Risks: Recession/Cyclical, Depression/Structural - Weekly Blog # 909

 

 

 

Mike Lipper’s Monday Morning Musings

 

Risks: Recession/Cyclical, Depression/Structural

 

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

 

 

 

Fears

Recessions are a cyclical phenomenon, largely due to price and debt imbalances. They occur regularly within a ten-to-twenty-year period. Subsequent recoveries are usually as quick as recessions. Depressions are much rarer, leaving societies changed and altering the distribution of wealth and power.

 

Based on elapsed time the world is due a recession, which may have already started. Liz Ann Sonders of Charles Schwab points out that the US Government tracks the profitability of both public and private companies. In both the first and second quarters of 2025 earnings declined. She believes that when data for the third quarter comes out it will be below trend. This may be different than more publicly reported GDP results because the wholesale sector is absorbing the bulk of the costs of the tariffs which foreign exporters don’t pick up.

 

There are lots of private indicators of economic business troubles. One that has been around a long time is the production of boxes, which declined. A new one to me is the trading multiples on the sale of trucking companies, which I have been told dropped in the first half of this year. This is important because it not only indicates a decline in the demand for goods, but it is a signal that they are having difficulty getting experienced drivers. Many drivers are on expiring or expired visas, demonstrating the impact of tightening regulations on many business activities.

 

Below the surface other concerns are becoming more visible. One can’t avoid a discussion of what AI (Artificial Intelligence) will do for global industry and consumption. While a lot of money and talent is being spent under this rubric, there are still no identified profits or sales from its use. In a recent study by MIT, they found a low return on AI’s use. From an overall economic viewpoint, I have not seen a study showing if AI’s replacement of the work of people benefits society.

 

With relatively small changes in price and debt levels there will be a recovery from the recession. However, every couple of generations those responsible for curing recessions believe the quickest solution is structural, which society rejects over an extended period.

 

My Fear

We have all heard that history does not repeat, but rhymes. My fear is that we are generally following a pattern like the 1920s and early 1930s, which led to the Great Depression. (You’ll recognize the term depression more from the study of psychology than economics.)

 

The US has suffered numerous recessions, most of which were in the one-two year range. For a recession to become a depression there needs a force trying to fix how society and the economy work. Unfortunately, previous commanded decisions didn’t work and prolonged the impact of the recession. Over our history we have had four presidents who have tried to make meaningful changes to our society/economy: Andrew Jackson, Teddy Rosevelt, FDR, and Trump. Through executive orders and legislation these Presidents tried to change how people lived and worked but ran into significant opposition from the courts and elements of the business community. Because of the US’s market and military power, we have an impact on what other nations do. They either resist or go along with the strategy but will be impacted either way.

 

What should Investors do?

This advice is for long-term investors looking to make returns for future generations. Traders who invest to make relatively fast returns should follow the momentum of the markets, while investors should move slowly with portions of their wealth and responsibilities.

 

Each will be subject to the cyclical behavior of the market, world economy, and changes in needs. While a trader may guess correctly regarding cyclical moves and early structural changes, an investor should wait for some understanding of the major implications of the change and be willing to be wrong before being right.

 

Whatever discussions occur today, they will likely be different a year from now. Major differences will result from views on the 2028 election.

 

Odds

These are my analog thoughts that lack the precision of digital work, but that is the way I feel very early on Sunday morning:

• The odds of a recession before the next Presidential election appear to be 65%.
• In dealing with a recession, the odds of government converting it into a depression is 50%, although it may take longer. Human nature almost guarantees future recessions and depressions due to over expansion of debt and other unsustainable commitments.

 

As usual, please let me know what you are thinking.

