Mike Lipper’s Monday Morning Musings
Inputs to Implications
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018
The Use of Inputs
There is a known cure for the narcotic attraction of
investing. We can’t help but view any inputs as possibly having implications for
our investing deliberations. The best we can do is to quickly review the
plethora of daily inputs and reject most as unimportant, or alternatively sent to
Warren Buffett’s desk basket, labeled
“too difficult”. With that thought in mind, the following inputs and possible
implications crossed my mind this week. See how many you can reject and how few
are important enough to require your further research. Alternatively, you can send
me your questions. The inputs below are
in the order they reached my consciousness, not of their level of importance.
Inputs & Implications of August 13th week
1. The Value of Competition: On the surface regulators see vigorous competition as the best way to achieve the lowest price for consumers and the highest wages for workers. For the long-run sake of society, the primary value of appropriate competition is the evolvement of a sector that can sustain itself and develop useful new products and services.
Implications: Placing a priority on competitive prices, wages, profitability, research, and national security, will likely hurt other players in the industry. No single force seems bright enough to allow for the enthronement as a Czar to oversee the industry. History suggests that mandatory leadership does not work. The best results are achieved when those involved compete against each other and let the marketplace decide the outcome.
2. Input of what is the market is saying. Most of the time there is not a single market and therefore a single market index is not that important. In an overt simplification of markets and indices, you can use the following generalization to see what each of the markets is saying.
The Dow Jones Industrial Average (DJIA) is the most followed by individuals getting their market views from local media and politicians. The importance of the index is its reflection of votes, not dollars.
The Standard & Poor’s 500 is the single most important index for investment institutions and corporate managers. The latter group is often incentivized by its own stock or industry relative to the index. Institutional investors are conscious of the flows into and out of their portfolios relative to the index. The SPX is often used as a forerunner of employment trends.
The NASDAQ Composite is useful in measuring the level of speculation in the market, as it generally tracks the performance of younger and somewhat smaller companies. Most speculations are based on the belief that the future of the stocks within the index are improving. That is why the index has been more volatile in recent years, with up and down tends moving faster than the other indices.
When discussing “the market” with someone, the first market measure they mention tells me what kind of investor they are. People see “the market” differently, and while the main elements of the market move at different rates, a good bit of the time they mostly move in the same direction.
3. “Pro Inflation” input. Very few people are publicly in favor of rising prices, although their specific actions push prices higher. Truckers, autoworkers, pilots, and other Teamster’s unions are among those pushing prices higher.
Considering the low productivity of businesses and non-profits, a meaningful wage increase will lead to higher prices and generally worse services. The current administration’s restrictions on energy production, onshoring, the mandating of employment practices and union membership, add to inflated prices at the consumer level. The implications are that the movement of interest rates will not be enough to sufficiently bring down long-term inflation.
4. Standard & Poor’s is no longer using ESG ratings in assigning credit ratings. (I wonder whether they should actually include it as a negative, reflecting the negative consequences of a company that puts social spending ahead of its obligation to bond holders, stockholders, and fellow local and national taxpayers.)
5. China’s export and import numbers have declined meaningfully. Some of it is due to US government policies. Is this wise from a purely US standpoint? (It could be as disastrous as FDR’s prohibition on US companies selling petroleum to Japan in 1933, after they were precluded from the carving up of the German Asian colonies.) China’s imports of US goods are paid for from their export earnings. There is also a risk of China dumping products on the markets of our “European allies”. Implications are that the US is reverting to isolationist policies, following a war that is the preamble to the next war.
6. Input: More than half of young Arabs in North Africa and the Levant are considering leaving their homes in search of better jobs. Implications: This desire is similar to those in China and many youths in the US who are also in search of well-paying jobs. This appears to be a global demographic urge. Arabs are part of this urge even though one of the stock market indices produced by Dow Jones Standard & Poor’s is labeled Islamic Technology.
The youths want good jobs and employers want good workers. I wonder whether it’s a global problem concerning the lack of sufficient rigor in their home, schools, or even religion? Discipline, respect for others, and following rules could be a global issue that makes future progress more difficult.
7. Input- the stock markets appear to be having a bout of complacency, with the VIX declining 14.84 this week vs 17.10 the prior week, and 19.53 a year ago. We used to think of the 30 level as normal. The bond and credit markets seem concerned about risk in the near term, with the continued inversion of higher Treasury yields for 2 years vs ten or thirty years. All of them are in the 4% range.
Implications: Permanently higher interest rates with the level of risk about equal through the whole long period. As a student of history, I have my doubts. I suspect too many investors are focused on current conditions extrapolated to the indefinite future.
8. Every large country regularly prepares for future offensive battles and defensive wars. China follows this pattern. Two indications: A Chinese national serving in the US Navy on an armed amphibious ship was caught selling photographs of critical equipment to a Chinese agent. (As a USMC Combat Cargo Officer, I served on an armed troop amphibious ship. I believe that if China attempts an opposed amphibious landing on Taiwan, it will need a number of such ships and an experienced crew, both on the ship and on landing craft.
The US has two army type forces, the regular army, and the reserves/National Guard. The Chinese have a similar set-up, with their Militia normally assigned defensive tasks. They are however receiving training in the use of drones and other more aggressive functions. This suggests the main army will have other responsibilities or will need replacements for some of their people that are wounded or killed.
9. How different is the level of investment performance compared to that in the past? One thing I do each week is to look at the performance of the 25 largest long-term mutual funds. Going back to 1926 the S&P 500 grew about +9% per annum, without any deductions for expenses and transaction costs. How does that compare to fund performance?
Of the only four funds which gained between +10.08 % and +14.33%, three were passive and one active. Three fixed income funds were slightly negative. The remaining funds gained between +6.41% for a value-oriented fund and +8.66% for a large-cap growth fund. The bulk of large equity managers produced returns in the mid +7% range, which was somewhat behind the passive index before adjustments. The implication of this analysis is that it may be appropriate to use +7% as a goal for large-cap institutional money.
Working Conclusion
Stock Market investors are not incentivized to change their
portfolios, while fixed income investors attempt to price in credit and market
risks.
How many of the implications are real and/or likely?
The following table may help you focus.
Indication Implication Accurate Important for investment
1. Competition
2. Market indices
3. Pro inflation
4. ESG, positive or negative
5. China
6. Attitudes of youth
7. Complacency & worry
8. Preparing for war
9. Long-term equity expectations
I'd be delighted to learn your views. Please let me know.
Did
you miss my blog last week? Click here to read.
Mike Lipper's Blog: Markets Are Time Frame Exchanges -
Weekly Blog # 796
Mike Lipper's Blog: Possible Investment Lessons - Weekly
Blog # 795
Mike Lipper's Blog: Cross
Winds - Weekly Blog # 794
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