Are Changes Indicative? - Weekly Blog # 961

 

 

 

Mike Lipper’s Monday Morning Musings

 

Are Changes Indicative?

 

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

            

 

 

Changes of Note

One rule of recon is to note any changes indicative of major transformation in the battle of survival. There are changes that I noted this week. These are not earthshattering, but could be indicative of either major changes, minor interest, or just possibly major importance. I ask my subscribers to reach their own judgement and hopefully share their conclusions with me.

 

The following list is in the order in which I found the changes, not the order of importance or the order of importance reflecting what the future might hold for us as investors.

 

Clues of the Future

1. Apple* is beginning its pay service in India. (Owned by clients and personally)
2. The Wall Street Journal publishes two sets of prices that it tracks.  The first is 118 items for the third quarter, with 53% going down. The second covers 72 prices for the week, with 74% falling. (Its significance serves to reinforce the Chairman of the Fed’s comments regarding the importance of shorter periods.) The ECRI reported a 1.6% decline in industrial prices for the week.
3. Both Nvidia and Tencent suggested that the price of certain long-term chips be used as an index to determine collateral for loans to data centers. (This suggests that debt levels have reached the point where lenders are running out of sufficient capital for loans.)
4. The yield of ten medium grade bonds tracked by Barron’s has reached 6%.
5. The costs to rebuild the Mid-East will be large, assuming the war in Iran is over.
6. Volvo reduced its estimate of car sales in both China and the US. (I have been increasingly thinking that the combination of the USA and China is going to drive the global economy.)
7. As of now there are only two of five SEC commissioners left. (The US government is missing lots of key people.)
8. For the week ended Thursday, only five of over 100 mutual fund sectors were positive, led by Japanese funds +1.74% and Dedicated shorts +1.60%.
9. The Kopernik fund finds value in Chinese pharmaceuticals, agricultural land, and Potash, among others.
10. Prudential is closing two of its office buildings by consolidating into its HQ and reducing staff. (They are not the only insurance company doing this, which suggests individual life insurance might be unprofitable for others.)
11. The Financial Times noted that “Mature market governments spend more on interest payments than the world is investing in “AI”, defense, and energy.

 

I am still expecting the next recession, if we are not already in one. There may even be an eventual depression if governments are not very careful.

 

Please share your thoughts with me so I can learn.

 

 

 

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

Mike Lipper's Blog: For Better Performance: Pick the Right Data - Weekly Blog # 960

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Bear Market, Recessions, Reinvestment - Weekly Blog # 765

 

Mike Lipper’s Monday Morning Musings

Bear Market, Recessions, Reinvestment

 

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

 

 

H A P P Y  N E W  Y E A R  to  All

 

 

 

An Explanation

For the very first time since publishing these blogs we suspended publication during Christmas week. While most blogs suspend publication in observations of the holidays, we normally don’t. The reason being something could impact our subscribers’ investments every day.

 

Although we mainly focus on long-term investing, each long-term investment journey starts with a first step. Thus, we scan weekly market activity in search of possible initial steps. Transaction volume during Christmas week was low and quite balanced between investors believing we are close to a change in direction and those seeing deeper problems that will take longer to solve. Thus, a relatively flat quiet market did not send signals to me.

 

This week I was faced with almost identical low volume fog. However, I noticed there was more selling than buying on the three main US markets for the week. I recalled that most non-trader investors spend their time waiting, while perhaps also worrying. With those thoughts in mind, this week’s blog is about the critical stages of long-term investing in search of future rewards: Bear Markets, Recessions, and Reinvestment.

 

People have been grappling with these issues since the beginning of recorded time. Since I was not producing a blog this week, I began reading “The Price of Time, The Real Story of Interest”. The story begins with a portion of an inscription found on an Assyrian tablet from approximately 2800 B.C. One of the first written attempts to predict the future states “…the end of the world is evidently approaching.” Therefore, take my views and those of others with a grain of salt.