 

 

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Mike Lipper's Blog: Tactical Headlines Show Strategic Clues - Weekly Blog # 908

Mike Lipper's Blog: Anticipation Pays; Deliveries May Not - Weekly Blog # 907

Mike Lipper's Blog: Selected and Casual Road Notes - Weekly Blog # 906

 

 

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HATE DOESN’T WORK FOR INVESTORS - Weekly Blog # 617

Mike Lipper’s Monday Morning Musings

HATE DOESN’T WORK FOR INVESTORS

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

Few if any investors like the current market, where on relatively low volume volatility has picked up, particularly intraday. This suggests that the stock market is dominated by relatively few traders with strong views. To the extent that bonds and credit instruments are sought to provide reasonable income, investors are finding current yields unattractive. The continued increase in demand for fixed income suggests that yield is not a driver. Some investors, perhaps counseled by investment advisors, suggest that bonds and credit instruments will be a safe port in the anticipated coming equity storm. The growth of corporate and individual debt, plus the deficit spending by most of the developed world, suggests there will be something of credit crunch. This may surprise holders of fixed income securities when they see an increase in the volatility of prices.

Nevertheless, people are being driven by “hate” of stock price volatility. While this blog is intended to deal with investments, it recognizes the environmental background influencing the decision process for some investors. If they can hate certain political leaders, geographies, foods, and sports teams, why can’t they hate certain investments?

Years ago, there was a very successful Broadway production and movie titled “Damn Yankees”. It was the story of a long-suffering former Washington Senators baseball fan whose team could never seem to defeat the New York Yankees, preventing them from getting into the World Series. His solution was to do a deal with the Devil, which enabled him to become a baseball player “phenom” for almost a full season. He led the Senators to victories right down to the last play in the last game, when suddenly the Devil’s magic wore off. He returned to his former state as a middle-aged lamenting fan as the Senators never learned to play better or get better players. (The losing team eventually left Washington and over the years were replaced by a new team using the old beloved name. Readers can make up their own minds whether this myth should be applied to the Senators working on Capitol Hill.)

Apple (*), Tesla, Microsoft (**), and perhaps Amazon are stocks that some investors have “hated” at various points in time. Historically, this has been a mistake for the following reasons:

1. The most important thing about any stock or bond is its price. The physical and intellectual scrape value may be worth a substantial premium.
2. In many cases there are good people in failed companies who have learned from their experiences. They now provide substantial help to others, some of which are winners.
3. The downfall of the hated may well be due to improvement in the opposition.
4. The nature of competition may have changed, benefiting the hated. (Microsoft and Apple are good examples)
5. Internally, hated leadership can change.  

(*) Owned in personal and managed accounts.
(**) Owned in funds utilized in managed fund portfolios.)

Once again, we urge investors to sub-divide their portfolios into slices of expected payments needs. Earlier payment periods should have less equity and more low-yield, money market fund type investments. Periods beyond ten years outside of opportunity reserves should be equity oriented, particularly legacy accounts. Payment slices in the five-year range should have at least 50% invested in risk products at all times.

To avoid falling into the “hate” trap, make a list of three positives and more negatives.

Question? Have your “hated” investment opportunities cost you?



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2020/02/investment-losses-can-be-prots-weekly.html

https://mikelipper.blogspot.com/2020/02/the-art-of-portfolio-construction.html

https://mikelipper.blogspot.com/2020/02/significant-turnaround-two-fearful.html



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Investor Mindsets Mine Different Results

Introduction

Is changing investment attitude all that is needed to change investment results? Is it as simple as flipping the coin to the other side? In my search for these and other problems I often take the contrary view or flip the coin to the other side. I do this frequently in my conversations with CEOs of investment firms, chief investment officers, portfolio managers, analysts and most importantly investors. I try to learn from all of them to help the accounts for which I am responsible.

Lessons from Budapest

My wife Ruth and I have just returned from a much too short visit to Budapest. We were part of a small group of senior and/or retired leaders of stock exchanges from around the world. On the last evening of the conference we separated ourselves from the group to meet to meet for dinner with nine locally based CFAs.

When we sat down around a large round table, I thought the analysts took random seats. However as the evening evolved what became clear was that those seated on the left favored intervention by “authorities” and those on the right were very much for markets to develop freely. This right vs. left discussion has caused me to think about a two-sided model of thinking in which the wise investor and his/her manager can periodically flip the coin over.

