The Dividend Cafe - My Weird Interest in the Important

Episode Date: July 31, 2020

In this week’s Dividend Cafe we will … Give a quick summary of the market this week Do a deeper dive into all the rage in big tech Question if big tech is the only game in town to invest in innovation Look at health care spending in Q2 and why it may shock you Analyze the dollar’s decline Explore the power of the Fed, in very practical terms … Wonder out loud what is going on with the Main Street Lending program The highlight of the week – What to think about Equities Right Now Walk through the full Economic Report Card of the week Politics & Money – the Biden VP pick, investor fears, and the fate of a new stimulus deal Chart of the Week – why China tensions are not going anywhere, and most people like that! … and much, much more … 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. Hello and welcome to this week's Dividend Cafe. I am actually back to recording after the market is closed on Friday, although that wasn't intentional. It's just been a totally crazy Friday And even intending to get everything done this morning, a couple hours before the market opened, I just wrapped it all up as the market was closing. So it's been a pretty busy week and a very productive one. And there's a lot to talk about today. So the market, by the way, when I talk about this big busy week,

ended exactly where it started. So what a waste of time, right? Although not a waste of time for those of us clipping dividends along the way. The market was up 100 on Monday, down 200 Tuesday, up 200 Wednesday, down 200 Thursday, up 100 Friday. So net it all together and you get a zero in the Dow. And we bring the month of July to a close as well, where I think the Dow is closing up 500 points or so. So a lot of volatility in the month of July as well for not that big of a move higher, but a move higher nonetheless, which makes it now four months in a row, April, May, June, July. So there's a lot to kind of talk about the market. We're going to do some of that right now. One of the things I talk about in the Written Dividend Cafe this week that

I thought might be interesting for you podcast listeners or video watchers is me trying to understand better internally and unpack for you the difference between what may be interesting and what may be important. And a lot of times those things are aligned. They are not aligned a whole lot for me because it's meant to be somewhat self-deprecating, but I also think it's pretty biographical. I don't think that what is often very interesting to most people is necessarily what's most interesting to me. And right now in the market, because that's really the context in which this conversation matters to you, the things that really matter to people are, you know, obviously in a

more practical sense, how's the market going to do as we get through the next innings of this COVID affair? Where's the market going to go out of this economic distress and the hopeful recovery based on the shape that the recovery ends up taking. And then also the big tech story. And when you look at these gigantic companies, several of which are becoming trillion-dollar-plus organizations, when you look at where the flows and the interest in the market is, the momentum, there's just no question that what is interesting is very much around that avenue of the investing landscape. And it's become incredibly significant in its representation and market indices and

investor results and things of that nature. But I believe that the real important things right now are macroeconomic in terms of monetary policy. I think there are very few things happening in the economy and in the shorter cyclical aspects of post-COVID plans and realities, employment, labor, consumer, all of those things. I don't think there's anything going on there that's as significant as the monetary landscape that we are creating as a country and what that will mean for risk assets, what it will mean for economic growth, and what it kind of means as far as an overall posture that our country has economically in terms of our appetite for aggressive interventions into liquidity and into kind of modifying various exposures to risk.

A lot of things are changing, and they're changing very quickly, and those changes are not going away. You know, airports are going to get crowded again, and I don't think it's going to be in three weeks, and it will be somewhat more crowded in three months, but they're certainly going to be a lot more crowded in three years. And the monetary stuff I'm talking about is not going to be much different in the sense that we have various temporary things going on. And I understand there's debate and interest and so forth

around how temporary some of the things are or what temporary means. But we have permanent things going on that I think are far more important. And so it is true as a bottom-up dividend growth investor that the consistent day-to-day talk around this social media company, this software company, this search company, you know, uh, those, these are just big companies and they're very significant. And I don't know how this will exactly end. Um, I don't really believe it's going to help people to continue talking about all these companies as if they're one in the same. You had today, a few of the more prominent FANG companies rally big and you had one of the real prominent FANG companies get hammered. And I think you could

see more of that. In other words, instead of those that believe all of them will continue going to Mars forever or other people think they're all going to crash together, you may end up with something more nuanced where maybe there's some that escalate further and others that don't, and they follow different paths. The 1999 into 2000 story was obviously different. Everything went up totally together and everything crashed totally together. This might not necessarily be the same, but I do believe this story is not going to end well. I do believe that there will be a moment of reckoning in big tech at these valuations. And what is right now being debated is whether a company that is trading at 150 times earnings will end up trading at 200 times earnings before that reckoning comes.

And I don't know. I don't know the answer. I'm okay with it. And I want my clients to be okay with it because I want them to understand that there's part of a philosophy behind it. There's part of a very strong conviction that forces us to avoid an investment philosophy that really amounts to the speculation of PE ratios. The really good thing, by the way, Lest, I ever get the impression that I view this as totally analogous to 1999 is the vast majority of those companies in 1999 that went away were totally devoid of revenue. I mean, forget profits. we're totally devoid of revenue. Okay.

