The Dividend Cafe - National Video Conference Call Replay - The 2020 Election and Your Portfolio - Sept. 14, 2020

Episode Date: September 14, 2020

Download White Paper HERE - https://thebahnsengroup.com/dividend-cafe/special-election-issue-dividend-cafe-sept-11/#download 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. Thank you, as always, Erica. Thank you, Scott, for joining me here again today. This is a really special edition of these national calls. Of course, we started doing out of the COVID pandemic back in the spring. And now today we want to dedicate the full hour, we're going to go an extra 15 or 20 minutes longer than normal, around this very special topic of the 2020 election. If you have not received it, I am holding in my hand a very special white paper that I've been working on kind of throughout the summer. I've referenced it on these calls and my co-host here today, Scott Gamm, has read it and

perhaps many of you have as well. We sent it out as our Dividend Cafe on Friday. But if you have not received it, please email us and we will get you a copy. It's available just in our normal dividendcafe.com from Friday. And we also have a link to the printable PDF if you prefer it that way. And it has the graphics and it can be printed to be read at your leisure. And you're certainly welcome to share it with whoever you want. This is not a client only piece like some of the things we put out. So like this white paper that I have in front of me, our call today will be dedicated to the subject of the 2020 election. And as I am very fond of doing, I get to turn this over to my friend and colleague, Scott Gamm, who is going to

guide us through a discussion of these things and perhaps grill me, certainly drill further into the pertinent areas of what this 2020 election season means in the economy and the implications it has for investors. Scott, welcome once again. Well, thank you, David. Great to be with you, as always. 50 days until the election from today. I did not realize that. 50 days. So depending on one's outlook, it's either going to go by in what feels like three days, or it's going to feel like 50 weeks. And I have a very strong feeling it's going to be more of the latter. Yeah. And we haven't even gotten to October yet. And we know there usually is some sort of October surprise. So maybe we'll talk about that in this call as well.

But David, I think we're going to focus on sort of the market outlook through the lens of the election and how to position, how to think about it. And obviously, that has been the center of your white paper that you published on Friday. Like you said, 17 pages. I really enjoyed reading it. And what I loved about the white paper was how timely it was, not just talking about what to expect from the election, but also how to think about the election in this COVID moment. And I think that would be a good

place for us to start. Just your take on how you're looking at the election from a market point of view, but how you're looking at it differently this year because of COVID compared to past election cycles? Let me start with sort of the obvious, which is more of a political comment, that there is a general rule and it is not universal. It doesn't bat a thousand, but it's a pretty wide preponderance statistically that a very strong economy favors an incumbent candidate and it even favors an incumbent party. Let's say the incumbent candidate is being term limited out. It even favors the incumbency of whoever the new candidate

from that party may be. But inversely, a weak economy, almost universally, but not quite, favors a challenging candidate and challenging party. And so there are a couple of exceptions throughout history. But when you look back to some of the one-term presidents that we've had, and we haven't had very many, that's something people need to understand. When they feel like it's so obvious that this election is going to go a certain way, and a lot of people maybe don't feel that as much this time around because of the 2016 surprise that existed with President Trump defeating Hillary Clinton, but I still think there's a lot of people that might normally really feel, hey, the polls and the approval ratings and some of these metrics sure seem to look as if this is Joe Biden's race to lose.

And yet I also think that has to be held up against the reality that one term presidencies are pretty rare. Now, went back to my point on the economy and then answering your question on where COVID fits into this. George Bush Sr. was a one-term president, and that was out of a recession that took place in the later portion of his first term. Jimmy Carter was a one-term president that was entirely out of economic malaise that sort of lasted through most of his first term, his one and only term. Now, Lyndon Johnson may have been a one-term president, but he chose not to run in 1968. So that's sort of a bit unique of a situation. The reality is that whether you're looking at Bush Sr. or whether you're looking at Carter, and you can go back to Hoover, you know, if you really want

to get an extreme example. Weak economies, questionable economic circumstances have almost always bode very poorly for an incumbent. The reason why I'm using this to transition to COVID as it pertains to this election is I honestly don't have any idea, and I don't think anyone else does either, if the weakness of the COVID economy is going to be a strength to President Trump or a weakness to President Trump. Because there is this narrative that the economy was humming along, unemployment was record low, particularly black unemployment and Hispanic unemployment was at record lows, and obviously had a very strong stock market.

