Mike Lipper’s Monday Morning Musings
Is History Rhyming Again?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Preface
Before the New Jersey Symphony’s inspirational playing of
Beethoven’s Pastoral Symphony there was a brief concert by the New Jersey
Symphony Youth Orchestra’s Academy Orchestra, who are gifted and wonderful. However,
what was more wonderful was thinking that these talented young people not only
learned their musical skills very well but also learned a bit of the history
and discipline of classical music. Hopefully, it will give them the skills to
manage the messed-up world we are passing on to them.
I couldn’t help my own burdened brain sitting there Friday
night after what may have been the most important stock market week in some
time. The Standard & Poor’s 500 pierced the low set in September. Classically
trained market analysts will likely suggest how difficult it will be for this
most important of all indicators to quickly recover the 10% loss from its high
point. Pundits will likely blame the current military and diplomatic failures
to end the war.
Those in leadership positions are not paying attention to
ancient history. Iran is the modern name of what was called Persia for
centuries. The rulers of Persia controlled much of what passed through the
“silk road”, which not only passed new foods to the western world but also
mathematics, science, paper money, and gun powder. Persia had a large and
powerful army that kept would be conquerors away, although it was not
particularly successful at adding to its piece of the Asian land mass.
I believe the main threat to the US and other countries is
not their incipient nuclear warfare, but their successful sponsorship of proxies
who damage other established governments and societies through the destruction of
people and property. Recently, the US experienced a couple of wanton killings carried
out by US citizens who received local training and support. We have seen the
Iranians do this not only here, but in the UK, Europe, Middle East, and Africa.
Because their sleeper cells easily entered the US through an open border, we
don’t exactly know the size and capability of the problem.
The US has a history of winning wars and losing the peace
because we are not very good as occupiers. Also, it is worth pointing out that
Iran has never successfully been occupied by foreigners. In my opinion, the
dream of a fully formed new government structure for the country appears naïve.
In exposing the problems which led to the market drop, we
need to address an approximately 100-year period of excessive debt creation and
the confusion between a top-down education and a bottom-up learning process.
This Week & Beyond
We got one violent rally this past week and could get one or
more this coming week because a gap opened between the S&P 500 and NASDAQ on
Friday. The gap must normally be filled before a sustained move can occur. Friday
can perhaps be summed up in three numbers:
- S&P 500 -1.67%
- Price of oil +7.07%
- ECRI industrial prices rallied again to the 130 level, putting the year-over-year gain at +9.25%
In the first three days of the week there was a positive
tone to US stock prices, but they were swamped with declines in the last two
days, putting the SWX down for five straight weeks and on Friday it fell below
its September returns.
The declines appeared to be coming from retail-oriented
accounts, many of which were housed at large retail brokerage firms years ago. Coincidentally,
both the number of listed stocks and the number of primary retail brokerage
firms significantly declined during this period. They were replaced by larger
more diversified firms whose brokers switched from commissions to fees, making them
look more like “wealth managers”. However, many of them are still short-term
oriented and prefer stock exchange listed securities for their accounts. Most
of these new recruits to the business have not experienced a full economic
recession and very few investors or investment committee members have any
direct experience with depressions.
The latter point, in my opinion, is causing great risk to
the market, not that I can estimate the starting date of a new depression. However,
as someone who has studied old races and other ancient track conditions, I am
conscious that bad things do happen. Thus, I feel a need when examining
investment possibilities to include an alternative negative future in reviewing
future strategies. There are not many investors or advisers who do.
Most down markets, but not all, are caused by a forced
repayment of debt at an inappropriate time, like in William Shakespeare’s “The
Merchant of Venice”, or in margin calls. We may be due for such a period!!
Coming out of the expansion of most global economies after WWI in the nineteen
twenties, there was a ballooning of debt creation. Borrowing against securities
became popular with retail investors in the US and other countries, particularly
by those of the farm community in the US. By the late 1920s, many US farmers,
merchants, suppliers, and local small banks were heavily in debt, with their
crops and land used as collateral. When the price for domestic crops was impacted
by lower-priced foreign competition, it led to dire conditions. They appealed
to their congressmen for help in putting tariffs on incoming food items and they
convinced a reluctant President to enact The Smoot-Hawley tariffs, causing foreign
governments to respond in kind. This led to the disruption of global trade,
which was one of the initial causes of the recession. The recession was turned
into a depression by a new government which needed a ten-year long depression
and a new World War to pull us out of this self-administered trouble. I AM NOT
PREDICTING THIS, BUT I AM SAYING WE SHOULD CONSIDER IT A REAL POSSIBILITY.
Caution: As these worries are disturbing, they should not be discarded, even though none of us wish they come to be. However, prudence requires that they should be examined regularly to see ensure their chance of occurring stays small and doesn’t creep up to a higher probability. The odds still favor expansion.
Please share your views which can help us.
Did you miss my blog last week? Click here to read.
Mike
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