Failed Expectations: Do Details Count? Zig-Zag Flips - Weekly Blog # 925

 

 

Mike Lipper’s Monday Morning Musings

 

Failed Expectations

Do Details Count? Zig-Zag Flips

 

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

 

 

 

Was this the week that was?

Last week’s blog anticipated a ruling by the US Supreme Court on the Presidential use of Executive Orders to impose tariffs on countries and products. It was further expected that the President would use substitute measures to accomplish similar goals if he loses the Supreme Court case. Additionally, there was a belief that the government would be forced to repay the existing tariffs to the American people (voters). The new tariffs would probably cause some changes by foreign nations. None of this happened.

 

Instead, the major topic of conversation at the World Economic Forum at Davos was Greenland. Discussions moved at lightening or Trump speed from a military occupation to a not fully disclosed peaceful agreement with NATO forces by the end of the week. The importance of these dramatic changes reminds us of what may be topic one in developing future investment strategies. All of this brief history shows how wrong we can be. What we missed was the significant price level change that occurred this week.

 

Critical Price Changes

Starting with the least followed ECRI industrial price index, which normally moves ploddingly. The index rose to 126.28 from the prior week’s 120.49. The jump raised the year-over-year gain to 6.58%, which is greater than the various inflation measures the Fed and many others use. I would not be surprised to see industrial buyers of products add this amount to their resale prices, after adding an insurance amount to protect their profits against further prices increases.

 

One explanation of ECRI prices can be found in the weekly price chart in the weekend Wall Street Journal, which showed Natural Gas rising +70.0% and Silver +14.57% for the week. Part of these increases could be for increased use of these items in the normal course of business. However, I suspect some of the increased demand comes from trading and/or gambling interests, either on the long side or from covering short positions. The importance of the last sentence is that the size of the trading and gambling sectors is growing, and I believe it’s already quite large.

 

The third price increase impacts all of us in our daily purchase of goods and services. It is the value of the dollar. On Friday the 16th of January the US dollar index was 99.395, one week later it was 97.599. The President has threatened foreign countries if they sell US assets!! (I personally believe this won’t happen, but it shows a sensitivity to the value of the dollar, even though Trump and Xi have both advocated for a lower value of their currencies as mercantilists.)

 

Warning

I have already indicated how wrong I can be. Please be careful in developing your own investment strategy and make changes slowly, not abruptly.

 

 

 

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Mike Lipper's Blog: Is This The Week That Ends Instability? - Weekly Blog # 924

Mike Lipper's Blog: How Much Longer Can We Avoid Thinking About the Long-Term? - Weekly Blog # 923 Mike Lipper's Blog: Data May Be Signaling Change - Weekly Blog # 922

 

 

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Is This The Week That Ends Instability? - Weekly Blog # 924

 

 

 

Mike Lipper’s Monday Morning Musings

 

Is This The Week That Ends Instability?

 

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

 Preface

I believe it was Lenin who said there are decades when nothing happens; and there are weeks when decades happen. Possibly, the four-day trading week beginning this coming Tuesday is such a period. In both the Financial Times and her podcast, Liz Ann Sonders of Charles Schwab* introduced the concept of the period we are going through as an extended period of instability. I am suggesting it is possible the beginning of the end of this period may have begun.

*Shares held in in managed and personal accounts.

 

Fund Data Sets the Table

Whether one invests in mutual funds or not, one should recognize that not only do many people invest in them, but more importantly, many fund managers get their training at fund shops. Thus, one can get an understanding of the institutional mind set by looking at fund data. In the five years ended last Thursday, the London Stock Exchange Group published my old firm’s weekly study of 105 equity related mutual fund peer-groups average performances.

 

The average performance of S&P 500 Index funds was 14.05% compounded for the past five years.  There were only five peer group averages that were better: Precious Metals Equity Funds +21.50%, Energy MLP Funds +20.79%, Commodities Precious Metals Funds +18.75%, Natural Resources Funds +17.30%, and Global Natural Resources Funds +16.05%.  There were just two better performing thematic categories, precious metals and energy. The narrowness of performance leadership proves how difficult it was to pick winners for the past five years. The leadership crown was indeed unstable.

