The Dividend Cafe - Market Outlook w/ David L. Bahnsen - Conference Call Replay - June 28, 2021

Episode Date: June 28, 2021

David and Scott discuss the market matters of the day 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, thank you, Erica and Scott, once again, thank you for joining us. I'm grateful to all of you who are on the call. I know we're kind of deep into our summer season now. And so I'm sure these things become a little less interesting as you get into the warm and enjoyable summer months. But the markets don't seem to slow down for the summer. And so there's plenty going on in the world, in Washington, D.C., and in the markets. And Scott and I are going to unpack those things here for the next 30, 40 minutes. And so I'll turn it over to Scott.

Let him pepper me with questions. I hope you all get plenty out of it. And again, please do send questions live throughout the event. Erica is sitting there on her keyboard, ready to react and get the questions to Scott. So email questions at thebonsongroup.com. Scott Gamm, the microphone is yours. Well, thank you, David. Great to be with you as always. And it's an interesting week to have our conversation as we wrap up the first half of 2021. It's always interesting to see how the market does during this time span. And we can see at least so far, we'll see how the numbers shake

out over the next couple of days, but tech underperforming the broader market a little bit so far this year. I'm just curious where you think we stand right now and your reaction to the double digit gains we've seen across the board in the three major indices so far in 2021. I think in a lot of ways, it's not so much a six-month story. When I look at what the markets have done, I wouldn't really describe it in terms of, oh, the first half of the year markets did this, because I think most of what was happening in the early part of the calendar 2021 year was a continuation of what had started in the late portion of 2020, which was really the vaccine. And so you look to the various things that were holding market valuations back, not only the E, but the PE. So meaning company earnings were being held back by less economic activity

as we were not out of the coronavirus pandemic yet. And then the valuations that would be granted to such earnings were held back. They were still pretty high because of Fed monetary policy, but you got both multiple expansion and earnings growth and expected earnings growth all to really accelerate out of the news of successful vaccines, which came just right after the election in November. So I think a good portion of what's happened in markets this year was just sort of the playing out of economic reopening and economic recovery. playing out of economic reopening and economic recovery. And then I think that you had and still have this sort of tension and tug of war in markets regarding a rotation, what is going to be the leadership group in the market as we proceed. This value growth story where tech fits in. There's a lot of those things kind of playing out that are almost sort of a subtext to the broader issue. The interest rate story then becomes the kind of new conversation.

And it's just fascinating to me that by the time it became this conversation of, well, with economic recovery and economic growth, now we have fears of inflation. And, oh, by the way, that inflation, excuse me, that economic recovery came with then the news of the third COVID stimulus bill. And that third stimulus bill, along with all the Fed policy, started a whole slew of conversations about threats of inflation. And the 10-year bond yield moved up to about 1.8% back in March. The conversations began, and the 10-year bond yield has very slowly but surely moved itself back down into the 140 to 150 range ever since then. And so I think that you have subtext what's happening, but no question, the primary driver of markets this year in what started in late 2020 is the story of economic recovery. A pretty fair amount of people underestimated pent-up demand.

I believe the pent-up demand is real. And I also believe it's in not early innings, but like early to middle innings of just how significant it is when it comes to things like travel, entertainment, vacation, group events, sports, and so forth. The things that were most removed from people's daily routines and quality of life during the pandemic, I think the pen of demand on those things is monumental. And I'm actually at a loss to understand why people underestimated that. It strikes me as entirely intuitive. So that's where we are now. We get ready to go in the second half of the year and we go into the second half of the year with a lot of the good news, well known, with market multiples very high, with bond yields very low, and not any real clarity as to where the legislative path is going to be. And in that case,

