The Dividend Cafe - New Normal and Old Normal

Episode Date: April 17, 2020

The week went essentially much as I expected in the markets – the health data continues to point towards marked improvement, but not quite yet a full re-opening; markets did not continue the violent rally of last week, but had some modest volatility both up and down; and the economic data from March was awful, with all eyes and ears focused on where we go from here. On the week, as of press time, the market is down a tiny bit on the week, but that comes with some decent sized up days and down days along the way (down 300, up 600, down 300, up 700). I am very excited about this week’s Dividend Cafe, and hope you will see why when you read it. • Is life about to change forever and ever? • Is a “new normal” coming, and what does it mean? • Will the next 12 months be a bear market or a bull market (from here)? • What really happened in March at the points of maximum market distress? • Long-term ramifications of this COVID-19 experience • And so much more So jump on in to the Dividend Cafe. I promise it will be a refreshing commentary on markets and the economy for investors who deserve better than the sensationalistic or self-serving garbage often posing as commentary. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. and the market is not closed for the week. I'm recording after the close on Friday afternoon. And so we'll have plenty of things we can kind of unpack here for you in the week that was. It is actually a very special Dividend Cafe to me this week. And I don't mean because I think it's so good and I'm so proud of my writing or anything like that. I really never feel that way. I feel when I say that I'm fond of this week's Dividend

Cafe, it's because it touches on some topics that are very important to me and that I think are very important, ought to be very important to investors and meaningful to the clients for whom I care. The week that we just got done with was a very interesting week in the markets. We're going to talk about that and then kind of unpack some much bigger picture issues. A couple of housekeeping things first. We are hosting a national video call on Monday, right after the weekend, 11 a.m. Pacific. Reach out to us if you did not receive the invite for that call. No RSVP is is required but the link and

the registration code and all that stuff was in the invite so reach out to us if you'd like that for our call on a monday uh april the the 20th and and uh furthermore i wanted to sort of remind you of the daily um market writing that we're doing at covidandmarkets.com, trying to every day provide some updated info around the health data, the public policy ramifications, Fed, Congress, and then obviously certain investor implications. It's maybe written for a little bit more sophisticated investors. I don't think it's particularly complicated, but I do think there's a vocabulary and a cadence to it that requires a little patience if you're not necessarily

familiar with all those things. But here at Dividend Cafe, I'm trying to give you macro principles and provide those that listen to this podcast the kind of broad thinking, particularly in this time period we're in now. And it's sort of a blur to some degree. The market closed up 700 points here today on Friday. Futures were pretty much up 800 or so all night last night. Market actually spent most of the day up 300-ish, 400-ish, and then rallied hard at the end of the day. But unlike last week, which was a really significant move higher, a couple thousand points on the week, this week, actually, the market was down coming into Friday we ended up on the week up a few hundred points but we had a big down day earlier

in the week and we we had some back and forth type action I will look I obviously you know anyone likes the upper days and that's great and And I'm sitting here looking at my screen. The VIX today was down 5%. It's at 38 right now. So the VIX is not exactly signaling that we're out of the woods in terms of fear and volatility and whatnot. But 38 is a lot lower than in the 80s where it was a couple of weeks ago. And I've said before, and I actually said this even before markets began improving, that even beyond the ending of the big down days, what we really needed for markets to feel more normal was an ending of the big up days too. Meaning as long as the markets are up 500, 700, it means that there's probably

days coming where they're down 500-ish as well. And if net-net, like has been the case over the last several weeks, you're getting more big up days than down days, the market could still be moving much higher. The Dow closed today 6,000 points, 33% higher than its low point on March 24th. I mean, that's a remarkable number. But the point being that there's still a lot of vulnerability in markets that are able to move with such swings back and forth. And so to feel that you have a more stabilized environment, I think is still a ways away. But really, the news in the market right now is not based on the fact that unemployment got a lot better and the economy improved a lot and so forth. I mean, we know that the nation is still essentially shut down. And even with a little bit more clarity

around a path towards reopening, most of which I find to be quite encouraging, frankly. But even there, we also know that there's still new cases every day and new deaths, tragically. And so it isn't like the entire health pandemic is totally behind us. If they were ever legitimate fears, they're largely off the table now. States that were previously begging for thousands of ventilators are now themselves lending out or giving out ventilators. There's excess capacity of hospital beds in every state in the country. And all these things are modeling in such a way to only be getting better and better. That's all very good, primarily, of course, just for our society and for our health and well-being. The question that people come to me for is related to investments in economy, not necessarily my medical expertise, for which I have none. I probably learned more about epidemiology in the last few weeks than I thought I would ever learn on any

