The Dividend Cafe - A Solution Means Knowing What You Are Solving

Episode Date: May 16, 2020

What I want to do, starting in this week’s Dividend Cafe, but really in the weeks and months to come, is to examine the truly significant macroeconomic forces that are relevant to investors, and to explore investment solutions that match the moment. I do not believe advisors and investors can consider solutions intelligently if they have not considered what they are trying to solve intelligently. So to that end, we work. Join us, in this week’s Dividend Cafe. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to this week's Dividend Cafe. I am recording this podcast from my desert house, which I have not been to in three months. I came out to last night with my two boys and three of their friends. So I got a house full of kids and enjoyed a hard day of work here today, but I'm hoping to be able to actually get a little reading and rest done over the weekend. I doubt it'll happen, but I'll try my best. The point is, it's nice to be out of my spot that I've been in pretty much nonstop since quarantine began at our home in Newport. And we will be back in the office next week as the Bonson Group is doing a soft reopen.

our team will be back in next week. We're not allowed to have visitors to the office yet, and the whole team won't quite be back yet, and our New York office can't open yet, but we're on the path to normalization and enjoying that idea very much. Hopefully some of you are seeing parts of your life come back to normal, and we look forward to the day when a whole lot of things are much more normal than they are right now. I want to spend time today talking about a few things that are on my mind as I am evaluating post-COVID economic life. And one of the things I point out at Divid dividendcafe.com today is that there's a certain

understanding of what that means or assumptions as to what that may mean that are pretty consensus right now, pretty regular, pretty pedestrian. I'm hearing them several times a day about how people aren't going to want to go to work anymore and people are only going to do video conferencing and no one will want to fly anymore or travel for a couple years and stuff like that. And a lot of the things I think that people are assuming are really, really wrong. Some of them are not necessarily wrong, but probably there will be nuances or more caveats around them. All of them, though, I think are uninvestable. They don't represent something that I think is practically significant for an investor. And they also really, in most categories, are just simply not the most significant aspect

of what I'd be focusing on when we look to post-COVID economic life. And so there are a few different short-term potential catalysts that I want to highlight for you right now. But then there's longer-term ones that I think represent the more meaningful and substantive considerations for a thoughtful investor and for a thoughtful investment advisor. In my mind, the short-term catalysts have a chance of surfacing, but not an assurance of surfacing. But if someone were to say, what is it that could disrupt risk assets right now, stocks or real estate or something like that, in the next month or three months, something like that, I have a couple thoughts around it. I do believe, and this is a

very difficult conversation topic, but I'd encourage you to read what I wrote about this at dividendcafe.com because I tried my best in the written commentary to unpack what I really don't mean. I think most people's expectation is that short-term market volatility will come when the stock market realizes what it doesn't apparently realize now, which is that there's a lot of unemployment out there and a lot of economic distress out there. I disagree with that assessment. There's all kinds of things that could disrupt the stock market, but I think that the market is well aware of the unemployment.

And I, as a human and as an empathetic and a compassionate person, to the best of my ability, am very distraught by what economic suffering I think is happening for a lot of people in our society. And I believe that most of the people that are feeling the most significant portion of economic distress are in the lower income brackets, lower levels of income and likely lower levels of productivity contribution in the economy. And that's not a denigrating comment. It's a mathematical or economic comment. And so I don't mean anything about the humanity of what's going on when I say this. I'm referring

in a very specifically economic context that there is a very high likelihood that the distribution of economic impact here is such that it's going to help a significant part of corporate America in terms of its output, productivity, its ability to produce more with less when revenues are able to come back up. Because to the extent that there might be lower job roles, people on the payroll and level of pay, when we've come out of recessions in the past, and this has been the case, you have seen a pretty big increase in margins. and this has been the case, you have seen a pretty big increase in margins. And so I think that a lot of what has held the market in a state of resilience is the understanding that this is particularly focused at the lower end of the productivity spectrum, where the pain is most severe, which creates an even worse, I think, economic, excuse me, a worse human

component, but economically changes the variables around how it affects things. So short term, I expect that a flare up in our relationship with China, perhaps an acceleration of the trade war, perhaps some retaliatory actions from China that are noisy and disruptive. That could bring some volatility. I think that there should certainly be headline volatility and political volatility. I don't know, but there may be market volatility around stimulus 4.0. It's out there now that something's coming. The president's been talking about it.

Secretary Mnuchin's talked about it. The White House team has been teeing it up. Senate Majority Leader McConnell has talked about it. And now this week, Speaker of the House Nancy Pelosi actually has put forward a bill. So we know they're going there to the extent that some expectation of a bill gets baked in, and then the volatility around getting that done, which I think will be very difficult. I think it'll take time. I think there'll be a lot of back and forth that will have an impact on how this plays out. So that's not to say that the market really will care a whole lot one way or the other,

but again, the uncertainty that that could invite. Speaking of politics, by the way, as we go further on in the year, you also invite a little bit more uncertainty around where the election's going to go. Right now, I think markets are pricing it as a 50-50. The Senate is definitely more up for grabs than it was a couple months ago. The tail risk of some of the candidates that I think the market least wanted to see is off the table. But there is different outcomes and different meanings of particular candidates and party affiliations, House and Senate, lined up with other candidates in the White House that make a difference in markets. It's a little early for that now, and I'm of the

opinion things are really, really 50-50 on the presidential side. But again, as time goes by, that gets closer to becoming a potential market impact as well. So these short-term catalysts, I think, are probably more likely to be at play than the things that most people are talking about that are very well known and in some cases have a very counterintuitive, different impact to markets than a lot of people expect around wages and margins and things I've already talked about. Longer term, I would suggest to you that the things I'm going to be spending the vast majority of my time thinking about for many months and preparing for what I believe will be many years of an impact are where things stand with the European Union and what changes there could represent to the entire global economy. What our relationship, not just with China, but the overall state of globalization for good and for bad.