The two-sided model

The interventionists were blaming the market and the economy for misallocation of resources to the effect that the middle class was being squeezed. Their solution was to raise taxes on the wealthy and fund the government’s redistribution efforts. The free market types thought that restrictions on corporate activities should be lessened so that businesses could hire more through their expanded profits. (I suggested that the quickest way to accomplish this was to reduce or eliminate the taxes on dividends.) From my point of view, this discussion could be boiled down to a simple equation. The external “they” need to take command vs. “we” need to be freer to produce for all to benefit.

The juxtaposition of the dinner with the conference did create an interesting insight. The blamers were incensed about High Frequency Trading (HFT). Based on the discussion at the conference I indicated that there is little evidence that the individual investor is materially harmed by HFT. Further it was pointed out that due to its loss of profitability, one of the largest independent HFT shops has had to acquire another firm whose basic business was executing orders for correspondent firms. (In other words, market forces have reduced the attractiveness of HFT to the point that it is no longer attractive.)

The other dichotomy that hit me in retrospect is that blamers saw the markets and their economy to be hemmed in by walls. (Remember the dinner was held in Hungary.) I guess it is my training from the US Marine Corps: where others may see a wall I see a hurdle to either get over or around.

Other two-sided models

To me the single most important determinant for investment policy is what time horizon will be used to judge success. Because of the frequency of publications, the media is interested in things that change rapidly. Note how much more coverage there is for short or sprint races than the longer cross-country events. The money that we are responsible for needs long-term success. Our clients want success for ten years or longer including multiple generations. I urge you not to fall into the trap of using three year data which can show performance going in a single direction and not the more characteristic up and down patterns of history.

Turnover rates

Allied with the need to set time horizons for accounts or even parts of an account, is the speed of required decision-making. Trading accounts could turn over their portfolios 100% every single month adding their managers' trading skills to the results earned in the underlying asset class. In contrast, successful equity managers investing for the longer-term have a complete turnover of their portfolios only every four to five years. Turnover, in my opinion, is not a cause of good or poor performance, but is a symptom of the speed of decision making and the time horizon focus.

Risk assumption

Many investors wish to avoid taking risks. (Risk is a loss that is so large as to put the long-term goal of the account in jeopardy. Risk is not volatility which may be uncomfortable, but does not threaten the accomplishment of the mission unless the discomfort forces the investor to jump out before the long-term time horizon is reached.) On the other side of the coin there are those that are risk seekers or at least risk tolerant as long as the risk is appropriately priced and diversified. The first group, (the risk avoiders) will occasionally be surprised to learn that ‘riskless’ is an incomplete title. Further, they may be out of position for recoveries and further expansions.  Being out of the market for as little as ten days can lead to poor multi year results.

Attitudes

Oscar Wilde said that a cynic knows the price of everything and the value of nothing. He could have applied that to those that can and do tell investors everything that is wrong with any investment under review. The cynic and the blamer have much in common. Both can have a great deal of facts to buttress their arguments, but both presume that they know all that there is to know. The believer understands bad things can and will happen but that there are some good things that will also happen. The long history of the human race is that the believers are more often correct than the blamers.

What to do now?

I can not predict the future, but falling back to my experience handicapping races I can identify both probabilities and possibilities. At the moment the short-term signals from the bond market in terms of driving the equity market turned favorable, with the Barron’s Confidence Index dropping 1.7 points to 74.2. Normally the weekly move is 1 point or less. As this is a contrary indicator when it declines it is projecting a good stock market. However, twelve months ago the indicator had a reading of 66.3 which did lead to a remarkable bull market over the last year (more than twice a perceived normal rate of improvement). Considering the remarkable rise we have enjoyed since the first quarter of 2009, I would not be committing sizeable new money into the markets just yet. Nevertheless, I have a positive long-term view and am willing to assume well-priced risk in the global market.

Where are you in your thinking?

Please let me know.

_____________________

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