Some Past Errors Create Future Problems - Weekly Blog # 798

 

Mike Lipper’s Monday Morning Musings

Some Past Errors Create Future Problems

 

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

 

 

 

Employers can't find suitable candidates to hire due to both faulty education and attitudes toward work. This is one of the reasons the US is losing the productivity of labor battle. In at least 16 states a large percentage of students are failing third grade reading tests e.g., 60% failed in Tennessee. (In our machine era, if you can't read instructions, you can't operate various machines.) I suspect that teachers are taught to teach to the test, test scores are used for hiring, and schools are retaining teachers in union jobs.

 

Teachers should be teaching students how to use information to gain knowledge. This is not what is happening today. (A classic example is a problem I had with my late daughter. She drove me crazy with her disability, which caused her to have problems adding a simple column of numbers correctly. So, I changed focus and concentrated instead on how she kept track of spending money. She always had money in the bank and her bills were always paid. In explaining it to me, she said that was easy. She said she was conserving the money by keeping it intact at the bank, while we paid her credit card bill. Thus, she was the best money manager in the family. The key was that she figured out what none of her teachers or aids did. The teachers need to learn to teach life lessons.)

 

The biggest problem with what is being taught is the integrity of our history, which pivots on one word: Tariffs. People don't like paying taxes. Politicians throughout history have given popular reasons why people should make these payments, without focusing on the real reasons. Three examples in US history still hurt us today.

 

The “Boston Tea Party”, staged by American Colonists dressed as Indians, threw the first shipment of taxed British tea into Boston Harbor. The Colonists were protesting the payment of a tax without being represented in the British government. The truth of the matter was that Lord North, an unpopular British Prime Minister, needed to pay for a six-year war with the French to protect the American colonies during “The French-American War”. Lord North and many in England thought that America was costing too much. It was being totally financed by revenues derived from goods purchased from “The Mother Country”. The Tea Party thus became one of the initial political events leading to the American Revolution.

 

The second misappropriation embedded in our history is the Civil War. In this weekend’s Wall Street Journal there is an opinion piece by Jim Webb, a US Marine Officer who served in Vietnam and a Secretary of the Navy. He was also an independent director of a respected Mutual Fund. In the article he commented that there were very few confederates who owned slaves. He also noted that more slave owners fought for the North than the South. Yet it remains a popular belief today that the war was about slavery. In truth, the war was about tariffs. The North wanted high tariffs to protect its manufacturing, while the South wanted low tariffs to aid the British who were major buyers of their’ cotton and were suppliers of cash to the Confederacy.

 

Post Civil War through the Wilson administration, Americans were fed a political diet about slavery. For about the fifty years this was happening, the German General Staff made many trips to study American war battles, particularly battles in the Shenandoah Valley with Stonewall Jackson. The study of these battles played a critical role in both WWI and WWII, particularly in their attacks of the ”low countries”.

 

I also believe the German underground political movements in the US led to delays in the US entering both world wars, despite British efforts. (The US recognized the importance of the war and placed its War College in Pennsylvania, hoping to understand both battles and the infrastructure challenges.)

 

The third misappropriation is still taking place today, with the last two administrations selectively using tariffs for domestic political purposes. These tariffs caused inflation that was importantly paid by low-income people. The current administration is attempting to hurt Republicans by damaging corporate earnings through the restriction of sales, while at the same time trying to raise labor union wages and their contributions.

 

With All This Good News-How to Invest?

Like Ronald Regan, “I won't exploit my opponent’s youth and inexperience”.  Neither party is serving up a long-term leader or a set of policies. Most people can see through their own accounts that there is no great future for them. Around the world young people have lost confidence in the "system".

 

With most equities around the world declining in real terms, one should consider a careful plan to dollar cost average into the markets. The more China suffers, the more attractive long-term investment in China becomes. Foreign car companies will benefit compared to ‘the big 3”, as the UAW forces prices higher.

 

Recognizing my COVID Brain does any of this makes sense.

