Fears On a Quiet Summer Weekend - Weekly Blog # 955

 

 

 

Mike Lipper’s Monday Morning Musings

 

Fears On a Quiet Summer Weekend

 

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

             

 

 

Is Disruption Ahead?

A quick late August trip to London to attend a great Proms concert by the Academy of St. Martens in the Fields in London seemed like a good idea to us earlier in the year, as not much happens in late August. As is often the case, I was proven wrong when a few worries raised their scary head this week.

 

Potentially the Biggest Problem

The self-appointed job of this blog is not to precisely predict the future, but to consider issues that may happen which few investment professionals are focused on. My concern for the repayment of debt in a rising interest rate environment is rising. Among my concerns are the sharply increased funding of data centers, wars in Iran and Ukraine, and the budding desire for retail investors to provide funding for new private ventures, both on earth and in space.

 

I do not know the level of care and consideration the corps of young financial bankers and their associates are performing, nor the experience of the investors they are interacting with. What concerns me is that few players have experienced a significant recession, and only a tiny fraction of the buyers of this paper have any knowledge of a depression. Morgan Housel states in his book Psychology of Money, “some lessons have to be experienced before understanding”. Few people appreciate the possibility of some loans not being repaid with interest on time when due. While I don’t know the conditions of every loan made by individuals, companies and governments, I do know that higher interest rates make it more difficult. On Thursday, Guggenheim Partners’ $1.2 Billion loan traded at $0.78 vs $0.96 the week before. (Price declines happen when the market recognizes that repayment of the loan on a current basis becomes questionable. How many other loans will be similar? I remember this kind of paper eventually selling substantially below $0.50 in a brief discussion of bankrupt investments in Professor Dodd’s class in the 1950’s. Graham & Dodd are well known for writing Security Analysis in 1934, one of the most respected investment books ever published.) The ECRI Industrial Price Index rose to 142.74 this week from 141.60 a week earlier. Considering the Index has risen 25.93% on a year over year basis, one would expect to see more distressed loans.)

 

This week, the Secretary of the Treasury more than doubled the purchase of 10-30-year US Treasury bonds on offer in reaction to the 30-year yield rising significantly above 5%. Some have already said that Bessent is putting a Band-Aid over a bullet hole. After declining following the Bessent intervention, rates have risen again. Increased rates are likely to make borrowing more difficult or expensive for the data centers, mortgages, and individuals. Prior to this announcement, the American Association of Individual Investors (AAII) sample survey raised its six-month estimate by 0.8% and its bullish projection by 2.0%. Their bearish projection is now 4.5% higher than their projected bullish guess.

 

Some Other Quotes from Morgan Housel

• Nothing is as good or bad as it seems
• Earth has on multiple occasions been covered with water. (Geology is a good history teacher)
• Snow White made up for 400 losing cartoons.
• No one makes good decisions all the time.
• Wealth is what is left after taxes and expenses you don't see.
• Wealth is accumulated after spending.

 

What do You think?

 

 

 

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Mike Lipper's Blog: What Could Go Wrong? - Weekly Blog # 954

Mike Lipper's Blog: Are History & Economics Books Closed? - Weekly Blog # 953

Mike Lipper's Blog: Dead Cat Bounce > Last Chance - Weekly Blog # 952

 

 

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What Could Go Wrong? - Weekly Blog # 954

 

 

 

Mike Lipper’s Monday Morning Musings

 

What Could Go Wrong?

 

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

 

          

 

To Predict is to Accept the Risk of Being Wrong

I read “The Psychology of Money” by Morgan House, which an investment friend suggested I read. The book suggests that the first task is to properly understand that most people view the future through the lens of their personal experiences in their early years. I try to broaden out my early experience of being born in the middle of the depression to a subsequently divorced working mother. Additionally, I’ve spent a great amount of time reading the history of many countries and cultures.

 

My view of the future is also influenced by my enjoyable time at New York racetracks, where I tried to end most days with more money than I started with. In essence, that meant comparing the posted odds versus the probabilities of winning, or at least coming in second, which has its own pool of bets that pay off separately. To accomplish that goal, I needed to guess what could go wrong for each of the horses in the race. I had to accept that the payoff was reduced by the track taking a portion of the winnings, along with various taxes and other expenses. The track-payoff was therefore less generous than the mathematical odds presented. Nevertheless, there was the occasional opportunity to leave the track with more money than when I arrived.

 

Using this approach, along with what I learned from both teachers and other students at Columbia University, I developed an understanding of the chance of specific future outcomes for various investments. The first thing I learned was to eliminate most securities, most of the time. (This was like Warren Buffett’s three sorting boxes of yes, no, and too difficult.) The formation of my investment philosophy evolved from these experiences, allowing me to earn more profits over time than losses taken.

