The Dividend Cafe - New Highs Amidst New Lows

Episode Date: June 5, 2020

I find it inconceivable that we will not have up and down volatility at some point in the near future. But I am not surprised by this market's resilience. The forward-looking capabilities of the market are powerful, even though they are more often subject to excess. On the downside and the upside - no perfect equilibrium can ever be found. This is why market timing is the errand of a fool. I hope and pray our society will find a forward-looking optimism, as well. That what is wrong in our country can be fixed by that which is right in our country. Believe it or not, even apart from all I care about on these pages regarding the markets and investment capital, it is to those greater ends that I work. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well hello and welcome to this week's Dividend Cafe. What a special and interesting and really significant, memorable, I can keep going on. A lot of adjectives described this week. And I hope that I'll cover all the things that I want to cover, but I can tell you right up front that the podcast this week is not going to cover all the market topics that thedividendcafe.com does. That's just because there's so many different things I cover in the written commentary. And I really want to be able to focus on the major things here in the podcast and, of course, those of you watching on video.

And so to the extent you have time to go to DividendCafe.com, not only are there always the charts and visual aids, but there are going to be a number of various market topics that just aren't going to be here on the podcast that I think you might have an interest in. I think right off the top, first of all, I'm recording with about an hour and a half to go in the market on Friday. And by the time you're listening to this, markets will have been closed for the week. for the week. And as of right now, we are up very close to 1,800 points on the week. In the market, we're up about 900 points on the day here, Friday. And there's two pieces to that, okay? A 900-point up day, an 800-point up week are significant events in any week, no matter what, whatever the context is.

But particularly in a week that the majority of the news cycle has centered around significant societal distress in America. And in some cases, significant damage to property and businesses and even human life, revelations of even greater divides culturally, socioeconomically, racial tensions. There's a lot of heat in this moment. And some of it is political, although if you're like me, that may be the aspect of it that you care about the least right now. But my point in bringing this up in a dividend cafe, which of course is very consciously and very intentionally centered around market impact and investment implications, the ramifications of various cultural hot button issues often are non-existent to markets. In this case, one could say, well, we have this very negative, distressful event taking place in the culture, and yet we have markets going higher and they

could be very confused by it. Prima facie, I get that. I understand why that might seem confusing. all the way through the COVID affair since we got out of that initial violence of the March drop and the accelerated decline of broad market indices dropping 35% in 31 days or whatever the exact numbers were. The reality is that we saw illustrated the way markets work, not work now, not work in this case, but have always worked, which is that markets are pricing in today what they believe about tomorrow, where the rest of us are reading about the present and oftentimes reading about the past. The unemployment numbers that were ghastly in April, we read about them in May, looking back to April. We read about June's looking back to May. I'm going to talk about that in a moment. Markets don't do that. Markets are saying, where are things going to be headed? Now, past data, forward data, trajectories, momentum,

very fallible outlooks. There's a lot of inputs that go into what market actors end up doing or assuming. But the point I'm making is that markets are always and forever discounting future earnings. And I don't mean this to be crass or cold or impersonal or to make it sound like I am disconnected from these events of this week, for I am most certainly not. But I think that there is substantial work ahead for our economy. And yet at the same time, the health aspects have been modestly outperforming some of the fears for some time now, and markets have liked it. And now you see some of the economic factors outperforming. And the particular input that's making us today, it's not modest outperformance, it's just kind of stunning outperformance. And so ultimately, I would love a forward-looking optimism across our whole society in the categories of these cultural epidemics, in the manner in which our society relates to one another, in the tensions that exist in some of our cities, in the way

that our body politic works, I would love forward-looking momentum and all of those things. But we don't have that. And we can all have different opinions as to where we're headed in those things and what will get better and what won't and how and all of that. get better and what won't and how and all of that. But where we do have forward-looking momentum is that the economy, as bad as things are, is not as bad as was feared and may be very well getting better. And that is what markets would care about. You combine that with the investing landscape of 0% interest rates and trillions of dollars of liquidity sloshing around, and you get an environment in which it's entirely understandable why equity prices would be going higher. Now, I think this jobs number here today is far more important for markets than just what the jobs number itself represents. It's entirely reasonable to say, look, we had a 27,500 Dow once with 3 if hypothetically a big financial media anchor were to go tweet something like that, it would reflect in all humility but in all candor a really, really bad understanding of how equities work and how economics works.

