The Dividend Cafe - Price Discovery and the Human Spirit

Episode Date: August 7, 2020

In this week’s Dividend Cafe we will: Summarize this week’s action in the market, with a summary of the better-than-expected July jobs report Look at the intense pursuit for a COVID vaccine and what that means for markets Add a little detail and caveat to the current market rally, and big tech’s role within it! Discuss what it will taken to energize midstream energy Correct the record on Q2 GDP growth Think through the growing tensions with China Simulate the stimulus Look under the hood of the current state of the economy (pretty extensively), covering manufacturing, auto sales, hotel traffic, restaurant traffic, and all the things … Politics & Money – the polls are tightening, and we look at a long-held theory about predicting the Presidential winner … Chart of the Week – our cup runneth over with optimism for dividend growth, thanks to present conditions, and past lessons 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. Welcome those of you watching on video as well. I'm so used to saying every night, welcome to the COVID and Markets podcast, which we do through Dividend Cafe every weekday. But the big daddy remains the Dividend Cafe, which I intend to be my weekly market commentary that I would love to do for the rest of my life. And this week has been an eventful week. There's a number of different topics we're going to walk through today.

I think there's one kind of central theme that I'm hoping all people will take away, whether they're reading the Dividend Cafe commentary or whether you're listening or watching right now as I'm speaking. The issues that are pretty prevalent throughout the news cycle and throughout the economy and throughout a lot of market data, invite me to talk to you all about this concept of price discovery. And so that may sound somewhat complicated and also may sound irrelevant. And for some of you, it may sound really boring. I'm going to try to make it none of the above here in a moment. The theme that is going to lead us to this talk about price discovery is something that I think all of us can relate to right now,

which is the consistent news of things being less bad than expected. And more and more we're hearing reports, we're getting data, we're seeing kind of finality of data points and studies and reports and all these things, all of which are backward looking, of course, where stuff was really bad. And there's nothing coming out. There's no data point coming out that someone goes, wow, this is really good. Even the things that are most good are good relative to how bad they may have been expected. And some things might have been expected to be less bad than others. And so when they're, more good than the less bad that was expected, it may seem like good news in the world that we're living in right now. But hopefully you follow what I'm saying. From jobs data to manufacturing to auto sales to consumer activity, we are obviously fighting out of the repercussions of an economic lockdown.

the repercussions of an economic lockdown. And that economic lockdown was followed by an economic slowdown, where even the reopening of the economy has been somewhat of a quasi reopening. Certain states took on different policy responses that turned the knob up or down a little bit, but nobody's knob is all the way turned, you know, to maximum economic normalcy. And so as we get backward looking data, there's certain expectations that are baked in. Everyone kind of does their best, I suppose, to know what to expect. And then this, you know, less bad than expected theme is continued. And I have a mixed feeling about it because on one hand, I think that we have the miracle of markets, and I don't mean stock market here. I mean markets right now as in the kind of universe of free exchange that produces this thing for us in our living called price discovery. Prices are an effect of all of these

different signals and decisions and indicators and so forth. Trillions of transactions that all kind of lead to prices. And as long as those transactions and those decisions and those components are a byproduct of freedom and a byproduct of human action and a byproduct of free exchange, it gives you a really great signal that we call prices. And we can at given times think that something seems a little expensive or something seems a little cheap, but the price is generally us realizing that there's more data, more signals, more affecting that outcome than we may be aware of, that we may understand. And I think right now a lot of people are interpreting this in the context of stock and bond prices, particularly stocks, maybe real estate, oil prices.

And there is a lot of complexity to how those things get priced. There is a lot of forward-looking expectations. They get discounted against interest rates. There's competition with foreign entities. I mean it's all kind of complicated obviously. But my point being prices that lead to what a stock price is are no different than prices that lead to a banana at the store is. It's a byproduct of a whole lot of things from shipping costs to supply and demand to competition to inventory to weather. You get my point. All right. So you have the complexity of how prices get formed, but you

have a beauty in that. There's a real gift that we have the byproduct of free transactions and free exchanges and people that have an awful lot of vested interest in these things, all of their decisions functioning at light speed, leading to price discovery, leading to the ability for people to make rational decisions, to choose to transact or not. And there's a reason that a house in Newport Beach may cost a couple million dollars and that a banana at the store may cost $2. And by the way, if a banana is really 60 cents or really $5, then I guess you just found out who does the grocery shopping in my family. But I think it might be $2. I don't know. My point being at some relative scale,

