The Dividend Cafe - Investment Committee - August 28, 2019

Episode Date: August 29, 2019

Today’s podcast features our entire Investment Committee in a battle royale (of mostly agreement), talking trade war, markets yields, negative rates, “this time it’s different,” stock sectors, and alternative investments. Subscribe to the Dividend Café Podcast 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 with our entire investment committee of the Bonson Group. This is David Bonson. I'm the chief investment officer here at the Bonson Group and we are now doing, what is this, our third investment committee podcast? group and we are now doing what is this our third investment committee podcast it's our third uh of this where we bring the group together and we're trying to do this weekly for you talk about different aspects of the market and our thoughts and positioning however this is actually the first where we have the entire investment committee here together because i believe our first week brian sitell was here and robert graham was not and our second week robert was here and brian was not so now we got the whole gang here together and if you think that we are obnoxious as a group

of four you should see us as a group of five um all right guys so uh rather than go around the circle and take half our time everyone said hello we'll just get into this organically we are sitting here now it's a wednesday and and the market is up about 100 points here today. It was down a bit yesterday. It was up the day before a couple hundred, down 600 Friday. I can keep going backwards all the way to the beginning of August. I actually do know the daily move of the market every day since July 31. And surprisingly, with an average intraday move of 315 points per day since July 31,

the market grand total from its high level to where we sit now is only down 3%, 4%. You've had 800-point down days and 600-point down days that have then kind of been made up on other days, usually 400 here and 200 there and stuff like that. So, no, we're down, but the volatility is a far bigger story than the directional moving markets. I'll start with you, Brian. Do you think that we are in a bearish environment, a volatile environment, or a bullish environment? Let's eliminate that one just for sake of argument. Between bearish and volatile, which one do you think we're in? And what's the difference between the two for an investor right now? I would say that we're in the middle of those things. So I would say,

if you look at volatility, the VIX was upwards of 20, a little over 20. It's back down here a little bit. But essentially, the market's trading in a range of 2,800-ish on the S&P 500 to 2,950. It's kind of oscillating between the 50 and 200-day moving averages. So we're kind of trading sideways. So a little bit of volatility, not bullish, not bearish, very sideways. Like you said, August is down a few percentage points, but not outside the realm of- You know, August right now is not even down as much as May was. Yeah. Yeah. So we're working through. Interest rates today are lower. What, 10 years at 146? Yeah. 130, yeah, 146, lower. What, 10 years at 146? Yeah.

130. Yeah, 146, right. Is that the all-time? 136 is all-time low. Yeah, 136. So getting close to there. Which I think it was at for about an hour and a half in 2015? Yeah, 16, I think.

Yeah. So, yeah, lower rates. You know, when you get lower interest rates, it tends to, you know, bode a little bit well for stock prices in the short term. And I think that's why markets are up 100 points today. But other than that, not a lot of news and kind of trading sideways here. So, Julian, what creates this kind of volatility? I think it's one person in particular. Without giving a name, I think you call him the purchase, right?

Yeah, we're allowed to say his name. We're not going to talk about individual stocks on this podcast today, but we can say individual presidents. We only have one at a time in this country. But I guess last week was all about a lot of tweets and a lot of things coming out about the trade war. And then he all calmed down when he took the plane to France, to Biarritz. And then it was a very different speech over the weekend.

Even talk about China calling him, like it's not clear if that's true or not, but I guess the market saw that as positive news that maybe they're going to be a trade war, some trade discussions. And I guess that's why we kind of trading sideways because you have on one hand, the Fed that's kind of helping, supporting. sideways because you have on one hand the Fed that's kind of helping, supporting, and on the other hand, this Fed war that doesn't look any closer from being resolved. So I have a question about it, though. President Trump has been tweeting rather heavily, and I would say radically, since he was elected,

and the market has not cared at all. Do you think right now the market cares about what he's tweeting or do they care about what it represents? Like are they taking it more seriously now? Well, I guess they're taking seriously because there's been some, it's not just tweet without action. I mean, there's been talks of new tariffs coming in September and in, you know, in October and then back in September. So, you know, changing the rates.

So there's really, I mean, this is happening. The trade war is happening. And so it's not just threats. So it's not just, you know, erratic tweets with no consequences. It's, I guess, you know, if you look at the inversion, you know, going the rates, the gold, all these, I guess, markers of risk are showing that the market is very concerned with what's happening. And the only thing that's helping is that the Fed, the market is also anticipating that the Fed will help.

And I guess today, I think, or that was yesterday, maybe deadly. Yeah, I was just about to bring that up. We should talk about that. We will. Yeah. Yeah, no, there is that up. We should talk about that. We will. Yeah. Yeah, no, there is something that needs to be said about that. Let me continue that thought with Daya. As far as what Julian's getting at, the markets aren't responding and not enhancing volatility around the mere tweets and the kind of behavioral or verbal gyrations of the president, but what's actually

underneath it, real actions. Is that your view that now we have to take the tweets seriously because he's not letting off steam? He's enacting policy from some of this. Yeah, I thought that was a great answer by Julian. I think if some of those tweets have certain details, or I'm sure some tweets seem more actionable than others, and I think the market does a good job of properly discounting that. I think as far as the market volatility, until there's more resolution, and it really

goes back to what we talked about with uncertainty versus risk. I think risk is something that's calculable, but there's a lot of uncertainty right now about I think risk is something that's calculable, but there's a lot of uncertainty right now about how all this is going to shake out. And business confidence has receded as a result. So yeah, I think this is, I'm sure this is consensus, but I think we'll continue to see this kind of all until there's a little bit more clarity. So, Robert, is the trade war – so let's ignore Twitter and President Trump as a factor in this other than the trade war. That's what he's doing that's getting to the market. So is the 10-year at 1.46% and a modestly in-and-out, in-and-out inverted yield curve, is that all related to the trade war? Well, we looked at the inversion a couple weeks ago ago and it was all of maybe an hour or so

early in the morning that it inverted. And, you know, I was looking at different yields around the world right now and you look at where there is an inversion. You have pretty much the United States, you have Canada. And so what I'm seeing right now is a very concentrated flight to security at this point in time, because where else would you traditionally go? You go to Switzerland, go to Japan, go to the UK. The UK has elevated volatility above anywhere else right now. I mean, on this current day with what's happening in Parliament. So I think, you know, the volatility is somewhat stemming from that illustration of an inverted yield curve in the United States.

