Sunday, March 18, 2018

Investors Need to be Wrong to be Right – Weekly Blog # 515


Investing is an art not a science. In science the search is for a repeatable answer under every identified condition. As strong as it may seem to many, the search is not in the end the largest performance number. The search is the delivery of the required funds to meet the accepted needs of the beneficiaries; be they institutions or individuals investing within the realms of prudence. Thus, the investment manager’s primary function is to aid in the feeling of the well-being of the beneficiary. According to a recent report on happiness as applied to nations, well-being is based on income, healthy life expectancy, social support, freedom, trust, and generosity. It is far easier to contribute to well-being through sound investing. I believe our clients hire us to provide sound investments for them in order to accomplish their well-being. Thus far I have been able to deliver. But much of this is not based on the certainty of math and science that I learned in school and university, but as a handicapper at the New York racetracks. From an investment standpoint what I learned at the track that is useful can be summarized as follows:

1.  The objective is not to win every race but to finish the day as a winner (including expenses).

2.  Don’t bet on every race, there could even be days when no bets are made as the payoff odds are not appropriate to the probabilities foreseen.

3.  Occasionally the most popular bet is logical in terms of expected results, but the payoffs are too low because it doesn’t take into consideration what can be called “racing luck.” At these times it could make sense to invest in the second or third most logical horse if they are being offered at reasonable odds for second or third place and turn into larger money makers if racing luck overcomes the favorite. This is a good bet as favorites rarely win, even half the time.

4.  After concluding the most logical result, the real analysis begins, which is how much should be bet on this horse in this race? Weighting one’s bets can make the difference of a nice win vs loss record and walking away as a winner for the day.

5.  Accepting that I was wrong an uncomfortable number of times, but learning from the experience by re-examining both my analysis and how I handled my money and to a lesser degree my expenses.

Thus, I believe that, like other investors, I will be wrong in terms of market direction, sectors, “factors” and selections. To defend our beneficiaries’ interests I have adopted a policy of having a number of different bets at the same time, but with the recognition that unlike at the track where races end, the investment process continues through many cyclical periods.

“Goldilocks” May Be Leaving

Liz Ann Sonders of Charles Schwab among others is raising concerns about the future. After all, for at least nine years it has been somewhat easy to ride the secular rise in the US stock market. (Shorter periods for other stock markets.) This issue brings up a number of questions: evidence of impending change and what should be the correct investment policy going forward. In terms of evidence of impending change there are two important elements:  flows into stocks are from traders not investors and credits may be mispriced leading to fixed income not providing stable values. This week some in the press for the first time are heralding significant flows into the equity market from “funds”, which shows the Public is buying the current conditions. The truth, according to Thomson Reuters’ Lipper Inc., is that $20.4 Billion came in net, but $18.7 Billion went into domestic oriented ETFs with $8.2 Billion going into the SPDR S&P 500 and $3.1 Billion into PowerShares (Invesco*) QQQ. Both of these are favorites of hedge funds and other traders. In numerous cases ETFs and ETNs are being used by these players as substitutes for futures which are more expensive. I am noting that a number of investors have sold short some ETFs that represent over 10% of their assets and in at least one case over 100%. What may be more disturbing is that a number of independent investment advisors and a number of advisors working through brokerage firms are managing discretionary accounts exclusively in ETFs/ETNs. Some of these are probably good, but I suspect many do not have any successful background in market trends, sectors, “factors” and the selection of individual securities. They may be, along with others, contributing to a much higher turnover rate in ETF/ETN portfolios than conventional mutual funds.

*Invesco is held in a private Financial services fund and personal accounts that I manage.

Credit Concerns

Remember that most significant stock market declines begin after a period of fixed income market declines. Through March 15th most bond funds are showing a slightly negative total return, which includes both their income and their market movement. The only domestic groups that are not negative are loan participation funds, some specialized credit vehicles, and ultra short maturity funds. I don’t know when the next recession will commence, but I expect it will be within this first term of the President. I do know that during a recession bankruptcies and other financial difficulties occur and they are not being priced into the market. Institutional term loans are being priced at only 3.2% above prime corporates, compared with 3.1 % before the crisis that began in 2007-8. Further, while banks have much more capital than they did before the last crisis, their book of derivatives is somewhat higher.

