The Dividend Cafe - Confusion in the Unfazed and Hysterical

Episode Date: December 3, 2021

It has been a wild week in the markets, with the -900 point drop of last Friday (Thanksgiving weekend) followed by a +235 point gain Monday, a -650 point drop on Tuesday, a -460 point drop Wednesday (after being up +500 points earlier in the day), and then a +620 point increase Thursday. As I type Friday, we are down -120 points, having been up +160 points earlier, so currently (at press time) reflecting a -330 point drop on the week. Now that’s a lot of ups and downs for -330 points, don’t you think? But market ups and downs are not a problem for real investors, so why do I mention this volatility at all? Don’t people invested in the stock market (and more specifically, in the earnings streams of the great companies that make up the market) know that markets do this, and in fact, normally experience much more volatility than we have seen this year? I would hope so. I know our clients do (how could they not?). But the subject of today’s Dividend Cafe is not the mere reality of market volatility, especially when such volatility is a mere 3% or so off of market highs. I mean, really. No, the subject of today’s Dividend Cafe is those who may be unfazed by market valuations and euphoric concerns, but go hysterical over the omicron variant. In other words, we want to look at that which does not play into our thinking, and that which does, and why we think the media and so much general investor consciousness have their fears and non-fears exactly backward. So jump on in to the Dividend Cafe. It will be worth your time. 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 Dividend Cafe. It's been a wild week in the markets and I'm going to have plenty to say about that. I'm obviously not recording in one of my studios. I'm in a hotel room in San Francisco where I speak at a conference tomorrow over the weekend. But we'll be back in New York City next weekend. And we'll see where things go next week. It's interesting. As I'm sitting here recording, the markets are down about 300 points, a little more than 300 points in the week. It's interesting. As I'm sitting here recording, the markets are down about 300 points, a little more than 300 points in the week. I mean, a pretty inconsequential activity. And yet, as we know, the markets are down about 900 points on the Friday after Thanksgiving. And then we had an up day of 230 this week, an up day of 630, a down day of 400 something, and a down day of 600

something. And so far here, I'm recording Friday morning, so there's still plenty of hours to go in the trading day. Markets are down a little over 100. So I don't know where it will end up, but I do know this, that the subject of today's talk is kind of a mixed bag around what I think is causing a lot of hysteria in the market that makes no sense versus some things that really ought to be concerning in the markets that don't necessarily seem to be. And so you can paint this as an optimistic dividend cafe in the sense that I most certainly have a more sanguine view on the ultimate market impact from this Omicron variant. But then I don't think you would want to paint the entire picture sanguine based on what I feel is the sort of ignored or misunderstood or underappreciated realities in financial markets right now. But we're going to spend most of the time today talking about COVID. So bear with me on that. But I want to give kind of a historical context to why I feel the way I feel about a lot

of things. And if you read the dividendcafe.com today, the written commentary that I wrote this morning, I do elaborate quite a bit. I got kind of into a bit of a zone of just sort of playing out the history of where a lot of this has come from. And maybe this podcast or video won't capture it with that same level of depth, but I'll do my best. You go back to January of 2020. And we at that point had in the news that there was a novel coronavirus in China, particularly in Wuhan. And there was very, very little market response. And in fact, even after it was announced that some major American companies with major Chinese presence were having to close warehouses or factories or things like that. Markets didn't really respond much, even with a direct US impact from direct China exposure.

And I'm completely transparent about the fact that my view was the same, that having gone through in my investing career alone, SARS, MERS, swine flu, bird flu, Ebola, Zika, okay, there was a lot of precedent of healthcare scares not even becoming the healthcare scares that they had been feared to be, but no kind of market scare whatsoever. And I think that there were Democrats who were in the same boat. I think the Republicans in the same boat. I think there was a total apoliticalness to this early on. The words of wisdom that were coming from Dr. Fauci, from Dr. Scott Gottlieb, former of the FDA. I mean, I participated in panel discussions, you know, where I heard people flat out say some of the very similar things that I'm remembering now. And I always think back to being being i'm sitting here recording in a hotel room i remember being in a hotel room los angeles in late february okay um that we were like

well past the early january wuhan diagnosis and and yet there was a i think it was the final like significant democrat primary debate there ended up being one more later after Joe Biden had already sewed up the nomination. But the last major Democrat debate where they had most everyone on stage right before Super Tuesday, and there wasn't a single mention of coronavirus the entire debate.