But I think the reason for it is for different factors than just U.S. growth at this point in time. And so the inversion of the yield curve, if there was no trade war, would theoretically still be happening? I think it would be more flat than it currently is. I think the inversion would be more muted than what we're seeing currently. Well, right now it's inverted by half a basis point. I mean, it's as flat as it could be.

So there's technical factors, global factors. It's the, we used to call it TINA, that there is no alternative. That's it, yeah. That's why people come into the US. That's my opinion, I agree. So go ahead, Dan. I'm hearing this time is different.

Yeah, a little bit with the- Yeah, well, Julian actually explicitly said it in an email to all of us last week, and I'm with him on this. I think that this time is different, but I don't like us, when we say this time is different, but I don't like when we say this time is different, the press will often say it as supposedly self-attesting reductio ad absurdum. Like anyone saying this time is different must be wrong because this time is never different.

Well, first of all, this time is different because it has been different before, too. So this time is different because it has been different before too. There's six out of seven past recessions, and even that gets the if A then B thing wrong because sometimes you have had a recession where the yield curve did not invert, and not every time you've had the yield curve invert did we go to recession. And then you go a little further back, it's nine out of 12. But let's say it was 10 out of 10 times. We've only had 10 recessions and and 10 times the

yield curve inverted we had a recession but that is untrue right but let's just say that were the case so in the past you had a 100 correlation you still don't have causation and you still do have for fact of the matter different circumstances this time so i don't think that julian or i are suggesting that it doesn't mean that julian or i are suggesting that it doesn't mean that we will go into recession i think it's very possible but i also want to be intellectually honest enough to say that you have never had germany at a negative 70 basis point yield in their sovereign debt and these kind of global flows into U.S. And I'm of the mindset that right now people are going, this is incredibly free money because it's 1.5%.

So over a negative 70, they're picking up 220 basis points with all this money that the ECB has put into outer space. I think that the 10-year could come down 100 basis points and their mentality wouldn't change a bit. That's a great point. I mean, and that's the thing. It's like, you know, right now we've had this huge run on treasuries. I mean, rates have dropped 225 to 146. And I think that the government should take advantage of it and keep doing what they're doing. And I think the Fed should lower interest rates to catch up to the rest of the world. Whether that plays out, we'll see. But at the end of the day, if they're trying to find a spot or an equilibrium in treasury yields

where they're going to kind of stop the flow into the U.S. dollar, into U.S. treasuries, they have a long way to go. The rest of the world is negative. We're at 146. It's a long way. Do they go below negative? I sure hope not. I sure hope not.

I don't think that they will. But I sure hope that that's not the case. But again, I mean, I— Politically toxic. Yeah. And like we were talking about the recession indicator, the inverted yield curve. And yeah, I mean, Fed funds is at 2 to 225, 10 years at 146. That's pretty inverted if you look at it that way. 2s, 10s are negative by five basis points, like you said. But that does not tell us when the recession might be. And I think if the problem is this time is different, I would agree that the probability of this time being different is much

higher because of the anomalies around the world. I mean, we've never had $16.5 trillion of negative yielding debt, and so that will cause anomalies, and it could cause things be a little different this time. That said, it doesn't mean that I'll be wrong to say that the inverted yield curve will cause the next recession, because it's not a cause, it's an it's an effect number one and number two might be 18 months from now might be 24 months from now and you could probably pinpoint it and say well that was because the yield curve was reverted so well yeah but if once you start saying it could be two years what's the point of it no I agree I mean it's gonna it's gonna rain some somewhere in America the next couple weeks and we'll have a recession in two three years so the So every time it rains, they have a recession two years later.

I mean, I make it up a ridiculous... That's the bull bear case on the this time is different. I could probably paint it both ways, and I could probably be right both ways because I could indicate different things. I think the inverted yield curve is one thing out of a whole slew of different things. So Julian, you've been at this for a little while.

This is not your first rodeo. Let me ask you a question. I know the answer, but I want to hear your perspective. Sure. Have you ever heard people at cocktail parties and restaurants on Friday night and the mainstream media when the yield curve inverted, talk about it the way they have now? This has become like a household conversation. Yield curves inverted six of the last seven recessions, nine of the last 12. This is not the first time. This is going back 30, 40 years. And yet now it seems like everywhere you go, people are like, ooh, a yield curve,

inverting. What do you think? What's different this time? Why is it such a big issue? Well, I guess what's different this time is the world is different this time. The rates are everywhere else. What we just said, having negative rates and, you know, the fact that you've had this QE, you've had the Fed playing with, you know, buying bonds. And so do you have a real market? Does it really represent what the, you know, would the yield, would there be a 50 pips inversion if the Fed was not involved in trading these securities? Probably would be different, right?

