The Dividend Cafe - Replay - National Conference Call on Covid 19 and Markets May 18, 2020

Episode Date: May 18, 2020

Chief Investment Officer David L. Bahnsen answers questions from investors on markets and the ongoing COVID-19 pandemic 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. Thank you, Erica, and thank you again, Scott, for joining us. This is exciting for me, even though I think we've done, you know, three or so of these calls, these video calls over the last couple months. This one is particularly exciting because it's the first time I'm actually back in the real office here in Newport Beach and back in my daily uniform of suiting up and coming into work. And about half, a little bit more than half of our Newport Beach office folks are back in today. So we're doing kind of a soft phased reopening of our California office headquarters, which is a lot of fun. It's been two full months of quarantine. And so we're happy to be back here and hope that

this call will be really beneficial for you. I'm going to turn things over to Scott Gamm. We got really great feedback from a lot of you after Scott's role in the last call. And I do want to give a little more information on Scott and why we brought Scott in. Some of you may recognize Scott because he interviewed me a lot of times over the years in his past jobs. First at thestreet.com, which is one of the leading online financial portals on the entire net. I mean, it's been a financial web star site for a couple of decades. And Scott was an anchor there before going to Yahoo TV. And I think he interviewed me on the floor of the stock exchange at least three or four

times. He has started his own company and works with the Bonson Group in a lot of our media relations and content distribution. But Scott is a markets guy. He's an extremely thoughtful guy. He's become a friend and the Bonson Group thinks very highly of his work. And I feel, as is perhaps evident in this very monologue right now, that having Scott involved helps edit me and focus our content to be a little bit more digestible for you. So I'm going to turn it over to you, Scott. Thanks for being willing to do this again. And we'll have our conversation. to you, Scott. Thanks for being willing to do this again. And we'll have our conversation. Well, David, thank you for the kind words. The feeling is mutual. And it's great to be with you and great to see you back in your office. When I was out there in January, things were normal. And

that, of course, seemed like a lifetime ago. But we'll get going on the markets right now. Certainly a lot to talk about, including today's action. And of course, the Dow is up over 900 points, perhaps driven by some of those reports this morning about positive news on the drug front. They've announced the results of their first human trial. It's a phase one trial, but 45 out of 45 people at different dosage levels that they were given showing the same level of antibody that those that had done the blood plasma test who had coronavirus now have. So it's essentially a very positive indicator that they have some vaccine program in development that is creating the antibodies that would stave off the acquisition of this novel virus. They've also done a lot of mice testing and have had, again, 100% success from what they're reporting and I don't know the quantity of testing done at the animal level but a lot of these

preliminary successes are what you need to be able to advance to further levels so this is not a sign that they have a vaccine it's not a sign that they're going to have one by the end of summer, and it certainly doesn't speak in any way to the production capacity. What I think it does indicate is that from this development to four or five other really significant endeavors that are underway, that you have not only a lot of positive science going on towards the development of something that would be preventative in people with coronavirus, but that you have an incredible commitment from the companies and the government to ramp up the research and the production and most importantly, accelerate through the bureaucracy to get on the other side of it. So I am very encouraged by the news. Now, as we're sitting here talking, Scott, the market's at 920 points.

I woke up at 315 this morning and the futures were up almost 200. So there was already a little bit of a positive day coming. The futures then went up about 500 when the announcement came on the vaccine. And that would have been maybe about 45 minutes or an hour before the market opened. And now you've seen this buying pressure and upward momentum has continued throughout the day. So look, even if you end up getting a bad trial at some point with this particular treatment, what you can clearly see is that the market believes that the development of a vaccine will accelerate a lot of the economic recovery, that a lot of the consumer behavior or fears of restraint that exist in the marketplace,

people are concerned about the speed at which people will return to normalcy in their economic lives, that that fear gets neutered substantially with positive news around a vaccine. So there's still plenty we don't know, but it would really take a lot of work to not see this in some positive interpretation. So I've got a couple of questions on the vaccine. First being, to your point on the market reaction, it kind of reminds me of last summer when you and I were in touch a lot just about the trade worries

that the market was sort of obsessed with. And if I remember correctly, the market was pretty range bound. But if you got a positive trade headline, the market would move to the top end of that range. You got a negative trade headline, the market would move to the bottom end of that range. Do you think we're in the same type of dynamic now? Only the difference is instead of trade, we're now obsessing over virus headlines and news about that. No, you're very astute.

