The Dividend Cafe - Bubbles and Resentments

Episode Date: October 15, 2021

I loved writing the Dividend Cafe for many years with a “jump around” approach, basically covering a wide array of topics that would enter my orbit of interest each week. I made a decision late last year to start writing “single topic” and to write the entire thing in “one sitting” – basically Friday mornings – so as to make it a more coherent and cohesive read. I do like it better that way, and the feedback I have gotten suggests you do too. Today is a little old school, which happens every once in a while when no singular topic is inspiring me. There are a number of things I want to look at today, from the Value/Growth discussion to the impact of debt on the economy to so much more. I did write it all in “one sitting” (yes, Friday morning – I am a serious creature of habit), but it covers a handful of different topics that entered my world this morning from a plethora of inspirations. So off we go into the Dividend Cafe, a read that will be well worth your while. 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 another Dividend Cafe. We are here into the middle of October and it feels like the market continues to not exactly know what it wants to do. But it's been quite a year and now here into the final quarter, we'll kind of see where things go. But I'm going to actually go through a few different topics today. As of like 4.15 this morning, I was a half hour into reading and writing and really had still not been able to come

up with a single topic I wanted to cover. And I just decided to kind of do one of those potpourri dividend cafes I used to do all the time. So there's a couple of things we're going to cover. But nothing too out of the ordinary for my normal topics. The thing I wanted to kind of start with has to do with this talk about bubbles. You know, it could mean a few different things. There's people that feel certain things are in a bubble, like a crypto or like a fang or, you know, certain parts of the technology sector, whether that includes FANG or doesn't. Then there's people that believe everything's in a bubble, like all assets are in a bubble, the stock market at large is in a bubble. They're not real selective about it. It's kind of

like everything under the sun. And they could be right, they could be wrong, but there's a pretty big school of thought there. And I think that the word bubble is important to kind of clarify for our purposes because whether or not you're talking about a given asset, a given specific kind of niche investment, or the broader market at large, that kind of language generally carries behavioral implications. People tend to be more fearful when they think there's bubble conditions going on. People can take a short position, bet against something if they think that's the case. It certainly can create a lot

of emotional roller coaster depending on the level of anxiety someone has about such a thing. And so my own view, I have opinions that are to the very best of my ability, evidence-based, very best of my ability, evidence-based, rational, valuation-driven, historical, things like that as to where I might find certain pockets of overvaluation. I generally don't like using the word bubble. I do it every now and then, but I generally don't like using it unless there is a significant amount of leverage involved, a lot of debt attached to the asset class that I think is bubbled because that's essentially what a bubble really means. If you say something's overvalued but there's not a lot of evidence of leverage around that overvaluation, it's kind of hard to use the word bubble because it's debt that gets you in trouble. If somebody just owns something

and is down in value, you know, I mean, I've written a whole different cafe about this before, but I don't think that that quite captures the essence of what the word generally means or what the historical uses. When you look at 2008's credit and housing bubble, when you look at Japan's past bubble, when you look at the dot-com bubble, these are things that were highly levered and then had an impact, had an aftermath that we can define. We could know what was going on when it took place and now historically describe it and what it meant. But a correction in asset price and a limited thing that doesn't have that kind of wake attached to it is something different. Well, the joke I use in Diven Cafe today, which is something I'd read from Charles Goff that but I mean, I've been hearing this line for years.

I've always thought it was funny. And Charles just reminded me of it in a white paper he wrote this week that a bubble is when something is going up and you don't own it. Right. And so I think that there's some humor to this, but also a lot of truth that generally people seem to have really strong opinions when things are going up they don't own. opinions when things are going up they don't own and then likewise people can do the same thing about stuff they do own when they fervently argue against it being troubled and I don't want to overly criticize this dynamic because because I'm only making against human beings and all the human beings are doing is being human it is human nature it would be less forgivable for me to do it as an investment professional with a company stewarding a lot of capital. I don't have the right to allow my wishful thinking to enter our investment process. I try to be extremely process driven about how we identify these things. And so, you know, I have certain

rules of thumb and I'll share some of those. But I think that the language matters. And I think right now a lot of people are caught up in those saying the whole stock market's in a bubble. It's possible they exited at the COVID crash and they're just really upset about, you know, 15,000 points that they've missed or maybe 10,000 of the 15 that they missed. You know, you can't rule that out. It's also possible that on certain limited things that people have strong opinions based on things that they don't own. In my view, though, the kind of criteria around problematic language, problematic perspective is not around my hope and aspiration. It's around these kind of time-tested lessons.