So that's why I guess you cannot really compare what's happening this time with what happened in the past. And so I guess that's really what's different this time. So it's different because the economic facts around it are different. That's your theory. Yeah, I think because... I'm going to throw out another theory I want to get you guys take it's trump talking down the economy talking down the market trump has made everything more toxic and that this time there's an election next year

and yield curve is a bearish economic conversation so it's trump yeah there's something else too i mean we've talked before about how it's been an unloved bull run in equities for the last couple years right and so the pundits on the news have been talking about talking about it it's it's fallen on deaf ears a lot it's the first time post 08 yeah and and this time there's actually a legitimate metric that they can count on say okay aha this time i'm really calling it all right and that's different it hasn't happened in the last couple years it's very very good point dan what were you gonna say yeah no i i think uh i think that has a lot to do with it. I think Trump pointing out the Fed, saying that they're against – shedding a lot of light on what the Fed's doing

and how it's the Fed's fault and pointing fingers. And what about Dudley's op-ed? Did you – you know, that's – Yeah, I have it up here on the screen now, so let's get our listeners up to speed here. You have Bill Dudley, who was the vice chair of the Fed for a long time throughout the whole Obama years, oversaw that seven-year ZERP policy of zero interest rates.

And then he came out this morning. I want to quote word for word because I don't want to misrepresent what he's saying. So when I quote his words, you would think that I'm less susceptible to being accused of misrepresentation. Although even that is not totally safe. It's crazy. representation um although even that is not totally safe it's crazy officials could state explicitly that the central bank won't bail out an administration that keeps making bad choices on trade policy making it abundantly clear that trump will have to own the consequences of his actions said mr dudley so these are word for word quotes from the assistant vice chair essentially

i don't want to say he's implying i think he's stating that the fed should not raise rates because then it will be up to trump to have no right with the excuse me that they should not lower rates because that would be a form of bailing out trump and that trump should not get the fed bailing them out first question is this appropriate for him to say? It isn't. Second question, do they all think this way and he just said it? Hopefully not. God forbid. Third question, will anyone listen to him? Are there Fed governors that are saying, you know, they're right, we just got to stick it to Trump here? I mean, what happened to that whole independence thing?

Yeah, exactly. I can't have it both ways. I've got to be consistent on it. See, my? Yeah, I can't have it both ways. I got to be consistent on it. See, my thing is that you can't have it both ways. My whole point was Trump was just calling out what we already know is that it's not really independent. We call it independent. We got more structural independence than they do in Japan and Europe. But functionally, the notion of that complete Chinese wall between fiscal monetary policy has always been ridiculous.

They're political positions. They're not elected, but they're political. They're appointed by the president and approved by the Senate. So Trump called out the hypocrisy of it on one side. And then all the Trump supporters said, yeah, good. He's calling it like it is. The Fed needs to do this. And then now he's doing it on the other side.

And people are like, wait a second, what about independents? I have a question. You might know this. How much has his PAC raised for Warren at this point in time? Because this seems a lot like positioning going forward for him. Yeah. No, he, I wouldn't be surprised if there's, you know, these bureaucrats tend to bureaucrat. I wouldn't be surprised.

I mean, he's a left-wing guy. And that's the implication. It's, you know, don't lower rates and that will hurt Trump's getting reelected. You know, that's the implication. It's, you know, don't lower rates, and that will hurt Trump's getting reelected. You know, that's the implication. It's very political. It's reckless. So, Julian, I guess my question is this. Did Trump bring it on himself in this sense?

There's two messages that we have gotten loud and clear, and I'm right now reporting the news. This is my fair and balanced presentation of two facts. One, Trump has told us something in the range of 50 times a day for roughly 300 days. Economy's the best ever. Economy's the best ever. Never seen anything like it. This economy is literally ridiculous. I cannot believe how good it is. That's one message. Number two, the Fed has got to lower rates and got to do QE, emergency economic actions, because it's just so bad we have to get the Fed involved. Has the president said both those things?

Am I being fair to him? And how do you circle those two things together? Well, I guess the economy has been really strong. Earnings have been amazing, despite the environment. So I guess he feels like he's in a strong position to go to war with China. The rates and the Fed will do whatever it takes to help him. And that's kind of what's happened the last one year already. The Fed going from raising rates to now lowering rates.

And another two cuts are priced in by the end of the year. So I think he keeps an eye on the market like like we do and uh and if he sees you know that is uh trade war really is starting to hurt the economy i would bet that you know and his re-election uh potentially he will he will do something but it's still a year away so he has plenty of time i guess so probably you know the thing we have to keep in mind is his agenda um and so there's no you know i guess last year the market tanked 20 because of the fed this year it's tanking because of trade war i think he can probably afford to wait you know another six months because you don't have to put your to your

votes uh until when uh until november next year right so there's plenty of time for for him to uh to change his narrative i I guess, on China. I'm not sure if I agree with that. I don't think that that's a real-time thing, that how people feel about the economy the day before the election is how they vote. I think it bakes in a narrative at least six months, if not 12 months in advance. I think that in the summer of 2012, Romney was trying to run on the economy being bad under Obama. It had been bad in 10 and 11 and it was not great in 12, but it was good enough that on a directional sense, I think voters felt better.

