Melt-Up, Leaks, & Echoes of 1907 - Weekly Blog # 858

 

Mike Lipper’s Monday Morning Musings

 

Melt-Up, Leaks, & Echoes of 1907

 

 

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

 

 

 

A sportscaster’s view of the US stock market is that many prices are gradually rising in a “melt-up”. But the owners of the teams, when possible, are curtailing spending. Some of the fans’ happy talk appears to be leaking away, particularly as the return on the value of their assets decline. Those who think only in terms of numbers, particularly streaks, should be worried. For the first time in 40 years the Vanderbilt football team beat Alabama!!! (This highlights the difference between a statistician and an analyst. A numbers hound believes the past is always prolog to the future, whereas a good analyst scans present conditions to determine the odds of a streak being disrupted. It is never zero.) Because of evolutionary changes in laws and technology the past should be viewed in terms of modern times. On the contrary, human behavior rarely changes under similar conditions, although it may impact the odds.

 

Something About the Name of Morgan and Financial Crisis

After a long period of financial expansion and the creation of new financial institutions, it was trust-companies, not banks that were in danger of failing after experiencing difficulty collecting on their loans. (The modern analogy could be private capital funds.) Trust-companies borrowed from banks and were publicly traded, but by 1907 there were concerns that a number were insolvent and would fail. JP Morgan, the man, was concerned and called a meeting of leading bankers to meet him in his library, which he locked until the bankers promised to contribute sufficient capital to rescue one large trust-company. By so doing, he single-handedly stopped the “Money Panic” of 1907.

 

While politicians in Washington were grateful, they felt Morgan had too much power. Consequently, a few years later they created the Federal Reserve Bank, which had supervisory power over large banks. This was The Fed’s initial mission and today it is really their first mission.

 

Jaime Dimon is the current CEO of JP Morgan Chase*, the largest US bank in terms of assets. JP Morgan Chase is the unofficial leader of the banking industry, so it goes without saying they see a parallel to the 1907 crisis. He is pleading for a modern solution that allows small banks to merge without time-consuming government regulation. *We are a small owner of shares in JP Morgan Chase and use the Private-Bank facilities.

 

Other Concerns

• Our European military allies in support of Ukraine and future wars are worried. There are concerns regarding the production of ammunition and other armaments, particularly during the present decline in our productivity. The rise of union workers will additionally shrink the corporate profits used to invest in research and expansion.
• The changing business structure of the investment market. There are concerns that stock exchanges around the world now earn a decreasing minority of their earnings from their initial business of trading and clearing securities. There are fewer brokerage firms, less daily liquidity, and more direct transactions.
• Brief news releases, repeated frequently, leads to a simplistic understanding of the economy, investments, and politics. For example, most news briefs focus mostly on movements in the New York Stock Exchange. However, there are numerous trading days where NYSE issues move in one direction and NASDAQ issues move in the other. The daily movement in the Dow Jones Industrial Average (DJIA) is much more volatile than the NASDAQ Composite. (Could it be that Washington has limited capacity to understand the difference between light-volume moves and high-volume moves?) On an average day the NASDAQ trades about five times the volume of the NYSE. (Part of this spread is the amount of trading between dealers to even-up their positions.) The Year over Year volume for the Big Board is down -11.26 %, whereas NASDAQ volume is up +26.27%. From an analysis vantage point, we see major differences between the two markets. On Friday, the percentage of new lows on the NYSE was 2.4% of issues traded vs 7.2% on the so-called junior exchange. (Is the NASDAQ showing it is closer to a peak after doing so much better for the year?)

 

Question: What are you concerned about?         

 

 

 

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

Mike Lipper's Blog: Mis-Interpreting News - Weekly Blog # 857

Mike Lipper's Blog: Investors Not Traders Are Worried - Weekly Blog # 856

Mike Lipper's Blog: Many Quite Different Markets are in “The Market” - Weekly Blog # 855

 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

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Mis-Interpreting News - Weekly Blog # 857

 

Mike Lipper’s Monday Morning Musings

 

Mis-Interpreting News

 

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

 

 

 

Understanding Motivations Before Accepting

Investors and other voters should always search for the motivations of people or organizations distributing investment and political solutions. Most of those using megaphones recognize that only a small portion of their audience will react quickly to the pundits besieging them to make commitments of time, votes, or money. Peddlers consequently boil their pitches down into simple sounding solutions. (When have important considerations ever been made briefly?)

