A Cyclical World + Consistent Results - Weekly Blog # 812

 

Mike Lipper’s Monday Morning Musings

 

A Cyclical World + Consistent Results

 

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

 

 

What We Don’t Know

We don’t know the dates and length of the next “bear market", or if it will “correct” the imbalances causing material problems for society. Similar questions have been asked throughout recorded history in the Bible, and even before that.

 

We have numerous records of rising and falling fortunes for both countries and individuals. In terms of specific people, we know of births, deaths and various sicknesses, as well as successes and failures. In a two-dimensional chart we can see the highs and lows. Unfortunately, we don’t know all the underlying causes for these end points. These events often occur at unpredictable times and suggest to me that while we can guess as to the next occurrence, there is no guarantee our timing will be precisely correct.

 

This creates a problem in managing client money. Prices move up and down, reaching end points at different speeds and magnitude. To judge the skill of investment managers, it is most useful to measure them against as appropriate index, particularly of reasonably selected competitors. This approach is in conflict with many owners of investment capital who have obligations to periodically pay some income/capital to beneficiaries. Consequently, owners without substantial payment reserves prefer to measure their results in repeatable calendar periods.

 

Going Out on a Limb

Based on a casual study of financial history preceding Biblical times, I am confident we will continue to have investment cycles. Thus, I believe we will have down markets in the future ahead of us.

 

Our job as analysts and portfolio managers is to estimate how deep the next major decline will be, and when it will likely occur. I am reasonably sure we will have a downturn in the US stock market before the end of 2028. What I do not know is whether this will be a cyclical bear market for most stocks, or a more serious correction of major imbalances addressing quality of leadership in education, the health sector, the military, and government.

 

(There is some evidence that the coming decline will be cyclical rather than corrective. History suggests most investors should maintain current holdings in sound companies, riding through the cyclical decline to benefit from the bull market that follows. On the other hand, if the decline is going to address various imbalances, many managements and companies will be replaced.)

 

Current News Bits Could Show the Way

1. Julius Baer has taken a $93 million bad loan provision, which includes holdings in Selfridges and the Chrysler Building. (The loan was made to a well-respected global player.)
2. Private equity firms are buying back failed IPOs.
3. According to Marcus Ashworth of Bloomberg, the supply of Sovereign Bonds will rise sharply through at least 2026. (This will likely keep interest rates from falling).
4. Goldman Sachs is predicting the S&P 500 will gain 5% without dividends and 6% with dividends in 2024. More importantly, the S&P 500 would end the year at 4700. The record high was 4724 on 1/3/22, so no bull market anticipated. Additionally, there will be no P/E increase until 2025, which would have the S&P 500 P/E at 20x at the end 2025.
5. The use of currencies has been innate in some people since civilizations began. Sam Bankman-Fried in a NYC jail used the currency of inmates to purchase a haircut for 4 packs of mackerel.
6. A visit to the high-end “The Mall at Short Hills” saw an orderly but unenthusiastic crowd practicing controlled shopping, fitting the merchant’s expectation of a dull Christmas.

 

Summing Up

The fact that the 3 popular market indices are all within 1% of their annual highs on relatively low transaction volume does not generate excitement. The presently dull Christmas Season is more attuned with global commercial real estate debt issues and increasing layoffs in the financial community.

 

Cash yields of 5% or higher are currently a hurdle to investing for the longer-term. We appear to be in some form of suspended animation.

 

Please share how you see things, particularly if you disagree.

 

 

 

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