Wasan Tita
Nervous Dilemma Positioning
My traditional allocation of stocks and bonds being close to a 70/30 split is somewhat misleading. A significant minority is in actively managed stock mutual funds with a financial services or international focus, often Asian. Financial services need a better label, so as to include two stocks of companies that are building their own portfolios that behave similar to variable annuities, Berkshire Hathaway (BRK.A, BRK.B) and Apple (AAPL). (The reason to call them annuities is that they are both primarily managed to produce long-term earnings rather than current earnings.)
Financial services holdings as a group are also expected to fully participate in the growth of the US and international economies. In general, their strength is not in making loans but in making money with equity. Consequently, one might characterize my equity investments as a combination of growth and value in more classical terms. This is appropriate, as most companies have spurts of growth and value.
Time Horizons
For both my professional and personal/family accounts, I start by designing portfolios built on an understanding (guess) of when and at what frequency the proceeds of the account will be delivered.
My particular situation is that I have a younger and healthy wife, with the fourth generation of the family begun. We are also committed to supporting the operational needs of a limited number of non-profits that Ruth and I have been involved with, both as volunteers and donors.
Short or Deep Recession?
I tend to look at various down periods through the late reporting of real net income (inflation/foreign exchange adjusted). Where possible, I prefer to use net operating income. Since 1970, the US has suffered 8 major declines of real reported income (-15% to -41%), with a median decline of about -28.5%.
The popular view today is that if we have a declared recession, it will be short and small. As someone who learned about odds at the New York racetracks, I am nervous with popular views. Their payoffs are too small compared to the pain endured in the prior decline.
One theory of economic/market history is that declines are caused by imbalances, which are addressed during the recovery. If that pattern is followed in the next recovery, we may not yet have gone down enough. We need more time before the correction begins.
The current path of major central banks is to follow the Federal Reserve Bank in attacking the supposed major cause of inflation with the only thing they can: short-term interest rates. The best definition of inflation is too many dollars chasing too few goods/services. The last two administrations contributed to these excess dollars, which were officially used to cushion the public’s loss of pre-COVID income with grants. (This was similar to the ancient Romans using bread and circuses to bribe people.) They are still at it!! This will make the Fed’s job more difficult and expensive.
Fewer people working should also drop the level of demand. However, despite all the increased regulation and required business spending, there are approximately 1.7 employees wanted for each current worker. This has created a situation where job switchers earn more than those who stay put. (If one really wanted to eliminate excess demand, you could simply reduce restrictions on business.)
Thus, a shallow recession could be shorter if the federal government wasn’t playing both sides against the middle. This may happen later this year with their hope of a meaningful recovery by Election Day 2024.
Assuming this case, financial markets could start up as soon as economic indicators hit a bottom, with smaller declines. Which could happen this year. If this were to happen, our 70% equity stock fund portfolio would produce a nice, but not great, return. One area to consider for investment are funds that have lost money over the last 10 years through January 12. In general, these funds were victims of a strong US dollar. Included are funds invested in commodities, emerging markets based in local currencies, Latin Americas, and precious metals.
Second Through Fourth Generations
While a recovery based only on lowering inflation and interest rates will generate returns for my wife and me, it would have little impact on succeeding generations, including various long-lasting charities.
The larger and longer-term problems that will reduce returns for succeeding generations will not be addressed by the level of interest rates. Most of these problems are related to people rather than numbers. These problems could be expressed as “Better for customers, workers, and owners”.
Below is a brief list of imbalances that should be addressed:
- Quality of leadership in each sector and operating unit of society, including levels of governments, segments of health and medical, education, and non-profits.
- Middle-class income as a percent of national income returning to levels of the past.
- Measured and productive population growth.
- Appropriate education for current and future needs.
- Governments of the people, by the people, and for the people.
Perhaps for the benefit of succeeding generations, the appropriate investment strategy should include less exposure to risk until there is a deep enough decline to correct for imbalances.
Please tell me what you think?
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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