The Dividend Cafe - Nothing New Under the Sun

Episode Date: April 30, 2021

Tell me what you think about these two statements: (1) Markets are dynamic, ever-changing forces. They are never predictable, their outcomes are never assured, the inputs are constantly adjusting with the ebbs and flows of different circumstances and facts that have to be monitored, studied, and adjusted as needed. (2) There is nothing new under the sun. I believe these two statements are both true, and I believe that the apparent contradiction between the two actually represents one of the great challenges and obligations for professional investment managers. And that is the subject of today’s Dividend Cafe. We live in interesting times. We live in unpredictable times. And we live in times that offer a milieu of circumstances which combine the novel with the redundant. And for all of the uncertainty about the future and the debate in the present, there does exist a past that can, at a bare minimum, help inform us in the present and in our preparations for the future. The “new” must be informed by the “old.” And that is what we are going to discuss in the Dividend Cafe today. DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to this week's Dividend Cafe podcast and video. Those of you watching on the video, I actually have not gotten out of my seat yet from about 30 seconds ago, finishing up a appearance on the Varney show on Fox Business. And rather than reconfigure and move and adjust, I'm just going to sit right here and start recording for you all. The subject of this week's Dividend Cafe is, I hope it's understandable. I hope I communicated all clearly, both at DividendCafe.com and for you guys listening.

The basic message isn't really all that profound, but the way in which I apply it, I'm hoping will really be useful to you. But I think that there are two facts that I'm going to state here. But I think that there are two facts that I'm going to state here, two beliefs, two tenets, two principles, if you will, that are both equally true, that are both profoundly true, that are both significant, and that seem to be at odds with one another, at least creating some internal tension between the two. The first is the basic idea that markets are highly dynamic forces, that they are constantly changing, that they are ever unpredictable, that there are circumstances, conditions, and various things that impact the terrain of the economy, and then the way that markets respond to that terrain, and that creates chain reactions, that all of these processes are highly complex and highly unpredictable. And there are some that have studied this at great length.

There's a book by Nassim talib called fooled by randomness that um completely and totally uh uh informed and in a lot of ways uh altered my beliefs about the complexity and unpredictability in what are i believe orderly and created systems that can that contain within them a significant amount of what appears to be chaos and in fact is not chaotic but is to us mere mortals impossible to predict and that we get into a lot of trouble when we start to project onto the unpredictable our own models and quantifiable systems of interpreting that which is itself quite complex and unpredictable. And these random forces of markets are not meant to be adjudicated that way. They are meant to be part of the creative and oftentimes chaotic, but certainly an exciting part of the human experience. And so you live with this kind of uncertainty and changing dynamism in economic conditions and in what we call markets, obviously the context here being financial markets. And then the second tenet and fact and truth

that I want to share is that there is nothing new under the sun. And I'm quoting this obviously from the great book of Ecclesiastes, but it's a principle and an expression that is often uttered in kind of cultural contexts. But basically, I don't believe we encounter things that we have not encountered before in some way, shape, form or another. The other cliche that you could say kind of ties into this conversation is that notion of history not always repeating itself, but often rhyming. And so I think that there are a lot of different mistakes that people make, and particularly as it pertains to our desire to properly understand and make decisions through financial markets and changing financial realities. The biggest mistake that I see from colleagues, from those who hold themselves out as professional financial advisors

or members of the professional investment community, is a total, complete disregard for history, a lack of interest in what history has to teach us. And the quote that has actually been something I've re-uttered many times throughout my adult life and something that had a big impact on me even at a younger age, it happened to be on the front book cover of a series of history books that my parents had bought me when I was very young. But the quote from the late President John Kennedy was that a knowledge of the past prepares us for the crisis of the present and the challenge of the future. the challenge of the future. And I think right now there's on just a daily basis, often in my inbox and in social media feeds and on the television and overwhelmingly in the television and internet

media, but also in our own conversations, there is a significant amount of anxiety around what we could call crises of the present, a sort of plural understanding of various things, whether it be the national debt levels, whether it be valuations in a lot of equity markets, whether it be the role of big tech in society, the relationship with China and their growing hegemonic power. I could go on and on, but there are major categories of things that feel, and in many cases are, present crises. And obviously the COVID moment was one that we're now coming out of, but went through a year ago. The challenge of the future is blurred with the crisis of the present in a lot of ways.

