Philip Fischer was prescient about depressions

[scorpioncapital]

Check out this quote from Common Stocks and Uncommon Profits:

 

"As already explained, our laws, and more importantly our accepted beliefs of what should be done in a depression, make one of two courses seem inevitable. Either business will remain good, in which event outstanding stocks will continue to out-perform bonds, or a significant recession will occur. If this happens, bonds should temporarily out-perform the best stocks, but a train of major deficit-producing actions will then be triggered that will cause another major decline in the true purchasing power of bond-type investments. It is almost certain that a depression will produce further major inflation; the extreme difficulty of determining when in such a disturbing period bonds should be sold makes me believe that securities of this type are, in our complex economy, primarily suited either to banks, insurance companies, and other institutions that have dollar obligations to offset against them, or to individuals with short-term objectives. They do not provide for sufficient gain to the long-term investor to offset this probability of further depreciation in purchasing power."

 

[Parsad]

That's a terrific quote!  Cheers!

[Rabbitisrich]

It is almost certain that a depression will produce further major inflation

 

 

 

Japan's experience with persistent deflation seems to offer contrary evidence. There is a fine article from the JapanReview.net titled "Can the Bank of Japan Create Inflation?" If you look at the author's "top 5" post-hoc explanations for the absence of inflation, any of them can be applied to America today.

[Rabbitisrich]

http://www.japanreview.net/essays_can_the_bank_of_japan_create_inflation.htm

[uncommonprofits]

Phil Fisher's comments are based on the American system and what has become politically acceptable and not after the dark days of the Great Depression (which not a lot has changed in that regard).  Japan's employee/employer culture is completely different.  5 years into their crisis, the unemployment rate was only at 3%.  10 years into it --- unemployment peaked at 5%.  Compare that to the U.S. situation where unemployment will perhaps hit 10% or more in very short order. 

 

The labour/corporate culture in Japan meant that as a loyal employee you agreed to take a cut in wages now and then to keep yourself and fellow workers employed.  While this might exist to a certain degree in the American system it is not nearly to the massive long-lived scale as it is in Japan.  If your employer is to keep cutting back your wages in America you eventually seek a new employer or move on to a new line of work or maybe self-employment, etc --- that is not the way it is in Japan.  In Japan you are loyal to your employer until retirement and that tradition is passed down to your children (as it has been for generations).  But it is again a mutual system and in tough times as they were -- the Japanese employer was also obliged to cut back on margins. 

 

Think about it --- employees taking pay cuts + employers purposely lowering margins = deflation.  It might be a good system when it comes to employment security -- but when it comes to creativity in growing an economy not so good compared to the American one. 

 

Furthermore, it took about 12 years for Japan to lower interest rates from about 8% to near zero.  Compare that to the swift action of the Fed.  Two completely different situations.   

 

UCP / DD

[Rabbitisrich]

That is a fair point about differing unemployment rates; that, and similar misallocation of capital, distinguishes Japan from the U.S. Or, I should say, similar types of misallocation of capital. Rather than pushing money to less productive workers, the U.S. will bolster inflated home prices via tax credits, deferral of GSE foreclosures, and various purchase plans for real-estate linked assets. Efforts to reflate real estate seem to be an attempt to maintain a 70% consumer economy. And Japan did lower the discount rate by about a percent a year from '90-'95, until it sat below 1% thereafter. After '95, real GDP increased by more than 1% despite the IMF crisis and the stock bubble. Meanwhile, avg. household disposable income fell by about 3.6% and expenses by 3.9% from '95 to '01. Households also saved less, down from 12% in '95 to a little over 7% in '03. So why did the Japanese watch their savings and incomes shrink without aggressively seeking yields higher than the paltry prevailing interest rates? Discouraged investors?

 

Japan and the U.S. may be apples and oranges. But it's also possible that tremendous real estate deflation will smooth differences. Of course, I hope that the stimulus works and that the worst case scenario is a high interest rate environment to contain future inflation. I still want to prepare for an economy that goes flat for a while. 

[Investmentacct]

Japanese Demographics trend:

http://en.wikipedia.org/wiki/File:Japanese_Population_chart.png

 

http://en.wikipedia.org/wiki/Demographics_of_Japan

[uncommonprofits]

Print and deliver $1 million cash to each and every family in America -- and I can assure you the system will inflate (no doubt big time!!).  Of course this is an overblown/exaggerated example -- but if inflation is preferable to deflation it should be obvious that the only thing standing in the way is political will.  And that political will works a lot quicker in America than it does in most other parts of the world (here in Canada there is arguably a lot of envy over the American system).