And it wasn't enough of a play to for Romney to get an edge with with Obama there in 12. of a play to for Romney to get an edge with Obama there in 12. In 04, in the reverse parties, Kerry tried the same with Bush Jr. And the economy started to turn down later, but it just wasn't that right message. But the best example for with the economy being bad and having gotten better, and yet it didn't matter, was 92 when Clintoninton beat bush senior the economy really bottomed in 18 months before the election and and you couldn't change the narrative that way and so i i definitely agree with you that in theory it seems like and from a policy standpoint there's time to reverse course but um the lag effect of this it let's say that he ends up reversing course with china it's not going to be tomorrow right so let's say it's a few more months could be by the end of the year i guess

yeah by end of the year and then business but but for you're still dealing with a backlog with non-started projects from the trade war of this year that maybe don't come back online for six months after that or a year after that uh that the to me if that's what he's thinking that i can just flick a switch and get everyone feeling good about the economy again in six months and i still have time before the election by then you've had all these debates all these primaries all this activity and all of it will have centered around a conversation of negativity in the economy not positivity in the economy i don't see how he could possibly reverse that by then. That's just my –

So then you think he really believes he's the one and he's going to do this, whatever it takes, even if it means losing the election? You mean the chosen one or just the one? Yeah, the chosen one. No comment. No, I think that – yeah, I mean I don't want to get overly political with it, but what's in the mind of the president on this? I mean who I don't want to get overly political with it, but what's in the mind of the president on this? I mean, who the heck knows? I do think that he every single day is torn on that issue. He, on one hand, believes that he has leverage with his base to just press with China and that people won't turn on him.

And I think he just looks up at the screen and if the stock market's not crashing he kind of feels better then the stock market drops 600 points and all of a sudden he has to unwind it uh but i do not believe that there's i this i actually am very confident of i don't think he has any strategy or certainty of where he's trying to get this to go strategically there's he's not playing chess on this this This is day by day, finger in the dam, figuring it out as he goes. I think generally, I mean, he has a genuine desire to renegotiate the trade deal with China. And I, of course, respect that completely. I think there's enough time before the election and the economy is doing quite well where you kind of have the

luxury of duking it out, so to speak. And I'm curious, as I think we all are, to see how that changes as we get closer to the election. But I mean, as of right now, he's doing this. It's causing ripples in markets and those types of things, no question. Is it really hurting the economy in the United States? It technically isn't all that much. I mean, consumer sentiment is high. It came in hotter than expected for this month of August with volatility that we've had.

Markets are down. Is it a consumer leading or lagging indicator? Yeah, that's a good point. Well, what's the answer? It's a lagging indicator. We're talking about it rhetorically, but the listeners don't know. Oh, yeah. Consumer's a lagging indicator, right?

Yeah. Is it hurting business confidence? Yes. Yeah, it's hurting CapEx. It's hurting business confidence, those types of things. But unemployment is 3.7%. You're getting lower interest rates out of it. So there's some positive things in the economy. And so my point is just

the question of whether it's a genuine desire to really change the world and change things between China. I hope that's the case. And we'll have to see as the election gets closer. Yeah, yeah, yeah. Yeah, I agree with that. And I think, like David said, it's just all about the market. I think that he uses that as the scorecard and if the markets higher you know come election time I'm sure he's going to market just that I think that who knows as far as what his genuine desires are I do think he really believes strongly about this China thing I just don't know where where he yeah as far as any strategy goes or any long-term deal I think it's a kind of just whatever he's feeling at the moment, which kind of freaks me out a little bit.

But yeah, it's going to continue. I was thinking like if we put ourselves in the Chinese shoes for a minute, what would you do? I was thinking like if that was me at the negotiating table, I would say I have another year, year and a half of this until we have the election here's the wild card there julian i'm with you 100 and if they had just omniscience to say joe biden was going to win i think they would say you know what trump is vulnerable let's ride this out let's not only ride it out and see if he loses but let's ride it out and help see that he loses yeah meddling But what if they now believe it's not going to be Joe Biden, it will be Elizabeth Warren, who in a lot of ways, you could argue is a China hawk in the same mold as Trump,

but perhaps even worse in that she's also willing to tax the heck out of the American people, which impedes their ability to buy stuff from China. I think Liz Warren is a wild card here. I'm doing very simplistic calculus along the lines of what you're saying. But if I'm China and we're now at this stage in the calendar, I'm saying let's ride out Trump and get Biden. We'll get a better deal. Or if Trump looks like he's going to win, we'll say let's get a deal with Trump now. We don't want to deal with him second term.

Then Liz Warren enters the picture and you go, ah, you know what? Trump could lose. We get a better thing trump now we don't want to deal with him second term then liz warren enters the picture you go ah you know what trump could lose we get a better thing but then it's warren that could be worse i don't know what i don't know what they're thinking i assume they think warren would probably be more rational than trump i mean they don't need rat like you mean or at least uh yeah somebody's not very emotionally driven or a little bit temperament matters to them. I also think we're... Is she going to give him a better deal? Yeah, I don't think so.

Yeah, I agree. I think she'll give him a worse deal. She's much more aligned with Trump as far as China goes. She could pick up 10% of Trump's base. She could pick up some of that nationalist populist base by her first thing in office being some big protectionist nationalist. She's calling it economic patriotism. Don't get me started.

But my point being, I think Warren could give them a worse deal. She's more focused too on labor cost differentials, I would imagine too. So that's one of China's biggest fears is the moving to lower cost supply chains, which is happening, you know, we're seeing Vietnam and whatnot.

So she would probably have less of a focus on the IP side of things, which is arguably what I think is most important about a trade deal going forward but yeah i think she's she's pretty scary to the chinese government at that point what would be interesting with warren and i'm not going to say anything to compliment her because i don't have much to say to compliment her but one thing warren would do is whatever her agenda was with it she would publicly articulate what the her agenda is where what trump will do is let's say ip is his agenda he'll then say tariffs and and trade deficit and he and he pollutes the

issue because he goes back and forth i think that confuses markets where warren would just say it's about labor cost differentials and she'll and she'll match her message with her agenda for and even though it was a message and agenda i probably disagree with she'll match the two where trump kind of uses one thing to justify another it gets a little confusing you know what i'm saying yeah let me let me put an end to the trump political stuff i'm going to borrow from my friend rich lowry at national review when we move from one conversation topic to the next and he and he finishes it with an exit question so i'm going to go around the circle real quickly. Brian, as it pertains to Trump, Twitter, trade war, yield curve inversion.