 

 

 

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

Mike Lipper's Blog: Inputs to Implications - Weekly Blog # 797

Mike Lipper's Blog: Markets Are Time Frame Exchanges - Weekly Blog # 796

Mike Lipper's Blog: Possible Investment Lessons - Weekly Blog # 795

 

 

 

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 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

What Did Friday’s Market & Political Actions Mean for Investments? - Weekly Blog # 687

 

Mike Lipper’s Monday Morning Musings

What Did Friday’s Market & Political Actions Mean for Investments?

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

(One of the challenges of living in the present is evaluating what has just happened, related to both history and expected futures. The following blog briefly examines four alternative sets of actions related to Friday’s events.)

Friday’s Actions

• Compared to a relatively low volume period for last two months, the New York Stock Exchange volume shot up 7.6 million shares from Thursday’s 3.9 million. Somewhat higher volume was generated on the NASDAQ, 7.8 vs 4.3 million shares. Interestingly, the Barron’s Confidence Index, which uses bond yields, shot up meaningfully in favor of high-quality bonds vs. intermediate bonds. For those who believe bonds often move before stocks, an increase in interest for high quality bonds is negative for future stock performance.
• The impetus for sharply rising stock prices in the morning was the announcement of a bill on infrastructure extensively negotiated by 21 Senators. The Senators were joined on the White House driveway by President Biden, who agreed without reservation to the proposed bill.
• Within two hours there was an announcement (from the 3rd term Obama staff) that the President would only sign the infrastructure bill after reconciliation actions coincident with the passing of his social programs. 
• This brought an immediate reaction by a number of Republican Senators who were part of the 21 member negotiations group. There were additional rumblings from a few Democratic Senators. Not surprising, price gains of Friday morning shrank.
• After the market close the White House issued the following statement from The President, “My comments also created the impression that I was issuing a veto threat on the very plan I had agreed to, which was certainly not my intent.”

What Should Investors Ponder?

1. Who is running The Executive Branch? Is it the President? Or is it the third-term Obama staff with their second-term FDR model?
2. Is redistribution of political contributions inevitable?
3. Pundits and their followers pay too much attention to political news.
4. Short-term market fluctuations do not determine long-term wealth opportunities.

Each Investment Portfolio Should be Managed to Fulfill it’s Needs

With that thought in mind the following tactical considerations should be considered.

1. We live in a global world. Increasingly, many of the goods and services believed to be vital are influenced by both attempts to restructure the domestic economy and actions taking place beyond our borders . Historically, people of wealth have diversified by investing outside the purview of their home governments. For the most part Americans have been a bit late in this effort. Our first conscious international exposure was often through buying shares in US-traded multi-national companies. In many ways this is a “half-pregnant” move. We are a believer that all investors should have some exposure to markets priced in currencies other than the US dollar. The needs of politicians are different than those of investors. Thus, the actions of selected foreign governments may be more favorable to investors than the those in the US and some of its states. This may be a particularly wise time to add individual foreign stocks and mutual funds investing internationally.
2. For shorter-term portfolios, considering the political uncertainty we are experiencing it may be wise to adapt trading technics, distinct from buy and hold investing approaches.
3. While the financial headlines are very short-term oriented, this may be the time to invest using fundamental terms. Dollar cost averaging could make a lot of sense.
4. For those able to meet liquidity needs with a portion of their portfolio, investing in selected private investments could make sense during a period likely to see increased investment regulation.

Please share your views on what has been expressed.

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

https://mikelipper.blogspot.com/2021/06/mike-lippers-monday-morning-musings-50.html

https://mikelipper.blogspot.com/2021/06/to-benefit-long-term-investors-invert.html

https://mikelipper.blogspot.com/2021/06/history-good-lessons-not-great.html

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 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

50% Humility & Search for New Money Standard - Weekly Blog # 686

 

Mike Lipper’s Monday Morning Musings

50% Humility & Search for New Money Standard

(Caution: Few may totally agree, but all should view as possible)

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

Top- Down Week:

Two messages from Washington this week; humility and arrogance. This week, the Chair of the Federal Reserve Board in effect recognized the need to show humility. Faced with the COVID-19 Pandemic and excessive lockdowns, the Fed recognized its all-important research/prediction process was significantly inaccurate in judging the economy and inflation. To me, this recognition is much more important than the “Dot Plots” prediction of two rate increases in 2023. As an investor/portfolio manager/analyst and handicapper, I believe “two in ’23 is a bad bet, partially due to the actions and attitudes emanating from The White House. 