And so I don't say that critically on either the way President Trump said stuff or the way the Democrats didn't say stuff or Fauci. I was in the exact same boat. The market response at that time was sanguine because that was the testimony of history. You really do have to go back to the Spanish flu. At that time, it was a little bit over 100 years prior till the things had kind of gotten way out of control. And then when you get into March and the infectiousness of COVID-19 became more clear and the uncertainty around the severity of COVID-19 took hold,

I think we all recall the kind of unwinding of that sanguine feeling, the public trust or confidence or optimism that everything would kind of unwinding of that sanguine feeling, the public trust or confidence or optimism that everything would kind of work itself out. And there would probably be some deaths and there would definitely be some sickness, but it wouldn't be a systemic event that elevated to pandemic status. That feeling went away very quickly. And I think most of us remember that night that the president gave an address from Oval Office, that Tom Hanks announced he had COVID, that the NBA canceled its season. I mean, there was just all this stuff. It was brutal. And then markets got into the negative feedback loop of selling, be getting more selling. And we experienced a national margin call that I'll

never forget. And many of you won't either. And so when I refer to kind of a more sanguine view about this variant, it's important to distinguish this from March of 2020. We did not know what the severity of COVID would be. We did not know the extent of vulnerability. We did not know what the policy response would be. There was a complete and total medical and economic ambiguity in the early stages of this. And by April of 2020, we were nowhere near being done with COVID, but markets did hit their low point in late March. But what we did know in April was that the mortality rate was going to be far, far, far lower than had been feared. The mortality rate of smallpox, I believe, was 35%. The mortality rate of SARS, I believe, was 10%.

The mortality rate in the Spanish flu was something, you was something very, very high out in teens. If I'm wrong on any of those, I'm doing them from memory. But I do know that you're talking about something five times, 10 times, 20 times, in some cases, 30 times higher mortality rate with some of these other situations than what COVID ended up being. So not only did the market absorb the fact that COVID had a much lower mortality rate, the market also certainly had to absorb the fact that COVID had a very high infectious rate. That's sort of the inverse of SARS. SARS wasn't very contagious, but it was very lethal. And COVID wasn't very lethal, but it was very contagious. And so COVID-19 that is. My point being that markets had more information a month later, and a lot of that had to do with policy response. By April, we knew that

the Fed was essentially unloading a bazooka of liquidity into markets and that the Fed was essentially unloading a bazooka of liquidity into markets, and that the Congress was throwing money at businesses through PPP and individuals through various transfer payments and social programs. So you did really have a lot more clarity a month later, but you didn't have an end to COVID. And you didn't even, you know, you didn't really even have a turn. Now what happened is we were in a national lockdown. I think the president called it a sheltering in place order, if I remember correctly,

and that got extended much longer than people expected and some people wanted. But what happened in May of 2020 is that we never again have had a national policy on COVID, a national economic reality. Because at that point, the diversity, the federalism, the individual, excuse me, individuality, the constitutional structure of the country, that took hold. And you ended up with certain states that got far more draconian, strict in some of their policies, some states that got far less. There are people who like

some of the policies in some states, people who didn't like policies in others, and all of that. And that's fine. And I'm not here to talk about that. But my point was that it did change the aggregates in the way that we would look at the economic side, because you had certain parts of the country that were more open than others. You had certain parts of the country that ended up getting more sick than others. You had certain parts that had already been very sick, and so forth and so on. But what you didn't have, and this is the market story now, what you didn't have again was that March of 2020 fear that you'd have a complete and total override of the American medical system, that we would find ourselves societally and systemically

incapable of dealing with the entirety of the COVID pandemic. Early on, we had far too many deaths because obviously there was not the proper protections and understandings for our senior population, for senior care facilities. And there's a lot maybe could have been done. And then you look through the summer. Those of you who recall my COVID and markets writing, we had what I was referring to as the fact dynamic day by day with Florida, Arizona, California, Texas. Then you had another little wave around the holiday season, and they started talking about not traveling to see your families as the seasonal winter reality of it. And then even after you had vaccine approval, before you were able to get really good vaccine

