The Dividend Cafe - FINAL Covid and Markets - Tuesday September 29

Episode Date: September 29, 2020

It is a bittersweet moment for me to present my last ever missive of COVID and Markets. Okay, it is a lot more sweet than bitter. I truly believe the essence of the markets lesson from COVID has been learned, and that the ongoing story of economic recovery, policy response, and all the various implications of things will live in for some time to come. But included in that essence is the reality of living with COVID, protecting the most vulnerable, and engaging trade-offs around reasonable safety measures for public health vs. the existential and economic need to have a functioning society. There are a lot of resources out there producing a truly intelligent, sober, and informed perspective on COVID medically, which really do seek to neutralize the panic-porn sensationalism so many have fallen into. This can’t be one of those resources. I don’t have the expertise or bandwidth to fully dedicate myself to COVID/medical information. It has been integrated with my work for six months, and I am proud of what I have learned and what I have presented, but it was always, always, always intended to be a part of the broader economic and markets story. I am a markets guy, with every ounce of breath in my body. And the COVID part of COVID & Markets is no longer on my front page, and shouldn’t be on yours either. So I have to be honest. 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 what is indeed the very last COVID and markets podcast brought to you by Dividend Cafe of the Bonson Group, but by no means the last Dividend Cafe podcast and by no means the last podcast with my whole team here, the investment committee. It's been so long, it feels like this is our first and our last, but actually for those of you watching the video, you can see I'm surrounded by the investment committee of the Bonson Group and we're going to have a little discussion here today as kind of a special farewell to the COVID and Markets podcast. The reason that we are getting rid of the COVID

Markets podcast is elaborated on in a little longer form today at COVIDandMarkets.com. I wrote a little piece kind of explaining why we're moving past it. What we're not moving past is a daily communication around the markets. In fact, the response that we got from the COVID daily missive has led us to decide we're going to keep that going. And on Thursday, October 1st, will be our inaugural edition of the dctoday.com, which will be a daily market update. We'll run every market day, Monday through Thursday. And then, of course, Friday, you'll get the weekly Dividend Cafe commentary. So the distinction would be Monday through Thursday, we're going to have a just kind of quick rundown on markets, summary of what's happening in the news cycle,

you know, Fed announcements, various macroeconomic developments that we think are relevant to your understanding of the markets and what's happening in the world around you. And we're going to try to make it short, succinct, understandable, but still informative. And then, of course, Friday, we'll continue with the weekly Dividend Cafe we've been doing for many, many years. If there's an important COVID announcement, if there's something substantial that needs to be discussed around the coronavirus, we'll include that into the D.C. today. But I am very transparent on the fact that I believe we needed to terminate COVID and markets.com as a daily offering for the very reason that I've been writing about COVID

over the last almost two months now, which is I think COVID itself is behind us as it pertains to being a prominent market story. Do not believe that coronavirus is not still out in the community and capable of infecting people and indeed capable still of being a potentially fatal disease. The virus is real. Viruses don't go away. Influenza has not gone away. It's a substantial part of both our medical reality right now, will be, and we have a lot of uncertainty around where those things go. But what we have seen are things that we did not know when I first started writing this missive six months ago, when the market volatility began six months ago. We did not know the incredible survivorship rate.

The fears early on, 4% or 5% fatality rates proved to be a magnitude of 15 too high, it appears. And right now we're looking at 99.98 percent survival rate, thank God, for people under the age of 50. So we most certainly believe it's a very serious condition. It's been incredibly serious to, of course, the medical reality of our country and society, but it's been very serious to economic well-being as well, and it's necessitated a lot of writing and focus around it. We went through a very volatile month of March, went through a total, complete breakdown in all capital markets in that period, both equity, fixed income, and other. And now a lot of recovery, a lot of zigs, a lot of zags, and here we are. and now a lot of recovery, a lot of zigs, a lot of zags, and here we are.

