The Dividend Cafe - Election Weekend Musings

Episode Date: October 30, 2020

I thought it appropriate to devote this weekend’s Dividend Cafe to the election, now that this long-awaited event is almost here. I thought about calling it an “Election Eve” edition, but considering 82,042,050 people have voted as of press time pre-market on Friday, which is about 64% of the total number of people who voted in all of 2016, it hardly feels like “election day” is “election day” … Hopefully it will just be the day they count the votes. One way or the other, we are well into voting (28.3 million people have voted early in-person; 53.6 million people have returned mail-in ballots; 36.7 million people have outstanding mail ballots; and then there are all those who vote on Tuesday). And we are getting closer to this year's election being over. It has been the strangest election season I can remember when all is said and done. But today in the Dividend Cafe we’ll make it a little more personal, a little more specific, and with apologies to those looking for me to throw punches, a lot less tribal. Opinionated? Yes. Fiduciary? Above all else. Objective and fair? To that end I work. 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 this very special Dividend Cafe podcast. We are recording in the middle of the market day on Friday, the final Friday before Election Day. And it's a little strange to refer to this coming Tuesday, November 3rd, as Election Day, because as of this morning, as I was finalizing my written dividend cafe, there are over 82 million votes that have already been cast. That represents about, I believe, 62, 64 percent of the number of votes that took place total in 2016. That's over 50 million that are written in. It's over 30,

or excuse me, mail-in ballots. And it's over 30 million that people went to the voting booth and have already voted with early voting in the states that have that. So really, by the time people were voting on Tuesday, we could very well have 75% of the votes already cast, and maybe more. And so we also appear to be headed towards really record turnout. But I wanted to do with our time today is kind of talk about a few things around the election. I would love to not talk about it. I'd love to kind of dive into some of the other things that are near and dear to my heart right now. But it really is, at this point, kind of the major issue. I think if you read the DCToday.com this week,

I alluded several times to the fact that some of the selling pressure is really better articulated as lack of buying pressure. And there are so many buyers on the sideline right now just sort of waiting to get to the other side. And so it's not at all surprising to me that you've had this kind of bloodbath in markets this week. And by bloodbath, you have to remember we lost a couple thousand points, but we were up a couple thousand points in the few weeks before that. And so, you know, it's all sort of relative. What was I going to say about that, though? Oh,

What was I going to say about that, though? Oh, the other piece I believe I put in Thursday's DC Today is that in the 10 days, 10 market days before the 2016 election day, nine of those 10 were down as well. So this is not new. it's unique this time because at least from my own anecdotal experience, although, you know, with as many clients as we have and two and a half billion dollars of assets that we steward, I don't think it's really just anecdotal. I think it is kind of representative. But there's so many questions that we've heard about, should we hold on or should we wait and deploy in cash? And do we want to pull money out while we get through the election and that kind of stuff and obviously I don't believe our clients are different than what might be a representative of some of the questions that are out there so when you get lost selling pressure and you don't have buying pressure to offset then it's difficult for markets to move well maybe that

will lighten up next week and maybe it won't. And this is kind of the two things I would say about what has to happen for markets around the election. First is clarity, certainty, closure. Okay. Results. You got to have results. But then second is markets have to kind of be able to gauge what they think about those results. And you can't start doing the second one there until you've done the first one, right? And I think that the possibility of us going to bed on Tuesday night, November 3rd, knowing the fate of the Senate and knowing the presidential outcome is very unlikely. It's not impossible, but I think it's unlikely. Look, very candidly, I'm just saying, anything I say today, I'm saying with total objectivity and impartiality. You could disagree with some of it, but I'm certainly not saying it around anything other than what I believe to be the case objectively, descriptively, not prescriptively. I'm fond of using those two rhyming adverbs to

draw a distinction. It's not what I want to happen. What I really want to happen would surprise most people, okay? That's not even really remotely on my radar right now. It's just simply kind of me reading the tea leaves and evaluating data and offering some perspective. If President Trump, as results start coming in on Tuesday night, is getting walloped in Florida and it looks throughout the evening as if Florida is a lost cause, I think the presidential race is over. And I think most anyone in the Trump campaign would tell you that. I don't think it's going to happen, though. I think that's highly unlikely. He could lose Florida, but I think he'd end up losing it very close, in which case we probably wouldn't know Tuesday night, certainly not early in the night. He also may win Florida. And, you know, the betting odds suggest