Because the $27,000 pricing on the Dow is not about a 13.3% unemployment. It's about the belief that a 20% unemployment, which went to 13%, is headed to 7% or whatever the number is. It's about a surprise on the upside. So bad news doesn't move markets and good news doesn't move markets. Surprisingly bad news moves markets or surprisingly good news. That's the key. And when the economists and analysts and pundits bake in that we're going to lose net an additional 8 million jobs and you gain net 2.5 million jobs. When the analysts say that they're very skeptical of 78% of people in last month's labor survey saying that they were

temporarily laid off and it was something like 2.7 million people, and two and a half million people end up getting their job back, well, markets have to say maybe those people knew something that the economists did not know. And it's difficult for markets to believe that the experts were only foiled this one time, but going forward, every other negative data projection they're going to get right or positive data projection for that reason, for that matter. This isn't about them being negative and the news being positive. It's about them being fallible. They got it wrong and people are all going to get things wrong. But I don't think that markets are right now saying, okay, this is much better than we expected. The jobs number, let's go act upon that. I think they're saying, what else out there,

which has a very predominantly negative bias, is wrong as well. Will there be what we would call right tail risk on going upside surprises? And I don't know how anyone couldn't conclude that that's at least a distinct possibility, that there is a risk of being surprised to the upside in this environment. to the upside in this environment. So that's, to me, the story of the jobs market. 1.2 million hires back in leisure and hospitality, 1.4 million hires back in bars and restaurants, health services, adding back 400,000 employees. You had a lot of jobs that were lost come back. There's a lot to go. 13.3% unemployment is insanely high. But I think that we're headed in the right direction and you have to now go through the process of pricing in where else a lot of the worst case assumptions may have been overdone or may be obsolete at this point. We've watched this play out in the energy

sector, by the way, since the late March timeframe, where you had the combination of oil demand going to zero effectively globally in this course of the shutdowns, and then the supply war that launched in early March between Russia and Saudi. And then from there, the production side got better as U.S. rigs were taken offline because of market circumstances. OPEC Plus came to its production agreement in mid-April. And there was a sort of purging or washing out of that excess supply. We had the famous storage fiasco at the end of April, which everybody misunderstood. By everybody, I mean the experts in the media.

You know, they got that whole thing wrong too. But this is the point I'm making. I'm not actually doing an expert bashing session here. If it sounds that way, I'm not articulating it right. I definitely would recommend experts start utilizing some judicious humility. This has not been a very good year for quote-unquote experts. But what I mean is that I think the markets have to price in some expectation that across a spectrum of data points, categories, sectors, some things could be really misunderstood out there. And so we'll continue to see how these things play, my own perspective. And I don't share it as an expert.

OK, I desire to have expertise in economics and I study macroeconomics as much as anybody could, honestly. that my view of someone who studies macroeconomics is that they need to be totally saturated in humility because that's the first lesson of economics is how dynamic things are, how subject to change and adjustment in very quick periods of time. And so humility has to be a cornerstone of it. But see, where I want my expertise to be most applicable for clients is not per se my ability to analyze macroeconomic events. It's in the application to investors that allows for the natural fallibility of one's projection. In constructing an asset allocation that takes into account that things could be better than we thought and takes into account that things

could be worse than we thought. It would be very difficult right now to fully invest client's capital on all the worst case negative scenarios because then you're going to effectively cut off the ability to have any chance of success for an outcome that may very well could happen, but then it's binary. If it doesn't, you've kind of blown somebody up in that regard. I think finding a balance around the circumstances that you're presented is the opportunity, let alone challenge, that comes out of asset allocation. Okay? So here we are in the short term with a really constructive May jobs situation relative to what was expected. relative to what was expected. And of course, we have this in the midst of the health data,

as I write about every day at covidamarkets.com, being substantially better than had been anticipated, a positivity ratio that is continuing to drop even as new testing is going higher. And even where there are some additional cases here and there in certain states. It's very difficult for anyone to make an argument that the act of economic reopening has thus far seemed to be problematic in any systemic sense, maybe in certain particular cases on a minor level. But when you look at the data of Japan and of South Korea and of Norway and of Denmark and of Italy and of Germany and of France and now in Texas and in South Carolina or Georgia the point being that where we have some degree of two weeks, three weeks, four weeks, six weeks of data of full reopening, partial reopening,

minor reopening. Again, there's all these kind of sliding scale realities to it. But across that whole set of data, there simply is not right now any basis for believing that reopening is creating a systemic risk of COVID spread. Quite the contrary. That's wonderful news for the human race, and it's wonderful news for the functioning of the American economy. So why don't I switch gears from all of the things that have me in a good mood, all of those waiters and waitresses and bartenders that have jobs right now, which, by the way, a lot of them still don't. So we still need more of them to reclaim jobs. But my point being so

many, quite literally two and a half million people that have a job that didn't a month ago with a high concentration of them in that industry and leisure, hospitality, food and beverage. Besides the good news for them and for investors and for risk assets, why don't we switch gears to some bad news or some question marks? How's that? Rather than just negative. And that is the question of the COVID moment of spending. And what I mean by this spending. And what I mean by this is that, and I do not have an answer, I have suspicions across the spectrum politically. But look, we had a significant high deficit coming out of the Iraq and Afghanistan wars, going into the financial crisis, where revenues dramatically fell off because of the early Obama administration, we blew out our deficits and reached that trillion dollar a year level.