medical or scientific-related field my whole entire adult life. And maybe that's true of a lot of you, because I think the subject matter has sort of been put into our face in a way that we never really thought possible. But no, my perspectives right now are not based on, you know, we're going to peak here or we are we're bending this curve or or any of those types of things i'm following the data like anyone i form certain opinions along the way like anyone but i believe that what is very clear to me is that markets being discounters of risk and and reward believe that a lot of the left tail risk, meaning the very severe negative potential scenarios that were on the table a few weeks ago, have largely been

priced away. And yet there's still some significant uncertainty. I don't just mean uncertainty. I mean really broad range of potential outcomes about how things are going to play out economically. And this is where I'm going to spend a lot of my time. The section I wrote in Dividend Cafe this week is called Another New Normal, because it has occurred to me more and more over, I guess this last week, but really it began probably the week prior. I'm hearing an awful lot of people talk about how the world will never be the same. We're experiencing a permanent change and we're going to have to just adjust to it. And all that's fine. I'm not saying I disagree or agree or anything. I guess I'm saying I've heard these sentences before.

I heard them after 9-11, but I really heard them profoundly and with specificity as an investor, as an economist in the financial crisis. When people relayed the message in 2008 and into early 2009 that we now had a new normal. They were relaying a message that some bad things happened and it was going to color the way forward for good. And at the time, it was focused on a deleveraging American consumer. It's a thesis I have a very hard time wrapping my arms around for anyone who's ever spent any time with any American, the notion of a secular trend of Americans that just simply desire to spend less money. I've never observed it.

And I definitely think there's been periods when Americans have spent less money. The Great Depression was a good example. And certainly out of the recession, there was a forced decrease in discretionary spending. But the kind of will of the American consumer, the spirit of the American consumer, from my observation, has always been to spend with both hands, as long as there is any capacity to do so. And so the notion of a completely categorical different world centered around deleveraging and greater intervention of government post-financial crisis, some parts of it were true. The mortgage leverage did come off significantly, thank God, post-financial crisis. And I would like to hope and pray that we'd never see those levels of leverage again.

There was excessive indebtedness relative to home values, and it created one of the worst economic catastrophes in world history. So I never viewed it as a negative when people said it was a new normal. As far as the greater hand of government, a lot of that was definitely true if people mean by that central banking. The role of monetary policy did forever change, I think, out of the financial crisis. And I think that we're seeing that right now in our response to COVID, that there is a immediate appetite and acceptance of a very primary role of the Federal Reserve and how they're going to come in to normalize and liquefy financial markets. And a lot of that is acceptable right now because the training

wheels were sort of kicked off out of the financial crisis. But as far as the idea that there'd be higher regulation and banks are going to be forced to be much smaller and so forth. A lot of that kind of, I mean, it's true in some areas, but more or less, the corporate economy post-crisis levered up again. Levered up, I think, very wisely. I think it was very well-utilized leverage that resulted in much higher return on equity, much higher return on invested capital, and obviously much higher corporate profitability as corporate profits essentially quadrupled, and not coincidentally, the stock market quadrupled out of that period. So the tangent I'm on right now is on purpose because all of this language about a new normal right now, we're hearing things and I'm not disagreeing. I can't tell you how people are going to act at restaurants, at sports games, at movie theaters,

and I can't tell you when they're going to act a certain way and when they're going to not act a certain way. I can only tell you this from the vantage point of free enterprise. The idea that there is something happening that will permanently impede the ability of free enterprise to work is probably the most ridiculous thing anybody can conclude from what we're dealing with right now with coronavirus. and also the self-interest of a profit motive, the innovation that comes from desperation, when all of a sudden your restaurant is told you can't be configured this way, and how proprietors are able to reconfigure to still somehow, someway figure it out. I have absolutely no interest in underestimating the power of the American entrepreneur. Will there be headwinds? Of course. Will there be obstacles? Of course. And will there be casualties along the way,

