The Dividend Cafe - Excited and Concerned

Episode Date: September 24, 2021

This week’s Dividend Cafe does cover a lot of topics, but all through the prism of looking at the recent past as well as the pending future. I think you’ll find it an interesting historical journey and, even more so, a good analysis of so many investment and market realities. The market enjoyed a little roller coaster this week, and I also dive into some lessons from that. I think a lot of stuff that gets covered in Dividend Cafe may mean nothing to some readers. It all means something to me, but different readers may find different topics with varying levels of application and interest. But the one universal – the one thing I constantly pray will come through in the pages of Dividend Cafe – is the primacy of behavior. My unpacking of matters monetary policy, valuations, economic growth, profit trajectories, market history, alternative investments, and all those things – none of them – not a single one – will ever trump the underlying thing I most care about for investors: Their own behavior. Some bad things happened this week – for those who behaved badly. Nothing terrible happened this week – for those who behaved well. That is more or less a dual truism that I could repeat every single week. In the meantime, let’s jump into the Dividend Cafe! 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. Hello and welcome to another week of the Dividend Cafe, a podcast and video. I'm recording here in the studio in our Newport Beach office. And it's been quite a week. Not only quite a week in the markets, but it's just been an abnormally crazy week all around. And so abnormally crazy for me means crazy in a way you wouldn't really believe because every week is pretty crazy for us and for me personally. But this has just been one of those.

And that's good. That's fine. I will be back in New York City next week, flying out here this weekend. But I wanted to talk today about a particular theme. And then it kind of has a couple investment applications, which is just sort of this moment in history. And I actually do talk a lot in Dividend Cafe.

I write a lot about history, about past events, the lessons that we extract from them into the future. So it's nothing new. It's nothing profound. It is profound in the sense that I believe all of the stuff that we try to talk about from history. I did a 9-11 retrospective a few weeks ago, and I've done an extraordinary amount of work over the years from the financial crisis. I believe at the one-year mark of the COVID collapse, we dug into some of

those things. There is this kind of personality defect I have of being hyper nostalgic, both around good and bad events. But that's just how I'm wired. And that's not really ever going to change. But then I also believe that there's an incredible amount of utility that we get as investors from understanding things from the past. And there's an incredible danger from not doing so, that there's at least a context and a kind of package of information that's available from past events that can help inform the way we view things in the present and preparing and for the future. But this is a little bit different, what I'm referring to this week, in that it's not just another kind of, for those of you who don't share my love of history and my appreciation for learning from the past and the sort of emotional nostalgia, you may be kind of rolling your eyes like, oh, another, you know, one of these. But

I actually think there's a few data points from a particular moment in time in the past that we can contrast to these same data points now and get a really compelling lesson out of this and at least some motivation in terms of the need of the hour, the urgency of the present predicament, and get a better feel for what the behavioral risks are that people might be subject to with one extreme and the other that can become very problematic for their successful achievement of their financial goals. And so what had happened this week was that Strategas Research is one of the macro research firms that I am an incredibly diligent consumer of. We are an institutional client of Strategas Research.

And over the years, since I became very fond of their work product, I've developed a relationship with a lot of the key analysts and thought leaders in their firm, including their founder, Jason Trenert. But he started the firm. Trenert. But he started the firm, Jason, as is the case of a number of the leading macro economists and macroeconomic publishers and thought leaders in our business, had a background at ISI, which was a large institutional research firm. It ended up being bought by Evercore. which was a large institutional research firm. It ended up being bought by Evercore.

And I will tell you that Jason went out on his own at a really interesting time, started his own firm, something obviously I have a fondness for because I was a pretty senior guy at Morgan Stanley in the wealth management world that left and started his own firm. And Jason started his in 2006, 15 years ago. And he wrote a piece, just sort of his own personal reflections on his 15-year journey so far, where they were in 06, where they are now.