In a talk at a Futures conference last week, my old friend Tom Russo, formerly General Counsel to Lehman Brothers, mentioned that when a counter-party believes it was duped, the entire class may be considered illegal as an auditor will have difficulty claiming the asset is worth 100 cents on the dollar. He said, according to the Financial Times, that “when you owe a little bit you call your bank - when you owe a lot you call your lawyer. “A good bit of derivatives are directly or indirectly financed through the credit market.

What Should Investors Be Doing Now?

There is no special reason for long-term investment policy to be changed as long as it contemplates that there will be periodic market declines. This is similar to money that is invested in what we label Legacy and Endowment Timespan L Portfolios®. For those with a shorter focus of at least five years, they should be making two lists of equities and equity managers.

The first list should be of items that at higher prices would become risky if the general stock market rises at a rapid rate. (There is some chance of this happening as new money rushes in on the basis of buy-the-dip or FOMO fear of missing out.) The risk is that such a surge most often leads to a major fall, which could lead to structural changes. The second list should be labeled “Hopefully not to be used, but probably will be.” It is a list of sound companies and managers who may be slightly damaged in a decline but will survive and prosper. Both of these lists should have names and prices scaled to avoid emotional price reactions. Five or ten price points could be prudent.
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Sunday, March 11, 2018

Danger Ahead, New High Stock Market: Is Capital Preservation with Appreciation the Answer? Weekly Blog # 514


At the end of February I was about to suggest that both the high and low for the year 2018 were in place. If either price was violated it would be troublesome. After the first nine days in March I am getting much more concerned about a breakout above the January highs.

Why are Higher Prices Dangerous?

Perhaps I am jumping to the wrong conclusions, but for many the 400 point rise of the Dow Jones Industrial Average on Friday can be chalked up to volatility, but others may see it as a successful test of the February lows. (I would have preferred a lower test with more volume of trading and statements of discouragements.) But the realist needs to accept reality, not wait for the perfect. There is a good chance that others will see it as a successful test, encouraging buyers with significant power to return and drive the next upward move. Using the very volatile sample by the AAII, 45.2% of their surveyed members are now neutral, which is higher than both their bullish and bearish members. This is a rapid change from just three weeks ago where the neutral tally was 32.6%. In the recent week the top 25 performing mutual funds had gains between +7.77% and +6.07%. All but one of these were growth oriented and or specifically science & tech oriented. 

Thomson Reuters tallies analysts’ earnings estimates and in their latest report the analysts expect the S&P600 Small Caps to have earnings growth for this year of +24.1%  compared with +19.45% for the S&P 500 and +37.67% for the Russell 2000. Both the fund performance leaders and earnings estimates are based on a belief that the future is going to be good, led by positive future developments in terms of technology, politics, and economics. (Perhaps they will be correct.)

After nine years of rising markets, I have been on the lookout for signs of an inevitable market decline. In terms of magnitude of decline a normal cyclical decline is in the range of 25%. These happen normally once within a decade. Not too many people are psychologically wiped out in these declines and usually return to the stock market within a few years after the decline.

A much more serious fall, that is often labeled a collapse, happens infrequently, normally once a generation and is generally in the range of 50% from the peak and has investors leaving the marketplace never to return, This type of fall is in the passing on their distrust of the market to the next generation. The individual and societal losses from these collapses are relatively small compared to the forgone profits from the recoveries, which impacts the rest of their lives and often also the next generation’s. As both a fiduciary and an investor I would like to avoid these results. I attempt to do this with an eye on a number of different market histories.

The major traumatic collapses start with apparently successful investing, that not only turns a small amount of money into a larger amount of money but inflates the investor’s belief in their own investment skills. Often this confidence leads to the use of borrowed money in the forms of margin or derivatives. A speculative fever takes over the crowd, while they recognize there is some risk their confidence is such that they can get out without large losses.

