The Dividend Cafe - Politics Fourth: Getting our Priorities Straight

Episode Date: September 18, 2020

• The big unknown of corporate profits in the here and now and future • Impact of perpetual quasi-COVID lockdowns • The ambiguity of the present economic condition • Operation Magnify • Why financial services are under-valued, but not for the reason many think • A sober assessment of the state of stock buybacks • Why corporate bond yields matter so much to stocks, and everything else • Night trading more important than day trading? • Politics and Money: A new poll you haven’t seen in the news • Chart of the Week: 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 and video. I think this is the first time in a few weeks that I'm recording it here at the studio in my New York office. I know last week I was out in the middle of the city and I think it may have been a week or two before that that I had recorded from Bryant Park. And so I want to give you guys as much information as I can today on a number of things that I'm looking here at some notes I took. All happen to start with the letter P and so this little alliteration is not on purpose but we're going to very briefly talk about politics. I want to talk primarily, no pun intended, look at that primarily and pun,

about priorities and then go into a discussion about profits, policy, and then there's a few little bonus piece in there like polling and some other things. Now, I did not have to go to any effort to end up with a number of subjects that start with this letter. I don't really feel the need to create remembrance of my talk by using clever tricks like alliteration. It was a total accident. I just noticed that all these words happened to start with P, so I'm sharing it. I wrote last week about politics.

I wrote last week about a 17-page white paper that we published, basically trying to give as comprehensive of a view on the election of this year and what it may mean to client portfolios, what we're doing about that, how we're thinking about it. We did an hour-long special podcast and video about this in a national video call last week. And I got a lot of feedback this week. It was very positive, and I'm really appreciative of that. I think that my prediction had been that there'd be a lot of people upset with me because in my paper I do not argue that if Donald Trump is reelected, it will ruin the world economically, financially, from investment and capital standpoint.

And I also don't argue that if he's not reelected, it will ruin the world. And so because of the very strong emotions that exist out there, both in opposition to President Trump and in favor of President Trump, I expected there would be a lot of that kind of feedback. And I'm hoping that the reason I'm not getting a ton of that yet is because, well, A, maybe people are just talking about me behind my back, which is fine, or B, that I wrote the paper in a way that would not facilitate such a response. And I wrote it facilitate such a response. And I wrote it trying to really reflect what I believe and provide some objectivity and prudent and sober analysis. And I appreciate those of you that have called that out right now. But I do think that expectation I had was fair in this sense. We really do live in a time where so many people, not everyone, but so much of national civic life in the United

States revolves around the federal government, Washington, D.C., the presidency, the news cycle around what they're doing. And I believe that the heat is so high because of the fact that this has become so central in a lot of American life. And I don't think it was designed to be that way. Now, that's not to say that there's not reasons for people to really dislike the president or really like him. There are, by the way, reasons for both that are legitimate, particularly within the context of one's own views of politics and the modern moment in which we find ourselves. However, I believe that there's a portfolio principle at play here that is very important. I've named my dividend cafe this week Politics Fourth. And I do not mean F-O-R-T-H, like let's go forth with politics. I mean it fourth, like the number four. Meaning when I look at, I'm a political junkie and I have been my whole life. And I don't know why. And I've

spent a lot of time thinking about it. My dad really wasn't a junkie. Yesterday would have been my father's 72nd birthday. He passed away 25 years ago. So he died very young. He was a huge influence in my life. And I talked about politics with him a lot as a child and as a teenager going into when I turned 20 and he died. But he was not a political junkie. He was informed and knew a lot about it, but it wasn't really his thing. And yet as a child, I really obsessed over Reagan. I obsessed over things that were happening in the news cycle. I don't know.

There was just sort of this like hobby formed, if you will. And I think that even myself as a junkie, I'm tired of it. And so where I'm going with this as it pertains to portfolio is that right now, we just sort of have this binary instinct. And that's where my fear was when it comes to the way we view our portfolios that, you know, if something happens here, it lines up with a side. We're either on this side or that side politically very quickly. And there's a lot of these kind of moments in which people feel the need to sort of, there's not a lot of nuance.