not just in the medical and truly sad sense of the word, but in the more crass economic sense? Will there be businesses that don't make it? Will there be households that struggle? Obviously. But what I mean on a broader standpoint in terms of the functioning of the American economy and the resurgence of corporate profitability is that I don't accept the context of a new normal, meaning the inability for free enterprise to work. I joked out of 2009, 10, 11, 12, when this nomenclature was so popular, and yet investment markets were performing so well, the economy began to grow. And I said, well, if this is the new normal, give me more of this. And I strongly suspect that there'll be more of that into the future. Now, it's not going to stop. The perma-pessimist, you know,

there's going to be data to extract that's going to be bad. And then when that data isn't bad anymore, there'll be other data that is bad. And I think there's a sort of sociology to this I've talked about recently on a video. But my point right now is not to make a bullish argument about what's going to happen in the next month, three months, six months,

because I believe bulls and bears have one thing in common right now. Short term, they just do not know. I confess to being a perma bull long term, and I confess to being a perma agnostic short term. Look, it was only three months ago that we had a good tick up in GDP growth, the record low unemployment, record level of wage growth had come off a 25% year in equity markets, had come out of fears of tightening credit and of a trade war a year, year and a half earlier. A lot of these things were rolling. And I don't think that people were necessarily thinking at that time, all this is going great, but what if all of a sudden there's a global health pandemic? Things can come up out of nowhere. I understand that. It's one of the

very difficult parts about life as an investor for all of you, but also particularly life as an investment manager for me. I mean, I accept the lot in life that God has given me. But I do want to say that those who are choosing to apply the present pain and distress and uncertainty around the economy being shut down into a long-term macro trend that people will not live their lives again or there will not be economic prosperity again, I strongly disagree with. And I say that without clarity as to what those innovations will be and alterations in society, without knowing what they will be, I only know that they will be. And so now into the shorter-term context that a lot of people like to talk about,

would I consider myself bullish or bearish? And I really don't think it's quite that simple. I'd be very cautious about strong convictions either way, let me put it that way. For those who want to point out the known knowns of unemployment, of small business vulnerability, of political dysfunction, of the idea that even when the economy reopens, there will still be people that are not comfortable going out again and so forth. Perhaps you have a longer tail of diminished travel, vacationing, hotel visits, restaurant dining, things of that nature. Okay, all those data points could go into a very negative direction, even more negative perhaps than anticipated. I don't know that they will,

but I certainly think you have to kind of be prepared for that. But with an acceptance of some of the bearish data points, you do have to interpret those up against some of the kind of compelling bullish data points as well, such as the fact that we've never seen this level of stimulus injected in the economy. A lot of that stimulus, by the way, I would argue is long-term concerning for other reasons. But in the short term, can we really say that the, let's say, unprecedented pain and anguish of restaurants being closed down in a different way than they ever have been, that we know that's going to have a macroeconomic impact, and yet we don't know that the possibility exists of trillions of dollars of monetary stimulus offsetting some of that, or trillions of dollars of fiscal stimulus offsetting some of it. Again, that's not in defense of the stimulus per se, and that's certainly not said without attention to the fact that both of those stimulus packages and plans carry with them a cost as well longer term. And it's something I intend to be writing about and dealing with as an investor

for years to come. However, up against the don't fight the Fed mantra, the unprecedented levels of fiscal stimulus, there's also this sense of, and I think a lot of this is driving markets now you have bond yields below one percent you have international equities that at best case have equal value propositions and most often have even more risk characteristics associated with them and so you do have a sense in which asset allocators all over the globe, from international equity bond options to domestic bond options into domestic U.S. stocks, might very well have to conclude for quite some time U.S. public equities are the best game in town, even if there are things about them that have those concerns and risks. Now, I certainly would agree that the sell-off we have now could very well reverse to some

degree. There will be ongoing market volatility. The market still seems very subjected to headline risk day by day, week by week. There's a lot of questions about leadership. You know, I could go on and on. I could make up plenty of reasons to be short-term bearish, and I wouldn't be making them up. They're a real catalyst to day-by-day market volatility. But to the extent that I'm a fiduciary, and my team of partners and advisors are all fiduciaries. And we counsel clients with goals on capital needs. We do not have the option of making decisions that will impact them for five years, 10 years, 20 years, around what may

or may not happen for five days, five weeks, five months. We have to maintain a timeline in our decision making that matches the timeline for a client's actual goals. So in that sense, the new normal is the old normal, and that is that new factors and catalysts and factoids and circumstances enter the fray all the time. And yet in the context of American free enterprise and of the risk-reward realities embedded in capital markets, I believe that investors will derive their return and results in the years ahead around good

decision-making and not trying to short-term guess market direction. I believe that with every ounce of breath in my body. And I would believe that even if we were still sitting here at $19,000 on the Dow, apart from the kind of relief rally that we've enjoyed here over the last few weeks. That relief rally, by the way, there's a couple charts in DividendCafe.com that are violent, and I hope you will find them to be profound. Because I want people to understand what was taking place the week of March 16th and the beginning of the week of March 23rd. There was $400 billion of forced selling out of just risk parity hedge funds alone.