And so as a matter of fact, I was watching a little tape that they had put together on my team of some of the new media appearances I've done around it, and we were looking at what the market was on the day of all these appearances. And the fact of the matter is, as we're sitting here now getting ready to close up September, the Dow's about in the same place it was back in the beginning of June. It's just it's been higher. It's been lower. But we kind of zigged and zagged around, which was something that was very much within our predictions

of what would happen sometime back. We dropped a ton because we didn't know if the world was going to end or not. The world didn't end, and we went up a ton. Now we're zigging and zagging around a kind of uncertain economy. So do not take our moving past covidamarkets.com to the DC today as a sign that we're not taking coronavirus seriously. We take it very seriously, but we also do not believe it is a prominent thing affecting investors. And we want to be investor forward in what we're doing. And so I think it's a good symbolic change of what we believe in and how we want to execute upon that. And we pray fatalities will stay low,

fatality rate will stay low. The severity of these cases seems to be very, very low right now. And if we're going to sit here and continue talking every day about cases, even as we're wanting everyone else to understand that cases are not a prominent metric in economic life, let alone medical reality. I think we're kind of undermining our own message. So that's the scoop there. Today's COVIDMarkets.com, by the way, the final missive, does have a whole lot of information, probably that information you're listening to the podcast right now that you're waiting to get.

But instead, I'm going to turn it over to discussion, my investment committee. And if you want to know how many people died in Florida yesterday and how good the positivity rate in California is today and some of those typical analytics you're used to, and there's actually quite a bit there I really, really encourage you to go to. I'm going to make you go to the website for it today, covidandmarkets.com. And by the way, in the midst of today, there is a link to an article, which is one of my favorite articles I've read. And I've read about 10,000 in the last six months, literally. Medical journals and all kinds of things. I hope to God I never have to read again.

God, I never have to read again. But there is a link to a transcript of an interview with three of the most prominent and impressive medical minds that I've been following daily through this entire incident. And they all three were interviewed together by Governor Ron DeSantis of Florida. And it made for some of the best 20 pages of reading on COVID. And so that link is found in today's missive. So there's the whole setup, the whole intro. And with that, I'm going to welcome Robert, Julian, Brian, and Daya, the full investment committee of the Bonson Group, back to our table here in Newport Beach Studio. People watching the video right now can probably tell that we're not wearing masks because they wouldn't be able to hear us in the video.

But what they can't tell is that we are safe and distanced and that we hand out sanitizer around here as if it were coffee or candy. Coffee and candy. Okay, we've learned a lot. We've gone through a lot. A lot has happened. MISF was a great idea. Everyone hopefully got something out of it. And now we're ready to push past it.

I guess I'd like to ask all of you as we kind of push past that into the next phase, into the fourth quarter of the year. Obviously, we're coming up on not only the end of September but the end of Q3. But, Robert, I'll start with you. Six months plus change of a pretty little hellish period of time in the market, for a lot of people in medical affairs, and of course, in the economy, the well-being of many in our society. Some of your takeaways. So two takeaways I have. The first of which I think served as one of the primary catalysts

for you starting the COVID and markets missive is that, you know, finding good real time information can be really hard. And I think sometimes we take that for granted. You know, we have the ability to look at our screens and see, you know, data, whether it's, you know, stock prices, volume, etc, etc. And we take it at face value. When COVID hit, there was so much information coming out, but so much of that information was just so disingenuine in its delivery. And a lot of the errors that I saw that certainly a lot of us saw were, you know, their behavioral finance errors, it was, you know, confirmation bias, poor sampling, just made the data very unreliable. And I think going forward, maintaining a healthy skepticism of what we're reading on our screens and elsewhere

will be a good best practice. We were also able to see through a lot of our research partners, which ones, and there were many, which ones were dynamic and able to respond to new types of analysis very, very quickly. You know, statistics is statistics, right? But when you're dealing with financial statistics, moving over to health statistics, there are nuances that make it different and challenging to switch over. And I think we were able to see a lot of our partners have a very, very high IQ, obviously, in terms of being able to make that change. The other thing that I'm going to continue taking away and talking to people about is asset allocation. And ordinarily, people think of that across asset classes, like stocks, bonds, cash, etc. But I think appropriate allocation within asset classes is very, very important as well. And security selection goes along with that.

