The Dividend Cafe - Did Someone Say Trade Deal?

Episode Date: November 22, 2019

Topics discussed: As of press time mid-day on Thursday, the market was down about 250 points on the week, which is not noteworthy in that 250 points is nothing, especially divided by 28,000, and especially because it is three or four days of action. I only mention it because (a) Some of you are getting bored by the low volatility market of the last few weeks and this makes it sound like markets moved, and (b) Some of the chatter behind the couple points we moved are interesting. But I am not going to pretend that there is much substance behind a 250 point move; markets can move 250 points on a sneeze! What I will do this week is provide some history, provide some economics, and provide some perspective – because frankly, I don’t think there are a lot of other places to get it right now! Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. our setup and our studio a little different. A lot of things going on as we get ready to go into Thanksgiving week. And so next week, we're not going to have a full, elongated dividend cafe. We do an annual Thanksgiving edition that will be a little bit different. But this week, I do want to try to bring you some degree, and I'm going to look at where the market is right now on the day so I can give you an up-to-date number. The market is down a little over 200 points on the week, not a ton. And I want to be able to give you a little context of what's gone on in the market this week and then just the bigger picture things that I'm very much enjoying focusing on right now. It's really shifted

from a lot of transitory market impacting events to things that I think are much more secular, much more sustainable in their impact and in their relevance to investors. And those are the things that we're looking at and studying and making decisions around. I'll explain what I mean. So on the week, first of all, it's very important for me to say the market goes down 200, 250 points in a week and it was at 28,000 on the Dow. It doesn't need a reason. I mean that is such a meaningless movement. It literally could go that way for any reason it wanted.

It could go up 200, down 200 any given day, let alone three, four days. Now, by the time you listen to this, we may very well be in a different place. We still have a couple hours left on Thursday. We have a full market day Friday. But my point being that, you know, there's been a little bit of downward shift this week in markets, nothing to really raise eyebrows. And I think that it's a bit of volatility premium on some perceived vulnerability in the trade deal, the phase one deal. You president was doing some more jawboning this week, and there's reports of reports of a person saying to someone who heard that they said, you know, China not wanted to give in on this or won't be ready in time for this.

We are not really following headline reports on this stuff very much. To the extent that anything meaningful and substantive and news-driven happens, then I assure you, we will know, and I assure you, by the way, that if the whole phase one trade deal blew up and a bunch of new tariffs were being escalated, the market would not be going down 200 points, okay? It would be a significantly more disruptive event than that. So the idea that, oh, the market went down a couple hundred should we adjust around the the perception of increased volatility that perception's there anyways and you can't trade off perception there is a chance

that things blow up in the trade deal there is a chance they get way, way better. And there's this lion's share of chance that belongs in a heavy medium spot where this phase one deal gets done and it avoids further escalation but doesn't do much to substantially improve where we are now. the long tail risk or the down tail risk, the left tail risk as we call it, meaning a very unlikely event that's positive or unlikely event that's negative, we're going to stick to where the higher probabilities are. And in the macro, the higher probability is that trade will not be the headwind in 2020. It was in 2019, but then it's not going to become a tailwind either. We're going to more or less be sitting in a neutral position. And I would love for that to not be true. I would love for there to be a much more vast, comprehensive trade solution that gets adjudicated. But I'd be very surprised if that were to happen. And as far as the kind of macro environment of things that we do know about,

that I am really focused to not allow people to think things that just ain't true. The U.S. dollar going up is an important macro event, an important big picture circumstance in capital markets and corporate profitability for both international companies and U.S. companies, for multinational U.S. companies. But this idea that what we most fear from a rising dollar is that U.S. companies are weakened, I think misses the entire point of what's going on. And my entire theme is most of what's driving global economics is excessive indebtedness, primarily sovereign debt, countries that have spent too much money and they're not in a position to do much about it.

And the fact of the matter is that you have so much increase in dollar-denominated debt, much increase in dollar-denominated debt. You have so many trade deals where the dollar is the currency by which the trade deal is getting paid, even when the party in the trade deal is not the U.S., that the strong dollar has been hurting foreign countries more than it's been hurting the United States for at least the last couple of years. The economic data is overwhelmingly clear on that. And so to the extent that the idea of a weaker dollar people believe would be a big boost to the U.S., it could very well be a big boost to those countries that have been impacted by dollar-denominated debt. A lot of that is in the emerging markets. It's a complicated subject, but it's an important one to understand and how you want to weight asset classes in your portfolio.