The driver of these “animal instincts” is based on an unshakeable view of the future. These speculative markets are driven by sentiment, not researched fundamental investing. This is why I am paying more attention to measures of sentiment, along with attention to internal financial calculations.  One of the fuels of a major top is the sucking into the market of all or most of the available cash.

Assuming the US and perhaps other markets pierce their former highs, the various pundits, including non-professionals, will proclaim that those not participating are stupid. They have never studied handicapping at the racetrack where in each race there is likely to be at least one horse with a good, very current record receiving a disproportionate amount of the betting money. This is the favorite of the crowd, no different than the current market where leading funds are heavily invested in a select group of multinational tech companies. At the track, while the favorites do win at short odds, they don’t win enough money to cover the losing bets the majority of the time.

I am concerned that over the next year or so too many investors, including those institutions that are de-risking, will get sucked into the market. My fear is not for them alone after their disappointment of losses from the next peak, but for the opportunity losses in a future recovery. Unfortunately in our society these are the losses that are socialized for the rest of us to pay.

What are the Signs to Watch?

Currently, the most visible largely speculative source of flows into and out of the market are the Exchange Traded Funds (ETFs). Much of the current activity in these securities is by traders, often at hedge funds, who are using ETFs rather than more expensive derivatives. In the last week, while the larger mutual fund industry had a small net inflow due to net purchases of non-domestic funds ($2Billion), ETFs had a net outflow of $12.6 Billion with $10.3 Billion in one ETF invested in the S&P 500. This is a sign of a trading market that has lots of speculation occurring.

The second item to watch for soon is mutual fund advertisements heralding their ten-year performance results, which had been trailing more current periods. It is easy to look good from a bottom in March of 2009.  These market efforts could bring a lot of unsophisticated money into the stock market, which will entice the so called sophisticated players to trade the market on the way up convinced that they can get out in time.

What can a Wise Investor Do?

In an over simplification, portfolio strategies can be divided into two buckets: Capital Preservation and Capital Appreciation. For some of our clients, particularly those who have worked hard for their money, their primary concern is capital preservation. This is particularly difficult today if one is concerned about after inflation and after tax earnings. Around the world, governments in theory are sponsoring inflation as a way to create jobs, by ballooning the income of businesses and individuals. What they are actually doing but not discussing is lowering the purchasing power of the loans that they are repaying. This is a continuation of a trend, as governments since their beginnings have debased their currency as a way to payback less value than what they received. 

To the capital owner and the individual, inflation is another form of taxation. In the current environment income taxes are not the only source of pain. Because of the recent changes in the US tax code, I believe we will see an aggregate increase in fees, tariffs, sales and use taxes, as well as various forms of value added taxes. If the job of capital preservation is to maintain the purchasing power of capital, it must earn more than inflation, all taxes, and other distributions. I suggest that in the current market, high quality bonds can’t produce the necessary income. (That is why in our TIMESPAN L Portfolios® we should only have fixed income in the Operational Portfolio.)

At this juncture, until we see much higher real interest rates, the best suggestion is high quality stocks whose yields are in the range of the ten year treasury and have a history of periodically raising dividends roughly in line with inflation. One would like to find dividend payout ratios below 50% of earnings, if possible. In truth that is going to be difficult to do with appropriate diversification.

As a practical matter many accounts are going to have to dip into the capital appreciation bucket. In selecting funds or stocks I would array them based on a guess of how many years into the future the particular issuer will pay a dividend that would qualify for inclusion in the capital preservation bucket. In some cases this may be in only a few years. In others, like with Berkshire Hathaway* and Amazon, the indefinite future may be too short. In these cases the willingness to periodically sell off some of the appreciation to fund the preservation bucket could allow the position to be in the portfolio.
* Owned in both a financial sector fund and personal accounts that I manage
<b>Questions of the week:
What portions of your portfolio do you consider Capital Preservation and Capital Appreciation? Do you expect to change these based on market cycles?  