So, you know, year to date, we saw, you know, various types of equities. And that's what people want to talk about do do well or do not so well. But let me focus on real estate as just an example, because people ordinarily think of asset selection in the active versus passive space for equities. But if someone was a real estate investor this year, you know, a REIT ETF or something like that, an index approach, they probably got smoked even even year to date across the board. But if someone went through and had a very high quality, you know, perhaps a private or just a, you know, publicly traded manager, they might not be doing so poorly. And so I think it's important to consider, you know, that security selection, not just in the context of equities, but across all

different asset classes on a forward basis. Yeah. Well, and do you think that that was a principle that was true before COVID that sort of got revealed and became a bit more apparent during COVID? Or was it maybe something that represents a paradigm shift? Well, it's the classic, you know, people don't care about security selection when there's no dispersion. When everything's going well, and there's the indexing, everything's doing well, someone says, hey, why are you doing a couple hours of due diligence on this fund when I can just buy the index and do just as well? Well, that extra effort shows in times of duress. So I think it's not at all a paradigm shift. It's just sometimes it takes a crisis to show you what works and what doesn't.

A real stress test, essentially. Very good point. Julian, what about you? It's been quite an experience. You've been right at ground zero of the research and significant amount of kind of bottom-up assessment of its impact to portfolio companies, sectors. What do you think are some of the great lessons of the last six months? Yeah, yes, I want to talk about really my focus, which is, you know, company-specific and across sectors.

I've seen, you know, companies going through hell and some not really being impacted, or you could argue that benefited from this whole crisis being, you know, in the tech sector or being in e-commerce in particular where, you know, basically you had a a 10-year uh you know leap in six months in just you know the gain of market share some of these companies have had uh from you know people not being able to go uh shop and just shopping online but i guess what's really interesting um you know and the lessons for me uh during this crisis is to uh to see how companies were resilient and able to adapt to whatever environment and do whatever they can to survive. And that started with supply chain issues

when this was still a Chinese thing. And we thought, okay, where was the exposure to China? How are they going to manage this and be able to serve the clients? And then you make more like an end market issue or with the forced shutdowns, like who is going to be able to to survive and pretty quickly when you have the fed intervene and then the federal government realized that the the world is not ending and you know all these companies were able to finance

themselves and you know that's really was the big i think turning point is that when they were able to raise billions on a very cheap level on the debt markets. And so by time, basically, now you can see at least the end of the tunnel. You see there's a path to survival. And then you go back to your model and think about when you look at actually valuing any businesses, you look at free cash flow, you look at the cash flow they're going to generate for forever, really, when you buy a business, whatever it is, an apartment or any business,

private equities, when they run their models, it's really discounting the future cash flows. And what's interesting is if you think about, you know, if you've done what you call a discounted cash flow analysis, the value is really based on the cash flow you project for the next 10,

usually you do 10, 15 years, and then you have a terminal value, and then you have your discount rate. So when 10 years ago, 15 years ago, I was doing my models at Lehman Brothers, you used to have a cost of capital that was 8%, 9%, 10%. And so at the time, half of your value was coming from the cash flow of the next 10 years, and the other half was coming from the terminal value. And these days, with the rates being so low, your cash flows are really, the value of your business is really based on the, much more on the terminal value,

so much more on the future cash flows than the next 5, 10 years. I guess what I'm saying is that, you know, if you look at the value of a business, having, you know, one or two years of, you years of cash flow that are really impacted by the virus, it's going to be scary maybe. But if you think about it, they haven't really been impacting over the long term. And if anything, you could argue that with the rates being so low these days, I think that's the much bigger story to me is, you know, coming out of this crisis. If you assume, I think it's fair to assume that we're going to have a vaccine and we're going to come back to, you know, life as we knew it, probably within a year or two maximum.

But what's going to stay is, you know, low rates. And we know the Fed is, let's say until 2023 at least, we have the 10-year at 0.7%, the 30 years at 1.4%. So how do you make a return? And so if you do the same, if you discount your future cash flows on this new rate of returns you can generate,

then that gives you valuation that are really attractive in equities. Absolutely. So the changes in monetary policy do more than just the short-term intent of the changes in monetary policy. They re-rate all of capital markets, particularly the risk assets that you research day in and day out. Yeah, exactly. So I guess to me, the conclusion is there was a moment where we didn't know if the world as we know it was going to end or not. I would like to say that I actually did know that the world was not going to end.