One month from now, is the yield curve still inverted? Yes. Julian? Yes, very much. Very much, meaning it's further than one basis point. The 210. The 210, yeah, still, I guess. Still inverted.

Yeah. Wider? Wider inversion? Probably. Probably, okay. Dale? I'm trying to find reasons why it wouldn't be as far as growth goes or good economic data but i just don't see it in the short term so yeah i'm gonna say yes it's still inverted i think it'll float around where it's at but

eventually end up more inverted one month now correct answer is still inverted a month from now very likely has nothing to do with growth the thing that could change it is if the fed shocks markets with 50 at once yep um it could potentially get about 10 points of still flat but not inverted differential next topic what is an investor to do we have trump twitter trade war volatility is the rule so then you say how do i play it you have cash to put to work you're not already invested let's just take for granted for a second you're already invested and your portfolio is properly allocated brian so let's assume that guy or gal is leaving their portfolio in place but a new person comes in says i've never had any money i got cash i turned on the news a

couple days ago we were up 800 points. I turned down the next day, it was down 900. Is this an environment to put cash to work? It is. It's still an environment to put cash to work. That all said, you know, it's all indicative of the individual's personal goals, risk tolerance in the whole deal. So when we're putting this stuff to work, we're designing- What if one of their goals is to make money? Then it's just a matter of time. What if one of their goals is to make money? Then it's just a matter of time. Sorry, we've got a time. I can't go that easy.

Yeah, no, no, no. Look, there's still opportunities there. I mean, there's leadership groups in the equity market, staples, utilities, such, things like that. There's great values out there. We've been adding to the portfolio. So if we didn't feel like there was opportunity, we wouldn't be doing that. That said, yeah, it's a time to use caution when you're allocating portfolios. I think there's opportunities in stocks and bonds and alternatives.

We'd still put money to work. I think we'd do it in a tactical way, and I think we'd be thoughtful about it. But yeah, it's still time to add. Julian, would you recommend somebody put cash to work in the stock portion of their portfolio? And then after you answer that, what about the bond portion of their portfolio? And then after you answer that, what about the bond portion of their portfolio? Yeah, I still very much think equities are, you know, what we keep saying, there is no alternative. I mean, you make the yield on the S&Ps about 2% now, and it's more that you would make on the 30-year. That went below 2% for the first time today, I think it's at 1.9. So there is no alternative there. I mean, for sure, the one thing you don't want is time today, I think it's at 1.9%. So there is no alternative.

I mean, for sure, the one thing you don't want is to have cash. Then it's a question of how you're going to allocate between equities, bonds. We have seen a massive rally, but if we keep having this trend of lower rates around the world, there's no reason why the bonds you have in your portfolio account, they're going to keep following the rates. And if they keep going lower around the world, the yields are going to go lower. So your bonds are going to appreciate.

And then also, given the higher volatility, a good time to have a large allocation to alternatives. All in at once if someone has cash or tether it in? Well, given the volatility, I would say probably tether. tether it in? Well, given the volatility, I would say probably tether, you know, use the opportunities of the big swings to, you know, to add on weakness and, you know, over time. We are a like-minded investment committee, aren't we, my friend? Daya, what are your thoughts on this cash and market? Let's focus on that bond part for a little bit. I actually would have very little emotional or psychological resistance to putting money into equities at this point.

And yet I would find it even harder to put money into a bond market where they're 10 years at 1.4% or 30 years at 1.9. Asset allocation doesn't care about those emotional, timing, event-driven nuances. You're supposed to put money to work, right? Yeah. I mean, it's hard not to go with the consensus on this one. I think that if you already have an exposure. Well, consensus in this room. Yeah, consensus in this room.

If you already have exposure to fixed income, I find it very difficult to add in this environment. already have exposure to fixed income, I find it very difficult to add in this environment. Sure, yields could continue to grind lower and your bonds could see some price appreciation. But if you're looking for a total return, I think there's still a lot of value in the equity market. You know, multiples are reasonable. I don't think they're stretched if you normalize for how low yields are. And yeah, there's still some opportunities out there. So I like adding to equities. And like Julian said, if you get some downswings and you can get a bargain in certain names, I think you should take advantage of the opportunity. Robert, let's play off Odea's last sentence there, though. Let's assume that structurally, you're on the same page that the rest of us are about this issue. But now let's change it to what he said, certain names.

Would you feel the same for an index investor going into the S&P 500 as you would a bonds and group dividend growth investor buying individual names that might be a more compelling values than the S&P 500? Which correct me if I'm wrong is still trading 17x forward. Yeah. So one of my favorite tools metrics to look at is the Fed model. So looking at the yield on the 10-year versus the yield on the S&P. No wonder the Fed has ever called it the Fed model. Yeah, that's right. I know.

I know. You already did a good job of placing it there. But that can be dangerous, I think, to your point, because I think now if you're going to get paid via positive cash flow dividends, et cetera, you need to make sure that you're getting paid adequately first and foremost, but that also the underlying balance sheets are very fortified. And I think that's what we do really well here is we're looking at a bottom up level at, you know, where is the cash coming from? Is it sustainable? You know, there's a lot of names in the S&P when you buy that basket that are, you know, the bad lumped in with the good, of course. Yeah, I think that what we're facing right now

is interesting in that there's a heavy temptation to pretend like we've not seen this before, where there are difficulties in making decisions about putting cash to work. But the thing is that normally that question would come in clearly bubblicious valuations. I am far more sensitive to wanting to tether and hold back and have heavy cash reserves when the S&P is trading at 22 times earnings than I am just because we've had three weeks of volatility. I think that deploying money in a volatile market, as particularly as you said, by us tethering it in day by day on those days of weakness, actually, I think is really attractive. I really like the idea of doing it. Valuation bubbles are harder to invest in.

