The Dividend Cafe - Market Outlook w/ David L. Bahnsen - Conference Call Replay - May 17, 2021

Episode Date: May 17, 2021

David L. Bahnsen and Scott Gamm discuss the market happenings of the day. 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. Thank you, as always, Erica, and thank you to everyone who's joined the call today. We have an awful lot going on, an awful lot to discuss, and we'll keep it short and, and, uh, succinct, but hopefully very informative with some really great questions have come in and we're going to try to get to all those. But as Erica said, send in questions real time, uh, to questions at the Bonson group.com. And I'm, uh, we'll do our very best to get to them here on the call today with that. I'm going to turn it over to our, uh, Scott Gamm, and we'll have a fun discussion. Well, David, thank you so much. Great to be with you as always. And as we normally start

off these calls, just by getting your overall market temperature, since we spoke a couple weeks ago, we've had quite a bit of market volatility, particularly in the tech sector, that volatility back today with the broader NASDAQ underperforming the rest of the market. You've been very clear about your outlook on tech stocks, but I think it's certainly worth repeating for this call as well. Yeah, I mean, my view is there's a lot of overlap with my general view of markets right now with some of the comments about tech stocks, but I'm becoming more and more nuanced in when we talk about tech stocks, separating some that are really speculative tech stocks, usually very small capitalization

versus names that are not speculative, that are not small cap. They're pretty sizable companies, but they're not FANG and they may be cloud. They may be kind of work from home. They're more maybe name brand type companies. A lot of them are the unicorns of the last decade that ended up going public. I think those have a separate risk and reward kind of context that I would look at differently than small cap. And then you have, of course, the big Fang names, those mega cap names.

Some of them are, this is actually a pretty good day to make the point that like right now, when I look at my screen, you have the largest social media company in the world that's down over 1%. And you have the largest e-commerce name in the world that's up half a percent. And you have the largest streaming name that is down 10% year to date. It's down almost 2% just today. The largest window, excuse me, software enterprise company, the second largest company in the whole world is down almost 2%. So the point I'm making on these big mega cap technology names, all of which I just went to great lengths to not say the name of, all of them are deserving of being somewhat dispersed from one another. The correlation amongst those names, I think,

has kind of broken up a bit. Year to date, you have the largest search engine company in the world up 30%, and then you have the largest e-commerce name in the world that's flat. And then you have the largest e-commerce name in the world that's flat. And those are two massive companies. So that's kind of an example. And you look at the maker of the largest smartphone in the world is down 5% on the year. And that's with a Dow that's up 12% on the year. So my point is this. Big tech, kind of newer tech, and then small cap, highly speculative tech.

I really think those are three separate stories. Then you add on a solar or EV kind of theme, and you add on crypto as a theme. You get one thing in common, which is where I think a lot of people take a lot of my comments to be in the same stew, that is that they're all oftentimes cut from a speculative cloth for the investor, that the investor is buying the momentum. The investor is buying the juice. The investor is buying the froth. But really, speak, which is some of the companies that you've owned for clients, some of the more cashflow heavy,

high dividend payer stocks that are a little bit more stable in this environment that is very speculative, as you mentioned. Yeah. I mean, I think that when you look to, like right now, the way I would view the stock market, I am talking about value and growth more than I ever have, even though they're labels I primarily don't believe in. And the reason is because they become very useful for even me right now to differentiate between categories of fast growing companies that you're paying up for and slower growing companies that you're paying down for. And to me, there is a kind of secular trend out of the indexing of these things between value and growth

that's been a useful category distinction for 40, 50 years. And right now, that's a general theme. But when I talk about the theme, that theme doesn't become investable to me, because it's not how we manage money. So I may have opinions on where the growth area is and where the value area is as a matter of attractiveness to a given investor. And yet when we go to execute on behalf of clients as bottom-up investors, I really truly believe that the dividend growth orientation