I don't mean it as a good or bad thing, because I think there's some things that could clearly happen that would be bad, some things that some people believe would be good. But at the end of the day, the fiscal side has been so wildly overestimated in its market impact that I'm actually dumbfounded. Well, and we've got some questions about the fiscal side that I want to get to in a moment. But in terms of this sort of second half of 2021 outlook, are there any risks that you see? I mean, you mentioned the 10-year treasury yield. You've also talked about risks of that potentially getting too low and why maybe we should be more worried about a low 10

year treasury yield than a high one. And then someone else wrote in wanting to know your thoughts about the Delta variant of COVID and what that might mean for markets or as a risk to watch. Yeah, let me just get rid of that one real quick. The Delta variant for vaccinated people isn't a risk to markets and it isn't to even non-vaccinated people. I suppose they're more susceptible to getting COVID and any variant if they're not vaccinated. I mean, but the spread risk right now by nature of the massive amount of immunity that's been created in our society is huge. So this variant story, that's a big story I could have alluded to earlier, but I was giving you positive answers of what have proactively impacted markets as opposed to a big story around what has not moved

markets. But the overhype on the variants this year has been an embarrassment and belongs in the top five of biggest stories, even if it's kind of the non-story, but so much of the hand-wringing and fear-mongering over the variants when time and time again, it's proven to have been massively overestimated, massively misunderstood, and then just very graciously and gratefully and wonderfully covered under the immunity that the vaccine provides. So I don't see it as a market event at all. And any clickbait websites and a lot of the doom and gloom stuff we've seen in the media has been unable to change that, that the markets have not responded. In fact, have mostly kind of laughed all of it off. But your first question before that had to do with interest rates and the risk of them being too low. And this is something very counterintuitive to a lot of

debt favorable circumstances. People love low rates when they love borrowing. And a lot of people believe that low rates help facilitate borrowing, which helps promote the cause of risk assets. And I would say that that's a fair thing to say in one sense without a lot of nuance and without filling it in much. However, I think that the truth is that what excessively low rates for an excessive amount of time do is exacerbate a boom-bust cycle. And then it becomes hard for markets to get a full amount of confidence. It becomes hard for entrepreneurs to take risks when they fear that they're later in a cycle of a boom and they're awaiting a bust cycle. So it alters entrepreneurial behavior, where a natural and organic and market rate of interest allows these things to flow through more naturally.

And so I think counterintuitively, excessively low rates do not help markets because they hold back rational market activity because of rational fear of a boom-bust cycle. boom-bust cycle. Ultimately, price discovery in a market economy is the sin qua non. We have to have the ability to price risk. Entrepreneurs are engaged in price estimates, in forecasting, in looking forward about growth expectations. And when the price of capital, the cost of capital, the interest rate represents is below a market rate or has an intervention that distorts decision-making, it can lead to a lot of malinvestment, a lot of bad decisions. And then that has to get cleaned up. And I'm not suggesting it's all like the 2008, but the 2008 moment was like this extreme example of what happens there

when you have a boom, a bubble, you have a lot of very low cost to capital, a lot of very bad investment decisions made, a lot of leverage that has to get unwound. And of course, in that case, it was highly systemic. But even in a less dramatic version of that, low interest rates can distort market activity. However, the biggest factor, and then I'm going to stop my answer. The biggest concern with low rates is what they indicate. It's not what they create. Low rates create some bad things, as I just got done saying. But more important than that is that low rates indicate poor growth.

Low growth, slow growth, no growth. You can look to Japan for the last 30 years to see what this means. 30 years to see what this means. If we had a 3% 10-year, I would assume that a lot of market actors and a lot of capital has aligned on the side of believing that there is greater economic growth coming in the United States over the next 10-year period. And even three would be quite low, but three would be pretty high compared to the rest of the world. It's always relative to some degree. Global capital has to land somewhere. I think that when you have a one and a half percent tenure, you have many, many trillions of dollars voting that they do not expect an acceleration of economic growth. So in this sense,

excessively low bond yields as a negative, I can defend that thesis both by what I believe they create, which is bad investment decisions, bad allocation of capital, and then what they indicate, which is expectations of subpar economic growth. Yeah, no, well said. I mean, you know, and there were several times over the past couple of years, I mean, really over the past five years, I mean, I think back to 2016 Brexit, where you saw the 10-year yield fall meaningfully below 1%. I mean, do you think we are out of those woods, so to speak, and that will kind of stay in this one and a half, maybe to two range for the foreseeable future? I don't think that the 10-year went below 1% during Brexit. If it did, I don't think it did.

