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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Gravitational Waves & Investing - Weekly Blog # 791

 

Mike Lipper’s Monday Morning Musings

Gravitational Waves & Investing

 

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

 

 

 

 Living & Investing within Uncertainty

We unconsciously make bets about a collection of futures at every moment. Scientists and other Seers have been doing this since the beginning of human time. The terms of our world have been evaluated, as well as how to gain, grow, preserve, and distribute wealth. I have come to a point in both my professional and personal life where I hope to find a systematic way to make investment decisions regarding money and the expenditure of time and effort in acquiring it.

 

This week, by mere coincidence, scientific teams in Europe, India, Australia, China, and the US, released their astronomical observations on what they perceive happening in deep space. Their observations are the result of 15 years of study using both land and satellite based large telescopes. (This knowledge is also being shared by nations building military applications.)

 

The research follows the theoretical work Albert Einstein did over 100 years ago. (Historical note, Einstein was a frequent guest and lectured at Caltech where I am a Senior Trustee.) The current work supports his theory that we are traveling through an undulating sea of intensity and are being attracted by the gravitational pull of large, dead, dark stars. At this point, we cannot predict how these intense, undulating pressures will direct our earth.

 

Coming back to earth and the subscribers of this investment blog. We should accept uncertainty as one of the undulating governors of future investment opportunities and risk. I am starting to corral a number of thoughts as part of a toolkit to develop appropriate investment policies tailored to particular situations.

 

3^rd Quarter Risks for Money Managers

The bulk of dollars under management may have entered a period leading to the termination of trusted relationships, both contractual and/or personal. Relatively few formal or informal investment committees execute management changes during the summer, but they likely will after the third quarter when decision makers receive second quarter reports. These reports will not be happy readings in more cases than not. It is estimated that the earnings per share of the stocks in the S&P 500 index will fall by -5.7%. Combining this news with another bit of analysis, it may cause fiduciaries to question the reason they are paying fees to their existing managers.

 

In a second bit of analysis, if one subtracts the performance of the 28 stocks in the S&P 500 which gained during the first half, the remaining stocks lost money. For the six-month period, gains for the 28 stocks were larger than those in the first quarter. Many more had positive gains in June, as the number of winning stocks expanded significantly. However, the June 30^th report may also reveal that there were losses for more than two years, as mentioned in last week’s blog.

 

Portfolio managers, anticipating the results of the 2^nd quarter, may have plowed money into the six to ten global tech-oriented leaders of the first quarter. It is my impression that the Price/Earnings ratios of many of these companies expanded more than their underlying earnings growth, perhaps pushing them to over-valued levels.

 

My concern is that we could see a repeat of a lesson from the late 1960s, when two leading Boston based mutual funds with the rest of the market fell. At the time my brother’s firm was selling fund performance data for brokerage commissions. Our trading desk was in communication with both of these competitors, among others. Up to that time both funds had similar portfolios but following the decline the two managers followed different defensive paths. One sold its most over-valued stocks. The other, perhaps learning from his mother who was a broker on the Shanghai exchange, sold his largest and most liquid positions.

 

After the decline ended, the second manager was hailed in the press as a brilliant manager. So much so that he was featured on the cover of a well-known business magazine. This propelled him to start his own fund management company, which raised a lot of money but didn’t perform particularly well and merged out. The other portfolio manager had retired earlier.

 

Using performance records can only lead to unfortunate choices. At the racetrack, some bettors select the horse with the most winning races or a high win vs loss ratio. I have often found this to be a trap. The wins were over cheaper horses or those competing at less competitive tracks. Whenever trainers enter a horse in a race which had a number of higher quality horses with less of track record, the horse often does not live up to its win/loss ratio.

 

As a provider of performance analyses, we addressed this issue by creating a peer group under the rubric “Capital Appreciation”. The peer group housed funds essentially based on their win/loss ratio, not what was in their portfolio, like growth or growth and income stocks. Over time, fund marketing people and lawyers convinced us to give them the widest range of portfolio choices in their prospectus. Many ended up saying their funds sought capital appreciation and secondarily provided income. The delineation of the peer groups were too broad and was consequently dropped.

