Mike Lipper’s Monday Morning Musings
Fragments Prior to Fragmentation
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Historic + Military
Learning
Some have said, if you
scratch a good security analyst a historian will bleed. If you add in two other
variables, learning from military training and exposure to the racetrack, you
will understand much of my thinking. In fearing World War III, one should start
with the German General Staff study of the American Civil War and the Peace
efforts prior to and post WWI. Long periods of relative peace can be achieved most
of the time if intelligent leaders continue to plan for economic and military hostilities.
Since we don’t know
what the future will bring, we should study every fragment of information
available and track developments that might lead to dangerous conflicts. Few peacetime
leaders are equipped to be successful war leaders, and often they make war
inevitable. I believe a lesson from one of the various “war colleges” is that
war is another way to conduct political change. Our political leaders increasingly
use an “anything goes" approach to cling to power, ignoring the vulnerabilities
they are exposing for our adversaries to exploit.
In retrospect, it
has become increasingly clear that WWI and WWII were inevitable. The threat of
nuclear war and some of our world leadership has held off WWIII, hopefully
forever. Due to improvement in tactical nuclear and other weapons, there is
greater risk today than in the past. We need to review all fragments as they
appear and be watchful of those which could harm us.
Dangerous Fragments
Past & Present
In the 1920s, the
general urban population looked askance at criminal controlled bootlegging but
enjoyed the local speakeasies. Today’s version of this attitude is the general
disrespect for most members of Congress. Although they continue to support
their local representatives, or for the younger set, the local ‘pusher”. We seem
reluctant to reform our own process of offering debt forgiveness in the hope of
gaining votes. They don’t seem to see these stimulants as bribes, much like the
circuses that led to the fall of the Roman empire.
Daily Stock Markets
React to Central Banks Words
On Thursday, 27 % of
the “Big Board” stocks declined, with 38% falling on the NASDAQ. The next day,
64% of NYSE issues fell, with 63% falling on the NASDAQ. The only difference was
many traders finally believed the clues given regarding the possible number of
interest rate cuts this year. (They paid no attention to the view that the next
rate move by the Fed could be up.) Most of the time investors stay focused on
their long-term needs and don’t react to politicians and pundits.
Fragmentation
Becoming More Popular
On many days more
stocks go up than down. This week, 21 of the 28 foreign markets Barron’s tracks
rose. However, in the US only the momentum index has gained double digits over the
last two months.
What is the
Remaining Upside Left?
While it is popular
for market leaders to mention their gains from the bottom, the payoff for today’s investor is
what is left? Jeremy Grantham, Chair of GMO, has generally held a bearish view
but has generated good long-term performance for the funds he supervises. He
mentions that if one uses the Shiller P/E, the market is in the top 1% of its
history. A more significant observation is that many analysts use both P/E and
profit margin, which are linked, so they are double counting. (Profits =
Earnings, which is the driver of margins)
Today’s Parallels
with WWI And WWII
Russia is in
fighting a war in Eastern Europe, with Western Europe supporting the locals. The
US is in a trade war with China and is constraining trade. Our opposition is
getting stronger, although we are having trouble convincing people that they
need to fight. This reluctance exposes our current weakness to our adversaries,
giving them reason to cheer.
The markets generally
seem to be ignoring the geopolitical hot spots accumulating around the world.
There seems to be a perception that we can ignore these problems as they are
occurring in some distant land. However, these problems are now surfacing closer
to home and their citizens are increasingly arriving at our borders and making
their way into the country. The situation is putting significant strain on
resources and budgets, at a time when pet projects are already being funded in
the hope of attracting the support of an expectant electorate. This spending is
unsustainable in the long-term and creates additional vulnerabilities for our adversaries
to exploit.
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