The Dividend Cafe - New York Annual Due Diligence Takeaways

Episode Date: November 5, 2019

Topics discussed: Our 14th annual New York due diligence trip featuring 20+ meetings with top portfolio managers, economic strategists, and alternatives partners was a whirlwind, and in this special podcast, we invite you into the key takeaways for us on this significant trip. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Come to you in a couple of different mediums right now with the portion of our investment committee that was just in New York City for our annual due diligence trip across my left. From you, it would be the right. Left diagonal. Yeah. Daya Pras, our managing director of solutions and analytics. And I think Daya joined us now in New York 15, 16, 17, in five years. Yeah, it's my fifth year. Has it been that many?

Is that right? 15 was your first year. The year that we left Morgan Stanley to start this delightful firm, you did come that first year. Five, six, seven, eight, nine. Fifth year. And then across from me to Daya's left and my right is Brian Seitel, who this is the third year you've joined, but not all in a row. We've kind of had last year, this year, and then another year previously. Was it 13 or 14? It would have been 14.

14. That's right. Yeah. So a lot of history in this trip. I've been doing it myself since 2006. Back in 2006 when we were first doing it, at the time, I was still actually at a firm called UBS, where I began the first six years of my wealth management career. And that was the last year that I was at UBS. I left for Morgan Stanley in the middle of 2007. And then I've done it every year since. If you guys recall,

about a little over a year ago, we did a whole series of podcasts about the 10-year anniversary of the financial crisis. And a good portion of the events from the financial crisis in 2008 took place on this annual trip back in late September, early October of that fateful year, 2008. But anyways, over the years, it's been a really productive trip, and we've obviously made some really key decisions over the years about how we allocate capital for clients as a result of this trip. Certain seeds were planted early on in these trips, including with our emerging markets partners many, many moons ago. That's when you started your weekly writing, I believe.

Yeah, the weekly writing started in September of 2008. But actually even a couple weeks earlier than that New York trip, like right in the midst of the week the Lehman Brothers went down, and there was all these things going on every day, and it was like what firm's going to drop next and everything and i just did kind of a group email because i couldn't like call 100 people at once yeah i just did an email to 100 people at once about whether or not morgan stanley was going out of business yeah and and and so then you're like saying all this and

and just trying to deal with it but it got it was really effective and then i just started adding like oh by the way i noticed this in the labor report yeah and earnings are kind of this and then it would just sort of grew and grew and yeah that's where dividend cafe was born yeah amazing but out of this trip annually i think that it is a chance particularly as the trip is matured and sort of clustered into something that is very uh intentional our part. In the past, it could be organic things that came of it, like sort of almost inspirations, like, gosh, I really need to pay more attention to floating rate bank loans, or we're underestimating certain risks or things. And we found different hedge funds over the years.

We found different relationships. I think the vast majority of the fruit that's come from the tree of this trip has been really, really great for our clients. But the truth is that right now it's really important. I think it would become kind of annual tradition for us to rethink what we're doing, evaluate decisions we need to make in terms of our asset allocation decisions for clients, and specific investment, security selection, manager weightings, all kinds of different knobs we may turn. Because it happens at the beginning of the fourth quarter into that fall season, it gives us time to really kind of figure how we want to apply it and then going to a new year,

potentially make different changes. So I guess I'm going to start with you guys telling me, again, it's unscripted. I have my notes from the trip open, but there's no questions here or anything. We're just going to go off the cuff and let our listeners kind of hear us converse. What did you most take away from the trip this year, Brian? You know, I think in the fixed income markets, I think there was a common theme in commercial mortgage-backed security, so CMBS. Most, three or four or five different managers kind of cited that that asset class was something that they found attractive from a risk-reward perspective.

I think most managers were sort of just expecting lower overall returns going forward, so just sort of muted, both in stocks and in bonds. So I think those were some themes. I think generally the real estate market was looked upon as being somewhat stable. So I would say those three things, kind of lower overall returns going forward, but still positive. Pockets in the mortgage-backed security market that were attractive, meaning you're just going to clip coupons and not have a lot of volatility. And then sort of underlying fundamentals of real estate seemed fairly attractive as well. Let me piggyback on something you said before I switch over to Daya. That comment you made about lower expected returns, it's interesting to me that it always does seem that the expectations one has are either this asset class is going to do well or this asset class is not going to do well. Either things are going to be good or things are going to be bad.

And I talk that way. I think we all do. Hopefully we do it less than others. But that is a sort of ingrained binary thought process. And yet sometimes things, the bad outcome may just be kind of tepid returns. It's like something doesn't have to drop 20%. It could just, instead of being up nine, you're only going to clip five from it. And that's a disappointing outcome.

