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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