Mike Lipper’s Monday Morning Musings
My
Outlook: Nervous Balances
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018
Nervous
Dilemma Positioning
My
traditional allocation of stocks and bonds being close to a 70/30 split is
somewhat misleading. A significant minority is in actively managed stock mutual
funds with a financial services or international focus, often Asian. Financial services
need a better label, so as to include two stocks of companies that are building
their own portfolios that behave similar to variable annuities, Berkshire
Hathaway and Apple. (The reason to call them annuities is that they are both primarily
managed to produce long-term earnings, rather than current earnings.)
Financial
services holdings as a group are also expected to fully participate in the
growth of the US and International economies. In general, their strength is not
in making loans, but in making money with equity. Consequently, one might
characterize my equity investments as a combination of growth and value in more
classical terms. This is appropriate as most companies have spurts of growth
and value.
Time
Horizons
For
both my professional and personal/family accounts I start by designing
portfolios built on an understanding (guess) of when and at what frequency the
proceeds of the account will be delivered.
My
particular situation is that I have a younger and healthy wife, with the fourth
generation of the family begun. We are also committed to supporting the
operational needs of a limited number of non-profits that Ruth and I have been
involved with, both as volunteers and donors.
Short
or Deep Recession?
I
tend to look at various down periods through the late reporting of real net income
(inflation/foreign exchange adjusted). Where possible, I prefer to use net
operating income. Since 1970 the US has suffered 8 major declines of real
reported income (-15% to -41%), with a median decline of about -28.5%.
The
popular view today is that if we have a declared recession, it will be short
and small. As someone who learned about odds at the New York racetracks I am
nervous with popular views. Their payoffs are too small compared to the pain
endured in the prior decline.
One
theory of economic/market history is that declines are caused by imbalances, which
are addressed during the recovery. If that pattern is followed in the next recovery,
we may not yet have gone down enough. We need more time before the
correction begins.
The
current path of major central banks is to follow the Federal Reserve Bank in
attacking the supposed major cause of inflation with the only thing they can,
short-term interest rates. The best definition of inflation is too many dollars
chasing too few goods/services. The last two administrations contributed to these
excess dollars, which were officially used to cushion the public’s loss of pre-COVID
income with grants. (This was similar to the ancient Romans using bread and
circuses to bribe people.) They are still at it!! This will make the
Fed’s job more difficult and expensive.
Fewer
people working should also drop the level of demand. However, despite all the
increased regulation and required business spending, there are approximately
1.7 employees wanted for each current worker. This has created a situation
where job switchers earn more than those who stay put. (If one really wanted to
eliminate excess demand you could simply reduce restrictions on business.)
Thus,
a shallow recession could be shorter if the federal government wasn’t playing both
sides against the middle. This may happen later this year with their hope of a
meaningful recovery by Election Day 2024.
Assuming
this case, financial markets could start up as soon as economic indicators hit a
bottom, with smaller declines. Which could happen this year. If this were to
happen, our 70% equity stock fund portfolio would produce a nice but not great
return. One area to consider for investment are funds that have lost money over
the last 10 years through January 12. In general, these funds were victims of a
strong US dollar. Included are funds invested in commodities, emerging markets based
in local currencies, Latin Americas, and precious metals.
Second
through Fourth Generations
While
a recovery based only on lowering inflation and interest rates will generate returns
for my wife and me, it would have little impact on succeeding generations,
including various long-lasting charities.
The
larger and longer-term problems that will reduce returns for succeeding
generations will not be addressed by the level of interest rates. Most of these
problems are related to people rather than numbers. These problems could be
expressed as “Better for customers, workers, and owners”.
Below
is a brief list of imbalances that should be addressed:
1. Quality of leadership in each sector and operating
unit of society, including levels of governments, segments of health and
medical, education, and non-profits.
2. Middle-class
income as a percent of national income returning to levels of the past.
3. Measured and productive population growth.
4. Appropriate education for current and
future needs.
5. Governments of the people, by the people,
and for the people.
Perhaps
for the benefit of succeeding generations the appropriate investment strategy should
include less exposure to risk until there is a deep enough decline to correct for
imbalances.
Please
tell me what you think?
Did you miss my blog
last week? Click here to read.
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Mike Lipper's Blog: Week in Conflict
Leads to Buy List - Weekly blog # 764
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