ACTV - Early Stages Of A New Grand Cycle? - Weekly Blog # 781

2023-04-25 12:20:00 ET

Summary

• The general price trend in various US markets, utilizing the median performance of US Diversified Equity Funds (USDEF), measuring from the peak on 2/19/20 to last Thursday, saw a compound gain of +5.93%. However, for the last 2 years, the average USDEF lost -1.14%.
• Money market funds are attracting more assets than any other type of fund. This is typical of a bottom, which comes at the end of investment cycle before a new cycle begins.
• These two elements suggest a lot of investors, both individual and institutional, expect a lengthy period of stagflation.

Travelers' Note

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

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

Reliance on History

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

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

Where are We?

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

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

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

*Shares in Apple and Berkshire Hathaway ( BRK.A , BRK.B ) are owned in personal and client accounts. Apple shares are the largest public investment owned by Berkshire Hathaway.

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

Working Conclusion

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

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

Thoughts?

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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