The Dividend Cafe - Bipartisan is Not Always Good For Markets

Episode Date: November 1, 2024

Today's Post - https://bahnsen.co/3UxOxda Election and Economic Insights: November Dividend Cafe with David Bahnsen In this episode of Dividend Cafe, David Bahnsen, Managing Partner at The Bahnsen Group, discusses key topics as the U.S. approaches the 2024 election. From his New York City office, David addresses the outlook of the election, the future role of tariffs, and the influence of the Federal Trade Commission and its Commissioner, Lina Khan. He explores potential impacts on monetary policy and the Federal Reserve's actions, commercial real estate loans, and the implications of a Trump or Harris administration on market dynamics. David also touches on the volatility of the yen and concludes with insights on the proportion of the S&P 500 represented by a small number of companies. Stay tuned for Monday's Dividend Cafe episode on economic data and housing updates. 00:00 Introduction and Setting the Scene 00:30 Election and Tariff Talk 04:04 Federal Trade Commission and Regulatory Insights 06:47 Federal Reserve and Monetary Policy Speculations 10:35 Commercial Real Estate and Corporate Credit Outlook 15:28 Currency Dynamics and Market Volatility 18:24 Conclusion and Final Thoughts 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. Well, hello and welcome to the first Dividend Cafe of November. I am David Bonson, Managing Partner at the Bonson Group. It is November the 1st. I am in our New York City office and we are just days away from the 2024 election. We are into the final two months of the year. It is fall. It is beautiful. There is football on. Thanksgiving is coming up at the end of the month. What could anyone possibly be anxious about? This is not going to be a Dividend Cafe dedicated entirely to the election. I'm going to jump around to a few different topics, but a lot of them are connected

to the election or the aftermath of it. But there's some important stuff to say today. So I'm excited to go through this. I do want to quickly do a mea culpa because last week from Chicago, I believe I said that I was going to do this week's Dividend Cafe on tariffs and dedicate a whole unpacking of the ramifications, the tariffs, taxes on imports. They have been a significant plank in the Trump States, tariffs for companies who don't. But of course, the companies in the U.S. don't pay tariffs. It's imports coming in, but then it's talked about different rates, different times, different specifics. So it's hard to analyze that. And then I started thinking about the fact that I'm standing still now just a few days before the election, where I was a week ago is where I am now, which is a 50-50 outlook on the potential results of the election.

And I'm well aware that there are people that think President Trump has a much better chance than 50-50 of winning. And I'm aware that there are people who think Vice President Harris has a better chance than 50-50 of winning. And I can make an argument in the data for slight advantage here, slight advantage there. But based on the electoral college, based on some turnout issues, based on unknowns, based on polling, based on battleground states, I just, I think it's a coin toss.

And so if I'm wrong, I'm wrong. I mean, if it ends up being a landslide one way or the other, then I am barely wrong because everybody is not anticipating that. So I don't know what to tell you. We're going to know when we know, but I don't believe it is worthwhile to do a whole issue dedicated to tariffs in advance of the election. I think that if President Trump does end up being elected,

it's a topic I want to almost immediately address. I happen to be very critical of a heavy tariff policy portfolio, and I want to explain why, what the concerns are, and again, some of the nuances as to what may or may not happen around that. So the tariff issue is not happening this week, but I do want to address a few other things. Let's stick with some of the election-oriented stuff first, because I was trying to be very positive, get into kind of a kumbaya mode. I am so utterly exhausted by the tribalism, by some of the intellectual dishonesty, some of the lack of civility. I just am a political junkie because when I was young, I got really into policy and ideas and governing

philosophy that I believe in. And that's not what the debate or toxicity is often about anymore. So this other stuff where one side learns to hate the other side and never really debate ideas, but rather things like vibes and intent and throwing all the things that go on. I just get sick of it. Okay. So anyways, you don't need a sermon from me about it. But my point is, I thought maybe I'll find a couple of things of common ground. And sure enough, I think one of the most significant investment aspects of the election is the Federal Trade Commission. It's a regulatory, a federal regulatory body that is given a significant amount of power. I don't think

that's a great thing, but who manages and mans the various regulatory agencies, but particularly one that has so much influence over corporate America, over business activity as the Federal Trade Commission, it's important. And the Biden administration put in somebody named Alina Khan, who got famous writing a paper as a very young woman advocating for the breakup of certain big tech companies on the basis of their mere size, not on some anti-competitive allegation, which was formerly at the core of what was known as the Bork Doctrine, that antitrust existed when there were monopolistic illegalities in place that were damaging consumers. And she wrote a paper that really suggested a much milder version of the criteria

applied specifically to the technology sector. And I'm not really saying it tongue in cheek. I think this is an area where on one hand, I'd be very critical of Khan and the Biden administration's, the Biden-Harris administration's implementation of her in FTC. But then Vice President candidate J.D. Vance, the sitting senator in the great state of Ohio, and I quote, said, I don't agree with Lana Khan on every issue, but to be clear, but I think she's been very smart about trying to go after big tech companies that monopolize or allowed to stay in her own country. I look at Khan as one of the few people in the Biden administration that I think is doing a pretty good job. Would Vice President Harris keep her? I mean, she's part of the administration that put her in to begin with. She hasn't said anything to indicate she's critical of her. If she does