The analogy I use in Dividend Cafe today is the Bay of Pigs was a present crisis when it was going on, and the Cold War was a future challenge. uncertain event that we were going through that had potential future, almost annihilationist kind of paranoia affiliated with it. And then in the here and now, there were various events that took place, such as Bay of Pigs, that necessitated a present crisis. The national debt's a great example of one that is often wrongly presented as a present crisis because it is in the present that the activities are taking place, the spending is taking place, the borrowing is taking place. And yet really, if people think about it, whatever it is they're worried about is something that is very likely a future event and a future event that apparently not very many people can time very well.

You know, you think back to all the guys writing books in the 1970s, and the 70s was just like an orgy of panic porn opportunists. The problem is back then, I actually think most of them meant it. Most of the panic industry now are just rank charlatans. But back then, I think there are a lot of well-meaning people that were just wrong, that were predicting the hyperinflation and predicting the death of the dollar, the death of the U.S., and the inevitable collapse of the American economy, the imminent collapse of the American economy around the debt explosion. And back then our debt was like pizza money compared to now. Now, they were right to be worried about debt, and we're right to be worried about debt.

And the fact that it's gotten worse and the world hasn't fallen into an avalanche or a cave or whatever is not indicative of the fact that everything is rosy. It's just making the point that timing future challenges is hard to do and when those things come to a head. And therein lies part of the rub, is you believe you're in a present crisis. It turns out not to have been a present crisis, yet it really is a future challenge. And you kind of become apathetic. And I don't mean you or me, I mean societally and collectively and from a policy standpoint. It doesn't ever really get addressed because the present crisis didn't come to fruition and the fact that it lingers out there, well, it numbs us and it facilitates a delay.

facilitates a delay. Well, I believe that the message I have today is simply this desire for a rigorous understanding wherever a lesson can be found in the past to prepare both for present crises, but also to inform our ability to discern between present crises and future challenges. I would love to see policymakers do that. I would love that to be part of the process by which these things actually get fixed, but I can't do much about that, and you can't do much about that. My context is in what I can do and must do and owe it to my clients to do as it pertains to the investment ramifications of these things. The idea of making investment decisions about some of the various catalysts to present concerns and future challenges that I've brought up without an informed understanding

of the past is malpractice. I will tell you, and I'm kind of explicitly speaking to the large part of you that may not be clients of the Bonson Group. I believe the vast majority of financial professionals do not have a commitment to understanding what history has to teach us and help us in preparing for these things. It's something I've observed professionally for over two decades. And the fact of the matter is that one of the examples I use in Dividend Cafe, and there's a few other things I want to mention real quickly, I go back to the period of time from the middle of November of 2012 to the end of 2012 all the time because President Obama had been reelected, been reelected pretty easily,

and had full control of the Democrat Senate, and all of the Bush tax cuts of the early 2000s were set to expire. And we were going to go to the second term of Obama presidency, and none of the tax increases required any vote from anybody. The House didn't have to vote. The Senate didn't have to vote. They were all just going to happen. And there were people, there was wailing, gnashing, what are all the expressions, cats and dogs flying everywhere about capital gain taxes going higher. And so people were taking gains now to avoid taking gains later.

They were moving monies to trusts. They were gifting to charities. They were, the estate tax was set to go up by a large amount and at a much lower threshold. It was going to pull in a lot more people. And people were doing life insurance stuff and defective grantor trust. And they were freezing assets and doing GRATs and ILITs and CRUTs and all of these different alphabet soup of various estate planning mechanisms, which by the way should just go to show you there's a whole lot of estate planning mechanisms, which is one of the ironies of the whole thing.

But my point being, they were accelerating decision making, sometimes at the advice of well-meaning advisors around something that they believed was going to happen and that did not happen. And in some cases, the opposite of it happened. The capital gain tax didn't go higher and the lower rate did get made permanent. And the state tax not only didn't go higher, it went lower. The state tax threshold went significantly higher, the threshold by which you would have to pay, and the rate that you pay went way lower. It was the opposite of what everyone had planned on. And I don't agree with policymakers making

people function within a one-week, one-month, two-month window of time to try to figure it out. And I can sympathize with legal and tax and financial professionals like myself feeling that they owed it to clients to kind of prepare for the worst. But no, history is rather clear. It's quite difficult to raise taxes. The estate tax is not something that policymakers have traditionally really cared about a lot. They talk about it. They give speeches about it. They say how much it's awful for rich people to leave more money to their already rich kids. But ultimately moving the policy around has always been very different.

