The Dividend Cafe - Replay - National Conference Call on Market Outlook June 15, 2020

Episode Date: June 15, 2020

Replay of National Call Market Outlook with TBG CIO and Founder, David L. Bahnsen and Scott Gamm of Strategy Voice Associates. 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 as always, Erica. I appreciate it and hope everybody is doing well and enjoying the beginnings of summer and hopefully depending on where you are in the country, enjoying some level of return to normalcy, though I understand that that's definitely less true in some areas than others. But our goal today is to really unpack a lot of what's been going on in the markets. There has been quite a resurgence of

volatility in the last week or so. And the only reason I say last week or so, by the way, maybe Scott will ask me something about this, is because people are totally accustomed to defining volatility only on the downside. The reality is we've had plenty of volatility downside. The reality is we've had plenty of volatility beyond just the last few days. It's just that it's been both upside and downside. So anyways, I want to be able to really answer your questions and we encourage you to send them to us in the middle of this call to covid at thebonsongroup.com and we'll address them live on air. But in the meantime, let me turn it over to our host, Scott Gamm, and let him take it from here. Well, David, thank you so much. And it's great to be with you again, as always. Last time,

I joked that the market had risen after each one of these calls, and we seem to be bucking the trend today. I think the closing price of the S&P two weeks ago when I last spoke to you on this call was 3055. We're just below that at 3040. So we'll see if we can get above 3055 by the end of the call. Now, Scott, you'll have to keep your screen real time here because we're now at 3060 on the S&P as it's moved up 18 points. Excuse me, it moved up. All right. Yeah, 18 points just since you started talking. So if for those people that are short term investors, in the last 38 seconds, they've made some money. Wow. All right. Well, that is a good lesson for

now and speaks to your earlier point about volatility in both directions. And I'm just curious because it seems as though if you blinked an eye last week, you missed a 7% down day in the market. And I'm wondering if you think that these big swings, both to the upside and the downside, in short periods of time are sort of the new normal for the stock market right now? Well, I mean, they're the new normal for the stock market right now. But I think that the question is always when people use the term new normal, is it the new normal going forward? I believe it was 5.9% on Thursday, not quite 7%. But it's interesting because the market, I wrote in COVID and Markets Today, I summarize the day-by-day movement to illustrate the point you're making of this enhanced

volatility. Now, as we're sitting here talking, the Dow is up 150 points. The Dow was down 750 this morning. So you have so far a 900 point swing intraday. On Friday, the market went up 850, ended up going down 150. So again, another 900 point intraday swing, and then closed up almost 500. Thursday, we had 1800 point day in one day, but then Wednesday was down 300. Tuesday was down 300. Monday had been up 500. The Friday before that up about 850, I believe. So we're now talking six or seven market days. It's not very, where each day has had on the low end, 300 points of intraday volatility, and on the high end, you know, 1000 or more. The reality is that we have had one third, 33% of all days this year, where the market has been up or down more than 2%. That is incredible. If we close out the year like that, it'll be the most volatile year in market history besides 2008 and besides

1929. That tells you the kind of environment we're living in right now. And so with that, David, you know, what struck me in something you wrote a few days ago in your daily missives is that you didn't really get many calls from your clients from the big downside moves we saw last week. Now, perhaps that speaks to how well you've prepared your clients for this environment. But what does that tell you? I mean, certainly we saw a downward move in the markets while we were above a pretty high level, 3,000 in the S&P. Yeah, there's a couple of things. First of all, it's entirely possible that some of our other advisors got calls from their clients on Thursday. I would never fault a client for reaching out in the middle of an 1,800-point day.

