The Dividend Cafe - Mayor Pete and Your Portfolio - TBG Investment Committee

Episode Date: November 25, 2019

In this week’s special Dividend Cafe podcast and video, The Bahnsen Group’s Investment Committee dives into the economic policy platform of surging Democratic nominee, Mayor Pete Buttigieg. Some refreshers on dividend taxation are in order, and so much more. A pre-Thanksgiving special edition! Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend week, and we want to get it out to you before your Thanksgiving weekend starts off. I have no doubt that a lot of you would prefer to spend your holiday weekend coming up listening to us it, we're instead going to kind of get this niche topic of the presidential election once again. And with a little particular emphasis on this new ascendant kind of climber in the polls, Mayor Pete Buttigieg. How many of you could have pronounced his name a month ago, three months ago? Two days ago. Two days ago. Buttigieg. Two days ago.

Two days ago. Buttigieg. I was grateful when he first entered the race that he was so low in the polls because I didn't have to go actually commit myself to learning how to pronounce it. But now it's coming up a lot more. And we're not going to only kind of address that. I think we've already done the broader podcast that we had done on just the general approach to investors thinking about politics, let alone politics a year in advance of the election. And I think that that podcast covered a lot of the principles that we don't have to restate today, just in terms of investors sometimes letting their political preferences get in the way of sound investment policy. It's a mistake I've seen plenty of people on the left

and plenty of people on the right do. But more particularly, I want to focus just on using Mayor Pete Buttigieg's platform to kind of discuss some of the other topics that are at play and where they may in fact impact either macro or company-specific,

sector-specific areas. So to really quickly set this up and why we're we're going to this candidate first of all mayor pete um has no federal uh uh political experience and that's not a disqualifier anymore whatsoever of course our current president had no elected experience at any level of government i think technically it's an it's an asset right i mean it is for some i mean it's not for everyone that that's the interesting thing about populism and about anti-elitism is generally there will be someone out there that gets really excited that this person's not part of the beltway

or not part of the what's the things trump the swamp but there's also plenty of people that say look i want folks with experience i want someone who's been inside the machinations of government. So I don't know how to quantify that, but I think that there are some that's a negative one and some that's a positive one, and you probably end up at about a break even when all is said and done. Mayor Pete's an interesting choice, by the way, for the anti-elitist because on one hand, he doesn't have the experience in federal government, and that's going to excite a lot of people, not part of the swamp. And he's the mayor of a town in Indiana with 100,000 people, which is more or less the population here in Newport Beach. Newport's around 90,000. And I have been in South Bend, Indiana many times, of course, because I go out for the USC Notre Dame game every other year. Now, how far has South Bend from where you grew up, Robert?

the USC Notre Dame game every other year. Now, how far has South Bend from where you grew up, Robert? I was outside of Chicago, but I actually had some good experience in South Bend going to some Silverhawks minor league baseball games back in the day as well. Are the Silverhawks based in South Bend? They are, South Bend Silverhawks. So you probably should say that because I don't think anyone – Oh, yeah, the Silverhawks. Of course, everyone knows.

Oh, yeah. I bet money on that. No, so you know South Bend. Yeah, I do. Yeah, yeah. Do Ho money on that. No, so you know South Bend. I do, yeah. Do Hoosiers generally hate South Bend or like South Bend? No. I mean, Notre Dame is kind of distinct. They're more of a regional private school.

Indiana, where I went to school, has more rivalry with, dare I say, Purdue. Oh, yeah, sure, sure. Okay, fair enough. Well, I don't know. The point I was about to make was that he has this anti-elitist thing because he hasn't been in federal government, but he is an Ivy League guy and I want to say Rhodes Scholar and so forth. Military. A mixed bag of elitism and elitism is hardly new because who has ever better described it than the current president who ran off of this red baseball cap, I'm the guy from Blue Car America, while he was taking a private helicopter to the rooftop of his Fifth Avenue apartment where he lived. And so there's strange sort of mixed cultural affiliations these days. But I think that Elizabeth Warren, Bernie Sanders, there's a kind of more progressive camp in the Democratic Party, and all of which have a chance of becoming president, certainly have a chance of becoming the nominee, and then you're going to have a very close election next year.

Do all of us still agree on that, that the 2020 general election is likely to be close anyone want to push back on that i don't have a lot to push back on it's tough not knowing who the nominee on the democratic side is going to be but i would assume either way it would be a close you know be close just based on where polling is and where trump's approval rating is and who the field of candidates is like i agree i've said if someone told me that michelle was in the race, I might feel different. Or if the only Democrat running was just some whatever, like a totally, clearly unelectable candidate. Sanders. Yeah. so out front of everybody else on different policies that we can come in as market people and investment people and look at her impact because she had 53 white papers on student debt,

on healthcare costs, on green, clean energy, various spending initiatives. So now it's sort of like, okay, it looks like there might be a new front runner and we have to sort of do it all over again, but it's all the same issues. So I guess let there might be a new frontrunner and we have to sort of do it all over again. But it's a lot of the same issues. So I guess let's start off. I'm going to give you guys a real softball and then I'm going to dig into Mayor Pete a little bit on this stuff. Is there anything in the macro, the way we philosophically would want to address 2020 investing that is different in your mind than what you might have shared on this podcast? What was it a month or two ago when we last did this? Has anything changed that now gives more clarity or more conviction, more caution in terms of how we view what is still one way or the other a year

out for how we go about investing 2020? Daya, you feel any different on the macro? On the macro level, I can't say that I do. I guess with Elizabeth Warren declining in the polls substantially relative to the other Democratic candidates, that makes me feel that socialist policies are less likely. But so as far as that's concerned, I mean slightly less likely. But other than that, the changing of the political scene, has it affected my thinking of how we think portfolios are going to perform? Yeah, I can't say that I do. I can't come up with anything that changes my beliefs there. Brian, any thoughts on that?