And so I don't know what's going to happen with the state taxes and capital gain taxes. And I'm hearing all the speeches and all the proposals and all the things put forward. But the notion of not allowing history to inform me in how I plan on these things, for me to just assume all of the capital gain stuff being talked about is actually going to happen with the clear and rather obvious precedent of history that to some degree it's not. Now, some of it maybe will. There will be likely a need for adjustment. But to have not learned from history

the need for patience and discernment, wisdom, I think is malpractice. And so that is a rather practical example that might connect a little more around one of the big kind of present crises as to this notion of a bipartisan form of government, in a Madisonian form of government that produces a separation of powers. These things are not quite so easy. And this is true in the Biden administration. It was true in the Trump administration. It was true in the Obama administration before that. President giving a speech saying, I'm going to do this, and people panicking about it, totally ignores that that's just not how it works. They can't just do it. Some of the bad stuff could happen, and some of the good stuff may not happen. But the point being,

there's a historical set of information that can help kind of drive the way we interpret these things in the present. I look also to a lot of the talk about the U.S. dollar. And this is one area where history has basically just put its arm around you and said, come, let me help you out with this. Because the idea of currency crisis, of lack of confidence in a nation's sovereign well-being, of confidence in a nation's sovereign well-being, what happens when one nation grows its debt a lot, but a competitive nation grows its debt even more, of the impact of lower rates, of the impact of higher rates, of the impact of exchange rates, of the impact of trade levels. See, we just have this monumental amount of data and history, and to go formulate a view on the dollar, on what we expect around inflation, deflation, on what we expect on interest rates, on what we expect about the future of

economic supremacy or primacy out of the United States without learning what history has to teach us. I read people all the time, global macroeconomists, talking about what to expect from Europe in the future that have never studied what Europe was like pre-euro, that don't understand 1994, let alone 1974.

I think that there is an entire set of information in the way that U.S. has dealt with various foreign policy crises, the progression of developments as to how we've got to where we are with China, how China's got to where China is, and what to expect from them going forward. And none of this mitigates that we are not going to know exactly how it plays out, and we're not going to know all the pieces but we're going to have more information more context and and a better sense of terrain that informs the way we navigate around

the field if you will i probably am mixing like like 20 metaphors at once, but I don't care. I think that we face plenty of crisis as investors, meaning uncertainty, meaning challenges, meaning things that feel like they never happened before. Look, the United States government has never proposed $6 trillion of spending in four months before. The COVID pandemic, we passed three bills. All of these have already passed. So $2 trillion Families Act has not passed yet. $2 trillion infrastructure has not passed yet. But $2 trillion COVID of January, $1 trillion COVID of December,

and $2 trillion COVID of CARES Act last March, that's $5 trillion that did pass. We've never done that before. New things happen. That does not contradict nothing new under the sun. Because what we know from the principle of nothing new under the sun is that there are realities. The analogy I use in Dividend Cafe, the Fed had never bought junk bond ETFs before.

But the Fed, and they did last March and April in the COVID crisis, but there is an awful lot of precedent for the Fed having a sort of overarching view of their role that it is to salvage capital markets, that it is to lend and assist to helping hand to risk assets. So from my vantage point, wherever history has something to teach us, I want to try to learn it. And I can interpret it wrongly, and I can even have the facts wrong, let alone the way in which I interpret the facts. But that has to be the effort. That has to be the intent, is to extract from the past information and perspective that will inform our view of the present and the future. That's my lesson today in the Dividend Cafe. I hope it's useful. I encourage any questions

or comments you may have, including wondering about how that can be applied to a particular crisis or challenge on your mind, because I've used a few different examples, but I could have cherry-picked from any place I wanted, and you may have other specifics. So reach out, uh, more to come on all of this. Thanks as always for listening to Dividend Cafe. Uh, please do subscribe, forward this around, send it whoever you want. We appreciate your efforts, uh, your help in our efforts to grow the subscriber base with these players, um, and the way the podcast world works. Thanks for listening to and watching The Dividend Cafe. 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.

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