Reactions from a Contrarian - Weekly Blog # 814

 

Mike Lipper’s Monday Morning Musings

 

Reactions from a Contrarian

 

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

 

 

 

Surprises Pay More Than Consensus

Consensus, when right, is not highly rewarded. Contrarians are correct less than consensus suggests but they receive greater rewards. Over time, the bigger winners start out by being relative loners. With these guidelines, I review my reactions to media comments. (Remember, my absolute right to be wrong.)

 

The Indices are at yearly highs; therefore, we have entered a “bull market.”  Not necessarily! In some cases, these are not all-time highs. Additionally, the indices need to be measured in the most valuable currency in order to enter a new market cycle. Trading volumes are also not impressive. We live in a global world with the US dollar declining, so we ought to adjust the peaks and valleys accordingly.

 

Possibly the best summary of market moves comes from Bank of America, which describes it as emotionally bullish but intellectually bearish.

 

When the Fed pivots it will be a seminal event. Possibly, but odds are it will be late. For those predicting a pivot, they are like football fans calling the pivot wrong six times in a row. They could be right, but their odds are no better than 50/50.

 

There are at least three other reasons to question the timing of an interest rate cut.

1. The original ignition of the inflation fire was caused by the Administration pouring an excessive amount of cash into consumer’s hands and restricting domestic trade.
2. Congress pushed the responsibility for full employment to a bunch of financial economists at the Fed, which led to it becoming politicized.
3. Most importantly, the largest factor in the US economy is not the production of goods, it is services. In general, service providers don’t need to borrow money for capital expenditures and inventory.

 

Current Market Focus Does Not Address Long-Term Problems

Almost all the attention of market participants is focused on short-term events, which are expected to determine short-term results. Media performance reporting on minute by minute, day by day, week by week, and year by year results view this as the only essential reality. These short timeframes are essentially important to traders, but of little value to long-term investors.

 

Most money invested in the market is for retirement, or longer. The assumption ought to be that the average worker probably still has 25 years before retirement and a somewhat similar period in retirement. Many institutions can have indefinite lives. Thus, the things that are really important to these investors are actions impacting the long-term progress of their assets and liabilities.

 

One of the reasons good analysts and portfolio managers study history is to get an understanding of market cycles, which are caused by insufficient supply of goods and services in the minds of consumers and investors, followed by periods of too much excessive production. These trends take a long to very long time to evolve. However, their terminal stages often occur swiftly and rarely reverse.

 

Three Trends That Hurt Investors

1. Political skills are paramount over operating skills. Most large organizations are comprised of collections of people with different backgrounds and strengths. Those who rise to the top are most often chosen for their political skills, with less attention paid to their operating and investment skills. These leaders recognize that their positions have finite termination dates, so their decision process is relatively short-term, with little regard for long-term implications.
2. The costs of developing and maintaining military strength reduces the available supply for other funding. There are a relatively small number of nations with significant power. The US has historically cut military spending sharply during “peace time”, as it tends to fall behind the ambitions of autocrats. Considering the current crop of political leaders and their tendency to cut military spending after inflation. Today there is no large military power that has any respect for the current US power base. They however recognize our potential, much like Germany and Japan did prior to WWII, making the world an increasingly less safe place. The leaders of Western Europe recognize that they cannot defend themselves. One leading expert believes that Germany needs 30 years to build its own independent force to safely defend Germany.
3. By far the biggest threat to the US, both commercially and militarily, is our youth. Based on global test comparisons, US students rank below mid-point in math and not close to the top in reading and science. Remember, we probably have the most expensive educational system in the world. To protect professors the US government measures academic college success over six years. In the UK, the normal college period is three years.

 

 Other Items of Concern

1. John Authers, now at Bloomberg and formerly with the Financial Times, believes that we should expect US defaults, particularly of regional banks.  Altman Z scores are the lowest since 1987.
2. China has stopped publishing youth unemployment data. (This habit of putting out just positives raises more questions than answers.)

 

 

 

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

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