that he will. You remember in 2018, where most things in the midterms went the Democrats away, not the Republicans. But in Florida, they did elect a Republican governor that night, Ron DeSantis. They did elect a Republican senator that night, Rick Scott, who had been the governor before. Both those candidates have been down in the polls, but won. Both those candidates were facing a lot of blue wave throughout the country that night, but won. And both candidates won with a recount. It was very close and took several days to sort of sort out. It actually took a couple weeks to really officially sort it out but took a few days to kind of know. So I'm not I don't think that President Trump's going to be

losing Florida big but I think it's possible and that's one of the scenarios where then all of a sudden it's kind of like the suspense goes down in the other states thereafter. But let's assume that it's going to be very close in Florida and perhaps even a President Trump win there, which I think is a real reasonable couple assumptions. Then you're going to go on to Pennsylvania, certainly of the Rust Belt type states, that kind of upper Midwest, a lot of blue collar voters that voted for President Trump in 2016 and caused him to win, surprisingly to many, Wisconsin, Michigan, and Pennsylvania. I think that Pennsylvania is the one of those three that he has the best chance to win. The polls indicate so, the betting odds indicate so.

I've done a ton of research in Pennsylvania and think that there's a lot of reason to believe he could end up winning that state. He's down in the polls there for whatever that's worth, but not as much as he is in Michigan, Wisconsin. So the point I'm trying to make is you could end up with just too close to call throughout election night Tuesday in Florida and in Pennsylvania. And what that does is it means we have a race, it's not over, and that we don't really know where it's going to go because there's going to be a lot of late ballots that come in that will not get counted for a few days thereafter if it stays that close. President Trump does need to win Ohio. He could theoretically not win North Carolina or Iowa, but he'd have to pick up another state somewhere else. So let's just assume that North Carolina, Iowa, Ohio stay.

I think that that's likely to happen. We've already talked about Ford and Pennsylvania are really very, very close, very unknown. And then assume he does lose Michigan and Wisconsin, then you end up very likely with Arizona determining the fate because Colorado and Nevada are not really purple states much anymore. They seem to be quite blue. And the polls seem to indicate and the Trump campaign's own spending and priorities indicate they don't believe they're going to win in those states. So if that's the case, we kind of go west throughout the night, and it could be a very, very late night, and Arizona results may not come until the next day as well.

So I'm just trying to create a realistic narrative for you as to why it's unlikely, other than that scenario I talked about in Florida, that you're going to really have a market day on Wednesday that is baking in what happens. And then let's just kind of look to what I don't think anyone wants to happen, but really could, which is that it's so close in so many places with so much kind of heat around things and questions and controversies and lawsuits and things like that, that the whole thing gets dragged on, not just till Wednesday, Thursday, or, you, a recount on Friday, but I mean, maybe even a court battle for a couple of weeks. I wouldn't put that as the most likely

scenario, but it's certainly not a terribly far off outlier of a possibility. Then you factor in the Senate, where you have a Republican lead right now at three seats. They're very likely by double digits to pick up Alabama, so they end up at four-seat lead. But then they appear also by about double digits. Not all polls have a double, but to be on track to lose in Arizona and Colorado with Cory Gardner in Colorado and Martha McSally in Arizona, again, the polls could be wrong. I'm just simply going through the data as it appears. That would mean that the Republicans are then at a two-seat lead and would need to protect two, or excuse me, three seats out of Iowa, Montana, Maine, and North Carolina. Georgia could end up becoming close, but that's a tricky one

because there's two Republicans running that are splitting each other up and one Democrat, and then they'd have a runoff once you know who the top two are, and then the combined Republican support probably would end up preserving that race, although it would be close.

I wouldn't say it's a for-sure thing. And then there are Republicans who say, look, the Republicans are drawing closer to Minnesota and Michigan. It's not that close, but it's possible. But I'm just sort of assuming as a base case that Michigan, Minnesota stay blue, Georgia stays red. And then you have the Iowa, Maine, North Carolina and Montana races. Both Iowa and Montana are looking a little bit better for Republicans than they looked. North Carolina and Maine, not Carolina, and Montana races. Both Iowa and Montana are looking a little bit better for Republicans than they looked. North Carolina and Maine, not so much. But my point is whether it's 1.3 points, you got four seats that are very close. And since the whole fate of the Senate

majority is on the line, it strikes me as incredibly unlikely that on Tuesday night, we have resolution. You could have resolution in every state but one, and that one is going to break the tie. You could have resolution in every state but three or four or five, and it really has to get dragged out. So I would not be optimistic that there's going to be a clear outcome on Tuesday night. I think it's possible, and very candidly, if there is a clear outcome Tuesday night, it most likely is because of a blue wave. Okay? Now, then we get through that number one. All my comments so far around the kind of first market impact, which is clarity, closure, certainty. Then you go to number two, which is in the policies specifics. And here I think that you have to kind of look to the reality of where these variables exist.