And I think nuance is a good word to say what I was going for in the paper. Markets require nuance. They demand it. Things are just not black and white enough. And the form of government, the historical record, the policy dispersions, there's a lot of reasons why nuance may be required. And so even as I view our society and think people would be happier if there was a little less nightly news and daily social media or table pounding, reflecting their anger towards a politician they don't like or their love of a politician they fawn over. a little more bottom-up focus, individual, you know, our own health, our own well-being, our own mental sanity, time with kids, time with grandkids, time with spouse, time with friends,

you know, civic organizations, church, faith, local life, right, participating in your community. Well, I think that a lot of those things have taken a backseat in American life over the course of the last several decades. And so what has really filled in that hole has been D.C., big government, national government, federal government, presidency, and therefore it stands to reason that people get a lot more heated around the controversies and disagreements of the day. So to get off my soapbox about where culture can stand to be a bit more well-rounded and a bit less centralized, maybe a little more subsidiarity, if you will,

I would say in our portfolios that the exact same thing is true. And so right now, I wanted to write a Dividend Cafe, and in fact, I did write a DividendCafe.com this week about those things that I think are more significant in our portfolios. And when I'm looking out at what I expect over the next several months, several quarters, I think corporate profits are going to end up being the big question mark. And a lot of times there's so much guidance and companies are able with such precision to telegraph their outlook that there isn't necessarily a lot of room to disappoint or

outperform because you know people have a fairly good idea well that's one of the things at the covid moment that could end up being a tailwind and it could end up being a headwind and that's why i would refer to it as a real large priority in in that um everyone's suspending their guidance and saying, OK, well, here's how we did in quarter one or in quarter four of last year. And now we've kind of lost optics on what's going on. And so we're not going to tell you. And then they've gone out and executed and done what they do. And obviously markets and analysts and actors in the investment space have to sort of price in what they believe could be the case.

Well, maybe some of these companies did far worse than we imagined and maybe some did far better than we imagined. But their ability, and I have an awful lot of confidence, by the way, in corporate America's ability to surprise you and how they can protect their own profit margins. And I think that's a good thing. I think that's their job. I think it's their fiduciary duty to shareholders. But I think that there are going to be a lot of possibilities for margin expansion and profit outperformance coming off of very low expectations.

And so, frankly, I actually really do believe that profits will end up being the biggest determinant of where markets may go in the next 6, 9, 12 months because there is so much bandwidth for what that could end up looking like, both upside and downside. But then one of the things that will dictate profits, will dictate the revenues from which profits are extracted, net of expenses, is policy. And I think that a lot of people were talking, and I was talking earlier on by necessity, out of COVID being the question mark. And I'm not so sure of that anymore. I believe more and more if someone had said New York's going to get their positivity rate below 1% and keep it there for two or three months, I would have said, oh, my gosh, that is going to be a massive upside to their economy. People are pricing in, you know, death and destruction and depression. destruction and depression. And if they're down below 1%, you're going to have a lot of problems still, hangover, but you're going to really have a lot more engagement in economic life, city activity, office productivity, things like that. And I wouldn't have been able to predict that they would still have the insides of restaurants closed all the way to the end of September or kicking the can of schools opening or whatnot at below 1%

positivity. Now, people can disagree as to what the policy should be or should not be. I have real strong opinions on all this stuff, but that's not my point, I promise. My point is, That's not my point. I promise. My point is, how do you project what policies will be in response to the COVID reality? And then from that policy response, be able to have an analysis of what it will mean economically. It's very, very difficult. Two of the states with the best metrics in the country are New York and California. in the country are New York and California, and by far two of the states with the most draconian still not kind of quasi-lockdowns, restrictions, limitations, are still California and New York. And those are two pretty significant states in the national economy because of their size and their status, you can imagine. So I think you look to profits, you look to uncertainty of policy, you look to the Fed going forward, as I've talked about, ad nauseum. And there are three categories right there.