But I think that there's a lot of that right now in risk assets. Yields so low, growth expectations low, inflation expectations low. Yeah, particularly in the bond market. I mean, 10-year yields at 175, and we were sort of talking about whether 2.5 was on the horizon before maybe 1.5 would be. And I think consensus was more on the downside to rates. So that's just a low-rate environment, and it's a low-return environment. There's not a whole lot of return there. I think I bold-faced in some notes I took in our meetings with Voya Asset Management,

which is our taxable fixed income manager, along the lines of what you just said. Outlook for anchored fixed income returns doesn't just speak to lower bond market expectations. It speaks to all asset classes. So I think you're right that there was sort of a context about bond returns obviously can't be as good as they've been based on the low yield environment. However, really, the bond market has to be thought of as an asset class and a proxy for asset classes in the sense that it defines the risk-free rate, and you therefore would expect at least traditional asset classes to have some total return effect going forward. Yeah, I think so. And as far as that risk-free rate, I mean, if you think about, we talked about where that is now.

It's lower than it was a year ago. The multiple in the market is actually the same or a little lower, and interest rates are going down. So that paints a pretty supportive backdrop for equities, too. What do you think, Dan? Equities look more attractive than bonds, relatively speaking, and absolute? Would you say yes to both? Yeah, I think as far as the trip goes, there's a few takeaways, and I echo a lot of stuff that Brian was saying. As far as our job as asset allocators, as multi-asset allocators, is to look at how these things are going to fare on an absolute basis, but also a relative basis. And David and Brian have talked about the cost of money, which is set with interest rates and the yield curve.

And the reason why those things are so important is because they're an indication for inflation, growth, the pricing of different assets. the pricing of different assets. So what happens in the bond market really does affect or give you an indication of how other asset classes are going to perform. So as far as the bond market goes, yeah, the yields are very, very low. And it's funny, when we talked with our bond managers and a lot of the other managers late last year, one of the primary risks was that rates were going to increase, increase, not decrease. And now, you know, you talk to our managers, and you hear a lot about how rates are going to go down and the possibility of rates going down, which just goes to show you how difficult it is to be able to predict some of these things. And I can't think of any other market barometer that has made people look more foolish

than trying to predict rates. So given where things are at the moment, we do relatively like equities versus bonds. You have to understand the downside in the bond market really, really well, because the upside is limited. And the upside is very minimal as far as what it's giving you as far as a coupon. The downside, there's more companies are leveraged now than before. There's a lot of companies out there that shouldn't be around, and the only reason they're around is because the cost of money has been so cheap. So understanding that there are some areas in the bond market that have a bit more downside than traditionally, given how the composition of corporate America at the moment,

I think is really important. Well, I agree with almost everything you just said. And I think it's on a high level, all of it's very important. And I do think that as far as the takeaway conclusions around the relative unattractiveness of bonds and the relative and general positive appetite for equities. And then I think we have to have a broader conversation with a lot of our time here today on the things you brought up around credit risk. But I'm not sure that anybody said or that I took away that we have a whole lot of companies that would have gone away if not for low rates. I think that the message I'm taking in this incredible credit buildup in the corporate sector, in the non-financial corporate sector, we have a significant deleveraging actually that's taken place in the financial sector. But in the non-financial

corporate sector, we have a modest deterioration of credit quality, a little higher debt to EBITDA, a little less attractive ratios than we had seven years ago. But do you think that we've seen companies that are zombie that have been able to get life breathed into them by the low rate environment? Well, just kind of extrapolating. I mean, if you look at the leverage, like, for example, SkyBridge, that information that Troy Gajewski was sharing with us, just around corporate debt and the leverage increase that you've seen over the past few years,

given the cost of money. What I take away from that is that, okay, so there are companies out there that are having access to capital and that are able to compete more or with companies that – and maybe the best way to do this is with an example. If you have a traditional incumbent that has a very solid business model, they're able to borrow pretty easily from a bank given their balance sheet or whatever the case may be. If you have another company that doesn't have that type of balance sheet, those type of earnings, they have an easier access to capital now than they otherwise would have. Do low rates mean easier access to capital?

No, but in this specific market. In other words, cheaper cost to capital is a separate category from easier access to capital. Sure, sure. Well, just as far as – okay, give me an example. As far as Russell 2000, you have a lot more companies there that you have the highest percentage of non-earners there than you have, uh i think in the last six or seven years so there's companies there that potentially would not be able to be around if it wasn't for this access or uh cheap capital is is uh an extrapolation i i agree with you um and i think it kind of boils down to credit rating so it's not so much that they can or can't access the capital markets.