Does Joe Biden win? And if so, does the Senate go? And in both cases, what's the margin? Because that helps get into the mandate. Let's say the Democrats end up with a 50-50 Senate and the VP breaks the tie, or even a 51 Senate. Some of the things that may get done that could be concerning to investors are not likely to get done with only a one vote margin. They may need enough margin to overcompensate two or three dissenters. And certainly that's been the case for Republicans for a long time, that 50-51 is usually not enough. You need 53-54 to offset the two or three that could go another way on a given vote.

So I have laid out in DividendCafe.com, some of the issues that I accept are legitimate issues that investors will want to then know. After we know the results of the election, where are we going with capital gain tax in 2021 and thereafter? Where are we going some of the policy ramifications of private equity? Where are we going with personnel? You know, there's all this talk about Joe Biden appointing Elizabeth Warren Treasury Secretary. I don't believe he will do that. But, you know, I think both networks are kind of talking about it, you know, left and right networks talking about it for different motivations. So it'll be a conversation. It'll be out there. I don't think it's very likely to happen. The implications and energy I've talked about before, very likely to happen. The implications in energy, I've talked

about before how in a really kind of paradoxical way, large ingrained oil and gas companies sort of benefit from increased regulation and headwinds in the space to the extent that it really kind of knocks out smaller competitors and increases market share because regulation is a subsidy to bigger, more entrenched companies. So in that sense, you get a case where something could be kind of bad from a policy standpoint for a sector but good for certain companies. There's a lot of policy things that will be out there, but none of those things, we may or may not know the election results next week,

but we're most certainly not going to know the policy expectations because a lot of these things are going to change. And then the timelines and what the legislative hurdles will be. And so we'll get better feel. If so, let's just say, OK, humor me here and forgive me those of you that don't want me saying this, but let's assume that it is Joe Biden who's elected president. What is the thing I'd be looking to to really best gauge some of the early administration policy objectives? It's not really candidly going to be some of the bills he says he wants to sign and some of the campaign promises about legislation or policy commitments. It will be the personnel.

legislation or policy commitments, it will be the personnel. Just as it was with President Trump four years ago, President Obama eight years ago, got a much better feel. And by the way, all of these presidents, in some cases, I would consider this to have been a negative revelation, in some cases a positive. It's all kind of relative. But personnel is policy, and you get a feel for what a certain inclination, a certain philosophy, a certain tendency is going to be by some of the personnel they're surrounding themselves with. So yeah, I already told you, I don't believe it's going to happen. But if Joe Biden's elected and his first day, he's standing side by side with his new Treasury Secretary, Elizabeth Warren,

and new Economic Policy Advisor, AOC, obviously the markets will respond in a certain way. But if perhaps a more moderate name, a little different inclination philosophically is present, that would change things, I think, in the eyes of the market. So we'll see. Personnel would be the earliest indicator because you're not going to get in the lame duck session pre-inauguration some real clarity on what exactly is likely to happen policy-wise there's too many moving parts and so uh personnel becomes an early tell if you will and that and that applies to the trump administration too i talk about this in dividend cafe i have a lot of friends in the administration that I happen to know are not going to be staying. That, you know, it's very common after a first term, if there is a reelection, they kind of have had enough of Washington and

they're ready to go back home and so forth. It's very rare you see senior people with cabinet and staff positions that go eight years, six years. It very rarely happens. And so then you might have, if President Trump's reelected, a whole new cast of characters. And that could be a negative. It could be a positive. It could be a mixed bag, which is kind of what I might expect. So I just want to be candid about those things.