distribution as Operation Warp Speed was getting ready to take effect and the uptake of the vaccine had not really been implemented, that we had our largest wave of COVID cases that was almost exclusively for places that had really not had much COVID infection before. And that took hold. It was much less lethal and there was a lot more cure rates and quicker discharges from hospitals. But you did have a lot of cases, particularly younger population. And then the vaccine really took hold and things were really quite quiet on the COVID front until Delta. And then the Delta variant came this summer and all of a sudden you had, well, it looks pretty infectious. It spread a lot. And there were these things that they called vaccine breakthroughs where even vaccinated people could get it, not often, but they could,

but then very, very rarely with any severity or certainly not mortality. It was exponentially lower deaths and hospitalizations for vaccinated. But then that drew attention to the fact that we did kind of peak in the level of vaccine participation. And there ended up being a whole story around a percentage of the population that was very vaccine resistant. And then that ended up not playing into some of the political lines, a lot of people wanted it to because it wasn't really identifiable politically. It was different demographics, different opposition on the back side, but that created another health story through it all. So I think most of what I've played back in time, you may have a good memory and remember everything I just said. Maybe some of it I'm refreshing your memory a little.

It's a pretty quick time to cover what was essentially a year and a half of stuff. But my point is that through all of that, the market shrugged every bit of it off, every bit, once it got past that initial spike. Now, markets did that. Why? Well, you had no alternatives of where else to put money. You had a flood of liquidity. You did have the market knowledge that things were not going to wipe out 20% of the American population. You, at some point, did get the awareness of a vaccine coming far quicker than had been expected and a really effective distribution of that vaccine. You did get in the middle of all this, there was political issues. You've got the market acceptance of divided government that they felt took away some

of the political risk on either side of the way things were playing out. And you had, I think, the general market reality that while there may be policy issues in the short term, there was still human reality in the long term that economic actors were going to act. They were going to reassert their lives, their dreams, their hopes, their activities, their social yearnings and things of that nature. And you had profit growth. Okay. And so for a lot of reasons, through the fact thing of last summer, through the winter seasonal resurgence,

through the pre-vaccine pickup in early 21, and then through Delta, markets shrugged it off. Now, in some of those cases, not all, there was a day or two of headline risk, a day or two of volatility, but nothing ever really played along the lines of what would have matched what I consider to be rank media hysteria. And I hope there's less confusion now as to why the markets didn't respond in tandem with the media or even in tandem with COVID headlines or press conferences or things like that. It was primarily because of very rational reasons. Now, this is not to say everything was rosy in the economy. It's just that the aggregates were very different than some of the isolated cases of pain. And the isolated cases of pain were largely small businesses that were impacted, big cities where

people didn't want to go back to work, and you had sandwich shops and coffee shops and dry cleaners. Those things are just utterly tragic. I can't even imagine someone could have been more vocal and outraged than I've been on this. And my opinions on people returning to work and so forth are very well known. Even if people disagree with them, I don't think they're unaware of how I feel. And that's the entire reason why I feel the way I do, by the way, because of the social impact it's led to people that seem to be totally forgotten in this COVID moment. But my point is this, markets, when you refer to the macro financial markets, have not cared much. So then you get to this new this new, um, I don't know about you,

if this variance name was any closer to the word Omnicom, I don't know what I would do. I keep, I continue to, you know, mislabel it. So forgive me if I do that, but the Omnicorn variant is to me, um, a very bizarre story. Okay. I put a chart in dividendcafe.com today where in South Africa, where there are really exponential cases growing from this variant, those exponential case growths are not even near their last four waves of COVID

that they've had in there in a much lower vaccinated population. We have five cases in the United States so far. We're going to have a lot more. Everybody knows that, this idea that it was not going to get into our shores at all. But at the time that the market dropped 900 points on Friday, I think there were two cases in Europe, zero in the United States. I mean, it's really weird. And on top of that is that thus far, it appears to be almost entirely asymptomatic. Now, not literally, mostly asymptomatic and pretty much entirely non-severe. I mean, there's not this waves of deaths and hospitalizations.