Profits, local state policies surrounding COVID, economic activity, and Fed monetary. Those three things are bigger than politics. And that's why I say politics fourth. So look, they're not all mutually exclusive. The national election plays into some of these things. I get all that. But I'm trying to create these categories to give you a framework for how to think about it. I hope that's helpful. In dividendcafe.com this week, I do talk about Operation Magnify, which is a very significant internal project at the Bonson Group that we're bringing external into Q4 as we just simply formalize and codify the process that we've talked about regarding revisiting what assumptions need to be revisited

as it pertains to client realities, risk and reward expectations in a zero interest rate world. And I think that it was very, we went to zero interest rates in March. I had no doubt in my mind then as I do now that this was a paradigm shift that would affect the bond market and risk pricing for years to come. But you couldn't revisit what it would mean in the moment of high COVID volatility because there was so much dislocation in the asset prices themselves. And now with much more settled capital markets and certainly much more settled COVID health realities, now I believe it's time to take action around the policy environment that is not merely transitory from COVID, but will be with us to stay. And so Operation Magnify

is meant to magnify the principles we believe in the Bonson Group and yet call out the necessary assumptions, realities, potentially changes that go there with. And maybe it is just simply a matter of recognizing bond market assumptions to be different, recognizing and appreciating and even wanting greater risk on the credit side. But we have got to look at credit and traditional bonds differently. And we have got to look to private markets, illiquid markets, alternative credit, debt, equity, real estate, things of that nature where appropriate as a diversifier. real estate, things of that nature were appropriate as a diversifier. Every client's going to have a different situation. It's just a matter of magnifying this process.

That's what that's about. So I also talked about small cap this week. The chart of the week focuses on why small cap is an asset class that particularly just screams for active management. I talk about the banks and there's some charts and things along with that. I'll close up with the polling. I just thought it was very interesting. I still believe this is advantage Biden, just in terms of the intuitive read of the lay of the land and where the polls stand in the electoral college and the narrow margins by which President Trump won. But I, like most people, do not believe,

whereas I did wrongly in 16, that Trump didn't have a path. I think that everyone, being honest, knows it kind of looks this way, but I really just don't know. And that's hence my prediction for a close election. I was surprised. Strategist Research has an institutional poll, 91 money managers. So institutional research. These are Wall Street types. They're not talking about who they want to win.

It's a poll of who they believe will end up winning. And it had been overwhelmingly that they believed Trump was going to be reelected all through late last year, early this year, through the Democratic primary, even into the beginning months of COVID. And then when things kind of really reversed in the polls throughout the summer and whatnot, the last couple of these had pretty meaningful margins in their polling that they expected President Biden to win. And this week, for the first time, all of a sudden it's reversed back. There's a poll I put the chart of where they're forecasting President Trump win. Well, look, do 91 money managers on Wall Street know any more than anybody else? Of course not. But my point is that, you know, their expectations are there's a lot of money on the line. There's a lot of positioning on the line there. So I guess at the end of the day, take it for what it's worth,

but read more about it at dividendcafe.com. And with that said, thank you truly for listening to this podcast, watching the video. If you are so inclined and you want to and you haven't done it yet and you want to write us a little review at your podcast player of choice, we really love you getting this podcast through a subscription in your feed. It boosts up our kind of marks and ratings and helps us share it out at a wider level. So if you want to go say positive things about us or negative things at, you know, Apple or Google or Spotify or whatever the case may be,

we'll take those criticisms or compliments, whatever they may be, and we'll send you a copy of my book if you point it out to us. we will send it as our gift. You know, yeah, I guess you could argue we're being generous and that we're trying to clear up a little closet space. Okay, thanks for listening to The Dividend Cafe. The Bonson Group is a group of investment professionals

registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Thank you. you're in. 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 based on the client's individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for any related questions.