 

In terms of making decisions regarding investments, the media is full of quick and often wrong recommendations. For example, far too many investors have been informed that the rise or fall of interest rates, as determined by the Federal Reserve, is the key determinant of future investment performance and the growth of global economies.

 

As a trained sceptic and rarely a bettor on favorites at the racetrack or in other competitive games, I suggest interest rate changes result from the numerous impacts of identified and unidentified forces. I believe the following factors should be considered:

1. Remember, the Fed was created to replace the power of J.P. Morgan, the man, the bank, and the use of his locked library. During the Wall Street crash in 1907 numerous trust companies were failing, with still more expected to fail. Mr. Morgan called for a meeting of the leading bankers in his library. After assembling the bankers in the library, he locked the doors and stated he would not unlock them until all bankers committed funds to the bailout of a failing trust company that had made poor loans. The Washington government felt too much power was entrusted to one man. Relatively soon after they organized the Federal Reserve Bank. With an eye to public relations, they never specifically stated the real reason for creating the Fed, which was to reduce the risks of bank failures due to bad loans. Bank failures continue to be a risk in the US, and some have occurred in numerous other countries in Europe and Asia. Today, the Fed has supervisory power over a portion of US banks, which is their first order of business.
2. Demographics and Psychographics change slowly most of the time but have long-term impacts on our financial and political structure. An example is our falling birthrates and the fall in educational standards, which probably leads to declining productivity levels.
3. Both trade and military wars create imbalances, which in turn cause global economic changes.
4. Discoveries of natural resources and those made in a laboratory can cause economic and political disruptions Remember what the discovery of gold in Latin America did to the economies of Europe and America. The discovery of oil in the US and Saudi Arabia was equally disruptive of the status quo.
5. The personalities of leaders and managers are very different in terms of their focus on the short and long-term decisions.  

 

Since we don’t conduct in depth psychological interviews with a wide sample of the economy, we don’t know why people act the way they do. We tend to believe that events occur close to when decisions are made. This has led to following beliefs and their assumed stimuluses:

1. Clark Gabel’s appearance in a film bare chested killed subsequent undershirt sales.
2. After the movie Matrix 2, Cadillac dealers couldn’t keep large SUVs in stock due to sales demand.
3. The lipstick indicator and the length of women’s skirts were each believed to predict the direction of the stock market.

 

I don’t know what will cause of the next recession or depression, but one or more of the non-Fed rate cuts may be the first indicator of problems ahead and deserve to be watched.

 

Some Attention Should be Paid to the Following Factors

1. One of the causes of WWII was the US putting an oil Embargo on Japan. The same administration had our aircraft carrier leave Pearl Harbor without protective support ships in December 1941. (It was the planes from these carriers that led to a victory around Midway.)
2. More recently, there has been a 75% decline in commercial flights from China to the US. Most of the decline due to reductions by Chinese airlines.
3.  Around the world, bank depositors are moving up to half their money into investments, accepting the risk that goes along with it.
4. A survey of Japanese workers suggests that 25% will be searching for jobs in 2025. (Lifetime employment used to be standard in Japan.)
5. 20% of Indian retail investors are accepting risk.
6. Manufacturing has hired less people in three out of the last four months. Even more significant for our country is an increase in short-term consumption spending, not longer-term investment needs.
7. People have diverse views regarding investments and other expenditures. The prices for NYSE and NASDAQ stocks rose this week, while the plurality of bullish views declined in the AAII weekly sample survey. In the latest week, the bulls had an 18% advantage over the bears, down from a 26% advantage the prior week.

 

Please share your thoughts.

 

 

 

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

Mike Lipper's Blog: Investors Not Traders Are Worried - Weekly Blog # 856

Mike Lipper's Blog: Many Quite Different Markets are in “The Market” - Weekly Blog # 855

Mike Lipper's Blog: Implications from 2 different markets - Weekly Blog # 854

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.