I guess. There was a period where it was really scary. But we're way past that point. And I feel like – I don't know why I would have felt that way with all the media was doing to calm people down. Yeah, I don't either. It was pretty calm on the media. Yeah.

How was coming, I think, was the – Yeah, I don't either. It was pretty calm on the media. Yeah. How was coming, I think, was the point of it? Yeah, I guess. I mean... I just remember flames on the news channels. The Fed and government, they were so fast,

I think, reacting. I mean, compared to 2008. And even, like, if you think, like, 2008, they learned from the mistake of 1930,

32. And now, in 2020, they learned from the mistake of 2008. I think they were much faster. And that probably made a big difference. So Brian, there's a good segue, I guess, to the 2008, 2009, and now going through the COVID moment. Similarities, differences, you know, share a little bit of what you've taken away from COVID and, and if there are parallels to the financial crisis. Sure. Yeah. I mean, I, I would say first, I mean, there's definitely parallels. And at the heart of

it, I mean, the conversations that I had back in 2008 and 2009 with clients and the conversations that I had in March and April and May with every, every client are similar, you know, and I, I'm grateful that people were able to kind of listen to what, you know, and I'm grateful that people were able to kind of listen to what, you know, what I had to say, and we're able to sort of stick with it. But I would put it in context and just say that this sell off, I mean, typically, the average kind of bull market to bear market takes about 10 months or so, like, you know, the market sort of rolls over, we kind of start to get signs of recession, and you get a 10 month period where you kind of get into that 20% decline that that bear market. This happened in 16 days. So it was a 16 day period of an absolute kind of, you know, bloodbath in markets. And my takeaway

and what reminded me of 08 was really within the credit side of things. It was a completely dislocated credit market in the middle of March, we were trying to get bids on individual QSIPs of corporate bonds and municipal bonds for people. And bid-ask spreads were 10 points wide. I mean, it was just a total mayhem thing. And what I would say is that part reminded me of the 08 time, but the causation was quite different. Back then, it was sort of like an organic deterioration of credit. You know, housing market was falling apart. It was toxic subprime inside of these bonds, and we couldn't find a value, and it was sort of organic.

This time, it was just a pure deleveraging environment. It was like everything had to be sold in three days and there were no buyers and we experienced that directly. And those are scary times. And I don't mean to sensationalize it more here other than just in a 20-year career, these things have only happened a few times and so there's things to be learned from it. But what I would say, as in 08 versus this time, it was the Federal Reserve that came in. And so there's things to be learned from it. But what I would say, as an 08 versus this time, you know, it was the Federal Reserve that came in. And the question I get from clients the most now is, hey, Brian, you know, the economy is terrible. Nobody's going out to eat. Nobody's on airplanes. How come the stock market is up? And that was the same conversation I had in kind

of April, May, and still in June and July and all those things. And it really is, the answer is the Federal Reserve. And you know, the amount of, of tools and money that they put into this thing to stop us from having a depression essentially, is for the record books, it's, it's far more than what they did in 2008. And it's phenomenal. I wrote down some of the things, I won't read them all off. But all the facilities to stave the commercial paper market, the money market funds, the muni market, the corporate bond market. You just go on and on and on. They did an unlimited amount of quantitative easing. Not like $500 billion a month or $700 billion.

Just infinity sign next to it. They were just going to buy all of the treasuries and mortgages until the economy was able to function again. And I think that's all just phenomenal. I'm not saying it was a good thing. And I'm not saying that I'm glad it happened. I'm just saying it is what happened. And that is the reason why one of the main reasons why you had just the support in markets, it was an expansion and balance sheet of not twice as much as oh eight, but what 50% more in the course of a month versus several year period over the financial crisis. So I would say that at the end of it, and we talked about, and I'll kind of end it with here. So huge reaction from the Fed. One of the main reasons

why I answered that question, why is the market doing well when the economy is not doing well? They're two different things. There's far more money in the system now than there was. And, and there's less goods and services. And so prices have gone higher, that and what I would say about markets, and we've kind of talked about whether you want to say S&P 500, or something, kind of being common, you said June, I think, you know, markets now are about where they were back in June. And if you kind of put that chart next to the Fed balance sheet and you kind of put them together, they're going to look almost the same. So you have expansion of balance sheet of S&P 500, and now balance sheet is going sideways