 

Next Major Downslide

A study of financial history, and geology through the study of rocks, reminds me that we are always subject to up and down cycles, which come at irregular times. Since the earliest time humans have attempted to find a reason for the cycles, either through supernatural causes, the elements Gods, or men.

 

I begin with the view that the up and down slices of cycles are in part a reaction to past opposite extremes, as well as new elements. We are facing both today. The most frequent human reaction is the funding of expansions. Initially, expansions are paid for by the reinvestment of past profits, either by savers or revenue generators. Downslopes are often caused by the unexpected requirement to pay back loans, like the type described in William Shakespeare’s “Merchant of Venice”, which may have been a comment on Tudor spending.

 

My analysis suggests that the growth of debt is a general precursor to a depression. We may be in such a phase now, considering the combination of recognized and unrecognized government debt and the growth of private debt supplied by retail investors. This may be the reason the 30-year US Government Debt auction reached a level this week not seen since 2001. It may also suggest that foreign investors need higher rates to accept an increasingly unpopular government.

 

Typically, an event brings these types of worries forward. Perhaps something like this week’s announcement of the quick sale of the Los Angeles Lakers to cover other financial problems. Broader and more distressing to me is T. Rowe Price’s statement that it will take a couple of years to stem the net redemptions of their passive fixed income funds. The final sad note is an IBES projection that the net income of the S&P 500 will only rise by 0.3% a year from now at the end of the second quarter of 2027, before rising 17.3% the following quarter.

 

Since we are approaching 90 years since the last depression, the odds maker in me thinks the odds of another Depression is increasing.

 

What do you think?   

 

 

 

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

Mike Lipper's Blog: Are History & Economics Books Closed? - Weekly Blog # 953

Mike Lipper's Blog: Dead Cat Bounce > Last Chance - Weekly Blog # 952

Mike Lipper's Blog: Long-Term Money Via Telescope, Not Microscope - Weekly Blog # 951

 

 

Did someone forward you this blog?

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Copyright © 2008 – 2026

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

 

Are History & Economics Books Closed? - Weekly Blog # 953

 

 

 

Mike Lipper’s Monday Morning Musings

 

Are History & Economics Books Closed?

 

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

  

 

 

The Reward for Analysis is Prediction

The payoff for analysis is plausible prediction, whether correct, wrong, or part of each. As this is an investment guess as to the future, it will at worst beget an emotional reaction, or possibly thoughtful disdain. On the other hand, it might suggest a future looking distinctly different than extrapolating the present, including the desires of those presently in power.

 

This may be an appropriate time to look forward to something different than the present and begin investing on the chance something different happens. The reason this is an appropriate time to express these thoughts is that those in power are only focused on the immediate and have closed the political and economic history books.

 

The following items point to a different kind of future:

Political Disruptions

• There is hardly any national government that is universally popular, which is different than being tolerated by a diverse population. At the moment the majority is not unified and lacks dynamic leadership.
• The current renter of the White House is waging a war which he believes he can end and in so doing can generate a political victory for him and his party. He should study the greatest UK leader of modern times, Winston Churchill, who lost power immediately after WWII to the Labor Party.
• While office holders are getting older, voters are getting younger and richer.
• While some media are controlled, increasingly more are not. Anyone, anywhere, may be able to reach individuals and groups.
• Both ancient Greece and Rome lost total control to an enlarged population. China had similar problems.

 

Financial/Economic Changes

1. The impact of air conditioning is coming to Europe, Asia, Africa, the Middle East, and Latin America. (In the US, the one thing the founding fathers did not foresee was the federal government existing in the humid swamp of Washington DC.)
2. The population of the US is likely to shrink without immigration, causing the national debt, social security, and Medicare to fall under pressure.
3. The rotation of the relative ranking of investment performance is likely to change. Over the last ten years only domestic and international science and tech funds have beaten the average large-cap growth fund average. This is from a universe of over 100 mutual fund category averages. (It is my bet that this will not be the case over the next ten years. None of the initial stocks in the first DJIA are in the current index.) The common denominator of successful funds is essentially the inclusion of computer-oriented products or services with substantial sales in the US. It is this concentration in a dynamic global world that will eventually lead to a rotation to other segments of the market.
4. Evolution has been part of life on our planet since the beginning of time. I believe only change agents have a chance of surviving longer. My accounts have two good examples of successful change agents, along with some mistakes. (These are not recommendations that should be made with complete knowledge of an investor’s needs, wants, and understanding.) Each of these companies began life pursuing other businesses and made significant purchases. Berkshire Hathaway started as   a money-losing textile mill. After Warren Buffett’s hedge fund bought it, Charley Munger taught him how to buy good companies at reasonable prices, which resulted in them building a great holding company. Recently, Warren appointed Greg Able as CEO of the firm. He is in the process of slowly turning Berkshire into more of an operating company by doing the following things:

• Appointed a Senior Executive over groups of single companies.
• Purchased Alphabet stock for cash, making it one of the firm’s 5 largest holdings.
• Purchased a home and community construction company and combined it with an existing builder of factory-built homes and a mortgage provider. (The country needs a major increase in the building of homes, and they will be part of the solution.)