try to remove her, the progressives are going to lose it. So I don't imagine Harris would move her. the progressives are going to lose it. So I don't imagine Harris would move her. And then would Trump vance look to remove her? I don't know that they would. You can make an argument they're more likely to than a successful Harris would. But this is just interesting to me because there's a lot of blockage of M&A. There's a lot of threats to break up incumbent companies. There's a lot of aspects like that out there. And I see Kahn and the FTC as very relevant, where I see so many other things in the political aftermath that's irrelevant to markets. I see this as relevant, and it's possible that there's not that much daylight between the two.

Another element where there is daylight, but maybe for different reasons than people think, is the subject of what will happen with the Fed. Whether Harris or Trump is elected, current Chairman Powell's term ends in May of 2026. I'd be very surprised if he wanted another term. argument. He may not even want to finish this term if things were to get ugly enough, because President Trump was quite aggressive with him in President Trump's prior term in office, in which he at one point suggested on Twitter that Powell was a bigger enemy of the United States than President Xi of the Chinese Communist Party. I don't know where they will be in terms of their friendship. I believe it's very unlikely. Here's my little summary. I think it's very unlikely that the Fed is going to change the course of monetary policy, regardless of whether if it were Trump presidency or Harris presidency. I think it will end up being the same path regardless. And what I think

that entails, by the way, is 100 to 150 basis points coming out of the Fed funds rate in the next year or so. They've taken out 50 so far. They take another 50 out by the end of the year. Do I think they get another 100 next year? I do. So that is likely true regardless of who ends up winning, prevailing on Tuesday. I do expect Powell will finish his term, which ends May 26th, certainly if Harris is elected, and almost certainly if Trump is elected. And I don't think that Powell would respond to Trump's threats about Fed independence and wanting the executive branch to have some sort of oversight of what the Fed does. Congress would have to act. And you could argue there could even have to be constitutional

amendment in place to see something that would replace, I mean, certainly legislation that would alter the embedded independence as it currently stands between the Fed and the executive branch, the White House, the Treasury Department. I've always said there is an accord between the two, and it's tightened a lot since the financial crisis. So nobody should be acting as if there is this pretend total independence. But there is at least a pretense of independence that has some walls. And I don't believe Powell would accommodate the attempt to break those walls down further, regardless of what political job loaning might. But no, I don't think Powell would be around after May of 26. And then I would expect there is finally the difference. All four of those things I just said, I think are true, regardless of whether Trump or Harris

wins. I think that Harris would nominate a replacement that would be someone out of the progressives desired playbook. Elizabeth Warren would be involved. I mean, I would like to say she may want to go to the Larry Summers and Jason Furman's for counsel on this, and maybe she would. I certainly know that Barack Obama would have, but I don't know.

I don't know. I think it may end up not being in that more neokinesian, center-left, Clintonian type of central banker, the Bob Rubin, Larry Summers mold. I don't think it would be, but it's possible. Barry Summers mold. I don't think it would be, but it's possible. But then with President Trump, I really don't know what direction he would go. And there's a number of names out there that I think could be possible. One being Kevin Warsh that I would absolutely love and another being others and other names that I won't get into now that may not be. So it's hard to say, but what I'm getting at is a Harris and Trump pick would be different

for one another. One and a half trillion dollars of commercial real estate loans have their rate reset over the next 15 months, from the end of 24 through the full year of 25. There is not even $100 billion of investment grade bonds maturing this year, but there's nearly a trillion dollars maturing over the next three years. High yield debt has almost nothing maturing over the next year, but in 2026 through 28, a significant pickup. Levered loans, really high in 2026, levered loans really high in 2026, and then absolutely parabolic in 28, current maturity schedule. So from 2022 to 2024, and the Fed tightening cycle really ended, you could argue, in mid-23, but then they left it there until mid-24. You had very, very, very few borrowers in commercial real estate, corporate credit,

bank loans that saw rates reset. And now there's a significant amount that resets in the next several years, especially front-loaded with commercial real estate. And then it gets even heavier into various aspects of bank loans with a lot of corporate credit in between. I think, my friends, that's why the Fed is cutting rates and will continue to be cutting rates. An election thesis that you've heard a little bit about, and I would argue warrants more discussion, is that if President Trump were to win, he's talking about a lot of deregulation and a lot of tax relief in the corporate sector. And that could really rally some corporate activity that increases the return on

invested capital. That causes companies to want to borrow more money because they're getting a great return on what they do with both borrowed and invested capital. And that pushes the long end of the yield curve higher. And that strengthens the US dollar. And the investment thesis I'm starting to see is, well, then therefore a Trump win becomes really problematic for Europe. The Euro currency, the European bond market, particularly more deficit-driven countries like France and Italy. And I think that there's a lot in these different premises that move from one to another very logically, the form of the argument. But I would not call it a cogent argument because there's tons of premises that are not necessarily true. Each one of the premises could be true and lead,

