The Rhyme Curse -Weekly Blog # 838

 

         

Mike Lipper’s Monday Morning Musings

 

The Rhyme Curse

 

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

   

       

   

^{Analysts, lawyers, and accountants spend much of their careers relying on history to protect themselves and their organizations. I have often said, cut an investment analyst and a historian will bleed. Mark Twain is incorrectly identified with the following quote “History does not repeat itself, but it rhymes.”  To select the most useful rhymes, you should select from all past observations as an “AI” search would do, rather than just using the most useful observations. For example, in reviewing the number of years between the S&P 500 “all-time highs”, including 1929. There were 15 such occurrences, but they were of different durations: 25, 6, 5, 3, and 1-year durations). The most common period was one year, with 6 out of 15 periods being 1-year durations. In attempting to pick a relevant number of years, you should look at other factors. I would pick periods of rising government deficits. The center of this array is 5-6 years, suggesting a cyclical recession and possible periods of stagflation. A longer duration would imply a structural recession.}

 

^{Historical Inputs of Relevance Today}

^{In the 1890s US Admiral Alfred Thayer Mahon wrote on geopolitics and pointed out that Great Britain, a geographically small nation, was the real leader of the world due to its naval and commercial fleets. Both Germany and Japan got the message, which was fundamental in their preparation for WWI and WWII. China once had the largest fleet in the world, before they destroyed it themselves.}

 

^{The result of this seminal work was that once Germany was able to send its battleships through the Baltic to destroy British warships, WWI became a certainty. Prior to that the German General Staff, thru visits and other studies, had focused on the campaigns of General Stonewall Jackson in the Shenandoah Valley of Virginia, demonstrating the power of using mobility against fixed forces. After it’s treatment as an “ally” during the signing of the Peace treaty and the US curtailing its oil supply, Japan recognized the need for sea power, an issue which led to Pearl Harbor. Bringing the lesson and its probable impact on our future up to date. China has the largest naval fleet in the world today, and it is still growing while the US’s fleet declines.  China has almost half of the world’s shipbuilding capacity.}

 

^{Preparing for the Future}

^{The Capital Group, one of the great mutual fund and institutional investment managers, has entered into a joint venture with KKR to produce and sell hybrid funds. JP Morgan Chase, an organization that internally studies many possible futures, is prepared for interest rates between 2% and 8%. Their CFO is prepared for the tailwinds currently helping them to switch to headwinds.}

 

^{Many Different US Markets}

^{The only US Diversified Equity mutual fund sector to rise during the week through Thursday was large-cap growth funds, which was echoed by tech sector funds. While the NASDAQ advances volume rose for 4 days in the week, the NYSE Composite Index only advanced for one day. Low volume has led to less volatility.}

 

^{What Many are Not Prepared for}

^{The average age of world government leaders is 62, with 19% in their 70s and 5% in their 80s. The median age for US senators is 65, with the House member median age being 52. The average CEO is 56. While I hope all of our leaders are in good health and remain so, I suspect the emotional strain and lifestyle choices are incidental hurdles. As they age, they often become more conservative and prefer the old way of doing things.}

 

^{Investors are not prepared for change. I am currently noticing an increase in the rate of top spot replacements. Investors should therefore be prepared for leadership changes, which almost always result in younger and more vibrant leaders. There are other changes few are ready for, like a change in the Fed and other regulatory bodies, or a change in policies. I suspect there will be changes in private investments and how they deal with the public. As usual, low-risk equity and debt not designed to survive either stagflation or a major recession will come in late the.}

 

^{Let me know what investors need to be prepared for.}

 

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

 

Mike Lipper's Blog: The Most Dangerous Message - Weekly Blog # 837

Mike Lipper's Blog: Trade, Invest, and/or Sell - Weekly Blog # 836

Mike Lipper's Blog: Secular Investment Religions - Weekly Blog # 835

 

 

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.

 

Government Debt vs. Tough Love

Introduction

Introspection is forcing many managers and investors to privately reconsider the basic premises of their long-term investment strategies. With the popular US stock indexes at or near all time highs, why don't they feel better?  The relative investment performance of many high quality value-focused managers is lackluster. The companies they own are doing well and for the most part they are sitting on lots of cash earned overseas from faster growing markets than their own home market.

One of the sectors which is doing very well for many portfolios is financial services securities. In terms of market value this sector is the second largest in the S&P 500. Further, in most other markets, the financials are the largest high quality names. Our own private financial services fund is having a good year producing returns at least twice a "normal" year would produce. And that dear reader may be a symptom of the deep problem.

The two drunks structure

When two people who have had too much to drink and are marching down the street supporting each other, there is a symbiotic mutual support system at work. In most countries, governments are thought to be the guarantors of at least the banks’ depositors, if not the majority of its creditors. In most societies, the largest owners of the governments' debts (those that are not a government entity like social security) are the banks. The drunks are into each of their pockets in a major way.

The reason and the costs of financial dependence

We all know the historic reasons for these relationships. In the past each side was feared to be in danger of failing. Under these circumstances heads, some of them innocent, would roll. There would be disruption of “normal” activities and many things would grind to a halt. That is until replacements came into being with new leadership and fresh capital. Order would be restored with the absence of some wonderfully historic nameplates such as Bear Stearns, Lehman, Washington Mutual, Countrywide and Merrill Lynch; as well as, at least initially, more assorted spending and investing. In a parallel example, think about some function or people who were let go and not replaced. In all likelihood they were not earning their cost of capital and in the past were a drag on all who were.

No bailouts plus “tough love”

In a somewhat simplistic view the bottom line of corporate, bank, and government failures is that they run out of money. This was probably due to the fact that they did not earn enough to pay their debts (including to their own people), and because their clients and citizens did not value their services highly enough to meet their obligations. As an independent investment advisor and private citizen, no one is holding a safety net beneath me to meet my obligations. Recognizing that I am not likely to get some form of bailout, and that with the specter of tough love, I have to manage my affairs to pay off my legal and more importantly for me, my family and charitable obligations.

What would the world look like under tough love?

Governments would rely on their taxing authority to meet much more limited needs. Some of present expenditures would be taken over by the private sector; this would include the postal system, Medicare, Social Security, Patent Office, Library of Congress, mortgage companies, student and farm loans, many government facilities and more.  At the same time the private marketplace would determine what would be the minimum level of capital required for a bank to be considered sound and safe. This probably would mean that banks would keep very little of their capital in medium to long-term bonds.

Do I expect this to actually happen?

No, but I think there is some chance that we will haltingly move in this direction.

If there is any chance, how should this be played?

In a conceptual sense we are already seeing replacements for traditional banks. You can't tell this from midtown Manhattan or in many wealthy suburban communities, but the number of bank branches is dropping. The financial agents for college age kids are credit cards, student loans and the “Bank of Mom” or other relatives. In some respects Google, Alibaba, Amazon and undoubtedly others including financial services web-based brokers, large family offices, gatherers and distributors such as BlackRock, Blackstone, KKR and T Rowe Price* will play roles that banks have played in the past. Not all of these stocks will be successful, but some exposure in portfolios will be warranted
          *Held by my private financial services fund.

A question

Who is providing financial services for your children and how will this impact your plans in the future?

___________________

Did you miss Mike Lipper’s Blog last week?  Click here to read.



Did someone forward you this Blog?  To receive Mike Lipper’s Blog each Monday, please subscribe using the email or RSS feed buttons in the left column of MikeLipper.Blogspot.com .


Copyright © 2008 - 2013 A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.