I think that the first time we broke below 1% was at COVID, right before COVID. I think that the first time we broke below 1% was at COVID, right before COVID. But even if I'm wrong there, it would have been for like a minute. But see, the problem with this is that it's all relative to global rates. And so when I say I don't see us going back below 1%. I really hope I'm right because I think that we had about $18 trillion of global sovereign debt trading at a negative bond yield a year ago, and now that number is at about $12 trillion. So the fact that there's $6 trillion that has moved into the realm of positive bond yields, you know, someone is not paying for the right to loan somebody money is a good sign, but that's the anchor we're dealing with.

And so when German yields go to 50 basis points negative, you could see the U.S. Treasury yields coming back below 1%. All of it, though, is kind of the relative machinations around a monolithic condition of excessive global indebtedness. So you have that as a global characteristic that puts downward pressure on all global yields, and that lures us all in it together. We're all fighting in the same mud. But then within that, you get relative strengths and weaknesses. And that's where the US is in a tough position. Because if they were to ever tighten monetary policy, what you saw back

in the 2015-2018 period was that the rest of the world wasn't in a position to tighten. The US said, hey, we kind of have to tighten, but then the dollar rallied so much and it messed with competitiveness. And so you end up with really no very good options. I am not an interest rate prognosticator, thank God, because no one's very good at it. The best bond managers of all time were not very good rate prognosticators. However, what I will say, do I think that the 10-year should stay above 1% and below 3% for quite some time? I do think that, yeah. I don't think that's a very bold prediction. that. Yeah. I don't think that's a very bold prediction. I mean, first of all, when the rate is this low, when you're at the lower bound and you're giving yourself 200 basis points of wiggle

room, that's hardly a very courageous prediction, but I don't see the economic growth coming to warrant a 10 year above two and a half percent, let alone above 3%. And I don't believe other than just a really significant like black swan event that we go back below 1%. And so then you have to factor in all of one's beliefs about this stuff, the total unknowns of what central bankers may end up doing. We kind of ended up with the yield curve we ended up with, with the Fed not ever technically doing yield curve control. And I would have bet significantly a year ago that they were going to do yield curve control. Now, they didn't do it, but they kind of didn't need to because they talked their way into yield curve control.

They did a lot of forward guidance. They used QE to some degree to kind of position some things on the yield curve. But they could do yield curve control in a second. And I think they would. And so therefore, predicting rates when the Fed has such an unbelievable gun in their holster, I think is a very unwise idea. Yeah, no, well said and apologies. The 10-year yield, you're correct, did not go below 1% after Brexit. It went below 1.5% briefly, but still low for that time. Yeah, yeah, yeah.

Well, and in fairness, it's all pretty low. So I know what point you're making. At the time, 1.5 felt like one, like it was just surreal. And then, of course, with COVID, it did go below. And correct me if I'm wrong, but I think it bottomed at 0.5 during the COVID drop about 15 months ago. Yeah, seems like a lifetime ago. But I think your point is very well taken and something that we're not hearing enough about, which is that, you know, earlier this year, we were worried about a rising 10 year yield, but that perhaps is not the right worry to be having right now. And certainly we saw that 15 months ago, as you mentioned. And David, let's also talk about some of the fiscal issues you mentioned earlier. A couple months ago, we were starting to talk about the potential for rising capital gains taxes.

Somebody wants to know your views on the possibility of some of these tax increases getting passed through reconciliation, sort of the technicality of that. So why don't you weigh in on that and maybe just your broader views on reconciliation, which is pretty controversial as well. Yeah, it's a complicated thing. I'm going to write a lot today in DC Today, the edition that will come out Monday after the market closes about where things stand, because one's view of the reconciliation bill is largely dependent on what their view of the infrastructure bill is. And all of it's dependent on kind of where they go with a budget. And so you have a lot of moving parts that all to one degree or another have to come together. Look, when Joe Manchin says over the weekend,

he doesn't mind a 25% corporate tax rate and he doesn't mind a 28% capital gain rate, and this is all in the context of them saying that they want to pass a bipartisan infrastructure bill once they pretty much know they are going to get a bill that can get through reconciliation. I take it at very much face value that this is Manchin saying, if you want my vote on a budget reconciliation bill, then I'll do 28 or lower on cap gains, but I'm not doing 43%. And I think that the corporate rate, which is something I've been writing about for months, was always going to end up getting settled around 25. Now, as it turns out, if, and it's a huge if, if this bipartisan infrastructure bill that was looking like it was kind of set to go last Thursday, then fell apart Friday, then really fell apart Saturday, then came back a little Sunday, now looks to be back on the table today. That thing is very vulnerable. There's actually no margin for error with progressives on the left

