The Dividend Cafe - Cutting through the Noise to the Sobering Truth

Episode Date: January 12, 2024

Today's Post - https://bahnsen.co/48Sg4um Before I get into this week’s wild fun Dividend Cafe on the subject of government debt, I want to make sure I do one final push around the Year Ahead, Year Behind White Paper that we published last Monday. Because of its depth and length, I imagine some of you printed the chart-filled PDF and plan to digest it this weekend. So don’t worry – if today’s Dividend Cafe is coming on top of your white paper reading, I assure you the data I cover this week about our fiscal position in America will not be going stale in the days ahead! But now we re-dive into the standard Friday routine of our weekly Dividend Cafe. And this week’s is a very cheery one, if you are cheered up by massive government spending and debt (hey, “we’re all Keynesians now,” right?). A fundamental component of our macroeconomic view going out ten years and longer is a belief in an internal tension in the American economy – that is, the extraordinary engine of growth and innovation that the greatest Western democracy the world has ever seen is and has been for 250 years, VERSUS the significant headwinds for growth created by excessive government indebtedness. The story is more nuanced than that, and I will get into those nuances and more in this week’s Dividend Cafe. Don’t think of this week’s Dividend Cafe as a position paper on how to solve for the national debt. It is not a policy paper, but rather a reaffirmation presentation of the state of affairs. Let’s jump into the Dividend Cafe! Links mentioned in this episode: TheDCToday.com 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 the Dividend Cafe in a lot of ways. It's week we released our special Dividend Cafe annual year ahead, year behind, what we call our white paper. It's available at DividendCafe.com. The video of me walking through it is available at our YouTube channel. The podcast has that audio there. I think if you want to go to the website, download the PDF. There's about 20 different charts and everything kind of walking you through what 2023 was and our perspectives going into 2024.

So as we're still early enough in the new year, and I'm still trying to make sure that the labor that goes into that project is not in vain. I want to continue mentioning its availability. But we are moving on to this first normal Div Cafe, and as markets kind of peter around a little bit after the massively successful November, December that they enjoyed. I want to go to a little bit more sobering of a topic, which is a longer term and more structural as opposed to the shorter term and more cyclical issues that a lot of people are talking about. That is government debt, particularly federal

government debt. I could and probably should do a Dividend Cafe one of these days about state and local debt. We talk about our governmental debt only in the context of federal debt all the time, and I'm about to do the same thing here today, when in reality, if you want to view it across the body politic, you have to actually include municipal debt as well to paint the full picture of how many future resources are already spoken for in terms of city, county, state, and then federal obligations. But to make things a little simpler and avoid, let's just say, we'll hold that topic for a rainy day. The federal debt subject is not really new to people. I mean, almost anyone you talk to is aware that we've accumulated a large debt.

I do think a lot of people are understandably, so I'm being sympathetic here, are understandably numb to it because there's been a lot of talk about the national debt for a long time that was itself accompanied to a doom and gloomism and an apocalyptic context that proved to be dramatically false. The prophecies of those who believed this debt issue was going to basically cause the skies to fall have not been good. And it's a really big reason in my own worldview and in my own development as that I abhor the doom and gloomism, perma-pessimism, and sort of sensationalistic context

of a lot of these people because that false prophecy does desensitize. It does numb people to the reality of legitimate problems when they feel like they've been fooled over and over again. I want to basically make clear that this is not, contrary to popular belief, a partisan issue. This is not the Republicans want to cut taxes so much and they're creating a fiscal crisis by doing it. And this is not the Democrats want to spend so much and they're creating a fiscal crisis by doing it. This is clearly a bipartisan problem on the spending side where I'm defining it not in terms of the absolute level of debt. And you say, well,

why? Well, for one thing, I just sort of explained why. We had national debt of a trillion dollars, a two trillion, a four trillion, and everyone said the world was going to end. And now we have national debt of 33 trillion and the world hasn't ended. And so it's very difficult to have any credibility if you're talking as if the national debt was going to destroy the world and then it goes up 10 times more and it doesn't, or 30 times more and it doesn't. At some point you're like, what, the next dollar does it? The next dollar, you know. It's because we've had a poor framework for understanding it, which is in the context of a fraction or a ratio, a relationship, the debt relative to the economy, the output of the economy, that relationship is intuitively obvious to matter the most

when we talk about real world things. Now, I get why someone could say 33 trillion of debt is awful and the numbers that are involved are just so staggering that they don't get into a ratio. They don't get into debt to GDP, that they just deal with the absolute number. I get it.

