The Dividend Cafe - From Growth With Love

Episode Date: March 11, 2022

I hope you will find this to be a special Dividend Cafe. No, this week’s Dividend Cafe doesn’t dare to bring the vast military sophistication of people who tweet all day long to you, but maybe we do one better. We don’t talk about Russia/Ukraine at all. Actually there is some true connectivity between much of what I discuss today and how it interacts with current events, but at the core of the present market story is the challenge of growth. Military conflicts, elevated uncertainty, spikes in commodity prices, and other undesirables do not help the growth story. But they are peripheral pieces to the story, not the story itself. And today in the Dividend Cafe we are going to talk about growth, and all we are doing to make sure we never get enough of exactly what we need. 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 this week's Dividend Cafe. Those of you watching on video, listening on podcast, what a week, recording here Friday morning, a lot of volatility, and I am blessed to have been in the Newport office all week, and I'm getting to record here today in the Newport studio. mention that it is not correlated to Russia and Ukraine, but I'm going to allow you to pick if by the end you think there's some application that may be relevant. But I think that, you know, in the Russia-Ukraine moment, there are certain things that are taking place that are accelerating things that were already in place. And I bring this up on the two-year anniversary week of when all blank broke loose two years ago around COVID. And that as that time went by, we found that a lot of the economic repercussions of the COVID moment turned out to be not so much totally revolutionary and trend reversing dynamics, but a lot of these things ended up being more accelerations of trends are already in place.

And so right now we see the impact in energy markets, for example, or commodity prices, for example, out of this Russian invasion of Ukraine and the geopolitical response. And there's no question that it has served the purpose of accelerating commodity price increases as supply shortages or fear of supply shortages have driven up demand and obviously either literally created or created the perception of supply shortages, more so, I think, the former than the latter. So the point I'm making is that this was all kind of happening before Russia invaded Ukraine. Energy prices had moved much higher. Demand far outpaced supply, and that put upward pricing pressure in effect.

And there were a lot of geopolitical dynamics suggesting that there was a need for greater sources of production, that U.S. output was inadequate to meet the need without a real price obnoxiousness. And then the Russia-Ukraine thing happened and it pushed these prices even higher. And right now it's really only a very rare breed that is not joining the party of saying, OK, maybe the U.S. needs to be producing more. Maybe Europe needs to have better ideas for getting their energy needs met than relying so heavily on Russia and so forth. And so I think those things were in play before they've accelerated the rush to Ukraine. And there was a lot of that that was taking place

in the world with different macro themes before COVID. And then COVID kind of accelerated a lot of it, whether it was the evident shortage of housing stock, whether it was greater, you know, e-commerce and digitization and so forth and so on. And then, of course, you know, COVID and lockdowns kind of accelerated a lot of things. The only point I want to make, I wrote this in DividendCafe.com, is that COVID accelerated the energy dynamic that was in place before COVID. And Russia-Ukraine has accelerated the energy dynamic that was in place before Russia-Ukraine. But those were two opposite energy dynamics. opposite energy dynamics. Going into COVID, we were dealing with an excess amount of supply after years of wild levels of production at a point where demand was slowing somewhat. Then COVID happened and you really had a slowdown in demand because it evaporated.

And there was this excess and glut, really, of oversupply. And so COVID accelerated the trend that was in place before in energy. But then the dynamic that has now been accelerated by Russia-Ukraine just happens to be the opposite dynamic. We were dealing with really accelerating demand before Russia-Ukraine and lower supply levels. And then now that has gone on steroids. So you can find that interesting or not. And maybe you think my setup of all this is too long. But I think the point I'm making is that big crisis events oftentimes tend to accelerate things that are already in place. And unfortunately, the biggest thing macroeconomically

that I believe is in place right now is this perpetual cycle of there being inadequate growth in the economy and that being remedied by things that further exacerbate inadequate growth. So we are dealing in a secular cycle of a negative feedback loop whereby we attempt to treat low growth with greater spending, which means greater debt and indebtedness, which puts downward pressure on growth and i've talked about this over and over again and one of the things i try to do in dividendcafe.com today is give you a bit of an economics explanation for why the monetary side of this is also a reinforcing

a self-reinforcing cycle a vicious one at that. And the idea that I want you to come away with today from Dividend Cafe is that very low interest rates provide a stimulative effect at the point at which they go from one level to a lower level. That can put an incentive into borrowing. It can spur some type of investment. It can incent an activity. And there can be a sugar high. And there can even be a lasting high from some of it, particularly when it's most impactful, going from like 5% to 1%. Well, that's a heck of a needle mover, right? Going from 1% to 0% is not so much of a needle mover. And of course, once you're at the zero bound, you can't go anywhere but up. Well, savings, of course, is like anything in economics, subject to incentives.

And you can logically discern for yourself, do low interest rates incentivize saving or do they disincentivize saving? I think it goes without saying that low rates over time take away the incentive for saving. And the problem with that is that in a short-term window, people believe, well, now people aren't saving at low rates, but that's making them throw money into great investment like real estate and stocks and business and credit and kind of fun, juicy stuff like that. But there's a really big problem with this, and it comes down to my love affair with algebra when it comes to economics which is actually funny because I hated algebra as a student and now only when I get to actually apply it to things that matter do I find it more interesting but s equals i and this

is a tautology savings equals investment why do I say it's a tautology? It is inherently true because there is no dollar of investment that didn't come from a dollar of savings. One cannot invest a dollar that is not first saved. up being take away from future invested dollars. And when you decline investment, you inevitably decline productivity. That isn't necessarily a tautology, but it is certainly not a stretch. You have greater investment, you get greater productivity, less investment equals less productivity. And then the one that follows, which leads us to our moral of the story, is that when you have less productivity, you get less growth. And that's about as self-attesting of a conclusion as I can come up with. So ergo, less savings equals less investment equals less productivity equals less growth. And low interest rates and perpetually low yields equals less savings. Therefore, a persistent level of zero-bound monetary policy creates lower growth.

