The Dividend Cafe - Profits Not Policy

Episode Date: February 26, 2021

So when I launched The DC Today, it freed me up to use Dividend Cafe to be more “singular topic” focused, and I really do believe that makes for a better commentary. I have mostly not used this weekly commentary for “ad hoc” market discussion or current events, and I think this approach has enabled me to go a little deeper into topics that I believe are essential in their relevance. I plan to continue this approach until I get inspired otherwise (or overwhelmed with hate mail, whichever comes first). This week, though, I do a little bit of both. The “singular topic” is a really important one – and that is seeking a better understanding of what really drives asset prices over time. There is a need for improved knowledge here, not just amongst mom and pop investors but apparently amongst the professional class as well. But I have been in New York City away from my family all week, which means one thing about my evenings back at my apartment – instead of hanging out with my wife and kids, I am just sitting there, unrepentantly (and some would say pathetically) reading more and more research. And this leads to one thing – more fodder and inspiration for the Dividend Cafe. Ergo, I cover a few “odds and ends” this week as well. Whether it is the discussion of market forces or the tidbits covering a healthy array of other topics, I truly hope you will enjoy today’s edition of the Dividend Cafe. Let’s dive in … 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 recording here from New York. And I'm going to kind of set this up the same way I set it up in the written Dividend Cafe. First, if you don't mind, I promise I'll just take a minute to do it. But I want to give kind of a sort of reset, reiteration of what we're trying to do with the different properties that we put out and give you an explanation as to why the

Dividend Cafe is the way that it is now. For those of you who had maybe just subscribed or just started receiving Dividend Cafe, you an explanation as to why the dividend cafe is the way that it is now that for those of you who had maybe just subscribed or just started receiving dividend cafe, you probably have no idea what I'm talking about and don't care about this and that's okay. But basically, um, there's been a pretty intentional effort as of late to make the dividend cafe, first of all, kind of singular topic week by week, but also much less focused on the events

of the week and focused on various, you know, taking a less miscellaneous approach might be a good way to say it, where for about 12 years, it was really written as a weekly market commentary about what was happening in the market that week and just sort of whatever my reading and writing and week by week, day by day, sometimes hour by hour inspiration led to. And when I began writing the COVID in markets in the midst of last spring, in the midst of the pandemic and the lockdown, that sort of took over. First of all, it was daily. It was really

quite intensive. And there was just a lot of literally what was going on right there. And then admittedly centered around COVID, but a lot of the market and Fed and economic impact of what was going on. And then when I decided to stop with the COVID market submissive. You can congratulate me later on my timing there. But I think it was not only done, I was done, and it was, I think, very well-timed, but I did make the decision to continue with the daily communique. That is what the DC Today is. I hope most of you that read Dividend Cafe are also receiving and reading the DC Today. But we don't do a daily podcast around it just because of time and labor intensity. So if all you do is watch the videos or listen to the podcast, you don't get those daily market discussions and ad hoc news events and economic updates and things.

And yet we do provide that every single day in written form with the DC Today. So the Dividend Cafe then allowed me to kind of reframe it, reconstruct it a little, and to do so around what I wanted to be and still want to be a kind of topic that I think is more than just what's particularly relevant right then and there. Less market sensitive and calendar sensitive and new cycle sensitive and more evergreen, sometimes philosophical, sometimes less so, but things that I believe are pertinent and valuable for investors. And I'm sure that there will be weeks that I miss the mark and there'll be weeks that maybe I don't miss the mark for some, but do miss it for others. There's a lot of subjectivity into what people will like and

benefit from. And I get that. I'm pretty thick skinned about this now, but it's just very different than when I began writing it. And some of you have literally been reading since day one, back in the fall of 2008, 12 and a half years ago when this began, where it was really intensely, purposely focused on what was happening that day, that week in markets. six, seven weeks of Divin Cafe being really kind of just a single topic extrapolation of something I think was really important. A couple of them became two-parters, but that whole kind of all over the map, a little emerging markets here, a little bond yields there, that type of thing, we're kind of doing more day by day in the DC Today. So I guess if you are only a podcaster video participant, then the DC Today written is something you might want to consider. But to the extent that what you're getting out of us on a weekly basis with the podcast and video is now this, well, that is

the reason. This is the reason. In terms of this week, what I'm about to go through here is the topic that really kind of struck me this week and allowed me to just sort of type away. I kind of began it on Thursday morning and finished it here this morning, Friday. And I think it's a very important point, and I hope that I'll effectively communicate it for you guys that are watching or listening right now. But then at DivingCafe.com, I also sort of went into the old school of what I call odds and ends. You know, there's some stuff on federal spending. There's some stuff on merging markets, on bond yields, a few different categories that I don't think were really fit for DC today, but that I really wanted to communicate and whatnot. And I joke in Dippin' Cafe, although it's kind of true, but I don't even know why I say the word joke. I just sort of describe that I'm in New York right now and my wife and kids are out in California. So when I'm coming

