Mike
Lipper’s Monday Morning Musings
Two Cycles Are
Worth Watching
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Concept
I am basically a student.
My reading of history, politics, government, finance, and sports, reveals that
each trend reverses somewhat before following a different trend.
In selecting individual
securities, the specific characteristics are often of primary importance. In
constructing a managed portfolio, the analysis of sectors are important. In
deciding whether or not to invest, cycles may be the most important factor. All
of these considerations need to be adjusted for the identified needs of the
owner of the asset. As an investment adviser I must consider these different responsibilities.
Below is a review of
history through different cycles, along with a view of both the current period and
various potential phases.
First Investment Cycle
In some respect an
investment advisor is like a baseball umpire behind home plate calling balls
and strikes. A famous umpire once stated that he calls them as he sees them. As
an umpire I call them the same way. The difference is that my initial view utilizes
mutual fund data. Not necessarily the best investment research media for all
accounts in all situations, but a superior one for relatively unbiased
analysis. Other measures rely either on a small group of expert analysts, media
employees, or choosing to be listed in a specific marketplace.
Unlike the alternatives,
mutual funds have in or out cash flows every market day and reflect the periodic
decisions of their managers. Since there are more than 15,000 funds, this represents
a large number of decision makers. Their results are much quicker at picking up
the impact of investor decisions. (My old firm’s data is now published by the
London Stock Exchange Group, which purchased it from a subsidiary of Thompson
Reuters after it acquired it from me.)
Each week I review 107 mutual
fund peer-groups over 11 time periods. This week I focused on the total investment
return in three time periods: the 5 and 10 years periods and the period since
the trough on 3/23/2020 through 7/13/2023 shown below:
Peer Group 5-Year
10-Year Since Trough
Large-Caps +10.20% +11.26% +23.62%
Mid-Caps +7.42%
+8.99% +25.74%
Small-Caps +5.62% +8.00% +27.25%
Value +7.26% +8.01% +24.63%
Growth +8.37% +10.06% +20.23%
Observations:
- Large-Caps won the last 5 years, but not the recovery.
- Small-Caps were the recovery winner.
- Mid-Caps with value orientation could be a reasonable bet, probably benefiting from M&A.
While “the market” is
focused on reported inflation, consumers are not. Using the experience of
retail consumers during Amazon Prime Days, the average order was $54.05, up only
3% from last year. A significant increase in buy now, pay later shows that consumers
are managing their cash carefully.
According to a recent
survey, 40% of asset owners are considering indexing. Equal weighting is
gathering attention, a positive initial change that perhaps leads to active
management later. The more investors congregate in the center, the less buying
competition for attractive securities. However, for the best-selling opportunities
buyers will have to wait until the too easy choice of the center becomes
lonely.
Analytical Conclusion:
The current large-cap,
growth leadership is unlikely to lead competitive investors much longer.
Despite the media hype
that we are in a new “bull market”, investors for the most part are considering
other issues. Top and bottom prices are established in the market, not through highs
and lows in a calendar year. Using historic peak prices, the DJIA is 6.63%
below peak, the S&P 500 is down 6.46%, and the NASDAQ is off its top price
by 13.77%. We have therefore not been in a bull market. One can view what
we have experienced as a rally or a correction. The NASDAQ Composite, the best
performing index, hit its high on 11/19/2021. On that basis, we have been in
a “bear market” with rallies for almost 2 years. This could be the first
part of the feared stagflation, which could last for many more years, using history
as a guide.
The Major Empire Cycle
One oversight of our Western
European focused education system is not studying the repeated failures of
various empire cultures around the world, not only in government but in
business too. These problems could be avoided.
World trade is often the
litmus-test relative strength evidence of growing and declining empires. We are
entering the test period now. The World Bank noted that China contributed one half
of annual world growth over the past few years. Due to current disinflation and
deflation readings from China, it is expected to contribute only one third of
the reduced size of world growth this year. This weekend The Wall Street
Journal had a front-page headline stating “China’s Slowing Growth Has Many
There ‘Losing Faith’ “.
Instead of the US taking
a victory lap, we should be concerned. The math of the situation is that
China’s import of US goods and services is dependent on their dollar earnings
from Chinese exports. This is on top of Washington’s vote buying efforts
restricting risk-oriented investment into the US. Odds are, a top-down Washington
directed industrial policy is unlikely to produce positive results quickly.
One of the lessons I
learned from college fencing was to respect my opponent and his abilities, including
some that were not obvious. I feel the same way about China. Even though I have
visited Beijing (central government), Shanghai (commercial power), and Shenzhen
(industrial development) over the years. I also spent additional time in Hong
Kong where we had an office before HK was returned to China.
I
do not claim to understand how China really works. It however has one of the
longest written histories of any large society, so I know it does work.
China has had some form of
central government for at least 3000 years. Only rarely has it been ruled by an
invader. Most of the time it has been ruled by a succession of dynastic
families. Failing dynasties have periodically been replaced by palace revolts
or revolutions from the south. During this long period it has been the leading
country of the world at times, as well as its scientific leader. At one point
it had the most powerful navy in the Mediterranean, before recalling it to be
burnt due to politicians at the court not wanting any foreign entanglements.
There are two reasons for
mentioning this. The first is to acknowledge the world power potential China could
have had. The second is to demonstrate that China has always had an
isolationist stance. Roughly 90% of its inhabitants are classified as Han
Chinese today. Many other ethnic groups within their borders are carefully
monitored. The largest being the 3 million Uyghurs and other Muslims which arrived
before Marco Polo.
During the Song Dynasty (960-1279)
there was a great deal of scientific advancement. This advancement was probably
based on algebra, which the Chinese invented. Arab traders later used algebra and
introduced it into the Muslim and European cultures. Other inventions from China
were the abacus, gunpowder, binary code (genetic sequencing), paper making, and
printing.
The basic unit in Chinese
culture is the family. Families are often grouped into Tongs, some of which have
led to Dynasties. Loyalty stretched from the family unit up to the courts of
the leaders. Most of these units had a singular leader, generally the most
powerful man and only rarely a woman. Even today, most groups are led by a
dominant male.
The present leadership
views its power as being derived from providing jobs, housing, and food for its
citizens. At the moment there are no known potential rivalries for leadership. However,
those on top are undoubtedly concerned about the large number of youths between
16 and 25 without jobs. They are not accepting low-level jobs below their educational
expectations. There is two-way traffic for young smart people. Most move to
western countries, preferably the US, when given the chance. However, there are
a small minority working in the US who experience bias against them and return home,
where they are welcomed.
Housing is another
problem. While a lot of apartment building have been initiated, many are
incomplete because builders spent the deposit money on marketing and other unfortunate
expenses. The government, mostly through the provincial governments, is trying
to help, but progress appears to be slow.
Two Conclusions:
- China is having recognized economic difficulties. However, their disappointing 5% goal for this year is many times larger than the somewhat rigged 1%-2% growth in the US, and no growth in Europe.
- China in the long run has some built in advantages, such as the Central Asian railroad into Europe which is being built to sell their improving quality goods. Their second big advantage that has become clear to the world is the poor-quality US government leadership, stretching from Afghanistan through Taiwan and into Ukraine. While China is having growing pains, the US is retreating.
Under these circumstances
it is probably prudent to include some Chinese assets for global
diversification as an important hedge against our problems here.
Did you miss my blog last
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Mike
Lipper's Blog: Retro, Forward, & Cycles - Weekly Blog # 792
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Waves & Investing - Weekly Blog # 791
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Lipper's Blog: Manageable Risk - Weekly Blog # 790
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