 

As a manager of accounts and a member of investment committees I seek to be invested in funds that meet the intermediate (5 year) and long-term total return needs of the account, not shorter-term results. I am anxious for my responsibilities to accomplish their planned distribution to finance their purpose.

 

Work in Progress

There is much more that needs to be discussed including responding to inputs from subscribers. Two additional topics require more space and your time. I am working on the tension between economics and the impact of China and the rest of the world. I would appreciate any comments on what I have produced as well as on the two topics that I am developing.

 

 

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Mike Lipper's Blog: Manageable Risk - Weekly Blog # 790

Mike Lipper's Blog: Predictions Suffered Last Week - Weekly Blog # 789

Mike Lipper's Blog: Head Fake, Unrecognized Opportunity, or a Minsky Moment - Weekly Blog # 788

 

 

 

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WWIII Slightly Delayed, Bear Market Accelerating, Prepare for Bull Market - Weekly Blog # 727

 

Mike Lipper’s Monday Morning Musings

WWIII Slightly Delayed

Bear Market Accelerating

Prepare for Bull Market

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

Chatter from Moscow, Turkey, European Capitals, and the confused and confusing White House, seems to indicate attempts to avoid raising the price of confrontation, with the hope that internal political problems in almost all countries will lead to lower military commitments. Possible but unlikely based on US actions before WWI and WWII, which appears to be the script that the former Obama White House staff is following through their statements. Focusing on socially restructuring the US economy instead of spending on qualitative and quantitative defensive needs has opened the window for aggressors. This has happened twice before and appears to be happening again. The political focus on US domestic policies and the growing gap in preparedness has encouraged the aggressors to attack.

In the long run our growing weakness is perhaps the product of the schooling system, from Nursery school up through PhD programs. It has produced many uneducated, undisciplined, and unhealthy students unsuited for the military and entry-level jobs. 

Bear Market Signs

Current and prior administrations saw imbalances in the economy through a top-down approach. They found it acceptable to increase money supply growth, which eventually led to an increase in the size of the federal deficit that unleashed inflation from its constraints. Today, many look back on 2019 as the base-case for a healthy economy, although problems existed on some corporate and personal earnings statements. There were clearly social imbalances and school systems were well on their way to producing unemployable people. 

Many see the large jump in 2021 earnings and extrapolate those gains further into 2022. However, if one looks at the growth rate from 2018 through 2022, it is far lower than prior growth rates and precedes the anti-profit and anti-trust executive actions proposed by the current administration. We are currently seeing materially lower earnings projections and planned tax increases that will hurt earnings in 2023, which will potentially impact corporate spending in 2022. 

The one main securities sector enjoying the current market is the energy sector, which The White House is blaming for inflation and suggesting it should be punished, rather than taking responsibility for its own actions. These actions are not going to lead to increased capital expenditures in the “oil-patch”.  

Preparing for the Next Bull Market

As I have previously mentioned, I am trying to focus where possible on looking across the valley of the bear market and likely recession to climbing out of the swamp and beginning the next bull market phase. I have written in the past that if one slashes the wrist of a securities analyst a historian will bleed. One advantage I have over most other market-oriented analysts is access to the portfolio holdings of many open and closed-end type vehicles around the world. Rounding out this area, I also review the financials of a more limited number of fund management companies. From these inputs I have gathered some observations that have led to successful long-term investment performance. I intend to share these thoughts with our subscribers through forthcoming blogs.

#1 Biggest Contributor to Performance

Rarely in securities analysis courses or books is the importance of weighting portfolio components attributed to long-term performance results. Interestingly, when writing the Investment Company Act of 1940 at the Mayflower Hotel in Washington, the fund industry lawyers recognized the importance of weighting as a characteristic to fund owners. 

Most funds are legally designated as diversified funds, which restricts the initial cost for each security to a maximum of 5%. As a practical matter, very few funds are so concentrated that any position exceeds 5% at cost. Additionally, most funds do not want to have any single position represent more than 10% of the voting shares of a company. Doing so would classify them as an inside investor and would impact the tax treatment of the sale of such a position. Most large funds chose to own many positions, with a large position representing 2% - 3% of the portfolio. An S&P 500 index fund will obviously own 500 plus stocks. 

