The Dividend Cafe - Investor Lessons from a World of Doing Something

Episode Date: October 9, 2020

I did something today I have not done with Dividend Cafe, ever. I just wrote it. I just sat down and started typing, and wrote it, all the way through. I didn’t cover ten or fifteen or twenty topics like I usually do. And I didn’t write some parts on a Saturday and other parts on a Tuesday, adjusting for new market action on Wednesday, etc. I wrote in one sitting an entire treatise on what I believe is the great paradigm to understand in the years to come for investors. Don’t worry, I went back and added some sub-titles to “break it up” a bit, but it really is one topic all the way through. I really hope it will inform you, guide you, challenge you, and to some degree, edify you. I also hope it will provoke you to reach out with any questions you may have. We invest for the world that is, not the one we want. And some years, the delta between those two seems wider than other years. Jump on in, to the Dividend Cafe. Links mentioned in this episode: 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. Well hello and welcome to this week's Dividend Cafe podcast. I am sitting in the New York office and it is actually before the market has opened on Friday morning that we're recording, but it's kind of bizarre to think about. And by the way, I'm not going to be talking that much today about what's happened this week or last week or things like that, but I just, I was thinking about it as I was walking into the office this morning from my apartment that I recorded last week's

Dividend Cafe on Thursday after the market closed from our Newport Beach studio. So the Dividend Cafe came out on Friday and it was the Thursday night into Friday morning that the diagnosis of President Trump's COVID positive came in. And so it wasn't addressed last week. And then I don't have anything to say about it this week because we're already kind of like past that. And yet in between there was the hospitalization at Walter Reed and medication and or therapeutic and kind of the questions last weekend about what the doctors were saying and all that stuff. And in a weird way, that almost feels, just from recording Given Cafe last week to recording this week, that feels like a total non-story now as we look into where we are with the stimulus, where we are with the election and other things. So the president of the United States, like the most powerful person in the world,

person in the world who is in that vulnerable demographic, health-wise, weight-wise, age-wise, what have you, contracted this disease that has really commanded the entire attention of the global media and economy and society over the last six to eight months, and yet it's completely out of the headlines in less than a week. It's just this 2020 can't get a whole lot weirder. And so when I say I'm not going to talk about the market this week that much today, it's because I actually have something I want to talk to you about that's, I think, much more significant, longer term, deeper rooted, more significant with its implications to investors. And, you know, quickly, I will allude to the fact that it was quite an up and down, mostly up week as far as volatility.

It's very important to remember volatility is bidirectional. So when I say volatility and mostly up, that isn't inconsistent. There's no rule that says volatility is alwaysirectional. So when I say volatility and they're mostly up, that isn't inconsistent. There's no rule that says volatility is always to the downside. That doesn't make any sense. But having like a 400 point update Monday and then being up a couple hundred Tuesday before dropping 600, so down 400 Tuesday, then up over 500 Wednesday and another couple hundred or whatever Thursday. And now the futures, as I'm talking on Friday morning are up another 150 points and so you know the stimulus or potential for some stimulus or potential for targeted stimulus or what have you is lingering. I'm not sure it's really the market looking for these the overall stimulus package from a truly economic

standpoint. I do think a lot of it has more to do with traders trying to be positioned around such and not wanting to miss what could be an imminent announcement, not wanting to be short into an announcement. And then also traders that if they don't believe it will happen, wanting to exploit that as well. So you get some of these up and down movements. But I did something with divincafe.com today that I've not done. I think I wrote in there that I've never done it. And as I think about it, it's possible I've done it before, but it's been so long I can't remember. But I just sat down and started writing. And I wrote all the way through.

And it was a single topic. And generally in a given week, just not that you care, but the inside baseball, I'll write part of Diviven Cafe on a Saturday morning and I'll write part of it on a Sunday afternoon. And I'll read, you know, three research papers Monday morning that inspired me to write some new stuff then. And so it gets written piecemeal throughout the week. And there's little inspirations and ad hoc, you know, issues that come up that drive that. But that's why it is, very purposely, has been a multi-topic commentary for the 12 years I've been doing it. The Divin Cafe Today was written all the way through, and it's kind of more single essay, but I broke it up with different sub-headline type things, subtitles, to make it a little easier to read.