or with moderates in the Senate Republican side. But if that goes through, it does not have any tax increases in it at all. And originally, the infrastructure bill the Biden administration put forward was for a 28% corporate tax rate. It's currently a 21. So a 7% increase divided by the current 21, that would have been a 33% increase in the rate of taxation on corporate income. And now the bill that is being supported by the White House has no is being supported by the White House has no corporate tax increase in it. This is one of the reasons I've been arguing all year for people to respond to actual legislation, actual sausage making, actual indications of what is moving through a process to become law, as opposed to press releases and doom and gloom on cable news and other things like that because none of the things that have been talked about wherever is easy to get done

as people might have thought. And that could be a good thing from one's point of view or a bad thing, but it's certainly the thing, okay? On the capital gain side, I still believe that if a capital gain increase will come, it will be in 2022. And it will be significantly lower than the Biden administration had thrown out. So the idea of an ordinary income rate on capital gains for high earners and increasing the ordinary income rate to 39.6 and keeping the Obamacare surtax of 3.8. So effectively about a 43% capital gain rate. I don't think that was ever going to happen. And could they get it done through a reconciliation bill if they had availability for a reconciliation bill and had a bigger margin in the Senate?

I think they probably could. But all of this stuff about, well, if they don't get this done, then Bernie Sanders wants to do a $6 trillion thing. It's like people are just talking as if the math has changed and not just the math in the Senate, the math in the House. It's not true that every single House Democrat is willing to go vote for a 43% capital gain tax. So I think that some of these tax rates are going higher, but none of these tax rates are going as high as people had originally feared. And I don't like to take credit for anything because I'm wrong on things and I don't want to take blame when I'm wrong. But this is pretty much what I've been saying all year. But forget me. This is what the market's been saying all year. There's never been a point where the market said, oh, dear God, capital gain rates are

going to be doubling. The market has never believed it. And I think the market seems to understand the way the United States Senate works more than a lot of people on cable news do. United States Senate works more than a lot of people on cable news do. Yeah. And when we talk about tax increases, presumably that's to pay for more things, right? Raise more money for the government. And so that's a somewhat of a segue into another question we received, wanting to know your thoughts about if anyone else is buying U.S. debt other than the Fed, and if foreign powers aren't as interested in U.S. debt, what that means for our refinancing, our broader debt issues that we face as a country. Yeah, well, this is one of the big points is that tons of other actors are buying U.S. debt. And this has been my point about bond yields. Right now, the United States has something in the range of

$27 trillion of debt, and the Fed is holding roughly $5 trillion of it on their balance sheet, a couple trillion of Fannie and Freddie debt on their balance sheet, unrelated to the U.S. national debt. So we have a central bank that has less than 20% of our bond issuance on its balance sheet. Japan has over 60% of its bond issuance on the central bank's balance sheet. So it begs the question. And by the way, the question should not be who's buying the debt. It's who's buying the debt and who's holding the debt. Because if you said, well, yeah, no one else wants to buy it, but there's plenty of people willing to hold it, that's the same thing as they're holding it at those current yields. If they weren't willing

to hold it at those yields, it would move the yields higher. So there would be price activity. Japan owns over a trillion dollars of U.S. national debt, of U.S. treasuries. China still owns over a trillion dollars. This is a complicated subject because of the world's reserve currency. That changes the dynamic. You wouldn't have a situation where all investors of the world, besides the United States Fed, were done buying U. debt. You wouldn't have that before the US lost its status as world's reserve currency. I don't happen to believe that's

happening, that that's going to happen. But if it weren't going to happen, that would happen first. The US would lose reserve currency status with the dollar, and then you would have these challenges of being able to sell the debt. But we did bond auctions last year where the Fed didn't show up to the auction at all, and the auctions were fully subscribed. You have a significant amount of US private investors, your banks and your hedge funds and so forth that are big buyers of the debt at these low yields. And then you do have a fair amount of global ownership as well. I think it was two, maybe three weeks ago that I put a chart in Dividend Cafe of the allocation of holders of U.S. debt from the central bank to global sovereign to corporation and so forth. So it doesn't have to make sense to us. I don't know how many of you