Sunday, March 4, 2018

Investors Should Use Microscopes – Weekly Blog # 513


Learning experiences occur everyday for investors with an active, searching mindset. We can see their importance more clearly if we utilize a number of tools. At this point in the market’s evolution from a combination of volatility and no forward progress for many stocks, we should be searching for some guides for both our investment emotions and our considered actions. I am suggesting there may be some valuable insights being offered by looking through a microscope as to very recent investment performance for equities and fixed income.

 Current Views through a Microscope – Equities

One of the basic beliefs supporting market analysis is that from time to time the ownership of stocks rotates from “strong” sound, long- term holders to short-term oriented momentum trading “weak” players. Strong and weak are applied loyally to their current holdings. In theory the market’s purpose for periodic meaningful declines is to shake out the weak holders selling at indiscriminate prices; e.g., offering bargain prices to strong buyers who foresee longer term value at these depressed prices. Historically, after a low price is followed by a rally, the question comes up whether the low price is actually the bottom of the move. Often a second or even a third down move “test” is required to convince some strong investors to be buyers. These tests can be at or somewhat near the prior low price. For me it is not only the price move that is critical in declaring a bottom. What I look for is a dramatic change in attitude on the part of the sellers who are exhausted from the emotions of the decline and proclaim they are leaving the game, often calling it “fixed.” At the moment I am not hearing this lament from the sellers. Thus, I believe the February bottom to be a weak bottom. Most of the time weak bottoms are not when the base for subsequent, substantially new highs are generated.

With the above thoughts in mind I wonder whether the stock market, not individual stocks has seen its high in January, which would fit the pattern of post performance from a prior good year.

For Those Committed to Equities for the Long-Term

Many of us have responsibilities to be largely invested in stocks or stock funds because the history of successful large macro bets is poor for many that have tried. Getting three successive correct decisions (Buy-Sell-Buy) in a row has proved to be difficult for most who try. Thus for the rest of us professionals we try to produce the best returns that we can within our prescribed market.

One of the reasons that all institutional investors should pay attention to the results of mutual funds is in aggregate they are the best contemporaneous record of institutional money. (Bear in mind many of the mutual fund management shops manage a great deal of money in non-mutual fund accounts, but use many of the same securities and strategies.) By using a microscope on the very small number of average mutual fund performance through March 1st, one can see some useful patterns. The average US oriented diversified fund declined only -0.31% where the average sector fund fell -3.13 % and the average world equity fund gained +0.11%. What these numbers suggest to me is that during periods of volatility liquidity is important. Further, that an important part of short-term global investing are the inputs from currencies.

There are some other lessons from this study. The best diversified US oriented fund category was the Large-cap Growth funds, which gained +4.02%. (Part of the gain is probably due to investments in a small number of globally oriented tech companies; the average Global Science & Tech fund rose +6.36%) What is significant about the leading performance of the Large Cap Growth funds is that in most weeks it has the largest redemptions. Contrary to the popular view that redemptions are a sign of disappointment in returns, (as these are often the oldest funds many investors own) the redemptions are the completion of particular phases in an investor’s life cycle; e.g., retirement.

Fixed Income through the Microscope

Utilizing the mutual fund data through March 1st, the average domestic fixed income fund was down -0.91%. Not particularly helpful to balanced accounts that were looking to fixed income gains for stability to offset equity losses. Institutional investors and some retail investors did find better investments than the general bond market in Loan Participation funds (Bank Loans) +0.97% and Emerging Market Debt funds in local currencies +2.65%. To emphasize, the importance of currency in Emerging Market Debt fund investing, bonds traded in dollars were down -0.63%.

In reading the annual reports of fixed income funds that our clients own, I found the following statement, “Credit sector is less compelling.” This particular fund has a long history of providing slightly above average income with less downside than most of its peers. Currently, they are sitting with shorter duration bonds or higher quality.