 

Another way to identify the instability in economic data is to examine the tails of the best and worst 2 items shown in Saturday’s WSJ weekly price chart. The best was Silver +11.67% and the second best was the KOPSI +5.55%. The second worst price performance was Financials -2.33%, which was half as bad as Corn -4.71%, the worst performer. The gaps between the top two leaders and laggards suggest concentration is at play.

 

Turning Points Possible Next Week

On Tuesday, probably in the late afternoon, SCOTUS (Supreme Court of the US) is expected to announce its decision on the IEEPA tariff. The President has said he is prepared for an unfavorable ruling and has substitute measures in mind. At best this will be disruptive, and possibly inflationary. The ECRI industrial price index, which is normally slow moving, rose to 120.49% from the prior week’s level of 117.42%.

 

Markets are anticipating problems, either from Tariffs or possibly Iran. Sixty-two percent of the stocks traded on the New York Stock Exchange (NYSE) rose last week, while only fifty-three percent rose on the NASDAQ. The NASDAQ trades more tech stocks and the shares of younger companies. Thus, the junior exchange is likely to react more than the “Big Board” to news events. Retail investors, when not gambling, are more active on the junior market. One possible measure of this is the American Association of Individual Investors (AAII) sample survey, which reported 49.5% bullish for the next six months, up from 42.5% the prior week. What may be more significant is the 28.2% that were bearish. Many professional traders believe “the public” is wrong at turning points.

 

The Davos meeting begins Tuesday, with many political and economic leaders present and chatting. One doesn’t know what will be discussed and how meaningful the meetings will be.

 

Keep us Informed as to any Changes in Your Views.   

 

 

 

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Mike Lipper's Blog: How Much Longer Can We Avoid Thinking About the Long-Term? - Weekly Blog # 923

Mike Lipper's Blog: Data May Be Signaling Change - Weekly Blog # 922

Mike Lipper's Blog: Investment Time Horizon Should Pick How You Measure the Results - Weekly Blog # 921

 

 

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Data May Be Signaling Change - Weekly Blog # 922

 

 

 

Mike Lipper’s Monday Morning Musings

 

Data May Be Signaling Change

 

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

 

 

 

Preface

I came to my desk Saturday morning and was prepared to begin writing this week’s blog. My thought pattern suggested we were quite possibly in a pivot period, with market leadership shifting to foreign priced securities priced substantially below “AI” securities. Then I paid attention to Bloomberg television, which is on 24 hours a day. I was mesmerized by the news on the raid on Caracas, the capital of Venezuela. The daring and skills involved were impressive and the growing implications are disturbing.

 

Normally, I try to view everything from a global perspective, as I believe almost all we do has roots in the global world. However, for this week’s blog I am not going to deal with the longer-term implications of the successful raid and capture of indicted criminals. It is too early to tell. I expect these events will create global shadows which I will address in future blogs. The world listens but does not necessarily follow the U.S

 

Pivoting to the Data

 

Last Two Weeks of 2025

Each of the last two trading weeks, including January 2nd, have had only four trading days of relatively light trading volume. A disproportionate number of trades were either tax motivated, or position statement driven. Nevertheless, they share traits with many earlier days of December’s trading, with more stocks sold on minus ticks than rising prices. It is worth noting that the popular stock market indices generally rose a small amount. This highlights the dichotomy in the market between what many believe are retail driven indices and a broader, slower-moving institutional market. I am guessing many retirement and other long-term institutions were relatively quiet in the last part of 2025.

 

This institutional hesitation mirrors the large corporations’ labor practices, where many companies spend considerable amounts training new employees, which they consider assets. They are therefore reluctant to fire many employees and are slow to hire new workers. Some believe in the “promise of “AI”, where in the not-too-distant future companies will need less employees to produce the same or more sales. Consequently, many employers are not hiring new employees, other than critical replacements.