It's that with the explosion of sort of this triple B space and how much is there, it's sort of like companies that maybe in other years may have been rated junk status and have a tough time buying. We're now sort of investment grade at triple B. So I think that's something to really keep an eye on. Yeah. And I think the point I'm making, I don't mean to get too granular with it, but I think the way Brian said it is a little bit more in line with how I feel. Yeah, and I think the point I'm making, I don't mean to get too granular with it, but I think the way Brian said it is a little bit more

in line with how I feel. That you have A's that would be triple B's, and you have triple B's that would be double B's, and then you have double B's that would be worse. But in no case do you necessarily have a systemic amount of companies. On the margin, there's certainly some, I'm sure. But I don't

think that you see credit frothiness that is actually sustaining dead companies. Your cost of capital is enhancing credit rating, giving more access to liquidity, and in some cases, certainly impacting EBITDA. That's a good way to put it. But I'm not sure that you see this sort of Japanification from years ago where they were literally just keeping dead banks alive artificially. I don't think you see a Japanification currently. I think that's a risk of keeping rates so low for a very long time. And the only reason I push back on it today is this is important.

I think sometimes that we look to left tail risk, and let's just say it has a 3% probability, and yet we ignore something that is really barely to the left it's not that huge of a tail risk yet it's um like an 80 probability and that's something like like the type of growth or the impairment of credit quality yeah so so in other words i don't have to predict a slew of defaults right like we've averaged three percent defaults and and we're having one and a half percent. Okay. So it could go up one or 2% to get to the median. I mean, big deal. What I do think is that we're not getting paid for the risk we're taking.

Yeah. And so, and that's what happens. You kind of either go out duration and get paid, which has risk to interest rates. And I think that's been done, or you go down in credit quality or a combination of both. And you can't, and now if you go out duration, you can't even get paid. You don't get paid on there anymore either so now i think it is you know we just have to be very vigilant which we are on looking at actual credits the underlying credit quality which is the bond portfolios that that we have with you know with voya um do just that you know which is we want our bonds to act like bonds so the risk reward skew in fixed income is unfavorable given given those things we just mentioned.

Yeah, I think so. And I think that we'll go near the end of our talk today and a broader and really important application of the whole credit quality conversation. Let's stick with fixed income just for a couple more minutes. I mean, for one thing, you got to understand our listeners love it when we talk. I believe it. This is the stuff that like I've seen people cancel dates for this like honey i can't go out tonight i have yeah um a comment from our fixed income team at voya i want to ask you about very low probability of hitting two and a half percent in the 10-year yield 10 in the next year also low probability but higher 30 of% of going below 1.5.

So you have a 10-year right now at about 1.6, 1.7. They're saying extremely low that rates go to 2.5. Keep in mind that's where we were a year ago. And a little bit higher probability going below 1.5. But the biggest likelihood is we stay somewhere between 1.5 and 2.5. They're obviously by implication putting a 60% chance. I tend to agree with all three elements of it, that there is a risk of getting above two and a half, but it's minimal. There's a risk of going below one and a half and it's higher and that the likelihood would be that you stay between one and a half and two and a half. Any pushback on any of that? Not from my end.

You know, that would be my assessment of where things are too. But I think there's a tendency to kind of say status quo things, you know, when you're trying to make a prediction. I like how they did some percentages on it at least too, where they've got a small, you know, you get everything that goes right with the trade war, you know, you get some positive things that happen in earnings and rates that go lower. And maybe you get sort of, you know, an extension of the economy doing better, and then maybe rates creep back up. But I think most likely, it's sort of range bound in a very flat yield curve. So one and a half to 1.7 across the spectrum. Yeah, yeah, I agree with that, too. It's just they have a hard time seeing where the

growth is going to come from. They don't see inflation creeping up, and they think growth globally is going to be subdued. So it's hard for them to see ways for us to get to 3% or 2.5% to 3%. And what's interesting is they were saying, they're all kind of predicting 1.5% to 2% GDP growth, and they're saying that's where the yield projection would come from. But even if you got 2% to 2.25% GDP growth and they're saying that's where the yield projection would come from but that even if you got two to two two and a quarter GDP growth um which is above trend line right now we just printed 1.9 last week that they think that we would stay in 150 to 185 basis point range on

the 10-year yield um one of the things I thought about last – on our trip, everyone's kind of right that if this happens, then this is likely to be the case. However, we talk all about all these left-tail risks, the bad things, but the right tail gets no conversation at all. And that's for a good reason. There's no one worried out there about things going so, so better than we're going to have. Going right, yeah. What if you get monumental trade deal done unexpectedly done not telegraphed and and and i we heard that qualifier oh we don't see with the trade war growth being good we don't see with global issues with slowdown in trade so everything was around the setting which is

totally accurate that this is the environment in which we're in, manufacturing, slowdown, things like that. But I'm just thinking about the repatriation benefits still to come, the ongoing supply side juice from the corporate tax reform, which is by no means go away. You see it in corporate earnings. There's still a lower tax liability being paid. If you get that resurgence in CapEx that we spent most of this year talking about that we think the trade war compromised, could you get 3% growth? 3% growth or 3% rates or both? 3% growth leading to 2.5% rates. Yeah. I mean, I think that you certainly can. I just think as far as rates go, you still have sort