When people start using language like, well, this time it's different, those rules don't apply anymore. That's at least a red flag. I mean, those types of words generally go somewhere you don't want them to go. When people refer to laws of nature, laws of economics, laws of mathematics, laws of business being completely changed, that's different than saying, hey, there's this new sheriff in town with a great new technology, a great new business, a great new perspective. Innovation and creative destruction are part of capitalism, but the wholesale replacement of laws is not. And a lot of people

are fond of making those arguments now, and I'd be careful about it. now and I'd be careful about it. Other things that I think may matter too is the overall consensus. You know, there is a sense where some people believe the more popular something gets, the better. And then there are people that are called contrarians. And this is what we are at the Bonson Group. We believe the more popular things get, the more we want to be concerned. And this is based on lessons of history around sentiment, around investor euphoria. And it's something that is very hard to time, but yet nevertheless very, very useful in formulating a perspective on where asset pricing belongs. I am, I guess I wouldn't say Hyman Minsky, the 19th, 20th century economist, I'm not in the camp that believes he was right on everything, but where he was right,

he was incredibly right. And Minsky wrote rather famously about this idea that extended periods of stability breed instability. And the longer the period of stability and the more stable the period of stability, the more dramatic the follow-on instability will be. And it's another way of saying that extended stability and excess stability does breed complacency. And in periods of complacency, certain things can get fertilized that really do result in highly unstable outcomes. And most certainly the societal participation in what was the credit and housing crisis of the early part of this new century is a great example. But really, there's a human nature lesson in that, and also an economic one. But it does kind of get down to why I always celebrate equity volatility, and it's very hard for some to do that.

And it's very hard for some to do that. Periods of incredibly light volatility in equities scare me because I generally believe in the Minsky moment kind of percolating and preparing for something much worse. within normal historical volatility. It isn't like I enjoy those COVID months of volatility, the March 2020, those periods of time when you hit a legitimate liquidity crisis, when there is 10 people running out a door and the door only has room for one, when you have a levered financial system hitting the sell button at once, when you have uncertainty around a macro event

like a pandemic event like a pandemic, like a credit crisis, like Wall Street's financial solvency in 2008, like a terrorist attack in 2001. I mean, those things are obviously not enjoyable. But when I refer to kind of enjoyable volatility, I do mean the more commonplace up and down movements that are par for the course for equity investors. And I think a lot of people would love something that can't exist. It's not just that it doesn't exist, but it can't, which is equity like returns with cash like volatility. So we so it doesn't exist, right? I mean, I hope you know that. But it also can't because of the nature of risk premia.

And yet I believe that sometimes we get excited about cash-like volatility and equities when in reality it either means we're going to get a decreased level of return or we're breeding some future excitement that may be problematic. So that's my view on how to think about asset pricing. Can I say that FANG is in a bubble or that small cap tech is in a bubble or that China tech was in a bubble or that Bitcoin is in a bubble or something. Listen, there are things that I think are overpriced relative to metrics that have stood the test of time that I think are very logical, very defensible, very economically foundational. There are valuations that are excessive. And I just don't think that that leads us to any ability to time what that means. I do think that most of the time when one starts being able to feel conscientious about bubble-like conditions,

it usually does not mean you're in the ninth inning. It usually means you're in the sixth or seventh inning. That sometimes those who warn, you recall alan greenspan gave his irrational exuberant speech in 1995 and the tech bubble didn't burst until march of 2000 um there were plenty of people that are now famous and wealthy for having shorted housing in 2008, but most of them did it in 2004 or added to their positions and whatnot in 2005. So they were early, but they were right. All I can say is that we have a real strong bias at our firm around assets that are not as prone to bubble-like conditions because they're not generally very popular. They're not very exciting.