Onshoring of a lot of U.S. manufacturing post-COVID, which I think could have a really positive cultural impact and in some cases, economic impact. But there's a disruption that has to be evaluated and better understood. The U.S.-Saudi relationship. You're talking about a country that is, I think, we consider an ally that just absolutely flooded world oil markets in March and April. You had a patient, the U.S. economic person, kicked down on the ground and then flooding the world with oil, adding insult to injury. Strikes me as something an ally doesn't do. Does this set off a new relationship between U.S. and Saudi

that impacts the geopolitics in the Middle East, that impacts Iran's positioning in the territory, that impacts the U.S. dollar, which is largely how oil is currency denominated around the world. Those things I do not want to be dismissive of. I think that there's some impact there that could be years to play out. And then by far the thing I've been most obsessed about way before COVID, and I think is now just every bit the story it was pre-COVID, now on steroids,

is that those deflationary pressures in the economy, that excessive government debt and downward pressure on interest rates and monetary stimulus response to it all sort of cycle together to create what I believe will be a generational downward pressure on interest rates and a generational downward pressure on growth. And what that impact of that means to bonds, to opportunities in the alternative investing space, to equities, and of course, to the overall state of economic affairs in our country. And so these are the kind of major categories of things that I believe post-COVID are going to be far more impactful, far more substantive, far more generational than things like that. Some people might want a skateboard to work from now on or something like that. And so in terms of a couple other things that we address in DividendCafe.com this week,

I would like to share with those of you listening to the podcast, watching the video, what I found to be, I just read about it, it was actually this morning, another research piece I was reading. morning a report uh another research piece i was reading but um energy and technology are now tied um since the year 2000 our last 20 years in their return and and it's you know i i am um a really really big believer in the u.s. energy renaissance and very pleased with the geopolitical impact and environmental impact that shale and that American natural gas production has represented in so many categories of life. But I was utterly shocked just knowing how bad the energy sector has been in such a bad place for five years now and how on fire Fang in the technology sector has been.

But from 2000 to 2014, that's how significant the energy outperformance of technology was, that even with this reversal of fortunes, that even with this reversal of fortunes, technology being at the top of the list and energy being at the bottom, that they're just at the same spot over the last 20 years now. It's really kind of fascinating. Leadership names, leadership sectors come and go,

always have, always will. And the assumption that yesterday's winners will be tomorrow's winners is never worked out in history. And it's very interesting, the rotations that we see over time in capital markets. What else I want to leave you with here, we remain extremely bullish right now. And again, I don't just mean over the next three, four weeks, but very bullish long term on the fundamental superiority of dividend sustaining companies. And I believe that the next 10 years are going to be very different than the last 10. The last 10 were

a straight line up. 10 before that were a straight line down, more or less, kind of flat, but with two big straight line downs creating the flat. And I think that we're going to have a more normal decade. And by normal, I mean those types of decades that have some good years and some bad years and are much more choppy and directionless, where dividends become a far more important part of the return that an equity investor will count on. And when you look, and there's a chart at dividendcafe.com to this effect, when you look at the percentage of return equity investors have gotten in some of the more

abnormal, excuse me, normal decades where it wasn't just a straight line higher, where it was more distressed or where it was more chop higher, where it was more distressed or where it was more choppier, where it was more up and down. The dividends have become a very important part of the return investor would have gotten. I think that's the period we're going to be in. I would add anecdotally that one of the most bipartisan agreements you can find right now on Capitol Hill is the Republican and Democrat agreement around going after stock buybacks. And I don't just mean companies that decide to take government support and then have to have some restrictions on stock buybacks,

which most people would probably consider pretty reasonable. I mean an overall hostility towards the idea of that mechanism of capital return to shareholders. Now, I don't fully agree with it, but my point is that stock buybacks are far more volatile. They come and go much more. They're an easier thing to cut, as we've seen here in the last couple months. And they, of course, are not reliable in the sense that companies can declare them the authorization but not have to go forward with it. And even though they're doing buybacks, you don't see what is being offset in the buyback through new issuance and the options side of

employee compensation. Whereas dividends are real money that you get to keep it, all of it. Dividends are real money that you get to keep it, all of it. And I think that it's very possible that dividends as a mechanism of capital return to shareholders will benefit from what I believe is assault on the world of stock buybacks taking place. So with all that said, short-term issues, long-term issues, some anecdotal advantages to the world of dividend growth. And behaviorally, just a reminder that markets right now are extremely unpredictable. You had a couple of pretty good-sized days down this week, a couple of good-sized days up. Markets ended up down on the week a little, not a ton.

But this sort of directionlessness and volatility, as we sit here in a very difficult period economically, and we'll stay difficult for some time, and we'll get less difficult as the economy begins to reopen. And then in a few months, we're going to have a chance to evaluate where the economy is and will be going as we have more clarity around reopenings. But so much is priced in, so much is unknown. And in the meantime, we feel that there are paradigm shifts taking place under our feet that are far bigger than what the consumer will be doing in a couple months.

And so we're really right now taking very seriously the tasks ahead. We welcome any questions you have. Look forward to engaging with you. Look forward to continuing to do our very best at making wise and prudent decisions on behalf of our client portfolios. For those of you that are not clients, please reach out with any questions you have. We're always happy to give you a second opinion on things. And with that, have a wonderful weekend. Be well, be safe, be free. Thank you for listening to The Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment

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