And so it's one thing if I say it, because I think people could take me the wrong way on it. I have said it, but you have like Pershing Square, one of the largest hedge funds in the world, led by a gentleman named Bill Ackerman. You had JP Morgan this week coming out and saying what is probably counterintuitive to some, but I think some of the most cogent words you'll hear that if, if, if it holds up that this variant has high infectiousness and low severity, that could be like one of the most bullish things that you get the accelerated path towards this immunization. I don't know why the market would respond that way to the news that we've had this week. But as I pointed out in my missive on last Friday,

market doesn't need any excuse to drop down to have some degree of resurgent volatility because the market has had ridiculously low volatility for a very long time. Now, I'm saying all this, and the market's like 2 two or 3% off of its all-time highs. It just doesn't count. 10% it becomes a correction. Okay. Do I think we're going to a bear market around this? No.

Do I think we're even going to get to correction? I don't know. I would like to, I'd like to get it out of the way. It's got to happen at some point. I think there are so many frothy parts of the market, but I don't even know if that's going to come close to happening here. There's been four, five, six times it looked like we could get something more reasonable and down tick, and it didn't happen. those responding around this variant are doing so in the face of short-term historical lessons that would profoundly suggest they're making a mistake. The overhype about things like long COVID, about Delta, I don't know what the policy response will be. Are they going to ask five-year-olds to wear masks again, playing football and so forth? I guess maybe in the park that you can get certain states that are going to do things that,

you know, candidly, I think seem kind of silly, but they're not economic, right? Are people going to where they already didn't want to return to work, use this as maybe an excuse to extend that return to work? I think that's entirely possible. But at the end of the day, I don't even know if this thing is coming into America in any profound way. I can assume that it does. I don't know what the vaccine efficacy will be.

I can assume it might be lighter than we would have liked. So you start talking about boosters, you have new treatments. What we know is severity is low. There is such a wildly high part of the population that's already had infection. And this thing just seems completely, utterly absurd to me. work from home, tech, social media, hot dot type stocks that have gotten killed, and no one's even talking about it. Even within the FANG group, some are still really resilient,

and some are down 20%. And so there is this kind of crypto craze. There's this hot dot tech thing. That to me, combined with the distortions that are taking place in the market via Fed policy, the financialization of the economy that has led to a lot of zombie companies, has led to companies that right now have more interest expense than earnings, but they can get away with it in a low rate environment. I do not believe that the primary risk we deal with as we go into 2022 is related to a variant of the COVID virus. I think the primary risk we deal with is related to a lot of the distortions that exist in our financial market that make it harder for people who are looking, who want clarity, to get the optics. It is hard to see things with 2100 vision.

You want 2020 vision to see the world, to see the investment landscape. to see the world, to see the investment landscape. And nobody has perfect vision right now because of distortions to valuation, because of distortions to the cost of capital, because of distortions to liquidity that has flooded our financial systems. Some of those things could be good. Some could be bad. Some could be good now and bad later. But my point is they make optics difficult.

And that's a risk. optics difficult. And that's a risk. And playing out of that moment into crazes, into euphoria, into all of a sudden, crypto people naming stadiums and so forth. There is so much of this that is deja vu to me. It is uncanny. I make no predictions about it. I only refer to the fundamental discipline behavior I think makes the most sense, which is to not be hysterical about this COVID variant and to not be complacent about valuation and financial fundamentals. That is my lesson today in the Dividend Cafe. Please reach out with any questions you have whatsoever um if you're mad about anything i said you could reach out to i hope you're not i this thing has never been even like a tiny bit political for me ever um and if anything i said sounds like it i promise you you're misreading me

uh and i care deeply for clients to understand that uh there's a method to the madness here, that we have very strong beliefs about the perpetual reality and inevitability of market volatility. And that we want to get the cause and effect right and get the response right. That's what we're here to do. Thank you for listening to and watching the dividend cafe. Please do review us, share us, star rate us, say good things about us, and please enjoy your weekend. Reach out to any of us at the Bonson Group anytime. Thank you. This document was created for informational purposes only. The opinions expressed are solely those of the Bonson Group and do not represent those of Hightower Advisors LLC or any of its affiliates. Hightower Advisors do not provide tax or legal advice. This material

was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client's individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for any related questions.