of a global paradigm of low rates. It was interesting during our conversations with them about what negative rates have done, actually, in Europe. And I thought it was fascinating. I didn't realize this, but it actually spurred an increase in savings. I would have assumed the opposite, which is, you know, that if you're going to have to pay someone to put your money somewhere, that you would not want to do that. And in fact, it was sort of the opposite. It was encouraging people to save more because they felt like they needed more money to kind of support themselves over time. So I think there's just, to your point,

could we get a 3% growth rate? I think we absolutely can, but I still think this global paradigm is something that is going to anchor rates on the lower end, and I think that was kind of a common theme. Yeah, I totally agree. Dave, do you think that,

whether it's a takeaway from our meetings with Voya or some of the hedge funds or just our overall conversations, but big picture, is this a fair conclusion in our thought process right now? There's nothing the Fed will not do to try to stimulate, protect growth. If they believed the outlook for growth commanded it, the Fed's prepared to do almost unthinkable things. I hate to say it. I hate to say it. I hate to say it.

It disgusts me a little bit, but that is absolutely our opinion, is the fact that there is, I mean, for whatever reason, the thinking is out there that the economy isn't able to experience any pain and the Fed has to step in there and pull out all the stops so we won't get some sort of drawdown or some sort of economic downturn and let the economy fix things using the mechanisms of prices that are kind of built into a market economy. So yeah, I hate to say it, but that is the state of affairs at the moment. And what's worse is I see it getting only worse. I don't see that changing anytime soon if you look at the political climate. Would the Fed go to negative rates, Brian?

Well, I sure hope not. I would say most likely no. I don't think so. I think there's still a pretty diverse economy here. So not will they but would they and so this is so you're doing the same thing a lot of the managers did which i understand they kept saying the fed the fed won't go negative because they don't need to yeah and and i want to hear someone say the fed will go negative because it's the wrong thing to do in

any circumstance under god's green earth yeah i i would that's the way i think about it i don't think it's uh it's an american policy i don't know how else to say it i just i don't it would be hard for me to imagine them going negative on interest rates especially when we have great examples of what happens with japan and europe it's not like it's helping or anything like that in fact it's spurring savings not not consumption that's the opposite of what they intended yeah i actually will say that it is most certainly not spurring consumption and i don't think it's spurring savings either yeah i think it is it is uh it is essentially just eating away at wealth i think it's eroding capital but i'm not i'm not sure if anyone has an answer as to what the fed would or wouldn't do about negative rates i certainly agree with you that it will not be necessary

that we have both uh the reserve currency under our control with the dollar and just have a genuinely more positive economic prospect. But it is unfortunate that a lot of people do feel negative rates can be discussed for why they won't be needed rather than why they shouldn't ever be considered. Right. Yeah. they shouldn't ever be considered. Right, right. Yeah.

So it sounds like you're saying that, obviously, we all agree at this table that they absolutely should not do that, and it would be the most ridiculous Fed decision ever. But you think it's possible that our Fed, or the way things are headed, that if we do get in some 2008 scenario again, where it's just the next step in super Keynesianism is you've got to stimulate at all costs. And if they have to go negative or they have to buy equities.

Exactly. Yeah. I mean, I think it would be more asset purchases. But I shouldn't say never. I mean, you can never say never. Could they go negative? I'm sure they could. I just don't see that scenario. You're not to Congress to do never. Could they go negative? I'm sure they could.

I just don't see that scenario. You're not to Congress to do that. Yeah. But I think that's what they would go for. I think they would try to get that done. Some way to. Yeah. Exactly.

Okay. So we talked about CMBS being a more attractive space. You have bond managers. You have credit managers looking to get some positive return. Interest rates, the anchored very low. Not a lot of opportunity in duration-oriented products. So you look into credit and spread product to get a return high yield right now the spreads are in the 380 to 400 range not a lot of return for the risk you're taking and the deterioration of credit quality we talked about floating rate bank loans just heavily dependent on flows to an almost Ponzi-like level

of where the asset class does well when it gets a bunch of new money in it and it doesn't do well when it doesn't. And that sort of self-fulfilling prophecy aspect of any asset class bothers me. And so bank loans seem to be a lot of favor, high yield. They're worried about risk-reward. But as you pointed out, RMBS and particularly CMBS, residential mortgage-backed securities, commercial mortgage-backed securities. We brought up the idea of, well, there's a lot of CMBS into retail. You see a lot of closures.