news about that. No, you're very astute. And I'll use this to remind folks and reiterate that you and I have done no preparation, no practice, no sharing of notes or questions. But honestly, Scott, it's very astute because it's exactly what I think is going on. I think that trade bound range from let's call it mid 2018 to late 2019 was maybe 26 on the low end and 29 on the high end in the Dow. And we're in a very similar dynamic now, except for maybe the low end is 21 or 22, and the high end is 25 or 26. That may seem to be like it's not very narrow, a 4,000, 5,000 point delta, but that's very narrow when you consider it from the middle spot. It's only 2,000 points up and 2,000 points down. And we were having 1,000 point days, and in some cases, 2,000 point days so frequently in the month of March. So that volatility has been compressed

a great deal. I'm not saying that the market cannot get outside of that upper range, but I will be surprised if it does until there is not just forward thought to economic recovery and progress, but more meat on the bone in seeing it. So my view is that with optimistic assumptions on the medical side and the virus, and then factoring in the fed and the various monetary stimuli that are driving a lot of investor optimism then forward looking to where you see the economic data being horrible but getting better that still leaves you i think with an upper range in the dow 25 or 26 000 um and then of course reverting to normalcy uh once you get some clarity around corporate profits which i would hope to have by the end of this year on the lower end it's been

a little tougher to say i mean a lot of my bearish friends are just beating themselves up right now because that thought that a double dip back to the low point before has to happen, it was always fallacious reasoning, which is different than saying it couldn't happen. But just the idea that it had to happen was not historically accurate. The market never did retest the March of 2009 lows, by the way, and that became a generational bottom in the market of great import. But my point is that once the virus' worst fears were reasonably off the table, the idea of 400,000, 500,000 deaths, and at one point they were talking over 2 million deaths, hospitals overloaded, a complete overrunning of the American healthcare system. By the time that got removed from investor consciousness, you were still left and still

are left now with an economy that's in shambles. These shutdowns have left the employment data, the wage data, labor, and then, of course, the stuff that will really matter into the future for economic growth, which is our ability to produce. We're in a total freeze. Yet, I think the market is viewed as we're not in the worst case scenario that would have justified a maybe 18,000 or 19,000 Dow. So I don't think there's a science to it, but I think 21, 22 seems low end, and I think 25, 26 seems high end in the range of which you speak. And we shouldn't necessarily dismiss the trade worries that were in play last year because there is actual news on trade, which we'll maybe get to later in our broadcast. But just on this notion of a vaccine, I'm wondering how that fits into your overall investing strategy. Is that something that as a money manager,

you think about on a daily basis? I think it has a lot of impact to how we would expect valuations to play in the short term. It's certainly headline relevant as we're seeing in the market today. But in terms of our ability to construct a long-term allocation, I don't believe that speculating on the timing of a vaccine should be or can be an input. We believe there will be one and we would be agnostic as to that timing for no other reason than what's our alternative. How could we have an outlook as to when there will be an actual vaccine? It's completely outside of anyone's knowledge, both on a scientific and regulatory basis. I do believe that within a range of outcomes, having a vaccine, let's say that you're invested in a space that is sensitive to consumer behavior.

We tend to be much lighter in our exposure to consumer behavior, nothing to do with COVID, just as a general rule about the sort of non-cyclicality of dividend growth. sort of non-cyclicality of dividend growth. However, I certainly can accept at face value that there's probably going to be more people at the football games in the fall and more people at the shopping malls if there is a vaccine and when there is a vaccine versus before there is one. So I think it's relevant, but how much you can play into a timing decision, I think, is somewhat questionable. So with today's rally, we are really back at levels we saw in the market in September of 2019, which was not that long ago. So do you think right now the market is pricing in a V-shaped recovery? And if we don't get that V-shaped recovery, if it's more of a W or some of the other letters that folks are throwing out there, is that a problem for the markets? What does that mean if we don't get that V? Let me first address the issue about the market now being at levels it was September 2019 and then come back to the issue of the shape of the recovery. As a matter of fact, you are correct.

And there's no way you would have said that if it wasn't true. But, you know, we were also at 26,000 in February of 2018. So in one sense, the market doesn't seem like it's very much off of places it was not long ago. But that is a result of taking a low spot in a dip in the market

and comparing it to where we are now, just as I previously used, I think February 2018, a high spot. From the beginning of 2018 to the middle of 2019, we had a choppy market and you could pick different spots along the way where the market sort of bounced around through the trade war of, let's say, between 23 and 26,000. And so at this level, I don't know that that September 2019, which was the peak of concerns about double dip, about inverted yield curve, about a currency war with China, and of course, about the trade war itself, that that would represent a totally logical comparative point to where we are now, any more than using the 29,000 figure, which was totally agnostic to coronavirus,