that's the lifeblood of our investing philosophy is only incidentally more overlapped into the value space and the growth space. We really are agnostic about how a Morningstar or an S&P might categorize some of those different names. They do categorize them, and they do fit into one of these aforementioned buckets. And more often than not, I think a lot of the names in the dividend growth portfolio are probably going to fall into a value bucket than a growth bucket. But the reason why that nomenclature is not super useful for us and is not driving any kind of investment decision is because I don't

care what bucket someone else may put it in. If there's a company that I believe has a really attractive dividend that has a really great propensity to grow the dividend and sustain it over time, then I'm very interested in that company, no matter what Morningstar bucket it might fit in. So right now, this whole thing about classifications, and I'm probably now forgetting what your question was, so forgive me if I got on a tangent, but I think it's important that people know why they're buying what they're buying. See, it's impossible for people to measure the risk they're taking and to think intelligently

about the risk in this market environment if they don't really have a good understanding as to what they own and why they own it. So look, I had plenty of days last year. I mean this very seriously. I don't mean it humbly because I don't really care. But there were plenty of days last year where energy and financials were down and the market was up or certainly FANG was up. And right now you have all this kind of market volatility and everything. I'm looking at my screen now, the NASDAQ's down 130 and the Dow's down 100. And our dividend growth names today are up 37 basis points. Well, it just so happens that the reason for that is all this healthcare stuff is rallying today. Consumer staples are too.

But see, if someone said, oh, it looks like your stuff's in favor today and other stuff is rallying today. Consumer staples are too. But see, if someone said, oh, it looks like your stuff's in favor today and other stuff is not, they would miss the point. We're not buying healthcare because we think it's in favor. We're buying company A, company B, and company C for that reason. And there are just certain days where those stars are going to align more than others. The fact of the matter is that what has produced some volatility on some days, and let's not get carried away on what this is. The market last week had two days where it was down over a thousand points and two days where it was up over 800 points. So net, net, the market was down about 300 on the week and the week before the market was up over 300. Okay. So the market is,

is not, it's just not a big deal thus far. It could become one. It isn't thus far, not even close. However, it's so obvious that what's driving it right now is concern about froth and excess valuation in certain distinct areas because of the fact that things that aren't susceptible to the froth concern, whether it be particular healthcare companies today or particular energy companies last week, they are not participating in the roller coaster of the market right now. And so I think it kind of speaks to the fact that we don't have, we have gone mostly, not exclusively, but mostly since 2008 in one of two speeds, either everything risk on or everything risk off, and with a few little exceptions along

the way. I don't think we're in that mode right now. I think you could really have a situation with high degrees of bifurcation from one sector to the next, from one part of tech to another part of tech, and certainly from higher valuation areas to more fundamentally rooted areas of the marketplace. So it's just a really opportune time for active managers, I think, to get their allocations right. Well, and David, the other topic that has been coming up since our last call a few weeks ago is inflation. We saw a hotter than expected inflation report last week, which was not surprising, but we are getting a good number of questions from viewers wanting to know your

updated views on inflation. Are you still in the camp that inflation will be more transitory than some folks are suggesting? Yeah, I don't know. A lot of people suggesting that inflation will be more than transitory are being very specific as to what they mean. I mean something very specific. I mean, from an investor standpoint, the primary reason one might be interested in what inflation does in a secular sense that is not transitory, that is pricing pressure upward over a sustained period of time is because of what it does to the interest rate. So if someone says to me, well, lumber prices are going to be high for a year or copper prices are going to be high for 18 months, but in four years, the 10-year bond yield is going to be less than 3%,

then they are not predicting inflation. They may not know they're not predicting inflation, but I promise you they're not predicting inflation. At the end of the day, the only real measure we have of if there's inflation or not is what the long bond yield says. Now, I have to change my answer to that if the Fed comes in and just buys all the long bonds. That is not the case in our country. Even in Japan, where they more or less monetized everything, Japan owns about 60% of the bond market. Our Fed owns about 20% of the bond market.

