Preparing for a Recession - Weekly Blog # 843

 

         

 

Mike Lipper’s Monday Morning Musings

 

Preparing for a Recession

 

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

 

             

 

Learning from Wartime

When US Marines embark on a troop ship, they are instructed to wear less than comfortable life jackets. This sense of preparedness was one of the things I learned as a Combat Cargo Officer training fellow Marines for potential conflict. This preparation for the probability of danger to our economy, including client and personal investment portfolios, is what I hope to highlight in this blog.

 

Recessions are inevitable because humans prefer optimism to pessimism, expanding debt to leverage the oncoming good times. Politicians have learned that it is not a good vote-generating strategy to disappoint voters with actions. This has been the strategy for a large number of US Administrations from both parties, where they increase private and public debt without building up reserves. Consequently, history suggests we have not repealed recessions, we just don’t know when they will occur. Furthermore, we don’t know if the oncoming recession will be cyclical and largely a correction in prices, or a more painful structural recession with significant businesses collapses requiring lifestyle changes.

 

Don’t Abandon Ship by Massive Selling, But Get Your Lifejacket Ready

As a midshipman in training on the Battleship New Jersey, I was assigned to serve watch as the sole crew member in the crow’s nest, the very highest point on the ship. I was to report anything I saw as dangerous by phone. At one point I saw some round metal objects that looked like tin cans through my binoculars and excitedly reported it to the deck officer. This caused some commotion. Luckily, the old Salt of the deck officer recognized me as a landlubber and didn’t put the ship in an emergency condition. He understood that it probably was a tin can and not an unidentified destroyer known to Ship sailors as tin cans. In viewing what may be ahead for markets and economies, I will remember my midshipman experience and be careful with my language.

 

This is What I See for You to Evaluate

• The Conference Board reported that the University of Michigan survey showed a large drop in its measure of Consumer Confidence. It came close to the low of 2020.
• Perhaps as a preparatory move, 100,000 tech workers have been laid off year-to-date. (I don’t know how many are still unemployed.)
• New capital goods orders (non-defense except aircraft), were expected to gain +0.1% but actually declined -0.6%.
• A number of large public companies are cutting employment by selling products or divisions. The interesting thing is the breadth of companies taking these steps: AIG, Morningstar, Interpublic.
• Several mutual funds that performed well in the first quarter have cut back holdings weighted over 5%. Some of the stocks cut back were Berkshire Hathaway, TSMC, and AIG. (All held in personal accounts.)
• In the latest week, 55% of the stocks on the NYSE rose vs only 49% on NASDAQ. Remember, the NASDAQ is considered more speculative than the “Big Board”. Only 38% rose in the latest Saturday WSJ list of weekly prices for market indices, currencies, commodities, and ETFs.
• Two well-established mutual fund management companies with long-term orientations are expecting dramatic changes. Capital Group expects to see a meaningful rise in price volatility. (If this happens, there will likely be a rise in direct trading between major institutions.)  The other group is Marathon, who is concerned about the expected growth prospects of all aspects of “AI”. There is not enough planned construction for all elements of AI and what is required for the rest of the economy/society. There is a need for innovation and increased efficiency.
• Year-to-date through June 27th, there were four investment sectors that produced average returns exceeding the +15.51% earned by the average S&P 500 Index fund. (You may be able to get the one day that is missing, which didn’t have much impact.)

 

Investment Peer Groups Performing Better than S&P 500

Large-Cap Growth    +20.42%

Science & Tech      +17.91%

Energy MLP          +17.69%

Equity Leverage     +16.29%

 

There were 1222 funds in these four groups.

 

Question: How are you going to recognize the next recession?

 

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