Day by day volatility, there's just no record of that not being a good entry point for investors. It ends up being an attractive positive, actually. You get lower prices as you buy in, absolutely. So what's getting cheapest? We're not talking about individual stocks, but let's talk sectors in the market. Let's talk asset classes. I'm going to go around the room

with a different asset class, emerging markets, what do we think there? It's difficult for us because our emerging market strategy is doing very well. Index is getting hit. What do we think? Index is getting hit. I mean, I think there's currency at play,

global trade war. Obviously, those things really do matter from a valuation standpoint, highly attractive. And I mean, the strategy that we're using, focusing on the consumer and the emerging market, I think is still the right play. I think, so there's opportunity there. So I would be adding the emerging market to this level, but I would not be doing it because I thought Yuan was going to go below seven again and or there's going to be a trade deal. I would be doing it just basically on fundamentals, bottom-up research on individual companies, looking at just the fact that you're buying a higher growth rate in the emerging world

than you're buying in the United States at a much lower multiple. Beautiful. Small cap, Julian, what do you think? A small cap frothy U.S. equity. I guess typically small cap is going to get hit harder than large caps just because investors fly to safety and they feel like large caps are going to be safer than smaller caps. So you probably have great opportunities in smaller caps.

If I look at their portfolio, we have a dividend yield. That's twice the dividend yield of the S&P 500. Then we have a beta that's around 0.8, 0.75. So that's twice the dividend yield of the S&P 500 and we have a beta that's you know around 0.8, 0.75 so that's more like defensive and we have some small caps in there and they contribute to that to that yield and and I guess it's I think it's about you know we should talk about sectors as well there's been a big move in sectors I don't know if you're gonna ask Dale later well we'll start it off and then we'll go to Dale. Pick one sector. Again, it's a top-down question and we're bottom of people, but is energy the most attractive sector?

What energy has been this month? I want to be clear. This is August of 2019 I'm asking this, because if you feel like you heard it January of 19, July of 18, May of 17, this has been several years, energy has been the most undervalued sector. It's been very interesting months. There's been a lot of, if you look at sector rotation, there's been sectors like real estate, utilities, consumer staple, like the safe haven sectors

not impacted by trade war too much, have been outperforming, and sectors like financials and energy and all the cyclical like industrials have been very weak. There's trading opportunities there as well. Sectors. That's a good answer, Julian.

It's almost like we sit together in all the sectors. I feel like we're agreeing a lot this session. Normally it's a bit more, I think, a bit more dissent. I'm holding back at the conclusion. When there's no one that can rebut me and I just get the last word, I'm going to let everyone know where you guys have been wrong. Okay, perfect, perfect, perfect. An avalanche is coming towards the end that I can't wait for.

Yeah, as far as sectors go, look, energy has been underperforming this year. I think there's a lot of opportunities in the energy space. I think it's misunderstood by the market. Even though oil, I think it's still around 20% year to date, has increased. And you haven't seen any sort of love from some of these energy stocks. If you look at yield contribution, make a significant portion of that 4% that Julian was talking about. So yeah, I like energy. I'm a fan. I hate to jump on the bandwagon, but energy, I think, has a lot of things going for it. We talked about a certain Middle East IPO upcoming, and so they're very interested in sustaining higher energy prices leading up into that.

When people talk about energy, too, domestically, they're generally thinking of, you know, oil, you know, gasoline for cars, things like that. But the petrochemical side of it, too, is really interesting, right? And the refineries that generate those materials, they still need pipelines to feed them as well. And I think those types of companies and sectors have been a little bit undervalued, to say the least, over the last couple of years, really, at this point. So you have an energy infrastructure story that looks attractive. And it sounds like you're saying you have a utility story that's overvalued. I would say so. I think it's had a great run. I think if you look at multiples of utility companies, they're in the 20s across the board. I mean, the entire index.

Think about that. Ut utility company at 20x yeah it doesn't make a ton of sense on the energy side i mean i would agree genuinely i think there's opportunity there i think you've got wti at 50 or getting close to going below and i think that starts to curtail capex in the us and so we slow production a little bit and then the pendulum tend to swing back the other way a little bit and you get an increase in prices and kind of round and round we go so i think from an opportunity standpoint as we sit here today i would agree that there's opportunity there i would also say the financials have obviously underperformed recently many trading below book value and if you look at what was it um nassim taleb the don't tell me what you

think of the world tell me what's in your portfolio yes that's right so if you look at it look at ours we're we're looking at financials don't tell me what you think of the world. Tell me what's in your portfolio. Yes, that's right. So if you look at ours, we're looking at financials as opportunities as well. Don't tell me what you think. Show me what's in your portfolio. It's a skin in the game kind of concept. Skin in the game, exactly. So financials obviously show some promise here

and many trading just at dirt cheap levels below book value. 22% of our dividend growth portfolio right now from a sector allocation? Yeah, that's our biggest sector allocation. But it includes asset managers and a little big bank and a little insurance. We're not going to say names. I guess I have a question though.