So 80% of economic actors driving bond market are operating off of their own long-term view and pricing in. you know, long-term view and pricing in, you're talking about trillions of dollars expressing a viewpoint in the yield they transact at around inflation. I believe that if we had such thing as a price level in our country or in the world, and we don't, but if there was just this thing called the price level, that all prices went up this or that, But if there was just this thing called the price level, that all prices went up this or that, up or down, in tandem with one another, that if all prices went up 2% per year for the next 10 years, that would be considered very low inflation. And that would be considered awful for people who have to pay for things in 10 years. So when I talk about the inflationistas, which are people that believed everything was going to be hyperinflationary, and have believed that ever

since the 1970s, it's true. I'm very critical of that. It is not proven to be true. It is proven to be really, really untrue. However, I am just as critical of regular inflation to the extent that I believe a 40-year-old today, when they go into retirement, is going to have less purchasing power than they have now unless they're invested in a way to keep up with the impact of inflation. So I want to be really clear about what I do believe and don't believe about inflation. I do believe and don't believe about inflation. In the specific context now, which is all coming up, I want to make a political comment and I want to make an economic comment. I think a lot of what we're seeing now is that there's obviously been an increase in lumber prices, copper prices. In some cases, they're higher than pre-COVID levels.

In some cases, they're not. But it is impossible politically to go nuance the base effect, meaning, oh, prices are higher because they're coming off of low prices a year ago. I just said a few things that already would turn a bunch of people off, base effect and price comparisons and year-over-year comps. Number two is the reality of supply chain disruptions that at a point of growing demand are impacting the ability to generate adequate supply, therefore pushing prices higher. That's a separate subject that applies to some parts of pricing pressures, but not all.

And then the third being this distinction between cyclical and secular inflation. And you start explaining why quantitative easing, which is generally what people are appealing to, like, oh, the Fed's printing all this money. And once you have to explain that they're not really printing money that gets circulated, which was inflationary, they're putting money on the excess reserves of banks. And until there's growing loan demand that gets that money circulated, it actually does not represent ipso facto inflation. And in fact, the loan demand is collapsing, not going higher. And so that percentage of deposits to loans have been all deflationary ever since the financial crisis and

still are now. See, I just covered like four different subjects. And politically, there's no way anyone can go on and make their talking point they want to make, whether it's a Biden administration official defending current spending levels on CNN, or some conservative Republican running for Congress in two years that wants to go scream that they're creating inflation on Fox News now. They can't get into the nuances of what I'm getting into with you right now, Scott. So they just end up either saying, oh, nope, there's nothing to see here. These are just transitory prices. Or they go, oh, look, we're getting 1970s inflation again. And I was on Larry Kudlow's radio show over the weekend talking about this.

I think politically, it's a really stupid thing for Republicans to be doing. Because the fact of the matter is that they don't know. And if their pricing pressures do get better, which I strongly believe they will at some level when supply chain disruptions are relieved, then all of a sudden they've given a talking point to the other side. I go, look, we fixed this thing you said was a big problem. So I think people need to be careful about trying to politicize complicated economic concepts, usually because it's out of their league intellectually. And second of all, they get it wrong and it backfires on them politically. But then the economic comment I want to make is that I think we talked about this two weeks ago, I've talked about it, Plenty and Dividend Cafe, people have really got to be able to understand

and appreciate why there is a distinction between short-term pricing movements of the different nuanced things that may be affecting them from supply chain to base effect to commodity reflation, et cetera, versus that secular longer-term theme. If anybody believes, I'm sure I've said this on our calls before, but I got to repeat it. If anyone believes that there is going to be a secular wave of inflation that comes in,

they have to be willing to believe that the long bond is going to a much higher yield, in which case they should be shorting the long bond with leverage because that's such a huge moneymaker. Good luck with that. I wouldn't touch that trade with a 10-foot pole. But then people say, well, you're a deflation advocate. Are you a bond bull? Because you must believe bond yields are going lower. So therefore, bonds are going to go higher in price. And I go, no, I'm not a bond bull because the 10-year is a 1.5%. So how much lower will it go that I'm going to make the amount of money that whets my appetite? What I am is interested in solutions for clients that are going to help move the needle.