No, I would echo that. Nothing has changed on the macro. There's not enough known outcome to this thing yet. I would say if you look at what's going on in today's market after the debate from last night, I guess if we're looking at sectors and different things, you can kind of see how the market's reacting with the Buttigieg surge and a Warren decline, which is that you've got energy stocks up today. You've got electric energy stocks up today, you've got

electric car companies up today, some of the things on his agenda. But does that change our macro view on how we would invest client money? No, absolutely not. Now, Julian, you've done a pretty good job in these different podcasts, always bringing back the issue to earnings, our earnings expectation. Even in the last podcast that we did, we talked about where the Fed was going to be, our earnings expectation. Even in the last podcast that we did, we talked about where the Fed was going to be going into the year. Has anything changed from the politics into earnings, Fed, trade? I guess politics, people need something to chew on.

If they breeze the market, speak about the market every day, they're going to talk about politics and how this candidate could have an impact on earnings, but it's still very theoretical and it's a year away. And as you say, it's going to be close. So I think it's, I would say, for 2020 forecast for now, it's irrelevant. And what's much more irrelevant to us is the Fed. And now I guess we're at the point where they've posed,

you know, so we are probably not going to have too much happening at the Fed level now in 2020, unless, you know, so we are probably not going to have too much happening at the Fed level now in 2020, unless, you know, the economy gets much better, much worse. And then the trade war, I think, is clearly number one. And that's, I think, for me, that's the one macro thing that's clearly on top, I would put on top, you know, at the top of the list. And then, of course, earnings.

And so we just finished the Q3 earnings season, and now I'm going to have to wait for mid-January for the next set of results I agree completely this is something I think a lot of people on the right would not like me saying but it is I'm right about it if right now

God told us Trump's getting re-elected in a year and the trade war is going to get worse in 2020 markets would go down if uh god told us the trade war is done it's fixed permanent great resolution and in a year you might have you're gonna have probably biden or budaj i'm leaving warren out just to make it simpler okay i think the markets would go higher and so i think that the macroeconomic issue, both in the sequence of events but in the priority of impact to markets, is a bigger deal than the politics. Robert, what say you?

I think the animal spirits result of tax reform hasn't been fully realized as a result of, I think, largely uncertainty around the trade war. So I still think there's some coiling of that spring that we're waiting for. On a go-forward basis, we hope for the unleashing of those animal spirits to be resulted in better earnings going forward, but we can't control that. So I think it's, I wouldn't say smooth sailing ahead, but we're still just kind of in anticipatory mode at this point in time. I wouldn't say our outlook has changed. I think a lot of the political presumed policies could incrementally adjust where we have preferences here and there, but I don't think there's anything really that we can steer towards right now.

So I want to be able to use that as a segue right into a particular policy aspect that Mayor Pete is right out in front of. And of course, all the Democrat candidates, I think, have said they would repeal Trump's corporate tax reform. I don't think there's any that said, no, we want to keep that. But before I do that, let's at least let our listeners understand why we're talking about this guy, Mayor Pete. Because in fairness, he's not by no the frontrunner yet. But look, the betting polls, when we use the aggregate to predict it, you had Elizabeth Warren up near 50% right around the time I signed a book deal to write a book about her. And she's now at 25%, still in the lead. Pete, who was sitting somewhere at around 5% just six weeks ago, seven weeks ago, is up to 19% in the betting odds for securing the nomination, not for being elected president. That's very interesting.

Not just Warren's draw. It appears that it's an inverse correlation between Warren and Buttigieg. Biden's still kind of around the same place. Sanders is around the same place. So there's a narrative out there in the political punditry circle, but I think it's important to our conversation because I think it's mostly a right narrative. It's this battle for the so-called moderate lane that really has everything to do with electability. That in other words, people are not saying, I like Pete better than Warren, or I don't like Warren, or I like Biden.

They're all saying, who's going to win? Because their biggest priority is winning. And the reason I feel a little bit of empathy for our Democratic brothers and sisters is that I think myself being a Republican guy, I've gone through it in multiple elections where you're kind of like, oh, I like this candidate. But then you don't think you can win. So you move to another. But your priority is winning the election. The pete budaj subject is not about mayor pete it's about their their desire to have somebody they think can win and there is clearly even for people who might like some of elizabeth warren's stuff there's a clearly a view that uh

that she's going to have a tough time winning and so then comes mayor pete and that's one of the things that's so hard about evaluating his policies is what does he really believe well it's tough to say because he's very wisely said i gotta go find this moderate lane i'm not totally sure that he's as moderate as his marketing message is now i'm not saying there's anything wrong with that it's certainly what i would do if i were him sure but when you look at – so, okay, so all that to say he's increased in the betting odds, and he's now essentially right at the top in Iowa. He's now running at 21 percent in Iowa, where Liz Warren, who had been at about 24, 25, is down to 18 or 19. So why does Iowa matter for a state? Last four Democratic candidates that won Iowa got the nomination, right? So let's talk correlation causation.