That's what investors likely face. But let me try to bring some of these comments to a close here um first i want to say and i poured my heart out on this in divin cafe because i am a political junkie to some degree i'm a weird political junkie right now because i seem to make people mad all the time on both sides of the aisle um because i don't i feel a little bit homeless right now, and some of my roots ideologically are not really represented in this race, and so I end up being a little too right for my friends on the left, and I end up not being supportive enough of the president for those that are big fans of the Trump administration,

and that's okay. All I could be is who I am and say what I believe. I try to advocate for truth. I don't like the divisiveness around the stuff. I don't feel that I'm overly tribalistic or polarizing on it. Others could disagree and they may have a different perception of me than I have of me. That would be the first time. But what I will say I think here is totally apolitical. Not in any way, shape, or form rooted in my view of these two candidates and my own political feelings. But I don't think the stuff that's going to make or break this election is going to determine the winner.

I don't think the things that have made this one of the most toxic and polarizing and tribalistic times in American history, or at least in recent history. I don't think the challenges that we face as a country on the other side of this election. I don't think any of these things are primarily driven by top of the list economic or market sensitive, investor sensitive topics. There's always overlap. There's always a kind of, you know, affectation. But we really are in a cultural crossroads. And I think that far more than what is often economic heat is, in this case, cultural.

Broad range of issues. I won't get into it. But the social and cultural fabric right now in the country is vulnerable and it incites a lot of emotion on both sides. And for investors just trying to make dollars and cents of all of it, it's not really the primary stuff going on in this election. It just isn't. Now, as I said, you talk about private equity, capital gains, you talk about economic growth. You know, yeah, there's a spillover effect for sure out of one candidate and another different policy commitments and so forth.

But my prayer for the country is that there will be some healing and unity in the years ahead around the cultural divide. But to the extent that I'm a professional investment advisor, I don't believe that the centerpiece of our divide is what's going to happen with capital gain tax rates. So a lot of the things end up becoming incidental to larger issues. So that makes it very difficult to handicap and assess and articulate. The final closing thought is this, and this may be the most important thing I say to you that had any of you have listened this far and yet had no interest at all in my political handicapping, my assessment of the week and weeks ahead, and don't even necessarily care on some of the issues I'm bringing up out there.

You just said we want to know bottom line, you know, where we go, what's the most important investor takeaway around this. And the most important investor takeaway is that neither outcome is going to in any way move or shake the biggest investor implication out there. President Trump and President Biden are both going to be presiding over unfathomable levels of national debt. Both candidates are going to see that debt go higher, not lower. debt. Both candidates are going to see that debt go higher, not lower. Both candidates believe, rightly or wrongly, that greater fiscal stimulus is needed to right some of the wrongs in the economy. Both candidates are inheriting both deficits and national debt levels that have forced a huge decompression down of interest rates. For the next four years, no matter who is the president,

you're going to have the most interventionist central bank in our country's history, where monetary policy, and particularly in its sort of marriage to the Treasury Department and fiscal policy, plays a larger role than we've ever seen. That's apolitical. That's going to be there no matter who is the president. And the great divide over deflation, inflation, those things are not going to be more one way if it's Trump or one way if it's Biden, we have disinflationary headwinds that are going to be the talk of town for some time, regardless of who's president. And so there's tons of political stuff out there that will affect tons of economic stuff out there.

But the largest economic thing out there is going to be there in a most nonpartisan way possible. And that is the reality of the size of government divided by our overall economy and its implications on bond yields, on interest rates, on credit markets, on liquidity, and on deflation and inflation. And those things in 10 years, someone will look back as an investor and say, what I did around deflation, inflation, interest rates, bond yields,

had a lot to do with my outcome as an investor over the last 10 years. Not a lot of people are going to look back in 10 years and say that election 2020 was. That's my view. So there you go. I'm going to leave it there. We are doing a very important national call. We'll have a replay by podcast and video

of it Wednesday. But Wednesday, 11 a.m. Pacific, 2 p.m. Eastern, we will be doing a day after debrief. And as I've said, I don't think we'll have a lot to debrief, but we'll debrief our attempt to debrief. How's that? We'll see how it goes. Be safe. Be warm. Enjoy this weekend. And for a kid who was walking door to door for Ronald Reagan when I was in first grade,

I will be the person, I guess guess to say that I promise you there's nothing more important this weekend or next weekend than your friends and your family and those things will trump politics every day of the week and twice on Sunday have a wonderful weekend

we'll see you again soon thanks for listening to and watching the Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC. 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. Thank you. may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice. The Bonser Group and Hightower shall not in any way be liable for claims and make

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