The Dividend Cafe - Central Bankers Unite, Politicians Face Fright

Episode Date: August 24, 2018

Topics discussed: Central Bankers Descend on Jackson Hole The Fed is Getting Ready To Make Another Move Markets Hold Steady While the Political Drama Takes Flight Links mentioned in this episode: DividendCafe.com Advice and Insights Podcast TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. This is David Bonson, the Chief Investment Officer and Managing Director at the Bonson Group. And we have a full plate this week. We're going to kind of steer clear of political drama and instead talk about the no drama markets that we've seen this last week and try to dig into the substance of what's really moving things. There actually will be some political discussion that needs to be had, but certainly the things more significant to markets have a lot to do with the Federal Reserve, the dollar. And I have, I think, a really important behavioral reminder for investors

this week. So let's jump into the Dividend Cafe. Vacationing with central bankers. The annual Jackson Hole Wyoming Symposium begins this week. Central bankers from around the globe, along with various pundits, economists, and assorted illuminaries, they all assemble and talk policy, perspective, economic framework, and so forth and so on. You'll note other basic, how do I say this? There's a lot of commentary about the Fed out there. I'm going to give some myself here in a moment, including some discussion of the political pressures on the Fed right now. But I will reiterate a central question that those of us obsessed with central banks have to get answered. And I want you to hear this for what it is. Will late 2018 and into 2019 prove to be like 2015 when a rising dollar and struggling international environment did the quasi tightening for the Fed and they backed off?

Or will 2018-19 be the time that they finally normalize? And of course, they've already begun to do so. So the question is, will they see it through despite the impact to emerging markets and global divergence in monetary policy? So how many more rate hikes are coming? What will the continued efforts to reduce the Fed's balance sheet look like when all of these factors are considered? It's a big story, big questions, no clear answers. My view is that they will continue to telegraph actions so as to limit disruptions or surprise in the market, and that they genuinely do fear not having inadequate bullets in their gun for next time we face recessionary pressures.

So in other words, yes, I believe the environment's changed since the beginning of the year when the Fed was quite resolved. But I also believe that they see an opportunity that has so far not disrupted risk assets to any dramatic degree to be able to finish this process of normalization. The impact of emerging markets and the shortage of dollar liquidity around the globe has started to get severe, and we will see if they go 2015 or if they stick with the 2018 plan. Our advice and insights podcast this week has more to say about this very subject in a very short, succinct, but hard hitting podcast dedicated to discussion of the Fed. Fed funds futures finding fund forecast. I was actually trying to type out a title for what we're going to talk about regarding the Fed, and I just kept going with all these different F-words, but not that F-word. In all seriousness, the Fed funds futures market is right now placing a 93.6% chance of the Fed raising rates, another quarter of a point next month. And the same futures market is calling for

a 60.9% chance of a December meeting hike. Of course, by the time I say those numbers, they've likely changed, but you get the idea. Almost entirely priced in for a September rate hike and still, you know, a little over 50-50 on the December. The odds of a rate hike price in the market tell you a lot more than what the president may be saying in interviews that he wishes would or would not happen. And I'll spare you my diatribe on Fed independence. But look, the futures market is not saying December is a foregone conclusion. But I would still say it's likely, but certainly not assured. If Chairman Powell wants to hike, he will. And I don't think it'll end up coming down to what the president has to say. As we said before, though, it's the dollar's impact on emerging markets and the flat yield curve that may, just

may, cause the Fed chairman to think differently. So let's talk a little sense about the dollar. I want to make some points that I don't think get made frequently enough, including in our own dividend cafe. The dollar weakened significantly last year when everyone believed it was due to strengthen. That strengthening actually, that weakening versus expectations of strengthening actually began in late 2016. It's rallied since February this year when a weakening was expected. So it's now kind of the expectation went the opposite and then the action went the opposite. Currency and foreign exchange rates are like all assets about expectations, not absolute events. So as the countries of dollar competitors have experienced weaker than expected data and the U.S. the opposite, it's the data relative to expectations that's provoked movement. So you combine this with international liquidity