was on the other side of the phase one China trade deal, was looking like the Democratic primary was blowing up. There were just various pro-market factors going on that all contributed. So my point being that whether the right spot for fair value is 24, 26, 29, based on various inputs, comparing them to various past points is necessarily going to be apples to oranges, because the political state is now different. Obviously, COVID and the entire economic turmoil, but then also the Fed, the balance sheet increases. increases there is not a precedent from qe1, qe2, qe3 and now qe4 where the fed has been actively buying bonds and stock prices didn't go higher there's no precedent for it now you could say well at some point that has to end maybe you could say this is different but if it is different it's only because they're buying more bonds this time and they're buying more creatively more aggressively as to what they're buying so i can make arguments on both sides the important part

comes to your second question scott which is the shape of economic recovery and i don't think that that's related to what the stock market will do the stock market is largely going to trade off the stuff i've been talking about. It's interpretation of Fed activity, the multiple in the marketplace that is created by other factors like the risk-free rate, and the overall sentiment that where COVID is and our forward views on corporate earnings, the trade war, a potential escalation on trade activity, those things drive a lot of market valuation. The fundamentals to the economy, I believe, are the most important thing to regular people, to folks that are wondering how their business is going to do, what earnings are going to look like, what wages are going to look like. That's going to drive the employment data.

But I don't believe there's been historically very much correlation in any six or nine month or even 12 month period with GDP itself and the stock market, largely because GDP is so backward looking and stock market is so forward looking. So we ultimately have to get into solving for what the economic recovery is going to look like. And I'm very much, I wrote about this a little Friday in Dividend Cafe, very much in the mindset that it's an all of the above shape.

That some aspects are going to be very V-shaped. I hope to God that includes business spending, capital investment, industrial production, manufacturing. I would love of everything that to be most V-shaped because I think it has the best supply side multiplier effect in economic growth. I'm skeptical that that will be V-shaped, but I believe you're going to have a different shape of recovery in different territories geographically and different segments of the economy and I think you're gonna see some V shape some U shape and some like the so-called swoosh shape of the Nike logo where you get a recovery but then

it's a little bit more long and drawn out as opposed to sudden and quick well and that's such a an important point And I want to reiterate something you wrote over the weekend, which is that you can't buy a stock called GDP, right? And I think that speaks to what you were just talking about. You know where I first learned it, Scott, was not in the U.S. stock market. It was in emerging markets. And I've shared this story many times, but it's powerful. And it was with an EM portfolio manager I'm very close with and have learned a lot from, but pointed out that from the early 90s up until we were having this conversation right after the financial crisis, so maybe 2009, 2010. At that point, China's GDP had grown something north,

real GDP, net of inflation, of 10% per year for that 18-year period. And their stock market was up 1% per year. Where Mexico had spent most of that 18 years in recession, no growth, negative growth, very low growth, and their stock market was up about 15%, 16% per year. So that was a dramatic illustration of what is actually a very generational lesson that GDP and stock markets are often disconnected. Now, the Mexico and China disconnections would be for very different reasons. But my point is that the U.S. stock market from 2009 to 2019 was up nearly 400%.

And it was amongst our lowest GDP real recovery of any post-recession since the Great Depression. And it was the lowest since World War II and Yet the market had an incredible comeback because the markets are very much looking to corporate profits which were in a huge bull market post financial crisis because margins were expanding and there was a lot of financial engineering. You had low risk-free rate from QE and zero interest rate policy that was allowing for a higher market multiple, even as corporate profits were growing. Now that framework set the stage for the big thesis we had at the Bonson Group for two or three years pre-COVID, which was

for this cycle to continue, we needed to finally get some boost in capex. And I believe we were starting to get that. I know we were in the data quite dramatically. And you had one of the best years in the stock market and lowest volatility years ever in 2017 shortly after trump was inaugurated where um capex was finally back on business investment the trade war neutered that deteriorated it then that started to get fixed and we thought hey is business investment back on and then covid okay and so as far as where the stock market is able to go to get an extension of its own rally in the backdrop of pretty muted and unimpressive economic growth, I think it's going to need CapEx. I think it's going to need business investment.

And that's going to require the right regulatory framework, fiscal framework, and certainly the monetary support is all over the place. So that's a big question on the other side of COVID. Well, and I'm glad you mentioned monetary support because, of course, Jerome Powell, Federal Reserve Chair, was on 60 Minutes last night, basically saying that there's no limit to what the Fed could do. I'm wondering your reaction to that comment and also how that fits into your investing strategy for the next year or so.