They pointed out there were 10,000 store closures that they project for 2019. 8,500 have already happened. It was Payless Shoe Source, by the way, that was the largest volume of closures that they project for 2019 8500 have already happened it was pay less shoe source by the way that was the largest volume of closures i don't know how many stores they had but overall uh their argument is that for higher quality cms of certain vintages this is an argument not only from bond managers but several hedge funds we talked to as well, that you simply just have a good positive carry, a really attractive spread, and you have a money good coupon combined with an underlying asset that is not likely to see a lot of defaults. And you push back on it.

And is this any different than we've heard the last couple of years? What do you think? Well, I thought it was interesting. So to your question i did we did hear that last year actually um and so that trade i guess is continuing on i think it's more expensive now than it was then so it's worked out but they still see value in it and i thought it was interesting on the retail side with all the closures i know it was toys r us yet last year and then this year it's you know pay less shoes shoes and you know a lot a lot of store closures

but they were talking about sort of these grocery store anchored strip malls being really good ways to clip coupons with CMBS with, you know, heavy traffic with people going to the grocery store still not being able to really buy food online. And so you have all the other tenants in those shopping centers, whether it's like a fitness place or, you know, salon of some kind being just great tenants. And they just love that credit right there, which I thought was interesting. Yeah, I agree. I think potentially the reason why that trade is still profitable is because of some of those high-profile defaults. It may not necessarily affect those higher-quality assets. On the retail front.

On the retail front. But you've got to look across the whole spectrum. You have multifamily. You have office. CMBS has kind of got a decent penetration into all aspects of asset class commercial real estate. Yeah, I just think when you're looking at the numbers, default rates are extremely low. I do agree that this has been a consistent story for quite some time. And most of our managers in general have maintained positioning. You haven't seen a lot of

about faces from now versus this time last year. So in general, yeah, this is a trade that's worked out and the story's been pretty consistent pretty um important principle for us to wrap our arms around i think we get it more intellectually than i would expect retail investors to but it's taken a lot of time to to uh uh you know fully adapt this thinking but the fact that it is not inconsistent to be somewhat bearish um or or at least at best neutral on the equity of an asset class and yet be positive and in some cases best neutral on the equity of an asset class, and yet be positive, and in some cases, overwhelmingly positive on the debt of the same asset class. It seems counterintuitive. And yet, that's, I think, the argument that a lot are making is we have a

bearish or unattractive feeling on the risk reward of the equity of some asset classes. And yet we think that the debt, the senior credit positioning, the coupon, the carry, all very attractive. That's overwhelmingly what we're hearing in commercial mortgage back. Yeah, and I think some of it has to do with total consumer debt, total mortgage to income debt, and how those things have really gotten healthier and gone down, whereas corporate debt has gone up a whole lot. That speaks to just a stronger borrower.

And I think that's what it is. If you looked at the real estate sector, like REITs, they're expensive. I think most of the managers would say that. They're trading at 20 times earnings. That's probably historically on the high end. But they're just saying there's enough equity buffer and enough strength of the underlying borrower that even if there's a downturn in real estate, that they still feel comfortable clipping the coupons and the debt.

Let's talk some big picture things. I want to share with our listeners and get you guys to comment in. 1969, the Dow Jones, so we're now talking about 50 years ago. But in 1969, the Dow was, I want to get this number exactly right here, 1,000. And as you know, we're at 27,500, all-time high here this morning as we're talking. So over 25 times on your money over the last 50 years, that would mean that we would be at 650 and probably actually now about 700,000 on the Dow in the last 50. So the first response one could have is, yeah, but multiples are now higher.

Well, in 1969, the Dow was trading at about 16, 16.5 times earnings. We're right now 16.5, 17 times earnings. So we're actually about the same multiple. And in fact, most of the last 50 years, the multiple has been lower than it is now. So it got a 25 times movement over the last 50 years with a long period of lower multiples, not higher. There were 4 million babies a year being born in the 1950s. million babies a year being born in the 1950s. Now, there are still 4 million babies being born a year, except for that's off of a much higher population base. So the fertility rate is way lower. That will have an economic impact in the next 50 years. However, so that's sort of one

argument for it being a little different. But then the technology and productivity are clearly much higher than they were in the last 50. So I'm going to just ask you guys point blank, and I swear to God I'm going to hold you guys accountable for this in 50 years. You know what? All three of us might be alive in 50 years. Might be. I wouldn't count on it for me. I'm knocking on some wood here. Day has got the best chance.

I don't know. I don't know. I don't know. Yeah. Dow, 650,000 in 50 years. Yes or no? I'll go first. Absolutely.