And at a 1.5% rate, if you go up 100 bps or down 100 bps, I'm not helping anybody. What I need is viable solutions. And to get viable solutions that are investable for meeting outcomes, meeting goals, I need to go into dividend equity. I need to go into alternatives. I need to go into credit. That's just the reality. And therefore, boring bond stays as a parking lot for investor portfolio. Boring Bond stays as a parking lot for investor portfolio. Well, and staying on that note, David, we're also getting another question about tax rates. Obviously, a lot of talk about higher tax rates coming for wealthy individuals, which potentially could be disinflationary as well. What are your updated views there in terms of the likelihood that we'll see higher

tax rates for wealthy individuals? And I presume we're talking about capital gains taxes here. Well, I think they may be talking about both the ordinary income rate at the top rate and capital gains tax. And of course, the question could certainly be applied to corporate taxes as well. There was a big story in Politico this morning about how almost uniform it is across corporate America that none of them believe that higher 28% corporate tax rate is really coming. And the big reason it seems to me that the Biden administration's back at the table with some of the more moderate Republican senators about a bipartisan infrastructure bill is I think that they're well aware that they don't have the votes, even the 50 votes, to get done through budget reconciliation

what it is they had proposed, even just only with Democrats. Whether it's the House or Senate or both, and I do happen to think it's both, I don't think they have the ability to do that. So I'm of the opinion that a higher capital gain rate would be bad for the market on the margin and bad for the economy on the margin and bad for capital formation. But I'm also of the opinion that the way it had been presented, like this is what our plan is, is not going to happen and was really never going to happen. So therefore, the question becomes directionally, even if it doesn't go all the way to a certain level, does it directionally move in some way I still may not like, whether it's marginal income rates or capital gain rates

or corporate rates. And my forecast at this time is that the corporate rate will move higher, but it will move higher with other offsets that in aggregate break even. There are other deductions and other amortizations and loopholes that will be brought back or extended that will offset the impact of a higher corporate marginal rate. And so it could be good policy or bad policy. Perhaps some people think that's a political question, but it probably will not be much of a market event. On the capital gain side, I really don't know what to say, Scott, because at this time, I just don't know who would vote for it. because at this time, I just don't know who would vote for it. If they were to come in and say,

okay, we won't do a 39% capital gain rate for higher income earners, but we'll do a 28% rate. So the rate sounds more reasonable. Then I think he loses some of the progressives that really believe it's wrong for capital that's already been taxed when it was earned to not be taxed again at the same rate as labor, as earned wages. So I'm pretty sure that he's kind of damned if he does, damned if he doesn't. I think he either loses some of the moderates if he goes to the more draconian progressive vision. I think he loses some of the progressives if he cuts back a bit. So it doesn't feel to me like the kind of thing they're going to be able to find middle ground on. So look, all I can say is I'm in wait and see mode like everybody, but the ordinary rate he was talking about at 37%, going to 39.6%. I want to remind everyone that President Trump himself

I want to remind everyone that President Trump himself was adamant that 39.6 was going to stay at 39.6, the top rate. And at the very last second, he went to Speaker, then Speaker Paul Ryan and said, OK, you can do 37. And they ended up lowering the rate. And right now, I don't know if they're going to do 39.6 ordinary rate or try to do it, which I do think he'd have the votes for that, and yet bring the salt deduction back or not. Because there are some who are saying they won't vote for it. Some Democrats say they won't vote for it without the salt deduction coming back, particularly blue state Democrats, New York, New Jersey, Connecticut, Michigan, Illinois, California, they're saying they won't vote for that if they don't get the salt deduction back. But if they get the salt deduction back, it's going to become a tax cut on high earners, not a tax increase. And so it just seems to me like Madison-Hamilton divided government is working right now for them to not be able to do

that, both on the spending side and the revenue side. None of this should be taken as me being overly optimistic. They could end up striking a deal. They could make some sausage that comes out with some higher taxes on things. But none of the things that I've seen put on the table so far ever struck me as having a feasible path towards becoming law. And none of them strike me right now as being in any better position than they were two, three or four weeks ago. And David, just on that note of gridlock, and we've talked about this before, that is historically good for markets. And forgive the sort of vague phrase when I say good, but you know what I'm talking about. particularly in a period where that divided government led to a legislative gridlock. So you could think of the environment we're in now.