My comment, you're right, was that I didn't have any. And that really says something. I'm quite accustomed to interacting with my clients very heavily throughout the day and throughout the afternoon. And as my wife will tell you, sometimes throughout the evening and throughout the early morning, I hear from clients all the time, text, email, phone, all the above. And yet I didn't Thursday. And my belief is that it is hopefully some credit to the efforts we go to, to offer our perspective and educate clients, prepare them for the realities of volatility. I also think that there is a sense in which people had to have been expecting some consolidation. You just simply can't reach

27,500 on the Dow that quickly and not expect that there would be some kind of blowback. But again, the part where perhaps I'm not giving us enough credit is the fact that I do believe daily communications, daily missives about our perspective is somewhat preemptive in some of those things. And then if you look into what the message of it is, apart from tooting our own horn and complimenting our clients, I think a lot of it is the fact that the overall reality simply does not match the way in which many in the media are trying to portray it. This concept of a second wave creating this sort of new level of economic vulnerability, it just doesn't meet reality. And I think people know it. And I think the markets know it,

not just the stock market, which was blowing off some steam from that escalation last week. But I think when you look into credit spreads, when you look into investment grade bond spreads, when you look into the way mortgages acted, syndicated bank loans, okay, syndicated bank loans and residential mortgages, just so we're clear, have far more real-time vulnerability to COVID than the stock market does. Now, maybe it's different with cruise lines and airline companies and things of that nature. But I mean, you're talking about a very real street level vulnerability around the economic sensitivities of COVID. And yet those things, bank loans, which are largely with small businesses and with mortgage bonds, traded higher on Thursday and Friday. So I think that that tells you

that there's a disconnect between the way some of this is being portrayed and the way many of us feel about it. Yeah. And here we go now with stocks at session highs, the Dow up almost 200 points and the NASDAQ up almost one and a half percent. And I think that's important to touch on too, this sort of outperformance of the NASDAQ and broader tech stocks throughout this entire three months of stock market volatility. Does that say anything to you or does that strike you in any way? It does. I don't think it's a bullish thing. I think people should be very concerned by it when the stocks that had performed best coming into a period then and are the most popular names and the largest names perform best coming out of it, it seems to speak to something other than underlying fundamentals. And it's obviously entirely driven by the PE ratios expanding, right? None of these companies are organically growing earnings at this time. A lot of companies, we don't even know what's going on earnings growth

because there's no visibility. They're not providing forward guidance. That would be true of most companies. But particularly with some of these big tech names, you just see PEs that were at 40 going to 50 or were at 100 going to 130. And I'm not going to say individual names on this broadcast, but there's a couple principles at play. One is that popularity is a self-reinforcing mechanism.

When people are buying stocks because they're popular, they become more popular because people bid the prices up and that draws more people in. And so that process kind of continues until it doesn't. But then it's a self-fulfilling prophecy on the way down as well. And with index ownership as heavy as it is now, I have no opinion as to how high some of those very overpriced names can go. I just have a very strong opinion that the risk reward trade-off is unattractive. All right. So let's move to some questions that we've been getting from folks who have been writing in over the past couple of days.

David, somebody wants to know if last week's marketability has changed your views on the market at all. You kind of alluded to this earlier, but are you doing anything differently because of what happened last week? No, what happened last week is something that every broadcast you and I have done so far, every communication I've had with clients since the COVID peaks of March was a part of those projections, a part of that kind of landscape, which is that there would be a point in which the market recovery out of its oversold conditions would then bounce back very strongly and lead to a period of choppiness and volatility. And that would be sustained. And I don't think that we face a sort of range bound market up 500 points Friday, down 700 points this morning, that kind of stuff. I don't think we face it just

for this week or next week. I think we face some degree of directionlessness in the market likely through the rest of the year. And that's why I think it's so important that people not expect a Dow 30,000 in the next couple of weeks and not expect a Dow 20,000, that there's some range that's tighter than that. And that's a difficult place to make money in a six month period if you're trying to buy a stock at one price and sell it at another. But see, we don't do that. I'm not looking to buy a stock now and sell it in six months ever. Ideally, I would view that as a failure on my part. I'm looking to buy sustainable companies that can deliver a return of equity, a return on equity, a return on invested

capital to my clients for a long period of time. And so the advantage, if I'm right, about a sort of period of directionlessness and choppiness in equity markets for the next six months is that we're dividend growth investors. Therefore, for accumulators, they're very likely to get certain opportunities to accumulate more shares at lower prices as they're catching the up and down movements in that reinvestment of dividend. The advantage to those clients who are withdrawing from their portfolio is that the market doesn't have to be going higher for their income to be going higher because we're continuing to get that vertical mobility and the dividend income of our client portfolios.

