The Dividend Cafe - Global Tensions Ripple Through World Markets

Episode Date: August 17, 2018

This week CIO David Bahnsen discusses headwinds to global economic growth, emerging markets, Turkey, dollar liquidity and more. 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. This is David Bonson, the Managing Partner and Chief Investment Officer of the Bonson Group. And we have a lot of fun stuff to dive into this week. It's been an intriguing week of two-way volatility in the markets. And by two-way volatility, I really just mean normal volatility. We only focus on one way of it, which is downside volatility. But of course, things fluctuating in price require that to involve both movements down and movements up.

And this week, we got a little bit of both. You had a big day down on Monday and then a little recovery Tuesday, big day down Wednesday. And then so far, as I'm recording here on Thursday, really strong move up. And so we want to kind of unpack a little bit the reasons for this resumption of zigging and zagging and what it all means. So we'll get right into it. First and foremost, global tensions have been rippling through world markets. And I think that's the big story even underneath the U.S. market over the last week or so. Wondering kind of what the shakeout will look like as global growth appears to be slowing.

And certainly that synchronized story of growth from last year has all but collapsed. U.S. growth continues to be very strong, both in their economic GDP growth and in corporate earnings growth. But other domiciles are not now experiencing the same degree of growth that they had last year. Some still remain better off than others. So we comment a lot about Japan's corporate earnings rebound, we believe will be playing out for some time. Although their economic GDP remains obviously very, very muted. Fundamentally, some emerging markets face real pressure, especially where their countries have borrowed in US dollars and have a lot of leverage. And now with the dollar rallying so much, it becomes much more expensive.

So the currency story ends up being very relevant. China obviously has been getting pummeled. And I think most know that Europe has been tinkering right around 0% flatline economic growth. Copper prices reached their lowest level in a year this week, and that's heavily correlated to the Chinese yuan. Gold and metals and mining stocks are all down sharply. Oil even dropped this week amidst a broad sell-off. So you have a lot of global tensions that have been rippling through and having an impact in markets in terms of the emerging market i want to provide a bit of a contrarian approach on things does the state of emerging markets cause us to rethink our investment there no but frankly the state right now does cause us to want to consider allocating more money in

the space. We can't, won't call a bottom, but the outflows have been extreme and there is an excessively bearish sentiment around it right now that I don't think is aligned with fundamentals. The sell-off has not been broadly distributed. You have India actually up 4.5% as an index since the highs of January, whereas a country like China is down 24%. So there's actually very disparate results across the map, no pun intended. This does suggest a healthier environment for active managers who are engaged in a more fundamental growth analysis but with that said in the short term if the dollar continues to rally

then it heightens the squeeze on dollar liquidity and could very well exacerbate this period of tension to the degree that maybe it isn't all priced in yet. There has to be a healthy respect, both for the macro pressures creating this, but also the pricing realities that are taking place and what they mean for future value realization. So I like the opportunity here to buy emerging markets at these valuations, but that is different than believing that we are necessarily at an actual bottom. than believing that we are necessarily at an actual bottom. The adage remains that when the U.S. sneezes, the rest of the world catches a cold or worse.

And that concept of decoupling is dead. But, so, you know, let me restate it. As the U.S. goes, so goes the world. And I don't believe that has changed. And I don't know if it will change. But I don't think it has in the past. I don't think it has in the U.S. goes, so goes the world, and I don't believe that has changed, and I don't know if it will change, but I don't think it has in the past, I don't think it has in the present. But it must be said that the opposite or the inverse of that is not necessarily true. Emerging markets cannot do well if the U.S. is not doing well, but the U.S. can do well even when international markets are struggling. There's ample historical precedent for just that. So the two-way assumption