wake up and say, I'd like to loan the government money for 10 years. And as long as I get 1.4% per year in coupon, I'll be happy. It doesn't sound like an attractive proposition, but you have to remember that what is happening in this situation is that there are a lot of people have to own US government debt for more than just holding it to maturity. They own it because it is a place that money has to be parked, that they believe it to be secure and stable. And the yields are going to get set off the risk reward of all these economic propositions. And no matter what we think about US fiscal insanity, and I think a lot of things about it, but it is a relative game.

And for good or for bad, we have to be compared to European Union, to emerging markets, to Asia, to Japan. You know, Japan is obviously part of Asia, but it's economically kind of considered a separate block in this context. So I think that the US will have no trouble selling its debt for the foreseeable future. And yet I don't necessarily think that's always a good thing. But these issues we talk about, how would you characterize them in the context of a client portfolio or from an investing point of view? Are those worlds sort of coexisting right now, or is there a time when they potentially collide? I think that within a fixed income allocation, there is some portion of any client's portfolio that is possibly going to be invested in boring bonds. any client's portfolio that is possibly going to be invested in boring bonds. And that number might be 0% for some people, but it might be a much higher for others. And one very practical

ramification of what's going on is where people want to consider alternating their geography, okay? Domiciling global sovereign debt. So they're still assuming there's no credit risk because we're not talking about replacing US treasury debt with Argentinian or Venezuelan debt, looking to some sort of stable home that one can lend to government money. So it's money good at maturity, but the currency risk and inflation risk and rate risk, people believe is all kind of baked into a yield that they like better than they could get from the U.S. This is one of the big reasons why the U.S. has done better because compared to like let's say the European Union and Japan, that kind of mixture of characteristics I just described has

led one to see the U.S. as a superior alternative, not inferior. But by the same logic, one of the things I've talked about with you in the past, and I've done other podcasts and writings on, is whether or not we're entering a period where certain Asian bloc countries, including China, might represent a better alternative than the U.S. for a portion of this kind of fixed income part of the portfolio that is meant to be very low risk and have a maturity date and preserve capital, but offer better yield and better return profile for the years ahead. So it's something that we're deeply engaged in in conversations at our investment committee as to not only what our comfort level is, what our viewpoint is, how we would go about executing it.

And I see some of those things being resolved in the next several months. And David, we're also getting a question on a different topic. We're also getting a question on a different topic. Your views on passive investing, which you described some downsides about in a recent podcast. What are your views on passive investing and what specifically are some of the downsides there versus a more actively managed portfolio? Yeah, I've written about it for a long time. When you look at entering the market with a 1.5% bond yield, when you are passive, when you're buying the index, you are mostly only buying that valuation. And the entirety of all the companies put together will either warrant a higher valuation in the future or will

grow into that valuation that's a big risk by the way and i hate that feeling of when everything goes as well as it could possibly go and and and things still go lower just simply because perfection when things get priced above perfection, even at perfection, a correction to normalcy does mean a negative return. It's entirely possible right now for index investor. So look, could 25 times go to 28 times? Of course it could. I just don't want to invest in that. I don't want to invest assuming that. I don't want to invest assuming that multiples can go much higher than this. Can PE ratios stay the same, but earnings outperform expectations? I don't know how that can happen. I think that the PE ratios are already set this high

because of great earnings expectations. So I don't think great earnings expectations then mean, okay, well, we've rationalized to 25 times PE. I think they mean that's what we're expected to do. So the passive investor's problem is that right now they're making a play on valuation. And I think that an active manager could say, well, I don't want to mess with valuation. I want to just go find individual stories I believe in, and maybe they're going to go play tech stuff they like, or maybe they're going to play with a few individual companies. They're going to have some investment thesis that they're going to execute on, and they can be right and they can be wrong.