And this is fascinating. You bring this up. Thank you, Brian. You are correct. Al Gore won Iowa, got the nomination, lost the election. John Kerry won Iowa, lost the nomination. Obama won Iowa, won the nomination, won the election. Hillary Clinton won Iowa, won the nomination, won the election. Hillary Clinton won Iowa, won the nomination, lost the election.

Four in a row, three of which did not win the general election but did win the primary. However, four in a row is not exactly rock solid. If we had an equity characteristic that had four out of six, we wouldn't necessarily call it rock solid. And Harkin, who I forgot was even around, beat Clinton in Iowa. And, of course, Clinton got the nomination back in 92. And Dick Gephardt won Iowa in 88. And, of course, Michael Dukakis ended up winning the nomination. So you had two in a row where it didn't hold up, and then you had four it did.

But this is why I really actually think it's worthless. This is the Republican side. Why would Republican and Democrat be that different? Ted Cruz won Iowa. Trump got the nomination. Rick Santorum won Iowa. Mitt Romney got the nomination. Mike Huckabee won Iowa.

John McCain got the nomination. So the last time that a Republican won Iowa and won the nomination was Bush all the way back in 2000. That's 20 years ago. Yeah. Republican won Iowa and won the nomination was Bush all the way back in 2000. That's 20 years ago. Yeah. Yeah, I think there's correlation of Obama, Clinton, when he sort of won, you know, got ahead in the polls and kind of won, was going to win Iowa.

He kind of surged from there and just sort of straight line up and end up kind of winning the whole deal within the presidency. And I think that's sort of the correlation with what's happening with Buttigieg, perhaps. But the difference also is the South. You know, Buttigieg doesn't have the support like those other people that you've mentioned did in the south and that's a game changer as far as his winnability you know so yeah it's a good point yeah that that in other words with Obama's precedent he was already looking good in some of the later southern states then he got the Iowa momentum so he could parlay it where in some of these other cases, like, for example, with Ted Cruz winning Iowa. Then he goes to New Hampshire and Trump just trounced everybody where this could lead to more dominoes that fall. So one of the things he's campaigned on is the idea of getting rid of the corporate tax reform.

Robert just got done saying that we haven't realized all the economic impact of the stimulative effects of the Trump tax bill. Julian talked about the importance of macro over politics. What do you think? Would he actually repeal Trump's tax bill? I think back to Republicans running over and over and over and over again about getting rid of Obamacare. And then the Republicans get in charge and they can't get rid of Obamacare. in charge and they can't get rid of Obamacare. Could Trump's tax bill be a little bit more popular with Democrats now that it's passed and in law and the stock market's up thousands of points than some of them, the ones who voted against it, would want to admit? Can you really

repeal a tax cut like that? I think with some of their agendas costing so much money, whether it's health care or any of it, I think it's on the docket to get rid of to try to pay for it. So I think that they would want to, and Buttigieg talked about that too, that's how he's going to pay for his healthcare plan. He's going to repeal the tax reform, it's $1.4 trillion roughly, that's going to pay for it all, and then we'll be

in the same place we are from a budget perspective and we get better healthcare out of it. So I think it's on their agenda. So you're saying it has a revenue-raising thing thing get rid of the corporate tax cut because it raises revenue if you get rid of it yes i can't possibly give day a better softball go ahead would giving getting rid of the corporate tax bill yeah put the economy in recession and when do you raise revenue in a recession? You see what I'm saying, Brian? Sure, sure.

I do. I do. I mean, it goes back to the notion that if you raise taxes, you are going to raise revenues. And as far – I mean, just the idea that you're going to raise taxes and automatically your tax receipts are going to be higher is something something's been disproven on many many occasions can't we agree that they might go higher but not dollar for dollar right definitely not dollar for dollar but my point wasn't that yeah i know i know no no yeah that's the way that they that's what the way they're that's always the way it's it's positioned but obviously uh markets anticipate these things and markets are

reflexive and and just like it goes goes uh speaks to his uh raising the minimum wage too i mean uh the law of unintended consequences apply and um the free market makes the decisions uh that are in its own interest and very often have different consequences and result finally in a different tax – the amount of tax receipts that are received is much different than these politicians. I assume care to know. It's really about the marketing of the message and all that. So let's give some support to Brian's thesis that they have to do some of these things because of the optics of the spending.

With Elizabeth Warren, it seems to a lot of people cartoonish but they're real policy proposals and the and and it's very difficult people pay attention when you start using t trillion with a t because you go like oh there's 50 trillion 30 trillion it's it all just sounds so ridiculous people tune out but line item by line item there are expenditures attached to proposals let's just use mayor pete he's talking about 80 billion to expand high-speed broadband we'll come back to how that could impact telecom but but what stuck out to me is a 200 billion dollar fund to replace uh to for displaced workers 50 billion in workforce retra $430 billion in low-income housing tax credit, $170 billion housing choice, $700 billion child care. You're getting kind of Warren-level.

You're into trillion-or-the-tee stuff going on. I wonder if we need to not focus on what Mayor Pete or this whole platform does to the stock market, but what it does to the dollar, what it does to the bond market. Julian, do we face even higher deficits than the Trump administration's allowed with some of these things going on? And does that affect our macro viewpoint?