You had very low inflation. There were a whole lot of economic metrics pre-COVID that would have probably been politically in the president's checkbox had it not been for the COVID moment. And then there was this sort of impossible-to-compare-to-any-historical to any historical precedent moment of the coronavirus and what it did to the economy. And then on top of that, like, then there could be debate as to whether or not voters may or may not give a sort of pass based on the rarity and the exceptionalism of the economic weakness around the COVID circumstances, that is a debate entirely on its own. And then you have the question as well,

if all the economic indicators are pushing back up, that even though there was this just horrific dip in economic activity out of the lockdown, if all those numbers are trajectory to the upside, could that end up being favorable to the president? I don't know. I think there's a mixed narrative there. I would absolutely not be assuming that the economy is going to hurt President Trump's reelection chances. And I would not assume it's going to help it either, because I think that the way one interprets those different facts and narratives I just laid out really depends on who they sort of like anyways. So I kind of suspect that this election will not so much be about the strength of the economy as much as these other factors where very strong feelings exist both for and against the incumbent president. You know, David, you also talk about how this topic is something that

you've received more questions on from clients and others than any other topic, really, over the past, you know, couple of months or certainly a couple of weeks. And I'm just curious, anything we can read on the tea leaves, just the fact that there is so much interest in the market and the election. Could you put those together for us? Yeah, I think that I make a point and it has the risk of sounding condescending, which is absolutely not my intention, but that if people want to be encouraged by something,

they may want to be encouraged by how much anxiety there is around the election and its impact to the market because we just simply don't have major market altering events that are also preceded by everybody predicting them. What we generally have when things are very disruptive to markets, and I don't mean 5% to 10% disruption, which is kind of insignificant in the grand scheme of things. But I mean, those really major market moves always have come historically. They call them black swan events in our business. I know

a lot of people may not know what that means, but feel free to Google it. There's certainly a historical context. But my point is, I do believe everybody talking about it does set the table for a lot of disappointment one way or the other when the positioning and perhaps kind of extreme activities or steps or endeavors people may go through don't end up warranting such. Now, look, the reality is that most of the hype around this election is not particularly the stock market. People ask me about it in the context of the stock market because I manage their money and because I am responsible for the financial outcomes of our clients. My partners and colleagues at the Bonson Group, all of us that are advisors to clients, we have a sort of duty to go execute on behalf of financial goals. And when people feel threatened and anxiety in other areas of their life, it will translate 10 out of 10 times into

the financial side. And when the financial side feels it, it exacerbates. It creates a sort of negative feedback loop. And so I totally understand where that comes from. But I do believe objectively that much of the hand-wringing over this election is not particularly the stock market, but we are in a high hand-wringing moment in our country. There are very strong opinions, ringing moment in our country. There are very strong opinions politically and culturally, some of which I think are cuckoo and bonkers, and some of which I think are totally justifiable and understandable. And I don't mean that the left is right and the right is wrong or vice versa. What I mean is I think both sides have a certain degree of tension they're bringing into it, some of which is very justifiable within their political and ideological worldview, and some of which I think

is totally divorced from reality, but is a necessary emotional byproduct to how they feel about things. So these tensions we have in the country right now are spilling over, Scott, and that's where a lot of the questions that I get come from. And I totally understand. I also think it's fair to say that Joe Biden ran for a Democratic nomination in a pool of candidates that included some people who advocated for things that would have been particularly problematic for markets and for the traditional understanding of the economy in America. I myself wrote a book about Elizabeth Warren. She was at one point a leading candidate, and she's very outspoken. There's no need for me to misrepresent her. She has very explicit views that she holds to that I think would have been interpreted by markets much differently than

a Joe Biden nomination. Bernie Sanders was the candidate to beat. He was far and away running away with this race when Joe Biden made his kind of last stance in South Carolina and ended up from there just running downhill with the nomination from there. But you forget that before South Carolina, Biden had come in fourth or fifth place in Iowa, New Hampshire. And there was a lot of belief that a very far left part of the Democratic Party was potentially going to receive the nomination. Now, where things are with the opposition party, the one seeking to unseat the incumbent president, Party, the one seeking to unseat the incumbent president, is that Joe Biden has a number of things he's carrying. He is, first of all, campaigning primarily from his basement. There's a very non-conventional reality to this campaign. He, second of all, is campaigning coming off of having bested some far-left progressives in the primary. And people have to wonder how much

of what they had advocated for he's going to hold on to or not hold on to. He is running as the two-term vice president of the United States. So there's very strong feelings people had about those eight years with Barack Obama. But he's also running as a 50-year public official who at different moments throughout his career had legislated as more of a center-left candidate, other points more farther out left. So I can understand why there would be ambiguity as to what exactly a President Biden may end up representing into his sort of economic worldview. I myself would say that I don't know. I will know a lot more about what to expect from a President Biden should he prevail in the election when I see his personnel.