Every stock, at any given time and price, has its own potential risk and reward in the eyes of investors. By combining these stocks with others, the entire portfolio takes on its own risk/reward characteristics. The smaller the number of positions, the larger the impact of a single position. I prefer a concentrated portfolio when I have confidence in a fund or manager and prefer a portfolio with a larger number of holdings if I am less confident but still want to participate in the market or sector. This is the filter many use in their selection of managers.

Over time, as holdings rise or fall due to changing prices, it is not unusual for a portfolio to have a limited number of holdings do very well while another group does relatively poorly. For illustration purposes, take a highly concentrated portfolio with initial positions of 5% each. After a length of time, the 10 best performing positions might represent 75% of the portfolio instead of the initial 50%, with the bottom 10 representing 25%. The winners will then represent 3 times the amount of the losers. Without a reversal in fortune, you would be far less diversified and could be more at risk of a loss.

Many of us initially take small position sizes when entering a new position, resulting in many holdings over time. However, some of the newbies don’t work out and some of the larger positions decline in relative value, causing wealth to not grow proportionately. We generally own a number of heavy hitters and a farm team. I recently looked at a very successful portfolio which had grown many multiples of its initial cost. Even though there were very large gains in 10% of the positions and 90% of the stocks were unproductive, wealth grew many times its starting value. This result was due to 10% of the stocks producing 90% of the gains.

One can also weight by industry or investment characteristic. For example, turnaround, new product, low cost, good management, takeover potential, local business, yen based, etc. The important point in terms of analysis is to divide the portfolio into meaningful segments that lend themselves to making useful decisions.

For a limited number of subscribers wishing to have a discussion, please send me your portfolio data and I will be glad to help use this tool in decision making.     

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

https://mikelipper.blogspot.com/2022/03/not-much-weekly-blog-726.html

https://mikelipper.blogspot.com/2022/03/relative-or-payout-returns-in-periods.html 

https://mikelipper.blogspot.com/2022/03/building-your-future-winning-portfolio.html

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

Historical Alerts for Current Investors - Weekly Blog # 676

 

Mike Lipper’s Monday Morning Musings

Historical Alerts for Current Investors

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

From the Ancient Past to Present

The problem with history is that there is too much of it. One can easily pick out any number of events and suggest they foretell the future. Thus, any selection is fraught with biases, incomplete information, and are insufficiently like the present to be worthwhile.  Recognizing these drawbacks and the SEC dictum that past performance is not a guaranty of future performance, there are several historical events that may be useful in thinking about the future.

Ancient Rome

By the 1st Century AD, Rome had transitioned from being a so-called Republic to an empire, although it still needed the support of the bulk of its citizens. To stay in power, the leaders fed the population what was called “bread and circuses”, of cheap food and entertainment. The population accepted these bribes instead of serving in the military and taking on societal responsibilities. Studies of the rise and fall of numerous empires suggest almost all fell from internal deterioration, causing eventual military defeat. 

Subscribers can decide for themselves whether the excess funding for COVID-19 and roads and bridges etc. is like the Roman bread and circuses. Or is enlarged deficit spending perhaps the excuse to raise income and estate taxes to reduce political power bases and enlarge union dues political contributions?

Discoveries of Gold

The discovery and exporting of gold from Latin America and hundreds of years later from California, was interpreted as a sign of internally generated moral superiority. Not only was this wealth delivered with relatively low apparent cost, but it was assumed it would last forever. Little thought was given to the destabilizing impact of the new wealth and the reaction from those who weren’t so lucky.

Vladimir Illich Lenin

He was supposedly quoted as saying “The Capitalists will sell us the ropes with which we will hang them”. Others may have said the same or similar things. (I wonder if a similar comment could be made of Silicon Valley, Wall Street, and other CEOs today. Could they be “selling rope” by supporting excess stimulus spending?)