They're exciting to me. I like the return profile. I like the mechanical benefits they provide to investors accumulating wealth and spending wealth. But I don't think that they're ever intended to be the hot dot. And we're okay with that. A couple other things. Speaking of hot dot, I've heard a few people say lately, and I tend to agree with them, you know, value investing is when you can pay 50 cents to buy a dollar. That right now, there

really isn't a lot of value opportunity out there. There may be things that are 80 cents in price that their value is a dollar. But, you know, severe distress value dislocation from price and value is not easy to find right now. And I think any value investor is pretty is pretty honest about that or ought to be. But just like you, you may not have an easy time finding a dollar for 50 cents right now in the growth side. finding a dollar for 50 cents right now. In the growth side, the argument is always I'm willing to pay a full dollar for something worth a dollar because I believe that it's going to be worth a dollar 30. And I think that if it's going to be worth a dollar 30, paying a dollar 35 for it now

is not very smart. I don't really think paying $1.30 for it, something worth a dollar, is very smart if it's going to be worth $1.30. You're paying up for a lot of growth. The growth will come and you got it, but it was priced in, so it didn't help you very much, right? Great growth investors don't pay 70 cents to buy $1.30. I mean, that would be great, but that would require a lot of luck. But, you know, a growth investor is willing to pay $1 to get something worth $1 that they believe will be worth more in the future. Right now, I think there's a lot of things out there that might be worth $1.30 in the future. And yet people are paying $1.30 to get that, and I think that's a different story. So there's economic tensions in these value growth aspirations on both sides.

I thought I'd throw out there. A kind of funny read at Bloomberg last week had a piece on the things we ought to be afraid of right now, and they had two things that were their number one and number two that literally are not even on my list at all about Washington fighting over the debt ceiling and and that fight coming up again in December and about Delta variant. And then they had things that like were almost sort of backwards, like one of them was fear of the Fed lifting monetary accommodation. And my my fear is fear of the Fed not lifting monetary accommodation. fear is fear of the Fed not lifting monetary accommodation. So I guess all I can say is that when you are writing something or thinking about something from the vantage point of what

to be afraid of for the next two, three or four days or two, three or four weeks or two, three or four months, and your investment plan has to do with returns and sustainability and income need and wealth building and wealth transfer of two, three, or four decades, you're applying some apples to some oranges. There are things right now that come up in the daily lexicon, the food shortage or labor shortage thing, food prices thing, the issue getting cargo off of ships onto trucks. Those are clear and present problems in the short term, and we'd really love to think they don't become long-term problems. But the notion of which congressman is mad at what senator and this and that,

these things are just very unlikely to stay in the news for five days, let alone five years and three decades and other things like that. let alone five years and three decades and other things like that. So it occurred to me that not only do sometimes I think people get their list wrong or sometimes backwards, but they almost always get the kind of time attachment totally wrong. Very important chart of the day in Dividend Cafe today at DividendCafe.com that really speaks to the problems in productivity that come from a declining national savings rate, particularly when national savings is dropping from excessive debt and what that means into our future about productivity and out of productivity growth.

It's obviously a very big economic hobby horse of mine, and I think you'll find the chart of the day really interesting. I'm going to go and leave it there. There's a lot of things happening. We're following all of them. We talk a little bit more about China and the dividend cafe. But my encouragement to you all is that earnings seasons here, it clearly seems to have started off strong. I'm really surprised at this violent melt up in markets of the last three days, given only three days so far of earnings results. But clearly, a lot of traders were afraid of being caught overly optimistic coming into an earnings season when we had five or six surprise good ones in a row. And then now

a lot of traders have decided, oh, my gosh, here we go again. I don't want to be caught inadequately risk exposed. And so there's been a lot of repositioning just in the last few days. We'll see where it holds. We continue to feel very strongly that cash flow generative businesses with strong balance sheets, good management, good business models are where you want to be right now. And playing for high valuations that become higher still is not where you want to be. That's all I have to say today. Thank you for listening to Dividend Cafe. Those of you watching the video and listening to the podcast, we appreciate your subscribing, putting it in your feed,

and doing what you can to star rate us, review us, share it with your friends, and help us otherwise stay high among the traffic in these various video and podcast players. Thanks, as always, for listening to and watching the Dividend Cafe. 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 profitable. Past performance is not indicative of current or future performance and is not a guarantee.

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