Berkshire has not said anything yet about paying a dividend, although I think they will do so in a number of years. My thinking is based on Mr. Buffett’s statement that he and Charley were not running the company for the shareholders, but for their heirs. (It is already happening. I believe that a good bit of the stock owned by individuals for 50 years or more has been inherited on a step-up basis. These new owners of the stock will have different attitudes toward the company as they consider their own retirement needs. In order to keep this growing number of shareholders happy, it makes sense to pay a reasonable dividend.

 

The second stock already pays a mid-level dividend. The Thomson family controls roughly 70% of all shares of Thomson Reuters through their private holding company. They have made a number of dissimilar investments over time, including a commanding position in the North Sea oil field. Their principal business today is distributing critical data to law firms, accounting firms, corporations, and governments in the US, Canada, the UK, and Latin America. Thomson is the largest provider of this type of data, and they have taken their time converting their products to utilize “AI”. Their customary careful management has recently introduced “AI” driven products which have been well received, making good progress with both old and new customers. (Disclosure: For a few years Thomson owned the data of my firm, Lipper Analytical Services, but they recently sold it to the London Stock Exchange Group.) Thomson Reuters is similar to Moody’s, S&P Global, and other commercial data providers that we own.

 

Working Conclusion:

Change is inevitable and risky, but necessary, and worth the risk most of the time. 

 

Please share your thoughts

 

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Mike Lipper's Blog: Dead Cat Bounce > Last Chance - Weekly Blog # 952

Mike Lipper's Blog: Long-Term Money Via Telescope, Not Microscope - Weekly Blog # 951

Mike Lipper's Blog: Before Focusing on Shorter-Term Reactions - Weekly Blog # 950

 

 

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A. Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

 

 

Dead Cat Bounce > Last Chance - Weekly Blog # 952

 

 

 

Mike Lipper’s Monday Morning Musings

 

 Dead Cat Bounce > Last Chance

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

 

          

 

We appear to be in a normal trendless summer, with relatively low volume on hints of fall upsurges and declines. This poses a big risk for

investors with large gains in their portfolios who could be subjected to major moves from stampeding investors selling for fear of a big decline or speculative surge.

 

I am therefore suggesting that this is the time to build cash reserves so that you are in a position to take advantage of large future declines. The trick is to have a reserve large enough to shelter the portfolio from meaningful losses, but small enough to protect against being out of the game following the next rise. The next decline could be major and last for a long time, which might encourage those who have too much cash to stay out of the game. That is the real risk facing careful investors.

 

My suggestion is to treat your account as a long-term pension or endowment account with annual flows of about 10%. This would require a two-year buildup of short-term cash reserves under normal investing conditions. This suggests a target equity commitment of 70%, with a short-term reserve of 20% and an emergency reserve of 10%. The key to this strategy is avoiding a down market that reduces the equity commitment below 50%. One way to accomplished this is to begin an orderly reinvestment program in the declining market.

 

Reasons for Concern this Week

• The Consumer Confidence survey fell to 50.8% vs the expected 52.4%.
• Estimated GDP for the second quarter came in at +1.5%, below the estimate of +1.8%.
• Chinese tech stocks fell -8.6% in July. On Friday, Apple (personally owned) fell -7.4% on rising earnings.
• Barron's 10-year high grade bond yields slipped -0.03% while yields on 10-year mid-quality bonds rose +0.04%. (The bond market is more concerned about the future of the US Government and the currency than commercial credits.)
• There were 286 new highs and 189 new lows on the NYSE, versus 468 new highs and 692 new lows on the NASDAQ*. Suggesting there is presently more opportunity in industrial and financial stocks on the "Big Board" than tech-driven stocks on the NASDAQ. (*NASDAQ stock owned in managed accounts and personal portfolios)
• Warren Buffett is quoted as thinking the market is gambling, not investing. (In the past his general warnings have proven accurate.)

 

What Do You Think?

 

 

 

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

Mike Lipper's Blog: Long-Term Money Via Telescope, Not Microscope - Weekly Blog # 951

Mike Lipper's Blog: Before Focusing on Shorter-Term Reactions - Weekly Blog # 950

Mike Lipper's Blog: Little Occurred During the Trading Week - Weekly Blog # 949

 

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please

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Copyright © 2008 – 2026

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.