The numbers are just so fantastic and surreal that it's understandable. But the analogy I use to just be kind of preposterous, and it's sort of a reductio ad absurdum to make my point, Apple has $111 billion of debt and some loser kid in a basement that has $9,000 of debt. I don't think very many people would say, oh my gosh, Apple's in a lot of trouble. The loser kid is in a much better position. He only has $9,000 of debt. When you compare the level of debt Apple has to the highest amount of financial resources of any company ever and the highest amount of financial resources of any company ever and the highest amount of corporate profitability of any company ever, then yes, their $111 billion of debt looks sort of minuscule and

benign relative to some non-earning, non-productive person who has $9,000 in credit card debt who essentially could be bankrupted immediately, right? So even though it kind of seems too obvious to compare Apple to some loser kid, the point being $111 billion is not really the problem. And the same kind of thinking can be and should be applied here. It is a matter of our debt relative to the size of our economy and our economy's ability to produce new goods and services. Gross output is what matters because that's what affects quality of life. That's what affects the goods and services, the opportunities for jobs and profits and wages within an economic framework. And I think that we excessively spent in the first decade of this

new millennium. And I think that there were a couple bills that were passed at a federal level that cost an exorbitant amount of money. There were a couple wars fought, cost a lot of money. And yes, there were some tax cuts that, again the bills spent, No Child Left Behind was an education bill. Medicare Part D was a prescription drug bill. Afghanistan War, Iraq War, and then the 2001 tax cut, 2003 tax cut. You have six different things on the table, and people could have liked all six of them, liked some of them, disliked some. That's the camp I'm in.

But my point is, regardless, if you hated all of it, liked some of them, disliked some. That's the camp I'm in. But my point is, regardless, if you hated all of it, loved all of it, the debt went higher and the debt to GDP really didn't that much, a little bit. So I think in hindsight, that relationship was less problematic than the world we've been living in for now 15 years. At the point of the global financial crisis, that's where the debt to GDP ratio skyrocketed meaningfully higher. And that's where you had a Tea Party movement. There was a lot of deficit spending and Keynesian policy prescriptions diagnosed. And there was a lot of pushback on it. They got a sequester. They shut down government. They did this and that. Deficits

quit going higher, but they stayed high. The national debt stayed high. We obviously weren't doing anything like balancing a budget or reducing debt. That's all laughable. That's where we implemented a higher form of what I then have parlayed in prior talks to the Japanification thesis where we started utilizing fiscal and especially monetary stimulus to try to treat the patient. And I believe you get into that downward spiral of Japanification. the post-crisis years into the mid-2010s, let's call it 2015, 16, 17. This is why, again, such a bipartisan thing. I think there was heavy deficit spending in the Obama years and then really heavy spending in the Trump years, even before COVID. And we added trillions of dollars more. Then you had the COVID moment, which really escalated it to another level. And now here we are in the Biden moment. And we're going to have basically a $2 trillion deficit for fiscal year 2023.

And we ran well over a trillion dollar deficit in 2022. And you say, well, some of that's still from COVID. Well, from 22, some of it was. There's still like eight-year money and 10-year money that was spent from some of the COVID bills, from some of Biden's spending bills since. It's both prior and current administration. This is not blame game stuff. I just basically mentioned four presidents that have been in power since this new millennium. And there are two Republicans and two Democrats in that mix. And so this is a bipartisan issue. But I don't mention that to kind of tout my own bipartisan objective virtue. I mean, you can do that if you want. But my point is that that's part of the problem,

that there isn't anybody who's actually concerned about this. The folks that scream about fiscal responsibility will only do so if the other party is in the White House. And that is the key issue, that when Democrats say there's tax cuts we can't afford, they don't seem to care about affordability when one of their own is in the White House spending recklessly. And when Republicans say we can't afford to do the spending, they don't seem to care when their own party is in the White House spending recklessly. So it takes two to tango with this, and I've been very conscious of that for a long, long time. But that adds to – it isn't just a comment on political dysfunction. It adds to the problem. You're not going to get a bipartisan solution.

And you say, well, wait a second. Maybe one day someone will come in and we just have got to get more revenue. You're going to have to tax higher. This is where one of the most important charts I think I've ever put in Dividend Cafe is there at thedividendcafe.com this week. And that is showing that the top 1% of our country do generate 22% of the income. And you might say, wow, that seems kind of unfair. I look at it like, wow, that's really productive that 1% of people could generate 22% of income. They must be a really innovative, productive bunch. But maybe you're on the side of, no, they're lucky, they're silver spooned or something you don't like about them, the cronies or

griff. There's always class warfare and inequality arguments out there. That's not my point here. My point is the math. They pay 42% of taxes. So they generate 22% of the income, but they are paying 42% of the taxes. How much room do people think there is to go? of top earners also makes much more, pays much more of the national tax as a percentage than they do receive national income as a percentage. The two brackets that are upside down that generate a lot more of the national income relative to the portion of national tax they pay. And again, just look at this chart for the kind of visual around our middle class. It's the 42 to 85K and then the 85K to 150K tax bracket. It's not even close. They're generating a significant amount of more of the national income as a percentage than they are paying as a total tax as a percentage. Now, does anyone think that politically we're about to go say,