This is a mathematical logic that I hope you follow. It is an economic and market-based logic I hope you follow. And we're living in it. And I put a chart in Dividend Cafe. I've shown the chart in different versions of it over the years. But at the point at which we went to hyper-low interest rates and excessively accommodative monetary policy to treat the growth implosion that was the financial crisis,

growth implosion that was the financial crisis. That's the point at which we went off of our real GDP trendline growth, both domestically and globally, and have been unable to come close to recovering it since. And now we're getting close to 14 years later. I believe a huge part, although not all of it, a huge part of it is related to this monetary policy phenomenon of which I speak. So the narrative right now is the Fed has really got to do something because inflation's up there. And I believe the Fed really has to do something, but I don't think it's because they have to treat inflation primarily because I'm quite convinced the causes of inflation are different than things that can be remedied from the Fed's toolbox. However, be that as it may, the narrative is that it's a real tragedy because the Fed has to do something and yet, my gosh,

now they have to do it when war is breaking out. And my belief is you could take out war and it would be something else. Because no matter what it is, there is a good reason for the Fed to not do something because what they have to do now is taking medicine and that no one wants to do it. And its impact to risk assets, to the risk-free rate, to risk asset valuations, to mortgage rates. I heard someone on financial media the other day just saying what an absolute disaster was that mortgage rates were moving higher. And I thought, why was it not a disaster that they moved lower unnaturally and distortively and then forcing this inevitable occurrence of rates having to move higher. At the end of the day, distortions are unpleasant.

And that is not simply because cleaning up distortions is unpleasant. And so this is where we find ourselves. I will tell you, as I've said before, I'm not of the opinion that the Fed goes as far in normalizing as people think they will. far in normalizing as people think they will. And I believe I put a list in DividendCafe.com today of things I'd watch for that will be the catalyst to them eventually blinking. But I've already said they're not going to come out and say, all right, well, we've tightened enough, but now credit spreads are widening, or the stock market's going down, or the VIX is going higher, or the dollar is strengthened too much much or the yield curve is too flat or God forbid the yield curve is inverted. These are all the things that eventually they're going to kind of watch and allow to signal

a reverse catalyst. But I don't think they can say that. I think it will be when disinflation returns, that with some level of growing inflation comes down the other way, that will give them cover to then go about doing this. So we have to watch that closely. But the reality is it still puts us in the position of being unable to solve for what truly plagues us, which is stagnated economic growth relative to what our capacity for growth is in this robust American

economy, that we are not achieving what we can achieve, producing what we can produce, and that I believe so much of that is related to the excessive indebtedness and the excessive monetary accommodation that we are marinated in. And so do I think that there is a solution to this tomorrow? It does not matter. If I did, no one would be listening to me, and my solutions would not be pain-free. And that is what American people want, is the belief that they can have a bender without a hangover. I don't think it works that way.

I hope you don't think it works that way. I always feel like I'm ripping off you guys on the video and podcast relative to the Dividend Cafe. I want to make sure that there are no things that I am missing here. I really like some of the charts that are in Dividend Cafe to help kind of bring a lot of this home. to help kind of bring a lot of this home. But at the end of the day, my conclusion really comes down to the fact that a lot of the things that we are worried about in Russia, Ukraine, you know, before with COVID,

there are various sort of event driven circumstances that are problematic or that accelerate already problematic dynamics. And I think that the greatest macroeconomic reality that we deal with is what needs to be focused upon. And that is an adequate level of growth and the fact that we treat that inadequate growth with things that give us yet more inadequate growth. and the fact that we treat that inadequate growth with things that give us yet more inadequate growth. And from an investment standpoint, it forces me into more fundamentally solid investments. It forces me into more predictable cash flow investments. It forces me to err against a dependency on high valuation expansion. And it forces me to be very cognizant of risk on, risk off dynamics when it comes to credit and other investments that are meant to be diversifiers.

So we continue to monitor all this. We want you to better understand our investment philosophy around monetary policy, around the seductiveness of monetary accommodation, and how good it can be in a period of time, but then what it ultimately can do and does do. And I hope that when I say something that I fully understand can be counterintuitive, that low rates are problematic, not higher rates. It is not that you want high rates meaning unnaturally high. All you're ever looking for is natural, natural level, low, high, medium.

It's when the market finds that clearing price that you can then get a return on invested capital that is above the market rate of interest. And when the return on invested capital is above the market rate of interest, businesses need no accommodation. They need no distortion. They need no interventions because humans act and they act rationally. And when the return on invested capital is going to be higher than the market rate of interest, then there is a natural incentive to produce and therefore to grow. That is my lesson today in the Dividend Cafe. I thank you for listening and watching. Hope you'll do your part to subscribe and share and rate us and say good things.

And I do hope you will get ready for the greatest sporting event on the calendar, March Madness, starting this next week. Thanks for listening to 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. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

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