The Dividend Cafe - New York Tough

Episode Date: June 26, 2020

• Some clarification on COVID and the current media coverage • How the result of “financialization” is to ignore capital investment, and how starving the economy of capital spending deprives it of future productivity • The stress of the stress tests! • The lost decade of gold is a powerful antidote to the strange argument that central bank abuses are bullish for gold. If the last decade wasn’t the golden era of central bank libertinism, I don’t know what was. And yet gold is just now trying to get back within striking distance of where it was ten years ago?? • A refresher on our friend, Illiquidity, and why behavioral finance drives the return premium in private market assets – a section that should get its own dedicated Dividend Cafe! • How good/bad is the economic “recovery” going? • And the secret sauce on how politics works in conjunction with markets … what we expect out of the next few months as various political scenarios play themselves out • The Chart of the Week looks at the three stages of the COVID era … Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to this week's Dividend Cafe podcast. I am kind of excited for this week's edition and I'll tell you why. kind of excited for this week's edition, and I'll tell you why. Much like the first time I got to record back in the studio here in our Newport Beach office after the quarantine, lockdown, all that, and that was sort of a special occasion just because it represented some resumption of normalcy. There also, though, today is a little bit of a resumption of normalcy in the fact that I'm actually recording on Thursday afternoon, which we recorded the Dividend Cafe podcast, or for those of you watching on video, the video on Thursdays for most of the last five years, I think.

five years, I think. And we switched to Fridays in the midst of the market chaos because it was not just possible, because it's always possible, but it was becoming incredibly likely that the information was becoming outdated like an hour after recording, let alone a whole day after recording. And let me be clear, that is entirely possible again right now. It's very possible you're listening to this on Friday afternoon, and I've recorded Thursday afternoon, and some great market event has transpired that is already kind of, you know, you're wondering why I'm not talking about something that happened in the market today on Friday. And the reason I'm not is because it's not Friday yet for me. Okay. So I have to record with that risk, but I also am doing it because I am preparing to go back to New York. And that is

what I think is most exciting, just in the sense that my family and I left New York on March 13th, which was a Friday. I'd been in New York that week. Most of you know I go back and forth between California and New York, two offices, two homes, kind of a bi-coastal reality. I've done it for three and a half years now. And that week, I'd been in New York all week, a lot of meetings, but then just a kind of breakdown throughout the week of what was happening, not only in markets, it was an awful week in markets, but it was also a week in which things were really starting to escalate as far as the spread of the coronavirus. And it was the week following that New York ended up going to lockdown. And

of course, California went to lockdown as well. So on that Friday night, I was going to be flying home a couple of days later anyways. But on that Friday night, my wife and I and our two kids flew back to California. And then of course, the next week, the lockdown transpired. Markets bottomed out that following week or two. And then, you know, March and April became those months for the history books. And really pretty much through most of May as well, although we got to start to kind of open back up again near the end of May. So I'm not repeating or rehashing anything you don't already know, but to be able to get back to New York now as they have kind of begun their reopening, our office in New York will do its official reopening on July the 6th.

But just to kind of get back into the city and deal with things that we need to deal with there. I'm excited to see some clients. I'm excited to see my East Coast-based team members and excited to just have that additional layer of normalcy. And, of course, incredibly grateful for this improved dynamic that has taken place in New York and the tri-state area at large, where really ground zero of the COVID-19 pandemic existed in the United States, an incredibly disproportionate number of mortalities and infections taking place in that area of the country. And to see the collapsing of their

death rate is a blessing because it was a very frightening time for a while there. Now, this week in the Dividend Cafe, there are a number of things that you're going to see me address in the written commentary, bigger picture things, not all current events, more I think macro type issues that I want to be able to go through. But I guess I should start off with just a little bit of a summary about the week in markets and just take my chances on the fact that Friday is TBD. This week, we saw markets drop 700 points on Wednesday, and then we saw markets drop 200 points more Thursday morning, but then rally 500 points to finish up 300 on Thursday. So I'm well aware of the fact that intraday volatility is alive and well. It's less than it was in that March-April mode, particularly the March mode, but that level of intraday volatility was just insane. And now we're at elevated but not insane levels of volatility.