Well, I thought his comments were very honest from his point of view. I'm not sure you could correct me if I'm wrong. I don't know if he actually said there's no limit to what the Fed can do. If he did say that, he's certainly wrong. But there's always limits. But I do think what he was saying about, and I hear I am quoting verbatim, we're nowhere near at the end of what we can do. Like there's still significant, you know, fire that we can pull out if needed. I believe that's accurate as well.

Now, there's no free lunch. This is the part people have to understand. When the Fed says there's more we can do, there's a reason they're not doing it because it does come at a cost. And everything they've done so far comes at a cost too. Some of those costs are distorted to capital markets. Some of them expand the income inequality that many people are socially worried about in the country. There's no free lunch as a basic rule of economics.

But in terms of some of the things that the Fed could still do, I've been writing about this at my covidandmarkets.com missives every day. Look, the Fed can be very creative in what assets it chooses to buy. Once Bernanke set the precedent that they can use 13.3 of the Federal Reserve Act, the emergency provisions, to allow for Treasury to fund a little, to be loss-absorbing in a special facility, and then the Fed can lever up around that with printed money. Once they went down that path, and it was very successful post-crisis. I'm just simply saying that you expand that now into corporate bonds, municipal bonds, even high yield ETFs.

They could expand that into plenty of other places as well that would result in shorts getting their faces ripped off i don't know that they will do that they're well aware it has a social and um market oriented cost to it and how distorted it would be but japan has been far more aggressive than our fed is has been and so we know there's more room in the sort of central bank universe for them to do things um pal has i think uh acted quickly there are things he's done that i believe have been very bold and he deserves commendation and there's things that i'm very apprehensive about that they're doing that i don't question their motives for, but I just

simply question anyone in my shoes believing that they're going to come at no cost. There will be a cost to a couple trillion dollars more on their balance sheet, and it's frankly going to be more than a couple trillion when all is said and done. Now, you're going to see a chart today in COVID and markets showing that a lot of these emergency liquidity facilities they set up for primary dealers, for money markets, and for commercial paper, the balances are starting to drop. The emergency need to access these liquidity facilities is coming down. Even the primary dealer facility at its peak about a month ago was maybe one-fifth of the level it was in September of 2008. So I think a lot of it just had to do with them putting emergency provisions out there to try to keep things from worsening and just the provisions being there enabled things from

worsening. But can they go to negative interest rates i pray they won't they could that i don't believe that would be good for markets could they expand what they buy with their balance sheet yes and in some cases i actually suspect they will um the biggest thing that investors have to understand is that there is a short-term benefit, there's a long-term cost, and there's a lesson that gets permeated through society. And this lesson is one that has been the story of my whole adult life, which certainly means your whole adult life, Scott. The American investing public believes the Fed is going to be there,

what they used to call the Greenspan put, the Fed put. believes the Fed is going to be there, what they used to call the green span put, the Fed put. The Fed is there in the eyes of most investors to back stock risk. And that has proven to be true and has proven to be effective for real estate investors and for stock investors. But it certainly carries a downside that we have to be aware of into the future. Well, and you may have just answered this, but we're just getting a question in right now from a viewer. In what ways do you think the crises have been a lasting change agent to markets? Perhaps what are the long term implications, the staying power that some of this crisis may have on markets going forward? the staying power that some of this crisis may have on markets going forward?

I think that a lot of the monetary side of what we're seeing post-COVID is actually an extension of what we learned from the financial crisis, that there was a sort of genie-out-of-bottle moment for the Bernanke-led Fed in September, October, November 2008 that bled into the first quarter of 2009. I remember these moments like they were yesterday. And so once they said they were going to be there to bail out mortgage bond investors, and again, their motive was not to bail out mortgage bond investors. That was the effect. The motive was to come provide financial stability into such

a key area of credit in the economy. So whether it could be critical of it or not critical of it, my point is they did it and it set a precedent that when you, a decade later, have a health pandemic and they shut their whole economy down, there was no doubt that the Fed was going to be there to aggressively provide liquidity, and their favorite place to provide it, always and forever, appears to be residential mortgages. So it provided a backstop into the conforming part of the housing market. I'm not sure if the question asker is wanting to know just the Fed aspect of what we're learning in this period, but if they are also wondering other broad economic principles or long-standing social or maybe political lessons from this period, I think that question needs to be answered. And yet I am really hesitant because of what I hope is a humility that I try to have that I don't think we know yet.