 

Finding the right balance at the current moment is the trick.  If it is too much the system will certainly inflate.  If it's not enough then deflation may become a problem in the short term but one can be assured that more (stimulus) will come.  Prior to the crisis in Japan --- unemployment was typically close to zero percent.  Had it reached 5% very quickly (rather than taking a decade) --- there would no doubt been a lot swifter action and deflation would have not been a long term issue.  The culture may be changing a bit in Japan now --- but that was the way it worked back then. 

 

As for the current stimulus and interest rate action in the States --- finding the right balance is obviously key.  To some it seems that they are overdoing it and inflation is going to be huge going forward.  Others like yourself worry that it will take forever to work through this and deflation is going to be a persisting problem.  Perhaps the right balance is being struck?  In the end --- I don't see the stimulus being such that will enable people to pay off their houses (and other debt obligations) in any dramtic fashion.  If that's the case then mortgage rates won't be rising much any time soon (perhaps for the next decade or two).  Higher rates simply are not affordable without pushing the system back into recession. 

 

So could it be possible that mid and long term bonds trade in the current range of 2-4% (or lower) for the next several years?  If so -- that would seem to bode well for common stocks which are currently yielding much higher.  If it bodes well for common stocks as a whole --- it would seem to be the most opportune time in quite a while to seek out of favour bargain situations of good quality. 

 

One other point is that a lot of emphasis has been on the financial and housing crisis being the sole cause of this global recession.  But what about high oil (and other commodity) prices?  High oil prices have been the prelude to many recessions in the past.  An increase in oil price (first Gulf War) also helped push things into the brink for Japan -- but the rise was not nearly as dramtic as it was in the current situation.  I think the role that high energy and commodity prices played in helping ignite the current situation has been under-estimated to a great degree.

 

UCP / DD   

 

[omagh]

On 2/9/2009 at 2:28 PM, uncommonprofits said:

Print and deliver $1 million cash to each and every family in America -- and I can assure you the system will inflate (no doubt big time!!).  Of course this is an overblown/exaggerated example -- but if inflation is preferable to deflation it should be obvious that the only thing standing in the way is political will.  And that political will works a lot quicker in America than it does in most other parts of the world (here in Canada there is arguably a lot of envy over the American system).

 

Finding the right balance at the current moment is the trick.  If it is too much the system will certainly inflate.  If it's not enough then deflation may become a problem in the short term but one can be assured that more (stimulus) will come.  Prior to the crisis in Japan --- unemployment was typically close to zero percent.  Had it reached 5% very quickly (rather than taking a decade) --- there would no doubt been a lot swifter action and deflation would have not been a long term issue.  The culture may be changing a bit in Japan now --- but that was the way it worked back then. 

 

As for the current stimulus and interest rate action in the States --- finding the right balance is obviously key.  To some it seems that they are overdoing it and inflation is going to be huge going forward.  Others like yourself worry that it will take forever to work through this and deflation is going to be a persisting problem.  Perhaps the right balance is being struck?  In the end --- I don't see the stimulus being such that will enable people to pay off their houses (and other debt obligations) in any dramtic fashion.  If that's the case then mortgage rates won't be rising much any time soon (perhaps for the next decade or two).  Higher rates simply are not affordable without pushing the system back into recession. 

 

So could it be possible that mid and long term bonds trade in the current range of 2-4% (or lower) for the next several years?  If so -- that would seem to bode well for common stocks which are currently yielding much higher.  If it bodes well for common stocks as a whole --- it would seem to be the most opportune time in quite a while to seek out of favour bargain situations of good quality. 

 

One other point is that a lot of emphasis has been on the financial and housing crisis being the sole cause of this global recession.  But what about high oil (and other commodity) prices?  High oil prices have been the prelude to many recessions in the past.  An increase in oil price (first Gulf War) also helped push things into the brink for Japan -- but the rise was not nearly as dramtic as it was in the current situation.  I think the role that high energy and commodity prices played in helping ignite the current situation has been under-estimated to a great degree.

 

UCP / DD   

 

@uncommonprofits DD - With inflation picking up after a period in which governments were giving people COVID money and also making the cost of money effectively zero to encourage borrowing, this post has stood up well.  Now we're in for a period of belt tightening and working off the excesses.

[omagh]

Phil Fisher gave a 1987 interview.  Would love to find the original if anyone has it.

https://investmenttalk.substack.com/p/a-rare-interview-with-phil-fisher?r=i1bs

• On the circle of competence: “I think a weakness of many people’s approach to investment is that they try to be jacks of all trades and masters of none.”

• On management: “Getting to know the management of a company is like getting married. You never really know the girl until you live with her. Until you’ve lived with a management, you don’t really know them to that same degree.”