But as far as my perspective on markets and the way the volatility took place last week, it sort of made me a little bit more bullish macroeconomically. And the reason for that is that what I alluded to earlier, that kind of equity drop, which didn't surprise me at all, was not accompanied by other asset classes falling off. And as I look onto the screen, just as I do all day, every day, I am accustomed to seeing equities drop that violently and seeing high yield bond spreads blow out, seeing other aspects of credit markets, even municipal bonds. The month of March was a great example. I mean, municipal sold off huge because people have that macroeconomic concern,

how are state and local municipalities going to hold up financially? None of that has really been evident in this newer bout of volatility. So you mentioned bond yields. Let's talk a little bit about the relationship between stocks and bonds right now, because we've got someone writing in, what is one way you see investors repositioning around a long-term bearish view of bonds and a short-term agnostic view of equities? Although you did just say that you're a little bit more bullish on equities in the short term. Yeah, but what I really should say, I don't believe I'm actionably more bullish on equities short-term. I think our perspective of a moderate weighting to equities with cash reserved to deploy in periodically over the next six months, that's our view on equities.

And that's not likely to get more bullish or bearish. That's a pretty neutral stance that we're being opportunistic by deploying cash over a period of time. And when I say opportunistic, we're accompanying that with defensiveness. We don't want to deploy it all at once because we want to be positioned around the possibility of downside volatility that comes and goes as this economic recovery transpires. The question about having long-term bearish view on bonds term bearish view on bonds is very difficult because you have to have a substitute for the asset class. You can't just simply say, I think something's going to deliver a lower return, but I don't know what I'm going to do with that capital. And so when one decides to pull from one asset, they inevitably have to move into another

there's not an under the bed asset class now you could say i'm going to permanently go into cash and take let's call it a negative two percent real rate of return but you can't do that for longer than a few weeks or a few months because your clients are not paying you to lose their capital. And when I say lose their capital, I mean their purchasing power, right? If you have cash paying zero and inflation at 1% to 2% and you compound that over a period of time, I'm losing them money, meaning their future ability to spend that money. And so cash is at best a very short-term place to hold. It is not an asset class, particularly now that we're back in the Fed world of 0% nominal returns, so negative real returns.

Therefore, I think that we have to look to the bond market as a place that either is going to get back to normal with higher yields that are delivering a superlative return to cash, or we have to view it as in a new normal where yields are very compressed and therefore the risk reward trade-off that we're used to out of bonds is categorically different. I'm very much in that latter camp. The thing that has enabled us to delay having to take action is we were never very big treasury bond investors, a little bit, but mostly we were in corporates, we were in mortgages, other pretty safe bond vehicles, highly rated, that still were offering a spread to treasury. So you still got some excess return there. A lot of those spreads have tightened quite a bit. That risk reward issue is not particularly

attractive. And so we have to formulate a perspective longer term on what to do with that capital. Well, traditionally people weighed back and forth between stocks and bonds, but I don't have much of an appetite to dramatically increase. Let's say a client has 25 to 40% of their portfolio in bonds. I'm not going to increase their stock exposure 25 to 40%. Maybe if I could go back in time to Dow 18,000 at the end of March, I would, but at these levels and in the context of proper portfolio balance and asset allocation, that would be far too high of a risk exposure to equities. So the logical conclusion that we're working through in our investment committee

is replacing bonds with alternatives that will be at an appropriate risk profile and an appropriate liquidity profile and income generative. The good news for bonds is they haven't been that income generative for quite some time. So it isn't like we have a significant amount of cash flow we have to replace. We can replace the cash flow the bonds have been offering, but we want to do it without taking on entirely irresponsible risks. So this is something we're doing very deliberatively. You mentioned Dow 18,000. Of course, prior to COVID, we were a stone's throw away from Dow 30,000. So we know that Dow has had, you know, in the stock market has had a pretty broad range from peak to trough, but interest