And I won't bore you with all that, although it wasn't boring for me. I'm fascinated by those kinds of stories and I loved reading his piece and very proud of what they've done. And I'm very blessed to be a client of stories. And I loved reading his piece and very proud of what they've done. And I'm very blessed to be a client of theirs. However, there was a portion in which he was looking at just kind of where some things in the world were 15 years ago. And that's why I'm wearing my reading glasses, because I want to be able to read you some of these things that I think are

just fascinating. I mean, we know, first of all, make a point in time here. When you look at the last 15 years, okay, 2021 minus 15 gets you to 2006. And you have to remember, 2006 was before the financial crisis. Now, barely, you know, so much time has now gone by. 06 was five years past 9-11, but it was still two years before the kind of crux of the financial crisis. And it was one year before the original leakage that became the financial crisis, which was the crack of subprime. It was the fall of 2007 that the CDX broke and subprime kind of began its unwinding. And then eventually into 2008, we had the fall of Bear Stearns, eventually the fall of Fannie and Freddie, and then, of course, Lehman Brothers. And then at that point is when all hell broke loose and we ended up with TARP and so forth and so on.

But to think about this, that like 15 years, you have the financial crisis a couple of years later. The COVID moment now was at the other bookend of this. And you have a Dow that 15 years ago was at 11 400 and now is it 35 000 and it's 11 400 to 35 000 with a almost 50 percent drop from there uh from because from the you the moments of 2008. So it really is kind of extraordinary what all has happened in financial markets the last 15 years just by starting with the equity level. But then you think, okay, well, all of this stuff has taken place and I'm going to get the ones that have not changed out of the way to make a point.

Oil prices were $70 15 years ago. They're $70 right now. And oil got up to well over $100, and it came down, even apart from COVID, it came down into the 40s. Then at the COVID moment where Saudi and Russia decided to go off of their thing, obviously oil got even much lower and we were at risk at one point of having the potential of sustained $10 oil if we had that collapse of demand met with a flood of supply and kind of some cooler heads prevailed there. But oil going from 70 to 70 does ignore the fact that it was up 50% and down over 50% along the way. But I want you to listen to some of these other statistics to think about

what I do not consider to be ancient history and where we are today and how absolutely fascinating it is for you as an investor, for you as a citizen, an adult member of society, an actor in this economy. But then you can imagine from our vantage point, running money 15 years ago, running a portfolio for a client, making decisions about risk and reward. And now here we are today. And 15 years ago, you had a Fed funds rate that was over 5%. about risk and reward, and now here we are today. And 15 years ago, you had a Fed funds rate that was at over 5%, and it's at 0% today. You had a 10-year Treasury bill that was 4.8%, and even that was way lower than at various points, of course,

it had been in recent history. It's at 1.3% now. Imagine being really overly confident in an inflation thesis in 2006. Now, I wouldn't want to have had an inflation thesis in 2006. Well, housing prices were going through the roof. We'd come off of the – we were at the very end innings. We didn't know it at the time. We're in the final inning of housing

appreciation that you know became the bubble and the burst and all of those things but there were plenty of reasons people to be talking about inflationary pressures there and then here you are 15 years later with oil prices flat and and bond yields have utterly collapsed. Just anecdotally because it's fun. The average life expectancy for a male was 75.2 15 years ago. It's 75.1 now. So it's actually kind of stayed about the same, gone down a little. When I say kind of fun, I shouldn't say that because the reason for it is kind of sad.

It's entirely related to the big increase in opioid use and drug use and various quality of life related issues of depression and mental health. But then the female average life expectancy has gone from 80.3 to 80.5. So there's a lot, you know, in the social and cultural dynamic that we're not talking about here that is taking place as well. But the budget deficit, the amount that we were spending that was greater than the amount we were bringing in in 2006, and this was considered an astronomical number at the time, and we were well into the midst of two very expensive wars, And we were well into the midst of two very expensive wars, probably past peak expenditures in the Afghanistan war, but not even yet at the surge, let alone peak expenditures in the Iraq war. And the budget deficit was $269 billion.