home to my apartment every night, like any normal person, I'm just sitting there reading more research, you know, because I'm not doing my family stuff. And so it just led to more and more things that I kind of was inspired to share. And so check out DivingCafe.com if you care about the odds and ends. If not, you know, I really do welcome feedback. I want to get this format right. First and foremost, it has to be authentic to what I enjoy and what I like and what I think I'm good at as much as possible. But I also want all those things to be informed by what is benefiting people. And sometimes when you ask for feedback, you get 10 people that say hot and 10 people that say cold, and you're kind of no better off.

But to the extent that there is any constructive feedback that could help us improve what we're doing in any of the mediums from podcast, video, written, DC Today, Dividend Cafe, I definitely want the feedback. I pay attention to it. I get a lot of good counsel from my team. We have a whole communications department and a client experience department that provide a lot of feedback. But I don't think there's a set formula. All I've ever done is just kind of what felt right. And then we've modified as we've gone to try to improve it. So as it pertains to Diven Cafe this week, and like I said, this is all laid out at DivenCafe.com in written form. But I want to talk to you about this idea that all that matters is policy. And the headline was,

all that matters is policy. Okay. And, and the headline was, um, it's all policy now. And, and it was from a research paper I was reading. First of all, the author of the research paper is, is brilliant. The, how the research house that he works for is indispensable in my process as an investment professional. I read their material religiously, hundreds of pages a week for years. And even this actual piece was really good. There was a lot of good information in it. And I have a chart from the piece that I put in Diven Cafe because I agreed with it in the right context. But the reason I bring it up was that there was something about just the framing and that verbiage that's really troublesome to me, but for no other reason than it is incomplete, not because I think it's inaccurate. When we talk about policy

mattering to your portfolio and that the market is taking its P's and Q's right now from policy, And the market is taking its P's and Q's right now from policy. And people in his article, he's referring to the triple whammy of monetary policy, fiscal policy, and vaccine policy. I would say vaccine is at best more of a hybrid around private actor actions and policy. But I get his point. It's fair enough. It's not something I'd care to fight about. But I get his point. It's fair enough.

It's not something I'd care to fight about. But when you look at the monetary and fiscal side, it doesn't seem like something I would disagree with in the sense that I myself have devoted weeks of the Diven Cafe and years of my life to this very point, that the macroeconomic context of what is likely to be the primary driver of various economic growth dynamics is itself a byproduct of the cycle and the intersection of fiscal monetary policy around debt, spending, and then the various responses and counter responses that come from that. And I've talked about this ad nauseum, and I'm going to talk about it a lot more in years to come. But I believe that there's something that is at risk of being missed

if we put a period at the end of the sentence that a policy is what matters. In the short term, I'm totally sympathetic to the idea that look, the markets see growth coming and bond yields go higher. And then that causes growth stocks to decline and value stocks to go higher. And so because of what moved bond yields was policy driven, ergo, policy is affecting what's happening on certain sides of the stock market. It's all fair enough. And there's a little bit of truth to it, maybe a medium amount of truth to it

in shorter term. But see, I think we have to understand the cart and the horse here. And this comes down to why does one buy a unit of ownership in a company, a company that very likely they don't know anyone at? Possibly they don't know anything about their products or services. Generally, they might. Sometimes they might know too much because they end up buying the companies that are really directly connected to what their shopping habits are. And that usually is a disaster, by the way.

But my point being, the familiarity level is really not that intense as an investor standpoint. Yet it is being bought for the purpose of meeting one's financial goals, paying for their kids to go to college, paying for their future retirement plans or charitable plans or legacy plans. There's like this very tangible, very personal financial goal. And we're trying to meet it through some part of the outcome of a company. And the reason is because companies deliver phenomenal outcomes. And the reason they do that is because of the profit motive. And the reason they do that is because of the goal for human flourishing. So this is economics 101. This is anthropology. This is man, human action at its best. And I am simplifying what is a very non-simple thing to make the point. It is the goal of profit making and wealth creation that we're investing in. And we

don't always think about it that way. We're not totally self-aware. I get that some people say, no, no, I'm just a trader and I'm just coming in to buy here and sell there and get out and all that. That's fine. But the world that we are in, the Bonson Group, is in buying sustainable enterprises that have the ability to sustain a profit growth. And I get and believe, agree, that policy impacts that process. First of all, monetary policy that can affect bond yields affects the valuations that the prices of these companies that are creating profits will trade at. So a company can be at 20 times earnings or it can be at 15 times earnings. And the profit growth may be higher 15 times than 20 times.