rates, particularly the 10-year treasury yield, right, those rates have remained relatively low, right, below 1%. We haven't really moved meaningfully, you know, in such a big range in interest rates as we have with the stock market. You talk a lot about the dangers of negative interest rates. And I'm just curious on your updated views there and if that's something you're still watching, or how do you view the 10-year yield right now, or how should investors be viewing it right now? The 10-year yield is not an investable thing for us. It's a very important signal of our investments to us. So when we see the 10-year go from 70 to 90 basis points, it doesn't all of a sudden become more

investable at 20 basis points extra return. But it tells me a lot about risk appetite in the economy when there's a 25% move higher in the 10-year bond yield, even though that 25% is coming from such a low level. It's a relative barometer. So our spreads to the treasury yield, what you see in how high yield bonds trade versus the treasury or corporate bonds or mortgage bonds or syndicated loans, municipals, you have to look at the 10 year as a reference, but it's not a pure investment to us because even if I just wanted pure and total safety, I would never do so with a 10 year lockup, right? At 70 basis points, that incremental yield pickup from the 90 day treasury to the 10 year is obviously not worth it. And so it's important as a market indicator, it's important for a lot of things

that affect other investment decisions, but it's not itself an investment decision. Now, in terms of the 10-year yield and our expectations, this is macroeconomics 101, and it pains me. I mean this seriously, Scott. I think you know this. It pains me how few financial advisors understand this or take it seriously. How little comprehension of macroeconomic wisdom there is from financial professionals. What 10-year and long bond yields are supposed to do is price inflation expectations. When you have central bank intervention that is dramatically holding down the price of long-term bonds, and they're not yield pegging the 10-year. They're not doing yield curve control yet on 10-year, but they are buying

a ton of bonds through this quantitative easing, their bond buying programs. So sort of a back door to yield curve control. But we saw the Fed get totally out of the bond market after QE3. And the fact of the matter is the 10-year yield still stayed very, very low. And as we are now, it's very close to kind of all-time low levels. That's a market statement about future inflation expectations, period. It's a market expectation about future growth expectations. So in my opinion, there's nothing the Fed can do to get that number much higher or much lower. Now they could go negative interest rates if they thought that's what they wanted to do, but I'm convinced that they don't want to do it. And I'm very convinced that if they did, it would be a disaster. So we could debate if the

10-year is going to go as low as 50 or as much as 120. 120 right now, off of 70, would be a huge move higher. It would indicate a ton of risk appetite, but it would still be a totally uninvestable dynamic. It would just simply mean governments are free to run bigger deficits because the bond market's allowing them to borrow money at a very cheap cost. So it has a lot of fiscal policy ramifications. It feeds the way in which governments fund themselves, in this case, our own government. But we could have the same conversation about Europe and Japan and other countries as well. So I'm not sure if I'm exactly answering your question. And I'm not even sure if I remember your question, because I've been

talking so long now. But I think that this is a very important point that we use the bond yield as an indicator to the macroeconomic framework in which we're investing. No, that makes perfect sense, David. And on that note, someone else writing in why you tend to focus on the Dow rather than a broader index like the S&P 500. Well, I don't think that the S&P is broader at all. I think that's a tremendous mistake. The technology weighting in the S&P has become a huge overweight and made the S&P's correlation closer to the NASDAQ than to the Dow. The S&P is 500 companies, but they are market cap weighted.

And so because of the size of some of these big mega tech companies, it's made the S&P much less of a reflection of a sector diversified broad swath of the macro economic picture of America than the Dow. I also choose the Dow because it's much more correlated to our own portfolio than the S&P. I don't care about those things much. We're not in a race against an index. We manage to grow cash flow for our clients, and that's why we're dividend growth investors. But if I was looking for something that is somewhat comparative, the Dow has a much heavier correlation to the way we manage money than the S&P does, where there's 505 companies and something near 300 of them are not worth as much as their top five companies or top 10,

you know, that distinction and weighting. Where the Dow is 30 companies, a significant portion of them have been in the Dow for a century. So you just have a real good exposure to Americana, to industrials, to utilities, to some big technology names, financial names. But I think it's a more pure market index. And on that note, David, we've got someone else writing in, is the election becoming an issue for markets or is it still too early to be thinking or pricing that outcome into the market? Well, great question, because the answer is yes, the election is becoming more of an issue. And yes, it's definitely too early to price it in. And then I'll add a kind of third component. I'm going to be writing about this a lot. I was meeting with my team this morning. I'm going to plan to put a special dividend cafe out and we'll do it as a white paper in early July. It's also very nuanced.