therefore, with the form being right and if the premises end up being true, leading to that conclusion. But is Trump seriously to be considered a strong dollar president? No, he's said over and over again, he thinks the dollar is too strong. The argument here is, well, no matter what he says, he can't job bone it. If he deregulates the way he says, or if he cuts a bunch of spending out of government, right-sizes government, and then the return on invested capital grows, increasing structural rate of the economy, the growth rate of the economy, that is, that then you do see higher bond yields. But again, is President Trump even saying he's going to reduce the corporate tax burden a lot? It's very different and nuanced versus what was done in his first term, which by the way, he very much did in the first term in terms of lowering that

corporate rate. It went from 35 to 21% marginally. There's a lot of nuance around what he's saying now, and that may not reduce the corporate rate. It may not reduce it as much as said, and it may not get support legislatively. There's a lot of questions there. And then will the deregulation happen to that extent? Will they cut spending? They obviously didn't cut it in the first term. Maybe this time is different. I'm not holding my breath. So I don't buy that premise that all of a sudden there is this structural improvement that drives return of us to capital higher, which incents more bond borrowing or borrowing in general that puts a lot of pressure into the yield curve. I don't believe that. And even if long rates went up, it doesn't always mean the dollar rallies. The dollar most certainly can rally with long rates going higher, but it isn't,

from the study of history, always connected. And there's a lot of other things that move currency besides just the yield curve and interest rates. So I do not necessarily believe that knowing the outcome of the election and, for example, a Trump successful result means the dollar does this and Europe does that and so forth. There's just other things involved and I would not jump into that. I can tell you this. I don't think Europe wants a strong dollar. The problem with this thesis is I don't think Trump wants a strong dollar. So there you go. The dollar is up to the yen over eight and a half percent in the last six weeks. So there you go.

The dollar is up to the yen over eight and a half percent in the last six weeks. Last time it dropped a bunch, the yen trade had unwound a bit. That is to say the yen rallied, unwound a lot of yen trade. We quote this dollar yen, not yen dollar. Don't ask me why they insist on doing all these things so confusing. Some of you may have seen the skit on Saturday Night Live where Nate Bregazzi is one of the founding fathers with a group of others, George Washington, kind of the night before they crossed the Delaware, sitting around talking about all the things they must do. And then he goes into a bunch of examples of their freedom will allow them.

And he says all these kind of funny, quirky, unique things about American measuring units and why in football, it's not a game played with your foot and they call it, you know, just quirky things. And one day I want to do that because I'm sure it would be really, really funny for people with our currency nomenclature, some of which is just incoherent and inconsistent and odd. And then you get in my business long enough, you just totally get used to it. And you realize that you're used to something that you shouldn't be used to because it doesn't make a lot of sense. So when I go back and forth on this, please forgive me that, yeah, when I say went up, I mean, the dollar is up against the yen in the last six weeks. Prior to that, the yen had gone up against the dollar violently for a couple of weeks, which unwound a lot of yen carry.

Prior to that, the dollar had been going up a whole lot relative to yen. And this is the argument I would make, that regardless of what has gone on and why in the last several weeks, there is not a lot of appetite, in my opinion, to put a yen carry trade back on because of this very enhanced volatility. Volatility is not the friend of a carry trade. It's the friend of currency traders, but it's not the friend of holding a borrowed yen as a way of carrying in a different currency to use dollars to trade to yen to buy to get the carry of the lower valued currency and whatnot. That's the issue that I would be very skeptical of, the yen carry trade coming on. And then you recognize too in the last

week or two, a lot of political alterations out of Japan. And again, just making that whole trade much more vulnerable. The chart of the week is fascinating. We are now at 37% of the S&P 500 in 2% of the companies. Is that right? 10 into 500. How did I do? 2% of the S&P 500, 10 companies make a record all-time high, 37%. It was around 30% when it happened in 2020. It was around 27%, 28% at the peak going into 2000. We are now at 37% of the S&P. I'm going to let you go to DividendCafe.com for anything else you want to pick up. There's a couple of things that we're not getting to here in the video podcast. I've had fun going through this with you. I hope it's been of interest. Just kind of jumping around the horn here as there's a little potpourri

of things worthwhile in advance of the election about markets, about the Fed, about the economy. And I will be with you again Monday going through our normal Monday Dividend Cafe stuff and economic data, the jobs report, housing, and so forth. And then we'll go into the election. And I can't really tell you what we're going to do next Friday in Dividend Cafe because I really don't know where we'll be in the country at that time. If there's noise next week, there's noise next week. It is not going to move us. It could be a lot of noise. Could be up, could be down, could be total certainty by 8.30 PM Tuesday night. We could know nothing at all

by this time next Friday. All outcomes are on the table. 50-50, remember I said it. In that sense, I will close out. Thanks for listening. Thanks for watching. And thank you for reading the Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisurities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be

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