I have less, I don't have a lot of experience on the U.S US politics. My understanding is when Democrats are in power, usually they are even more aggressive at running deficits. So I would say that if you have a Democrat presidency, you probably would have even more deficits going forward.

I was going through some of what Mayor Pete said, and it's interesting to see, if you go back to when he I guess he announced his nomination back to April, it's very different from what he said yesterday. So at the time, you know, he was interviewed by CNBC and he was

saying that we should consider a wealth tax. He was talking about a financial transaction tax. He was talking about having a taxing estate as well. So I think he's smart. He sees a space and he's shifting his policies based on that. So who knows what his policy is going to be in six months, right?

Yeah, that goes back to that thing I said earlier, the lane. The marketing. The lane that someone has to be in. It's going to be hard to run in a class warfare message and maintain a moderate lane. There's a way traditionally people have threaded that needle. Bill Clinton did it masterfully as a politician. I think that to be a corporatist and a populist at the same time is very tough to do. So you have to sort of find a different message. I want to stick with you, Julian, just from an equity research standpoint. This talk about, we of course own some companies we're not going to say any names

that are um reits in the high-end mall space that are directly levered to to retailers we even own a couple companies that retail presence um 15 an hour minimum wageally administered, which he's running on. And I got to think most of the Democrats are running on as well. Let's say something like that were to pass. It's passing in more and more states anyways. Is that either way at margins of some of these restaurants? And we have to be careful about that. Or is it accelerating these companies move into technological replacement so that they get ahead of it?

In other words, does it have the opposite effect of what the politicians are hoping for? That's a good question. I would really have to think out about, on a name-by-name basis, how they would be impacted. I'm not sure how many of the workers at some of the fast food chains are on minimum wage.

I think quite a lot are already above the $15. I think it may not have such a big impact on most of the companies we own, really. I would have to really dig into the names one by one. Do you think that

right now, with e-commerce and all the pressures we talk about, this would be a good time to raise costs at restaurants and retail and potentially force more kiosks and more automation. In other words, could it have an impact in the labor market at the lower end of the wage scale, Robert? market at the lower end of the wage scale, Robert? So it would definitely, in my opinion, not erode margins for a lot of these companies. People are going to move into automation, things like that. With Mayor Pete, one of the biggest shockers around him with regards to some of these, you know, cost increasing policies.

He comes from South Bend, Indiana, okay, steel belt, rust belt, whatever you want to call it, a region that has been plagued by the flight of capital by, to an extent, anti-competitive policies before some of the more Indiana tax friendly policies came in. And then he's seen, you know, from my home state of Illinois, a lot of a lot of movement of capital into Indiana, because they were competitive. So I just don't understand when someone's going to run on being a mayor of a small city, you know, they've kind of tracked along with the other major cities, Indiana, along unemployment, economic growth perspectives. Why isn't he drawing from his experience in what went right, what went wrong in his city in his region, that that continues to

shock me going forward. So, you know, the $15 minimum wage, I mean, someone in South Bend living on $15 an hour is doing okay. I mean, the cost of living in some of those places are fine. So maybe he's just thinking about, you know, giving his constituents a raise. I don't know necessarily. A lot of the other policies,

he's being vague on a lot of these still going forward. I think he's kind of preserving the ability to be a middle ground guy. But I think from a corporate perspective, a lot of these still going forward. I think he's kind of preserving the ability to be a middle ground guy. But I think from a corporate perspective, a lot of these things are very unfriendly and he should know better. Well, let's even move that then into what is a pretty significant part of his policy portfolio, which is in climate change. And of course, from an investment standpoint, we have a lot of skin in this game as oil

and gas pipeline investors, as investors in a couple of the larger integrated energy companies, U.S., believing in the U.S. energy infrastructure story. Here, he has not adopted the language of Green New Deal, but he's adopted some of the philosophical objectives of that left-oriented climate environment. He did not say he wants to ban fracking on day one, which is what his competitor, Senator Warren, had said. But he does say he wants to ban it on federal lands, all new development. He's talking about net zero emissions by 2050.

And then I just want to read a few things so everyone gets an idea of why I'm asking the questions to my partners here I'm about to ask. A $250 billion with a B dollar fund for a global investment initiative to build U.S. clean energy in China and other places. That sounds really generous. The issuance of climate action bonds. I can't tell you what those are. They sound like someone will make some good money off of those. An American Clean Energy Bank, that sounds lovely with a capitalization of $250 billion. Another $100 billion in urban surface transportation over 10 years. All these are separate policies. They're not overlapped here.

These are line items. So again, you're up at that trillion-dollar level. Does this make clean energy look investable to you or less investable? And for our purposes, because I define clean energy as natural gas, I'm going to accept his definition and pretend it's wind and solar only. and pretend it's wind and solar only, does all of these subsidies and federal government money make clean energy more investable or less investable, Dave? So are we going to assume that a lot of these, let's say he does get elected and a lot of these things pass?

