuse with risk. 

• Politicians intensely focused on the mid-term elections will try to force more stimulus payments on the portions of society likely to vote for them, not really caring about the induced inflation. Furthermore, they will attempt to raise the taxes of the capital bases in opposition. (Remember, money is the mother’s milk of politics.) 
• The investment industry has also shortened the performance period by introducing wealth management asset-based fees as an alternative to brokerage commissions. This has caused the switch to increase trading in ETFs. The sale of mutual funds, have anti-churning restrictions. 
• In 2021, for the first time, the compounded dollar impact of traded short-term options was greater than the aggregate value of shares traded. (Typical of a contrarian, I have lengthened the period for measuring investment success.) 

5.  Whether we like it or not we are all globalists by circumstance, not by choice. It impacts our lives and investments and will become even more important in the future.

Missing the Significance of Pandemics

In seeing how point 5 is likely to impact our investments, recognize that the two major variants of COVID-19 came out of China and South Africa to infect much or the world. Globalization follows the path of commodity prices, which drive both food and energy prices higher globally. Bottom line, we cannot escape the impact of globalization on our lives and investments.

Just as we used horsepower to measure the influence of internal combustion engines on society, investors are similarly using the incorrect measure to understand the power of globalization.

Last week I mentioned at least one investment manager who focused on the supply side of trade, rather than the much more popular demand side. Carrying this analysis further, China is the largest single importer. I think we should be looking at China’s impact on the exports of other countries. Germany, US, Canada, Australia, and Japan are increasingly dependent on exporting to China.

China’s domestic growth, while still a multiple of the rest of the world, is slowing down. They have been building their financial reserves, which could backstop their export earnings if they were to slow. China’s slowdown is due to their population growth declining, both in terms of the overall birthrate and the movement of rural peasants into cities. Once in the cities, the peasants find work for domestic or foreign owners and the productivity of their labor grows. (One of the issues facing the rest of the world is labor productivity not growing as fast, due to the focus on schools, rather than education and useful learning. This concern is multiplied by the Chinese being savers and soon investors, which our populations are not.)

We are correctly concerned about the Chinese growing militarily, including in space. In their long history, the Chinese have gone to war to protect their borders and critical suppliers perceived to be vulnerable to opposing forces. They, like the Japanese, don’t want to add people to their country, just their goods and services. (In the West, Rome conquered much of the known world to get slaves, which were often freed once acclimated within the Roman Empire. Europeans hope to grow their population base at a lower cost by expansion, rather than through growing their own population.)

Simultaneous slowdowns in China and the rest of the world are not likely to be bullish for the global securities markets.

Question for Subscribers: Are you worried? What Do you intend to do?      

  

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

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

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

https://mikelipper.blogspot.com/2021/12/selections-weekly-blog-710.html

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