The Dividend Cafe - Inflating Our Thoughts on Inflation

Episode Date: May 21, 2021

I thought I would do something really fun with this week’s Dividend Cafe, but just as soon as I typed that I realized that, like beauty, fun is in the eye of the beholder. But what “fun” thing I was going to do was write a full recap of the recent Mauldin Strategic Investor Conference that took place from May 5 through May 14, and use that recap to capture some of the profoundly important takeaways that I want to share with readers of the Dividend Cafe. However, for that to be “fun” for me I need to do it thoroughly, and this week was a hysterically insane week here in the California office between projects, portfolio work, client meetings, morning research, DC Today, and all the normal things. I also got inspired by another few things this morning, and so I am going to call an audible and use next week’s Dividend Cafe as my Mauldin SIC recap, and use this week’s for a whole different kind of fun. Now, I kind of lied. I said that I was saving my Mauldin SIC recap for next week (and I am). But the truth is that some of the things I get into this week are itches that were somewhat scratched at the conference. So consider this a tease into next week, and I promise I will make it all worthwhile next week. I disagree with a lot of what I heard at the conference. I agreed with a lot more. Anyone who agrees with everything that everyone says is a compass-less fool. But that conference did for me what I earnestly want the Dividend Cafe to do for you every single week – foster thought and consideration. The conclusions that come out of that? Well, to that end we work. 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 podcast and video. I am actually, once again, I think I did this a couple months ago, recording from my little spot here near LAX as I'm getting ready to fly back to New York City. And as I'm sitting here recording, it's Friday morning. And so markets open, it's up big. It's had a couple down days, a couple big up days here more recently, but more volatility. A lot of the same things that we were talking about last week have returned to

markets this week. And yet I'm not really talking about a lot of that here today. I'm more talking about what I think is one of the big subjects that underlies it. And that is this continual conversation around inflation. We have a lot to say about this subject, but I don't think much of what I'm saying about it or have said about it this year is really in the same context as what people are hearing day by day, week by week, in the news and websites and social media and things like that. So I'm hoping that what we have going here today is a little bit more thoughtful, but also more practical conversation about the subject of inflation. Now, I had intended this week to do a kind of big recap of all the takeaways from the Malden Strategic Investment Conference that concluded last Friday. It was a virtual conference

this year, and it had started a week and a half before that. So it was a pretty robust conference with some of the leading economists and thought leaders and portfolio minds, not just in the country, but around the world. And I say that despite the fact that I was one of the speakers as well. So present company excluded, there was really a lot there that I think warrants me covering it here in the Dividend Cafe. But I ended up getting kind of inspired away from that. And I want to put the right time into that conference recap, because even though most of the people who would be listening and reading Dividend Cafe weren't a part of the conference and may not find me giving a play-by-play of it to be that interesting, what I'm actually going to do is write around a lot of the topics that came up out of the conference that I think have tremendous practical bearing on what

investors who read and listen to Dividend Cafe do care about. So I will save that for next week. And I think I'll have the right time in New York to devote to that. But I ended up doing a Dividend Cafe today that I think is very important. And it does cover a lot of issues that matter. And I'm pleased with the way it came out. But it is one of those things that just a simple Dividend Cafe, whether it's a podcast or video or even the written DividendCafe.com can't fully and exhaustively cover. There is a lot of nuance, a lot of complexity to the overall topic. But I think that what I've done is try to simplify it into some of the categories that I think are helpful. What I won't do right now is rehash the main issue that I've been covering for a long, long time, which is the deflationary pressures that I'm convinced are predominant macroeconomically as a result of excessive indebtedness in sovereign developed countries.

And right now I speak first and foremost, the United States. That Japanification idea is indeed my working thesis, very, very high conviction thesis as to what's taking place in the United States. But that is not the subject. And it's not the category of subject that we are really talking about right now. When this word transitory has become this kind of household term, so to speak, you have the Fed saying, yes, we see pricing pressures, we believe they're transitory. And you have different economists and people even like myself that will come up and have an opinion as to whether or not the issues that we face are transitory or not. And what I want to suggest is that there's a lot we're kind of missing in the whole discussion.

First of all, we need to go back to Milton Friedman's great words of wisdom, which is that inflation is always and forever a monetary phenomena. And that's most certainly true. But I plagiarized. Well, I didn't plagiarize because I gave him credit. in Paris this week who had said, saying that inflation is always a monetary phenomena, that it's always related to a growth in money supply is true, but it is not the same thing as saying that all growth in money supply is inflation. In other words, it's the classic necessary but not sufficient condition. When you have a growth in money supply, it does not mean you have inflation, but you will not have inflation without a growth in money supply, easy enough.

So the great example would be the quantitative easing moments out of the financial crisis. A lot of people saw this increased money supply. They saw what they called somewhat imprecisely, but we'll just play along, money printing and said, look, this is clearly going to be inflationary. It proved to be anything but. And the reason for that was that that increase in quote unquote money supply did nothing whatsoever to contribute to velocity of money, to its turnover in the economy, to its circulation and use in the economy. turnover in the economy, to its circulation and use in the economy. It added up bank reserves. It did things. It added to asset prices. It compressed credit spreads. You could argue exacerbated the wealth inequality divide. I mean, there are things it did for good or for bad,

but it was not inflationary. But then you say, okay, well, wait a second, right here, post COVID, we're doing that. There's a lot of this QE going on. They're buying $120 billion of government bonds per month, 80 treasury, 40 mortgage. And so you see a lot more of that happening, but there's another form of money printing in the form of direct payments to taxpayers. We gave everybody under certain income thresholds $2,000 about a year ago. We gave them another $600 right at the turn of this year. We just gave them another $1,400 last month. So that represents hundreds of billions circulating around and we have the federal unemployment benefit. So, okay, that's a bit