There's a lot of particulars that I think people have to understand that don't lend themselves to just outcome A bad, outcome B good. It's not going to be binary like that. No matter what one's political views are, markets and the way markets respond to the political outcomes of 2020 are going to be very complicated. I do think that right now, the spread that Joe Biden is opening up over President Trump in some of the polls, but more importantly, in the betting odds, is a big story. I think markets see it. I don't think markets ignore it. But markets also are just painfully aware that there's almost five months to go before the election. I think that in politics, five months is almost like five years. And in the era of Trump, five months is like 50 years.

So the amount of things that can happen over the next five months with President Trump, it makes it incredibly difficult. If you are capable, not just you, Scott, but I mean people listening right you are capable, not just you, Scott, but I mean, people listening right now are capable of separating their own personal political wants, aspirations, and beliefs from what I'm about to say, I think it would be a reasonably indisputable statement. And that is that we can easily see a scenario where President Trump gets beaten very badly based on where the economy is, based on fatigue with his personality, his temperament,

his Twitter behavior, and some of the kind of just issues that have fatigued a lot of the American people around his persona. And we can easily see a scenario where the American people reject what they believe is unfair treatment of him by the media. And the economy is on a trajectory of recovery. And they kind of say, you know what, we maybe don't like all the things he says and does, but overall, we're pleased with the results. I'm not right here giving an opinion on scenario A or B, but I will tell any objective market participant that both scenario A and B are entirely possible. So my view is right now the momentum is going against him a little bit, but it's June, not October. But again, let's say we knew right now, as you and I are talking, that President Trump was going to lose.

I still don't know enough to reposition client portfolios. I don't know who Biden would be surrounding himself with in his economic advisory department, and he's keeping it very hush-hush. And I don't think that's because he's putting a bunch of communists on his team, by the way. I think he's trying to hide who he's putting on the team, not for people like me, but for people like the far left. And so maybe I'm wrong about that, but my point is, I think that there's something interesting at play as to why he's being so secretive about who's advising him and his economic counsel. But also, we don't know what would happen with the Senate.

And that, I think, is something that the market would become increasingly concerned with. If the polls do show that the center of power in the Senate will reverse and that you would end up with, that's one thing I'm totally convinced of. If President Trump wins, the Senate stays Republican. If Biden wins, then I think the Senate's gonna flip too. I will be very surprised if you end up in a scenario where the Senate stays Republican and Biden becomes president. It's possible and it's historically common.

I don't think it's going to happen in this election. I think we're going to get a wave one way or a wave the other, and reading those tea leaves is very difficult. Yeah, and David, to your point about how it may be too early to start pricing in the election impact on the markets, do you also think that the market has a lot on its mind right now, maybe more so than the last presidential election cycle in 2016, where if you go back to four years ago this month, we had Brexit, but there really

wasn't much else beyond the 2016 election that the market had to price in. So do you think for that reason, perhaps the market might be a little bit numb to sort of the day-to-day polling numbers as we head into the 2020 election. Yeah, it's a good point, although that could change too. It could be the opposite where everyone's been very interested in COVID news cycle. And then of course, the last couple of weeks, we've had the protest and a lot of social unrest and things like that. And it could be that people almost turn to the election because they're fatigued by the other stuff, which would be counterintuitive because normally, you know, the last place you want to turn to is more political coverage.