I believe it's going to take time to really assess and really digest what paradigmatic shifts are going to come out of the whole COVID experience, not just with the Fed and monetary policy, but with a whole lot of other issues. So the way that the federal treasury ends up interacting, this is ultimately going to come from Congress and the White House, of course, with states and municipalities, what the funding support ends up being to troubled states out of COVID, that's going to potentially represent a new precedent in the federalism that has long dictated American political life. How long this unemployment stays on is going to perhaps redefine the social safety net in some way. I'm not convinced it will go this way, but I think it's very possible that you're going

to get a sort of modified, what was Andrew Yang's whole concept, you know, of universal basic income, that there is a growing acceptance in a crisis for that type of thing that could be more long-lasting. That has political and social implications. My point is that's something we have to watch. A redefinition of our relationship with China is low-hanging fruit. As I mentioned on Friday in Divinity Cafe, a redefinition of our relationship with Saudi Arabia, I think, is a very real possibility right now. So there's a lot of things happening geopolitically and macroeconomically that are going to affect the next 10 years of an investor's life. Well, you brought up Saudi Arabia and not

to necessarily focus on it now, but I think it's interesting. I mean, because folks may not have that on their radar right now beyond just what the price of oil is. So explain why that is something that should be top of mind right now. Yeah, it's interesting. I get a lot of little emails and so forth from clients saying like, hey, are you worried about oil? It seems like shale's in trouble and they can't make money without this much oil price. And so what's going to happen? It's usually kind of the media line. And so someone will sort of parrot that from what they've heard, and that's fair enough. And there's a lot of nuances that go around that, and I've talked recently about the credit situation that a lot of the producers in American energy face. But you can't really digest oil prices and the health of the energy sector without understanding the dynamics between Saudi

and the U.S. And I'm quite convinced that what you're wondering in your question is correct, that most people are not thinking about the possibility of a totally redefined U.S.-Saudi relationship. And to make this somewhat pessimistic, there's a lot about the US-Saudi relationship I want to be changed, okay? Personally, I find their actions in the month of March, flooding the world with oil supply in the midst of this COVID pandemic breaking out and the world economy shutting down,

I consider it a borderline act of war. And I maybe mean that metaphorically to some degree, but I mean, it's a big deal deal but even apart from the kind of anger over what transpired with an ally i think you have to then wonder if there is going to be a breakdown in us's friendship with saudi arabia what that means to the peace in the middle East, that largely our presence in the Arabian Peninsula has been facilitating. Does this then change the dynamic of Iran's power in the region? Does it create a triangulation with some of the more complicated forces that exist there? I would not be ignoring those subjects.

By the way, ironically, most of those possibilities increase the price of oil and increase margins to producers. So that doesn't mean there's not an investment thesis that's positive to come out of it, but it does, again, come with a cost. I'm not as concerned about Saudi undoing their peg to the U.S. dollar, that would have tremendous implications to the U.S. greenback and would probably cause the dollar to collapse quite a bit and oil prices to escalate. I think it's in Saudi's best interest because they're such a huge food importer to keep their peg to the U.S. dollar. But I think all things are on the table. And I'm grateful that the media hasn't caught on to this story. Because if they had, I think they'd screw it up really bad.

Well, on that note, another viewer writing in, what changes have you made lately to client portfolios? You guys have some high-yielding energy names in the portfolio. Yeah, so we did get a little lucky with our timing but we did add to some of those we're not going to mention any stock names on this broadcast but we did add to some of our higher yielding um integrated major oil and gas companies and we did um uh add to some of our pipeline companies and while trading out for the highest quality names in the midstream space from a balance sheet standpoint and we happened to do so at a level that was pretty near the bottom if not exactly the bottom when those

things were in all the disarray in late march. We're not going to be adding to that net exposure per se from where it is now, but we're not going to be subtracting either. We feel very confident in the dividend outlooks for these companies that we have in both midstream and integrated energy. And we intend to continue receiving those dividends, but also believe that none of those stock prices

are anywhere near fully recovered. And we see them as a long-term part of our investment thesis. So in terms of the acquisition of stocks, the basic theme that we discussed on the last call is still in effect, that we want very high quality names that are lower beta that we believe produce a lot of dividend sustainability and and dividend security to the portfolio and then we want to couple those with names that we think are thematically opportunistic some of the alternative asset managers

that are in the private equity world that have incredible i mean hundreds of billions of dollars of cash right now to go uh take advantage of opportunities in the marketplace both on the debt and equity side so uh and then of course the health care theme both in biotech and pharmaceutical. We prefer as fiduciaries to play those themes with higher quality names. Potentially, some of the lower quality names could rally harder, and we won't benefit from that. But that's okay. We want to be both defensive and offensive at the same time. And I'm really comfortable with the way me and my team are doing that right now. time. And I'm really comfortable with the way me and my team are doing that right now.