You could think of the environment we're in mostly throughout the Trump years. I remember the Democrats took the House back at the end of 2018. The market was down in 2018, by the way, first time since financial crisis. Then the market had one of its biggest years ever in 2019, and not a single piece of legislation got passed. So I think that the Gingrich, Clinton, Reagan, O'Neill, Obama, Boehner, you know, there's a lot of these precedents in modern history. Now, the only nuance I want to offer to that is sometimes there was divided government, but it wasn't gridlock. Gridlock's a little bit newer in the sense of where you literally can't get anything done. And people have a lot of different opinions on how good or bad that is politically.

My answer is probably the same as anyone who thinks through this to the second level, is I'm all for gridlock if what they want to do is bad, and I'm really against gridlock if what they should be doing is good. If there's a problem that needs to be solved, I don't want gridlock. I want the problem to be solved. Who doesn't think that? However, when it comes to really draconian tax policy or things that may weigh on the effectiveness of a free enterprise system in our country, you look at the 1986 tax bill. the Democrats had the majority in the House. Tip O'Neill was Speaker of the House. This was the second major tax bill the Reagan administration got through. That was so much sausage making. There were so many trade-offs. And yet they passed

one of the biggest bipartisan tax bills in history. It brought the top marginal rate all the way down to 28%. So there is such thing as divided government without gridlock, but a lot of us have not seen it in a long time. Well, and David, one of the final topics I want to discuss today is the Fed. We did get a question from somebody wanting to know your reaction to comments made by Treasury Secretary Janet Yellen from a few weeks ago, when she said something along the lines of interest rates may need to rise as the economy gets better. Obviously, there was some controversy and market reaction to those comments. But, you know, just sort of generally, I guess, what is your take on what the Fed might do in the coming year when it comes to either interest rates or the potential for tapering the stimulus as we see the economy improve from the lockdowns we saw last year? Yeah, let me say a couple of things about this.

First of all, I don't know what people expected when you name a Treasury Secretary who was a former Fed chair. Jenny Allen was the chairwoman of the Fed after Ben Bernanke before Chairman Powell. And she's a monetary economist. And so I'm sure this will not be the last time that something's come out of her mouth about interest rates. And if they all happen to be as obvious and vanilla as this one, I don't really know who cares. But from a purely tactical and political standpoint, she probably shouldn't have said it. It would be best, all things considered, if the Treasury Secretary maintains the appropriate level of neutrality and objectivity and agnosticism around monetary policy.

But she didn't say anything that anyone in the world doesn't know that if this happens, then this may need to happen. She didn't say it was going to. She didn't say, I hope it does. I don't know. She didn't say, I hope it doesn't. She just said that's what the kind of nature of things would be. But someone had asked about what the reaction in the market was said to me.

And I really want to be clear about this. There was no reaction in the market. And when you hear people on TV say, oh, the market moving because of Chairwoman Yellen's comments, they're wrong. I began managing money professionally a little bit before heavy electronification of our markets. There was a lot that had already been electronified. I was not in the business in the 1950s where you were literally writing every single ticket by hand on the floor of the exchange. There was a lot of computerization. But my wife and I took a tour of the floor of the stock exchange. After 9-11, I had already been in the business for a number of years.