FDR’s First Term

FDR arrived in the White House with a “Brain Trust”, which led to an enlarged cabinet and new departments. He quickly attempted to pack the Supreme Court with more judges and reduced military spending. The reason for the big rush was that he was not convinced he would maintain political control of Congress after the next congressional election. Consequently, there was a need to push as much legislation as possible through in his first year. (Does this seem similar to today?)

Short-Term vs. Long-Term

Now Focus

While a single week only captures the “hot breath” of the moment, it can be insightful regarding the thinking of the transactors. Of the over 100 mutual fund peer groups I briefly review each week, only five gained on average more than 2.5% for the week: 

Five Best Performing Weekly Mutual Fund Averages 

Precious Metals             +3.54% 

Latin American              +3.51% 

Agricultural Commodities    +3.06% 

Large-Cap Growth            +2.92% 

Base Metal Commodities      +2.82% 

 Precious Metals - Gold mining stocks up, but not gold

 Latin American - Recovery in Brazil

 Agricultural Commodities - China buying more than expected 

 Large-Cap Growth - Politics Driven

 Base Metal Commodities - Reflation in Asia

There were 8 Precious Metal funds in the top 25 and 8 Natural Resource funds in the bottom 10 for the week. The 8 Natural Resource funds probably reacted to very current price trends. The performance of Energy funds and Precious Metals funds are often more parallel than divergent.

Markets See Things Differently

The New York Stock Exchange (NYSE) is the senior market in terms of size, history and perhaps prestige, but the NASDAQ may be the savior due to the relative absence of large, passive investor pools. The junior market has more stocks listed and proportionately more “tech” companies. While the image of the NASDAQ is that it is more speculative, the table below suggests it does not appear to be so this week. 

 

Exchange    Number of Highs    Number of Lows

  NYSE            669                54

 NASDAQ           518               128

I believe the NYSE gets more passive and individual investor transactions than the NASDAQ. NYSE prices move more in line with the weekly sample survey of the American Association of Individual Investors (AAII). In their latest survey, 56.9% were bullish on the outlook for the next six months. This is one of the more extreme readings and is often viewed by market analysts as contrary to future results.

Longer-Term

While it appears we are in an up-market for the moment, long-term investors are focused on the next major move. Unless there is a dramatic change in how people think, the current expansion will be followed by a measurable contraction, followed by another expansion. There is no guaranty however, many of us lived through a relatively flat period from 1968-1982 as the country was adjusted to the ending of the Vietnam war, severe inflation, and its correction. Today there is too much debt being financed outside the banking system. It will take a long time to be liquidated and could lead to a longer than normal recovery.

From 1900 to Present

The following instructive tables of the S&P Historical Composite show the Inflation-Adjusted Secular Highs and Lows.

         High from               Low from

Year     Prior Low     Year     Prior High

1906       +334%       1921        -69%

1929       +396%       1932        -81%

1937       +266%       1949        -54%

1968       +413%       1982        -63%

2000       +666%       2009        -59%

Current    +315%

According to Steve Blumenthal of CMG, the above chart shows:

• Secular bull gains totaled 2075%, for an average gain of 415%
• Secular bear losses totaled -329%, for an average loss of -65%
• Secular bull years totaled 80 vs 52 for bears, or a 60/40 ratio.

While the ratio of years is correct, to me the more significant fact is that since 1877 only the 1932 low was below the prior low, suggesting a portfolio with a buy and hold approach, using diversified mutual funds, probably works under most conditions.

Question of the week:

What of all the elements in this blog makes sense to you?