And I allude to that in the white paper, Scott, because I believe the majority of the time you get an idea of what policy is going to look like by the personnel that a president sets around them. I know that's a lot of alliteration around words that start with P, but for a president, personnel is policy. Right now it's all campaigning. Yeah. And David, you also said something earlier about a lot of people are talking about this, right? So you have maybe an angle of this or a part of this that is priced in, right, which could limit, you know, the market moves that some folks are worried about around the election. And then something else you write about in the white paper is the fact

that, you know, the way our government is set up limits the power that any one political figure has, right? And you say, quote, you know, that constitutional reality has served our economy and our country well for 250 years. I feel like people forget that when thinking about politics and the markets. Well, one of the reasons people forget it, and this is very unfortunate, and it may sound to some like I'm waxing and waning politically myself here right now, so forgive me, But our founding fathers did not intend for us to have a strong presidency. And you can understand the birth of America came out of the rejection of the imperial monarchy that was our rebellion against King George III. And so our view with a legislative branch that had two chambers with a separate judicial branch responsible to interpret law and then an executive branch that at the time had very few executive or cabinet departments brings a lot of power to help the economy or a lot of power to hurt the economy is because they have an inflated view of what the presidency is supposed to entail, let alone what it does and can entail.

and I alluded to this in the paper, I think both President Trump and President Obama were rather excessive in their use of executive powers. Those things are temporary, though. They are written in on the stroke of a pen, and they can be written out on the stroke of a pen, unlike legislation that gets duly passed by Congress, signed into law by the president. Legislative changes that impact the economy one way or the other are more lasting. Executive powers are temporary, but nevertheless, they do have an impact. And so that heavy use of executive powers that we've seen over the last couple of presidents, and it's bipartisan, elevates the kind of pedestal that we give to the president. But ultimately, I think that what you're alluding to, the 250 years, the constitutional structure, the separation of powers that we have, and there's

a number of components to this that I allude to in the paper, I cannot emphasize enough how much of a governor that's been on how a president that one may like can impact the economy or a president one may dislike. It is, and from a literal portfolio standpoint, is quite a bit of a hedge. So much of a hedge, in fact, that the best performance we've seen in the modern era has come when there was one party as president and another party in control of the Congress. party as president and another party in control of the Congress. That divided government seems to have actually created a more fertile environment for not only the stock market, but overall economic growth as well. With that context, David, we should also point out that you're not saying there's not going to be volatility around the election, right? But it's more that the sort of long-term implications are such that the short-term volatility doesn't necessarily

or really doesn't translate into long-term market changes or structural changes. I mean, that's a much higher barrier, right? Yeah. Yeah. There's sort of, I guess, what I would recommend investors do is think about this thing in a couple of different levels. And the first one is perhaps the one people are talking about the least, and maybe they should be talking about the most. And that is the short-term volatility, as you say, around an uncertain election outcome. Now, perhaps one candidate is going to beat the other candidate by seven to 10 points on election night, run away with enough of the battleground states that there's not a lot of ambiguity around the electoral college side. And you just end up,

as we had in 2012, at President Obama's reelection, as frankly you had, even though it was tighter margin, you know, President Bush Jr. in 2004, there was no ambiguity around his defeat of John Kerry, both in the popular vote and the Electoral College. And so the reality is that people don't seem to really be thinking about the fact that, look, if we're going to go two or three weeks potentially without knowing who the winner is, that's going to create a lot of volatility in the markets. Now, one of the things I put on the paper is I'm very happy to concede that that could happen. I don't know if it's a 40% chance or a 60% chance. It's not only a 10% chance, and it's not an 80, 90% chance either. It's something substantial, but it's something moderated. But listen, what is anyone going to do about it? That's the question I would have. Does someone really

believe the right thing to do would be to sell everything they own, going into it, wait and see how the election results come out, and then come back in, I don't know how that would be any different than the age-old problem of taking significant timing risk at both an exit and then even greater timing risk, frankly, timing impossibility at a re-entry. So the fact of the matter is that this is a flaw politically. I believe it needs to be rectified that we're very likely going to have some uncertainty around the short-term determination of a winner. Now, maybe we won't, but my point is there's a substantial and legitimate opportunity for short-term market volatility. But as I have said over and over again, in not just political matters, but all sorts of things that impact markets. It is not bad news, and it certainly isn't good news. It is uncertain news that impacts markets with elevated volatility. Markets have an incredible ability to discount in bad news,

and before you have a chance to blink, price in the bad news so that then you're now looking to sort of rebound from it, not figure out what just happened. With uncertain news, that becomes much more challenging. So if anyone is really just concerned about six weeks, then that's sort of my take as to what potentially could happen from, God forbid, the early part of November all the way into December. I think Bush v. Gore was finally totally rectified a few weeks later, if I remember correctly, very early part of December. But then really the questions we're getting are not about the four to six weeks after the election. It's more people wondering what could substantively happen, whether it is, you know, one year, two years, four years. And some questions even center around a kind of generational impact to our country out of the election. And that's where I think, you know, I focused a lot of my paper on.

