The Dividend Cafe - Getting the Growth Story Right

Episode Date: April 18, 2019

Topics discussed: Things really are good, but they really are sensitive to conditions that could make them not good The term “insurance cut” A slowdown in small business job creation Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. And we do wish you and yours a wonderful Easter weekend. Well, Good Friday, the market is closed. And so we're doing this a little bit early this week, but there's quite a bit to talk about. Let's jump in. I'm going to cover a lot of topics. I'm a little heavier than normal this week, but I hope that that won't bother you. It certainly does not bother me. A little housekeeping first. For those interested in the video, we do have a

weekly Dividend Cafe video that we do. Most of the time, the content there is different than what we do here at the podcast. We try to keep the video roughly 10 to 15 minutes long each week. You can subscribe to that at YouTube. And our sister podcast, The Advice and Insights, feel free to subscribe to that. That's different than what I do here at Dividend Cafe. Here at Dividend Cafe, I want to take about 10 to 15 minutes a week to give you an overview of a plethora of topics that we are looking at and addressing and dealing with. In terms of the advice and insights podcast. We take one big topic

and try to exhaustively address it, whether it be 10, 15, 20 minutes or even 45 minutes or longer. Oftentimes we'll bring in a guest for an interview. Advice and Insights is just a little more comprehensive, deeper and more focused and concentrated. We're here at Dividend Cafe. We're trying to very purposely do more of a broad overview. So if you would like to subscribe to

both of them, that's great. If one over the other more appeals to you, now you know the difference between the two. But either way, what we'd love is for you to actually subscribe and please give us a review. Give us stars, whatever it is. We're trying to build up that base in traffic with our different podcast players. Okay, that's probably long enough of an intro here. I'm going to dig in the nitty gritty of the world economy. How exactly is the global economy doing? What investors should be doing in light of certain realities about economic conditions, globally speaking. We'll also be talking a bit about the

Fed, President Trump. So, okay, listen, getting the growth story right. It is not easy to be a macroeconomist right now. It's probably never easy to be one. But right now, macroeconomic analysts are dealing with conflicting data, the likes of which I haven't seen in about 20 years. The risk of mere noise clouding one's analysis is very significant. We all know that there's very positive U.S. economic data, low unemployment, rising wages, expanding manufacturing. I think all those things are true. But on the other hand, global trade is declining. Tax receipts have decreased and the yield curve had inverted two weeks ago and still remains inverted inside the one year and seven year treasuries. It's no longer inverted, by the way, between the three month treasury and the 10 year treasury. So I don't know. Those things, you know, you can look at

as being pretty concerning signals. On the other hand, corporate bond spreads, very tight. And that's a huge tell for us. It's a bullish sign that doesn't indicate a lot of stress in the credit economy. Oil prices are certainly not recessionary low, but neither are they inflationary high. You have copper and other industrial commodity prices that have been very strong. The dollar has been pretty stable as of most foreign exchange currency rates. So what does it all conclude? What does this lead us to? Are the negative indicators false noise?

Or is the signal from the market accurate, you know, with low credit spreads and high equity prices? Or are the positive indicators vulnerable and the economy will turn south? And maybe, of course, it could be something nuanced altogether. Well, here's what we think, and I mean this very seriously. No one knows where markets and economic strength or weakness will go from here. What I do believe is that the present mixed bag of circumstances still indicates a positive and healthy economy and a positive environment for risk assets. But it also exhibits one that is very vulnerable. Central banks have used tools that now force uncertainty in unwinding those tools. Global trade is facing headwinds that the world has frankly not seen in a few decades.

Heavy dispersion of policy and economic status has created a heavy dispersion of environment from one country to another, region to another, in terms of just the volatility that they're all going through. Things really are good, but they really are sensitive to conditions that could make them not good. But while we're on the subject, let me add to the narrative of mixed data a few interesting things. Tidbits I've kind of looked into this week. Chinese equities have moved dramatically higher. I mean, dramatically higher here this calendar year. I'm sure that is largely in response to optimism of a U.S.-China trade deal getting done. The cost of insuring Chinese sovereign debt has declined substantially, so-called credit default swaps.

The cost of insuring European high yield debt is the lowest it's been in a year. Japanese markets are showing signs of strength. The semiconductor sector has rallied. You have quite a bit of positive indicators out there as well. And the U.S. economy has good earnings and had been doing well anyways and was sort of being held back by fears around a lack of global strength. And if you get any kind of momentum in that direction, I think it will bode well for the U.S. I have a term I want you to add to your kind of lexicon, your vocabulary, if you will, because I think you're going to be hearing it more and more.