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

https://mikelipper.blogspot.com/2021/04/respecting-opposition-market-weekly-bog.html

https://mikelipper.blogspot.com/2021/03/the-biggest-risk-we-all-face-weekly.html

https://mikelipper.blogspot.com/2021/03/2-presidential-lessons-to-be.html

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

The Week’s Fashions and Our Most Dangerous Asset - Weekly Blog # 643

 

Mike Lipper’s Monday Morning Musings

The Week’s Fashions and Our Most Dangerous Asset

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

There are instances where very current observations can have long-term implications. The week that ended last Thursday night was quite possibly such an instance. Each week I examine a report on the performance of over one hundred different investment objective peer groups. Since the competitive game, not the investment game, is beating “the market”, I look at what types of funds that have beaten the S&P 500 Index Funds average performance. In the quiet lazy summer week, the index gained +0.40%. The following is a list of the seventeen peer groups that beat the index:

Base Metals Commodities   +2.83%

Precious Metals           +2.43%          

Energy Fund Commodities   +2.11%         

Large-Cap Growth          +1.83%         

Science & Technology      +1.60%         

Global Science & Tech     +1.58%          

Multi-Cap Growth          +1.52%         

Convertible Securities    +1.37%        

Consumer Services         +1.25% 

General Commodities       +1.13%

Agricultural Commodities  +0.78%

China Region              +0.77%

Global Large-Cap Growth   +0.77%

Global Multi-Cap Growth   +0.70%

India Region              +0.61%

Alt. Active Extension     +0.49%

Telecommunications        +0.45%

Most of these leading groups have been leading for some time, benefitting from momentum. The commodity owning funds look forward to higher prices for them and inflation for their customers resulting from shortages of supply.

One could say that these groups were deemed attractive by some pundits and their followers. Thus, if one would invest in most of these, the bet is not on the fundamentals of the underlying companies and commodities, but on the expected pronouncements of various pundits. To me, this suggests that these funds are likely to be more volatile than most funds. Thus, they make sense for those who believe in their trading skills or have a firmly held view of the investment cycles of the future.

CASH Is the Most Dangerous Asset in the Portfolio

Cash is a dangerous asset, not because it may lose some value, but because of how we exit from it. Remember, almost without exception every single loser we have had started from exiting cash. Potentially, the biggest problem in having cash is the way we think about it, our portfolio, and ourselves.

Whether we have a thousand, ten thousand, one hundred thousand, a million, ten million, one hundred million, one billion, or ten billion, as we jump each successive hurdle it gives to us a different attitude about ourselves, our status among others, and the safety of our situation. However, these emotional and intellectual highs can be very misleading. 

Cash is a receipt from past activities and its value changes imperceptivity every day due to the interaction of currency and inflation. Additionally, changes in tax regulation and investment/legal practices change the purchasing power of cash. Another critical element impacting how we feel about cash and other attributes of wealth is the perceived wealth of others, either foolishly published or gossiped. (The wealthy lists are not adjusted for present debts or future commitments. Some multi-millionaires have assets tied up and have little or no “walking around money”.)

The expected use of cash defines the flexibility of wealth. Large families in terms of number or generation of people need to think about the state of their physical, emotional, and mental health when considering future spending. Only some family members and their highly trusted advisors have a real understanding of the extent of cash and other indications of wealth. Often, no one has a complete picture of the emotions attached to assets/liabilities and how that influences their disposition.

Working Toward Solution Suggestions

The best suggestion I have is to adopt a holding company philosophy like Berkshire Hathaway, which is a holding of some clients and held in personal accounts. With over 60 operating entities and over 100 separate financial centers, their current operations retain enough of their cashflows to meet current needs and send the excess to headquarters for future investments.

The first suggestion deals with the proper identification of reserves to meet specific needs. It can include specific elements such as buying future residential property, education expenses, specific medical needs, and a loss of employment reserves. Determining the size of the specific reserve will at best be guesswork, but some numbers are better than none. A much more difficult task is guessing the range of future dates when the reserves will be tapped. It is at this point that an intelligent allocation of cash and risk/return assets should be made. The closer the likely expenditures, the higher the allocation of cash or extremely high-quality short-term paper. However, there are risks associated with funding long term needs with short-term paper and cash. My own view would be the following reverse ladder:

• 100% cash for assets to be spent in the next 90 days
• 80% cash for assets to be spent one year in the future
• 60% cash for assets to be spent two years in the future 
• 50% and no higher in cash beyond that 

My second suggestion is to divide one’s portfolio into two separate parts, the reserve element just mentioned and an investment portfolio with at least a ten-year view, potentially extending beyond multiple generations.