And let's start talking about some of those more specific implications and policy implications based on the binary outcome from November, you say, David, in the paper, no area is more quantifiable concerning investors than changes to tax policy. We know a major part of the Trump presidency was the reduction in the corporate tax rates from a couple of years ago. What is the future of that policy and its implication for markets? Well, there's a couple of problems that make it hard to apply into our portfolio management because, A, there is what candidate Biden is saying that might be different than what he would be doing.

And I don't say that because I have some cynicism about this candidate. I say it because every president in history, including the one we have now, campaigned on a tax plan that had certain granularity around it. And if you go back and look at the campaign website versus a tax bill that ended up getting done under Presidents Trump, Obama, Bush Jr., Clinton, et cetera, et cetera, it's completely different. There's nothing wrong with that. That is a byproduct of the reality of the American system of government, that campaign rhetoric and the actual sausage making of legislation is often very, very complicated. So I don't think one can only go off of what Biden is saying in his campaign versus what Biden would actually be doing.

And I don't know what's going to happen with the Senate. And this is the point that I have to continue to make. If one believes certain things that are good for the market or bad for the market can come out of a Biden win or a Trump win, and they are formulating opinions both on what the good or bad may be and what they're going to do about it, without consideration to how the outcome of the Senate fits in, something's getting lost. Something's incomplete. It's inadequate analysis and it's inadequate application. analysis and it's an adequate application. The truth is that the Senate, if it were to stay in a Republican majority, even by the skin of their chinny-chin-chin, a 51-49 majority, a significant amount of the things that people might be worried about legislatively in a Biden presidency have absolutely no chance of happening, including the corporate tax rate

going from what was 35% for several decades down to 21%, where it is now, up to 28%, right in the middle of those two numbers where Joe Biden is campaigning. So that is a measurable thing of what it would mean to company earnings, but there's no certainty it's going to happen. And there's a whole lot of political headwinds that would keep it from happening. And let's just say, by the way, that it does happen. Is the market that has gone from 24,000 to 28,000 since Joe Biden took a lead in the polls, unaware that that is at least a risk? Of course not. Now, I can understand why the market wouldn't fully price in that risk. It doesn't know how the election is going to go either. It doesn't know the Senate's going to

go either. But my point is, this is not this slam dunk bearish signal. And I think one of the reasons is that a huge portion of the economic benefit of the Trump tax bill passed in late 2017 that became law January 2018 has already happened. It can't be reversed. And that was the one-time tax hit for repatriation of foreign profits and the over $1.2 trillion U.S. dollars that have now come back onshore from profits earned overseas that previously an inefficient tax code was leaving over there out of fear of double taxation. And so you now have really got to price in a lot of the benefits of that supply side maneuvering in the tax bill that President Trump had passed. So, Scott, I think that the tax bill that Biden has does contain things the market would not like. And it contains things that I don't like. Now, I do want to make a comment, by the way.

And I wrote about this. But some of the people listening to the call, like myself, are in a high tax state and are in a high tax bracket. And Joe Biden's talking about raising taxes on wealthy earners. And there is a sort of ironic tweak here is that my taxes went up under President Trump. And that is true that most people's did not. But by getting rid of that state and local tax deduction, which I, by the way, was fervently and still am for getting rid of, just as a matter of policy,

I don't believe that lower tax states should be subsidizing higher tax states at the federal level. But be that as it may, regardless of what one feels about it, the net result was that a lot of people's taxes did go up. And Joe Biden is campaigning on getting rid of the repeal. So in other words, to avoid the double negative, bringing back the state and local tax deduction. So even though the tax rates would go modestly higher for higher earners, in some cases, people's taxes would actually go lower and it would actually be high earners, ironically. Now, I don't expect the press is going to run with this story, but it is a big story and it is a mathematical fact. But my point is that there's nuances in the tax bill, nuances in what he's proposing,

nuances in what will actually happen, and then an entirely complicated political dynamic around what happens with the Senate. I mean, the Trump tax cuts are set to expire in several years anyway. So there's that to contend with eventually as well. Yeah, I think it's fair for you to bring that up. But I should make a comment. First of all, it's quite a few years to go and not all of them are set to sunset. Only some are, but there is just absolutely no precedent for favorable tax cuts that are set to sunset, ever actually sunsetting. I will remind everyone the so-called fiscal cliff that was going into 2013. Bush's

tax cuts were supposed to sunset in 2010. We were still in a pretty difficult economic time from the great financial crisis. Obama punted that to the end of 2012 and got reelected. This was after his reelection. He had no political risk and even he allowed, and by the way, it was Joe Biden negotiating with Senate majority leader, Senate minority leader at the time, Mitch McConnell. The Republicans didn't take the majority in the Senate until 2014. It was McConnell and Biden under an Obama presidency that made permanent the Bush tax cuts with only just a couple minor little tweaks. And some of them got more favorable, such as the estate tax, by the way.