and analyzing correlations between U.S. and international markets, I think, is only halfway right. So like I mentioned, there has been this sort of stunning result to the upside this week after kind of a pretty negative environment around a lot of these global issues. You had the kind of flare up in Turkey and things like that. And then now we have this report that China and the U.S. are looking to resume trade talks and you get kind of a reversal rally and so forth. Well, look, I don't have any idea what will come of this particular China conversation, but I do think it's worth noting how vulnerable the market is to a melt up on the idea of China trade chatter getting a positive headline. You saw a similar thing happen out of the European Union talks a couple weeks ago. My point is not to make a directional call here as much as just point out the directional

vulnerability clearly exists in both directions and and given the nature of these trade talks and the posturing that's understandable um we do have a chart at dividendcafe.com this week uh pointing to the disparity between u.s equity market returns since the financial crisis and individual European country markets, and you will see a stark contrast in how European equities have performed relative to U.S. Let me make a comment on Turkey, by the way. I understand there's probably some legitimately catastrophic things going on for the Turkish people. I am just arguing that they're virtually inconsequential for the American economy. Now, headline events boost volatility until they don't, and that's what we're seeing here.

But the fact of the matter is that U.S. banks have about the same exposure to Finland that they do Turkey. have about the same exposure to Finland that they do Turkey. The number representing an aggregate figure so small, it doesn't even register in a lot of reports. So yeah, there's a disruption currency landscape, and emerging markets already have a lot of embedded vulnerability, as I've been talking about, particularly around dollar shortage, dollar liquidity concerns.

But as far as the specifics in this matter with Turkey, no, I don't believe it to be a systemic threat to the US. It does surprise me that this needs to be said, but I can think of no more useful truism about investing to share than this. If something sounds too good to be true, it isn't true. As I wrote a couple weeks ago, more capital has been eroded by well-meaning people seeking novelty than anything I've ever seen. And the same can be said for those buying things that have no basis in reality. Those who just swear they're receiving unbelievable returns with no risk. Those who have a can't-miss real estate opportunity at some incredible yield with no downside, blah, blah, blah. I also know this, though. As much as that truism exists, that things that sound too good to be true must be considered not be true,

not be true. There are, for a lot of investors, no other way than experience to understand and appreciate this truth. Edmund Burke said, example is the school of mankind and they will learn in no other. I really do want to point you to DividendCafe.com as always. You have got to see this chart about dining out and the surge taking place in American spending at restaurants. I'll leave it up to you to try to harmonize that with what we are told is going on at American shopping malls. Supposedly, we see the death of people going into stores to buy things, and yet they're going into restaurants in record numbers. And perhaps in there you could find understanding as to where the direction of these retail centers is going to go, more experience-oriented and so forth. On the political side, we talked about the fact that the China trade talks are potentially resuming here.

There is a ballot measure. It's not yet eligible for the ballot. It's at risk of making the ballot in Colorado that could change the regulations around oil and gas development and I think would have a dramatic effect in jobs and state GDP. It's a highly sensitive energy state, so you might want to read up on that a little bit. And then the chart of the week at Dividend Cafe. Speaking of market volatility, everybody's favorite subject, you can see visually the actual average daily trading range. And you will note that 2018 has really been about as average as it gets.

It feels brutally high because 2017 was so brutally low. And yet, in reality, the day-by-day swings we're seeing in 2018 really match up right around the kind of mean or average as far as those trading ranges go. Okay, I'm going to leave it there. Really excited at the Bonson Group to welcome our new Chief Operations Officer, Brendan Sullivan, who we officially brought into the Bonson Group family this week, had been working with our friends at Hightower Advisors for over three years, had worked with Charles Schwab in Field Enterprise before that, and now Brendan has officially joined our team, taking on a senior leadership position in our day-to-day operations, something we vitally need as we professionalize our leadership

structure. And look forward to you guys that are clients of the Bonson Group getting to know Brennan. And so look at our website for more information. Really fun times for all of us. And fun times in the market. We're going to keep doing what we do. And we look forward to talking again next week in yet another Dividend Cafe podcast. Reach out with questions and comments anytime. Thank you for listening to the Dividend Cafe. Thank you for listening to the Dividend Cafe, financial food for thought. 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 and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or

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