But it addresses the subject of a new paradigm, and you could argue it's been there before, but it's now here more. And that is this concept of don't just stand there, do something. That is the governing philosophy of policymakers. And I refer here to regulators. It's very rare that there's one who believes their job is to regulate less, to take away things for them to do. They mostly believe what can we do more to help a given situation impact an outcome. To monetary policymakers, central bankers, who most certainly believe in very aggressive intervention for them to effectively do their job and to try to spruce up the economy, to try to impact full employment and so forth. And then obviously on the fiscal policy side, the idea of a president or a Congress not intervening to go help the economy by

targeted spending, targeted actions around the government treasury, it's been a very long time. And that's sort of at the heart of Keynesian economics, which has governed a lot of U.S. federal policy for about 75 years. I don't know that it matters if we should sometimes don't just do something and stand there as opposed to don't just stand there and do something. But I do think it matters a great deal to investors that we recognize that we're in a don't just stand there, do something world. And what that generally will mean is greater federal budget deficits. And that generally means quite explicitly that they have to take money out of the private sector to do that.

The government can only spend money that they tax. And they're either taxing in the present tense through taxes or in the future sense through borrowings. And so they pull future growth forward into the present or they extract money from the private economy through taxation. This isn't controversial. What's controversial is people will debate as to whether they should do that and how they should do it and how much they should do it. All legitimate debate topics. What isn't controversial is that that's how government is funded. Government's funded from taxes or from borrowings.

Nothing else. Okay. So when you concede the point that the government has to pull money from the private sector, either in the present or future tense, to run greater and greater fiscal expansions, fiscal interventions, not just standing there, but doing something, I think you sow the seeds of what becomes the disinflationary spiral that we have. And that is that you have taken away future growth to try to get a current remedy. And then you have monetary policy that is coupled to that, where they will stimulate using lower interest rates, bond buying. There's kind of, I think, an ongoing science experiment as to how much monetary experimentation can be done at the central bank level.

And in pushing those rates lower, it all works together for a very deflationary spiral. And it, of course, has brought bond yields down and has really created an incredibly never unprecedented mix of policy and expectations into the future. And so this goes beyond the points I've been making for months and months and is one of the major tenets in our Operation Magnify about the implications to bond investors. It does indeed, I think, with bond yields now at the zero bound as a result of interventions in fiscal and monetary policy, it does have implications as to the ability of boring bonds to mitigate risk in the future. But it also has a lot of implications for equity investors.

Indexing, I think, becomes a self-fulfilling prophecy where big companies, when you buy an index, you're buying more of the big companies, and they're big because they've already done well, and you're buying less of the smaller companies, and they're smaller because they haven't done as well. and you're buying less of the smaller companies and they're smaller because they haven't done as well. So you guarantee a future underperformance in terms of the construction and composition of how indexes are devised, their basic methodology. You just can't time when that might happen. You just can't time when that might happen. And it rewards chasing popularity and yet true value gets mismarked until it doesn't. So you have a really profound implication in the current environment for index investing with equity and for boring bonds with people that are looking for either yield, which they're not going to get, or risk mitigation, which they're not going to get.

And so I think that this story, the causation of which is a conscious decision for policymakers to intervene more and not less, that you get this kind of feedback loop where the more that one intervenes fiscally, the more they need to intervene. And certainly the more monetary intervention, the more future monetary intervention. It exacerbates boom and bust cycles, which then makes us more averse to risk and yet less prepared to deal with the risk because we don't have boring bonds to help it or because equity volatility, equity indexing is less efficient. So it's a fascinating time to be an investment advisor. And I hope if I'm not doing it justice for you right now in this podcast or video, and please forgive me, I do have a little bit of a sore throat, but I hope you will read divincafe.com because I think I'm unpacking

in a way that I was happy with the way I wrote it. I think I'm unpacking what I think is the most profound crux of tension for investors in the decade and decades to come. And so as far as what needs to be done about that, that risk assessment, that understanding of dividend growth, that a 10-year, let's say it's paying you 0.5% in the treasury bond market and you can get 4.5% with a diversified set of dividend stocks. 87% of the income for the right to know you're going to get the coupon. And you're missing out on a 400% premium just because of the alleged uncertainty of those dividends coming when, in fact, one can actively manage their way to seeing their buying companies that have been paying their dividends over and over and over again for years to come, for decades in the past. So my point being, I think dividend growth, I think alternatives, I think rethinking boring bonds, all of these things are really on the menu and available to help investors

in a thoughtful way. And that's what Dividend Cafe is about this week. I hope you've gotten something out of this. I have to jump into a symposium right now. It's virtual this year, but I'll share more about that next week. In the meantime, reach out anytime with questions. And thank you very much for listening to and watching the Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with 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. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative Thank you. from the obtained data and information referenced herein. The data and information are provided as of the date referenced.

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