Mike Lipper’s Monday Morning Musings
Are We in Normal or Historic Times?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
The Single Most Critical Job
In thinking about the investment future, the critical job is
guessing what the near future will be like compared to the past. Is the next
period going to be like the last five or ten years, or possibly the downfall of
the leading country of the world?
In trying to ponder ways of thinking about the future, it
starts with an admission that I don’t know what the investment future will be.
The second admission is acknowledging that I do not know what global changes
will occur that have not existed in the world. For example, the discovery of
the new world, the harnessing of electricity, and developments in the medical
world. However, a study of human history and some understanding of geology can
be useful.
Everyone has their own way of thinking about relevant
financial behavior, whose models often parallel most others. I have devoted an
adult lifetime to the analysis of the investment performance of mutual funds,
with emphasis on those offered for sale in the US. These funds were used by a
large portion of the American investment public and were something of a model
for investors from other countries.
The US Experience
The largest portion of mutual fund money is invested in
8,162 US Diversified Equity Funds, with total assets of $20.7 trillion dollars.
This group excludes narrowly focused specialty equity funds, overseas funds, fixed
income funds, and commodities funds. Over the last five and ten years through
last Thursday, the average investment performance including reinvested capital
distributions was a gain of +8.26% and +11.09% respectively. These periods
included relatively mild recessions and no depressions or global wars. Looking at
longer periods, these results were better than average.
These results repeated over long periods have met the
retirement needs of individuals and institutions for capital investments. They
delivered good results which hopefully will continue, although I doubt it.
Historical Long-Term Lessons
President Trump will soon meet with Chairman Xi again. The
last time they met Xi asked, “Can China and the US overcome the Thucydides trap
expressed by the ancient historian and general Thucydides?” The Thucydides trap
is the point at which financial and military costs exceed the productive
capacity of the domestic economy, which is what led to the fall of the richer
Athens over Sparta.
Is the US Approaching the Trap?
The Federal debt has reached $40 Trillion, with two war
efforts by the US. This weekend Russia recognized its problem by entertaining into
high level negotiations with US officials to resolve some unclear proposals for
peace in their war with Ukraine. Both Russia and China are supporting this
expensive battle, as is the US.
The current US debt expansion is causing European and other
countries to reduce their ownership of US dollars. This weekend, Norway is
reducing its holding of dollars by $17 billion. The dollar is slowly losing
value relative to UK Pound Sterling and the Euro. In addition, private US debt
is increasing through private debt channels. (When retail investors are enticed
to buy investments that are new to them, it has not led to an extended period
of gains.)
Investment Advice
While there are some positive signs, it would be wise to be
careful. An important size buying reserve could be useful.
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