Possible Investment Lessons - Weekly Blog # 795

 

Mike Lipper’s Monday Morning Musings

Possible Investment Lessons

 

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

 

  

Not Cured Returning Employee Risk

“Cancel Recession” or “Soft Landing” are the media headlines and expressed views of many investment pundits. They could be correct, which may be unfortunate for long-term investors. Through the ages people have identified the primary cause for various economic cycles ending. These historians could be correct, or their labeling may say more about them than the actual causes. Nevertheless, after an expansion, analysts often seek reasons for the next correction. I am one of those worrywarts.

 

The tip of the spear for most successful military campaigns is reconnaissance. (That is why, like Robert E. Lee, I look to find “the hidden road”. The hidden road allowed US troops, including a group of Marines to get close to Mexican fortifications undetected during the Mexican American War. The subsequent Mexican defeat is remembered in the Marine Corps Hymn.)

 

In many studies the focal point of a critical change in direction results from the growth of imbalances accumulated over time. While there are always imbalances in societies and economies, they occasionally reach extreme levels. My recon of current conditions suggests the following imbalances are present today:

1. Wealth disparity within societies and countries.
2. Technology gaps
3. Demographic differences
4. Educational levels
5. Leadership characteristics
6. Medical capabilities
7. Rising levels of mistakes

 

In each of these situations the spread between the leaders and the rest is widening. At some point people will tire of waiting to catch up. Envy will drive some to seize the critical elements of perceived success. This can happen within a society or between countries.

 

We are currently in a bipolar or multipolar world. Critical players are not only the US and China, but also multipolar players including Russia, Islam, Japan, and the ROW (Rest of the World). The spread of technology, communications, and envy will at some point lead to conflict, for which we are not prepared.

 

The world has been somewhat prepared for these conflicts by the changes that occurred in the post COVID world. Many of these changes were instigated by slowing economic growth. The risk to discontinuation of these and related changes is an attitudinal switch from protection to expansive growth, labeled as no or little recession.

 

This is similar to the risk of a returning employee who has not gotten over his/her cold or other communicable problems, leading to widescale sickness throughout the worksite. We no longer require a doctor to notify us of a complete recovery, or the number of days without symptoms, etc. We may be taking a similar risk by assuming lower interest rates, more capital, and higher stock prices will be the cure for all our economic and social problems.

 

Most prolonged periods of growth happen after extended periods of contraction, which we have not yet had. We are instead experiencing the frivolous spending of dollars and time, with an increase in errors and short-term oriented leadership.

 

Current Briefs

• T. Rowe Price executed a second 2% mostly non-investment staff labor force cut. It led to a significant price jump, similar to what Franklin Resources experienced.
• The weekly AAII sample survey bullish reading backed off from 51.4% to 44.9%, with a smaller rise in its bearish reading, from 21.5% to 24.1%.
• High-grade bond yields rose more than medium-grade yields, 54 basis points vs 18 basis points.
• Chinese youth are exemplifying capitalism by not accepting manual labor positions in the hope of securing tech jobs.
• Some retail goods buying may be anticipatory in an effort to avoid expected price increases and shortages.

 

Summary & Conclusion

There is an investment risk in accepting no recession or a small recession for long-term investment. Not all current data is supportive of the general prospect of a small price risk. While not predicting a new low is necessary to end the down cycle, it is possible. Watch the data carefully and correctly interpret the news between now and the presidential election prior to the winter of 2024. Be careful.

 

 

 

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

Mike Lipper's Blog: Cross Winds - Weekly Blog # 794

Mike Lipper's Blog: Two Cycles Are Worth Watching - Weekly Blog # 793

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