Several hundred billion more out of various market neutral and computer model strategies. On top of that had the more kind of organic and easy to understand levels of margin selling and for selling where people just simply needed to access cash. So I've talked a lot about how that impacted municipal bonds, even treasury bonds, high grade corporate bonds, how all those other asset classes got so dislocated. And some of them still sit here with minor dislocations embedded in their pricing. And people thought it was just a stock market crash. But what took place was really a revolt in capital markets as so much for selling hit the tape at once. And so understanding those kind of extra couple thousand points down for what they were is

very important. Now, we sit here in the halfway point, more or less. Markets were here and they came to here and now they're back halfway between those two numbers. And I just want to be very, very candid. Apart from the disclaimer I've already given about not knowing if we go backwards from here, I don't expect that we're going forward quickly and suddenly. I most certainly believe we're going forward eventually. I most certainly believe that the ability of many, many fine American companies

to grow their cash flows and grow their dividends that they pay from the cash flows will lead to higher prices through time. But in terms of seeing the broader markets reset to higher levels, obviously, there's a sense in which we need to be on the other side of the economic damage. But there's also a sense in which that economic story isn't going to play out in a straight line. There's going to be companies that are going to shock people by benefiting from the whole sordid state of affairs.

There's going to be companies that see their stock prices go higher even though they're suffering because they're not suffering as much as maybe the market expected. There's going to be companies that are doing well but not as well as maybe the market thought they would and so they might actually see stock prices decline. And there will be companies that are going to surprise on the downside, doing worse than even expected. So you're going to have all these different quadrants. There's multiple quadrants of what could end up happening in the market.

In a macro sense, I expect volatility. I expect there to be, and I don't just mean the obvious of markets going up and down. I mean volatility in the headlines, volatility in the politics, volatility in the public policy response, and volatility in sentiment around it all. I know that the economy is not going to open up all at once. That will add to some of the volatility. Now, it needs to be that way from a health standpoint, because if the economy were to open all at once, it would not be when the first state is ready to go. It would be when the last state is ready to go. And I don't want that.

I want to see the economy open up incrementally so that some number of people can begin productive activities sooner than later. And yet when you are subject to kind of a tearing in of restating economic activity, I believe it is going to subject us to various ups and downs and spurts and sputters along the way. I would be optimistic about how this will play out in the end. I would not expect a V-shaped recovery in the entire economy, but I most certainly would expect some form of a U-shaped recovery. And that will end up allowing gradual over time demand resurfacing where it is eroded. And then, of course, the production necessary to meet that

demand and then to create its own demand. And this is where my supply side economic biases come in. Ultimately, human beings are meant to produce, and as we produce more goods and services out of our own innovations, creative talents, and profit motives, then you create demand. And that's the beauty of free market economics. And so how that gets priced into capital markets right away is going to take some time to play out. People who need income from their investments along the way should be invested in income-generating investments that will not see volatility in that cash flow or downside volatility in that cash flow while they wait things out. People are trying to accumulate towards the future, should allow that process to play out and reinvest along the way,

capturing a compounding of their returns over time. It's pretty simple when it's put that way, but I know it isn't so simple in real life as the last couple of months have proven. and it's put that way, but I know it isn't so simple in real life, as the last couple months have proven. The amount of topics that I cover here in DividendCafe.com that I did not just cover here in today's podcast are plentiful. So please do go to DividendCafe.com over the weekend and read through some of the other topics that we covered. I really enjoy my conversations with you, the clients who have reached out, the people who have questions.

Continue reaching out to us. There's nothing I want more than to provide the information and perspective necessary right now for good, sound decision-making. Remain very grateful. I speak on behalf of everyone at the Bonson Group. We remain very grateful for those of you who are clients who've entrusted your financial care to our well-being. We take it seriously. We intend to continue doing so.

Thank you for listening to and viewing this week's Dividend Cafe. Thank you for listening to the Dividend Cafe. Financial food for thought. Thank you.