Mike Lipper’s Monday Morning Musings
Manageable Risk
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018
Uncontrollable and
Controllable
Every day in almost every
activity we can increasingly be the victims of bad things. That is certainly
true of our investment activities. Short and long-term weather, misjudgments of
governments, inflation and deflation, as well as other accidents. Essentially,
these are beyond our personal control. We can try to anticipate or at least
recognize these risks and attempt to take some defensive measures.
Controllable risks can be
addressed by our own actions. In our investment actions we should be aware of the
various mistakes we could make. Both large and small errors should be avoided,
usually by being more patient. In making investment decisions it is wise to remember
what our changing attitudes bring into the decision process. This summer may be
a particularly important time to recognize that we may have entered a new phase
of the market.
The Game May Have Changed
If you pay attention to
what various pundits in the media, political office, or investment circles are saying,
we are either in a "bull or bear" market. Quite possibly we are in
neither and have not been in either for some time.
Market cycles don't
follow calendars or the movement of selected indices. Investments don’t move in
lockstep with one another either. My particular laboratory is the weekly
performance 109 identified mutual fund sectors invested in equity, debt,
currencies, commodities, and combinations of largely publicly traded
investments.
For a two-year period ended
Thursday, 83% of the individual sector averages were negative. The 28 sectors showing gains
were led by Japanese funds, Energy and Natural Resource funds, Capital
Appreciation funds, Alternative funds, S&P 500 index funds, Short-Term funds,
and Money Market funds. (Some stock indices also reached higher price levels in
this period.)
Two Down Years Suggests a
Change
We have quite possibly entered
a different phase of the market and economy. We may have entered a period of Stagflation.
In the last century there were two such periods, the Great Depression into
early WWII, and the mid-1970s to late 1980s. The latter period killed a popular
view of buy and hold forever. In both periods there were periodic and unsustained
rallies of 20% or more for the indices, and much more for individual stocks.
Both periods of stagnation were led by government actions attempting to prolong
an aging economic expansion. These government actions hurt investor confidence levels
and suggested to the public that the economy was better off left alone in returning
to equilibrium.
Some investors currently have
equity money hiding out in bonds and money market instruments. These investors are
itching to bring their equity commitments back up to "normal" level.
They view declines as good opportunities, which they occasionally might be, but
not often. Investors should not be impatient. If we are in a period of
stagflation, averaging in with a small percentage during disparate time periods
makes the most sense.
Long Shot
We all gamble on the
future and have two choices about predicting the future-extrapolation of the present
or making changes to it. On a day-to-day basis extrapolation is the most
likely. The longer the time period, the more extreme the changes. There can also
be periodic Minsky moments of great change.
What happened in Russia
this weekend was a dramatic event that will undoubtedly change what happens in
Russia for some time. The long shot is what could happen in how the US is
governed. This is not a prediction, but an examination of what could happen.
First, we should
understand what happened in Russia this weekend. Russia does not have a large,
disciplined, and battle trained army. Consequently, it had to use a number of
private armies, the biggest of which was the Wagner Group led by Yevgeniy Prigozhin
who disagreed with the leadership of the regular Russian army. He claimed the
Russian army told Vladimir Putin that Ukraine was going to attack Russia with
the help of NATO. He also complained that Russian forces were killing Russian
sympathizers in Ukraine. The feud got so bad that Putin ordered Prigozhin be
arrested. This caused Prigozhin to send his troops to within 120 miles of
Moscow, before some settlement was reached and the arrest warrant was dropped.
It was arranged for Prigozhin to go to Belarus, a Putin friendly country.
The key point for the US
is that Putin now has less confidence in his advisers. When powerful leaders lose
confidence in their people, it is often like a disease or plague potentially
leading to isolation. As this plague can impact any dominant, semi-isolated
person, it could impact the current White House. There are many observers who say
the current "Obama White House" and Cabinet is possibly the worst
performing the US has ever had. If the President is re-elected, he will be a
lame duck, making him an unattractive boss for any rising politician. Thus, major
changes are expected, either for career choice reasons or due to the President's
wishes.
Changes in interest rates
will have a relatively small impact on the economy. Considering inflation is generally
caused by excess demand over supply driving prices higher. What is needed are customers
willing to pay higher prices for more attractive goods and services. This,
however, is not what Washington is looking to do, so there may be a change.
Future Outlook Appears Troubling
- After a trend is recognized investment groups often change their published outlook for the period ahead.
- It has become popular to expect business conditions to get increasingly more stressed, with interest rates rising and loans becoming more difficult to get.
- China, the second largest economy is facing its own debt problems, both at the provincial level and in real estate. The big difference is how they are handling a problem similar to that in the US. They are doing it differently.
- The latest US academic test scores show 13-year old's materially declining in reading and math. Perhaps most damaging is a drop in reading for pleasure, which appears to be at a record low.
- The Chinese central government has outlawed tutoring children in order to create greater equality, although parents and grandparents feel differently. A recent article in The Financial Times shows "illegal'' tutoring thriving, at least in the top cities. Tutoring is viewed as a way to improve a student's chance of getting into better schools and universities and consequently getting a higher paying job. When constructing investment portfolios, you should consider the consequence of a decline in US secondary school learning and a decline in college applications while China and other countries show improvement in preparing future leaders.
Conclusions
Investors need to
recognize change while continuing to focus on long-term goals.
Did you miss my blog last
week? Click here to read.
Mike
Lipper's Blog: Predictions Suffered Last Week - Weekly Blog # 789
Mike
Lipper's Blog: Head Fake, Unrecognized Opportunity, or a Minsky Moment - Weekly
Blog # 788
Mike
Lipper's Blog: The Course to Explain Last Week - Weekly Blog # 787
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