Mike Lipper’s Monday Morning Musings
A
Terrible Week
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018
A
Blogger’s Point of View
Everyone
reacts to stimuli based on their physical, financial, and emotional perspective.
Considering these filters, I had a rough week. While I almost always have
views, I try to base them on facts. I found little in the way of published
facts supporting or completely opposing my views. Therefore, to quote my arts
photographer, I opened up my aperture to give more credence to a widened field of
inputs. Some may refer to these as collateral notions, but in the absence of
convincing evidence they will have to do.
Quality
of Information
In
the US Marine Corps, we were instructed to value our inputs in terms of
accuracy and creditability when planning to engage the enemy. I find this type
of information missing from most publicly available statements about the future,
although there are occasionally some pre or post warnings to be found. This
week there were two such notices concerning topics about future budgets and
pandemics.
The
Congressional Budget Office (CBO) regularly publishes estimates about future
budgets related to Gross Domestic Product (GDP) and the Demographic outlook. (One
problem with both studies is that accuracy in the past has been wide of the
mark. In spite of that, they presented a single number answer in their
projections. I question the precision and credibility of the single number. For
example, their stated deficit for 2023 is $1.4 Trillion and between ‘24 and ’33
it will average $2 Trillion. As this is perhaps the single most important
number for those who pay their salaries, I would be more impressed with a range
and a description of what might cause the difference. Personally, I would doubt
an estimate in the exact center of the range.)
Furthermore,
while the demographic study shows a decline in population, it is my guess that
a good psychographic study would show an even worse outlook concerning the
number of hirable people and their willingness to work.
Perhaps
the biggest blow to the creditability of government estimates and actions are summed
up in the following headline “Fauci Changes His Public Tune on Covid Vaccines”.
In an article in “Cell Host & Microbe Journal, Dr Fauci wrote that vaccines
against respiratory viruses provided “decidedly suboptimal” protection against
infection and rarely produced durable, protective immunity. (I am not qualified
to have a medical opinion. I certainly don’t know whether they hurt and
probably will continue to get shots if my doctor recommends them.)
The
key lesson from these inputs going back to my USMC training is to evaluate
inputs based on the sources of the input. In these particular cases both were
paid for by a government apparently in need of political help, meaning they
should be viewed with skepticism while searching for other “facts” or properly
labeled opinions.
Application
Analysis
Investors
love numbers, but often don’t apply carefully with constraints in making
investment decisions. The following is both a summary of the data and my
applications of the input.
- The longer the period measured, the smaller the downside. (It is best to invest for the long term, there are very few periods of 20 years or longer where it hasn’t paid to invest in a portfolio of stocks. - Losers are not around for the full period.)
- Historically, when an inverted 2-year US Treasury yield is higher than the ten-year yield for more than 100 trading days, 10-year yields peak. The current inversion has existed for over 160 days. (Either the old formula doesn’t work anymore, or the drop is going to be large.)
- In the minds of investors, most stocks traded on the NASDAQ are more growth oriented than those on the NYSE and many are considered to be speculative. NASDAQ investors are not normally more patient than investors favoring NYSE issues. Additionally, there are fewer passive investors owning NASDAQ stocks. Last week 61.8 % of the shares traded on the NASDAQ fell, vs. 53.7% on the NYSE. (Speculators tend to sell more quickly than investors, as they sense price problems more quickly. – Hint, the stock market sold off later in the week because participants finally believed the Fed was probably not going to lower interest rates this year. Even though many growth stocks are not highly indebted, the larger the number of years used to value earnings growth, the higher the valuation.)
- There are 20.8 million employees in goods producing firms and 129.6 million in service providers. (In an attempt to reduce inflation, the political establishment is focusing on the sales of goods producers instead of service providers. However, these politicians probably are more likely to be Democrats.)
- One of the most interesting aspects of the week was the rise in John Deere’s stock price. They announced rising earnings, declining supply chain problems, lower industrial costs, and an increase in their own prices. (The timing of their price increase is curious. While I do not follow the company, a number of my old analyst friends had great respect for it. This made me think that this savvy management team might be afraid of political pressure to lower prices in the not-too-distant future and wanted to start out from a higher level.)
- The weekend WSJ ran the following headline “Brace for the Richcession”. The article highlighted wages going up more than inflation for the poorest quintile of workers. The other quintiles could be losing ground, not only in terms of relative wage hikes, but because their home prices and portfolios have peaked. Thus, the Richcession in the title. (I am not certain of the nature of the problems the editors were considering, but they may also sense an attempt to restructure society and therefor the economy.)
- The biggest immediate problem facing America and other economies is China’s economy slowing down. Exports to China are critical to world trade growth.
- I do not know how to measure it statistically, but I sense there is declining trust throughout our ecosystem. All relationships are based on trust, be they personal, political, or economic relationships. (While I and my accounts have been purposeful global investors for a long-time, as an odds-playing investor I get nervous when I see what occurred last week. One of our most speculative sectors, equity exchange traded funds (ETFs), had negative outflows of $783 million, while international ETFs had inflows of $1.9 billion. This makes sense tactically and is appropriate for hedging purposes, but it is not encouraging for our children, grandchildren, and great grandchildren.
Readers,
please share your thoughts as to my views.
Did you miss my blog
last week? Click here to read.
Mike
Lipper's Blog: Primer on Starts of Cyclical & Stagflation - Weekly Blog #
771
Mike
Lipper's Blog: Words that Trap: Growth, Value, Recession - Weekly Blog # 770
Mike Lipper's Blog: What will the
Future Bring? - Weekly Blog # 769
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