 

As all life appears to be cyclical, it is appropriate to start the first blog of 2023 with a look at the cyclical behavior of bear markets, recessions, and reinvestment.

 

The commonly used term for a bear market is a 20% loss from a former high. In prior bear markets I have lost 20% of my worth, but I have not lost my source of income (paying job) or main source of cash. During 2022 we certainly experienced a bear market, but luckily not for the full year. The mistake I made in writing my blogs was trying to get ahead of the crowd by labeling what we went through as the early stage of a recession. It neither qualified as an economic recession nor was I out of work, a popular definition.

 

My problem as both a portfolio manager and blog producer is the timing of labeling a recession, as it officially gets labeled a recession long after it begins. The pending label is useful in timing and making investment decisions. However, in waiting for the “official” label, remember that stock and commodity markets generally discount the future.

 

The three types of recessions are cyclical, secular, and structural. Most recessions include elements of each type, with one dominating. The most common type is a cyclical recession, which is generally limited to a price decline from the prior bull market high. The common perception by most investors and apparently the Federal Reserve is that we are likely entering a small and short cyclical recession. (Applying my contrarian nature from the racetrack, I am doubtful that the next recession will be that simple. Historically, if I am wrong, the penalty won’t be very large.)

 

A possible hunting list for stocks might be those that performed well for many years prior to 2022 and significantly declined this past year: Apple, Microsoft, Alphabet, Nvidia, Costco, Danaher, NextEra, Adobe, UPS, Texas Instruments, SalesForce, and S&P Global. All of these stocks have suffered from pricing, delivery, and other short-term problems. These issues also appear to be fixable and seem cyclical in nature. I or our accounts own some of these issues.

 

The second most common type of recession is a secular recession, which is caused by changing elements in the foundation of society. This type of recession generally has a lasting impact on the economy. Think in terms of women working outside of the home after WWII and expanding the number of people working, changing the size of homes and gross income.

 

We may be entering a period where a large portion of the population are not qualified or prepared to work in the traditional payroll structure. The most significant change could be the US, UK, Canada, EU, and Japan failing to reproduce at a sustainable population rate. Another problematic change is US students ranking in the middle to lower range on global tests below the college level. Quantitatively and qualitatively, there is concern regarding our future leadership.

 

As we move to succeeding generations, the society and economy may adjust to these “abnormalities”. Thus, they would be considered secular changes and hopefully not structural changes.

 

I suspect these types of changes cause long-term institutions to modify their portfolios. This may be the reason the State Street Investor Confidence Index decreased to 75.9 from 90.3 in the fourth quarter. Of interest are the different global readings: North America 72.2, Asia 86.9, and Europe 102.6.

 

The third and most uncommon form of recession is caused by structural change, where the way people think about earning money changes and never goes back. Typically, these changes are driven by technologies like the steam engine, the automobile, semiconductors, or by basic changes in government, such as divorce and inheritance laws.

 

The problem I have in questioning the type of recession relates to its likely frequency and financial impact. Which in terms of severity, from most to least, are cyclical, secular, and structural. However, in terms of significance to family wealth, the order is in reverse.

 

If one believes there is an all-knowing power in the sky wanting to eventually adjust the way humans operate, it might be by using economic cycles to correct for the way we screw up our lives. Economics is the historic tool that forces us to do the right thing.

 

There are multiple imbalances in almost every sector of our society and its messenger is the economy. There is hardly any part of society today whose leadership possess superior political skills, not operational, or judgmental abilities. Since we seem unable to solve these problems ourselves, we are going to be nudged in “the right direction” by a secular or structural recession. Corrective actions won’t likely come from a short or mild recession, as that would be like putting a Band-Aid on a gunshot wound.

 

While I clearly don’t know, I am on watch and ready to adapt the right moves to protect my responsibilities.

 

 

 

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

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Copyright © 2008 – 2022

Michael Lipper, CFA

 

All rights reserved.

Contact author for limited redistribution permission.