 

Typically, corporations begin investing new capital into their retirement plans in January, be it pension or 401-k accounts. The institutional advisory community has counted on this flow in the past. My guess, it may be smaller this year. We will see.  

 

Prices and Inflation

There were two lessons on prices in the Weekend Edition of The Wall Street Journal, which measures 72 traded items each week. Only 24 prices or one-third were up, and 48 prices were down. Are we peaking? The second lesson from these data is that markets deal with both extreme momentary shortages and slower moving prices, which are more common. One analytical technique I use to differentiate them is to examine the top and bottom two prices. On the upside is Comex Silver +142.34% and Platinum +127.57%. On the downside are Orange Juice -58.75% and Cocoa -48.05%. I believe these four are special imbalances, as the third extreme prices are the KOSPI composite +75.63% and the Argentine Peso -28.96%. The gaps between the extremes and third ranking are large. Much smaller but concerning nevertheless is the one-week industrial prices gain of +1.28% in the ECRI weekly index, suggesting inflation is not under control.

 

The Key Link

If there were a single suggestion of a world view of the US economy, it would be the value of the US dollar. The Financial Times headline “Dollar Is Wild Card in 2026”. This UK publication, now owned by the Japanese newspaper/wire service giant, is a traditional critic of the US. The value of the dollar is dependent on two factors, the value of the other major currencies and the price of the dollar. In 2025, numerous foreign markets have for the first time in many years appreciated more than the US. Currencies, like securities, are priced at their perceived future value. Not only is the US government spending more than it is earning through taxes and tariffs, but it’s also expected by many to continue to do so in the future. (Even if tariffs bring in a lot of money, part of the receipts are expected to be paid to citizens instead of being used to pay our debts.) In addition, both President Trump and Chairman Yi have stated they would both like their currencies to decline. Some weakness in the dollar may have been caused by individual and institutional investors selling dollars to buy foreign securities.

 

What to Do?

Examine whether it is prudent to have 100% of your long-term investment money in securities that are traded primarily in dollars? Is it time to pivot?

 

Share your thoughts, please.

 

 

 

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Mike Lipper's Blog: Investment Time Horizon Should Pick How You Measure the Results - Weekly Blog # 921

Mike Lipper's Blog: Tis the Season of Joy & Reflection - Weekly Blog # 920

Mike Lipper's Blog: Are Investors Seeing a Change? Politicos Are Not - Weekly Blog # 919

 

 

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Risks Are Rising Thru the Clouds - Weekly Blog # 915

 

 

 

Mike Lipper’s Monday Morning Musings

 

Risks Are Rising Thru the Clouds

 

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

 

 

 

Overview

There does not appear to be a clear unified picture of the near-term future for the next couple of years. In examining a number of separate and distinct elements, each with their own limited cloudy outlook, I see a growing level of disconnected risks. Hopefully our intelligent subscribers can sense a positive future and share it.

 

Topics of Concern (In no meaningful order)