But I really think the more important factor is why we're in this mess that we are to begin with and understanding that right now you could, for those who just think government spending more money, it's kind of a Keynesian economic philosophy, is the solution to almost everything. Or then the monetarist belief that just the Fed, or any central bank, depending on the country you're in, having easier, more accommodative monetary policy,

cheaper cost of capital, additional liquidity, that that's all you really ever need. Anyone who believes that those two-headed monster, monetary fiscal stimulus, is the solution to economic growth, I don't know what else they could possibly want than what they're getting right now, not just in the U.S., but in various significant countries all over the world where you have hyper-accommodated monetary policy, and you certainly have countries running as big a deficit as they've ever run. And yet, with that two-headed monster of stimulus, you have virtually non-existent growth in Europe and Japan and so forth. Even here in the U.S., the Fed now with a 1.5% federal funds rate, significantly below the natural rate. And you do have a really hot labor market. You do have a very confident consumer. But the GDP growth is still below trend line. It isn't like our economy is

growing at 5%. It's growing right there in that 2% range. Maybe it'll end up being closer to 3% after you get a little more time under the belt. But that's the point I'm making is that the economic growth is being stunted and it's not by lack of fiscal stimulus. And it's being stunted and it's not by lack of monetary stimulus. It's being stunted because of excessive debt that is a drag structurally in the economy on growth. And therefore, we have as investors a duty to understand what that means in the present and the future. And in my mind, it A, boost up the valuation of assets presently in circulation, if you will. diligent in where there is sustainable value creation, sustainable cash flow that will come from legacy investments. And that's the podcast version of how I can lay out the thesis driving a lot of what we're doing right now. In the long term, we believe in free enterprise,

we believe in the profit motive. But we believe that there are structural impediments, heavily so in Europe and seriously so in the United States. And we want to be cognizant of what that means to interest rate market. Does it behoove people based on my thesis that this is putting downward pressure on yields to go load up on heavy borrowing because rates are likely to stay very low? What's the problem with that thinking? Because it's intuitively interesting but there is a problem that you still have to have a return-seeking investment to borrow any money at any cost to go into. And ultimately, this is where the supply side school of thinking that I belong to is very important. You need the production part of the economy to be growth-driven. You cannot manipulate that for long. At some point in time, the low cost of capital does not assist you with

the return on invested capital, which is what we have to be focused on as investors. So for those that just kind of want to hear how the stock market's doing or how we think it's going to do next month or whatever, the report's still reasonably sanguine. It's been an incredibly positive year. As everyone knows, stocks, bonds, even alternatives have done a good job diversifying risk and still delivering some form of positive return. So 2020 is going to be a very different year and we're going to have a lot to say about 2020 in the weeks and months ahead. Going into early January, we're going to continue to do our annual tradition of releasing very extensive thought around our views of how investors ought to be positioned in 2020. But as we get ready to end this year, we believe that the short-term factors have gone all positive and it's enabled risk assets to rally and that the longer-term concerns are not the things people are talking

about. You do not hear anyone. It's not Republican versus Democrat. It's bear versus bull on any side of these things, politically, economically, philosophically, and market orientation. No one is talking about the impact of excessive debt in secular structural growth and what that means to asset classes, particular asset classes, and how portfolios ought to be positioned. People are more still focused on yesterday's battles. I don't know if the Fed funds rate in a year will be at one and a half or one. I don't think it's going to be at two. But whether it was at two to zero, anywhere in that range, it's going to be very low. We know that. The Federal Reserve will not be the primary driver of market behavior in 2020.

The Federal Reserve will not be the primary driver of market behavior in 2020. Ultimately, we have a long-term responsibility to generate sustainable results for clients that help meet objectives. And I think that we want to ask different questions that are being asked. So that's my lesson in Dividend Cafe for the week. I'd commend you to the podcast that my partners and I did a couple of days ago on emerging markets. I thought it was a very good discussion that our investment committee had, why we view emerging markets as not only a diversifier, but a growth creator in a client portfolio right now.

And then next week, we're going to have a special podcast for you around the Mayor Pete candidacy in the Democratic Party and where there might be some particular things to pay attention to for investors there. Beyond that, then that will be early in the week and then at the end of the week, we'll have a special Thanksgiving message for you. Thanks as always for listening to and watching the Dividend Cafe. I really do ask you for the favor of sharing it with those you think would be interested as we continue to try to boost up our traffic, get better search results and become more findable and whatnot. Your little quick review or whatnot, not only if you send it to us, we'll get you a free advanced copy of my next book, but it also helps us as we try to grow the message that we believe in so much here at the Bonson Group and

that we use the Dividend Cafe to attempt to spread each and every week. Thanks so much. Thank you for listening to the Dividend Cafe, financial food for thought. The Bonson Group is registered with Hightower Securities LLC, a member of FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor of the SEC. Securities are Thank you. Past performance is not indicative of current or future performance 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. It does not constitute investment advice. The team at Hightower should not be in any way liable for claims and make no express or implied representations or warranties as to the accuracy or completeness of the data and other information or for statements or errors contained in or omissions from the obtained data and information reference herein. The data and information are provided as of the date referenced. Such data and information are

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