Here we are today, no wars, and the budget deficit this year is $2.8 trillion. So we've gone up over 10 times in a given year where we were 15 years ago. There was $8.5 trillion of national debt 15 years ago. There is $28.5 trillion now. Credit spreads have not moved a lot. The BBB bond category, which is kind of the lowest rate of quality of the not junk category. So we like using that because it sort of captures some low quality and yet still decent quality to kind of give you a little bit more universal look at credit spreads. There are 125 basis points over and there are 107 now.

So if anything, there's been a little bit of tightening, but pretty similar. The Fed had less than $1 trillion on its balance sheet, meaning the amount of bonds that they had bought. And they now have over $8 trillion. And the S&P was trading at 14 times earnings. It was a little bit below its 30-year average. It's trading at 22 times earnings now. And then because the readers of Div Cafe are getting this information, I think it's important I share it with you on the podcast and the video as well.

But in 2006, USC was the number one team in the country, and they're not even ranked right now and of course 06 we were number one in the country at this point in the regular season but we weren't even it was actually a little bit past we won the rose bowl in 06 07 and 08 but we were winning national championships in 03 and 04 and almost in 05 so you know my point being 15 years ago was like this absolute glory day period of SC and here we are. Okay, so what is my point with all this? Well, I think that when you,

all this data captures a lot of things that I want to talk about and a lot of things I talk about all the time. The reality of the increase has taken place in debt and the reality of the increase has taken place in the Federal Reserve as an active intervening entity in the economy. And at the same time, what I haven't captured with some of those data points is the wonderful things that have happened. You know, we have had a difficult 20-year start to this century, and you have had financial crises, you have had government debt explode, you have had the global pandemic. However, the breakthroughs we've seen medically, I'll highlight some of them from,

from 3d body parts, uh, certainly the immunotherapy, um, additions to cancer treatment, um, the various additions of treatment, not only out of vaccines and particularly vaccines in this pandemic moment. Um, and, and, and, but also, um, with HIV, uh, treatments that are available in various aspects of skincare of diabetes. Um, the, the progress that's been made in 15 years and heart valves has completely, totally changed the world. Uh, gene therapy technology, hepatitis C. In such an incredibly short period of time, we have blown out government debt by almost 400%. And in such an incredibly short period of time, we have changed the world and are still changing the world with various medical and healthcare breakthroughs. And then some of these things I hesitate to bring because I think some people could say

that some of these things have brought on a negative as well. And I'm well aware of the negative side of social media, what it's done, I think, culturally to a lot of our political discourse. But certainly when you think about the fact that iPhone wasn't even at market 15 years ago and the evolution in personal amenities, convenience, quality of life, ease and comfort, ride sharing, food delivery, various things that now are, for a lot of people, taken for granted. They can't imagine going back. And for a lot of people, they don't know what they'd be going back to

because it's all they've known, this sort of avalanche of ease, convenience, and really what, by any historical measure, would be considered just abject luxury that people live in, both as a result of technology and various quality of life enhancing toys and services. It's surreal. You know, e-commerce, our wait times, the digital conveniences brought about by the cloud, which was basically in infant stages then um you know the economic productivity boost is unfathomable and so i kind of created this little spreadsheet uh excuse me cheat sheet and just said innovation unbelievable medicine

technology modern amenities the entrepreneurialism, that DNA of growth, of achievement, profit-making activities that enhance someone's quality of life, all of these things by any objective measure over the last 15 years, off the charts good. And I think most would consider that we're headed towards more good times ahead in those categories, more growth, more scientific breakthroughs, more quality of life enhancing developments. But then you look over the last 15 years, not to mention projected in the future, debt levels, spending, the dependency that the economy has on the Federal Reserve, the economy has on the Federal Reserve and the various economic instability that is created by such a prominent role of a central bank, our political dysfunction, our social cohesion.

