The Dividend Cafe - Investors Don’t Want Safety, They Want the Illusion of Safety

Episode Date: January 11, 2019

Topics discussed: Safety isn't Always Safe No Fix from Fixed Income Only Corporate Debt One Rung Above Junk 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. We are going to start off real quick, okay, with some just general housekeeping stuff. And then I'm going to go through the week that has been here in the markets and our kind of first full week of 2019. But just real quickly, there's a pretty long podcast I did this week that I really want you to check out

at Advice and Insights. Oh, I don't know if it was 45 minutes or so, but it was a kind of full recap of 2018, which I'm not going to do right now here in this weekly Dividend Cafe podcast. But we did a full recap of 2018 and my entire kind of perspective and outlook on 2019 in the Advice and Insights podcast. And so I really encourage you to check that out.

And for those of you that really prefer to kind of read it and look at all the charts and so forth, at marketepicurian.com, we have our annual white paper of the same. It's a kind of 30-page summary. There's a lot of charts and everything in there, breaking down the whole deal, just recapping everything that was about 2018, what took place and why, and what we are doing going into 2019, our perspective for an investor about the economy and about the state of investment markets as we enter this new year. So I would love for you to check out marketepicurian.com.

If you'd like a printed booklet of the piece, reach out to us and we will send that to you on our dime. And if you just want the PDF or the web link, then that's available online, like I said. And I think that's the only housekeeping I have other than, I sure hope if you're listening to this, that you're listening to it as a subscriber in one of your, whether it's your iTunes or Stitcher or Google play or all those different things. It's better for you and better for us if you subscribe as opposed to just sort of getting it from the email. Okay. So you know what? The markets

here this week are behaving quite nicely as a follow-up to that melt-up rally of last Friday, as is often the case during periods of elevated volatility. I recorded this podcast on Thursday, and then the market goes up 5 billion points on a Friday or goes down 5 billion on a Friday. It's very frustrating. But in this case, what happened last Friday was that Chairman Powell of the Federal Reserve made comments in an economic forum very much waving a white flag around what he had alluded to at his last presentation, where he talked about staying the course on the balance sheet of the Federal Reserve, meaning continuing to quantitatively tighten the liquidity in the economy. Now he's sort of said,

well, we're going to kind of wait and see. So it caused a huge melt up in markets. And then now this week, surprisingly, I think to some degree, the follow-up has been pretty robust. As I'm sitting here talking, we're up another 450, 500 points and we will see where things kind of go from here. We do have to get into earnings season and I can assure you there's going to be a lot of disparate results amongst companies and disparate outcomes into their guidance going forward, what they're kind of forecasting as we go into this new year. The major point that I chose to headline the Dividend Cafe with this week was this comment that for the significant amount of investors who carry with them the reality of human nature, which by the way is all investors, it's not safety that they're most after, but rather the illusion of safety. So a significant amount of people who carry around human nature are content to have the illusion of safety rather than safety itself.

And whether that be from the bond market or real estate offerings or some who knows what guaranteed certain return, it can't go down investment and that can't go down is a statement that gets to be uttered because of the lack of mark to market pricing in most asset classes outside of the traded stock markets. Now that's best case. It oftentimes is just total balderdash, somebody getting scammed or what have you. There's nothing wrong with this reality of human nature that people prefer to feel safe, even if it is not in fact safe. We're wired to lie to ourselves frequently in life to protect ourselves. What would be wrong, though, is a financial professional sworn to protect their client's well-being capitulating to this dark side of human psychology. I really do believe that the notion that equity markets lack risk is a lie, but that it's not as big a lie as the notion that any other

asset class doesn't. The mental gymnastics and self-deception people go through to avoid understanding this is forgivable, but it's sad, but it's also something the Bonson Group will be vigilant in combating for the betterment of our clients. If profit-seeking businesses run by highly compensated executives who are responding all day every day to price signals sent to them by 7 billion individuals intent on improving their own lives is risk, which it is, then it's a risk I'm compensated for through the equity risk premium. It's a risk I believe in. So then that brings us to the world of fixed income investing.

Fixed on what? Well, the income is fixed, but the inflation in the economy affecting price signals is not fixed. The interest rates in the prevalent economy is not fixed. The cost of goods and services is not fixed, but the income that one has to absorb while they sort through all these other variabilities is fixed. Now, is this a way of me saying I don't like fixed income? No, it is not. I believe the bond market, and there's a big theme of ours in the 2019 booklet I referred to earlier, the fact of the matter is that the bond market is a very healthy diversifier almost all the time, not always, almost all the time from the reality of equity market volatility. And I believe that the bond market becomes a very helpful

reverse correlated asset class in equity markets versus equity markets to help smooth the ride of being an equity owner. But when you combine alternatives and real estate commodities or whatever the total picture asset allocation looks like, the idea is to optimize your risk and reward profile you're taking on as an investor to go into all fixed income. You have a profile as an investor, and it's one, in my opinion, that is very dangerous in a rising rate environment, in my opinion, that is very dangerous in a rising

rate environment, in a potentially inflationary environment, at the end of an economic cycle, whatever the case may be. And I think right now we want to own bonds for the right reason and own them in the right weighting. The jobs number last Friday was stellar. Over 300,000 jobs created in the month of December. Well over 100,000 more than what was projected. And some past reports were moved higher, revised higher by 58,000. The unemployment rate actually went up despite all the new jobs. And that's just simply because you had so many new people enter the workforce. And so the percentage, you know, the math ends up going the other way, which is a great thing. And wages were up 3.2% year over year. I don't believe in looking at only one month's jobs number, whether it's good, bad, or what have you. You got to get kind of

rolling averages to get economically valid and useful data. But I will tell you this, this jobs report didn't have much to look down upon. I don't know much to say about the government shutdown. I don't think it's a market moving event. It's not even really much of a political news event right now, as hard as they try to make it such. But I would say that could change through time on the margin. It's not to say that it's a good thing or bad thing or what have you. There's a lot of hair around the whole deal. But my point is markets clearly don't care. And this is not a surprise because we've been through shutdowns before

and markets didn't care then either. And this is a far less exhaustive shutdown than what we've had in the past. So we'll let the political side play out. I don't know much else to say about it. I do want you to look at dividendcafe.com, chart of the week. We just kind of reinforce our big theme about corporate debt and liquidity in the economy. Why the Fed, what the Fed does with their balance sheet, why what the Fed does with rates is a very big deal, but not a big deal for the reasons people think. People think, well, yeah, I mean, the Fed raises rates a quarter point. Now my mortgage

goes up a little or my credit card bill goes up a little or something. The fact of the matter is that what has macroeconomic impact in a larger scale is not into the household sector, which is largely still delevered from post-financial crisis. It's in the corporate economy where there was significant re-leveraging and now it's vulnerable. And I believe that that's what we're going to be watching primarily in 2019 for the overall sentiment of the market. So far, the Fed is saying that they kind of got that signal, got that message as things were whacked in the month of December. I'm going to leave it there. I got to get back to work.

But please do check out our 2019 perspectives at marketepicarian.com. Reach out to us with any questions, any time. Have yourself a wonderful weekend. Go Cowboys. Thank you for listening to the Dividend Cafe, financial food for thought. are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance is not a guarantee. The investment opportunities referenced

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