• The price of gold and crypto elements are rising, with the exchange value of the dollar falling more than 10% earlier this year. For centuries the single greatest attraction of gold was at the coin level, with the ability to bribe one’s exit from one country into another. Today, I am unaware that this is a major demand contributor. The Central banks appear to be the largest buyer, replacing some of the depreciating value of their large dollar holdings. While that might serve a few countries well, there is not enough gold in the world to fill all needs at any reasonable multiplier of current gold prices. Crypto also seems to be potentially price limited. At the moment I do not see any move by major countries to be a substitute replacement for the dollar.
• While the Chinese currency is now the third most used currency for world trade, I do not see any willingness of that government to use its currency for anything beyond its own trading. They do not want their currency to trade freely and absorb the turmoil of other countries.
• I do not see crypto as an alternative in size, particularly if it is US dollar based. Both gold and crypto don’t have a large industrial use, unlike silver to some degree.
• One possible substitute for the dollar is copper, and possibly some other base metals. One new problem for Dr. Copper is the expected increase in use by “AI”. It is interesting to note that Base Materials (Metals) were the second best performing mutual fund category in the current week (+4.44% vs -2.70% for the worst fund category Global Science & Tech.)  It may be worth noting that the ECRI industrial price index went to 115.50 from 114.80 the prior week, even though it does not normally move much.
• A significant number of casualty insurance companies have invested in private debt vehicles with limited liquidity.
• The weekly 6-month forward looking AAII sample survey found only 31.6% bullish and 49.1% bearish compared to three weeks prior, where the readings were 44.05% bullish and 36.9% bearish.
• In the current week there were more decliners than gainers on the NYSE and NASDAQ.
• A number of economists have noted that the top 10% of the population, often over 75 years old, own 50% of US wealth. The bottom one third, those who are 35 years old or younger, own 10%. (This may well explain the results of the only two governor elections this year.) This formation is being called “K shaped”.

 

I appeal to our readers to contribute your good thinking regarding the importance of these elements and to let me know how it affects your view on the global stock and money markets. 

 

 

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Mike Lipper's Blog: The Inevitable Recession - Weekly Blog # 914

Mike Lipper's Blog: Biggest Investment Hurdle: Complexity - Weekly Blog # 913

Mike Lipper's Blog: Signals of Change in Historic Patterns - Weekly Blog # 912

 

 

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Insights From a Sleepy Week, Important? - Weekly Blog # 784

 

Mike Lipper’s Monday Morning Musings

Insights From a Sleepy Week, Important?

 

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

 

 

 

Sentries Be on Guard

Both military and investment sentries (analysts and portfolio managers) know that the most dangerous part of their jobs is falling asleep before a major, unexpected change. There is a good chance that on the investment front we are being lulled into not searching for changes.

 

In the last six weeks the S&P 500 has moved under 1% each week. Market analysts call such periods accumulation or distribution, which is when securities move into from weaker into stronger hands. The results of which will become known when the eventual breakout/breakdown occurs.

 

Currently, as is often the case, we are simultaneously experiencing two different markets. For example, the week before last S&P 500 stocks continued to have more distributions than accumulations. Last week on the NYSE there were 6.3 million shares acquired at rising prices and 10.3 million shares acquired at declining prices. This is not surprising as the year-to-date extreme performance spread in the DJIA is quite narrow, from a gain of 4.56% to a loss of -1.33%.  The S&P 500 year-to-date gain of +6.96% could be labeled stagflation. Liz Ann Sounders of Charles Schwab reminds us of two other stagflation periods, 1929-1942 and 2000-2009.

 

At the very same time the year-to-date NASDAQ extreme performance numbers show a range of +19.23% to -0.36%. Advance and decline share volumes are also evenly matched at 10 million shares.

 

Currently, the five largest companies are producing better than average index results in most sectors. Contrast this with the week’s WSJ weekly prices of the 72 security, commodity, and currency measures, where 75% declined. The two worst performers were Comex Silver -6.8% and the South African Rand -4.85%, both hedges against the US dollar.

 

Signs of the Future

In the current market most buyers expect an acceptable year in 2023, and a good one in 2024. Sellers expect to have to wait, at least until after the next presidential election. They are being paid to wait with certificates of deposit yielding around 7%.

 

This week we have seen two estimates for 2024. The 2024 estimate for Social Security COLA is 3.1% (It was 8.7% for 2023). Interestingly, the household survey for 2024 came out with an almost identical 3.2%.

 

Longer-Term

In attempting to predict the longer-term I find it is more useful to rely on recognizing symptoms rather than attempting mathematical projections. The largest contributor to world trade is China, where most high-priced purchases are generated by wealthy young people. Recently, they have cut back materially on their purchases of top-line jewelry. I don’t know if any of these purchases hedge against their own currency in favor of the US dollar. (Due to inflation and out of control government bribes the US dollar should decline on an absolute basis. In terms of the value of the US dollar, according to Michael Cembalest of J.P Morgan, any major change is likely to take a long time considering the US only provides 25% of world trade while being used in 85-89% of foreign exchange or similar transactions.