• On waiting for big payoffs: "I don’t want to spend my time trying to earn a lot of little profits. I want very, very big profits that I’m ready to wait for."

• On avoiding stock market favourites: “Nor will I buy market-favored stocks. I particularly notice it when I attend meetings for technology stocks and see all the people crowding into the room and so on. If there’s standing room only, that’s usually a pretty fair sign it’s not a good time to buy the stock.”

• On retirement, as a then 80-year old: “I could wax for a half-hour on the utter folly of people being forced to retire at the age of 65. I think I have produced better results in the last five years than in any other five-year period. The refinement that comes from contemplating your own mistakes and improving yourself has continued. I have seen enough people start to go senile as they get older that if it should happen to me, with my responsibilities, I would cut myself off. But unless that happens, I think it’s ridiculous to stop the work I enjoy.”

[thowed]

Thanks for this - this is a great interview - I must re-research him.  I am very on-board with his philosophy.

[Cigarbutt]

Thanks to omagh for this thread's revival and kudos to uncommonprofits for the insights about inflation balance and potential effects of money printing.

Note: the link seems to contain the complete interview.

-----

This is not widely known but Philip Fisher (apparently and from his own memory) was starting out in the investment world in the 1920s and identified (in mid 1929) general price levels compatible with a major oncoming bear market but (from his own admission) failed to take his own advice and decided to protect his portfolio by buying lower multiple 'value' stocks that got decimated also. I guess it's called learning from mistakes? In the 1987 interview, it's interesting to see how one can have strong convictions about macro factors and still be able to stick to basic investment principles grounded on individual investment names.

-----

Mr. Fisher's and uncommonprofits' point is that governing authorities have the ability to inflate (asset and consumer inflation) and it seems that this idea is playing out in the context of an increasingly unstable equilibrium?

-----

Thoughts on why this inflation episode is about to end and how the speed of the disinflation (or even appearance of deflation) will depend on 1-extent of manifestation of underlying secular deflationary forces, 2-extent of real demand destruction and 3-extent of Fed-Treasury pivot.

Movements in checkable deposits are mostly a reflection of recent monetary and fiscal policies.

Using Q1 2020 to Q2 2022 (one can use slightly different end points but principle is the same):

-about 20-30% of the increase in checkable deposits occurred the usual way ie through increases in loans and leases

- about 30-35% of the increase in checkable deposits arose as a result of QE. Because of the asset swap, money appeared in checkable accounts (mostly in the invested groups ie top 1-10%). This had started to show up post GFC. Then, there was bound to be at least some consumer inflation from the wealth effect but the inflationary influence was drowned by other deflationary forces. The sheer size and speed of the open market operations unleashed in early 2020 made a huge difference. But this QE part mostly played out on the asset inflation side, not the consumer inflation side.

-about 40-45% of the increase in checkable deposits occurred as a result of commercial banks expanding their balance sheet and acquiring government debt in the secondary market (effectively directly financing the government).

This has been going on since the GFC but there was a tremendous acceleration in early 2020 (and a recent reversal). While this dynamic does not create net wealth in the private system, this allows the Treasury to effectively issue debt (to banks so bypassing the removal of money in the private system outside of banks) and add (on a net basis) money to other private market participants though the creation of a new deposit (checkable) by the commercial bank when banks buy the government debt (When you think about it, it's like if money is taken from a private market participant then redistributed to another private market participant with a higher propensity to consume when the time comes and with the initial funding private market participant being reimbursed in the process). The money (thereby 'created') that appeared in checkable deposits was mostly directed to the bottom 50% and the 50-90 percentile groups.

This rise in checkable deposits fed by banks buying government debt at a rate much higher than GDP resulted in gradually higher consumer inflation with consumers having a high propensity to consume being able to take the pass-through from corporations but with wage growth lagging (lagging with accelerating inflation and, lately, lagging with decelerating inflation) and with, for a few months now, the consumers (especially lower end but trickling up) experiencing the negative effects of consumer inflation (saving rate down, consumer debt up (including credit card) and overall data points from on-the-ground corporate reports revealing behavior change at the consumer level showing stress ie less discretionary items, bloated inventories and gradually lower margins from retailers etc).

Lately (from commercial banks themselves), it is said that the ‘consumer’ remains in good shape with higher than usual cash balances in their checkable accounts. It’s funny when you think about it because the increase in this wealth is perfectly matched by a decrease in wealth of the government, something which does not seem to be perceived or understood as a determinant factor in deciding (guessing?) if the present inflation is entrenched or self-fulfilling.

Anyways, who knows what's next but the Treasury-Fed complex has only started to gently tighten and the yield curve is awfully flat and even somewhat inverted.