I have written in the past of my unease with the growth of credit funds, both in the US and globally. The leading bank distributing syndicated loans is Bank of America, not one of the leaders that I know of in credit research. The search for yield has been a trap in the past.
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Sunday, February 25, 2018

Investment Lessons from “The Phil,” “The General” and Warren - Weekly Blog # 512


I look for valuable investment lessons from exposure rather than only from annual reports, company statements, and the financial media. I often find lessons learned from beyond the investment arena as more meaningful. Over the last weekend I was blessed to have three exposures which gave me valuable insights. The three were: The Vienna Philharmonic Orchestra, General George Washington, and Warren Buffett.

Investment Lessons from “The Vienna Phil” Friday Night
They played an all Brahms Program beautifully.  I will let others in the packed audience comment on his Academic Overture (university drinking songs), eight variations on Haydn’s masterful work, and his long delayed symphony No 1. But sitting in Carnegie Hall Friday night, two important observations came to me. The first with the aid of The Playbill was that it was very difficult to produce high quality music in very different musical formats. In particular, it was said at the time no one liked his first symphony, except that over time it became viewed as the best first symphony ever written. Further, Brahms was considered the best composer of his era and the best successor to Beethoven’s crown.

In thinking about the comments on his work, it is somewhat parallel to what we and many others do in assembling a portfolio of managers or securities. At any given point in time one or more managers or securities fail to do well in the period and we are deemed to be less good investors to those highly concentrated portfolios of only the most winning holdings in the period. From a career risk standpoint we get penalized for this underperformance, yet similar to Brahms, taken overtime the complete work through multiple market cycles can produce much more credible “lifetime” results. The lessons are that diversification can hurt results, particularly in short time periods, and we should therefore pick clients more carefully as to their time frame focus.

In addition, there was another critical observation that came to me Friday night at Carnegie Hall. When I was a college student sitting in the cheap seats in the highest balcony, the audience below looked a bit like a bunch of fury animals, with women and some men encased in full length furs.  Friday night, at one of the highlights of this season’s top concerts, I did not see one human draped in furs. Clearly there has been a major change in the audience’s thinking. It was an important reversal. Sitting there, I started to look for a similar reversal from today’s investment fashion. I began to wonder whether in a number of years “intelligent” portfolios will own index vehicles or even this year’s model of ETF/ETNs? The lesson for all of us is to think what will be different when our children or grandchildren have our investment responsibilities.

“The General” Speaks and Too Few Listen

Each February my wife Ruth and I attend a birthday celebration for President George Washington. This year I had the pleasure to spend some time with a young but noted historian. I asked him about the “Whiskey Rebellion” where President Washington had the task of dealing with an organized bunch of angry western Pennsylvanian farmers. At the urging of Alexander Hamilton, the largest American army formed since the Revolution was raised to deal with the rebellious farmers. I asked the bright historian what was really going on in this rebellion. I knew that the excise tax being levied was a small six to nine cents a gallon. He agreed with me it was not the size of the tax, but the resentment of the western farmers to the easterner’s wealth. (Sounds somewhat familiar to the resentments between the blue and red states today.) Hamilton’s solution through negotiation was to have the central government assume all of the war debts of the various states, which lowered the tax burden of many and led to a sound national debt policy.

The reason for my question is that I am seeing the potential for a surge in indirect taxes. These are sales, use taxes and fees paid to the government. Once these indirect supports to a government are in place they are difficult to reverse, except with enormous popular demand. I am told that today in Egypt they are still collecting an excise tax that that ancient Pharos initiated! My concern is that Federal, State, and Local politicians will gravitate to increased use taxes to reduce any shortfall created by changes in the income tax. For some jurisdictions indirect taxes equal about half of corporate income tax payments.

Many years ago the late chair of the US House of Representatives Ways and Means Committee asked me about his favorite tax raising approach, the Value Added Tax. I replied, did he want to convert US citizens to French citizens who at that time had made an art form of not paying their share of taxes? It did not go forward then, but is being raised again now. I hope we don’t as a nation have to go back to The Boston Tea Party and the Whiskey Rebellion to express our concerns for these sly ways to take more money from us. We need to be on watch.