And then what happened is they kind of froze and eventually started declining. There was a big political battle. Republicans at the time, the Tea Party movement pushed back on things. So you did not have low deficits and you didn't have a balanced budget or anything like that. But what you did is really isolate the intensity of the additional government spending around the time of the financial crisis. of the additional government spending around the time of the financial crisis. And then you had some sort of normalcy around excessive government spending as opposed to an add-on of excessive government spending. Well, now, as we all know, we've added $3 trillion plus change in fiscal expenditures since COVID began. And they're debating if we're going to do another $1 trillion, another $3 trillion. So you could argue if we get out of this with a $5 trillion price tag,

we might get off easy. It could be a little less. And it most certainly could be more. If it's less, it's not going to be a lot less, okay? It's $5 trillion. OK, it's five trillion dollars. Will that represent a sort of part two from the financial crisis where it's a big, huge amount? But the voters, the politicos, the electeds, the general consensus of the public is, yeah, we had to throw the kitchen sink at this thing to save the economy that we shut down from COVID. But then on the other end of this, we may not get religion real quick about fiscal discipline, but we're not going to blow out the problem and make it a lot worse. My own view is that that's possible, but unlikely. That the more likely scenario is this does represent a paradigm shift in the overall societal comfort level. This is not ideological.

This is incredibly bipartisan. I don't think that there is some party of major prominence that is sitting there fighting with the other party about spending. There is, for good or for bad, a general acceptance that fiscal policy now includes excessive government spending, has a stimulant to aggregate about risk assets, about the inflation-deflation debate, etc.? I think it is. be a very significant issue in the years ahead as to how our society reframes the issue of government spending. And the COVID moment has allowed for that reframing to take place. And I don't know that there's a way to kind of reel it back. I think that this train has left the station. So that's going to become a major issue that we have to continue looking at. Well, we know that the China issue continues to linger. You know, this market rally started last Friday when we dropped 300 points on a Friday near the end of the day

on the assumption that some big kind of bark was coming at China, potentially a blowup of our phase one trade deal, some other bad things. And then markets instead rallied 300 points upon not being particularly bothered by any of the things that President Trump shared last Friday. My forecast, as I shared last week, remains the same, that there will be increased rhetoric against China in the weeks and months ahead, that there will not be significant actions against China in the weeks and months ahead, not until probably after the election, and that long term this deterioration of the relationship is going to last for many years and it has to somehow and in some way get baked into market expectations. So I think it's a legitimate story. I think it'll play out more

long term than short term. And I think that in the short term, you will still see plenty of rhetoric against China, but not a whole lot of actions until after the election. Okay. Now, I promised that there were other things at Dividend Cafe that I go through that aren't necessarily going to be here on the podcast. I also want to talk about emerging markets, where you're getting that reflation thesis we believe in, very evident as commodity prices continue moving higher.

The inverse relationship right now between a lot of these different asset classes, you have emerging markets and the dollar that are heavily inverse correlated. And so emerging markets are catching a bid as the dollar is declining. You see the dollar going higher versus the Chinese currency and lower versus the European currency. And I think that there are very good reasons for that. So we unpack some of that in the Diven Cafe. I'll encourage you to look at it there. And then I try to focus primarily on just different metrics of economic hope, some things that are starting to look a lot better.

And all of that is in the context of where the deficit financing is coming from, which is Fed stimulus, providing the liquidity from their balance sheet, buying all the treasuries in sight, which enables the government to add more debt. buying all the treasuries in sight, which enables the government to add more debt. And if the Fed wasn't doing it, the Treasury would find another buyer because they are going to issue that debt to finance the deficits, and there is no political will to stop that. And it won't be for quite some time, if ever. So we have to bake all these things in. And most importantly, we have to wish you a very good weekend. I know we covered a fair amount of ground here, but I really do hope that you'll read about oil, the Fed, these currencies, emerging markets, European Union, and more at dividendcafe.com. And I hope that my broader comments here today on why the market is doing what it's doing in the wake of such cultural disruption and where we are in the moment with the employment data and the potential trajectory

of the economy. Nothing I've said here today should be construed as me being a blind optimist about things. I do believe that it will be a grind coming out of it. Everything so far has been outperforming my own expectations. So I take no credit here for anything. I haven't called anything. I just simply believe that we have to understand the historical reality, how markets function in the midst of bad news, that we should not be surprised by it. And obviously, we should not be upset about it as if we're rooting against America. I can only think of one reason why anyone's doing that right now, and I find it deplorable. With that said,

thank you so much for listening to Dividend Cafe. I really would appreciate any reviews or stars or things of that nature you can share with us at your particular podcast player of choice. And please do reach out to us with any questions you have anytime. We're here for you. Look forward to hearing from you and have yourselves a wonderful weekend. Thank you for listening to the Dividend Cafe. a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable.

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