and S&P 500 is going sideways. I don't think those two things are a coincidence. I think they're directly related. A trillion and a half added in March, April into May, 80 billion a month since. So that flattening of market does seem, at least on a chart, to correlate with flattening of market. Yeah. I mean, the Fed even went out and started buying ETFs, so perpetual securities, basically

stocks that represent a basket of bonds. Those things have all tapered off, too, so they're no longer really doing that. In fact, actually, of the money they had to pull that trigger, they really didn't execute all that much. But so anyways, in my, in my opinion, you know, the,

the, the extraordinary action of the federal reserve through this COVID pandemic was one for me for the record book, similar to 08, but much bigger. And it answers one of the questions that most people have, which is why are, why are asset prices going up if things are bad?

Well, I can't resist temptation. I wasn't going to do this, but before I move on a day, I do want to get a little more granular because otherwise I'll end up getting granular in my closing comments and I won't give you a chance to interact with it. Let's do it. Do you think that what they did was more aggressive than what they did in 08, 09? And if so, I assume that would be because you're saying the size and the speed at which they acted. Yeah.

But is there also room to point out that TALF 1.0 in early 2009, that was far more provocative or far more controversial, but had much more of a shock and awe impact on markets because for the first time, it was 2009 for the first time that they were coming in and buying loans, buying mortgage-backed securities, giving a backdoor way to buy the asset-backed securities market structure credit. A lot of people think they're more tame this time with some of that. They only stuck with AAAs. They only stuck with conduit, CMBS. They only stuck with agency, residential mortgage. And in doing that this time with TALF 2.0, they were just doing what they'd already done before, where before they had never done it before. I would argue that the Fed was quicker and bigger this time, but more shock and awe last time.

That's a good point. I mean, I think anytime you have a – Excuse me, in composition, shock and awe. In composition. Yeah, anytime there's a first, I guess. And I remember the feeling I had back then was, it was probably more of a dramatic feeling I had. And actually, you're right. I mean, the problem last time, it was this sort of, where does it ever end? If you have a package to security and 10% of it is subprime or junkie,

what's the value of it? Is it zero? Is it 70 cents a dollar? I don't know. Let's have the Fed just go out and solve that problem and buy it all. I think that is a shock and an awe thing. I think the size and the speed this time around is what kind of does it for me a little more so. And technically, I mean, through these SPVs, I mean, they took money from Treasury, they levered it up 10 to 1, and then they were able to buy, like I said, perpetual securities, which is a first. All that other stuff is loans, and it has due dates on it. Granted, it was junk, and whether you know, whether it was going to come to a par or not, who knows. But this time around, just buying a security that has no maturity date on it is something new. And they didn't do it directly. They did it through that levered fund through

the Treasury. But, you know, a combination of size, you know, out of the box stuff, infinity QE, you know, you know, removing reserve requirements, you know, all of those things I think were pretty significant and needed. And, you know, balance sheet going from, what was it, four to seven and probably will end up somewhere around 10 at the end of this thing versus going from one to four. So, Dan, before your comments, was what the Fed did needed, yes or no? So I – that's a good question. Yes or no?

I would say yes, but primarily just in order to thaw up the credit markets. I don't know if they need to be going in and buying ETFs. I don't know if they need to be extending in and buying ETFs. I don't know if they need to be extending to this level these liquidity lending programs. But as far as, I mean, I'm glad I'm not somebody dictating policy, but

as far as standing there and saying to the credit markets that we're here to support any and all transactions regarding debt with you guys. There's a lot of moral hazard argument there going down the line that we could talk about for hours. So, Dan's going to give us his breakdown of COVID lessons.

That's a really tough question. I'm on the fence about that. Seven seconds. Yes or no, Fed activities were necessary? Can I have a caveat to it? It's counting into seven seconds. It's a yes, but because they had to fix policy errors on the other side of things.