Well, I think it might be $2. I don't know. My point being at some relative scale, the way in which these things priced come about rationally. And yet what is rationally leading to prices right now are a lot of unfortunate circumstances that might happen to be a little bit less unfortunate than they maybe could have been. And this leads me to my second point that I try to make in this week's Dividend Cafe, is that the less bad than expected has led to better stock prices than a lot of thought there would be, most certainly better real estate activity, at least so far. Credit markets, keep them, by the way, for anyone who wants to write in and say, yeah, but you're forgetting intervention of the Fed and so forth. I'm not forgetting that. I'm well aware

of where their thumb is on the scale and all of it, but that doesn't change the underlying point I'm making. Just because they may be intervening, that doesn't mean that they're not impacting the prices. The prices are still a byproduct of all the different factors which would include their intervention to whatever degree. unemployment rate we had a month ago and what a lot of people thought was going to be 15%, that we're down to 16 million continuing claims of unemployment, where we were at 25 million a couple months ago. Yesterday's new initial weekly jobless claims number came in at 1.1 million. People thought it'd be 1.4 million. So in each data point, we continue to get things that are pretty bad, but a bit less bad than expected. And that is the byproduct of an awful lot of very complicated and very rapidly moving components in the invisible hand that is an economy. in that we have the folks that are probably hurting the most are the people indeed with the least balance sheet.

If there's anything on their balance sheet, it usually is a few bucks in their checking account that they rely on going paycheck to paycheck. ongoing paycheck to paycheck, not necessarily the diversified and expandable and broad scope of job skills and training and knowledge to have been disappointingly let go of one job but go reconvene at another, limited options in the labor pool. limited options in the labor pool. And I think this is the part that is not letting up for me, is that in forced lockdowns and voluntary lockdowns and lost opportunities that come out of lockdowns and the regulatory byproduct of things, regardless of what's causing all of it, regardless of what's causing all of it, in the present COVID moment, we have an awful lot of people that are unable to create economic productivity,

which has an economic impact in their lives through lost income, and then has an existential impact in their lives through lost meaning and purpose and dignity and usefulness and activity and productivity. And it leads to some of the worst things people can ever do when they're down and out, which is stay inside and stay horizontal. And the need for people to be outside, to be vertical, to be engaged, to be in community, all of these things have got to come back. And that now gets outside of the world of price discovery and into the world of human flourishing, which of course is the point of it all.

It's the point of free markets. It's the point of economic transactions. It's to create better lives and better outcomes for ourselves. And we're suffering right now, not just because of 10% unemployment. We're suffering because within that 10% unemployment is just a really tremendous lack of opportunity that can stimulate the human spirit. And so as we're going to talk about in a second, Congress can debate how they want to stimulate the economy all they want. They're not doing a very good job of debating it.

And once they are done debating it, they're not probably going to do a very good job at stimulating it. But what really I think ultimately all of us are looking forward to is that moment in which we can go back to economic activity for everyone and not just 90%. And that number, by the way, does seem to be kind of holding. More or less, we seem to have something in the range of 15 to 20 million people unemployed, probably a bit closer to 15 now based on continuous claims and based on the unemployment rate multiplied to the labor force of about 164 million. So you probably at 10.1% unemployment at 164 million labor force, you're sitting there somewhere around 16 million plus change that are unemployed.

So that has an economic byproduct and it has a societal byproduct. And I think that we should not be confused. We should not feel guilty. We should not feel guilty. We should not be surprised. It just is a byproduct of all these dynamics that I'm talking about. When you see the stock market this week up about a thousand points, I'm recording in the middle of the market day Friday, and we're kind of flat in the market today. But we were up 250 Monday, 150 Tuesday, 370 Wednesday, 180 Thursday. That's a heck of a streak. And people can continue to say, yeah, but unemployment's high and restaurants are only a quarter open or

half open or whatever. And all of that's true. And all of these things are byproduct of price discovery. And there's a lot of complexity happening in the economy, a lot of surprises. There's some businesses that are just not able to adjust and not able to figure out what to do. And there's others that have become really innovative and had workarounds and alternative revenue sources or expenditure reductions. You know, there's just a whole lot of moving parts. And that part is what it is. But I think that the mode we're in right now is going to stay this way for a little while. Price discovery is going to reveal to us what it reveals, but I think we're a ways away

from having that feeling of a fully engaged economy and beyond the fully engaged economy, the fully engaged human spirit. Now, let me ask you a question. If I were to say to you that a vaccine is coming in two months and it's going to get fully approved and distribution is going to be pretty well teed up and so forth, would you think that that means markets are about to really take off? I think a lot of people would say that it would. And I would suggest to people just to moderate expectations that a lot of market prices may very well already be reflecting it. There may already be quite a bit of discounting into the market for the expectation of a vaccine. There's been very encouraging trials thus far.