So I don't think that the markets are thinking much about those Trump tax cuts going away, because it's the individual side that's set to sunset. And I don't know what president is going to let the taxes on people making $50,000 a year, the tax cuts sunset, Republican or Democrat, I imagine those are going to get extended in 2026. And David, we're getting some questions coming in in real time. Somebody wants to know your take on the bipartisan support we're seeing to limit or end stock buybacks. And as a dividend growth investor yourself, and that being a core philosophy of the Bonson Group, do you think that's a good outcome? Oh, that's such a good question. And this is such a chance for me to virtue signal for everybody, which I loathe doing.

I'm just going to give you an honest answer. I actually despise it, but it's going to benefit us tremendously. But I think it's disgusting because I don't think the government has any business telling private companies what they ought to do with their capital. But to the extent that both Republicans and Democrats that have now taken up an opposition against stock buybacks are to prevail with some sort of regulatory headwind to such? Do I think that it will in fact benefit companies that favor dividend growth and capital return to shareholders via cash distributions? Do I think it will benefit that area of the investing world that we happen to be very focused on. I absolutely do. So I think that

most people favor policies that will benefit their particular portfolio approach. In my case, I will find it to be very unfortunate policy, and yet I will concur that I do think it's going to benefit the clients of the Bonson Group. So we've talked about tax policy as one of these sort of longer term things to watch based on the outcome of the November election. I also want to get your take on policy with China, just given sort of the where we are now with what President Trump has done and with what Biden has said. Yeah, no, it's a very important question. And yet, I want to point out, I dedicated a whole page to tax policy. And yet, I just dedicated this

little paragraph to the China question you asked now. And the reason for that is it's so complicated and there's so much ambiguity and also emotion around the issue. And yet, I really want to make an important point with this. I believe that there is a decoupling from China in terms of U.S. and China economic activity and cross-pollination that is going to happen regardless of who is president. And the pace at which it happens and the manner in which it happens will largely be determined by who is in leadership. But I don't think that that train is going to get slowed one way or the other.

I believe that there is right now a bipartisan inkling towards on-shoring a lot of key manufacturing activity. And when President Trump campaigned on this in 2015, I don't think that was the case. I think that there were certain groups that really resonated with that kind of economic nationalism. But it was largely presented as we're losing factory jobs because of low-cost labor jobs in China. And we need to bring those jobs back. And there were people who that message resonated with. And there's merits and, in my mind, some demerits to the position.

But see, that's not what I'm talking about now. The reason why I now believe this issue has legs is not related to the restoration of factory jobs in Western Pennsylvania or Eastern Ohio. It has to do with, whereas there's more of a national appetite that is entirely, I think, nonpartisan around protecting national security from greater reliance on China, our supply chain producing so much in China that it slows our abilities to get key ingredients, whether it be weaponry, whether it be intellectual property, or whether it be pharmaceuticals. And that there is very likely in President Trump, term two, or President Biden, term one, very likely going to be some form of an effort to accelerate and amplify on-shoring of some of these key areas that are pertinent to national security,

intellectual property protection, and particularly out of the coronavirus moment, out of the coronavirus moment, the ability to get those kind of key pharmaceutical and other PPE type manufacturing done here in the United States. So that whole issue, when you're talking about another economic superpower that clearly China is, I don't know how any of these things can happen under either president without some volatility and without some uncertainty that it will create in the market. But yeah, the tactics that each potential president might take to do this will be very different from both President Trump to candidate Biden. And so there is a lot of question mark around that. But I'm not looking at it as with one president, we're going to get decoupling and with the other, we're not. I suspect that the American people are largely going to demand this. Well, yeah, I think that begs the question,

though, given something as complex as the U.S. relationship with China and the policies around that, is that worthy of making any types of changes to your investing strategy because of that? Here's what I would say. I think that within our own portfolio, we did a full evaluation. We have an incredibly gifted director of equity research with Julian, who has really stayed on top of quantifying what we believe our China exposures may be. And you, by the way, you couldn't China-proof your portfolio if you tried, okay? I promise you that. But there is a way to have a little bit less reliance on heavy China import-export-oriented companies. And some of our companies happen to be more in the semiconductor oriented space that had a greater China exposure. We didn't sell them, but we trimmed them.