But it's a different investment approach than just simply saying, I'm betting on 500 companies in aggregate being better valued a year from now. So my concern with passivity is I think that passive approaches for index investors have worked very well coming out of periods of low valuation and worked very poorly coming out of periods of high valuation. And therefore, in the broadest sense, before I talk about dividend growth, I think active management is very likely to do better. Now, one thing that is sustained passive management that creates what my friends at Strategas Research call, and everybody gets a trophy, investing environment is heavy accommodation from the Fed does tend to lend support to all risk assets. And it makes things pretty non-discriminatory from one sector of the market to another, when everyone's benefiting from a lot of liquidity, from very favorable credit conditions, from very low cost of capital, all of that.

My view would be that it's going to be an extended season that favors active management versus passive. But then what does active management look like? What does that mean? For us, it means dividend growth. We actively manage around a thesis, around a philosophy of companies that are free cashflow generative, that believe their job as stewards of shareholder capital is to return it to investors and allow those investors either to reinvest that cash back in the company or to monetize their investment through the receipt of that cash. And that most certainly requires an active approach. So that's my view on the active passive thing. Nobody in their right mind could deny passive investing in a really good market season does very well. Not always for income investors

because everything is very low yielding now, but generally the price returns when you're going from low multiple to high multiple are going to be good. But we're in a high multiple now. And so I just think people need to think through what the implied presuppositions are in assuming that passive investing is going to do better at a starting point, not an ending point, at a starting point of high valuation. Yeah. And David, to your point, I mean, I guess this is sort of a byproduct of the rise of passive investing. But, you know, the tech sector is now such a large part of a lot of the indexes and a lot of the ETFs that passive investors flock to. So perhaps they're not as diversified as they think they are. Well, and that's true. We talked about this a lot last year that, you know, an S&P 500, which is generally a market cap weighted index, you can

buy an equal weighted version of it, but almost nobody owns that. The market cap weighted version S&P, you can feel like you're very diversified. It's 500 companies. And yet, because of how large five of those companies are, people ended up, you know, for good or for bad, being much less diversified than they thought. And I think that's even more true going forward. Now, of course, that can really help when the things that disproportionately impact performance are all doing well. That problem, so to speak, in one's diversification is not a problem in the performance. problem, so to speak, in one's diversification is not a problem in the performance. It only becomes a problem when you expect in a period of difficult performance, the diversification to be there for you. And it's not there for you because the weightings within your passive portfolio have

been skewed so badly. This was a tremendous lesson. I mean, we talked about the NASDAQ in 2000 blowing up, but everybody knows that story. And anyone who was in the NASDAQ blew up. But people in the S&P 500 should not have blown up as much. But the problem was, is that some of that tech overweight became so significant in the S&P that it ended up really hurting S&P investors who thought tech was just a part of their portfolio. And it really ended up being double the impact that they would have expected. Yeah. And David, as we move towards the end of our discussion here, give us a preview of what's coming up in DC today, which is your daily market commentary. I'm pretty focused today on public policy on this infrastructure bill, where we see some of that going. There's always, you

know, a few other tidbits from the Fed and on COVID front and things like that. But it's a pretty robust policy. Quite a few last week were as well for good reasons. And so that's kind of where we're headed in D.C. today. I do see, Scott, one more question just came in. And so just because we have a couple of minutes, I'll let this one come in. I've said in the past, one of the reasons I don't buy inflation thesis, 10-year bond remains at 1.5 percent. And it would be much higher if inflation was about to raise its head. And in the past, fededs enabled Congress to spend above its means. There's no indication that will change. But to what extent have Fed actions kept the 10

year artificially low? And might it not be a good indicator of inflation as it has in the past? So this is a really important question because it presupposes something that I think so many people do not understand, which is they presuppose that the Fed can control the 10-year rate. The Fed controls something called the Fed funds rate. And the Fed funds rate is an overnight rate. So if the Fed wanted to control the 10-year, which they could go out and buy a ton of the 10-year, and if a lot of other people didn't like what was going on that held the tenure, they could sell it because that's trillions of dollars of actors out there. But the Fed has

more or less allowed market forces. And even when the Fed has intervened and not allowed market forces, it's been for a day or a week or a month. I kind of answered this question indirectly earlier, that the Fed is not the primary buyer of the long end of the curve. They could be. They could use yield curve control. But people have to understand that us having a 30-year treasury rate that went from 6% to 2% in the last 13 years, and a 10-year that went from 5% to 1%, that was not at the hands of the Fed. That was at the hands of market forces. There was no Fed buying of bonds whatsoever after QE3 ended at the end of 2014, at the end of 2014, all the way until COVID. And those rates stayed way down below 3%, and in the 10 years case, most of the time below 2%. So you cannot interpret it any other way than the bond market voting that there is low, slow and no growth coming. And it is my belief