Now, I mean, forget profits. You know, remember the famous thing, Allen Iverson saying practice, we're talking about practice. Well, profits, who's talking about profits? We're just talking about like top line revenue, like any sales at all. You had a full technology bubble

that had a lot of companies in it that were devoid of revenue. Now, look, there are plenty of companies that that were devoid of revenue. Now look, there are plenty of companies that were not devoid of revenue and they were way overvalued and they crashed and they stayed down 10 or 15 years. That's the thing that I've been fighting for a few years to avoid entering into an investment that I don't really believe in and a price I really don't believe in and having a permanent level of damage associated with it. And this is an unavoidable dilemma for a value-oriented investor. A fundamentalist is that you end up having to see things go much higher that you're not invested in before that moment of kind of vindication and understanding might come.

Well, the good news is we're not sitting here shorting these things, right? We're not betting against them. We're not losing on it. We're even mildly invested in some aspects of it. The weightings are not significant, but there is exposure to the parts that have dividend growth component. But my point is this. There's really good investments out there that are not being missed. They're just not of interest. They're not as popular. And I want to focus on what I think is more important,

which is the fundamental defensibility, sustainability of those companies that will be there and then apply an investment plan in what I view as a new paradigm and apply those kind of 20 or 30 dividend growth companies we really believe in, weight those with the right approach to other growth investments, small cap, emerging markets.

We're looking at, I think, a smarter, more interesting way to be exposed to innovation, but also then where your fixed income exposures come into. Rethinking credit, rethinking the safety aspect of bonds, allocating and weighting those things in a way that's appropriate for what the next 10 years represents and not necessarily what the last 10 or 20 or even 30 years represents. And it's a daunting task because I think I'm living through a period where some of the most significant rules, not all, okay, see, I'm a conservative, and I don't mean that politically, I mean that almost spiritually, like I believe that things get formed over time and ought to be conserved for a reason,

for a reason, and that the bar for breaking up norms and traditions and long-established successful customs, the bar for doing that needs to be very high. And a lot of the principles that I believe in as a professional investment manager are evergreen and timeless. I don't think are going to be broken up anytime soon. I don't think we're getting to a point where cash flow doesn't matter for a company, for example. I feel pretty good about that one. But there has been a principle around the weighting between stocks and bonds and what a fixed income exposure looks like, ought to look like, and so forth, income exposure looks like, ought to look like, and so forth, that was largely formed over 10, 20, 30, 40, 50 years longer of the relationship between bonds and stocks, of an absolute interest rate in society, of spreads, of a shape of a yield curve. Now there's parts of those things I just said that have fluctuated over time,

but the entire kind of framework, the foundational reality of being a bond investor and pricing your other investments, how you view cash, all of these things are changing right now in monetary framework. And I really feel from the bottom of my heart that I have clients who, if they get this wrong, there are advisors out there

that I believe are going to get the next 10 to 20 years wrong, and it's going to damage their clients. I do not believe that any client's going to be damaged because they didn't own this social media company or they did own this dot-com company. I don't believe that, assuming their weighting is reasonable and whatnot. At the end of the day, I'm focused on what I think is more important, and I freely admit that I also find it more interesting. And so I'm reconciling, I guess, that personality glitch that sometimes what is most interesting to me is, excuse me, what's most important to me is not necessarily what's most interesting to others. And so here we are. And, you know, I'm getting asked pretty much every day. I've spoken my piece for today in this podcast on big tech. I get asked every day about it. But I also get asked every day just generally what I think about equities in light of the totally understandable COVID moment, economic distress moment, and increasingly so people ask about the election. economic distress moment, and increasingly so, people ask about the election.

I do get a little concerned that that's pretty much it. Okay? Like, I pretty much don't ever get asked, hey, are you worried about the market in terms of China? Are you worried about the market in terms of, you know, some aspect of the U.S. dollar? Is it getting too weak? Could it bounce back and get too strong? Are there implications to multinationals we want to think about? Are importers in trouble?

Are exporters in trouble? Now, by the way, none of those things may very well be a risk, but my point is from European Union to tensions with China to what seems to me right now to be a pretty interesting turning point with the US dollar. The fact that those issues never come up concerns me. And what always comes up are the most obvious, and they're totally legitimate, totally real,

but very well-known problems, which is kind of the questions around the election and the broader market questions, you know, how has the market held up like this in light of the economic uncertainty, the high unemployment, et cetera. So my view in the market is that it's been two months now where we've kind of had a number of opportunities to sort of retest like a Dow 25,000. We've by no means had an easy couple

months. The market has gone over 27,000 a couple of times, but not really wanted to stay there. So 25 to 27, I've talked about it for quite a while. We've kind of hung in that little range. It is now officially a range-bound market. Like we're in this zone. We could drop lower. We could go higher. But it's a little tighter than I thought. I could have seen it having a little lower basement

or maybe even a little higher ceiling. But 25 to 27 seems to become this little range. And it's hard for me to imagine going a lot lower because A, the economy is going to recover at some point in some way. That's not too controversial. And B, the Fed has trillions of dollars of support in new risk assets.