All right. I really believe it. I really believe it is the smart bet to make. Day. Yeah. Yeah. I mean, all you can do is go by a historical record and the you know the marvelous wealth creation mechanism our market economy has been and uh you know this is a great example i think to just watch stop

worrying about the multiple just worrying about the underlying earnings worry worry about you just how how things are evolving as far as capital markets are concerned and have continued to evolve over the years. And it is a trend to the upside. So yeah, yes, I would definitely be with you. I am an optimist. So I'm an optimist as well. But to make a market here, I'll take the other side to that. I actually think that the 25x over the last 50 years was in an environment where we talked about population growth being a lot bigger with baby boomers. So you had that sort of backdrop. You also had a lot less debt in the world. And so you had some more real growth and with distortion of capital

markets at this point with central banks and also a lot of debt and also population that it's growing, but at a slower rate. i would say that the dow will be some big number in 50 years but i don't know if it'll be the exact same 25x over the last 50 years but that doesn't mean i'm not optimistic yeah yeah there's there's a no you're optimistic you're just you're just wrong and here's what we're gonna here's the thing you're right i'm gonna be alive in 50 years now just to prove now yeah no we'll have have to wait it out. Yeah, Brian, here's the thing. Population growth in the U.S. is lower. Is population growth in emerging markets higher or lower?

It is higher now. Like exponentially higher. It'll slow over time. Okay, well, compared to what it's been for the last 50 years. Yes. 50 years ago, 50% of the world was in abject poverty. Exactly. 10% now. Exactly. years ago 50 of the world was in abject poverty exactly 10 now exactly so you have significantly

more consumers worldwide over the next 50 years for americans to sell product to develop services for create economic activity around then you have the last 50 years you brought up the debt issue absolutely over indebted sovereign wealth around the world, including in our own country, relative to the last 50 years. That compresses growth. It's a huge argument against getting that growth. The flip side to it is you had 9% yields 30 years ago. You now have 2% yields.

So you have very different borrowing conditions and different ratings given to risk assets. Brian's right to point out that there is a push and pull in some of the considerations. The reason why you want to go long optimism here is that the creative genius of markets, the creative genius of entrepreneurs, of innovation, of the ability for those operating in self-interest for themselves, their families, their communities to overcome those obstacles. Now, we do need greater population growth, but these things have also worked in waves. I happen to think that you could, in 50 years, you're going to have a couple generations

flow through. So we're having less kids in America now than the boomer generation, but I think that that could flip itself um overall there's some arguments for on the margin things being better than 25 times and there's arguments for being worse the takeaway for most people who don't have a 50-year timeline in their investing is that perma pessimism is just a destructive and idiotic, intellectually indefensible worldview with no basis in history. Brian, why don't you share the line from Lloyd Blankfein that Ron shared with us, Lloyd being the now-retired CEO of Goldman Sachs. Yeah, so I agree with everything you said wholeheartedly, by the way.

So I'm optimist to my core. I'm glad I was able to convince you. To my core. But if it over-under on the thing was all the same. Just taking the other side. Yeah. But no, no, no. Yeah.

So we met with Ron Barron, founder of Barron Funds, and happens to play golf with Lloyd Blankfein from Goldman Sachs. And he was saying there's too many things that can go right at this point in markets. And that's why he's optimistic. He just sees too many things that can go right. And I tend to agree with him. I think markets have been climbing this sort of wall of worry now for 10 years, 11 years. But at this point, I tend to agree. There are too many things that could go right here.

We could get trade deal done. We can have interest rates stay low, go lower. Earnings continue to be good. Growth continue to kind of happen and things go well in the markets. We've talked about this theme for about a year now in the short-term push-pull. In the short-term, we're afraid to be bearish or hyper-bullish. You've had trade war issues, and yet you also have earnings growth, and you've had an accommodative Fed. And so there's these kind of the TINA trade arguing for US assets. So you've

had reasons to stay engaged in US and you've had reasons to be cautious. It's argued for a neutral position short term. It's interesting to me that what we're talking about sort of suggests same thing around long term, that you have long term, there are some very secular headwinds and there are some very secular tailwinds. And it argues for prudence, argues for asset allocation. But that's going to be my big takeaway, by the way, from this trip. I didn't come home with any compelling reason to feel that we needed to ramp up risk or ramp down risk, that we pretty much have our risk settings weighted appropriately across the different spectrum of clients we manage money for. Dan, do you feel the same? I completely agree.

I think that this usually isn't the case. No, it really isn't. It really is not. And like David mentioned, this New York trip, the purpose of it, that we do it at the end of every year and we meet with all our managers, it helps us kind of zoom out from the day to day and kind of adjust our capital market expectations around different asset classes, both absolutely and relatively speaking. Even the correlations between asset classes. And we typically come back, we make adjustments, whether it's the broad asset allocation level or the sub-asset allocation level. And this time, more than any other year, we've decided to leave pretty much everything where it was because of those things that David mentioned.

Not a lot. There's not a lot that we kind of learned from this trip that causes us to change our perspective or look at things any differently. And most of our money managers that we spoke to, like I said earlier, see things kind of the same way. They're positioned in a similar way. There's not a lot of re-waitings going on. So, yeah, yeah. Just pretty much staying the course. Yeah, I agree as well.