There is the just doing the opposite attitude by the current repeat tenants of The White House. In terms of improving relations with China, the stated purpose of the meeting in Alaska, US Foreign Policy was a failure. The same game plan was used in the meetings with the G-7, NATO, and President Putin. The goal of all was to influence the domestic consumption of post meeting press conferences, not to conduct any substantive negotiations. Since the beginning of meetings between adversaries, successful meetings were generally held in private. At these meetings, disagreements between parties were often worked out and largely settled, with the participants being critical contributors in the negotiations, not props for press releases. 

Connected to the discussion with Russian President was a set of clues that would perhaps benefit the Russian economy. By further increasing the price of oil the occupants of The White House are, or are planning to, reduce the production of US energy. This may be why they turned down a critical way to pay for part of the proposed infrastructure bill by indexing the federal gasoline tax. Seems a strange way to address the exploding inflation issue.

Reactions: 

As few if any buyers or sellers offer affidavits as to why they have bought or sold a security, we don’t really know the real cause of transactions. The best we can do is use circumstantial evidence and we have learned how wrong conclusions from such evidence can be. The following is a list of reactions, from the simplest and most current to historical and future generational extrapolations.

1. The traditional slowdown in trading, particularly on Fridays, with summer apparently starting earlier this year.
2. Individual investors and inexperienced wealth managers have focused on the Dow Jones Industrial Average fall of -3.45%, compared to the smaller decline of -1.91% for the more institutionally oriented investment focused S&P 500. The savviest traders who predominate the NASDAQ only experienced a fall of -0.28%, suggesting the DJIA decline was driven by disappointing reactions to media pundits press conferences. This was particularly true on Friday as traders unloaded their positions they did not want to carry over the weekend. Friday's downside relative to upside volume on the NYSE was six times greater than the 2.5 times on the NASDAQ.
3. There were relatively few price gainers for the week, most being tech-oriented growth stocks, with particular focus on internet related firms. These gains were generated in spite of largely Democratic members of Congress calling for the breakup of the large tech companies. Based on history, many smaller companies and users of tech would suffer, potentially causing a switch to growth from value/industrial companies where valuations are one half or less. Value stocks have been performing better than growth for a while. Is it possible that the aggregate market demand switch is saying that growth will produce higher returns than value over the long-term? One could take that point of view based on the expected future actions of politicians and the "Fed". The weekend roster of weekly prices across many sectors showed 86% going down.
4. Some may be seeing the probability of more expensive energy retarding global growth.
5. The rising interest in actual and synthetic gold reflects concerns related to the value of currency. The "gold standard" worked for thousands of years, although that was in a world where physical assets were the primary measure of wealth. The private sector holds gold as a hedge against the historic tendency of governments to reduce the amount of gold backing money. Today, most currencies are not significantly backed by gold or hard tradeable assets. These fiat currencies are increasingly issued by autocratic governments with substantial debts who benefit from inflation. Governments with substantial debts benefit from inflation increasing taxes and reducing the "real costs" of repayment. We have experienced governments attempting to deny ownership of gold in the private sector. Those who own actual or synthetic gold expect the prices of their assets to go up and become the real backing for the currency. I question that we have entered a world where we pay considerably more for services than hard assets. At some point I suspect bundles of service contracts will be the backing for our currencies. These include medical contracts, protection contracts, travel contracts, use of location contracts (homes and facilities) and others including military contacts. (Remember, the American Revolution had European mercenaries. The current administration is removing ours in the Middle East and wants higher compensation for our forces in Europe and Korea.) We are closer than we realize to a service-contract oriented wealth system.

