The Dividend Cafe - Politics, Policy, and your Portfolio

Episode Date: October 25, 2019

Topics discussed: Greetings from New York City where we are approaching the end of an intense week of meetings, discussions, debates, analysis, and soon, decisions. It has been invigorating and we still have a couple of days of meetings to go, so a more comprehensive download will linger for another week. But in the meantime, this week's Dividend Cafe will recap the week in markets, offer an update on the Fed, explore the latest on NAFTA 2.0, seek to scare you a bit, and seek to encourage you a bit. There is also yet another pretty comprehensive analysis of the political landscape and what it means to markets right now. So jump on into the Dividend Cafe, and let's explore the latest and greatest in the world of investing. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. now for a little over a week and it started a week ago I had just fallen into the middle of the night and I was sitting actually right here having completed the dividend cafe for the week and getting ready to go to a whole day of meetings with Blackstone our an alternative asset manager and we were in a symposium discussing all different aspects of the alternative markets in which they happen to exist. And now a week has gone by and we're something like 80% done through a whole lot of similar meetings, most of which have been private meetings with different asset managers that we work with, other asset managers that we don't, a certain degree of analysts. I actually have a meeting today with someone who's just sort of a top-down strategic intelligence provider to hedge funds. So just a whole lot of input, a whole lot of perspective on markets, asset classes on investment opportunity and

that's what this week has been about and it's been an absolute whirlwind it always is and and two other gentlemen from our investment committee partners at the Bonson group day up or not and Brian's I tell are here with me I'm getting ready to leave for more meetings here momentarily but still wanted to bring you some weekly dividend cafe but I'm not gonna do the full aberration right now on on this week because I really want to be able to organize and curate a more meaningful summary of the week some of our actionable takeaways, and of course want to

finish these next two days worth of meetings. We're recording right now Thursday morning and we still have a couple days to go. So let me just spend this time instead to kind of recap this week in the markets. A little Fed update, a little politics update, some things like that, and then we'll send you on your way and I'll get on my way. It's a beautiful fall day, as you can see out the window here. Let's see, that would be, you'd be looking down south that way. My apartment is out, it looks out over the East River. And then that's right into Midtown this way.

So right behind me, you're looking down. I'm here in the Middle East portion of Midtown this way. So right behind me, you're looking down. I'm here in the Middle East portion of Midtown. And you can see from the blue skies that this is fall weather in New York, and it's beautiful. Not all is quite so beautiful necessarily in the global economy. It isn't a rainstorm either. It's sort of like New York weather. By the way, I'm making this up as I'm going along here, but I like the analogy. It rained really hard here on Tuesday of this week, and it was actually beautiful yesterday, and you see what the weather's like today.

But New York, of course, is known for somewhat volatile weather, which is different than I'm used to in my other home of Southern California, where it's obviously much more consistent, steady, and frankly, very attractive weather. We're not in a Southern California weather type market. We're in more of a New York weather, where when it's pretty, it's very pretty, but it can be troubled. It can be volatile.

It can be turbulent and one day raining and one day sunny. And I think that if you don't mind the fact that I made up the analogy as I was going, I think you might find it useful because it is a pretty reasonably descriptive summary of the state of the economy right now, of markets and of a lot of the things that investors like ourselves might be looking at. like ourselves might be looking at. It forces us to avoid a one-sided conclusion that has a whole lot of conviction. Like we are clearly very, very bullish or clearly very, very bearish. That is not there for us right now. The data doesn't allow us to do one of those two things. Data doesn't allow us to do one of those two things. The market conditions don't allow it.

Objective and intellectually honest assessment of things pulls you in a number of different directions. And it makes it challenging to be an efficient steward of client capital and a wise allocator. I think that the market this week was rather interesting. If I remember correctly, we were up about 50 Monday, down about 50 Tuesday, up about 50 Wednesday. And as I'm talking right now, the futures market on Thursday morning is suggesting about 50 to 75 points up today. So we may net net end up the week about 100 points. We don't know what Thursday or Friday will end up doing, but modestly up on the week. But not only a lack of a big directional move one way or the other this week, but very minimal volatility as well. Well, the Fed is going to be meeting next week. The futures are now pricing in like a 94% chance of one cut next week. Interestingly, that's gotten much higher

in probability that a Fed cut is coming for October. It seems to be all but assured. But then the December odds of a second rate cut have come down. They were between 40 and 50 percent, and they're now sitting just around 25 percent an implied probability in the Fed Fund's futures market. So the Fed is maybe one and done. There are certainly others who believe that they're going to do a second one, but there's a lot of disagreement on that. And then the trade war issue, we know that we left things with phase one being sort of verbally agreed to but needing a little elaboration on the written side and most people should you know expect that deal gets finalized and then what happens beyond that is still a bit of an unknown i don't think the