I think you score all those negatively. And so the point I kind of want to make for you as an investor is that you're living in a period of time where it is totally irrational to be blindly and universally and naively optimistic about everything. And you're living in a period of time where it is totally dangerous to be universally and blindly pessimistic about everything. My friend John Maldon likes to say that he is long humanity and short government. And I think that's a framework that I'm very comfortable with, that I'm very fond of. I understand it. But even if one has a lower view of humanity or a higher view of government than guys like John and I might have,

you can at least understand the push-pull that he's getting to. That there are certain things that you kind of have to feel optimistic about and certain things you kind of have to feel pulled the other way. And yet with an investor, if you say, I want five units of risk and five units of anti-risk, you have a portfolio that has provided you no risk and no reward. And so kind of capturing the right blends of risk and reward in a portfolio, when we have this sort of view of society and this view of recent history as well as expectations for the short-term future, mid-term future, whatever it may be, it's very difficult. I think investing right now is tricky. And that's not because things are difficult. It's because things are not difficult. Volatility has been incredibly low. Valuations have gone from high to higher. You have a very low dispersion of returns, meaning most things are behaving in concert with one another. And why is that a good thing? It's not a good thing for

money managers. It's not a good thing for value added, but it is a risk reducer in that you have very little chance of getting your selection wrong because everything's kind of going up together. chance of getting your selection wrong because everything's kind of going up together. And even if things go down, they all go down together. Now, generally, that dispersion won't last. The dispersion will come back, I mean, the low dispersion will last. But we have incredibly low bond yields at a time when people are talking about how worried they are about inflation. We have earnings growth that is outperforming expectation at a time when people are talking about how worried they are about inflation. We have earnings growth that is outperforming expectation at a time when people are talking about high price earnings ratios, high multiples, profit margins continuing to grow.

And then you look at the reality of equity investing. Think of our best and brightest in our society, the best companies, the best future companies, the best talent, the best managers and operators and creators. And companies are waiting longer than ever to go public. They generally are going public into a period of time where their peak percentage growth years might be behind them, not in front of them, which was incomprehensible. When I was growing up in the business and in the

initial phase of dot-com and whatnot. You have about a thousand less publicly listed companies now than we did 15 years ago. You have greater assets and opportunities in private equity than ever. Why is that? Because more and more companies want to stay private. They want the less troublesome arena of public markets. So I think that there's plenty to say is good for the world of equity investing and plenty to say is not. And then I look back to the basics on where we are. and then I look back to the basics on where we are and I think, okay, dividends are going to make up, as of right now, about 9% of the total return that the S&P has had. So whatever the S&P is up, 90% of it came from price gains

and less than 10% came from dividends and yet dividends have averaged just shy of 50% going back pretty much 100 years. It's a little less than that. That is just not sustainable, my friends. And the notion that in the environment we're in, we want to disconnect from the mathematical and economic historical reality

of the contribution of cash payments to an investor's return strikes me as incredibly dangerous. You look at the troublesome things that come up. And earlier this week, we had a Monday where the market went down 970 points intraday, closed down 630. And now as I'm sitting here talking Friday, the market's actually up and up a pretty decent little amount on the week. And this is not the first time this has happened this year. And in some cases, it happened, you know, back-to-back days, let alone over the course of three, four, five days. And I think that this is something you have to look at as a concern, not as a good thing. People are saying, oh, look, every time the market goes down, it comes right back.

That's great. There are people that are right now forgetting the historical reality that entry year moves that are not 2% or 4% as this last one got. I think we were down about 2% in the S&P over the last few weeks. And then we were down 2% Monday. So we got down about 4% in the S&P over the last few weeks, and then we were down 2% Monday. So we got down about 4% in the Dow S&P, then rebounded right off of that within a couple of days. That's not normal, and we've done it a ton of times. And maybe the next time things get shaky, that will happen again.

But people on one hand can say this is this resilience and it's optimistic and we can't hold a good market down. On the other hand, you say, how many people own stock right now that have never experienced a 10% drop, let alone a bear market, a 20% drop, let alone one of the real big ones, the 30s and 40s, you know, the COVIDs and the financial crises and the 9-11s and all these more severe drawdowns. How many people have never seen bond yields move much higher and seen their safe money take a mark-to-market correction? So I think there's historical lessons that are both in their conclusion producing optimistic and pessimistic sentiments.