We congratulate all the fathers for their good choices who spent time with their children, grandchildren, great grandchildren, and other relatives on Sunday.

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

https://mikelipper.blogspot.com/2021/06/to-benefit-long-term-investors-invert.html

https://mikelipper.blogspot.com/2021/06/history-good-lessons-not-great.html

https://mikelipper.blogspot.com/2021/05/mike-lippers-monday-morning-musings_30.html

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 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

Debt, Inflation, and Markets - Weekly Blog # 669

 

Mike Lipper’s Monday Morning Musings

Debt, Inflation, and Markets

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

I. The Changing Value and Price of Money

As is often the case, when we speak of purchasing a good or service, we mention its cost in our local currency. We don’t view the purchase in terms of unrelated transactions, like a vacation vs. a month’s rent. If we were more intellectually rigorous, we would calibrate the purchase in terms of inflation and currency exchange rates. For those whose wealth is totally used up by spending, this thinking is understandable. However, for those who have savings/investments, this singular way of thinking reduces future wealth and spending power.

With the above predicate, all savers/investors should focus on prices and inflation. An agreed price is the result of supply meeting demand and the costs incurred in the present or future. As in a gunfight, don’t show up with only a knife. For serious purchases, don’t bargain without insight into the history of prices. In the modern world, where services are the largest part of an economy, we have difficulty grasping the costs driving prices. For manufactured goods, the costs of raw materials and industrial goods play a dominate role, excluding the cost of labor. That is why I pay attention to the weekly reading of JOC-ECRI Industrial Price Index, which saw a price rise of +44.83% year over year. Part of the price explosion is due to capital expenditures not keeping up with demand. For example, Goldman Sachs is warning of a copper scarcity in the coming months, leading to the largest deficit in ten years. A somewhat similar situation is occurring in the oil patch.

In analyzing inflation, it is useful to recognize who benefits, who hedges and who loses. The pure benefactors of rising inflation are the relatively few that gain from rising prices, due to it being the sole input to their financial well-being. Most people have a mix of prices received and prices paid. Some are naturally balanced, while others hedge offsets. Non-savers/investors who consume all their income are clear losers, as the losses created by the declining value of a currency are the equivalent of a tax. 

The motivations of the Federal government are mixed. When governments pay off their debts with inflated dollars, they net the difference between the purchasing power of the dollar and its contractual payment value. In addition, personal income tax payments rise on the inflated income. (Since corporations pay taxes on their pretax income, which may be offset by inflated costs, their pain of inflation is less.) 

From a political vantage point, the financial problems of the non-saving poor are intensified. However, for some politicians this problem has a “silver” lining, it encourages the redistribution of wealth through the socialization of the concern. In a healthy economy, increases in productivity often create gains that offset the pain of inflation, but US redistribution also leads to increases in jobs overseas and makes international investing more attractive. (The difference between international and global investing is that international investing excludes the home country, which global does not.)

Most investors ignore declines in purchasing power due to currency depreciation or inflation, if they are small. Due to current conditions and global political leadership, it may be prudent to adjust investments.

II. Breaking the “Bubble” Ahead?

Since the beginning of recorded history we have dealt with seasonal cycles and those that last longer. Trading markets adjust due to the relative strength of buyers and sellers, thus markets have they own cycles. Economic and market cycles do not always coincide, and when they don’t coincide the amplitude of the cycles is more limited. As long-term investors, we therefore need to examine the probability of the next declining phase, both in terms of economic and market cycles. In analyzing cycles it is useful to look at elements the popular media and marketers can spout quickly. You should also look for structural changes that can cause the foundation of the cycle to weaken to a point where it collapses. What are the signs I see?    