 

On a longer-term basis a more concerning factor is the growth of Chinese science and technology. They appear to be the leader in the development of fusion for utility purposes. This is happening at the very same time US utilities have become the best performing sector, in part because of the expected increase in load to produce transferable energy to the ballooning “EV” market.

 

Portfolio Management Moves Implied

During this lull in market activity before a new phase begins, all portfolios should be reviewed to put them in the best position for the future. One approach is to examine all present holdings currently priced at a loss. Unless one sees a major increase in the next 31 days, they should be sold and selectively repurchased after the “wash sale” prohibition of 30 days.

 

The losses created should reduce potential capital gains from selling some of the winners you are less than thrilled with. By all means, please consult with your trusted investment adviser and tax consultant.

 

Correction to last week’s blog:

In the Berkshire Hathaway discussion, the correct spelling of the first name of the Vice Chairman in charge of insurance was published as Amit instead of Ajit, our apologies.

 

 

 

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Mike Lipper's Blog: My Triple Crown - Weekly Blog # 783

Mike Lipper's Blog: Fire Drill - Weekly Blog # 782

Mike Lipper's Blog: Early Stages of a New Grand Cycle? - Weekly Blog # 781

 

 

 

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Investors, Politicians, & Other Children - Weekly Blog # 745

 

 

 

Mike Lipper’s Monday Morning Musings

 

Investors, Politicians, & Other Children

 

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

    

 

 

Most investors, politicians, and other children act as if they are the only people that have had to deal with behavioral challenges. However, there is very little in life that is totally new, only the packaging has changed.

 

For example, how should one measure progress, and should it cause action? Most of us have some level of confidence in reported numbers, although numbers are an abstraction of a reality, not reality itself.

 

We are all counters from an early age, and since tradeable money was created have tended to count many of our successes and occasional failures in monetary terms.

 

The problem is the value of money is in the eyes of the beholder. One hundred million Confederate dollars has very little, if any value today.

 

Those dollar bills were on the losing side of a painful war, but we have been on the losing side of an age-old battle since birth. That depreciating value is called inflation.

 

The crux of the problem is the creator of this vehicle of exchange is also one of its largest users. Furthermore, the ruler of the mint or printing press is in a position of strength due to support from the right people. The easiest way to keep their loyalty is to pay them. In imperial Rome it was called “bread and circuses”.

 

In many Roman cities and towns, the amphitheater was larger than the nearby fortress. These were the entertainment centers for the populace who had enough food to eat due to an efficient agricultural system with well-engineered aqueducts.

 

I find it revealing that today’s name for giving money indirectly to the population is derived from a Latin word for stimulus. In earlier days it was called a bribe.

 

When a long-distant trader, Marco Polo, worked along the long Silk Road (1271-1295), the most advanced society was the Chinese empire. It developed gun powder and later developed paper money. Not surprisingly the empire had a large government, with examinations for jobs.

 

From my standpoint, smuggling silkworms back to Europe created a market-based exchange with a sounder form of money, especially when compared to their traditionally weakened currency. This is the way he delt with inflation.

 

In the thirteenth century the Europeans were somewhat protected against inflation due to small indigenous silver mines whose content went into their currency. This lasted into the next century and was replaced by gold and silver produced at low wages in Latin America, starting about 200 years of inflation.

 

When the steady stream of gold dried up the overseas colonies of England and other European countries became too expensive to maintain without substantial taxes. This is the reason a political group in England was not disappointed with the result of The American Revolution.

 

Confidence in the Future is Low

There are a plethora of signs showing this lack of a defined future:

• What are yields on US Treasuries saying? 2-year Treasuries are yielding 3.25%, 10-year Treasuries 2.84%, and 30-year Treasuries 3.07%. The 2-year is inverted relative to the 10 and 30-years!!