In other words, it's above average, but I don't think I could with a straight face call it crazy just because crazy took on a different definition during the peak COVID month. Look, one of my theories in Dividend Cafe this week is that a good portion of the market volatility, in particular downward pressure in market prices, volatility, in particular downward pressure in market prices, may not be as obvious as people think regarding the case escalation of coronavirus in Florida and Arizona and Texas. I really do believe that there is a kind of tug of war right now that the market is debating how willing it is to just sort of coexist with the reality of coronavirus, say that it's the virus itself mutating into a less severe form of itself. population, which is leading to a significantly different statistical reality in hospitalizations and intubations and ventilations and hospital stays. I also do believe, you could say this is me being optimistic, but I think I have a lot of empirical support for this position,

that the medication and some of the treatment is much different right now than it was in March. Some of the FDA accelerated emergency provisions, remdesivir being one that continues to come up in reports I'm reading from hospitals in Southeast Texas, in Maricopa County, Arizona, in South Florida, there seems to be a growing belief that they just have a better handle on the treatment. Now, we're still going to see for mortalities, okay? This is a deadly virus when it is matched with a vulnerable situation, particularly a comorbidity. Now, here's the thing regarding the markets and the response to it. I think that you saw Joe Biden up 14 points in a national poll this week that is considered extremely credible.

And I know it's called the New York Times Siena poll. And a lot of people would say, oh, well, the New York Times isn't trustworthy, but they don't commission the poll. This is a poll that historically has done very, very well. They're kind of a sponsor, but the Siena poll was quite spot on in 2016 and across some of the individual state data as well. And even if you like this poll or don't like that poll or what have you, the blended average of polls show a very significant widening of a lead for Joe Biden over President Trump.

And particularly in some of the battleground states that are very likely to be considered the place in which the next president will win or lose. When you look at the Wisconsin's and Michigan's and Pennsylvania's, Arizona's now considered a battleground, North Carolina, Florida, and every single one of those states, Biden having a significant lead over President Trump. Significant or maybe less so in some states, but enough that it's outside the margin of error in this poll. I think that markets are looking at the overall political predicament and saying, okay, we have an economy that still has to rebound. There's a lot of optimism it's going to rebound. I have a lot of optimism it's going to rebound, but we know it's going to be

shaky. There's some vulnerability around it. We're not totally sure what the impact of corporate earnings will be going into Q3, Q4. You have an added uncertainty of the election and the possibility of, will something be changing in corporate tax? Will something be changing in trade? What are the factors that will drive market positioning into the second half of the year? And I don't believe that we know who's going to win the election right now. And I don't believe the market thinks so either. Believe me, the market would price things differently because then it isn't just about, oh, the market likes this candidate, it goes up, the market doesn't like this candidate, it goes

down. What I mean is in the nuances of the market, the particulars as to where they expect policy ramifications into given sectors, given companies, the market would do that if it had high conviction and was in that kind of pricing in, discounting process that it will inevitably do, whether it's the day after the election or in the weeks before the election. We'll see. We've had elections in our country that the outcome was not in doubt going into the election. People knew who was going to win or lose way in advance. We also have had elections where the market really didn't know, really couldn't price it in ahead of time. I think back to like a 2012 where I suppose the

market knew better than David Bonson did that Barack Obama was going to beat Mitt Romney for re-election. But the market did not know what exactly would happen with, say, some of the Senate races, for example. And I think that in 2020, you could get to a point where there's some better clarity as to what's going to happen in the presidential race. We'll see. By the way, the market can't have total clarity in the presidential race, even if it's just absolutely unanimous, absolutely incontrovertible that there's some

lead that Biden has over Trump. Because the market still has to look to the 2016 factor of just surprise. And even though I have always maintained that the polls were not that wrong in 2016, they had Hillary Clinton winning by two or three points. She won the popular vote by two or three points. It was just that on the margin, the polls were wrong in Pennsylvania, Florida, but it was very much within the margin of error. And it kind of, you know, it was very much within the margin of error. And it kind of, you know, tilt, it was enough to tilt the Electoral College. And so the, you know, unless it's a really, really severe gap in October, I think that you could very well still have a too close to call issue for the markets. But back to my point, the Senate is going to be a bigger issue. And right now you do see widening Senate leads for the Democrat in a couple of states that they're either challenging or protecting.