There's more than one player. Not all of our eggs are in one basket. There's more than two, and there's more than three, and there's more than four. And only a couple of these leading contenders are small companies. Some are big, sophisticated, experienced, well-resourced, globally diversified. So you have a real portfolio of vaccination opportunities. In the meantime, you have an economy that's sort of figuring out what to do with itself before a vaccine comes. And you have obviously an improved dynamic around the reality of COVID. And all of that has to be taken in. Now I say improved dynamic. What I mean is it

becoming less infectious? I don't think so. I don't know. But is it becoming less severe? Meaning, is the result that we're seeing in the people that are testing positive for COVID-19 more benign than the result in aggregate was a few months ago? Well, if anybody denies that, I can't help you. So, yeah, those are all good signs. but there's a lot of work ahead of us. What else do I want to cover for you? The market rally, as surprising as it may be to people, I really can't emphasize enough how much I would use the Dow instead of the S&P if you're trying to get a gauge on what's going on out there. And if someone's just straight up invested in the market cap weighted S&P, then they

can use the S&P because that's what the plus or minus is happening inside of their portfolio. But the truth is that there are five companies in the S&P 500 that are up 36% from the bottom. And there are, excuse me, year to date. And there are 495 companies that are down 6%. Okay. And so while the overall S&P is up a tad on the year, and that seems quite shocking to people, it's still down a little from its high in February. It's just so incredibly skewed from these five companies that it's like something we've never seen before. But when you look into the Dow, it's only 30 companies.

It's very diversified across a whole spectrum of the economy. It does have some big tech names in there. It's capturing some of that upside, but then it also has better proportionate representation from the financials, from the industrials, from the kind of whole spectrum of companies that make up an economy, the whole spectrum of sectors. And when you look inside the S&P and those five companies, you can say, well, is it just simply a matter that nobody else is making any money and those five companies are making all the money? And the answer is no.

The 495 companies in S&P are right now trading at around the same multiple that they were at the beginning of the year. Their multiple went down and now it's come back up, not quite to where it was. But those five companies have seen their multiple, their PE ratio, their valuation skyrocket. So we don't really have a situation where their earnings have gone up dramatically. They've gone up a bit, of course, but you have a re-rating of those earnings, a re-valuation that has been the story behind it. And I have an absolute moral, legal, ethical obligation to continue telling the truth. The further up big tech goes, the more exacerbated the risk reward skew becomes.

And so with that said, I think people need to be able to better evaluate however their portfolios are positioned, however they look at the overall market and the overall economy in the context of something that's a bit more diversified and a bit more representative of the whole world in which we live. In DividendCafe.com this week, I do cover a deeper dive into the future of midstream energy, what is going on in the transportation of oil and gas, and how one may want to look at that opportunity. transportation of oil and gas and how one may want to look at that opportunity. We talk a little bit about some of the misnomers around Q2 GDP growth and some of the misunderstandings of that data. Some stuff has hit the fan this week with China in a minor scale, some new executive

orders that have come down impacting the tensions that the U.S. has with China for good or for bad. And then there's a deeper unpacking of what's going on with the stimulus bill, what we expect from here. And then, of course, you know, the politics section, polls tightened a little bit. You know, Joe Biden has a sizable lead still in some of the battleground states and in the national polls. But this is a definite, noticeable, and diversified. It's not just one outlier poll. It's in the averages of polls that have seen the race start to tighten. And that is something to keep an eye on. And then, of course, and by the way, I don't see any scenario in which if it tightens further,

all of a sudden, the market has no real chance, in my opinion, of pricing in ahead of November a certainty that Trump is going to win. I suppose you could get to a number where the market feels that it has a certainty that Trump's going to lose. But my very best guess is that the market is going to have an uncertainty about what's going to happen in the presidential election. It may be a bias that is looking a little bit like it's going to be Biden or whatnot,

but as far as the ability to completely price in ahead of time, unless those polls go back to where they were a couple of weeks ago and widen from there, you probably are going to end up having markets that are themselves waiting through November like the rest of us. So there's a politics section there. And then I think a really, really helpful, I'll close it up with this, a chart of the week to finish up Dividend Cafe that shows you the dividend growers in the market out of the great financial crisis for the next couple of years. Because right now what you have is companies that are paying down debt or have less debt or less leverage that the market, even though we're going into recession, even though we're in very uncertain

economic times, the market's favoring companies with more cyclical businesses, more debt, more risk than they are more stable. That is highly unlikely to last as we navigate through these economic waters. And when you look back to the financial crisis, you see how the market has historically looked at dividend growing companies coming out of periods like this. And I think that should be understood. If it doesn't help inform our view of the future, at least our understanding of history. With that said, thank you as always for listening to Dividend Cafe. Appreciate any help you can give us in spreading the word as you post it, share it in your social media, give us reviews and stars. If you'd like a copy of my book, the case for dividend growth, um, if you could just send us a

copy of any review, uh, or posts that you do about this, we will gladly send one to you on our dime as a gift. And that includes, if you write a nasty review that says you hate the podcast. Um, but a, we want to help support the dissemination of this podcast. And B, we want to clear out our storage facility. Okay. Thank you. Have a wonderful weekend. As always, thank you for listening to The Dividend Cafe.

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