The Dividend Cafe - No Deal, No Relief

Episode Date: May 31, 2019

Topics discussed: Effects of trade war on business investment Impact is not limited to US and China Brexit, The Fed, and more Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. This is David Bonson and I'm the Chief Investment Officer at the Bonson Group and we had a shortened market week but probably won't be that short of a dividend cafe because there's a lot to talk about around the trade war, which you may be surprised to know did not end this week, nor did the market volatility that it's creating. The collateral damage from the trade war in the real economy is starting to show up, not just merely in the up and down movement of stock prices.

So we're going to dig into all that stuff and hopefully you'll get something out of it. And hopefully you will be so inspired by what you hear in this week's podcast that you'll forward it around to your friends, write us a review, give us some stars and subscribe to the podcast. And by the way, we'd love for you to check out DividendCafe.com because there are, I don't know, one, two, three, four different charts this week that are available there at the website. I think you'll find really good, really helpful. All right. The business investment number in April measured by capital goods orders was up 1.3 percent, and that is the lowest year over year monthly growth number since President Trump took

office. Factory activity has taken a big hit as a result of the trade war, and the CapEx boom is on hold as the benefit of the corporate tax cut policy is being offset by the trade war policy. The chart that we've put at DividendCafe.com shows the big boost, which was a needed boost, in business investment at the beginning of the Trump administration. And then it shows now the impact of capital goods orders since the trade war began. So as we move through this kind of third iteration and into the fourth week since negotiations broke down, it's important to point out what is and what is not going on. The market tensions right now do not center around the tariffs that are actually on as much as the uncertainty around where things are going. Capital spending plans are almost certainly to drop now,

and the slowdown in global manufacturing will likely be accelerating. The market is not trying to figure out what tariffs will be applied to what products. It's trying to figure out what new turns altogether this will take, concluding with specific company restrictions. The thesis remains the same. This is not likely to end until the pain point for one side or both forces a will to end it. One of the biggest misnomers since this began is that what we no longer buy from China, we will simply end up buying from others. And what China formerly bought from us, they will simply buy from others. And that in the end, it is all zero sum and the

global economy will not be impacted because overall trade will not decline. The reality tells a very different story. Global trade in the aggregate is in fact collapsing. The rest of the world cannot just make up that difference in the flip of a switch as if there was no reason or comparative advantage to begin with that China and the U.S. were trading with each other, what they did. The supply-side school of economics has said since the beginning of time that if you tax more of something, you get less of it. It's the incentive-driven philosophy behind marginal tax rate reduction. Well, guess what?

If you tax more of trade, you get less of it too. trade right now. There's a chart from the International Monetary Fund at Dividend Cafe has now dropped the most since the financial crisis. Okay, so what does it all mean? You have two economic superpowers doing less trade with each other. It's hurting the respective economy of each country, which hurts the overall global economy, which impairs the ability of the other countries not directly engaged in the trade war to grow. It's a negative feedback loop further worsened by the complex reality of global supply chains, which actually touch numerous countries on the way from nation A to nation B. All bad economics can be reduced to ignoring the impact a policy has on unseen actors, as Henry Aslet famously put it. The reach of a global trade war transcends the two countries directly engaged in it.

And what weakens the peripheral countries comes back and weakens the countries engaged in it further, rinse and repeat. When will this end? When the pain points reach a point that force one or both sides to desperately need a deal. Call it silver lining if you will, I've never ever ever throughout my career celebrated the drop of interest rates and bond yields as if a weak expectation of future economic growth or a flight to safety assets is what we want to be aspiring for. But from an asset allocation standpoint, investors who have diversified into stocks and bonds will no doubt see bonds that act like bonds do what they were supposed to do this month, diversify equity market volatility. Brexit update. Resignation of Prime Minister Theresa May

clearly has opened the door for a clearer understanding of what Brexit will mean to the UK and the Eurozone economy. no-deal Brexit, which will finally call the bluff of the media and the European Union, who predicted that only a Brexit in name only would stabilize economic conditions. Let's just stay on hold here to be determined as we let this play out here in the months ahead. Is the Fed likely to cut rates now with the impact of the tariff war? As long as we're clearly distinguishing what I expect will be from what I believe ought to be, then the answer is yes. I see that getting more and more likely by the day. This is the message that the bond market is sending, that they believe the Fed is too tight and that they expect the Fed to ease in short order. Last week in Dividend Cafe, and I appreciated a lot of the feedback I got from

people. It may have been as much feedback as I've ever gotten on a particular issue I wrote about, which meant a lot to me. And it was an issue that I think it was well covered in Dividend Cafe, and it's something that's been a huge focus of research for me for a long time, is the impact of excessive indebtedness on interest rates and what will bode for the global economy and our national economy for the years ahead. And I argued that excessive sovereign debt pushes interest rates lower, not higher. The instinctive belief that I formerly had is that greater debt makes risk greater and therefore requires a higher yield to compensate for that risk, so it would push rates higher. But the instinctive belief

is that higher debt has to be inflated away, which pushes interest rates higher, and I get that. And I certainly have no doubt that inflating away debt is what politicians would prefer to do if they could. But rather than participate in a theoretical conversation, I put four charts at DividendCafe.com this week showing the skyrocketing debt to GDP ratio in the United States, Japan, Europe, and Britain, four different charts, all of them showing that debt to GDP going from the bottom left to the top right, and yet interest rates collapsing as their line of bond yields goes from the top left to the bottom right. Seeing should be believing, and maybe for those of you that aren't going to go look at the chart, hearing will be believing. But see, the fact that

my thesis is exactly what has happened for a generation now, the economics are only counterintuitive until we think to the next step of it, which is that new dollars in debt do less to inflate than the negative effect of the debt on growth. It is classic deflation and it has depressed business activity all over the world. Productive use of debt grows economic activity, but when the debt reaches levels of non-productive use it does the opposite this is where the term pushing on a string became popular with economists because monetary policy tools eventually just don't work i believe the growth of the monetary supply is inflationary yet i do not believe the fed or anyone else can make the money supply grow when they can't generate a velocity of money, the turnover of money in the economy caused by high business demand, high

economic activity. I believe we're in a long-term period of excessive debt putting long-term downward pressure on interest rates. Because of downward pressure on growth, this becomes the economic burden for the next couple of decades. All right. The actual chart of the week, too, does show the skyrocketing federal public debt. I'll let you guess what that chart looks like. And I am going to leave it there. I am heading out on a little annual birthday weekend trip with my wife for our few days of R&R. Obviously, awful lot going in capital markets. We're looking forward to another very robust Dividend Cafe next week. We'll try to get you another Advice and Insights podcast next week too to kind of do deeper dive into some of these subjects. I have a couple

topics that are near and dear to my heart that I want to get to at deeper dive into some of these subjects. I have a couple topics that are near and dear to my heart that I want to get to at our Advice and Insights podcast. But in the meantime, enjoy your weekend. The month of May, we will say goodbye to here and we'll enter the final month of the first half of 2019 looking to some greater resolution in the weeks and months ahead on the trade war. And in the meantime, grateful for the process of asset allocation and high quality dividend growth for the defensive characteristics they play in a portfolio. To that end, we work. Thanks so much for listening to the Dividend Cafe, financial food for thought. 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 and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable.

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