Not Much – Weekly Blog # 726

Anyone who has served guard duty instinctively senses some of their most dangerous moments being described as “not much happening”, just before dangerous things happen. This is my gut feeling looking at the US stock market activity last week. (Both the government bond and commodities markets moved under the strain of adjusting to supply shortages, including Russian Uranium.)

Calibrating “Not Much”

The main function of this blog is to assist investors in their thinking about long-term investments, typically extending from five years to multiple lifetimes. With that as a framework, the guiding math becomes clear. On the downside there is always the potential for a 100% loss, excluding any additional leverage losses or legal settlements. My long-term objective is multiples of the potential 100% loss, or to quote the great stock portfolio manager Peter Lynch, “ten baggers”. (Peter learned and worked for the late Ned Johnson, who died this week. Ned was the second CEO of Fidelity Management & Research. Ned was more than just a first-class money manager; he was a good selector of talent and found new ways to invest and market investments globally. Ned changed the investment business around the world. His daughter Abby, the third member of the Johnson family to be the CEO, is going even further.)

If one gains multiples of loss positions it doesn’t take long to produce a satisfactory return, it just takes patience to ride out multiple-year periods.

Every Journey Begins with The First Step

The first step begins with direction, chosen or not, and a small distance. With rare exception, first steps are consequential to the result, except when beginning a march to a meaningful end. It is this exception that drives me to focus on what happens each week. Most things don’t materially matter, but some do in the short and long-term. This is the reason I spend a lot of time and energy pouring over what happens. I will share my reactions to the surface elements of an inconclusive week.

Short to Long-Term Implications

• The NYSE up-volume dropped to 13.7 million shares from 20 million shares the week before, while the NASDAQ up-volume rose to 15.4 million shares from 10 million shares the prior week. Downside volume was essentially the same level each week. (I suspect some of the up-volume in the prior week was short-covering to curtail losses. In the second week the selection process favored tech stocks.)
• There has been some extreme performance year-to-date, with Commodities enjoying the best performance since 1915 (WWI) and bonds the worst since 1941 (WWII).
• In the last 16 years, $2.6 Trillion went into bonds and only $ 1.85 Trillion went into stocks.

(Looking at the last two items raises the question as to whether the US dollar can retain its privileged position of being able to borrow globally in its own currency? It may be determined by where critical commodity resources are found.)

• The price of coal has risen to $330 per ton from $80.50 at the end of 2020. Little in the way of energy capacity is planned to come on stream before 2025. The call to end global trade and production is the opposite of what Adam Smith wrote about at the time of The American Revolution. There will likely be multiple sources of critical supply when sought, but at increased cost.
• East Coast US ports have been less busy recently. I suspect inventories have been restocked. Retail sales have also slowed or have been priced too high.
• Goldman Sachs and others have discussed an increased risk of a policy-induced recession
• There is no doubt we have entered a global food shortage period, driven by the absence of supply from Russia/Ukraine, and others due to insufficient investment. Food prices will be going up partially due to a labor shortage.

Many of these noted problems are already impacting our markets, as others will in the future. Never-the-less, after this period of contraction it will eventually lead to a period of expansion and opportunity, if patient. The cyclical will turn to a favorable phase, allowing us to use our brains, capital, and patience to ride out the storm.

Help is on the way.

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