Yeah, because, you know, a lot of those areas of the market you mentioned are also tied to the economy, right? And, you know, kind of one gauge of economic strength is inflation, right? You know, we talked about monetary stimulus earlier, though, are you worried about a rise in inflation coming from all of these efforts, both on the monetary and fiscal side to combat COVID-19? Okay, so let me address the inflation question. I'm always worried about inflation coming because I consider inflation to be a tax but unlike a tax that you see on line 37 of your tax return and you write a check for inflation is a tax that you never know you're paying that you're always paying so inflation is a great detractor from wealth however generally people mean by that question, is inflation your outlook? Like, do you see a significant risk of big inflation coming? And the reason that we're wondering that

is because we see the government spending a lot more money, so therefore reduced interest rates higher, and then become inflationary a la the 1970s. And so I have become extremely convinced of the opposite thesis that macroeconomically, I think there is nothing more deflationary in world history, and I can prove this both empirically and theoretically, than excessive government spending. Now, I do not say that is a good thing. I'm very happy to not be overly concerned about the inflation threat right now, but that's only because I'm more concerned about another threat that I consider even more difficult, which is saving off a debt deflation spiral. The reality is that you have to be concerned about inflation as a financial planner. The fact that prices for certain things

may still be creeping up for your clients who one day plan to withdraw capital and their purchasing power may be lower. But in a certain segment of what they'll be spending on, generally it's health care that seniors would be more worried about. And for people that are maybe of a younger age, it's housing costs and education costs. Most of the other inflationary pressures have been to the downside on the consumer and electronics technology aspect. And then, well, yes, the energy prices, of course, have been very subdued. And right now we're very distressed. The energy prices, of course, have been very subdued, and right now we're very distressed. My own view is that the Fed would absolutely love to create inflation.

So it isn't that someone's worried about it or not worried about it. They should be worried that the Fed can't do it because it cannot be done by the will of a Federal Reserve. They are limited by the Federal Reserve Act. They cannot circulate money and create demand for credit in the economy. That money only starts circulating when there is a demand for goods and services. If they have sloshed up the money supply higher via excess reserves in the banking system,

and all of a sudden people start a lot of economic activity, that becomes inflationary. And then that is a whole different animal the Fed would have to do. They'd have to reverse their monetary policy. However, I don't think that the lesson in Japan or Europe gives a lot of confidence to the idea that the Fed can manufacture demand for credit. on manufactured demand for credit. Ultimately, an organic recovery of goods and services on the supply side is what will create economic health and economic growth. So I'm not worried about inflation, but that's only because I am worried about what I think is happening, which is excessive government debt constraining productive economic growth.

All right, we got about 15 minutes left, and we'll take a couple more questions as well. But I also, David, wanted to ask you before we wrap about the job market, right? Obviously, a lot of headlines, a lot of pretty devastating headlines surrounding jobs right now. Do you think that the losses we've seen in the job market will be temporary? Or will those turn into more permanent losses? Will those jobs ever come back? The answer is yes. Some of them will prove to be permanent losses and a significant portion will prove to be temporary. So it's going to be both and. The question, and I don't know the answer answer to, nor does anybody else, is what percentage of the lost jobs will prove to be temporary?

Right now, we know the number is somewhere around 36 million jobs lost. And we know that 78%, at least at the 21 million that went on the unemployment rolls in April, 78% of that 21 million classified their job loss as temporary from their vantage point. So I believe that that number will prove to be 50% or higher. But how much higher is a big difference when you're talking about tens of millions of jobs.

difference when you're talking about tens of millions of jobs. If 50% prove temporary versus if 80% prove temporary, that 30% delta is equal to 10, 12, 15 million jobs. And so it's a big deal. And ultimately, I think that the two questions I would have are how many of the jobs that are intended to be saved by the CARES Act, by companies who received this Paycheck Protection Program and are needing to put people back on the payroll within eight weeks and ramp up that pay, how much of that gets done and where they kind of modify the rules to provide a little flexibility to get people back on the payrolls going into June, July, etc. You know, when it's an experimental government program, Scott, it's hard to have a lot of confidence in how it's going to play out. That's not to mean it won't go well. It's just to say we don't really know.

And I'd say there's maybe a wiggle room of 5 to 10 million jobs that plus or minus that could net out based on how that goes. The other big factor is the extension of unemployment benefits. The Democrats in the House passed by nine votes on Friday night, a $3 trillion stimulus 4.0 bill that's not going to get picked up by the Senate. It's not going to become law. But it does put a marker down that they're looking to extend the $600 per week unemployment benefit on top of state unemployment insurance benefits through the end of the year. And I suspect that if some version of that federal subsidy extension gets done, which again, I'm not making a comment right now on whether or not it's good or bad policy.