Fair enough. Julian, yes or no? Seven seconds. It's a yes based on the 20 years of what they've done. You cannot just take the candy away after 20 years of... So is your answer yes, it was necessary to do because of other bad things they had done before yes okay brian i think they had to do it it's not that i wanted them to do it and that they should have done it or necessarily but it's more of

the collateral the damage of not doing something in that period of time would have been more than the future potential collateral damage that may be may come of it and it's also the system that we're in and so my answer is operating in a system that exists. All right. I will answer my own question as soon as Deya is done with his lessons of COVID. I will also add that whether the Fed had acted or not, I do think that through prices, things would have eventually fixed themselves after a certain amount of time and after a certain amount of pain. But I'm very much looking forward to your answer. And a lot of times with these Fed actions, I think a big part of it that makes a difference in terms of markets is the announcement, just as much as the facilities actually being open,

the buying of some of these assets. Because really what's causing all this volatility and all this gyration is fear. And if the Fed comes out with an announcement, they're backstopping everything. That starts to assuage a lot of those concerns. And additionally – and it's interesting. We talked about the shock and awe. I mean I may not have lived it as real time as you guys regarding the great financial crisis. But it was kind of shocking to me some of the assets that they were willing to buy,

and especially what happened at the fiscal level regarding the CARES Act. And what was so surprising for me is I had remembered thinking at the time that, okay, I understand that there's a lot of people out there that need money. Julian mentioned that a lot of businesses that are doing better as a result, they're doing better as a result of this. And that's clearly true if you look at their financials. But there are also a lot of businesses out there that absolutely could not function, you know, with a government shutdown and absolutely needed some sort of stimulus. And although I knew that the willingness on the behalf of the government to give these people all the stimulus they needed was there. I wasn't sure the ability was there. And it was really remarkable to me how fast that

they were able to get loans in the hands of small business or non-recourse loans in the hands of small businesses and essentially grants in the hands of individuals. So that part was incredibly surprising me and does more so to add to the notion that there is this Fed put and that there is this government type of backstop, you know, no matter what kind of pain is happening in the economy. And I think it's important to remember, to go back to Robert's point about asset allocation, not making any knee-jerk reactions, that, you know, yeah, there may be a crisis and there may be some really bad fundamental deterioration, but you don't know what any sort of response is on the federal level to that and how quickly

things are reversed. So a lot of times the best thing to do in a situation like that is to just sit on your hands. Brian talked a little bit about leverage, about how, look, maybe your situation regarding leverage to your portfolio is exactly constant. If you're using your portfolio as collateral and your lender is saying that they're going to extend to you $0.70 on the dollar, a lot of those arrangements are subject to change in times like that. As we saw. As we saw. As we saw, exactly. So, you know, it's a very scary thing to all of a sudden have this arrangement change and

you owe a lot of money in a very short period of time, which does an incredible amount of destruction to your wealth and your ability to achieve your goals over the long term. So it's important to realize that your leverage stay at healthy levels. And also to Robert's point about the dishonesty of the media, I remember seeing a study where they actually looked at people's intake of news and around 1% was fake news. So it's not the fake news problem. It's the media lying to you by omission and misrepresenting the objective reality of what's going on by focusing on cases that are able to create the sensationalism and attract the job.

Lying by omission. Right, exactly, lying by omission. So, yeah, a lot of this to me is a reinforcing of certain principles and certain beliefs that existed prior to this crisis. But the speed and just the ability of the Fed or the government of both Fed and fiscal level is very surprising to me. I guess maybe on that point, I guess the big difference with the great financial crisis is that there was no one to blame. Like, you know, 2008 was a bit harder because the banks, you could argue, were responsible here.

Yes, absolutely. You know, it's nobody's fault. So it's much easier for the Fed to act quickly. If anybody's fault, it would be China. So they had all right, you know, to go and intervene. And I'm sure they didn't have the more hazard that they had back, you know, 10 years ago. That's absolutely right.

There wasn't a bad actor that enabled Congress to move at the speed that it moved, which played a huge part, I guess, in their ability to move quickly. Yeah, that's a great point. Yeah, well, I think it was what enabled them to do it without the political backlash. We also had, when TARP passed, about $9 trillion in national debt, and we had, when CARES Act was passed, $21 trillion in national debt. So there was a little more societal anger when TARP was passed than CARES Act because the anger would have only been directed just kind of either at China or the abstract virus itself. But the debt ramifications and the overall financial picture were certainly different.