hey, I'm ready to solve the deficit and I know how to do it. We're going to raise taxes on the middle class. If so, Walter Mondale, good luck in your race, 49 to 1. And also, forget 49 to 1, Walter Mondale, it's also 40 years ago now. Nobody is talking about raising taxes on the middle class. But that's the only brackets where there's even room to do that. And so we don't have a revenue solution here. Revenue as a percentage of the economy is dropping, but it isn't because they're collecting less taxes, they're collecting more taxes. it's just that expenses are growing quicker the amount of government expenditures as a portion of the

economy is growing in the denominator at a faster rate so you say why does this matter i have money i have a job maybe maybe it doesn't matter for you I'm not predicting an apocalyptic moment of the world, a bang tomorrow. This is actually, I think, an argument for this low, slow, and no growth Japanification as a real slow, torturous way of dealing with it, especially multi-generationally. But don't kid ourselves. Even an anti-doom and gloomer like me recognizes there's also intermittent shocks, exogenous shocks to the system that will come in that then will be less prepared for. And so there'll be intermittent moments of crisis, but really in a structural secular sense, there's downward pressure on growth. That suppressed economic vitality, that suppressed economic vibrancy as a painful part of dealing with this, well, it is true that that might not mean this apocalypse and sky-falling moment that so many like to write books about. But it may very well be leaving an opportunity set to our children and grandchildren that has significantly diminished what we've enjoyed. And I find that unacceptable.

It may very well mean forfeiting geopolitical advantages and strategic leverage with our adversaries at a point where we may need it. It may mean less tools to deal with other future crises. It may mean lost government services that are of a good and important variety, let's say military defense, because we have to increase the outlays to keep up with commitments made for transfer payments. Social Security, Medicare, we owe that money. So the entire picture is not worthy of predicting, hey, if we don't do something by this date, this is going to happen. All sorts of people, various, you see this type of stuff out there with climate and with the national debt and with foreign adversary issues. And right and left, there's something about shock

and awe that is sensationalistic enough to lure people in. And they love to do so by attaching a particular prophecy to a particular date. I'm not doing either of those things. I'm suggesting that there's structural impediment to forward growth that investors have to be aware of, have taken into account the need for greater fundamentals, cash flows, and protections around the fact that there is an embedded instability, a fragility, and yes, downward growth that will be real to wages, jobs, and profits. It already has been. This is no longer a guess.

This is no longer a prediction. We're living in it. We've lived in it 15, 16 years. At some point, as they say, I've seen enough. This is the world we're in and we're not trying to figure out what to do about it. There isn't like, okay, well, we have this awful problem of 34, 33 trillion in debt. What do we do? for $33 trillion of debt, what do we do? All we're doing is adding $2 trillion a year to it. So that's why I say it's really bad if I say, hey, this family has $100,000 of credit card debt, and they can only pay $2,000 a month to reduce it. They're going to have a real declining quality of life for years as they sort through it. That's bad. But it's way worse if I said, this family's got $100,000 of credit card debt, and they're still adding $2,000 a month to it. That's bad. But it's way worse if I said this family's got $100,000 of credit

card debt and they're still adding two grand a month to it. That's where we are. So this isn't political. This isn't even policy prescriptive. It is a macro commentary about the state of affairs so you can understand where we are and why some of the just easy solutions, let's go cut spending, let's go raise taxes. That's not going to do it. There has to be a truly mature understanding that we will not get out of this pain-free. There has to be a commitment to growth, which is not at all remotely there. There has to be various acceptance of the political dynamic that in order to get something done, it's going to address a couple of things that not everyone's going to like.

You know, all that's on the table. I don't happen to, for a living, work in the public policy sphere. I have a lot of opinions there, but I don't have to write the pieces to what they need to do about it. I have to tell you guys the truth, which is that there's a macroeconomic impact around excessive government indebtedness, puts downward pressure on future growth, affects future quality of life, if not for yourself, for your children and grandchildren. Therefore, that impacts the way we want to invest money. That's what I have to do. That's what I'm doing. And that's what leads into this Japanification thesis.

I'm going to leave it there. All of this negativity exists in the context of believing that there's pockets of cyclical economic growth and productivity boons. So the CapEx renaissance scenario is very, very plausible right now. It could come at a downside of too much of its deficit funded from government, transfer payments, CHIPS Act, industrial policy, corporate welfare. You may get an advantage in one hand and a disadvantage in another. I'm not favorable to that. But my point being, there's other aspects organically within the economy people may be really underestimating where some of the advantages of a CapEx renaissance and boom to productivity could be. But it's cyclical. And in the larger structural context of this kind of government debt, we have to incorporate that into the way we invest money

and think about the differences and go forward macroeconomics versus where things were in past decades. I'm going to leave it there. Please reach out with questions anytime, questions at thebondsongroup.com. And in the meantime, please go Cowboys, beat the Packers. And thank you for listening. Thank you 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, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered

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