It May Be Early - Weekly Blog # 898

 

 

 

Mike Lipper’s Monday Morning Musings

 

It May Be Early

 

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

 

 

 

A Usual Trap

A classic mistake in making future plans is focusing mainly on the present. In search of an investment policy for the next few years or longer, one should look at the causes of the main trends, not the size of the tariffs that have been announced.

 

The key force behind the announcements on tariffs is Donald Trump. His background is one of complex negotiations evolved from materially different views of how he sees the present and the future. I believe The President saw a critical problem of unfair trading terms facing the U.S. and saw a way to change the terms in favor of the country. He saw a way to solve the problem through meaningful discussion with the powers on the other side. The key was getting the right people around the table.

 

The core elements of unfairness are to be found in non-tariff trade barriers (NTB) erected by commercial interests with official or unofficial government support. (A number of examples were listed in last week’s blog, copy available.) While there is no published total of each country’s NTB effects, some experts believe their impact is twice the level of tariffs applied.

 

Mr. Trump’s way of dealing with foreign countries is to make the host nation an ally by using the size of US tariffs as a hammer. This is the reason behind the high announced tariffs, which is where President Trump expects the real bargaining to begin. I expect negotiations with major trading partners to take most of the summer. We may never fully understand the various changes to NTB’s, but a good clue will be changes to US tariffs.

 

Clearly there is another element to the aggregate size of the final US tariffs, the amount of cash expected to be paid to the US Treasury. This needs to be meaningful enough to keep the growth of the annual deficit acceptable to an unknown number of Republican Senators.

 

Most of these should be settled in the fall and early winter, so they do not unduly impact the mid-term elections. The economic background to the elections may be influenced by layoffs and the administration’s attempt to expand the economy. Additionally, further international actions may be the cause of how some state elections turn out.

 

The current crosswinds shown below may also impact the level of markets during this period:

1. After a period of outflows, T. Rowe Price is cutting staff.
2. Freight railroads are growing from China to Iran and Spain, for US continental trains, and other trains from Canada to Mexico.
3. Tariffs may encourage smuggling.
4. The latest weekly American Association of Individual Investors (AAII) sample survey showed a 39% positive and negative 6-month outlook.
5. A study of structural bear markets shows the average breakeven to be about 9 years.
6. The critical operating problems facing the US government is no different than those facing commercial and non-profit activities, a focus on effectiveness, not efficiency.
7. Jaimie Dimon has shared the following thoughts:

• Tariffs will be inflationary
• US reserve currency status rests on military superiority
• Markets are not low
• Lessons can be learned from the turnaround of Detroit and problems created (and elongated) during the 1929 crash
• Dollar weakness helps US multinationals 

As usual, I hope you will share your insights on the various thoughts expressed.

 

 

 

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Mike Lipper's Blog: Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

Mike Lipper's Blog: Expectations: 3rd 20%+ Gain - Stagflation - Weekly Blog # 896

Mike Lipper's Blog: Analyst Calendar: Preparation for 2026 - Weekly Blog # 895

 

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Early Stages of a New Grand Cycle? - Weekly Blog # 781

 

Mike Lipper’s Monday Morning Musings

Early Stages of a New Grand Cycle?

 

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

 

 

 

Travelers Note:

Many who speak of future seminal changes don’t recognize where they are. This is understandable, as it is difficult to identify where we are in the development of trends, let alone where we are going.

 

Whether or not you agree with my perceptions, they may be useful to you in gauging where we are in the progress of time. Please share your views with me. You can’t avoid thinking about the future if you invest in securities. But by not investing at all you are letting others decide you and your family’s fate. No investment isn’t an investment.

 

Reliance on History

The main tool we have in thinking about the future is our perception about our collective past. We selectively use our less than completely accurate perceptions of the past in projecting our futures. While our learned or experienced views of the future can be helpful, they won’t give us a completely accurate map of the future.

 

The worst remembrance that some seniors have is a period labeled the “Great Depression”. In thinking about the future, my analytical training suggests that this is a useful model for the worst that might befall us. We hope we can survive a similar period and therefore we can deal with whatever may come.

 

Where are We?

Remember this question when traveling with young children? We may remember a partially inaccurate statement from a nearby authority-figure making a guess. This was not an attempt to misinform, but a quick estimation of what was known or believed. We do the same today in addressing the future, using a selection of factoids that lead to a satisfactory conclusion. I follow this learned pattern.

 

When I look at the array of information before us today, the following elements are part of my thinking:

• The best single predictor of the future by a mass of decision-making people is the general price trend in various US markets, utilizing the median performance of US Diversified Equity  Funds (USDEF). Measuring from the peak on 2/19/20 to last Thursday, there was a compound gain of +5.93%. (True, from a subsequent bottom on 3/23/20 the gain was +23.31%.) However, for the last 2 years the average USDEF lost -1.14%. These are pretax and pre-inflationary returns. Obviously, retirement capital during this period was not augmented by positive real performance. For the last 52 weeks, results were even worse -6.59%. In the current year through Thursday, 7 out of 108 fund peer groups lost money, with the same number gaining over +10%. I am guessing the median fund probably produced about +5%, adding little to retirement accounts after taxes and inflation.
• Perhaps the most depressing news came over the weekend in a NY Times column titled “Why Money Market Funds are now Leading the Pack”. They are referring to money funds attracting more assets than any other type of fund. This is typical of a bottom, which comes at the end of investment cycle before a new cycle begins.
• These two elements suggest a lot of investors, both individual and institutional, expect a lengthy period of stagflation. We have had two extended periods of stagflation, during the depression and during portions of the 1970s and 1980s.
• Today we are seeing two types of behaviors we saw during the Depression.
• Empty apartments or floors being temporarily used for parties or other short-term uses.
• Broadway shows picturing past happier times.
• Last week 8.8% of NASDAQ listed stocks hit new lows vs. 2.9% for the NYSE. The NASDAQ led the NYSE on the way up and is still up +17.15% year to date. We should consequently expect it to lead going down.
• There are another two Depression era trends currently reappearing. A speed up in the replacement of CEOs and new ways of doing business. Apple* is an example of the latter. They are offering a cash savings account, not an insured deposit relationship. During the Depression, FDR started the FDIC to protect the bank assets of small depositors. While most people thought the accounts were backed directly by the government, losses were socialized by the remaining banks when the FDIC bailed out the banks. (This privatized the loss in the same way JP Morgan did in the 1907 Trust company panic.) Apple’s current move is backed by Apple, the largest company by US market capitalization. 

*Shares in Apple and Berkshire Hathaway are owned in personal and client accounts. Apple shares are the largest public investment owned by Berkshire Hathaway.

• Inflation is caused by excess demand not being consumed by the domestic economy. Throughout history wars have contributed to inflation, as the government spends money not supplied by the domestic economy. Spending on climate change, poverty, and similar expenditures also add to inflation. Short-term interest rates only directly impact short-term borrowing, having only a modest impact on national inflation.

 

Working Conclusion

While it is not absolutely certain we will have a major economic decline, it shouldn’t be discounted.

 

After depressions there is always an expansion to look forward to.

 

Thoughts?

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.