And some of those companies have performed quite well. So look, if we're going to go to some war with China someday, everything's going to sell off. I don't think that that is in the cards as far as an imminent military war. But as far as elevated economic tensions, the more a company is reliant on China for low-cost production, the more exposure one has there. I don't think you can go to zero exposure, but I would be pretty comfortable recommending people seek to limit that exposure. And we've done that. David, let's also talk about the national debt as sort of another long-term implication from the election. What should we be thinking about in this area of the market? Yeah, I mean, I think that the national debt, people have to learn to see it not as a market event, but as an entire national

way of life event, culturally, economically, politically, because this is not just something that happened out of nowhere. It speaks to the current relationship between the citizen and the state that exists in America. It speaks to the size of the federal government. There are states that sometimes get a little bloated in their budget and they end up having to kind of what we call austerity, right size. But there's not very often superpowers that end up really getting religion, getting discipline, and particularly in a republic. It is not like we exploded our national debt because we elected a dictator. By definition, you don't elect a dictator. We didn't have a dictator come in

and spend us into oblivion. The vast majority of things that created the national debt in our country were done with incredible support from the people. And so more or less, we have a very high national debt and we have a high demand for the things that cost, that created the national debt. Let's put aside kind of one-time expenditures such as the CARES Act, such as the Iraq War 15 years ago, 17 years ago, things like that. And just look to the ongoing funding of government year by year. And I've put these charts in Dividend Cafe over the years. You can look to what people believe the size of military ought to be. You can look to what some of the discretionary spending ought to be and turn that knob up or down. And I have opinions on all these

things and all of you have opinions on them. But this is one of the good things as why we don't have to have a political fight about this, because it really doesn't matter. The large national debt we have comes from transfer payments. It comes from the amount we spend every year in Social Security, in Medicare, Medicaid, and in healthcare. And I don't think there's a lot of political appetite to reel that back in. Then you add to deficit spending through the contraction of CARES Act, an emergency type moment. We don't know whether it'll be another stimulus bill. And so you end up with what has become a gargantuan situation. The point I've written about in most dividend cafes, I've alluded to this, some dividend cafes have dedicated a lot of space to it. But the point I've written about in most dividend cafes, I've alluded to this, some dividend cafes

have dedicated a lot of space to it. But the point I've tried to make is that when we talk about the Federal Reserve monetary policy, and when we talk about the size of government, and we talk about bond yields, we're only talking about one thing. This is all one integrated conversation. We're not talking about three or four or five different topics. So whether or not we have a President Trump or a President Biden in a couple of years, I believe that the national debt will be the primary economic issue. Now, look, the fear 30 years ago, I've made this point so many times. In the late 80s, when I was in high school, In the late 80s, when I was in high school, we were talking about six, seven,

$800 billion in national debt saying, oh my gosh, the country's gonna go bankrupt. And we were paying 8% for a 10-year treasury yield. Now here we are a few years and a few pounds later, and guess what? We have $25 trillion of national debt and counting, and the bond yields are below 1%. So this is something that almost everyone's gotten wrong in the way they would have expected it to play out. And so what I've tried to do is present multiple options as to where this can go, none of which are good, none of which can possibly get rectified without

some pain to someone, but all of which represent some kind of scenario that is going to end up playing out. Exactly how, exactly when, no one knows. I wouldn't listen to anybody who pretends they do. But are we going to cut our way out of this? No. Are we going to grow our way to deal with this? No. Now, a combination of growth and cutting, could that work? In theory, yes. Do I think that train has left the station? I do. I didn't think that five, 10 years ago. I think at this point, I don't see any national appetite for the policies necessary to create that growth and the policies necessary to cut that budget down. So more or less, what the whole country has done, people sitting at home right now listening, even though they don't know they've done

it, and certainly the elected leadership of Washington has de facto said, hey, Federal Reserve, we need you to handle this for us. That's what Japan did. That's what Europe has done. That's what England has done. That's what the United States is going to do. And that's why I think the Federal Reserve, which are not elected leaders in the sense that, yes, the Senate has to approve Fed voting governors. The president has to appoint the chairman or chairwoman of the Federal Reserve, but they don't go to a direct vote with the people. And I think they're going to have the biggest impact on how the national debt is monetized in the years ahead. Just to put a final point on that,

what is the meaning for markets from that? Well, most importantly, Scott, it's that low interest rates are here to stay for the very simple reason that whether you look to the corporate leverage that Fed monetary policy has encouraged and facilitated and asked for, or you look to the sovereign leverage that is at the heart of Keynesian economics and is at the heart of U.S. policy, both out of the financial crisis and out of the COVID moment, we have a national debt and ongoing budget deficits that

require low interest rates. And so the Fed has and would manipulate those yields down if they needed to, but they may not even necessarily need to because yields right now or with this deflationary environment are already very anchored to the zero bound. To the extent that all of a sudden people start saying, oh, there's inflation coming and inflation expectations pick up. Those bond yields would probably start to go higher and the Fed would then intervene to keep them from going higher. But they don't even have to do that right now. So what's the investment implications to national debt? It's low bond yields across the yield curve. What do low bond yields mean to our investment