But then on the other side, the economy is going to recover. We're going to end up having some degree of reality check around covid uh a vaccine could come there could be greater understanding of the herd immunity dynamic there could uh be a greater appreciation for a declining severity and mortality and hospitalization dynamic around even increasing cases of COVID, which has really been the story of the summer thus far in 2020, that allows for some economic life to resume. But the reality is that there's a structurally high unemployment now, higher. A lot of these jobs have been lost, are going to come back, and there's going to be a

part of the recovery that will feel sort of V-shaped, but there's going to be a lot of it that's not going to feel V-shaped. And I know that, and I think most serious economists and advisors, analysts, know the same. So there's compelling issues that hold the Dow from going much above a certain range, and there's compelling reasons that keep it from going much below a certain range. Then you throw in that other issue of big tech, and I think you have to kind of view that separately. I think that because it's been the case for a long time that the market sometimes can do something differently than what its prior leadership group did. Market can go down while big tech goes up. The market can go up while big tech goes down.

Or as has been the case over the last couple of months, they can both go up together, just maybe at different proportions. up together, just maybe a different proportions. My view is that investors have to make the decision based on a risk reward trade-off. They have to make every decision on a risk reward trade-off. I've talked about this so much over the last couple months, and I'm never going to stop talking about it. But what I think is primarily on the table right now is a market that investors simply have to be poised and and patient about um because i think a lot of people wanted to drop more because they they're interested in deploying some dry powder being opportunistic but they don't really want to do it at this level like it's not that cheap it's not that attractive and then there's plenty of people that wanted to see it go higher,

like, hey, in January, February, I looked at my statements. We're at Dow 29,000. I want to feel like we're back to those higher levels. You can sympathize with both positions, but the problem is I think both end up getting frustrated probably through the end of the year. I don't think you're going to get a screaming buy where markets get real cheap again. It could happen, but I don't think so. And I don't think you're going to see new highs made in the Dow anytime soon. There's some significant headwinds that I talked about. So in the meantime, that belief in one's allocation, the belief in the ability to see dividends accumulating and compounding, the belief in the ability to see dividends accumulating and compounding,

to have some protection of capital in the alternative side, and potentially even non-correlated source of returns and gains on the alternative side, I think becomes very important. But also sometimes just kind of being patient and waiting. The purpose of investing for someone who has a 10, 20, 30, 40 year timeline, depending on what their life and situation is, the purpose of investing is not to see their statement value go up in the month of August. It's for the companies to be executing and performing and doing the things they need to do that will generate the returns that do come over those longer periods of time. I want my companies executing in the month

of August. I just don't think that has anything to do with what happens to the stock price in the month of August. And so our ability to stay in tune with what companies are doing in their own strategic plans, in their own capital deployment, in their decision making. I think those things matter. The stock prices month over month, maybe not so much. And as we tie that into investor decisions, investor realities, you know, we always talk about the impact of a portfolio going on from COVID. And the reality is a lot of you might just have actual planning issues happening from COVID, liquidity needs, issues with your own parents' health, your own parents' financials, your own kids' financials, real estate decisions. The COVID moment is not merely what it's going to do to the broad economy and what

it's going to do to stock prices or other investment prices. There's a whole lot of planning dynamic that goes around that stuff as well. So for the next several months, that's going to be our focus. We're going to be talking more about the election in the month of August. I think that when you get to that kind of three-month mark mark now it's really time to be able to start to handicap uh various scenarios and what it could mean um where the risks are where the opportunities are put a little bit of forecast and perspective in it and and mostly do all that through a lens of history uh which is what i intend to do um and some of the material I'm putting together for you in the next couple weeks. So that's where we are. Thedivinecafe.com this week covers most of these topics. We dig a little deeper into the

Fed and the dollar and commodity prices and some other things. But I think I've gone on long enough. I do hope that you have a wonderful weekend. I hope your July is something you can look back on fondly and that now as we go into August, you're ready for another month. Because certainly it continues to be trying times in a lot of ways. But I hope and pray that you're doing well through these trying times. And I certainly hope and pray you know, if you're a client of the Bonson Group, there's absolutely nothing we would love to do more in this time than talk to you, walk you through what those vulnerabilities and questions are, and guide as we are tasked to guide. It is our duty and honor.

And so with all that said, thank you for listening to and viewing the Dividend Cafe. Thank you for listening to and viewing the Dividend Cafe. Please do, if you are so kind, write us a little review or subscribe in your listener of choice to our podcast. It helps us a great deal and helps us get the word out more of our belief and message. Thanks so much for listening to the Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Thanks so much for listening to the Dividend Cafe. Thank you. 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.

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