The Dividend Cafe - Growth and Debt and Everything in Between - August 26, 2016

Episode Date: August 25, 2016

Growth and Debt and Everything in Between - August 26, 2016 by The Bahnsen Group

Hello and welcome to this week's Dividend Cafe podcast. We're going to close out the second trimester of the year next week and as of right now markets have a small upside for the month of August. It's been a little bit down this week but not much. We appear set to complete the sixth consecutive month of positive stock market performance. I guess don't hold me to that because we want to wait and see how things go next week. There's three days left in August in the market week next week. But let's dig this week into some other issues that matter to investors. Talk about student loan debt, the media.

And I want to have a little discussion about where a marriage and dividend growth stocks might have something in common. So it could be a fun week. If you are in front of your computer, you want to look at our written version with other charts and such, that's at DividendCafe.com. If you ever want to listen to our weekly YouTube, where it's a little bit different content than what we do on the podcast, feel free to subscribe to our YouTube channel. But let me get into it now. The media's perspective makes perfect sense.

To give you an idea of how I feel about the way financial media covers markets and the economy, I think there's a perfect parallel in the coverage at the tail end of the Olympics. The U.S. had two of the great Olympic stories in history this year with Michael Phelps and Simone Biles. Well, what dominated the coverage? The antics of this idiot, Ryan Lochte. I mean, the coverage will never be about that, which is most relevant or powerful.

It's just not the way it's going to be. It's always going to be about that, which is most sensational and tantalizing. When it comes to investment context, keeping that in mind, I just simply say no thank you. I miss the old millennium. We talk a lot, rightly, about the anemic economic growth in this post-recession recovery, less than 2% per year for the last seven years. Did you know that the high year by a lot in terms of economic growth since the new

millennium began 16 years ago was 2004's 3.8% growth? And frankly, that was heavily boosted by much of the then insanity around the home equity refinancing and spending that was going on at that time. Well, why is this interesting? Because that high number of 3.8% that we saw in 2004, it's the high we've seen this entire millennium, it was the average number for 50 years prior to that, from 1950 to 2000. Just incredible to put it in context that way. The more we pay for stuff, the better. There's a very understandable confusion about whether or not we should be viewing low oil prices as a good thing or a bad thing. The consensus view has always been that the less companies and individuals had to pay for an input cost, oil, in this example, the more money that would hit the bottom line. The less a

consumer had to pay for one thing, like gas in their car, the more money they'd have to spend on other stuff, like frivolous spending or what have you. So naturally, there's tremendous confusion as to why the stock market now seems to be positively correlated with oil prices and why pundits are rooting for oil prices to be higher when we have generally wanted it to be lower, unless, of course, we sell oil for a living. I mean, however, there really is a rationality to the desire that oil prices be higher right now. And I just want to be able to explain that. Our economy has had so little growth over the last seven years outside of the energy industry that the negatives of a suffering energy complex have far outweighed the limited positive effects of lower gas prices. Number two, it isn't that oil is considered a

cause, but rather an effect. Lower oil prices are perceived as a sign of global weakness, particularly in China, by the way. In other words, the rules are all backwards right now because the few sectors and companies that benefit from lower oil prices are offset by the macroeconomic damage that a slowing energy complex represents. One man's loss is another man's gain. We wrote a few weeks back about why the growing LIBOR rate, despite negative bond yields around the globe, was not a sign of frozen credit markets but a byproduct of changing regulations and money market funds those borrowing on a rate link to LIBOR may not like it we are happy at the Bonson Group we changed all of our

client credit line borrowing needs to a Fed funds based situation about a year and a half ago but anyways I want to point out that those invested in bonds, like bank loan floating rate bonds that are linked to the LIBOR rate, they're actually getting higher income now because those coupons are ratcheting up. So we think that it's kind of a mixed bag here. And I guess as a long time floating rate investor, it's nice to finally see. Do as I say, not as mom and pop investors do. The most discouraging thing to say about the present state of equity markets may be that in the last two weeks, stock funds saw their highest level of inflows they've seen all year. On one hand,

it's potentially a classic contrarian signal that retail investors' sudden confidence with stocks means it's the ideal time to pare back. I assure you the opposite is generally true, that the more skepticism and fear we see from investors, the more attractive we find stocks to be. But on the other hand, it's a textbook argument for the need of an honest, competent fiduciary financial advisor. The most money of the year flowed into stock funds after a nearly 3,000 point move up in the Dow. I mean, it's a tragedy. It's never, ever going to change. When we put our foot down in the face of emotionally driven panics at the Bonson Group, we're operating in your best interest and to keep you from becoming a bad statistic. No new clothes for me, but I'll take that science textbook. I've taken

on the student debt fiasco in our country as an area of intense study because A, I have strong opinions about the numerous flaws in our higher education model, and intense study because, A, I have strong opinions about the numerous flaws in our higher education model, and B, I think there's an economic bubble at play in student loans that will have profound effects, many of them positive as I see it. In the short term, one byproduct of the student loan mess is that we believe it will affect spending at retailers in the next five years. Moody's released a report this week on the demographic shift taking place as the lion's share of student debt is now going to be held by folks in their 30s, not in their 20s. There are higher delinquencies in student loan debt than any other category of debt,

and it's the only type of debt that is growing faster than income is. A marriage without argument is no marriage at all. Married people disagree sometimes. Is that a big shock to any of you? Very loving and committed couples often have tension and disagreement, but it does not undermine the thesis of the marriage. If you'll forgive the use of me using financial writing terminology to describe a romantic relationship, the love and commitment do not go away just because there is an errant tension and argument at times. In our world of dividend growing stocks, many of which, not all, are also known for lower volatility, there does actually exist the potential for tension.

It hasn't felt like it this year because lower beta and higher dividend names have mostly hit the ball out of the park. But what do we make of this marriage when certain realities inevitably kick back in? Should price fluctuations resurface or a period of high beta growth outperformance come back? Will it undermine the thesis for ownership? Absolutely not. The discipline of dividend growth investing expects periods of outperformance and it expects periods of underperformance.

It expects periods of price upside and price decline. In other words, like any successful marriage, it expects turbulence, but never undermining the real foundation. I'm going to close out this week with a quote from Jeff Mackey I thought was really helpful. Markets are a complex, adaptive system being acted upon by millions of individuals who do not behave according to any predetermined set of rationales or rules. This plain and simple fact is what condemns all market timers to inevitable failure, regardless of their experience or the calibration of their indicators.

What Jeff's getting at there is that basic reality that markets are far too complex and there are too many millions of actors impacting things for all different reasons and objectives and considerations to ever think that our linear and rational calculation on something is how we should expect things to play out. It can make big problems for people trying to time things that cannot be timed. Let me leave it there for this week and we hope you have a wonderful weekend. It can make big problems for people trying to time things that cannot be timed. Let me leave it there for this week, and we hope you have a wonderful weekend. We really want you to get a lot out of this content.

We're open to your feedback anytime. And we'll be back at you next week at the Dividend Cafe podcast. Thanks for listening.