Well, for the sake of argument, we'll assume that. Okay, so for the sake of argument, we'll assume that. Okay. Well, I – okay. So for the sake of argument, we'll assume that. Well, look, if a company is being subsidized to – as far as wind and solar goes, it's going to decrease their cost of production. And essentially, if you're lowering their cost structure, it's going to improve their margins and it's going to improve the valuation of the firm. I don't know – and again, I don't know the nuances of all this. You're stating that as a fact or making an argument? I'm making an argument for it. As far as – and I can't speak to how competitively the landscape will change.

the landscape will change but just as far as if i'm if i'm a uh a wind guy let's say and i own a a bunch of wind turbines or whatever it is and the government's willing to give me subsidies it's going to help my business in the short term put wind farms up where it's not economically productive to do it that's that's the problem there i mean you you want to put just let's use turbines as an example market forces dictate you want to put them where they're most efficient, right? Maybe far out to sea where they're not a blight, things like that. When there's no outside government influences, you do the economically rational choice geographically, right? When you essentially throw money at different industries, you're attempting to pick winners. In some cases with energy, you're trying to make losers out of it.

We've seen how the renewable energy space has had a lot of losers. Look back to the Obama administration. What was it? I don't know if we're allowed to say certain companies. No, you're trying to make losers out of it. We've seen how the renewable energy space has had a lot of losers. Look back to the Obama administration. What was it? I don't know if we're allowed to say certain companies. No, we're not. But, you know, there were several to pick from, right? And it doesn't work. Luckily, I'm not worried about anyone breaking our compliance rule here because I know the

answer to this question. Could you name a company, wind and solar, that right now has a higher stock price than what Obama took off? No, I cannot. And I would say, you know, to answer your question, is it investable? It's hardly investable now. I think with more subsidy, it would be less investable, not more investable. That's my opinion on it.

I think there'll be collateral damage or other things that will happen if this stuff kind of comes through. And it would technically probably benefit some of the companies that we own in some ways because we own companies that produce oil and gas and ship that and transport it. And the fact that there'd be more regulation and less ability to produce it, the prices would likely go higher and corporate profits might go up a little bit and those types of things. But I'm not against clean energy. Of course not. I think it's fantastic. I think we've made huge strides in this country and in the world, frankly. And I think that's fantastic. I think we've made huge strides in this country and in the world, frankly. And I think that should continue.

But as far as creating a bank with $250 billion solely for those types of things, I don't think that they're that efficient and I don't think it's money well spent personally. I think free market capitalism. piggybacking to Dea's point that one of the arguments here, one of the policy prescriptions is extending and modernizing existing tax credits for solar wind geothermal. And then this is the compliment I pay. You say if I own a bunch of wind turbines and now suddenly get subsidies, I have higher margins. I disagree with that in this sense.

I think there's a good chance if you own a bunch of wind turbines, you might be a smart guy. You might have entrepreneurial giftedness. You might have the ability to solve problems. You might have the ability to create a path to profits because you have this human talent that God has blessed you with. And now the money you're getting from the government disincentivizes you to go out and create that innovation that that solution set that you're otherwise wired to go create entrepreneurs create profits but when all of a sudden you're in the game of gaming tax credits your focus is off of actually leveraging wind and solar and and instead

moving into how you can best manipulate in the system not to mention this i think is where you were going, Robert, you're going to get people that do projects for the tax credit to offset another profitable project they have. And so it distorts that in the market. And so I am on the track that you are, and I think this comes down to, Julian, some of the things we own in our portfolio. Look, there is a reason some of the biggest oil and gas companies

in this country are pushing hard for a carbon tax. It will hurt smaller and mid-sized players. And they have the ability to absorb it. And then when all is said and done, you get a higher commodity price. You have an artificially constricted level of supply. So their margins expand. And then you come out of it with less competitors you have to go toe-to-toe with kind of like the tobacco regulate the fda regulation on tobacco companies with

altria during the bob administration that was that was the biggest boom to those companies you know in years and years and if we just explain perhaps what might happen to global emissions if you increase the price of say natural, natural gas in this country? Because those markets are global, right? What are end users of fossil fuels going to do if commodity A's price goes up? They're going to switch to something different, something perhaps dirtier like coal around the world. That's right. Okay.

So, I mean, you look at what natural gas production has done for the emissions in the United States. We've been technically decreasing. Our second derivative of use of emissions has gone down in this country as a result of fracking greenhouse gas. Well, it's gone down substantially. Yeah, it's a big deal. So, I mean, if the end result is decreased emissions of greenhouse gases, do what has worked in the past. Repeat that going forward. I just don't understand why they're not pushing that a little bit.

But even apart from criticizing the policy and our kind of political and trying to do more thoughtful economic extrapolation of this, from the investor standpoint, and either Day or Julian or both chime in, he says one of his policy ideas is fascinating to me because we're heavily focused on currency and where it could affect things we're doing as investors. Impose a border adjustment tax on any imports from a country that does not have a carbon tax. So it's a social policy agenda. You have to have a carbon tax in your country because it's going for the right climate agenda we have. Okay, fine. But then what does that do to the U.S. dollar if

he's putting a border adjustment tax for that reason? How does the currency itself not just simply adjust? And could you accidentally get a weaker dollar because of something like a border adjustment tax out of it? You follow what I'm saying? Yeah, I think, and this is the problem with politicians and policy, more broadly speaking,

is they're not really invested in the long term. I mean, they're incentivized to send good messages out there. They're incentivized to get reelected. And a lot of this stuff may have some sort of impact in the short term that they can then go market. But in the long term, the dollars are going to adjust. Corporations are going to adjust. And the consequences of all this may look very, very different than the intentions. But as far as how the dollar is going to react, if the countries that we're trading with,

we impose a tariff on it because they don't have a carbon tax? Was that the question? Right. That's what he's threatening to do. And then, again, if you end up with a border – first of all, I think it would be fascinating to have a border adjustment tax with one country and not with a country right next door and so forth, and then all the manipulation.