Warren’s Investment Policy Lesson

As most every investor knows, on Saturday morning Warren Buffett issued his annual letter portion of Berkshire Hathaway’s annual report. I believe very few of the media pundits caught what I believe is a very important affirmation to his and Charlie Munger’s thinking. The letter revealed that Berkshire began a slow but deliberate program to eventually buy 80% of Pilot Flying J (PFJ), which has about 750 locations that we used to call truck stops. I am sure that it is a good business, but to me it reinforces what has become a major tenet of their thinking in terms of many of the operations. They seem to be drawn to products that need to be shipped by trucks, trains, or pipelines. While they do own some service companies beyond insurance and finance companies, it seems that goods production and transportation tend to be rather unique vehicles which are often built and owned by entrepreneurial families, which at their current stage are producing excess cash flow to their growing needs. Most of these are domestically located. The greater volume they do, the more closely their results will parallel the Gross Domestic Product, but they will grow faster because of smarter use of leverage and freedom from normal corporate disciplines.

In Conclusion

From a long term investor’s viewpoint there are a lot of positive factors. I am not too concerned that the recent recovery appears to me to be a weak test of the recent lows. I wonder for 2018 whether we have seen both the highs and lows for the year or possibly neither, but in the long run it may not be important either way.

Question: What do you think?     

Sunday, February 18, 2018

Misinterpreted Signals – Weekly Blog # 511


There should be much to learn from the last six weeks that could influence our investments going forward. Unfortunately, these inputs do not lead to a quick sound bite, which isn’t bad.  “Sell in May and Go Away” with a return in November, might help equity traders, but would be of little help for long-term investors who are tasked with paying a long stream of future bills. To aid our diverse audience I have divided my focus into three buckets; equity, debt, and inflation.

Equity Prices

Analysts tend to utilize tools which they are most familiar with. In my case, the main investment vehicle is mutual funds, particularly actively managed funds. Each week, my old firm publishes the average investment performance of 8,452 diversified mutual funds largely invested in the US (USDE). After fourteen straight months of gains I saw that the USDE had a gain of +4.37% for January. By the 15th of February the gain for the first six weeks of 2018 had shrunk to +1.53%.  Disregarding the effect of compounding, if that gain was to continue for calendar year 2018, it would be a gain of +13%. That is still too high relative to its past history of +8.41% for the past three years or +8.12% for the past ten years (through the end of January). These eight percent moves are within the long term range of 9% since 1926 for the S&P 500 Index, so are believable. Contrast that with the 12 months performance of the USDE to the end of January of +21.34% or twelve months through February 15th of +14.73%. Thus, there is room for those who expected a continuation of last year’s growth rate to be disappointed. Near term, some of my market analyst friends would only believe the February recovery if there is a meaningful test of the recent low points.

I have an additional concern that the majority of portfolio managers did not actually experience the 1987 decline and recovery and they won’t be attuned to additional insights from that experience. Almost all of the words written about 1987 are about the failure of so-called “portfolio insurance,” not only to protect institutional portfolios but more importantly the contribution to massive sales of equities and derivatives into a weak market. 

There are two other insights that have value today. The first, as pointed out to me by a client during the onslaught, was that while our domestic economy was shrinking due to the Volcker-administered high interest rates created to break the inflationary spiral, corporate earnings were growing smartly through a combination of exports and foreign subsidiary earnings. I suspect that these trends are even stronger today.

The second missed input was that one of the best and strongest specialists went to the wall (bankrupt) using his last equity and borrowing power to absorb some of the selling. Because of regulatory changes, there is even less capital positioned to absorb selling today. Also, little has been written about  the beginning prices of 1987 being similar to the year ending prices, the market was flat. Thus, the market system actually worked and provided the basis for a long bull market that extended many years.

Hopefully we can look for useful lessons from our immediate past that we can apply to our current and future investment policies.

