Mike Lipper’s Monday Morning Musings
Bear Markets & Recessions, Not Inevitable
------------------
This Week’s Rally in Bear Market
-------------------
Popularity Unnerving to Contrarian
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
No Absolute Law Governs Markets+Economies
The time series movement of markets & economies are not controlled by scientific law, much to the annoyance of quantitative analysts and pundits. Statistically, the minute-by-minute or day-by-day are both random, and reactive to the thoughts of swing factions. Ever since products and services have changed hands there have been trends of rising and falling prices, although there is a fundamental difference between markets and economies.
Markets move on both real and rumored transactions, whereas economies move on the actions of participants and government forces. One critical difference is that markets move without much attention to those who are not active, while economies attempt to induce non-participants to take a more active role. Both market and economic/political pundits react to very current information, trying to get ahead of directional changes. Most major moves of 10% or more are due to radical confidence changes resulting from the recognition of long-term trends of imbalances.
Implications of Latest Data
- While the bond yield curve is rising for maturities of up to 5 years, it is quite flat in the 5-30 year periods. (The bond market believes inflation is an intermediate problem, which will be solved by the end of the next presidential term.)
- The most current economic data shows a very mixed picture, as indicated below:
- Personal Income +2.61%
- Personal Savings Rate Change -65%
- Residential Investment -4.38%
- Baltic Dry Cargo +3.27%
- Inventory/Sales Ratio 0.79%
- CPI +8.24%, PPI +15.68%
- Broker Call Rate 0.95% vs 0.12% a year ago. (The cost of liquidity is going up, reacting to risk and availability.)
- Both AAII measures are extreme: Bullish 19.8%, Bearish 55.3% (Bearish was 59.4% on 4/28)
- Productivity -0.6%, which means +7.2% in labor costs
- 5th consecutive semester college enrollment, -4.1% for all and 6.5% for blacks.
Equity Market Inputs
- Only 3 of 121 equity oriented taxable mutual fund peer groups were down for the week. The biggest decline was for the average short- oriented fund -5.97%. The other two declines were less than 1%. This is an extreme reading for the week, suggesting an extreme rally in a bear market.
- Stocks listed on the NYSE are doing better than the growth- oriented NASDAQ: New High/New Low for the NYSE 88/36 and 49/113 for the NASDAQ. In terms of advances/declines shares traded for the week, the NYSE had more than 7x vs 4x for the NASDAQ. Indicative of a switch away from presumed growth and/ greater public participation in the rally.
Contrarian Concerns
Numerous brokers, advisers, and portfolio managers have become much more cautious, led by customers worried about a recession this calendar year. (As the recent second report of first quarter GDP confirmed a decline, reinforcing the first report, it probably means two consecutive quarters of GDP decline is now in place for a recession.) While corporations are publicly maintaining bullish earnings views, shoppers and stores are reporting early signs of cutbacks, both in spending and downgrading to more essential needs. Inventories are high relative to sales, which will probably be serially cleared through discounts.
Some contrarians have been warning of a bear market/recession for more than a year and appreciate their views moving from fringe to almost center stage. However, if investors become bearish and start selling before the “official” declaration of either a stock priced bear market or a recession based on GDP, they will reduce the eventual magnitude of the decline and forgo the opportunity to participate in a major future reversal.
This is somewhat like the racetrack, where an early bettor spots a long-shot bet that makes sense, but sees just before post time the odds on his choice decline caused by increased participation of the “smart-money crowd”. While the long-shot bettor is complemented by others agreeing with his/her handicapping skills, winning payouts will be reduced by sharing their winnings with more people.
What are the Imbalances Triggering a Decline?
As we never fully know why people do anything, we must rely on circumstantial evidence and accept that some identified elements may have caused people to act in a way that contributed to the decline. The following are the imbalances I perceive that may contribute to the decline:
For the Economy
- In the end, all collapses are due to excessive debt on credit terms that are too loose. From what is visible, the main culprit around the world this time are the works of politicians with their focus on the next election. Continued deficit spending leads to higher penalizing taxes, higher unemployment, and higher underemployment. Potentially leading to the offshoring of jobs and opportunities.
- Various restrictions on trade to redeploy capital in the economy, both cross border and within the country, is basically a tax that will lead to more inflation.
- A school system producing students ill-equipped for today’s jobs and unable to be successful consumers, voters, parents, and employees.
- Under spending on national and international security in terms of military and other large threats.
Stock Market
- Traditionally, young people and other first-time investors don’t have an appropriate knowledge of investing, saving, legal conditions, or reading financial statements. We probably can’t prevent them from making the “easy” money in the fad or the hour, but we need to help them learn from their mistakes. One of the reasons young and first-time investors dominate various derivative, crypto, and trading techniques, is that they are easy “marks” for salespeople. More experienced investors know that they do not have the appropriate information to play in those games.
- Due to low interest rates and regulation, the amount of capital devoted to generating trading liquidity has been vastly reduced. This is one of the reasons we have such intense price movements.
- We also need to accommodate global investing or it will continue to leave our shores, leading to a loss of capital and some of our better minds leaving to work and live in more attractive places.
- Due to our growing retirement crisis, we should create vehicles that give favorable tax treatment to domestic generated dividends.
Barron’s had a good comment on the market for the week from Ann Richards, the CEO of Fidelity International. She heads up Fidelity’s ex US activities and has led several important UK investment firms. “I think that there’s a possibility, we could be seeing the peak of bearishness. But we’re not quite through it yet.”
Your Thoughts?
I would be delighted to learn of other moves that could improve the long-term outlook for investment, both in the US and in the greater world.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2022/05/falling-confidence-beats-numbers-but-be.html
https://mikelipper.blogspot.com/2022/05/inconclusive-but-trending-lower-weekly.html
https://mikelipper.blogspot.com/2022/05/three-worries-april-near-term-slowdown.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.
Posts
