Mike Lipper’s Monday Morning Musings
Worth
vs Price Historically
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Merchants Needed
Despite what many believe
is the oldest profession, growers and herders were the first tribes to survive.
As both tribes frequently had more of their own product than necessary, they needed
to exchange their excess production with members of the other tribe. Both tribes
were skilled in their own production but did not fully understand the other
tribe’s costs. Initially, the agreed price was in terms of quantities between the
two commodities (x sheep for y bales of cotton).
Fairly quickly, solely
mathematical terms of exchange (3x for 5y) became insufficient in terms of defining
the starting quantity and conditions of transfer. The exchanging parties often did
not know or trust the other party. Thus, there was a need for a middleman to determine
an agreed price between buyer and seller. The middleman would necessarily be
known or recognized by the would-be traders as someone who could be reasonably
trusted and was capable of developing accepted terms of trade.
With buyers and sellers geographically
separate, both in terms of distance and possibly language, the value of a somewhat
trusted third party became even more important. Still further elements became
essential, a recognized type of money, or later, credit.
Over time, the third parties
evolved into merchant houses or merchant banks. When dealing across borders and
cultures the participants were often happier if the money or credit exchanged was
issued by a bank, especially if the bank
backed by a government with a wealthy family behind it. At this point these
transactions utilized money in the form of coins convertible into known
quantities of precious metals.
Foreign Exchange
When the western world
was ruled by Rome, the value was understood to represent an understood bundle
of goods and services. This worked well when the government controlled the
coinage. A problem arose when government expenses for war or extravagant expenses
rose beyond an acceptable level of taxes paid. A conflict that exists today.
Governments addressed the
problem by gradually debasing the currency, such as substituting copper and other
base metals for precious metals. As governments did this differently, the purchasing
power of their money became dissimilar to one another, both in ancient times
and today.
Those who suffer from a liberal
arts education are taught incorrectly that the English Magna Carta was forced
by the public on the English king. The real cause resulted from the Barons revolting
against the increased tax load on their land. The increased tax load was caused
by the expense of the Crusades and the ransom paid for the release of their
king who was held hostage in Europe.
Today our federal
government is changing the rate of taxation and how it is applied to both
income and estates. Since foreigners derive earnings from activities and trade in
the United States, they react by reducing their exposure to the US dollar, reducing
its value. This is currently an issue for an investment committee on which I
sit. In looking at our portfolio and foreign expenses at the last meeting, I suggested
we begin tracking the changing value of the dollar. It is also something I need
to do in looking at portfolio selection.
A Historic Portfolio
Change
(Please do not take this discussion
as a recommendation, as that requires careful analysis of the needs of an account.
T. Rowe Price is held in a personal account and some client accounts.)
The man, T. Rowe Price,
started his investment counsel firm in 1937, a year of a few months of gains in
a period of stagflation. Mr. Price was one of a few managers investing in
growth stocks at the time. Sometime after the conclusion of WWII he became concerned
that the inflationary habit had taken over management of the economy and by
1979 he was disturbed about how the US was doing. He started managing money to
graduate from FDR’s New Deal, implementing a philosophy he called New ERA in a
new fund concerned about government led inflation. In 1979 George Roach became
his assistant, and I believe in 1997 he became the portfolio manager. He later became
President of the firm. George kept with Mr. Prices’ concerns, but he allowed
the rest of the firm to continue with their growth stock orientation, which produced
a very commendable record.
Prior to December 2023
The T. Rowe Price New Era
Fund was managed with extreme consciousness of inflation. This translated into investing
in common stocks of companies expected to rise in the future as inflation rose by
investing in assets, not earnings. Most followers of the New Era fund viewed it
as a commodities fund because that is what the portfolio looked like.
Shinwoo Kim has been the portfolio manager for New Era since 2021 and has
been with T. Rowe since 2009. He has proclaimed that commodities have
been and are in a long bear market ever since he became portfolio manager, but that
changed in December. On the first
of December hea as portfolio manager of New Era affected a considerable change
in its portfolio, returning it to Mr. Prices’ basic concerns.
Kim feels the US has migrated to a world where inflation and excessive
federal government spending is the principal driver of investments. After ten
years he has concluded, and convinced the rest of his investment committee, that
the commodity cycle is about to change. He expects future investments to benefit
from cyclical earnings growth, which will produce better results than ownership
in highly valued assets.
As a natural resource fund New Era has not done
poorly, compounding at +2.97% compared to the average Natural Resources Fund’s
+2.69% over the past ten years. I suspect this outcome was largely the result
of its yield, not earnings or Price/Earnings expansion and/or P/E expansion.
(The result was not measured against the changing value of the dollar.)
Economists have tagged the price of copper as Dr. Copper. As the price of copper has
performed better than most economists over time. The use of copper by the
electrical/electronic industries and construction activity gives its use a
cyclical growth trend. Other structural changes expected to benefit the
portfolio include Uranium and US shale production. The fund believes the long-term
outlook for production in Marcellus/Utica as well as Permian is understated. Additional
attractive areas for investment include industrial gases and pipelines. (This
brings to mind Berkshire Hathaway- a position owned in our personal and managed
accounts)
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