The Dividend Cafe - Is The Bull Coming Back?
Episode Date: July 26, 2018Topics discussed: Tax Reform Part Deux? The Inflation Chatter As profits go, so goes the market Contrarian Nugget of the Week ...
Transcript
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Welcome to the Dividend Cafe, financial food for thought.
Hello and welcome to the Dividend Cafe podcast.
This is David Bonson, Managing Partner and the Chief Investment Officer of the Bonson Group,
our beloved bi-coastal wealth management firm that is bringing you
fresh content, perspective, commentary on the market, on the economy each and every week.
And this week is no exception. Market moved further to the upside this week within a thousand
points of its all-time high. And, you know, I guess about 2,000 points higher than its
March low. Quarterly earnings season has gone quite well, which was expected, but various aspects of
the trade trauma have begun to ease, and that's helping markets. So we're going to cover a lot of topics this week. Inflation,
tax reform. Let's just jump on into it, all right? The tax reform. Listen, I am titling this tax
reform part two because I do think that there is a very good possibility of a second tax package
coming. I doubt it will come before the midterms. But I think that there is some real substance to behind
a couple of the things that are being discussed that they want to do. I talked last week about
the possibility of the Treasury Department issuing guidelines that would index the capital gain in a
gain transaction to inflation. That would be a very big deal for long-term stockholders,
real estate, et cetera. I think the House wants to
move to make individual cuts, the individual cuts portion of the tax reform bill to make it
permanent. You may recall that those right now expire at the end of 2025. I am reading and
understanding that there's discussion around incentives for retirement savings,
kind of new pieces around the retirement savings tax advantages coming.
I haven't read any details, so I won't comment there.
There's talk about trying to increase the R&D tax credit.
I actually would not support that, but it's obviously popular politically,
as most crony capitalist things are. But bottom line,
there's some potential tax legislation that will be worked on in the months ahead, I think probably
to be implemented after the midterms, and it's something we're going to be watching closely in
the months ahead. And speaking of things we're watching closely, inflation needs to be understood in the context that we have been
talking and writing about for some time, and that is the distinction between chatter about inflation
and real inflation. I'm in the camp that believed entering this year that chatter about inflation
would be on the rise, and I certainly believed and believe now that there are market implications to
rising chatter. But that's a very different thing from core inflation being high, let alone staying
high for any extended period of time. The very modest increase we see in the data this year
comes off the Fed's kitchen sink of efforts to make it so, and even then mostly with transitory help.
Longer bond yields, 10-year and 30-year treasuries for example, still suggest very muted long-term
inflation. The barrage of discussion about a shortage of skill-based workers has not seen
wage growth skyrocket. I think Phillips curve logic is dead. My belief is that many of the data points being
used to talk up inflation will prove to be drivers of increased productivity, not inflation.
Business investment and CapEx can be thought of as soaking up some of the inflationary potential,
should they surface the way we forecast they will. My contrarian nugget for the week, more than $20
billion was pulled from U.S. stock mutual funds and ETFs in June, leading to one of the worst,
or I guess I would argue best, periods over the first half of 2018 for equity flows in the last
decade. The huge flows out in June may explain the market's huge up performance in July, but
all of that to say $80 billion has flown into bond funds in the last six months.
History is a good guide here. As profits go, so goes the market. The move higher in corporate
profits is visually reiterated in a chart I have at DividendCafe.com.
As the chart indicates, we're at the highest level of corporate profitability ever.
And I would add that the period from mid-14 to mid-16 of muted profits growth,
perfectly with a period of flat market returns.
So you had muted profits growth for two years and a flat market for those two years.
But if you look at the chart, you'll see we're at all-time record highs in corporate profits.
The real world cup, the race for capital across the globe is a predictable one.
Which domiciles or geographies present the most attractive places to do business?
Where is growth likely to be found?
Where do companies want to put capital for an investment opportunity?
For all the talk about a declining United States,
a talk rooted in a lot of things, but certainly not in coherence or facts,
there are surely no place investors have wanted to part capital
more than the United States for a long time.
What levers can competitive countries pull
to increase their standings in the race for global capital?
Lower taxes are at the top of that list.
The U.S. upped the ante with its tax bill late last year.
If you want to see the seriousness of countries
trying to stand out as a place for capital investment, watch for those countries creating
greater competitiveness in their tax codes over the next six to 24 months. The big fat bad yield
curve, whatever you want to call it, listen, a three-month treasury right now is yielding 2%.
right now is yielding 2%. Two-year is 2.7%. The 10-year is 2.96%. And the 30-year is just a tiny bit over 3%. Okay, so basically you have an extremely flat curve between the 10-year and
30-year, a little bit wider in the short term to the 10-year.
The Fed is watching this, so are we.
Hey, check out my dear friend Trevor Cummings, one of our advisors here at the Bonson Group.
His inaugural issue of his financial blog, ThoughtsOnMoney.com,
came out this week, first issue.
It's fantastic stuff.
Check it out, Thoughtsonmoney.com.
In the politics side, we know that this week the European Union and the President,
President Trump announced some reports of progress in their negotiation and mutual intent to reduce tariffs and not add new ones.
That caused a good rally in stocks.
Ultimately, we do believe if he were,
President Trump were to go forward
with auto tariffs on European imports,
it would really unwind a lot of the benefits
of tax reform in our economy.
But it looks as if we're moving the other direction.
All these things are in flux.
No final deal's been announced.
I see this $12 billion aid package
for farmers impacted by tariffs.
Obviously, I think it's a negative because I don't believe in federal welfare to any particular constituency like this.
But on the other hand, it does seem to be the White House admitting the negative impact that the tariffs are having.
And I hope that will color the way that they negotiate going forward in some of these matters.
And I hope that will color the way that they negotiate going forward in some of these matters.
I don't feel totally optimistic that we're right around the corner from a big announcement with China.
I think those things are going to take longer to play out.
On the subject of market valuation, unfortunately, you're going to have to go to DividendCafe.com for the chart of the week. It just really shows you where we stand versus historical averages in market valuation around the price to earnings
ratio, price to book, price to cash flow, the earnings yield spread, all these different ways
you can value stocks and showing how most of them are right smack dab in the middle of historical
valuation. I'm going to leave it there for the week. Thank you for listening to Dividend Cafe podcast. Please check out our YouTube channel
if you're interested, the Bonson Group. We do this, a very different kind of talk each week on video
with our weekly market commentary. And most importantly, reach out to us if you have any
questions. dbonson at thebonsongroup.com is my email. And I am always open to answering your questions about stocks, bonds, economy, investing,
asset allocation, college football, politics.
No, I digress.
But if you do ask me a question about Chinese food in New York City, I will have plenty to say.
But please reach out.
Thank you for listening.
We look forward to coming back at you next week. Thank you for listening to the Dividend Cafe, financial food for thought.
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