•  All 3 of the AAII survey predictions for the next 6 months are in the 30-39 % range.

• While 53% of the DJIA companies were winners for the week, the DJIA lost value in aggregate points. By comparison, only 40% of the companies in the Transportation index were winners.

 

• The JOC-ECRI industrial price index dropped 5.15% year over year.

 

• Exchange traded equity funds continued to suffer redemptions, led by growth and value funds.

 

• Liz Ann Sonders, the highly respected chief strategist from Charles Schwab is not bullish because she has not seen the market capitulate, as would normally be the case near the end of a bear market.

 

My Views

I have been searching for reasons to be optimistic for our long-term investment accounts, as after every bear market there is a bull market.

 

I agree with Richard Bernstein that bull markets don’t start with narrow leadership.

 

I believe economic and market cycles are not just number exercises, which you might be led to believe after reading columns from the various pundits.

 

I believe cycles are critically needed to address severe imbalances, not just trading opportunities. In previous blogs I have listed troubling demographics quality of schooling, healthcare, military strength, and leadership.

 

As I do not see these imbalances being addressed, I am afraid we will experience one or more recessions. There is a popular hope we will avoid a recognized recession, or only suffer a mild one.

 

If that were to happen, it would not likely sufficiently address our problems. I have no doubt our politicians can continue to produce a smoke screen to hide the issues. The current proposed legislation is an example of this, almost guaranteeing a major recession in a couple of years.

 

If that were to happen, much like during Paul Volcker’s tenure where he had two recessions, there would be substantial risk of a needed recession with very high interest rates.

 

I look forward to a new bull market with some answers to our problems, even after that experience. Our families will need one.

 

Please comment.

 

 

 

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

https://mikelipper.blogspot.com/2022/07/weather-market-economic-and-political.html

 

https://mikelipper.blogspot.com/2022/07/beware-of-cheap-seek-fair-slowly-weekly.html

 

https://mikelipper.blogspot.com/2022/07/time-to-be-contrary-weekly-blog-741.html

 

 

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Surprises & Policies - Weekly Blog # 660

 

Mike Lipper’s Monday Morning Musings

Surprises & Policies

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

                           

                     

Surprises

One of the most curious things about most humans is that they are surprised by surprises. Perhaps it is my Marine Corps training, being a student of history, or just having a contrarian streak, but I always expect surprises. Without knowing the details, I know that I will live and operate in periods of uncertainty. Below are two lists: Elements of uncertainties and reactions.

Surprises                        Reactions

Prices (Inflation)               Ignore (As long as Possible) 

Quality (Improvements?)          Go with the flow 

People (Unexpected behavior)     Resist

Taxes (Words worse than rates)   Attempt to escape

Current Surprises

My friend Byron Wein publishes a list of forthcoming surprises each year. Below are three surprises that are already known but not being considered by most investors and their advisors. Thus, their lack of reaction is the real surprise.

Rising Prices (Inflation)

For several weeks I have been noting the almost parabolic price increase in the JOC-ECRI Industrial Price Index. This week it reached +23.80% compared to a year ago. This phenomenon is supported by the mid December price of coiled sheet steel, which was $900/ton compared to $700/ton in mid-November. The price of Aluminum is nearing its two-year high. (With Coke Cola cutting the number of brands it sells in half, they are likely to try to pass on the increased costs of aluminum cans to consumers. An example of inflation at the supermarket level) In Asia there is a major shortage of shipping containers for exports. (I assume that means the rental price of shipping containers is up significantly.)

Many top-down thinkers in Washington and in the securities markets believe that central governments and their agencies can control their economies, exemplified by the following 2017 quote:

“Would I say there will never, ever be another financial crisis? Probably that would be going too far. But I do think we’re much safer, and I hope that it will not be in our lifetimes, and I don’t believe it will be” 

This was said by Janet Yellen and I believe it was part of her effort to be reappointed Chair of the Federal Reserve. Let’s hope in her new post she has learned to have more respect for forces she does not control.