And so just by nature of that valuation dynamic, which is usually more sentiment driven than monetary policy driven. But again, it certainly gets into a secular cycle like we are now where it impacts valuation. And so I understand that. And I also think there's some room to concur that fiscal policy from tax cuts, tax increases, spending increases, targeted things that Congress or the White House may do can impact a company either in a direct way or at least maybe an indirect way. However, I don't believe that it ever will make sense to say I'm investing in this company because this policy X, Y, Z. This policy is going to help. This policy is going to change. The policy can help. A policy to change. The policy can help.

A policy can hurt. A policy can change. More so short-term than long-term. But the reason we're investing is our confidence in the ability of a business and its management and its strategy to adapt and deliver a profit result. And out of that profit result, achieve wealth creation that feeds into your family and my family for the purpose of meeting financial goals. So I think that the language of saying it's all about policy stuff is fair enough when you're not meaning it that way, when you're being

just sort of nonspecific. On a day-by-day basis right now, we see kind of policy things that are moving up bond yields, and then that's affecting stock prices. And I get all that. And there's other examples too. Now, a quick timeout. It is not true that the thing we're talking about right now is monetary policy driven. When we're talking about the 10-year and the 30-year bond yields that have moved higher this week. In Japan, I think it's fair to say that the Japanese central bank controls the bond market, up and down the term structure, 0 to 30. They own the bond market. That's fair. Not here. Not in the United States. The Fed cannot control inflation. And they have tried. The Fed cannot control the 10-year bond yield.

Now, could they come in and do a radical yield curve control? They could. And maybe they will. But they haven't. They're not. So yes, the Fed controls the Fed funds rate. Well, the Fed funds rate is 0% now. It was 0% Monday. It was 0% two months ago, four months ago. It was 0% 10 months ago since the COVID thing happened. The Fed hasn't moved that. The Fed hasn't changed the portion of monetary policy they are controlling, which is profoundly important, which is heavy amounts of liquidity being pumped in the system through quantitative easing and holding the Fed funds rate at the zero bound. The longer yields, even then, influenced by the Fed, influenced by the short-term rate, sure. But that's why you get yield curves steepening and flattening, because the Fed doesn't control it. The market does. And right now, if the market believes there's more growth coming,

especially the productive growth kind, then you expect bond yields to go a little higher. Ultimately, government spending holds it down. That's the thing I've talked about over and over again. I don't think these yields get a lot higher. But my point is, when the 10-year in a given three-month period goes from 1% to 1.5%, that was not the Fed. It was against the Fed, really, if you want to be honest about it. So I don't think the policy even affects these things as much as we say. But even where policy does affect things, I don't want people to lose sight of the fact that the profit motive and the ability of highly competent, highly sophisticated, strategic, competitive businesses are what we're investing in.

And sometimes we're going to be wrong. Sometimes the business is going to be wrong. Sometimes they're going to be wrong before they're right again. That's actually the story of enterprise is that companies have highs and lows, but good companies overcome challenges, things like that. But I believe that once you disconnect your investment thinking from the objectives all the way to the kind of execution side of portfolio, once you disconnect it from the big thing, the main thing, which is that profit motive, you make a lot of mistakes and you fundamentally misunderstand what's really happening. There's no company we should be investing money in, if we do not have confidence in that company's management

strategy and execution to grind through or overcome or work around or overcompensate or whatever the verb you want to use is, all sorts of different policy stimuli, all sorts of catalysts that will come from the monetary side, the fiscal side, geopolitical, what have you. To the extent that I believe in a sort of long-term trajectory of cash flow growth, of profit growth, and then, of course, the return of profits, deaths, the dividends, whole other subject, the fact of the matter is I'm not making a call on what policies will ebb and flow along the way. I'm making a call on that company's ability to overcome the ebb and flow of that policy impact. If you think there's someone out there that can predict what's going to happen policy-wise, be my guest. But they can't. And

even if they could, being able to guess what exactly is going to happen on the policy front does not come with a playbook on how to invest around it. What I do believe in is staying as tethered as I can to companies that are creating competitive advantages and enabling themselves to do what we do in a free enterprise system, which is create goods and services that people want to buy and out of that extract profits, actual wealth creation, expansion of the wealth pie. This is why kind of my whole passion for investing has always come out of a passion for free market economics. I don't think the two can be separated. Policy study is what I do. It is relevant. But the fundamental driver, back to cart horse stuff, is profit creation. That's what we invest in at the Bonson Group. I hope this is

helpful. I hope it's interesting reframing for you. I definitely welcome your feedback. And with all that said, I will let you go to DividendCafe.com for the other odds and ends. And I do wish you a wonderful weekend. Look forward to coming back to you next week with yet another Dividend Cafe. to you next week with yet another Dividend Cafe. 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. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice.

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