that that stems from this Japanification thesis. Well, maybe I'm wrong about what it stems from. Maybe all the trillions of dollars of debt investors have just gotten it wrong. Either way, that is the indication one needs about inflation. To the extent that the Fed is intervening, which they most certainly are, and distorting, which they most certainly are. So on the low end of the curve, does the low end of the curve impact the 10-year? I think it does, to the extent that I think your 10-year or 30-year are going to be your Fed funds rate plus inflation expectations, or if you want, growth expectations.

So if the Fed funds rate were a little higher, I would believe that the 10-year and 30-year would be higher, unless you had such a negative view and almost a recessionary view that you got an inverted yield curve. We've had that happen. But more or less, I think that the 10-year is why I use it as such a powerful indicator in the economy, because the Fed can't control it. The Fed has nowhere near, now they could choose to try to exercise more firepower. I'm just saying they haven't. The reason we have a 10-year yield we have is because this is what people who buy 10-year debt have been content to receive and yield. Well, yeah. I mean, David, it's, you know, and that's, you know, one of the indicators that,

you know, to your point, gives us a pulse on our economy, right? I mean, the 10-year yield is one of the main gauges as to how as to what investors are saying about our economy. So its movements are important. Well, it's absolutely one of the main indicators. And it speaks to growth expectations. It speaks to inflation expectations. And it speaks to currency. And so currency moves up and down around yields

and those yields have to do with economic growth expectations. And contrasts are a lot easier when one economy is doing really poorly and one economy is doing really well. But when all are kind of stuck in the same mud of over-indebtedness, it becomes differences at the margin. And that's what's challenging.

And when people talk about a race to the bottom is you get somewhat handcuffed by the global indebtedness phenomena. indebtedness phenomena. Because even to the extent that we want to be able to move forward with a little bit higher growth, a monetary policy that indicates better growth expectations, you can't move very much when Europe is pinned down at the zero bound or something like that. And so this is something that right now the US has done its very best to play catch-up in in the last few years. We put our balance sheet at a competitive level with other countries very quickly, and I don't mean that in a good way. David, anything else you're watching or things you wanted to add today? No, I think that covers it. We've covered a lot of ground.

I hope we've adequately covered everyone's questions, but certainly send follow-ups my way. I'm very happy to write back further. We're deep into a lot of projects. We have a lot going on. Our construct of Magnify at the Bonson Group is not going anywhere. The way in which we have constructed and put together a paradigm of asset allocation for clients, something that we believe in very strongly. And right now, for the time being, these things are pretty well moving on in 2021, the way we would have expected. So we continue to monitor everything daily, make adjustments as necessary. And, you know, July is going to be a new earnings season.

And the second quarter is going to be a good quarter. They're going to be reporting on a really profitable quarter. And so then the question is, at what point, because I don't think it's when, I think it's coming. But when do you see the good news become bad news because the profit expectations by outperforming profits now, it means profit growth in the future ends up being a little lower. In other words, you're getting some of next year's profit growth today, unless one has to totally recalibrate profit expectations for next year. And I don't think a lot of that's going to happen. So that tends to bring PE ratios in a little bit.

And that tends to hurt the stocks that are really dependent on a high PE ratio. So I don't know if that's going to be this quarter or not. I do think it's coming. But right now, the economy is doing well. The job market thing is just sad to watch the amount of unfilled job positions. But, you know, everyone can see the expiration date on some of that. And so I think there's some optimism that we're going to get a more market oriented and more normalized labor condition by the fall of this year. labor condition by the fall of this year. So those are some things on our mind, Scott, and hopefully we'll continue to make the best decisions we can. I know they don't come without an awful lot of research and attention. 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 Thank you. in this research, is provided as general market commentary and does not constitute investment advice. The Bonser Group and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the Bonson Group and do not represent those of Hightower Advisors LLC or any of its affiliates. Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax

advice or tax information. Tax laws vary based on the client's individual circumstances and can Thank you.