But the CARES Act was as big as it was because I think a lot of people realized they were not going to have an easy chance getting another one done after that, and that's proven to be the case. And they've been all log jammed now politically here for a couple months with whatever it is they're trying to do further and i think all of you have really highlighted i mean it's so much i'm now i'm kind of down on myself that we were trying to do this thing a little quicker because i think we could sit here and talk for another hour or two on a lot of the lessons and obviously between now and the end of the year we're gonna have plenty of chance to continue talking about applications how about

what we learned you brought up an interesting point about the research partners. There's media outlets that I don't intend to ever listen to again. I'm so disappointed in them from this event. And I've had 25 years listening to one particular network, and I don't care if I ever hear another peep from them again because it wasn't just simply a kind of stressful interjection into our lives in March. It was a morally offensive one as far as I'm concerned. But I also learned a lot about our research partners. I think some of the different people that I digest research from, some of whom we pay significant amounts of money to, I got a chance to see real value added from some research partners. We gained some new partners through this period of time, and there are others that I've been paying a pretty good amount of money to

for research for some time that I wasn't particularly impressed with what they came up with. And so that's been a good learning experience, just kind of inside baseball for us in our process, top-down research. The issues about the Fed and the fiscal side, why don't we agree with this conclusion that we're not in the bottom of the ninth inning? At the end of the game, you get a chance to go back and say, well, should they have thrown that pitch and should they have done this

and that? I don't know what inning we're in. I do know that when Bernanke took victory laps about the monetary policy decisions made out of the financial crisis, and we were still at the zero bound, I took offense to it. I believed that you had to unwind the aggressive monetary steps you'd taken to declare that it all worked. You couldn't just simply do the emergency measure, get out of the financial crisis, and then say it worked. You need the full thing to play out. And just as much as I say that, I don't believe the whole thing is going to play out. I think we're stuck to it. I think we're now in a perpetual situation. I completely agree with Julian that to the degree there was some justification for

the actions, it was a justification that came about of having to deal with the rules that they had previously set themselves. But I am resistant to the idea that thank God they did it because the thank God they did it abandons or fails in the first economic principle Henry Hazlitt taught me or before him Friedrich Bastiat. I can't look at thank God they did it only from the vantage point of what happened in March of 2020. It's very possible that our kids in August of 2034 will not be saying thank God they did it. We don't know yet what those ramifications will be. We cannot measure in the present the cost benefits of those decisions. What I am – and this is what I wrote down as the single takeaway that I think a lot of you guys captured through different points, but I'll just sort of try to summarize it all together. It's just a concept of tradeoffs.

I'm fine with people saying, thank God for CARES Act, it did this, as long as they don't say or ignore, but it's also doing this. The Fed did this, and that was really helpful, but it's also doing this. There are actions in the weeds of what the Fed did that were really good. There were actions in the weeds of what they did that were really dumb. But the whole point of what you were making was they just said, we're pulling out bazooka. We're doing it day one. And so they kind of thought the flexing of corporate ETF would be a big deal. It turned out not to be.

Probably wasn't even necessary. It might have set a bad precedent. It was frankly a little bit silly. But it wasn't really a policy decision. It was just sort of part of a bigger picture of, hey, we got to go show capital markets. We're going to do whatever we have to do to keep the world turning. So, yeah, there's a lot going on that's going to exist far beyond COVID-19. The ramifications of CARES Act, the ramifications of Fed interventions. But the first Fed intervention that made all these

Fed interventions possible, you said the SPVs, the concept of taking Section 13.3 of the Federal Reserve Act that gives them the ability under exigent circumstances to do crazy things, still limited by

the Federal Reserve Act itself. The notion of saying, OK, well, one of the things they can do is create a special purpose vehicle, get treasury capital in it, and then be allowed to do a lot of creative things. That was all actually a precedent from the financial crisis, not COVID. All COVID did is take that Bernanke precedent and build on it. And they did some really interesting things, TALF 2.0 stabilized the mortgage market.