different, right? That's different than the quantitative easing. At the point of determining inflationary impact, I think it's important to understand our categories that we're trying to decide whether or not that money will circulate throughout the economy, create inflationary price pressures, and whether or not that will last, whether or not that's sustainable. That's what the word transitory means. Is it kind of a one-time issue, a short-term phenomena, or is it something that's going to have more lasting impact? And ultimately, you could argue if you're willing to isolate the inflationary pressures from government payments, direct payments, then you might have to say, well, it'll depend if those payments prove to

be transitory or not. That maybe the payments were transitory and there'll be a inflationary impact that's transitory, but then cyclically that will die off. What I would like to point out is that the part of inflation, meaning prices going higher, that I very much believe in, I don't believe is transitory. And yet I'm a deflationista. So what do I mean by this? What I mean is that there is non-transitory price increases in things that I don't believe are related to monetary inflation at all. And this is what the nuance is that frustrates me so much. I want to talk over and over and over again about the totally unacceptable price increases in higher education, healthcare costs, and housing. And other people want to talk over and over about inflation, but I don't believe those two things are the same. And so the nuance makes it impossible to talk about the one because the other has sort of dominated the conversation. It's simpler,

it's more friendly to soundbites. Just like I said, not all increases in the money supply are necessarily inflationary. Not all increase in prices in the categories we're talking about necessarily come from monetary inflation. And so you have policy issues, cultural issues, a whole lot of things I won't get into now that I think need not only attention, maybe require the most important attention in our society. And some of them have portfolio ramifications around housing, real estate, et cetera. Some may not at all. But I think at one level or another, these are crucial topics that because they're not being read through a quick and easy and, frankly, politically convenient lens or prism, they're not being fully understood.

has been and will be and is, that there is a debt feedback loop that is putting deflationary pressures in the American economy. Now, one of the things I talk about in this week's dividendcafe.com is that there is, I think, other factors that have to be considered in all this i certainly agree that we have an impact in um deflationary uh factors from technology globalization demographics other such things more predominantly with some of those in japan some in the us some of them though very global now my friend uh louis gov who who's all just absolutely phenomenal economist he happens to be charles sun and i mentioned charles earlier but he wrote a piece this week that utterly just absolutely enthralled me it was brilliant it was fascinating and it's a lot to chew on but his suggestion was that there was a really multi-decade event that has been playing out that was clearly part of the deflationary pressures in the United States,

Japan, and Europe over the last 20, 25 years, which is a couple billion new workers entering the global economy out of China and other Pan-Asian countries as well, extra pan. And that essentially, they used their currency and created this high production economy to feed the consumption developed world, which was very deflationary to us and allowed them to sort of enter the global economic stage. There's very little to dispute in Lewis's theses, but studying what impact they had to the deflation effect in the United States, I think it's fascinating. It's something I want to very much unpack. I don't believe that any of this stuff is helpful to try to isolate to one particular thing. There is sometimes multiple factors that play into some of this and therefore has to be studied that way. And then you might have to draw multiple conclusions out of it.

And I've talked about this before, but from a practical standpoint for my clients, I'm very much studying whether or not I want to reposition some of our fixed income assets around this thematic understanding of Asian shift in the global economy, where their currency is, where their rate market is relative to where our currency is and our rate market is. I believe that it warrants further discussion. I'm not ready to act on it. I will not do this quickly. But I also think that when we talk about inflation, deflation, if what we're talking about, which is what the news is talking about, it's what Twitter is talking about, and it's probably what most of you are talking about, to be fair. If we're talking about whether or not the CPI went up last month or what lumber prices are doing, that is a just totally different conversation than where we believe interest rates are going to be in Asia, where the US dollar is

going to be for the next five or 10 years. And I'm very focused on that macroeconomic trend. And then to the extent people go, well, you don't think it matters what people pay in prices. I say, look, I think if airfare costs are going higher or lumber prices are going higher this quarter, that matters to people who are buying airfare and lumber. It's not an investable thesis, but if we're talking about where it becomes investable, it's evidenced in the rate markets, how we look at bond yields. And if we really want to talk about something that is permeating all society, then we're looking at housing, higher education, and healthcare costs. Those are the three categories that I do believe face upward pressure and prices since I was a little

kid. And I believe none of those things are indicative of monetary inflation, that they're being driven higher by other cultural and policy phenomena that I think are very problematic, but again, need to be isolated in the conversation. So that's where we're headed with this. We want to unpack what is macro inflation deflation. I've talked enough. I think I'll keep doing it, but I have talked a lot about where the underlying deflationary pressure comes from in the US being excessive indebtedness. We want to look at how this interacts on a global economic stage with China going

forward, what the investor impact is, as it pertains to the bond market currency interest rates. And then when we want to break it down into short term considerations, I'm sorry, but there is no possible way that one month's report and the CPI has gone up or gone down is going to lead anyone to say, see, I told you so, or we should have done this, or, well, look at the 10-year bond yield moved up four basis points today. What does this mean we should do? All of these things can be destabilizing on a day-by-day basis. But if they weren't, something else would be. That normal market noise is just ridiculous.

It is totally unhelpful or unuseful to any serious investor. And because most of the conversation driving it is unhelpful, we can avoid all that. I want to talk about the serious things that will matter for your portfolio for the next 10 years. So I will leave it there. I know some of this stuff is rather heavy. Please do read Dividfe.com. I always think I articulate these things better in written word than I do spoken, but I've done my best here. I got to jump on a plane and please reach out with any questions

you have any time. Thank you as always for listening to and watching the Dividend Cafe. Please put us as a part of your feed, subscribe. It helps us. It helps you. And thank you again. Have a wonderful weekend. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC,

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