Yeah, yeah, just pretty much staying the course. Yeah, I agree as well. I think, if anything, it just sort of, you know, reaffirmed our approach of asset allocation, having, you know, each of those asset classes, alternatives, stocks, bonds, cash, be weighted in such a way to really have a balanced type of way forward. You know, so I thought that was interesting, too. And you're right. I mean, there's been years where we've gone on this trip. And then during the trip, we've eliminated an entire asset class, like commodities one year. I think it was interesting, too. And you're right. I mean, there's been years where we've gone on this trip. And then during the trip, we've eliminated an entire asset class, like commodities one year.

I think it was gold or commodities. And so we make those decisions. This go-around, I think we're set up pretty darn well. By the way, gold's still at the same price it was. Exactly. That was in 2014? Something like that. Yeah, 2014.

But no, I think it's a balanced approach is the way to do it. I really do. So in the kind of key summaries of the event of the trip, we've already covered the sort of long-term viewpoint. We've covered the asset allocation, weightings, kind of staying where they are tactically right now. We've already talked a bit about credit conditions. Let me say three other takeaways real quick,

and then let you guys interact with both, and then we'll wrap it up. Number one, credit conditions are the most important thing right now meaning when we do tip over economically and in the stock market whenever that may be it will be preceded by a credit market revulsion i'm thoroughly convinced of that but that is not a timing a tip in any way shape or. It is merely a prediction that when something happens that I don't know when it will happen, it will be caused by this as opposed to other things that could be caused by. That buildup in corporate credit. Now, we talked about last year. Although last year we were talking about it as the risk that was making the Fed tighten.

Now the Fed is putting all this reason to take on more credit risk back on the table. It could be a long ways off, but you have to respect the Fed's capacity for kicking the credit can further down the road. To your point, they have the ability to sustain what seems unsustainable longer than mere mortals. What are your thoughts on how we protect our clients from something that, A, we believe is going to happen, a credit problem, and B, we don't know if it will happen even for two or three years? Any thoughts on it? I'll come to you, Brian.

Yeah, I think, first of all, as you continue to monitor certain measures that line up exactly with what's happening in corporate credit in that environment, as far as how leveraged companies are and so on. And if you see the trend continuing, obviously that risk is now greater than it was when it was at a lower level. So I think always continuing to monitor that risk is really important. And finally, really how you position things. I mean, you don't want to be in any trade where you think it's, you know, make a little, make a little, make a little, lose a lot type trade, which is, you know, what high yield corporate bonds looks like at the moment. I mean, David and Brian talked about that risk-reward skew. So having an understanding of that risk-reward skew through the data that you're observing and keep monitoring things to have some forward-looking opinion. And then make sure you construct your asset allocation appropriately for those risks, I think is the best way to deal

with that and how we typically go about things. Yeah, I definitely agree. I think it's important to be selective on credits, individual credits. I think it's, you know, the way that we've built our, you know, both taxable and tax-free bond portfolios is to actually own the underlying securities and understand exactly what we own and be intentional about it. And, you know, if high yields at a 350 wide over treasuries, we're not just not going to own it. It doesn't make sense. It's too expensive. And that's a good way to do it. I think it's really, you know, just understanding that when you buy just a general fund out there that has, you know, high yield fund, you're getting a lot of crap in there. You know, you are,

you know, really low tier credit quality stuff. We just don't want to own that at this juncture. We'd rather be up on the credit quality at this point. Totally fine to take a smaller rate of return if the party keeps going on, but I just need to protect people going forward. So one of the takeaways that I haven't really talked to you guys about yet, but I've codified in some of the deliverables

we're doing with clients and whatnot, is to your point about going up, trying to find good credit quality. It begs the question a little bit as to how you know. And it strikes me that there are entire sub-asset classes in fixed income credit where there's not underwriting. The underwriting is really a byproduct of the whole asset class. Like you buy index of high yield. No one's looking to the bonds underneath it.

They're just simply saying spreads good or spreads bad, conditions good or conditions bad. It's or conditions bad. It's a macro play. It's not underwriting driven. If you have a fear of growing risk in credit, of a growing deterioration of credit quality, the only thing you can do is either not be invested in credit, which no one can do right now. No one can live off 1% yields in treasuries. So you want credit, but you're afraid of the credit quality. You have to go where

there's real underwriting. And I think that that's an unlimited number of asset classes. We, with our municipal bond approach, the manager we use happens to be a manager called Alliance Bernstein. They run over 40 billion in municipals. But one of the reasons we first selected them years ago, both of you were part of the team when we did this, was their heavy emphasis on credit analysis, not merely being yield curve guys. Being yield curve guys that also did underlying credit analysis. You can underwrite bond issuance. You can actually go do underwriting analysis. underwriting analysis. I think that private markets, middle market lending, small capacity strategies where you're looking to the underlying quality of the loan. What got away from the RMBS

market in 2007? No one was underwriting anything. They had no idea what was in the portfolio. It was all model-driven on credit ratings, sometimes insurance wrappers, not even that often, and then just tranches. Kind of their assessment of where tranches were in the risk reward waterfall. I think that there are credit plays that you can actually have a reasonable expectation of outcome around underlying credit quality, to your point, Brian, by underwriting. It's just that the strategies that many credit investors have don't involve underwriting bottom up. And I think it's something we've talked about, our friends at Cliffwater and a lot of the private market credit things we're looking at right now on behalf of clients.