The corporate bond issues, companies have unlimited ability to issue debt and service debt, very thin bid-ask spreads, very low cost of capital right now. There's pros and cons within it all. But just like with shutting down the economy, just like with COVID, just like what actions we take on a daily basis,

what actions we don't take, all of the things happening in a local, state, federal level, what people do in their portfolio, with the level of risk and reward they're trying to balance, everything's a matter of trade-offs. And it's not just that all of a sudden I've learned trade-offs exist. We all knew trade-offs existed. Yeah, they were reiterated, reaffirmed, we were reminded of them. But I think that what I am taking away from the last six months is that those trade-offs are inescapable and they're not talked about. I want to talk about the trade-offs of zero interest rates, of Fed interventions, of CARES Act, of record deficits, of economic shutdown, of an economic reopening. All of these things play into the medical, fiscal, economic, social, cultural realities.

Well, a lot of it's the nature of political decision making. If the tradeoff is in the future, then they don't care. For sure. Well, I think that's true. But I think that, let's say, even apart from the convenience of politicians trying to create a tradeoff where the good part is now and the bad part is later, within a portfolio, there's a tradeoff where someone has a desired return and they have a desired risk level and those things are in a constant state of tension with one another. And I think too many people try to ignore it or they try to address it by just simply pretending it isn't there. So I think that with the COVID reality, there's a certain degree of risk in society. There's virus infection exposures that are out there.

And then there's also the risk – you could mitigate the risk of COVID medically with permanent shutdowns, right? And then put the whole economy into depression. So there's kind of extremes. I'm saying even in the micro, whether it's governmental decisions, as you talk about, science decisions, as everyone's trying to figure out all that stuff, but even just on our day-to-day basis, the decision-making that we're faced with on behalf of our clients, I'm just very cognizant not only about the existence of trade-offs, but about the need to communicate about them, to remind clients

of them, to just not pretend that we're not in a tension around risk and reward. Well, we've also reconstructed the whole way we're thinking about reporting and model portfolios as a result of some- Would you say that we're magnifying the truth of trade offs? It's a great word. Yeah. Yeah. I mean, I think so. Yeah, we're living those trade offs right now. Yeah. Yeah. No, I mean, that that's exactly the point I was going to say, too, which is within all of the mayhem in the fixed income markets, one of the things that we've really done is delineate what those trade offs are with certain risks that you would be taking rather than mix them together. And so, you know, and, and so some of our fixed income

holdings are really going to be that trade-off of not a whole lot of return, but also something that is anti-correlated to, you know, equity beta and something that will, will be safe and sound and be happy with the low return because the trade-off is safety. And with the stuff that you don't, you know, with other risk assets, risk assets, we've just delineated them a little bit better I think instead of having it more mixed together. Well, if the threat of 2,000 people a day dying and the overloading of the American medical system that we were all very afraid of late March, early April went away, and some of the various factors of COVID, the idea that perhaps the economy is going to be shut down, you know, well into next year, some of those tail risk events that were just frankly awful. Those things seem to be off the table now. But it sounds like we can all agree that what's still on the table are some of the policy ramifications of what was done.

And that's where COVID in markets doesn't go away. That's what the DC today takes over, is we do still have to deal with the reality of zero interest rate environment. We have to deal with the reality of very liquefied credit markets. That can be a very good thing. But there'll be challenges around deficits, around national debt. We have a very politically polarized society. I don't think anyone would argue that COVID has made it less so. The country did not come together around COVID like it did 9-11, like it did World War II. The country's further apart. Now there's a lot of issues that still go on. I'm grateful that we're not having to pull a battleship into the Hudson River right now to try to put excess medical casualties there.

Those things didn't happen, thank God. In the meantime, we have more things we're going to have to deal with, and there will be the opportunity and the need and the challenge that your investment committee at the Bonson Group will be up for. Thank you, Robert, Julian, Brian, and Daya. Thank you who have listened to the COVID Markets Podcast over these last few months. And we look forward to many more opportunities to share the kind of lessons we're learning and things that we're doing. Many of the topics that came up today will still be topics in front of us for weeks and months to come. Reach out to any of us anytime with any questions. We literally eat, drink, sleep, breathe this stuff. And we want to be able to

give you the answers you need. Sleep well at night to stay well and be healthy. And we do very much hope that you will today be free. Appreciate your freedoms. We say all these things because we mean them. And we are grateful at the Bonson Group for a chance to serve you. Thanks for listening to COVID Markets brought to you by 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 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 Thank you. or for statements or errors contained in or omissions from the obtained data and information referenced herein.

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