Is the utility thing overpriced or is the yield surrogate, you know, bond surrogate story overpriced? Or is it part and parcel the same? Well, it's all relative to each other. So I guess if we assume that the tenure is what it is and it's just going one direction, then there's, you know, talking about the risk premium,

it's pretty interesting. So, you know, the yield you make on the S&P is around 5.8% now. At 17 times, that's 5.8, right? Yield equivalent. So on our portfolio, we have more around 13 times P, so that our yield is much higher. So I feel pretty good about owning stocks at 13 times P,

yielding 4%, when you can make one and a half owning a 10-year U.S. government bond. So we're talking about utilities being a little overpriced. We're talking about financials, energy, some of the dividends, stuff that we really believe in being underpriced. But we're not talking about FANG. We're not talking about big tech. What about the idea that as big tech goes, so goes the market? Is that dead? That's something that traditionally, obviously, we stay away from, primarily because a lot of

those companies don't have really any earnings. They're over investing. There's a lot of hype to the name. People tend to overbuy stories. Names that have great stories aren't necessarily good investments if you look at the historical record. In a low rate environment, I think the market, those, I think those growth companies, Julie and I were talking about this, they normally get a disproportionately get a higher multiple because the cash flow from those companies is so far in the future. And if you lower the discount rate, it brings all that cash forward a little bit more than it does for companies that have maybe a more stable cash profile over the years.

All right. So what you just said, which is 100% accurate, but if we kind of brought it down to a little bit dumbed down version you just said that their play on multiple expansion that you hope to get from a lower interest rate a lower risk-free rate in the society look i don't know what kind of risk so the 10 years of one three yeah so um how we doing there like how much more room is there to go of high tech, high PE, high beta names getting more expensive because of the cost of funds getting lower? That's a great point. There isn't a lot of room for the cost of funds to go lower. I imagine, I mean, given from today's conversation, it sounds like you guys think

there's a reasonable likelihood they go to zero, in which case I think that multiple would definitely be affected. Then you're buying because you're trying to predict what rates are going to do, which I think is a bit outrageous. So we try to stay away from those predictions as much as possible. I think dumber than trying to predict bond prices off of interest rate projections is trying to predict stock prices off of interest rate projections. Big tech, cool tech, new tech. Are we in the 14th inning of a nine inning game? I think we are. And I've never really liked, you know, that FANG classification because these,

you know, while they were leaders for the last couple of years in the markets, they're very different companies a lot of times too. And so at what point are, you know, investors going to get tired of funding different projects that aren't revenue generating, right? And I also like to look at which companies are generating revenue and from which sources. I mean, is ad revenue going to be a very sustainable source of revenue in the coming years? Or is it something more consumer-driven? Is it people actually spending money on goods and services that they'll still spend money on in a downturn? So I think the FANG dispersion will be a story people are talking

about here in the coming months and years. That's a great point. I think understanding whether the companies in your portfolio, whether you would be happy holding those through a recession. And it's a question we always ask ourselves with the names we own. And price matters. The entry point on any of those stories or any of those theses matter when you're looking at multiples at 50 times, 70 times earnings, something like that. It mutes returns for decades. So it's just an entry point. If you're looking at, can those names go higher here? Are we at the end of the bull market? Of course, they can go higher. And of course, multiples can get stretched more and those things happen. It's not something that we're going to likely own just because of those reasons, but that doesn't mean

that they can't go higher from here. But I think over the long term, you really do got to focus on the fundamentals. You got to look at what I think over the long term, you really do got to focus on the fundamentals. You got to look at what's happening from the income statement, the balance sheet, and make those decisions accordingly. So I'm really philosophically committed to the idea that the allocation we have into bonds is driven by the discipline of asset allocation and the notion of a defensive play. We talked about the possibility of the 10-year. Don't get me wrong, Dale. a defensive play. We talked about the possibility of the 10-year. Don't get me wrong, Dale. When we talk about the 10-year going from 1.4

to potentially just above zero, something with a zero handling, 0.8, 0.7, I would put the odds of greater than 50% that that'll happen, that we'll have a yield sub 1% on the 10-year at some point here, based entirely on the global technicals of $16 trillion of negative yielding debt.

I would not suggest, and I don't think anyone at this table would, that we want our bond allocation because we're trying to capture price appreciation of bonds of a yield going from 1.4 to 0.8. I would suggest keeping bond allocation to defend what that deflationary pressure may mean to equity prices. So we have a justification for bond ownership, even in this rate environment. We talked pretty thoroughly about our views on equities, valuations, index, individual names, sectors. Then we're going to come back into alternatives now. Tell me, Julian, you've spent a lot of time at hedge funds in your career. You

understand philosophically at the Bonson Group how we position the alternative investment asset class. Why should I not be thinking about alternatives, something we already over-weighted coming into this year, to over-weight it even more? I think you definitely want to over-weight in alternatives and probably even more these days because, you know, it's been a tough 10 years for alternative managers with the S&P, you know, going up 15% every year and having very little volatility. So it's very hard to outperform on your hedge fund doing, you know, when the market is just training up every year with no volatility. But these days seems to be over. I mean, I guess since... Our friends at Strategas Research call it

that everybody gets a trophy market. Yeah. That because of QE and zero bound, that it was impossible for any risk asset manager to not make money. So it's easy to feel, you know, smart just because you were along the market, the market was going up.

So these are days where alternative managers should outperform where they can, you know, use the volatility to their benefit. And when you have a market that's sideways, it's an interesting alternative to generate alpha in your portfolio. We always see in the news, all these reports of outflows from hedge funds and alternatives and whatnot. You know, literally speaking, how many outflows do we see from some of our big, very good hedge funds? Very little oftentimes, right? Yeah, that's right. But I guess my question is, are outflows an indicator of an asset you want to be avoiding or an asset you want to be buying?

Well, I think it's all a factor of the focus on averages. I mean, if you look at a hedge fund average or an index, if that's even a real thing, it's irrelevant completely. By definition, you're looking for alpha generation and talent in those spaces. And so I think people generally don't understand that the focus should be on alpha generation, risk reduction, volatility, dampening, things like that. But I would agree to what you implied, which is when there's outflows, you know, you've got to look at that. And I would say it's a contrarian indicator to consider the asset class generally. I mean, the, the alternative quote unquote space is very broad. So we're talking about different managers, different strategies can mean about a million different things.