It's very much like the tariff that Trump is doing, and it can't be good for the economy. It's quite literally, except for in this case, it would be our currency that could adjust for it. And you're going to have retaliation from the countries. At least with tariffs, one of the goals presumably is to protect IP and encourage competitiveness. This is just giving the advantage to your competitor. Totally. You know?

Totally. And you guys can correct me if I'm wrong. He's a little less draconian about tariffs. And after seeing all this, I'm so surprised that he's running. I mean this is so left-leaning that the fact that he's being considered more moderate is just amazing to me. Well, let's be fair to him. That's a byproduct of – it's relative to the leading voice. He's dealing with Senator Warren.

And, of course, Bernie Sanders' level has stayed very constant. He has been right up in the leader. He's never – no one's really ever thought Bernie Sanders is about to be the nominee. But he's never dropped into fourth, fifth, sixth place. It's not like he's Kamala Harris or something. To Mayor Pete's credit at least, whenever he's coming out with a lot of these policies, he's at least looking to be deliberative about it. He's saying, hey, this is maybe a policy I'm considering instead of I'll pick on Warren. She comes out with these plans with completely flawed inputs and assumptions to it. And I think that's been transparent these days.

So Julian, let's talk investment side of taxes. This is very interesting. You pointed out he had past talked about like, you know, a financial transactions tax. He's open to the idea of a wealth tax, but he hasn't put meat on the bone the way that Sanders and Warren have. However, he's the only candidate I've studied so far who has said, I will go straight for a higher marginal tax rate. And ironically, you guys know Elizabeth Warren has not suggested that. Now, she hasn't needed to because she's talking about tripling the payroll tax for people over $250,000. And she has all of her other tax portfolio. But he's actually suggesting a higher marginal rate. And then the other part I'm paying attention to for our purposes, he has not come out with any suggestions around capital gains or dividends.

Are dividends now thought of as sacrosanct? They can't touch it? Or is there a possibility that the present value of our dividends that we invest in could, in fact, be impeded by additional taxation? I think they kind of link, as far as discussion goes, to long-term capital gains tax. Well, in theory, they are right now in current tax code, but that not inherently true they never were until the bush second tax cut uh capital gains always had their own different tax rates over the years and dividends were taxes ordinary income right but in this current climate of thinking do people think about them in one in the same as far as uh i mean it's hard for me to answer they think about them as one and the same because the last two tax bills that came out treated them one and the same. That was Bush in 2004.

They both were taxed the same at a 15% rate. And Obama fiscal cliff resolution in 2013, they both were kept at 15% with a 20% kicker over $450,000 of marriage income. So I guess, Julian, would you think differently about the value of our dividends if the tax on dividends went higher? That's just a generic question. Well, I guess, yes, you would look at it on a net basis.

You know, if net to you is going to, you know, instead of being taxed at $15,000, it becomes $25,000, $35,000, I guess, on a net basis. That's why we, I guess it would. You're taking the easy way to answer. I'm going to make it hard. Would it make the value of those dividend stocks more vulnerable?

I never ask a question that I don't already know the answer to. So if you change the tax specifically just on dividends? Yeah, if the dividend tax rate went higher, would you think dividend stocks would go lower? Well, I think they would be impacted, yes. They should, you know, relatively to the rest, would go lower. Seems logical, right? Seems logical, yeah. Brian?

I would take this what makes a market, I guess. I would take the other side of that. I mean, I think any time you do something across the playing field like that, on a relative basis, what has really changed? Not much. I mean, you've got a dividend stock that's growing that income, paying back to shareholders. That's still going to happen. Albeit it'll be taxed at a higher rate, but that versus a company not doing that, there's still value in that. And so I don't know that it would inherently send the prices lower.

I don't know that it would really change our prices lower. I don't know that it would really change our strategy that much. I guess I'd have to look at the tax code and what things changed. But the philosophy, I think, would still hold true. And by the way, dividend tax rates have changed a ton over the years. So they're very attractive now. But it was ordinary income. The high tax rate on dividends for several years into our career was 39.6%. Exactly. dividends for several years into our career was 39.6 percent. President Bush lowered it to 15 percent. That's virtually a 65 percent reduction. Did dividend stocks go up when that happened more than the rest of the market?

Not really. No, it did not. But that was also growth versus value. So why is the inverse not true? Sure. So let me take the – not the other side, but maybe – There's a third side. There's a third side.

You got the fourth way coming? I got it. There's a third side you got the fourth way there's a third side um so are you saying that if no other nothing else in the tax code changes besides the dividend uh tax rate long-term cap gain stays the same short-term cap rate i'm happy to i'm happy to pretend that okay happy to pretend that if everything else happy to pretend that. If everything else were to stay constant, which I don't think would happen, I mean, it's hard to imagine why there won't be a slight multiple reduction on dividend stocks, just given that there's a... Okay, here's what I'm saying. I still think that it's going to be very attractive. And the fact that the companies pay dividends, all those same things still apply. But if there's a higher tax rate, I mean, think about how we're going to make adjustments in our portfolio.

We're going to probably think more about asset location, right, if dividend income tax rates are higher. Depends on what those tax rates go to. I'm assuming it's like a 5% increase. Okay, okay, okay. If they tax them at 99% or something. Sure, I'm saying like a doubling of the tax rate. Okay, yeah, that's a lot.