Our view right now in this market is that it's complete and total malpractice for people in our shoes to ignore the fact that we are living in a period of time in which – excuse me. I'm trying to find where I put out my major conclusion. The next 20 years could be wildly opportunistic, exciting, and beneficial for those who believe in profits, cash flows, innovation, freedom, market mechanisms, health, prosperity, prosperity quality of life they're all on the move and we may be in early innings of how much humanity can grow that to me needs to be very paramount in the world view of people managing money and at the same time the second sentence not contradictory but somehow in need of juxtaposition with the first, that the next 20 years could be wildly challenging when we look at the downward pressure on growth that excessive debt is likely to create, the unwinding of a zombie economy, a lot of zombie companies that the Fed has kept alive and facilitated with excessive interventions. with excessive interventions, the 10 to 20 years of dealing with market distortions that are made possible by two of those data points I read earlier, 0% interest rates and a blowout

size of the Fed's balance sheet. There is nothing easy in this, but there is nothing available to good investors that will give them the free and easy path crystal ball. They must simply rise to the challenge of juxtaposing two sets of reality with their risk tolerance, with their liquidity need, with their appetites, with their timelines. You know, the timeline thing is important. You know, what if someone's 60 and they're ready to retire? They're ready to not need the earned income anymore and to have financial comforts from a portfolio to go along with whatever their next phase of life goals may be. I just talked about 15 years. In the next 15, they're only going to be 75.

Some people are just getting started at that time with this phase of life. To me, when I meet with a 60-year-old, I think that I might have two or three, close to three 15-year periods to go. What about 40-year-olds? You know, I'm not 40 anymore. I'm closer to 50 than 40, but I'm still in my 40s. How many 15-year periods does someone of my age have? And now there's financial resources, there's financial wealth, there's financial responsibilities that this age demographic has, and yet they have multiple 15-year periods ahead. And just in the last 15 years, look at the change.

Look at what has taken place when it comes to things like interest rates, geopolitics, the debt levels in the society, and, of course, these innovations and evolutions that we benefit from. I think that people who believe that we are in some kind of absolutely rare and never-before-seen period of change miss the point. All of history is a study of change, and everything we're dealing with now in the present is all we're doing now are the changes that are going to bring us from the past to the future. And it doesn't become the past until you're in the future, but that's what the present is.

And for an investor, that means something. It means that they have to, in the present, have a portfolio that looks to the past to understand various patterns and realities and principles and historical occurrences. And they have to have a view towards the future of what is going to take place that could impact them positively and negatively and account for a portfolio, account for a financial strategy that brings a lot together. And of course, you know, we believe that there's a dividend bias that comes out of that for good investors. But that's not really my point today. My point today is just to not get caught on the wrong side of either of these traps,

to not look at 15 years of data and say, oh my gosh, everything's going to hell, and not look at 15 years of data and say, oh my gosh, we're just another step away for solving for all of mankind's woes. Both things are excessive. The reality is that there's a lot of difficult challenges ahead that inform our view of interest rates and inflation and growth expectations and P.E. ratios and risk calibration. And there's a lot of positive things out there that influence, for one thing, our incentives, our motivation, even our demographics, people living longer.

All of this has to be factored in. And so that's what we do with the Monson Group. That's what I want you to understand this week as you listen to and view and hopefully read the Dividend Cafe. There's some charts there I'd love you to see. My goodness, a Monday. No one's going to be talking about

what is Evergrande and this Chinese real estate thing. I'm not sure we're going to talk about it in 15 days. We're not going to talk about it in 15 years. But my gosh, we're going to have a lot to talk about. And we sure do these last 15. And I hope one of the things you'll be talking about is the benefits that the dividend cafe brought to you and that the principles i talk about in different cafe that we execute on daily at the watson group have brought to our clients who i care about most thank you for listening to and watching and reading the dividend cafe

have a wonderful weekend and we appreciate your efforts to spread this podcast and video far and wide. Have a wonderful weekend. Fight on. Beat the Beavers. 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. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable.

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