portfolios? They simply mean that we're not going to get either the return or the risk mitigation we're used to from traditional bonds, and that people are going to take a lower return in their portfolio, or they're going to take more risk, or they're going to do what most people are going to take a lower return in their portfolio or they're going to take more risk or they're going to do what most people are going to do, which is lie to themselves or get lied to by someone else. But they're not going to get lied to by somebody at the Bonson Group. That's not going to happen. So they will end up having to take a different risk

or a greater risk to get the same return or they will have to take a little lower return because of the fact that the zero bound is anchored asset return expectations across the board. That's the basic math and basic economics of it. It has tremendous political implications because the Fed is the only game in town to try to monetize the high national debt that comes out of Washington. And as we were talking about that, somebody writes in asking about the implications of monetizing our national debt. And we, of course, covered that at length just now,

unless there's anything else you wanted to add. Yeah. The only thing I would add to it is that I don't think we've covered it in the sense of being able to predict exactly what they're going to do, how they're going to do it, because I don't know. I want to give everyone a little bit of context. I talk about this Japanification a lot. Well, Japan's central bank was not limited by a Congress. They're not limited by a Federal Reserve Act that defines what they can and can't do. Look, our Federal Reserve has gotten pretty creative at expanding the bounds of what they can do. They're not supposed to take losses in their portfolio. So what they have done is create special purpose vehicles, get Congress to approve a certain amount

from Treasury that will be loss-absorbing capital as an equity buffer, and then they've leveraged that amount with printed money from the Fed. That's what they did with TALF after financial crisis is what they're doing with TALF now. And it's very creative. It's very clever. And frankly, it made the government a fortune out of the Bear Stearns collapse in 2008 and some of the other collateral damage. Maiden Lane 1 and 2 made a ton of money for the Treasury Department. So there are things the Fed can do to kind of cheat the system a little, if you will, legally. Pardon my oxymoron. Japan, though, isn't limited by any of that. They can literally go buy corporate bonds. They can literally go buy stocks. They can go buy ETFs.

And they've done that. They've done it to the tune of gazillions of Japanese yen spent direct interventions into capital markets. We can't do that in our country. So when we talk about monetization of debt and their quantitative easing, so far, they're not actually monetizing the debt. And again, we're probably way too in the weeds on this, but it's such an important topic. And I know some listeners are interested, all listeners should be, if I'm explaining it in a way that keeps your attention. By doing the quantitative easing, it buys them time. It puts reserves on the excess reserves of banks, but it doesn't circulate into the economy and create inflation. Ultimately, can I see a scenario where the central bank literally monetizes the debt,

where they actually just sort of print it away? That would require Congress. That would require a certain different political environment. There are scenarios I can see them doing that. I think that the Fed would probably go through a very long list of kind of manipulations and machinations before they would get there. But ultimately, I would just follow Japan's playbook. Japan has not disappeared. Japan has not been in a great

depression. They haven't grown. It's not an economy anyone would be aspiring to over the last 30 years, but they've kind of gotten by okay. And I think that's what the Japanification mode is going to be for our central bank. So David, any other long-term implications from this election, just in terms of the markets that you want to highlight for folks today? I think that long-term, there's all kinds of things that are going on and that will continue to go on that I would stay focused on that are not pertinent around the 2020 election. I believe that the principles of self-interest and the principles of the profit motive,

the principles of cash flow generation, and what that does in the C-suite to the stewardship of a company's assets, those things are well in play and will be well in play regardless of who is president. So I don't fear even a little bit that the long-term principles of how capital should be invested are undermined. I think that some of the bigger issues people are worried about right now is whether or not there is a long-term undermining of the American experiment at play. And this is where I am firmly on the other side of some of my fellow conservative or center-right friends, is that I believe America has had bad presidents on the right and bad presidents on the left and good presidents on the right, good presidents on the right and bad presidents on the left and good presidents on the right, good presidents on the left. And through all of that political turmoil, that thing we talked about earlier has always worked. That thing I talk about is the uniqueness of our form of

government, separation of powers, congressmen and women that have to be reelected every two years, powers, congressmen and women that have to be reelected every two years, senators that have to serve a whole state, not just one particular socioeconomic enclave of their state, presidents that get term limited out every after two terms, etc. There is a lot of uniqueness in our form of government, separation of powers, co-equal branches that has worked to even though certain things have gone this way sometimes and this way sometimes, it's worked to kind of recenter it. And I am of the opinion that long-term optimism in the American experiment is warranted. Now, there are plenty of people that will make the argument, no, it's all falling apart. We can see this, the social unrest and the new culture and new this and that. And so look, I can't disprove it. They certainly can't prove it either. I guess the question I would ask is whether or not one is willing to go

blow up their portfolio over those longer term fears. I suspect we could have a really bad four years in certain situations. And this is where, by the way, Scott, and I alluded to this in the paper, and this is where I'm really hopeful I'm not offending anyone right now on the right or the left. Because somehow in the last 10 years, I get to use both sides as an example. I had so many people that are conservative Republicans come to me and say, President Obama is going to destroy the country. And their portfolios went up through the entire time he was in office. And I had so many people come to me and say, President Trump's going to destroy the country.