The third surprise is the not much discussed probable immunity to COVID-19 after receiving the vaccine. Because of the newness of our collective experiences, the most learned of medical experts say there may be a 5-7 month immunity. Let us hope they are being conservative; however, even doubling the initial estimate suggests a very different world than most are expecting.

I am not suggesting I can make intelligent guesses as to how these three surprises will work out, but I am noting that these along with other uncertainties need to be considered in making day-to-day investment and other decisions.

Where Are We?

Far too many military and business battles were lost when one of the combatants used out of date positioning. As I cannot avoid being a global consumer and investor, I must look at both the US and other markets for our clients. Because we invest in mutual funds for our clients, we pay a great deal of attention to their results. Again, somewhat surprising is that various market pundits seem to be unaware of two current relationships.

Each week I review fund performance for numerous periods, including the 1, 4, 13, 52-week and year-to-date period results, which are compared with various equity asset allocations. While the average S&P 500 index fund has produced positive results in each of those time periods, they have underperformed the average US Diversified Equity fund, the average Sector Equity fund, and the average World Equity fund. (This has not been the case for longer periods.)

What has caused this change? The data gives us a clue. The popular way to display results is asset weighted. We also review performance averages that are not asset weighted and include the median fund’s performance. What we discovered for large-cap, medium-cap, and small-caps is that larger funds are doing better than their peers in almost every period. Why is that? Larger funds tend to have lower costs and often have more aggressive portfolios. Advisors and salespeople find that performance momentum makes an easier sale than a belief in different leadership over the next market period, which is less risky due to current performance leaders often being more volatile.

Another example of it being beneficial to pay attention to size is in commodities. The number of contracts by large speculators, commercial hedgers, and small traders are tabulated each week and large speculators are often successful. In the latest week, the aggregate large speculator reduced very large long holdings, except for positions in gold, silver, T bonds, and the Yen. This seems to indicate that speculators are betting on non-currency related inflation. A few portfolio managers, while bullish on their stock portfolios for 2021, believe there could be as much as a 10% drop in their stock portfolios in the first part of the year. (This may be related to concerns over the new administration having difficulty getting their program started.)

US vs. the Rest of the World

Our economy and stock market structure are different than the Rest-Of-The World (ROW). The following tables highlight key differences:

        GDP % of World Trade      Market Cap % of World

China            19%                        9%

US               16%                       44%

ROW              51%                       30%

                           S&P 500     MSCI World

Information Technology        26%          21%

Financials                    10%          13%

The Wisdom of Charlie Munger

One of the highlights of Berkshire Hathaway’s (*) annual meeting are the brilliantly phrased but somewhat laconic comments to questions that Warren Buffett spends too much time discussing. Charlie, a student at Caltech while he was in the Army Air Force during WWII, sat for a zoom interview for Caltech Associates. The following is my edited review of his 22 comments. (I will be pleased to send his full comments if desired.)

(*) Position held in our private financial services fund and personal accounts.

Selectively edited comments as follows:

1. Avoid being stupid consistently rather than trying to be very intelligent.
2. Technology is a killer as well as an opportunity.
3. American companies are like biology, all individuals die as do all species, it is just a question of time.
4. I try to keep things as simple and fundamental as I can
5. A successful life requires experiencing some difficult things that go wrong.
6. We are in unchartered waters regarding the rate we are printing money.
7. “Who would have guessed a bunch of communist Chinese run by one party would have the best economic record the world has ever seen.”
8. “I don’t think Caltech can make great investors out of most people.” Great investors, like great chess players, are born to be in the game.
9. “You have to know a lot, but partly it’s temperament, deferred gratification (willingness to wait); a combination of patience and aggression. Know what you don’t know”
10. One needs to be fanatical to succeed.

Question: Which of Charlie’s statements do you agree or disagree with?    

