The Dividend Cafe - It Ain't What You Don't Know

Episode Date: April 9, 2021

The title of this week's Dividend Cafe comes from one of my favorite quotes, ever. "It ain't what you don't know that gets you into trouble.  It's what you know for sure that just ain't so." ~ Mark Twain (I attribute to Mark Twain because everyone does, but ironically given the substance of the quote, even this appears to be untrue, with most scholars believing there is no reputable source for who quoted these exact words). The underlying message here is never more relevant than in investing, it seems to me.  Plenty of people don't know certain things, and that has some impact at given times.  But I am quite convinced that far more damage is done, not at the things that are that people don't know, but the things that people believe to be true (and act upon), when in fact they are not. 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 another week of the Dividend Cafe video and podcast. I'm actually in a hotel room in Nashville, Tennessee, and recording before the market opens Friday morning. It's been a pretty boring week in the markets, a little up, a little down, different things. And you're getting those daily updates of what's happening in the market in DC today. So I won't waste our time in Dividend Cafe with the day-by-day weekly market stuff, because today I'm going to go into a couple bigger

picture issues. And I want to start with a quote that is attributed to Mark Twain, because this is basically the subject of today's Divided Cafe. But I also want to point out that I don't think Mark Twain actually said this. And we don't really know. And there's a whole story on that. But either way, I don't care. Okay. It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so. And that is a pretty widely distributed quote. I myself have said it or some version of it many times. I'm sure most of you have heard some kind of sentiment that captured that same idea. And I think that in the world of investing, there are all kinds of different opinions. There are all kinds of things that people can disagree

on. And of course, there's a lot of things that people don't know. Like there's information that they're not privy to, realities, or even underlying principles that people may not fully grasp. All of that I understand. I don't think that the point of the Dividend Cafe is to go solve all the ills of investor ignorance out there or gaps in knowledge levels. But I do believe, particularly for my clients, for those that are in a client advisor relationship with the Bonson Group, it would be my earnest desire that none of our clients believe things that just aren't true. that none of our clients believe things that just aren't true. And so lacking some information versus believing things that are inaccurate are two different things. And I'm pretty focused on that second one.

So what I did in the Dibbing Cafe today is kind of took three, four, five examples. I'm going to go through them here right now in our time. And the only reason why going to dibbingca here right now in our time. And the only reason why I go into DermotCafe.com will really add to this week's is the charts that go with it, but I'll explain it all as best I can for you right now. But I think trying to unpack some things that are widely believed, and I mean almost consensus views, certainly very common views that I will suggest are not merely inaccurate, but the opposite of accurate, that are flat out counterproductive, counter truthful, and therefore have a really, really big impact and represent a big danger in the way various

investors might think or operate. So the first one I'm going to go through here is a topic I've talked about a lot, is this idea of gold as a hedge against government irresponsibility of governments, of central banks run amok. It's a perfectly understandable belief. On one hand, we see governments doing things that seems crazy. On one hand, we see central banks doing things, they're getting very creative. You see these global events, let alone even within U.S. fiscal and monetary management. And there is this sort of ease of just sort of defaulting to, you know, gold is kind of the way we want to go to play against that. I've talked a lot. I don't do it in Dividend Cafe this week,

but I have in past Dividend Cafes quite extensively tried to correct the significant misnomer of gold as a hedge against inflation, basically concluding that there have been points in history where gold was an excellent hedge against hyperinflation, but that if you just simply empirically look at the period that happens to be my lifetime, and I'm not a young man anymore, gold has been an awful hedge against the inflation we've had since my own childhood. You're talking about over 40 years of gold now from where it was to where it is being basically about half of its inflation adjusted price, 50% of gold's value lost to inflation since those 1980 kind of levels when I was in, let's say, first grade or so. And so in my mind, that's a misnomer that exists out there, but it's not as interesting as the one

that I think we're kind of living through right now which is this idea that well central banks are going crazy they're printing money there's bond buying in europe there's negative interest rates and i'm saying here's the reality because all those premises are true qe1 qe2 q now with COVID, QE4, a run-up of something in the range of $6 to $7 trillion in new assets on Fed balance sheets, which really represents money added to the balance sheet out of thin air, okay? They're bonds and and it represents this new addition the money it doesn't as i've talked about a bunch it doesn't necessarily become circulated money that tr that turns over in our in our money supplier in the economy but the point is it's just a radical new convention in monetary policy interest rates being held down to 0% for seven years plus change in the financial

crisis. Now, interest rates since COVID being held down to zero again over a year. They're projecting another couple of years. I think it could be longer than that. And so this is like, if there is a moment at which the gold bugs are saying, hey, look at what the central banks or the governments are doing, this is the moment. And it's been going on for 10 full years. National debt up to 25, going to 26, $27 trillion, running over a trillion budget deficits per year, trillion dollar deficits per year.

This year, we're very possibly going to hit three trillion. We're certainly going to be over two trillion. We were over two trillion last year. And even apart from COVID, pre-COVID and post-COVID, no intentions at all to stop that. So spiraling with the debt, spiraling with the monetary policy, So spiraling with the debt, spiraling with the monetary policy, the Fed intervening to go buy corporate bonds, to create new emergency liquidity facilities. And this is all just on the U.S. side. A lot of the argument for gold as an antidote to kind of fiscal and monetary insanity is global.

You look at Europe, the picture is worse. You look at Japan, the picture is worse. You look at Japan, the picture is worse. You look at $15 trillion of debt. The number was 17 or so. It's now, I think, actually a little less than 15, 14 or so trillion dollars of global debt trading at a negative yield, trading below 0% in what that investor who buys that debt is going to receive. This is the dream potpourri of circumstances. And yet, what has gold done over the last 10 years? Basically dead flat. And it had a big run up.