And that is the term insurance cut, which is not a standard vernacular of finance, but it has, to me, a message behind it that's going to be very interesting throughout the election. And that is that the economy is doing just fine, which is obviously what the Trump administration would argue for. It's what I have been arguing for, that we're doing quite well. And then there are people like the president and some others who are going to say, even though it's doing so well, we need to cut anyways. And their reasoning is a term that the vice chair of the Fed used this week, Richard Clarita, an insurance cut, whereby, oh, no, no, no, we think the economy is doing quite well,

but we want to have an insurance cut like the Fed did in 1995 and 1998, that it would help kind of just stave off any potential weakness coming in. Well, of course, those that remember investing in the late 1990s and the bubble burst that we saw after that 90s and the bubble burst that we saw after that may not think this is a great analogy that the Fed implemented what he's calling insurance cuts just in time for the dot-com collapse and so forth. I really think that the increase in the Fed funds rate is not needing a cut from it right now as much as the last round of quantitative tightening of them adding to their balance sheet. That would be a better area in which they could do an insurance cut than the one being discussed. By the way, while we're on the subject of past

predicting the future, interesting thought. The yield curve certainly, as I've been discussing at Dividend Cafe for some time, has preceded recessions. And if past is prologue, that's worth considering. But am I saying that the Fed should cut rates because of that? No. Does this sort of precedent speak to the possibilities of what may lie next in the monetary agenda? Well, in a sense, yeah. In a sense, it does. Before one bakes in that the Fed will cut rates this year, it has always, always been the case in the past that the Fed has cut when they've seen an inverted yield curve. And so if you're going to say, well, yeah, every time you see an inverted yield curve,

you get a recession. You may also have to argue that every time you get an inverted yield curve, you get a Fed cut on the way. And again, like I said a moment ago about quantitative tightening, I think it's entirely possible that the Fed uses the repeal of their quantitative tightening. I think it's entirely possible that the Fed uses the repeal of their quantitative tightening. The deferral of doing the tightening that they were doing could very well become the kind of form of dividend cut we were talking about. All right, I got to geek out a little bit more on Fed policy. I'm going to read to you from this week's Dividend Cafe. At the heart of the modern monetary policy conundrum is this simple statement. Central banks know that there is excessive debt around the world, mostly sovereign government debt. And they also know

that raising rates to stop that debt from expanding would create even worse effects, period. The medicine becomes a bigger problem than the disease in that it would feed a deflationary negative feedback loop and increase government spending due to rising debt service costs. My view is not that the central bank is bad at solving this conundrum, which is surely probably true enough, but that they were never meant to solve this kind of problem to begin with. The Fed was created to provide liquidity to markets when needed. That sort of lender of last resort concept. They were not created to address solvency issues. We dance around solvency in our society because we either don't want to admit hard truths that some companies or banks are insolvent and

should be wound down, or we don't want to take the steps necessary to repair insolvent countries, which would really involve often austerity and public pensions and things like that. So instead, we just dance around pretending like nothing's going on. By the way, on this positive economic data, which I am a believer in, jobs data was one of the examples I used. I read a really interesting report this week that there is a potential for a kink in the armor in that jobs market thesis. And that is that the small business job growth has really dried up as of late. You had only 6,000 jobs created in March in small businesses and only 19,000 in February. And normally, small business job growth makes up about 40% of the job growth that comes from the total private enterprise.

You would expect about 40% of new jobs to come from small business, and we're not getting anywhere near that. I think that there's two issues here. One is the kind of economic mixed signal it could represent, but then the other is culturally, it could represent, but then the other is culturally, because the number one reason small businesses are giving for not being able to hire more is indeed an inability to find qualified workers. And what I think that speaks to is that we don't have a job openings problem. We have a job applicants problem. Read dividendcafe.com this week for a bit of an update on Brexit. I'm going to try to keep

doing that, if not every week, at least every three weeks. And I quote Charles Gabe this week, one of my favorite global economists, and there's a good kind of breakdown of what the various options may be. And then I think I alluded to earlier, but the politics and money section, we look at the Fed's haranguing, excuse me, the president's haranguing of the Fed on Twitter all the time. What I think that the relevance of that is to Fed policy. And then we look at the energy infrastructure story and what an executive order President Trump signed that could be a real game changer. We also do have the chart of the week. It's the only chart this week in Dividend Cafe. Some weeks there's like, you know, eight, nine charts. And I always feel bad for the podcast

listeners that aren't getting to see the charts. This week is just the one. But the chart of the week getting into the government debt as a percentage of GDP and what it was during World War II, what it is in Japan now, kind of helps me put a lot of things in perspective. So I do got to leave it there for the week. We covered a lot of ground. I hope you were able to pay attention and follow everything we were saying. As always, go to DividendCafe.com for more elaboration. And thank you so much for listening to this podcast.

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