The investment portfolio should avoid holding cash except for a tactical reserve, with a time lock forcing some commitment if the tactical reserve remains after 18 months. Remember the following things:

• In an investment portfolio cash is a decaying asset due to inflation and currency. 
• If you must reduce or eliminate cash, the investment opportunities are vast and include some relatively safe alternatives. 
• Long-term successful investors often go through periods where they are very lonely.     

 

Questions of the week: 

1. Do you monitor the opportunities to invest investment cash?
2. Do you review your reserves periodically to ensure that they are appropriate? 
3. What was the last time you adjusted your cash levels and what was the result? 

    

   

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

https://mikelipper.blogspot.com/2020/08/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/08/rotating-leadership-likely-on-horizon.html

https://mikelipper.blogspot.com/2020/08/more-to-learn-by-seeing-more-weekly.html

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

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Contact author for limited redistribution permission.

Turning Points Provide Hope for Everyone's Wealth

In a world of so much uncertainty, I find relief that people eventually follow their intelligence and act in their best economic interest. After many years of resistance, large portions of the U.S. population are finally beginning to get it right. This causes me to shout, “It is working – there is hope for wealth!” These fundamental behavior shifts are being carried out by people of very modest incomes as well as those who are described as Ultra High Net Worth (UHNW).

The recent decline in gasoline consumption is my first example that there is hope. As Americans, have been told how wasteful we have been for at least the last thirty years. We heard, but did not listen.

In 2008 the price of gasoline skyrocketed to over $4.00 a gallon. Then for the first time, perhaps since WWII days, the number of miles driven by cars on American roads dropped significantly. On now-crowded commuter trains, a frequent conversation topic is where to find the cheapest gas. The lowest I’ve heard this week was in the $2.50 range.

The drop in gas prices was caused by consumers changing their behavior: driving less to avoid paying too much; not by Congressional regulation outlawing speculation and speculators. (As I mention in my book Money Wise, we saw the same trends in the 1930’s, when Congress held hearings to investigate speculation.) People will change their behavior (and will largely benefit from doing so) when given sufficient information and motivation.

The second example, which I think is the best news in many years, is that the savings rate for the second quarter of 2008 shot up to 2.7% of income, after being below 1% for many years. In some quarters the rate was less than zero, as people borrowed more than they were making.

During the third quarter of 2008, the economic slowdown became more pronounced. In recent conversations with various companies, charities and merchants, I have found business has come to an almost complete stop, with high ticket transactions nearly non-existent. As saving is the opposite of spending, I expect that we will see an acceleration of the savings rate when third and fourth quarter savings rates of 2008 are published.

Why am I so excited about the increase in the savings rate? The major precursor to wealth for everyone is savings. In many cultures, people of very limited means save a great amount of money. For example, years ago a business acquaintance in Hong Kong was having difficulty meeting his office rent and he was notified by the building manager that his rent was about to go up. He begged the manager for some concessions. He was told he had to discuss his problem with the building owner. He asked for a meeting and it was arranged quickly that the owner would visit him in his office.

He was flabbergasted when at the appointed time, the lady who had been cleaning his office walked in. Not only was she the owner of this building, but a number of other buildings as well. Over many years she saved her money from cleaning and invested wisely in small Hong Kong office buildings. She kept working to earn more and to watch over her investments. The key to her becoming wealthy, she learned, was to spend as little as possible and save/invest as much as possible.

There are many, but not enough, people in this country who have similar behavior practices. They recognize that their long term desires are larger than their likely income, so they must become savers/ investors.

If we define wealth = freedom, then the small income saver is well on his/her way to wealth. In contrast is the ultra high net worth investor who is spending more than what is coming in, and in the process destroying his/her wealth. The challenge for many UHNW people is to consider gifts to charity and others as an investment that should payoff in psychic benefits.

Those who have saved and invested wisely are now faced with challenging their children and grand-children to do the same. These discussions will benefit both the child/grandchild and greater society. The benefit will be converting the savings/investments into jobs, high tax revenues and enlarging the vital pools of capital which fund our future.