And so as Colorado and Arizona and, well, even Montana and Maine, there's a number of seats that are going to kind of dictate the prospects for the Senate. So I wonder if this week you're not I'm not saying the COVID-19 issues are not a part of it. They most certainly are. But they're a part of a potpourri that includes a handful of things, all of which cannot be classified as good or bad, all of which have to be classified as uncertain and uncertain is worse than bad. And so I've talked about a lot over the years. So you have uncertainty in where the election side's going, leaning towards what the market may consider to be bad as far as corporate taxes and deregulation and things like that are concerned. And then, of course, uncertainty regarding the obvious set of circumstances. Economically, airline travels continue to pick up. Restaurant growth is definitely picking

up, although the rate of growth has slowed a little. The mortgage and housing market looks pretty darn healthy. Unemployment picture is kind of a mixed bag. I mean, I think that we expected initial jobless claims were going to drop more this week than they did. They dropped versus the week prior, but not by much. And they're still at a much elevated level. I am sympathetic, by the way, to the argument that some of the reason you're still getting over a million jobless claims a week, initial jobless claims, is that there's a backlog getting reported through from some states that had just a tremendous screw up in getting claims processed. I know this from various research sources that there's some validity to it, but either way, even adjusted for

that, the number is just too high. Although it was good to see the continuous job claims dropped by 700,000 people on Thursday today. So I guess there's a mixed bag there. But I would argue that you really can't think of a category right now where there's incontrovertibly clear good news or incontrovertibly clear bad news. There's leanings that might be negative for markets. Let's call it the politics. There's leanings that might be negative for markets. Let's call it the politics. There's leanings that might be positive for markets. Let's call it some of the economic data, the recovery. But all of it is still clouded with a certain degree of uncertainty. So that has to be factored into the way we view things. Now, what is not uncertain as far as short-term pricing of markets, is the Fed's support to risk assets, to capital markets, to liquidity, to credit.

I don't know that I'd call that a certainly good thing long-term. I think it does provoke further financialization of the U.S. economy and represents a hindrance to productive growth into the future, particularly because I don't expect them to take away that monetary punch bowl anytime soon. But in the short term, one of the great reasons that it is very difficult to give in to one's bearishness or skittishness or uncertainty is because of the

fact that the Fed is there and alive and well, and it's not a small thing. Trillions of dollars of support that do have the effect of bidding up risk assets. So we continue to be very respectful of market volatility. I go through a whole lot of subjects this week at DividendCafe.com. Talk about the lost decade of gold. Those who worry about central bank abuses have not necessarily found their antidote near gold, which is still down, now coming up on 10 years later, getting close to the price it was 10 years ago. So I try to very gently and humbly put down some of the common misnomers about the concept of gold as an investment defense. investment defense. I also want to unpack further our belief in illiquidity as a weapon against other investors, the behavioral biases that other investors have that can affect our own

public market investing, the herd mentality when there's a lot of panic investing in stocks, bonds, all sorts of different things, mutual funds that force prices down, the benefit around being protected from that when people can't do that. They can't affect your pricing by their behavior when they themselves are illiquid in their ability to transact in otherwise good, fundamentally solid investments. So the private side in markets of credit, of equity, of real estate, and what those things represent relative to public market counterparts. Again, our clients need liquidity too. So we can't use illiquidity as a catch-all, but where liquidity has been addressed and other aspects of a core portfolio where we have the luxury of implementing illiquidity, we think it provides defense and offense, and that's something that we're very

aggressive about right now. So that's our take on this week in the markets. I will be recording next week's Dividend Cafe going into the 4th of July weekend from the great state of New York. I look forward to getting caught up with my East Coast business over the next several weeks out there. I'll be back in the California office in August. But in the meantime, please reach out to anyone at the Bonson Group with any questions you may have. We hope your life is returning to some degree of normal. There's still work to do, you know, both in that sort of glide path to normalcy, but also plenty of work to do in markets and in the economy and in our country at large. So please have yourself a wonderful weekend.

And we look forward to welcoming the second half of 2020. It's hard to believe we're just now getting halfway done. This is a year that just, I don't know, seems to be taking forever. I'm sure a lot of you feel the same. Butower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, 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. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information

contained in this research is provided as general market commentary and does not constitute Thank you. the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the Bonson Group and do not represent those of Hightower Advisors LLC or any of its affiliates. Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary Thank you.