It's a very unfortunate thing. And you both, you and I started our careers at UBS. They had a head of alternative investment research back in the early 2000s who wrote a paper that really changed my life. I mean that. Alexander Einheiken wrote a piece about fireflies, but it was essentially arguing that the alternative investments are not an asset class they are asset managers and we have to refer to it as an asset class for classification purposes but really the very clever answer one of you could have given to my trick question i guess is i can't answer if alternative investments are attractive or not in this environment i got to

know what alternative investments we're talking about that's true i mean i think you could tell us anything about the stocks you know i i you know investments we're talking about. That's true. I mean, I think you could say the same thing about stocks. You know, if we're talking about- No, but I disagree because stocks have a beta. Yeah. There's a beta. You see what I'm saying? The whole point of alternatives is you're not referring to the beta of an asset class.

The dispersion of results in stocks is very narrow. The dispersion of results among alternatives is very broad. You know what I'm saying? It can be. Yeah. Yeah. Yeah. of results among alternatives is very broad. You know what I'm saying? It can be, yeah. Top performers in the alternative space versus bottom performers are far wider than you would see in equities.

Yeah. And when we say alternatives, obviously you can have an alternative manager who just trades equities. So clearly there's many different types of strategies. When we say alternatives, I automatically think the talent that we own in our portfolio. That's what I'm thinking. And as far as alts go, I think, look, you make a point for the bond market being significantly overvalued, stocks in some areas being overvalued. There's a lot of volatility. It's a great environment for alts. And going back to the

everybody gets a trophy, I think the best statistic that demonstrates that is the Russell 2000. I think about over 50% of the companies in the Russell 2000 don't have positive earnings. And that number is astronomically high given the historical record. So yeah, there's been a lot of cheap money out there that's been keeping a lot of companies going in this market. I think there's a lot of stuff to avoid in the stock market and the bond market, and alternatives is a good place to look. So I'll end us up here. We're out of time, so I'm going to do an exit question to bring us to the end, and we'll go around the room here. Everyone get a quick answer, and we'll call it quits, and we'll be reconvening again next week.

August is going to end here another 48 hours. All likelihood we're going to end the month slightly negative return in equities, meaning single digits, less than 5% down on the month. So bottom month, one of only two down months so far in the year, but not a pretty situation. Big up month for bonds. Alternatives, again, to your point, Dave, looks like it's been a good month there. Asset allocation, is it a winner in this environment, or do we need to think differently about asset allocation, about that whole philosophy when you have a month like this? Robert, what say you about the time-tested principle of asset allocation?

I think it's just that it's timeless. And I think right now is a great example of that. You know, bonds were very unloved last year and then into this year, and they've done a great job, right? Brian, asset allocation. No, I think it's timeless and evergreen as well. And if you look at this month and or this year, really, I would look at 2019.

And, you know, the nice thing is last year, it didn't, well, it still worked, but technically every asset class was negative last year. It doesn't matter what you choose. Everything was down. This year, technically, most things, almost everything is up. You could look at some commodities and things. So while it's evergreen and you should always look at that, not just from a risk standpoint, but from a return standpoint, it happens to be that 2019, you've really had a tailwind because bonds are up 8%.

Stocks are up as well. So it's worked out well. Yeah. Julian? Hard to add too much to that. I agree with what you guys are saying. I guess if you take a step back and look at history, it was a relatively small move, at least in equities in August.

And we see big moves in bonds, but still probably not enough to justify really changing too much. Yeah. I think when we say asset allocation, I think it means something a little bit different than most everybody else. I think when other people say it, it just tends to mean over-diversification. We will purposefully stay away from certain asset classes or sub-asset classes

if we think we can't make money in them or there's too much risk. So I think there's always considerations to be made regarding asset classes and bonds traditionally are a safe investment, but maybe there's an environment where there's more interest rate risk and we have to trim our exposure a little bit. So we're always adjusting our capital market expectations, but the overall method of putting some money in stocks and a portfolio approach rather than making a bet on a certain asset class. So we'll have overweights and underweights in different broad asset classes at any given point in time, but the asset allocation contra market timing, I want to be

in right now, I want to be in right now. I want to be out right now. That's sort of what I'm getting at as a binary decision. We're all on board. No time to get cute with market timing. By the way, here's the irony, and I'll finish the exit question with my own exit comment. It's not just what all my colleagues and partners here have said is correct about asset allocation. It's that asset allocation is most

beneficial in this period of time. It's not that it's still beneficial. It's optimally beneficial. You don't even need asset allocation if everything's going up at once and you don't need it when everything's going down at once. It doesn't protect when everything goes down at once. And when everything's going up at once, you can just pick one thing and you're getting the up. It's when you have zigs and zags and it's because of the folly of market timing and market timing is very difficult to do when month you have a really bad month and a really good month. People are not good at picking their entry months, but they sure as you know, what are not good at picking their entry days, their exit days, you drop 600, you go, you know what? We got more

500 points more downside I'm getting out. And then you go up 400 the next day and you go, okay, I got to get back in. And then it's down 800 and you go, okay, I can't take it. I'm back in up 200, up 300. Okay, good. I got back into the right time. Oh shoot. Now we're down 500 again. This is the stuff that humiliates people. And the only way to avoid it is to not play that nonsensical game. Asset allocation protects you from that folly, from that behavioral lack of wisdom. So asset allocation is not only the friend of the investor, it's the friend of human nature. That's my exit comment. Guys, thanks very much. Naya, Robert, Brian, Julian, the investor committee or the Bonson Group with

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