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

https://mikelipper.blogspot.com/2020/12/searching-for-surprises-weekly-blog-659.html

https://mikelipper.blogspot.com/2020/12/an-investment-dilemma-with-possible.html

https://mikelipper.blogspot.com/2020/11/mike-lippers-monday-morning-musings_29.html

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Inducing a Recession, Opportunities?

Reading the general and financial media, be it print or on a screen, most of us see disappointment. In part because of our disappointments with political leaders around the world, we are taking away their firepower by inducing a recession. We are disappointed with the various politicians for their reluctance to solve the growing gulf between what we want to receive as a society, and what we are willing to pay for in the way of taxes and fees. Since political leaders wish to get elected, they are reluctant to force the narrowing of this gap.

As political leaders like spending as much as getting elected, we are pressing them to cut expenses, mostly by cutting the other person’s entitlements or benefits. This less spending without an offsetting increase in the private sector will shrink the size of the global economy. Since the expected general level of demand will be reduced thus creating a recession, many are already cutting back on expenditures and have a pessimistic attitude toward investment obligations to themselves and others.

Two extreme behaviors

The first extreme behavior assumes the worst is compounded into tragic levels. Since politicians won’t lead, in this scenario we will see the equivalent of the “Man on Horseback” taking charge and forcing a solution, usually by attacking one or more groups. The dastardly actions of various dictators of the 1930s who “solved” the crushing debts of their country are the source of some people’s paranoia. Following historical precedents, the group to be attacked are the wealthy people, who fear a pillaging of their assets. This fear is palpable today for some. In an investment group meeting last week, we were informed by a third generation dealer in gold bars and coins that sales of these items for personal delivery are skyrocketing. The announced intended purpose for this portable wealth is to pay bribes to cross a border. For some, this was experienced during their lives or their parents' lives in Europe and Asia. Others feel that their wealth is threatened by various left leaning governments, including the present gang in Washington. Their demand for physicals is such that new vaults specifically designed to hold gold, and to some degree silver, are being sold in London and elsewhere. Perhaps another example of this conversion of fiat currencies is that the highest priced real estate properties are selling very well.

The second extreme behavior is that some are buying in the face of plunging stock prices around the world. The buyers could well be traders who recognize, using the past metrics, that both the S&P 500 and the MSCI EAFE are oversold by a significant amount, at least as of Thursday’s close. The other possibility is that the buyers are really investors who know something. My brother points out that our grandfather, based on decades of Wall Street experience, told us that the person on the other side of a trade may know as much, if not more, than we do.

Asian Lessons

Perhaps the rumored flirtation of the Chinese for Italian debt was aborted by their analysis that the rating agencies would lower the credit rating on both the sovereign debt and two of the largest banks in Italy, which occurred last week. A more difficult factor to consider is the announcement last week that FedEx is significantly lowering its estimate of the growth in revenues of expected parcel traffic from Asia for the rest of the year. What requires more study is whether the projected drop in growth is due to an expected dip in the sales of Christmas items in the US. Historically, we have thought of Asia primarily as exporters to the US and Europe. However, our Asian portfolio managers point out that over half of Asian exports are now done within Asia. If the expected decline in the growth of air freight shipments is due to an expected weakness in the Christmas trade, that fits with the induced recession scenario. If on the other hand, the growth of consumer demand within Asia is softening, this could be much more serious. The continued growth in Asian consumer demand is critical to my long term investment philosophy, and to others as well.

What is happening in the “Real World?”

According to a survey done by JP Morgan Chase, 75% of small company CEOs are planning to add people in the coming six months. They may feel that they have a chance to fill a void left by their larger competitors who are pulling back. What appeals to me is that there is an abundance of high quality talent available, either already separated from their employers, or people who are available for the first time.

What should Investors Do Now?

We are reducing our fixed income exposure for our long term accounts who perceive that they have extended obligations to various beneficiaries. Soon the only high quality fixed income that we intend to own will have short maturities. Periodic, planned increases in equities make sense for many of our institutional and High Net Worth clients.

What are you doing with your portfolios?
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