markets care on the impeachment story at all i actually do think it's much more of a political story than the Mueller investigation was. I think the impeachment story is a real story, but that's different than me saying I think it has market sensitivities. I do think there's market sensitivities around some of the outcomes from the political side. We've talked about this a lot. from the political side. We've talked about this a lot. Interestingly, some strong polls came out this week suggesting Joe Biden's back out in the lead and Senator Warren had taken a little bit of a down tick, but I expect to see polls move around up and down in the weeks ahead. I point out in Dividend Cafe this week, one interesting consideration into the market, out of the election, out of the politics, out of impeachment is,

let's say the House does impeach President Trump by the end of the year. The Senate then would likely be having its trial into January. And that takes Senator Warren. Now, it also takes Senator Booker, Klobuchar, and Harris as well, but they're meaningfully lower in the polls. But Senator Warren is a frontrunner. You know, you presume the senators are going to be there for the trial. I don't think it looks very good if they're not. And yet that's right in the real thick of that campaign season. And yet that's right in the real thick of that campaign season, going into Iowa, New Hampshire, election or caucus and primary results in early February. So that could give an advantage to former Vice President Biden, who obviously wouldn't have to be at the Senate trial, and even Mayor Pete, who's up there in the mid-level of the polls.

So that Senate issue could end up having some interesting ramifications out of the impeachment trial potential into the campaign itself of the Democratic primary. And that could have an effect on markets, because I do think markets are really clear right now about two things. One being that they expect Elizabeth Warren is going to be the candidate, and they could be wrong about that. It's my expectation, by the way, and I very much know I could be wrong about that. But then the second thing is that the investor community, the survey data, institutional results, and things like that,

a lot of which I've laid out in Dividend Cafe this week, also suggest that they believe Warren would be the worst for markets and have the most negative effect in certain aspects of risk assets for investors. And so that's kind of a worst of both worlds if they were right about both things, which is A, they expect her to win and B, they expect her to be bad for the markets. Of neither thing is written in stone although the second one is probably a lot more forecastable than the first one but my our thesis is always going to be the same you know this far out in advance this is the last thing someone ought to be doing is trying to position a December 2020

portfolio around October 2019 polls that is a a very bad idea. Very bad idea. So in the meantime, we look at what we do know. We do know the Fed is looking to cut the discount rate again by which risk assets are measured. We know that earnings season is going just fine. It's not going gangbusters. It's only 25% of the way done, but it is exceeding expectations and how much so it's a little too early for me to go there. So I'm not going to go there. I'm going to wait at least another week, if not two weeks to really unpack how it's looking. I can certainly speak from a bottom up standpoint, from the vantage point of a lot of the names that we own that we're really happy with how our earnings season is going and the financials and energy sectors seem to be

surprising to the upside we'll see if this carries through across penetration of equity sectors what else do we want to cover this week I really am continuing to monitor both out of all the meetings we're having this week, but even just in our overall viewpoint and the key information that's feeding the knobs we turn in how we allocate our client capital is the impact of debt levels and the impact of Fed activity post-crisis into different aspects of the American economy. And we divide that up, of course, to the government, to corporate economy, and to the households, to families, individuals.

And there's very different characteristics across all three. Debt, impact of debt, leverage ratios. Some have increased the quality of their balance sheets, and some have deteriorated the quality of their balance sheets and some have deteriorated the quality of their balance sheets across those three sectors. And drawing actionable conclusions out of the information that we have and what we believe about that information is very important. So I want to be able to better frame some of the risks that we think are out there, which I think are different than some of the vanilla assumptions many are making about the state of markets and the state of debt, state of leverage, the inherent risks in credit markets

and things of that nature. All of that stuff is very important. We want to unpack it more coherently for you. So do go to DividendCafe.com this week if you have a moment just to see some of the charts. A really interesting chart we did showing where President Obama's approval rating was at this point in his first term, where President Trump's is, and then where President Obama's approval rating went in the final year before his reelection effort and where President Trump may need to go. So there's some good political stuff in there, but just because I have to run, I'm going to leave the podcast here now. So we will have much more information next week,

and we're going to be doing a lot of debriefing, downloading, summarizing of where we are with the municipal bond market, with alternatives, with real estate, with taxable fixed income, risk assets in general, all of the fun things that we live, eat, drink, sleep, breathe, die for, and what so much of this great town behind me is all about. And I think that this has been a very constructive week. I feel extremely happy to have had some of the meetings we've had and to be inspired in the way we're inspired right now. But we have more work to do. And so I'm going to do that and come back to you with more information. Thank you for listening to those of you that are watching. Thank you for viewing the Dividend Cafe.

Please have a wonderful day, a wonderful weekend. Look forward to talking to you again soon. Thank you for listening to the Dividend Cafe. Financial food for thought. The Bonsai Group is registered with Hightower Securities LLC, a member of FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor of the SEC. For thought. Thank you. No express or implied representations or warranties as to the accuracy or completeness of the data and other information or for statements or errors contained in or omissions from 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 team and do not represent those of Hightower Advisors LLC or any of its affiliates.