And then into 10 years ago, it then had a big run down. It came back a bit, is now, you know, it's down through the post-COVID period, a couple hundred dollars an ounce or more, over a 10-year period from start to finish, through this 10-year period of dream circumstances for something to hedge, government recklessness, government aggression and irresponsibility and fiscal monetary creativity, and some might say insanity. And gold is totally flat.

So I think this is the stuff that has to at least be accepted empirically and then considered as to where the misnomer comes from, why people have gotten some of these things so wrong. The other area I really focused on was, in fact, something I've already talked about so much this year. And I just think it's really a good thing that I'm spending so much time talking about the understanding we have about inflation and deflation and trying to empirically demonstrate that government debts run amok all over the world

for decades upon decades now. And it has obviously not proven to create this big hyperinflation prediction. In fact, bond yields have utterly, totally collapsed. So this is a major theme. It's very important because of the perspective one would want in their portfolio around inflation versus deflation. But I've talked about so, so much that I'll spare you that redundancy. Although I'm going to be continuing to talk about it because I think it's necessary for this message to get through an awful lot of repetition. And we have a pretty high conviction to that message. Switching gears a bit, I love this misnomer. People will talk sometimes about how growth and value alternate in leadership.

Growth does real well at periods and value will do less well. And value will do real well in some periods, but growth will do less well. And yet, I've made the point before that going back over 40 years, growth and value have basically had the same annualized return, one to each other, but just with a decade at a time of kind of alternating that leadership. But one of the things I really want to be clear about, it isn't that like, for example, in the 80s, value was up 400% and growth was only up 280. That's a huge outperformance, but growth still did real well. Over the last 10 years, growth was up 680% and value was only up 280. Again, value did fine, but it was the outperformance

of one versus the other that gets the highlight. But we have to understand, there was a decade in there, and this is all factored into the baked-in numbers of how growth and value have done over extended periods of time, where growth was down 51%, and value was up about 6%, 7% over that post-dot dot com period going into financial crisis. So, yes, growth and value have more or less had periods over longer secular cycles of alternating who was in the leadership. And they've ended up averaging a very similar return to one another. But that is not because they're just trading places and who's doing well and who's doing really, really well. That can come through

periods of contraction. That can come through periods of really significant negative returns too that has happened on the growth side, not on the value side. And I think that's really something worth understanding. This is by far my favorite one I'm going to talk about here today. And that is that when the Fed does come in, whether people like the policy or not, when there's real low interest rates, it does some things, some good, some bad. But one really good thing it does is it helps support some businesses that are dead or struggling. It helps them stay alive. And then by doing that, it avoids layoffs.

It avoids liquidation. It avoids suppliers not getting paid. So there could be some economic contagion risk that gets contained by kind of keeping what we call zombie companies alive. Companies that don't go out of business, but they just maybe can generate enough cash flow to service their ongoing debt because the cost of that service is so artificially suppressed. But they couldn't otherwise service their debt and they certainly couldn't otherwise actually pay back their debt or chip away at the principal. And that we, this is kind of a good thing economically because it keeps these companies

sort of going. And I put a chart in this week's doingcafe.com that shows kind of where that Fed put, that Fed support began in the late 90s with Greenspan, and it's sort of continued through a number of Fed Reserve chairman and chairwoman since. And I think it is so wrong, because what it ignores is the fact that these suboptimal companies that are receiving resources, there's capital that is allowed to stay in them. There is labor and investment and focus that stays in these zombie companies that therefore does not get channeled into other companies. So it creates a less productive result. It does avoid the short-term pain of those liquidations and terminations of

employment and things like that. But it then delays, defers, and prevents those assets and resources from going into another avenue that would just be far more beneficial in enhancing productivity. Well, what are we struggling with? And you see in the chart I put in how this really plays out. We're now struggling with suboptimal and subhistorical productivity levels for over 10 years. And I think this is part of the reason. We are looking at what seems to be a help to the economy and ignoring what is really a bigger hurt to the economy longer term. Again, something that I think people believe that is in fact totally wrong. And then just in the interest of time,

I'll wrap up with one of my hobby horses, which is the notion of stock buybacks versus dividends. Some that might say stock buybacks are superior, more tax efficient way of rewarding shareholders and dividends. Others that would say it's all the same thing, whether you're giving money through the form of reduced share count or giving money through the form of cash in the pocket, it all equals out to the same. And I think this is just a tremendous investment misnomer where dividends monetize and de-risk an investment.

Stock buybacks do none of the same. And in fact, generally, are not even really reducing share count because for so many sectors, they're being used to offset new share issuance for employee and executive compensation. So many stock buybacks are not even really happening. They get announced for authorization, but don't necessarily get executed. And it's the very, very first thing companies can cut. And so I put a chart in the kind of in chart of the week this week, reflecting the propensity to just eliminate stock buybacks when going gets tough, where really more mature, seasoned, committed, culturally aligned dividend paying companies don't do that. So I believe you have

a superiority of dividends over stock buybacks. I also talked this week about where bond yields really would have to be to impact the economy, impact the stock market. We've talked about where gold is and isn't properly understood, inflation, deflation, a whole potpourri of things that I think are widely not just misunderstood, but really understood in the opposite way of where truth and investment prudence ought to be. Check out this week's dividendcafe.com. Thanks for listening to this week's podcast, watching this video, and send out any questions, comments you have. Look forward to another conversation with you next week. Take care. The Bonson Group is a group of investment

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