And there were still specialists and floor brokers and $2 brokers that were really, really trading. And not everything was as digitized as it became. And it certainly wasn't all, there wasn't the degree of algorithmic trading and high frequency trading. But right now, when someone says a comment that is going to impact markets, you have to distinguish between what a thoughtful person would do and not do. Because if something's happening that a thoughtful person wouldn't do,

then it's a computer doing it. Because what does a thoughtful person do when they hear a comment from the chairman of the Federal Reserve or the Treasury Secretary or a tweet from a presidential candidate or some other thing or a tweet from a CEO about crypto or whatever. A thoughtful person doesn't in five seconds start hitting their sell button or their buy button, obviously. So what is happening is the immediacy of algos kicking in that are just simply trying to front run what could be a very short-term market impact around a comment made. And it can last for 30 seconds.

It can last for 30 whole minutes. It can't last for 30 days. And it can't last for 30 months. And it can't last for 30 years. So there was no market response to what she said. I think that that day, the Dow went down for a few minutes. And then it was up by the end of the day. And so there's no market signal.

There's just short-term high frequency it's called high frequency for a reason there's algorithmic response but not thoughtful person response when there's a quick comment now you can hear comments and then digest them and analyze them and decide if they change the point of view you might have within your portfolio i think that's a healthy thing to do. But ultimately, I hope I really want anyone who's a client of mine to understand this. There is just no question that the Fed has put themselves in a corner. It's going to be very hard for them to get off one day. But there's also no question that they're in no rush to get off of it. And someday, if and when they are ready to start normalizing rate markets, credit markets, their balance sheet, things like that, they'll have a few options.

And nobody knows what they're going to do because this is unprecedented. Do I think they will start quantitative tightening again while they're raising rates again? I do not. They did it a little bit 2018 and it kind of worked off and on. And then by the end of the year, credit markets kind of threw up and they chickened out. So maybe when they try to get off of it in the future, they do one and not the other. That's my guess. But I'm not even sure they'll do the one because they could leave the balance sheet where it is and just not tighten, not actually let bonds roll off and see and not reinvest them where you actually have a lower balance sheet of the Federal Reserve.

They were doing that. I think they reduced it by $400 billion. They'd run it up a few trillion. They reduced it a bit. Now they've run it back up a couple of trillions since COVID. My point is this. At some point in the future, should they be in a position to normalize, they'll normalize and anything that is rated and priced against a

0% rate that now gets priced against something higher than a 0% rate is going to go down. But that doesn't help anyone to know that right now, because you don't know if they're going to do it in a year or three years or five years or never. So it has no predictive benefit in portfolio management whatsoever. But Yellen is right that there are certainly things that can happen that they may have to respond to, and that could include higher interest rates in the future. Well said, especially the never point. No one's really talking about that, but it's certainly possible. Yeah, it is.

the never point. No one's really talking about that, but it's certainly possible. Yeah, it is. David, let's also give people a quick preview of what's coming up in DC today, which is your daily market commentary note that's released at about 6 p.m. Eastern. Yeah, it's a very full one today. It may come out a little bit early because I've done most of it already. I had an airplane trip from New York yesterday, gave me a big head start and got a lot done this morning. We'll wrap up market data when the market closes and then tie a bow around it. Send it to my guys to get out to you. But there's a lot of COVID stuff in there.

There's a lot of economic data. There's a little bit more than normal on crypto today. And some pretty important comments about it. And for those of you who saw Dividend Cafe last Friday, I devoted a good portion of that both to the midstream energy sector and to some comments on the crypto world. So DC Today is a full one. I hope everyone will check it out. All right. We look forward to that one in a couple hours. David, thank you as always for your insights today. Great discussion and look forward to our next call in a couple of weeks. on Fed, on where dividend stocks fit into all of this, on where we are in the market,

on growth momentum speculation. I can go on and on, but these are all things that I'm just absolutely obsessing over right now. And I'm happy to talk about them further. Please send your questions my way. And in the meantime, I'm going to turn this back over to Erica with my gratitude to all of you on the call, my gratitude to my friend Scott Gamm and our gratitude to Erica. Thank you, David. This concludes today's conference call. Thank you for attending. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Thank you. and does not constitute investment advice. The Bonson Group and Hightower shall not in any way be liable for claims and make no express 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 change at any time without notice. Clients are urged to consult their tax or legal advisor for any related questions.