Even the corporates would probably do something. I mean, they would do more buybacks, maybe on those dividends. I assume there would be some sort of repricing. Now, this is with the caveat that nothing else in the tax code changes whatsoever. I mean, if you think about what's the valuation of an asset. Do you know what they're all missing or am I going to – No, no. I'm waiting for your response.

But if you think about the valuation of an asset as the present value of its discounted future cash flows on an after-tax basis … Seems logical. That's going to be less. So again, I'd go back to my other question is why it didn't inverse in 2004. Or not even close. No substantive connection. Yeah. So I didn't know what else was changing in 2004. or not even close no substantive connection yeah so I didn't know what else was changing

in 2004 well the dividend tax rate dropped substantially capital gain tax rate barely went down at all capital gains were already at 22% they came to 15 dividends went from 39.6 to 15 and so the

reality is that even when dividend rates have gone higher, you haven't seen it affect dividend stock pricing in the past. And when dividend stocks have gone lower, you haven't seen it benefit them either. But you want a chance to guess where I'm going or do you want me just to – Go ahead, Robert. I was just going to say on a relative basis, where would I want to put my money in a less competitive environment? It's going to be the more stable companies that have been paying dividends going back. That's what I would say.

So I would presume their prices to, I don't know if I'd call it rally, but perhaps rise a little bit as a kind of an internal market safety. I love that contrarian play on it. I would actually agree with you. Julian, what is the tax on dividends for someone who owns stock in their IRA? Zero. What is the tax on dividends for someone who owns stock in their 401k? It's actually not zero. Profit sharing plan.

It's a deferred ordinary income. It's what it is. Zero, zero. The actual answer is it's deferred ordinary income. That's incorrect. That is the wrong answer. The answer is the tax is zero. You do not get taxed on the dividend.

That's true. You get taxed on the dividend that's true you get taxed at withdrawal on the withdrawal that's right so what is the tax of the money that's invested which is forced what is the tax and endowments zero pension funds zero sovereign wealth zero okay so this is the answer that the democratization of stock ownership is so unbelievably skewed against taxable accounts that it is um do you know the split well it varies year by year but it's a seven handle it's in between 70 and 80 percent oh okay okay and that's in u.s not even global retirement plans not but i'm saying even institutional ownership. And, of course, there is very difficult – there's such a heavy ownership in algorithmic, non-economic owners of stocks, high frequency and so forth, that are big liquidity providers to the market but aren't necessarily the holders of companies the way we are.

So at the end of the day, the best thesis, because everything Dan and Julian said is exactly right. If you're going to receive something that's worth five and now after taxes is going to be worth four, to value that on a go forward, you have to assume it's a lower valuation, more or less cash in hand. However, that is not proven to be true. So therefore, we don't get the luxury of saying, well, it's supposed to be true, therefore it will be. It hasn't been, so we have to answer why. And the best answer I've seen is that taxability in accounts, it affects us.

Like from a financial planning standpoint, we're going to tell a client, hey, you're going to have 200 grand, and now we've got to tell them you're going to have 190 grand. That affects their pro forma. But I, of course, ask the question very specifically to the valuations of stocks. Do we expect to raise higher in dividends would move the needle? And the best thing we could do is say historically it hasn't. And maybe one of the best reasons is the tax freeness of the –

I will add just as far – Are you surprised by where I went with that? No, no, not at all. I was actually operating under the assumption that it was about a 50-50 split between taxable and non-taxable type money that's invested in dividend stocks. I didn't have that data. But this also speaks to a broader conversation about theory versus practice. And theoretically, on a mathematical basis, it does make sense that there would be a repricing. But oftentimes in practice, like David was just mentioning, historically, it hasn't proven to be true. So there's always these challenges in capital markets that we have

to deal with. I agree. I think one of the other things that brings to light too, when you were asking about how Buttigieg has, or maybe what Julian mentioned, there's a state tax, he wants to make it more equitable, whatever that means. Then there's, you know, top tier tax bracket going higher and those types of things. But dividends and capital gains aren't really touched. Well, we kind of defined probably why that could be, which is it doesn't really raise tax revenue all that much. If all of those, as David said, you know, those dividends are taxed inside of retirement accounts and pension accounts anyway. What's the real point of doing that?

It doesn't really, doing that? It hurts prices potentially, and it doesn't really bring a whole lot more income, so why do it at all? Yeah, I also would say a really contrarian and kind of unprovable but also unfalsifiable theory of mine. The second you raise taxes on dividends, you can start repricing the fact that one day they're going to cut the taxes on dividends. So you're pricing into the future, the future dividend cut that's coming. Yeah, every election cycle gets a rally with the Republicans. So, Julia, I know there's a lot of commentary around this. And it must be a little frustrating because I know the American politics theme is not necessarily the thing that you would spend a whole lot of time thinking about or has been a driving factor in your research process throughout your career.