Economic Structural Issues

Debt is a major accelerator of most economic collapses, distinct from those primarily caused by political, medical, or climate changes. Debt is already growing much faster than the economy, even before the full increase in debt at all levels of government globally is disclosed.  Normally, the banking system controls the policing of debt. However, significant debt is being extended by non-bank credit groups in many countries, including China and the US. The problem with debt is that it replaces equity for temporary uses and speculative purposes, solving short-term needs, but doing little to generate long-term investment. While China and some other countries are spending on infrastructure to produce longer-term economic gains, it is not happening in the US. While both the past and current administration have discussed infrastructure programs, the private sector has not indicated a willingness to provide substantial equity. We don’t seem willing to get little or no cash return for a number of years, before the supposed gusher of profits arrive.

The steepening of the yield curve may be capturing this reluctance. There is great competition to supply short-term funds for margin debt and short-sales by brokerage firms and banks. Bank money market account interest rates dropped below 10 basis points this week, indicating banks have no need to attract new deposits to make additional loans, driving the front end of the yield curve even lower. On the other hand, interest rates at the long end of the curve are now higher than they were last year. One should remember that the published yield curve is for US Treasury paper and long rates for perceived lesser credit should be higher. This drives up the costs of long-term equity dollars, making them scarcer.

This week’s weather in Texas and the Midwest shows the need for much more capital spending on local infrastructure and power generation. The purported growth of electric vehicles will also shift energy needs from oil to natural gas, which should economically be distributed through pipelines, contrary to the present government’s wishes. The combination of new regulation and higher taxes means that many energy facilities will be taken off-line. Fitch believes the removal of these units for economic production will reduce the earnings of the energy companies, which in turn will lead to lower credit ratings that drive up their capital costs. Beyond the energy sector, the expected jump in taxes and regulation will reduce the ability of industry and individuals to generate capital for spending and investment.

Stock Market Structural Changes

Most of the time money follows performance. In the week ended Thursday, an index of the large S&P 500 index funds gained +4.47%. Five other equity fund indices were up at least twice as much:

  Lipper Small Cap Value           +13.13%

  Lipper Pacific Ex Japan          +13.10%

  Lipper Global Natural Resources  +11.66%

  Lipper Science & Tech            +11.48%

  Lipper Financial Services        +10.05%

There is no common denominator in the five leading groups, except they are not primarily large companies and the leading tech companies have less influence of in the portfolios of the largest funds.

The cash positions of many of the leading institutional investors are near a historic lows and the new speculators are heavy users of margin. The American Association of Individual Investors (AAII) weekly sample survey of bearish sentiment for the next six months has dropped 10.2% (25.4% vs 35.6%) in the last three weeks, with an almost concomitant rise in bullish sentiment (47.1% vs 37.4%). Professional market analysts view these as contrarian indicators and the combination of the three sentiment indicators could be significant.

Investment Conclusion

Rising stock markets have a habit of lasting longer than when structural problems are present, staying “bullish” until something changes mass opinion. I would use this enthusiasm to raise this year’s cash needs. I expect within two years we will have an opportunity to buy valuable investments with more knowledge and at better prices.

   

Important Note: 

I always want to hear from our subscribers, but I particularly appreciate hearing from subscribers that can correct or disagree with what I have written. That is how I learn to do a better job. In response to last week’s blog, a long-time subscriber and investment professional with non-Us experience, correctly noted that the Declaration of War between Germany and the US was declared by Germany a few days after the December 7th attack on Pearl Harbor. It was followed  by the US declaring war on Germany in a reciprocal move. This re-enforces my view that the main impact of an action is often the reactions of others to the event. In this case, if the move by the Germans was to support Japan, it had a different impact on both, as well as the US. In terms of Germany and the US, it led to a two-front war waged by the US, with the political decision to primarily focus on the European War. This in turn gave more force to the industrial mobilization of the US, which probably shortened the overall war effort,  leading to the surrender of both Japan and Germany. One should think through the reactions of others to the moves you make.

Question of the Week: What is the worst for which you are prepared? 

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

https://mikelipper.blogspot.com/2021/02/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2021/02/adjust-investment-tools-for-next-phase.html

https://mikelipper.blogspot.com/2021/01/is-gamestop-missing-event-weekly-blog.html

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 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.