I'm only making an economic observation that for people under about $50,000 of income, they're very likely gonna have a big incentive to not go get a job or not take their old job back because they'll be getting paid more to not do so. Not everyone would do that. A lot of people want to go back to work. A lot of people would say, hey, this party will be up in a few months. I better get what I can now. But obviously, there'll be some who wouldn't do that. And so that creates a lot of variability around how the labor data will play out.

So I can't give a specific answer as to what percentage will recover i certainly though believe that the lion's share the jobs that have been lost are going to come back when they open up the economy there isn't enough um lost demand once the economy is operating to justify all of those job losses but in those areas where restaurants are not going to reopen and some of the food and beverage and hospitality and service sector is going to be bruised and battered, potentially through the end of the year, I think you're going to see some real job impairment. And the longer the shutdown goes, the more likely some of those losses transition to the permitted column.

Well, and we just got a related question about restaurants. Someone writing in Spokane, restrictions are lifting and construction is bouncing back. Restaurants in some areas are showing activity. So given all this, are travel recreation companies at risk in the long term? And which sectors will be the laggards? Yeah, it's interesting. People feel very strongly about this issue. And I don't mean economists and finance professionals. I mean, regular laymen have really strong opinions that they'll share with me about, oh, I know for sure no one's ever going to go out to eat again, or everyone's going to go back on the first night and different versions in between. And the reality is, I think it's going to

be a mixed bag, different geographies, different demographics. But I do tend to lean a little more on the optimistic side that I think a lot of people are very anxious to get back into some degree of healthy social living. I think there's going to be changes in the spacing, changes in some of the logistics at some of these restaurants. But the data, whether it's in Spokane, Washington, or even what we can see with open table reservations in Naples, Italy. I shared this data point in a COVID missive last week

that they're now seeing their online reservations up 50. I think it was up 57%. So it will take some time. And a lot of restaurants themselves, it's not about the customer demand to get back. Some of the restaurants aren't going to be open because they've now taken on such a significant financial hit that it's going to be difficult for them to be able to open their doors.

It's a low margin business. And so when you take 10 to 20% off your top line, that can be very frustrating. So, you know, we don't, we're not invested in consumer discretionary type names. I'm more bring it up as a point, a data point around consumption in the economy. The hospitality sector is another one, even apart from food and beverage,

hotel lodging, companies doing corporate events. Clearly some of those things are going to take longer to recover than others. And that's another area, back to the very first question you asked me, where the vaccine becomes somewhat relevant. I do know this these things are coming back i'm completely not in the camp that uh companies are never going to do corporate events again and people are always going to do their business uh meetings via zoom and video and and not at all over restaurants and so forth i don't believe any of that but it's just

the pace of recovery and normalization that's a huge question and i'm forth. I don't believe any of that. But it's just the pace of recovery and normalization that's a huge question. And I really don't understand those who have a lot of confidence in their theory, whether it's a bullish theory or a bearish one, because that would mean having confidence in something that we have no precedent for whatsoever. You know, we talked earlier about the incredible measures that the

Fed and, you know, Congress is taking to, you know, combat the economic fallout of all this. And someone writes in, given the ballooning of government debt, how can this be sustainable? And what are the scenarios for how this ends? Well, the answer in theory as to how government debt that is above and beyond the revenues can be sustained is that they can continue running deficits. And how can they keep running deficits is because the bond market keeps letting them. And how the bond market keeps letting them

is because the U.S. is a pretty big, powerful country and a lot of people want to own the paper because they believe they're gonna get paid back because they've always gotten paid back and the US is the biggest baddest country on earth and so they're gonna keep paying back so the bond markets ability to fund the deficits is how it can happen now is there a point at which that has to end? I mean, I think most people would say countries cannot run debt infinity. But what that level is, I mean, look, we were talking about a total national debt

in the late 80s of under $1 trillion, something in the range of 800 to 900 billion, not the annual deficit, the total balance of the national debt. And at that time, the apocalyptic things being written about the national debt would put some of the things we hear now to shame. I am a balanced budget guy. I believe in living within our means as an individual, my family, and as a country. But I can't tell you that there's a point coming in three months or three years at which all of a sudden this red ink becomes the