Do you guys like that theme in both the alternative and fixed income ecosystem of what we're doing? Yeah, and I think that was a great way to put it. And it's really analogous to what we do on the equity side of things. Very much. Very, very bottom up. So and whatever the portfolio looks like after you've made all your selection is how the portfolio is. And it's incidental of the process. And I think this is important to remember that when we're talking about different asset classes and we're talking about different sub-asset classes, we can be very negative on a sub-asset class but be very positive on an individual security within that sub-asset class. So as far as what David's mentioning, most of our managers share our bias, that bottom-up bias, where they're making selections, they're looking at the underlying company, they're looking at the underlying credit, and they're making a selection. They're doing bottom-up fundamental work, fundamental research.

And that's another way to protect yourself from a certain asset class or just a broad kind of view of a market is have a manager that has the talent to be able to select the right kind of credits or companies within that market. So I think that's a great, that's a perfect way to put it. I couldn't agree more. Yeah. Yeah. I like that when we're talking about middle market lending or direct lending or floating rate or bank loans and those things that you have managers that we're working with that are, they've already done the workout if it doesn't go right. So let's say that the economy takes a turn for the worse and they actually have to go and collect the collateral

to kind of support the loan that they've made to this company. They already have a full workup already done. It just speaks to having total skin in the game with that. You know, they're willing to go through a painful process and they've done that analysis to be able to do that. That says a lot. I think that's where a lot of people,

myself included, have some skepticism right now. Bank loans, floating rate, all the CLO issuances. I'm not convinced that a lot of people have an understanding of what they'd do if they took on the distressed securities in the form of equity versus debt. Now, look, we don't want distressed events to happen. But you're right. It points to risk management. This is probably more appropriate in an alternative strategy than a conventional bond strategy. But having a workout.

Yeah. Yeah. I hate to speed us up, but unfortunately, we got to wrap it up. I'll close with one final thought. Dave kind of alluded to it. The debt underwriting philosophy I'm talking about being applicable to our equity management. From our small cap to our emerging markets to our dividend growth, one thing that is really apparent to anyone paying attention to how we manage money, very apparent to those of us inside the investment community at Bonson Group, but that was just kind of on display, I think, throughout a lot of our meetings, is our relentless philosophy of bottom-up, company-driven management as opposed to stock market management. I really think that it was refreshing to see both in the sizable amount of capital we manage ourselves in dividend growth

equity, but also in sort of peripheral asset classes like EM and small cap and some of the private equity managers and things like that. Just how philosophically aligned our partners are in the idea of companies and their operating prowess driving profits, driving profit growth, driving opportunity. It was refreshing. So a final comment from each of you and then we'll wrap it up. Yeah. So final comment as we are staying the course, not too many changes from this

year's kind of manager meetings at the end of the year. I think that even if we come out of this without anything that is super actionable, it's still very useful as far as consolidating our views about

markets and different asset classes. So, I mean, like David and Brian talked about, our managers share a lot of philosophical biases that we have. That's a reason why we're invested with them in the first place. And we're there to monitor if these make sure that they are continuing or being biased in the way we'd like them to be biased. Yeah. Yeah, I agree. I think this trip affirmed or reaffirmed all of those theses, basically. We're bottom-up stock-selecting investors, and the managers that we work with, both on the credit alternative, the equity side, are the exact same. And we didn't sort of bait them to get them to talk about it that way.

They just organically did. And so that was comforting or affirming to me and then you're right i think our current approach with with more of a balanced way forward i think is the way to go and having that sort of affirmation on the trip i think was really really good i feel good about it well guys it was a wonderful trip we spent most of our time today talking about bonds and stocks and markets and risk and we didn't really talk about that veal at El Tonello. We really barely got into some of the steaks. We'll have to... Maloney's. We should do

a whole separate podcast on Maloney and Percelli's. I love that place. Yeah. It's so good. And I would point out that I even lost weight on the trip despite all those workouts. That's nice. I did not. Wow. Yeah, I have to torture myself very early to do it. But we'll do a separate podcast on the steakhouses and Italian restaurants of Midtown Manhattan another time.

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