around dollars tightening because of Fed policy. And then there's been, you know, this perfect storm that's required the shorts to cover those who are short US dollar. So all the factors have come together to help push dollar higher. But all those factors are by definition, transitory, temporal, therefore subject to reversal. And sometimes that can happen very quickly. That's what people need to understand. The things moving dollar higher are the types of things that could very quickly reverse. All right, here's the most important thing I'm going to say today in this week's podcast. And it's called planning on the right portfolio.io. It's wisdom of my long-time

mentor, Nick Murray. I don't share enough that people begin believing the whole purpose of their portfolio is to beat someone else's portfolio when their own portfolio was allowed to exist without a plan. A portfolio must have a plan and a purpose behind it, or it's a random gob of assorted line items, each incoherently placed next to each other, leaving an investor inevitably predisposed to wondering the wrong things, asking the wrong questions, seeking the wrong results. If I talk about the economy, the merits of dividend growth, the impact the Fed's having on the market, the state of interest rates, global financial conditions, yet I do not tie all of these things back to how it matters to the actual plans, needs,

and goals of my clients, then I am talking only academically. The impact of the economy on the markets and the right way to position a portfolio exposed to markets are only relevant to the extent they drive a successful outcome for a client. In other words, the fulfillment of a plan. So as we talk week by week by week about the market, your portfolio, these related, you know, Dividend Cafe topics, never lose sight of the partner to your portfolio, the plan, which must be its guiding purpose. If God forbids that your plan is not in place, a written, intentional, organized design and roadmap, then get one without delay. That's of course exactly what we do. If you go into dividendcafe.com this week, we're going to have additional comments about the

municipal bond market. One thing I want to say right now is, and there's a chart to this effect in Dividend Cafe, about the corporate debt levels. I talked a couple weeks ago about the household sector being at a 40-year low in its leverage ratio, that its debt divided by total net worth is at a 40-year low, and that since the financial crisis, we've seen this really dangerous increase in debt and leverage in the public sector, meaning both sovereign governmental and state, local, municipal, and yet a really healthy and impressive and rapid deleveraging in the private sector. But the corporate sector sort of fits in there. And I think the chart will kind of tell the story. There was a real meaningful de-levering coming out of the 2008 recession

in the corporate sector. And there's obviously been a very opportunistic reflating since. I would guess that corporate America right now is in need of a sort of leveling out of its debt ratios. But I want to make clear, and the chart shows this in the context of past recessions, debt reduction in the corporate sector is generally the consequence of a recession, not the cause of one. So, so much to say in politics and money this week. The president chiming in on the Federal Reserve and what he thinks that they should do and

not do. And I think that the Advice and Insights podcast gets into this deeper, but I believe that it's a bad political idea, but not one likely to sway the monetary environment. We allude to all the political drama with Paul Manafort's conviction and the plea bargain with President Trump's former attorney, Michael Cohen, and the market didn't even move from it. I don't think that the market cares because there is nothing to care about in the market for Mr. Market, okay? This is not me saying that other people shouldn't have real strong opinions one way or the other, but the very non-partisan, apolitical, and completely accurate reality is that the market's not materially impacted by these kinds of things.

Now, should some actual uncertainty enter the fray, out of the whole White House, Mueller, soap opera, volatility would increase. Even then, I doubt any fundamental or secular repricing would take place. So the market shrugs stuff off. That doesn't mean society needs to. But that's been the story since this president was elected. And I think we've talked about quite a bit why that is.

Now, by the way, do I think the events this week increase the chances of the Democrats winning the House? I suppose so. And I think the Democrats already week increased the chances of the Democrats winning the House? I suppose so. And I think the Democrats already were very likely to retake the House. You never know for sure, as we've all sort of learned. But what does that even really mean for markets? Well, I'll tell you what it means. A legislative gridlock, which is as old as our country itself. And I find no precedent at all of markets ever being concerned about a Congress that

can't get anything done. So that sort of gridlock, I think, is a completely immaterial event in the markets. And that's probably the most dramatic thing likely to happen. All right, I'm going to leave it there. I would encourage you, as always, to read DividendCafe.com. And if you have any questions, want to dig any deeper to some of the topics we've covered, please feel free to reach out, send us a note. But thank you for listening to Dividend Cafe.

We look forward to speaking again next week and answering any other questions. We are getting close here to the end of August and the fun continues. Thanks for listening to the Dividend Cafe. For thought. referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinion, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice. The team at Hightower should not be in any way liable for claims and make no

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