point at which everybody revolts. One of the biggest things that helps the United States run the deficits they run is that everybody else is worse you say like oh i do not believe how responsible the u.s is i want to go put my money in japan or in europe or china you see what i'm saying there is a sort of race to the bottom element with this that that that changes the conversation ultimately the united states needs to reverse the trajectory of debt and the only way to do that is to cut spending and that's very difficult politically to do because the people don't want to cut spending so then you say okay well we need to raise revenue then the only way to raise revenue is to get more economic growth you can say well what if we just get higher taxes from the same amount

of growth? But the problem is that taxes cut into growth. Higher taxes become more disincentivizing, marginally. You really need more revenue to come from greater economic growth. And it's very hard to get more economic growth when you're up against the private sector being crowded out by the excessive debt itself. So there's all kinds of policy things I could share as to what I think they ought to do in the years and decades ahead. But I suspect the question is more geared towards what I think they will do. And ultimately, my experience with these things is that the American people allow it to go on until they hit a crisis. And that's what I think will end up happening here as well.

All right. And I think we've got one good question, I think, to end on, which is, is there anything that keeps you up at night? Well, okay. I don't sleep a lot, but that's not because I'm tossing and turning in bed it's because I I don't I I work long hours and and have sort of a regimented program and I'm more focused on the quality of my sleep than the quantity of my sleep but what the person probably wonders is are there things that are are producing a lot of anxiety and anxiety and and I can answer it in a more personal context if you'd like, but let me address for the sake of my clients.

I have total confidence in the philosophy and our execution of the philosophy of how we're handling and stewarding client funds. I do not lose sleep over the decisions we make on behalf of clients. I worry that some clients may break the plan themselves. In the month of March, with anxieties running that high, I certainly worried about folks who would abandon their plan, but I did not worry about the logic

and sustainability of their plans. Whether it's coronavirus or financial crisis or whatever the next thing will be, there's no part of me that believes 20 to 40 percent drops in equities are going away. They can come every four years, five years, 10 years, whatever the case may be. And that really painful and difficult volatility reality is part of the return premium that has enabled equities to return as NASA class 9% or 10% per year for 100 years through world wars and health pandemics and everything else. So I don't worry about the positioning of client portfolios. I do worry about our country. I do, I love America. I am being very

honest with you. I love the country and I want what's best for our country. I worry about the polarization I see, the tribalism. I worry about the propensity for issues that might somewhat seem to be either medical or economic, maybe even political, to become cultural issues and cultural sources of division. I worry about the national debt that someone asked about a moment ago. But those things don't keep me up at night. And they did keep me up at night at the time of the financial crisis. The viability of the firm I used to work for, the viability of our global financial system, that was keeping me up at night. That was keeping me up at night. The difference between David Bonson now and David Bonson then is I do not spend very much time worrying about things that I cannot control.

And I don't want my clients paying me to worry about things I can't control when they're paying me to worry about things that we can control, to affect wisdom on behalf of the decisions that are made for them, to execute well, to prudently assess risk and reward and make decisions around that. So most of the things that I think would keep someone up at night are probably in that domain of things that are uncontrollable. And I've worked really hard over the last 10 years to no longer be controlled by things that I uncontrollable. And I've worked really hard over the last 10 years to no longer be controlled by things that I myself cannot control. Well, David, thank you so much for having me on this call.

I certainly learned a lot. I'll toss it back to you for a closing remark as we wrap up here. Well, let me just close by just thanking you, Scott. I really appreciate your willingness to do this. I think it facilitates a nice conversation. Obviously, we'll see what client feedback is and so forth. And we're going to keep doing this.

We're going to keep writing daily missives. We're going to keep writing weekly dividend cafes. Please check out the other content that my colleagues are putting out. Trevor Cummings is doing his thoughts on money every week. It's a fantastic financial blog that I want people to read. Kimberly Davis, also one of our partners, has just really built out an incredible set of content, often around women's issues, but covering a whole gamut of things that I think are really truly beneficial.

whole gamut of things that I think are really truly beneficial. Our financiers is intended to drive more wisdom, more resources in peripheral planning. We're having an avalanche of inquiry these days about taxes, estate planning, financial planning, things even outside of just the kind of investment allocation work that I do as chief investment officer. So just understand that even though I'm here talking so much about markets and the economy, that more than any time in company history, the Bonson Group is right now very well resourced with a very deep and wide bench. And I am very grateful for all my partners, all of our advisors, and our entire team and the services we're trying to provide every day. I encourage all of you, clients and those interested in learning more, to reach out to us.

Any questions you have that are keeping you up at night, reach out to us. Let's see if we can help your sleeping patterns a little. Thanks, everyone, for listening. We're going to tune out now. We'll be back with you in two weeks. listening. We're going to tune out now. 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.

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