The Dividend Cafe - A Week Without Trumpian Drama

Episode Date: May 25, 2017

A Week Without Trumpian Drama by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. Hello, welcome to this week's Dividend Cafe podcast. This is David Bonson, Chief Investment Officer at the Bonson Group of Hightower Advisors. And we are coming to you this week with our special Memorial Day weekend edition of the Dividend Cafe. It is an issue that on our website we're titling A Week Without Trumpian Drama. It actually was a pretty good week for the Trump administration. It's had a largely successful week overseas with visits in several Middle Eastern countries, in Israel, at the Vatican, and now into Europe with meetings in Brussels today with some

European leaders. But essentially, as far as it goes with capital markets, a pretty boring week, some upside in stock markets, and we'll get into it. The sweet spot of economic boredom, the economy is not smoking hot. It may become such, and we do believe certain fiscal reforms, primarily centered around supply-side tax cuts and effective deregulation, would lend a significant hand to that effort. But the economy cannot be called smoking hot by any reasonable definition. Leading indicators are growing. CapEx demand is pent up and very possible ready to break out. Industrial production is growing. Manufacturing is expanding. All of these things are modest advancements, speaking to a not too hot economy, but also a not too cold one.

but also a not too cold one. As for 2017, the dollar at a six-month low has been the factor that has either made people look bad so far this year or made people look the worst. We happen to have not believed in dollar strength in the face of the five factors that every man, woman, child already knew about and already priced in. We got plenty of other things wrong and always do. But the reality is, is that in this particular case, we were exactly right. The dollar has historically rallied in advance of Fed tightening cycles and is sold off in a buy the rumor, sell the news kind of way. rumors sell the news kind of way. This appears more of the same in the present context. It has had profound implications in one's equity, commodity, bond, emerging currency investment results. I will point out, by the way, today's level, the dollar is down in calendar year 2017,

but it's essentially right back to where it was on election day. The Fed has given some muddy clarity. Federal Open Market Committee meeting minutes came out this week, and as expected, the subject of their balance sheet reduction was front and center. The Fed made clear that they do plan to reduce the assets on their balance sheet, lower the amount of reinvestment of bonds they own that mature, meaning assets run off and do not get replaced. But they added the caveat, as long as the trajectory of growth matches committee expectations.

So, you know, that is subject to interpretation. It will be a gradual process as expected, and they haven't really indicated what size balance sheet they intend to be left with here's what we know there they were roughly half a trillion dollars pre-crisis the balance sheet was and it's roughly four and a half trillion now we do not believe the size will drop below three trillion dollars which would mean a currency in circulation of about $1.5 trillion, reserves of another $1.5 trillion. Their planned ratios, though, have not been discussed in any

public forum. Now, this is a new world. We have a chart at DividendCafe.com we'd love for you to look at this week. It was prepared by an internal research project we did in our own investment solutions department at the Bonson Group. My managing director, Deya Parnas, did a study around the employees per $1 billion of market cap for the top 10 companies excluding new technology, and then the top 10 companies within new technology. And we looked at how many employees each of these companies has for every $1 billion of market cap they have. And the point that we are deriving, and you really have to see the visual to appreciate it, is that older, more industrialized, more traditional companies required a lot more labor force for a given size of company than these newer technology companies do. And that's sort of exaggerated in the form of a company like

Facebook that only has 17,000 employees, but $350 billion of market capitalization versus a company like Exxon, let's say, that has $350 billion of market cap, but 72,000 employees. So I would encourage you to look at the chart. It tells the story in a nutshell of just how many less employees are needed. are needed, but it's really showing, I think, the economics and earnings bonanza, but also the societal challenges labor markets have to adjust to the fact that companies are generating more revenue and more productivity with less employees than ever before. The sustainability of financial relationships may be like your personal ones. We talk a lot about valuations and reversion to the mean in financial markets, the historical relationship between financial category or one financial category or asset and another. They may assert that those relationships revert to the mean as well. And this is unfortunately lacking in any empirical precedent.

and this is unfortunately lacking in any empirical precedent. Many of us have personal relationships, maybe a friend or sibling, where there are periods of, shall we say, volatility in the relationship, followed by restoration of normalcy, a reversion to the mean, if you will, and in that sense financial assets can often do the same. Sometimes stocks may be really overpriced relative to bonds, but the valuation levels may reset through time to historical levels. However, sometimes the often volatile relationship with a friend or a sibling just ends. Normalcy does not resume. People separate, move on, give up. It happens. And likewise, sometimes a financial relationship just ceases to be. It's redefined. It changes.

To invest as if asset A must come down or go up to be in line with asset B requires two, if not three, levels of premises that are subject to risk. We saw this error as it pertained to gold and silver's relationship or gold and gold miners over the last 10 years. This unfathomable capital was lost, chasing ratios that had forever been tossed to sea. Right now, even analysts we respect are suggesting the same must happen as it pertains to U.S. versus European stocks, which, by the way, it may very well prove true. But that doesn't make it a compelling investment thesis. Valuations are a lot more reliable than relationships that have much more correlation than causation at play.

In the DividendCafe.com this week, we also have a couple points that might be very interesting about emerging markets and giving you kind of a real nitty-gritty as to what the bottom-up fundamental things are we look to and applying those things in the case of India and in our chart of the week at dividendcafe.com there's wonderful illustration as to why we see such compelling value right now in the energy sector. We'll close you this week with the quote of the week from Michael Milken. Business and society are intertwined. The best businessman, the best investor has always been a social scientist. He has always been concerned with people.

He's always tried to figure out what people want and what the people's needs are. We wish you a very wonderful, enjoyable Memorial Day weekend. Our hearts and minds are out with the people in Manchester, UK this week and the unspeakable terrorist tragedy that's taken place there. We appreciate the men and women who have given their lives to defend our freedom. We need those on the right side of civilization more than ever. And we at the Bonson Group praise God for those who have given up their lives so we can enjoy ours. Thank you for listening to The Dividend Capital.

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