Credit Concerns

These past few weeks we have seen some reversal of the more than a year long global rush into fixed income funds. Due to global central bank downward pressure on interest rates, investors have been in a scramble to find higher income yields without a great deal of concern for principal risk. It is not yet clear if the sizable redemptions in High Yield funds are a display of concern that the inevitable rise in interest rates will make the refinancing of high yield debt more difficult or the beginning of a concern that some of the debt won’t be paid off as scheduled. At the moment we are not seeing the institutional market reflecting the same reaction to bank loan/floating rate vehicles. However, a number of private equity managers have noted that they are seeing an increase in the use of leverage globally.

It is important to understand the impact of a defaulted loan or delayed interest payments on the financial system. Loans from various financial institutions are treated as earnings assets which produce income to pay bills. If these experience slow or no payments, the expected users will have to change, usually by restricting their ongoing payments. In addition, if the defaulted loan was an earning asset for a financial institution, its capital is involuntarily reduced. Perhaps, the most insidious element of defaults is that they cause rumors to fly within the global financial community and beyond. This causes the institution with the perceived bad loan to quickly restructure its loan and other portfolio elements, magnifying the impact of the rumored or real defaulted loan.  Loans can go into default for lots of reasons, mistakes in judgment as to the extent ion of credit to clients, bad product and pricing decisions, acts of nature, and loss of integrity anywhere along the payment line. Unfortunately, as interest rates rise the pace of activity accelerates, which can lead to an acceleration of the problems listed. More exposed fraud becomes visible as rates rise.

There is a strong connection between a threatened credit community and the equity market. Many equity based financial institutions are vulnerable, including money mangers, brokers, and liquidity providers such as market makers, authorized participants for ETF/ETNs, and credit extenders. Most often they function with borrowed money, usually in the form of call loans (which can be called at anytime without reason). The firm that went to the wall in 1987 and Lehman Brothers could have been saved if instant credit was available to them. I am not aware of such a need today, but the rumor or the reality of such a need can come very quickly anyplace in the world.  As we are so interconnected globally, it is conceivable that on any given morning we will be forced to react to such a happening.


Hardly any investment meeting that I have attended in the last couple of months has not included a discussion on inflation. I believe that these discussions, along with the purported discussions at various central banks and by most pundits, have been focused on easy and incomplete data. The focus has been on prices, including reported wages. Not only does the data not deal with changes in quality, terms of trade, and non-reported wages, it also does not deal with the “informal economy.” 
I am becoming increasingly concerned that the strength of deflationary trends is not fully understood in assessing spending habits of consumers at all levels. One of the major deflationary trends is technology under Moore’s Law. Each year the power of our cell phones and other technology grows. This can be measured easily, but what can’t be is its value in terms of what we can now do that we couldn’t do last year in terms of commerce, enjoyment, and better health.

I suspect that one of the reasons for the declining number of auto deaths is due to the large number of computers in each new car. It has also led I believe, to less time in the repair shop. This is caused by two trends. The first is that the modern repair shop is equipped with its own computer set up to interrogate the car’s system. And second is a trend we see in all of our mechanical devices, of replacing rather than repairing. (How many young repair people do we know?) 

When economists look at wages, they look at it from the workers' take home pay level and exclude payments the employers are making to benefit the worker in terms of social security taxes, health insurance and retirement contributions, all of which have been growing faster than take home pay. I wonder whether the increase in quality of what we are wearing is included. We are no longer wearing cheap, poorly made imports. Walmart and other supply systems are selling much better quality, which is often delivered by Amazon. In the competitive era that we have been going through, the terms of trade are often more important than price e.g., delivery time and conditions, payment schedules, advertising support, etc.

For the above reasons I have little confidence in the value of the published inflation numbers and hope that the Fed and the other central banks will be slow in reacting to reported trends. The consumer and commercial worlds are much better at adjusting to change in conditions than people sitting in capital cities.


We are in a new era of more rapid changes. Dividing one’s portfolio by various timespans can minimize the risks to your total capital.

Question of the Week;

Have you materially changed your 2018 portfolio?      
Did you miss my blog last week?  Click here to read.

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Copyright ©  2008 - 2018

A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.