a driving factor in your research process throughout your career. But when you look at anything that you've studied and we've kind of discussed as an investment committee, Mayor Pete or any of the candidates running, Donald Trump for that matter, is there something in the fiscal agenda of the 2020 election that strikes you as an immediate catalyst to portfolio rethinking? Not really. I mean, I guess at the end of the day, the one thing that I'm most interested in is, you know, if there's any chance a Democratic president, and assuming they have majority as well to get that voted, could repeal the tax cuts that Trump did, and that could have

a significant impact. But it's way too early to have a view on that. As you say, it's going to be a close election, I guess, so who knows. And then, as you say, even if that was to happen, we're going to, again, maybe four years later, we would reprice a new tax cut. Sometimes two years later. I mean, that's the thing that's so interesting. I go back to, because I learned a lot from it personally when president obama was re-elected

in 2012 and you had this very ahistorical reality that a bunch of these bush tax cuts were going to expire and they called it fiscal cliff go look at what the market did in december of 2012 going into 13 sometime and then look at what the market did in 2013 huge Huge. 30%. Massive. And the reason being that you could think, oh, a Democrat who likes taxes got elected or someone who likes taxes got elected. That doesn't mean that they're going to be able to go forward with that policy proposal because at the end of the day, most of the people, they're smart enough to get elected president. Not necessarily smart in an intellectual way, but savvy enough, street smart enough to get elected. not necessarily smart in an intellectual way, but savvy enough, street smart enough to get elected. They also are savvy enough to realize if I do something that's going to completely screw up the economy or the perception of the economy, that's why the dividend tax cut, it's not

going back to 39.6. I just don't believe it. The risk reward is there's not a lot of tax revenue. The mass senior citizens that are getting dividends from utilities, and all of a sudden we think they're going to triple their tax on it. And by the way, we've already tripled their tax. How do we do it? We brought interest rates from their CDs from 5% to 1%.

Well, they lowered their taxes, but it decreased their income. There you go. Thank you. But I mean, who's pushing granny off a cliff in a wheelchair now, right? They can't get any money as savers. And then you talk about raising those taxes. I don't believe it. But let me do this to kind of close this up a little.

If we were being intellectually honest, we wouldn't do another Investment Committee podcast on Mayor Pete or Elizabeth Warren. And we're not going to do is investigate a podcast on Cory Gardner's race in Colorado, Susan Collins' race in Maine, Martha McSally's race in Arizona. There's three, four, five Senate seats that are going to dictate the direction of the Senate. That's a good point. And we said this on our last podcast. I think all of us in one way or another made this point. Read whatever you want from Mayor Pete. Listen to whatever you want, Liz Warren, on a debate stage. we keep forgetting joe biden he's still out there somewhere a little theory a

very close political friend of mine shared is that joe biden could end up proving to be the mitt romney of this cycle in that no one was really excited about him he's been in the lead he's been presumed but then they're going to go try on every other outfit before just coming back to him. And you saw that with Romney in 12. He got the nomination, but that didn't stop the Republicans from looking at Rick Santorum, Newt Gingrich, you know what I mean? Herman Cain for a little while, 999. We should do a podcast on where our economy would be with 999.

Do you guys remember that? Yeah, I do. But do you know what we're talking about, 999. Do you guys remember that? I do. But do you know what we're talking about, 999? No. No idea. No idea. Yeah, we can share it to you offline. It's not something we're real proud of.

Well, no, I think that that's the point is what's the point of interpreting the presidential side when you don't know the way the Senate will go? And there's three, four, five Senate seats that are really going to make a big difference in what kind of moral authority, political capital, intellectual gravitas, and most importantly, legislative math that anyone who wins is going to have going into 2020. I'd even flip-flop that. What if the Dems do take the Senate, but Trump keeps the White House? That's not impossible. That could happen. And so all of those things are going to create a very different dynamic. And it does help us conclude to the point that we've all been stating. You can't form a vessel policy out of these things. It's one thing if you had to bet on who will win the presidency, which is pretty much impossible to do, I think. Right now, we have

to talk about who's going to win the nomination and the presidency and three or four Senate seats. And then you still have to bet on how those people that got elected or reelected or what have you would then go vote. Because to my earlier point, I don't believe all of – I don't think that you'd have 51 votes to repeal the corporate tax cut. And certainly not in the House. I just think it's a trickier political environment, and it sure doesn't hurt to use that opportunity for us to remind our clients and the people that we are fiduciaries for of the fundamentals, of the benefit of dividends, no matter what the tax rate is. Dividend stocks went up in the 50s, and the rate was 90%. Yeah. Now, of course, everyone was cheating on their taxes. God bless them. But my point being that at the end of the day, the fundamentals we talk about, they're so much more important than politics.

And we're doing a whole podcast on politics. And the media is talking all the time. Why? That's what people want to talk about. It's interesting. It's fun. But when Brian turns off the camera and we go back to looking at the new company's report and the new announcement and the new utilities commission and the this and that it's not politics it's fundamentals fundamentals that's right amen yeah yeah i think that's absolutely right it's how how do these things

influence fundamentals and that's a whole different conversation than just just the mood of the moment talking about what the political atmosphere is like and who's going to win the nomination or who's going to win this or that. So I think it's important to focus on to get an idea of how these companies operate in the system that we are in, but actually trying to make predictions on how these different policies will all play out is very different. It can get very emotional. And I would encourage people to really divide their political feelings with the intellectual side of portfolio management. That's a good point. Anyone else have any closing comments they want to make? We'll wish our listeners a happy Thanksgiving.

Happy Thanksgiving. Happy Thanksgiving. Yeah. And we will come back to you next week. It will be end of the month of December, next time you hear from us. But in the meantime, do enjoy that Thanksgiving time. We're thankful not only for all of you, but we're thankful for the opportunity to share this podcast with you. And we're thankful for the five-star review you're about to leave us right now.

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