And their portfolios went up the entire time he was in office. So I'm not making a point about which candidate I like or don't like. I think people know the fact that these are difficult elections for me because there's a certain type of ideology and worldview I'd love to see as president, and that ideology and worldview is not running for president, okay? So this is not partisan or political for me when I make the comment that in recent history, there are very inconvenient truths for investors who hate Trump and saw their portfolios go up, and investors who hated Obama and saw their portfolios go up. Now, there were circumstances

around it. There was the rebound out of financial crisis. There was Federal Reserve activity. There's all kinds of different things that kind of fit into that. And there were periods of volatility along the way. President Trump's trade war with China spooked the markets at given points in 2018. President Obama's, you know, fighting with the financial industry and various governmental stalemates created certain periods of volatility. So there's things that will happen out of Washington, in particular, out of the Oval Office that will have brief periods of interjection in the markets. I don't deny that. But no, I do not believe that the long-term interest of investors with a properly allocated portfolio are threatened by either outcome in this election.

On the margin, there are some things that will be better for certain parts of our portfolio and other things that'll be better for others. And that's where I kind of alluded to specific risks and specific opportunities and ideas to play these thematic things accordingly. But if one asked me if I go from being long-term in my positioning and philosophies with a given election outcome and then change that with another, the answer is no. David, with that, let's end on your best advice for investors over the next 50 days and even beyond that.

Well, I think in the next 50 days, it's a wonderful opportunity to try to revisit your allocation, revisit the construction of your portfolio. I would frankly be more biased towards doing that around the reality of 0% interest rates and faulty expectations for what bonds will do in someone's portfolio more than I would based on the election. So that's a whole theme we're going to be driving in the fourth quarter, that we are reconstructing our portfolio allocation and our portfolio mentality around core dividend growth, which is our primary area, but separating bonds that act like bonds from credit, looking to growth enhancers, looking to income enhancers, looking to alternatives, and then directs or illiquids for real sophisticated investors. That's seven different

categories we want to implement into a portfolio. And that conversation is apolitical. It's not, it's totally agnostic to what may happen or may not happen out of the 2020 election. The primary catalyst right now to rethinking potentially someone's positioning should be the reality of the zero bound, the zero interest rate anchor that's affecting a lot of capital asset pricing. But again, on the conclusion of the white paper, I point out that the historical record is very clear. Most people's fears around a political outcome and the reality of markets have not ever really played out historically. And that even in this particular heated moment, the truth is that there's a lot of nuance that enters the fray from our form of government and from the reality of what we're

going to end up getting. So look, in the next 50 days, I expect there to be a bit of a ride, and perhaps the 50 days after that as well. But do I believe that people ought to be taking significant steps to blow up a really well-allocated portfolio that is geared towards their long-term financial interest. I do not. And David, one of my favorite lines in the white paper was, markets just plain generally do well. I appreciate you pointing that line out. And it's one of my favorite lines too. And maybe I shouldn't say that since I'm the one who wrote it, but it's important for us to remember when people say like, oh, well, look how well the market did, you know, under President Reagan. And yeah, he was a Republican, but look how well it did under President Clinton.

But he was a Democrat and you can go back and forth to these things. The truth is the reason why markets went up under a whole bunch of Democrat presidents and a whole bunch of Republican presidents is because they're markets. And capital must go fight for its most rational and optimal use, always and forever. And markets are far more nonpartisan than any of us are. Yeah, well said. And something else you brought up was that, you know, just sort of the presidential election impact on markets goes beyond just the stock market, right? There are implications for real estate.

We kind of alluded to that earlier, but other asset classes as well. That's right. And so obviously we've talked a lot about the low interest rates, the bond market. I think the U.S. dollar, you recall that we have had strong dollar Republican presidents, strong dollar Democrat presidents, and we've had strong dollar Republican presidents, strong dollar Democrat presidents, and we've had weak dollar on both sides. And so the currency implications and how that factors into one's international investing, commodity investing, emerging markets, there are implications beyond just the S&P 500. And so hopefully anyone who reads my paper will appreciate that reality.

All right. Well, David, I think that wraps up our time for today. But certainly I learned a lot, very informative hour, talking about what to expect over the next 50 days until the election, and most importantly, beyond that. And David, thank you for your insights as always. And obviously, we'll continue the conversation over the next few weeks. Well, thank you, Scott. Appreciate your time. And Erica, I'll let you adjourn our call. Thank you. Thank you. 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.