But based on where the news cycle has been over the last few months, the politics may be where people end up headed. A lot of people listening right now were clients of mine throughout 2016. And of course, you and I knew each other from past press situations back then. But you recall, Scott, 2016 was one of the only years where I said, this is a year in which we're going to talk about A, B, C, and D. And A, B, C, and D did not include the Fed. The Fed at the very beginning of the year in 2016 took themselves out of the news cycle. They said, we were supposed to raise rates four times on our dot plot. We're not going to do it at all. We're out. They weren't doing QE. They weren't doing Operation Twist. And they didn't

raise rates or lower rates for the entire year. Part of that may have been apolitical. Part of it may have been what was going on in the world economy at the time. There were sensitivities about China's growth slowdown. And so the Fed was a little bit scared. But my point is, I'm talking about the Fed every day. And in 2016, they were totally out of the news cycle. So I think that this year is very different in terms of how the politics are going to affect markets because you have COVID, you have the Fed, you have fiscal stimulus, and then you have an awful lot of social unrest and just a really increasingly polarized society. And all of that will end up showing up in the election as well. So this is a very interesting time in our country. I think everybody knows that and maybe feels in a different way. But how that pertains to markets is the part that I have to be focused on. And I think that the corporate profit signal that generally drive market prices

are totally removed from the equation right now. There's no optics on corporate profits. And so even market news watchers end up looking to COVID news, to social news, to political news. So David, we've got someone else writing in, how does the Bonson Group determine when to cut their losses or divest on a particular stock? And on the flip side, what factors are needed to occur to buy a stock to get into a new holding? Well, let me answer the second question first, because it's easy. Our criteria for selecting a stock is our belief that we can buy at an attractive value, an attractive entry level, a company that has a tremendous trajectory in front of it for growing the cash flow they return to shareholders.

Now, that is another way of saying that we believe they'd be growing earnings in the future because you can't return a growing flow of cash to investors if you're not generating an increasing flow of cash. But our criteria is based on our perception of dividend growth, which is largely driven by management alignment, by culture at the company, particularly in the treasury and C-suite of the company, by culture at the company, particularly in the treasury and C-suite of the company, and by the financial metrics of their balance sheet, their debt leverage ratios, their past behaviors with dividends, how they view dividends as a mechanism of shareholder capital return, and then, of course, their business model itself. Do we think that the

business model lends itself to sustainability of dividend growth? So that's the easy answer is how we enter into a position. But then as far as how we exit, that phrase cut a loss is an interesting one because it implies to a certain degree of trader mentality and we're not traders. We want to buy companies that definitely have stock prices that are going to go up or down, but we fundamentally are wanting to buy an operating enterprise, a company that has a real life cashflow generating business, and that is executing in the marketplace with an ongoing success in their delivery of goods or services. So that will come with some degree of up or down movement in stock price, but the up or down movement in stock price cannot ever be the factor that drives our decision. We have to make our decision based on our perception and understanding and analysis and ultimately our decision making around the prospects for that company to continue executing and growing their free cash flow

and by that grow the dividends they share with us. We can get that wrong. We don't very much, but we can. But we do a lot of intense study to try to limit when we get our perception of those things wrong. But the notion of a stock price dropping either means that the company is more attractive because in fact, our outlook for their free cashflow growth is accurate and it is going to be positive and moving in the right direction. And yet now the stock price is even lower. So that would make us want to buy more, not sell. Or it may indicate that there's a problem with the thesis. And so we have to

continually analyze, are we missing something here? Is there something going on? And very often the answer is that we're not missing something, but it's a transitory event. So you look at a company right now that might be a huge landlord and real estate owner for retail, for example, for real high-end shopping malls. Well, clearly there's a really bad impairment in that business because, you know, all the shopping malls were closed down for a couple of months. So we have to then be able to look forward and analyze that sector and that space and formulate expectations for how a company that is dealing with a transitory event will be able to perform out into the future. You could say the same thing about any number of other categories of companies.

How do integrated oil companies perform when oil drops from 50 to 20? How do you expect them to perform when oil's gone from 20 to right now back to 37? If you think you're going to get back to 45 or 50, what is oil natural gas look like? And what are the overall cash flows and debt dynamics of integrated oil companies? So these are just kind of broad questions we have to ask, but they're not about cutting a loss. Ultimately, I think our sell discipline, as long as we've been managing money, is something that I'm very proud of. Well, and when we talk about individual stocks, David, I'm reminded of some recent news reports and even reports from some of the analysts

that retail investors have been driving a lot of the movements in some of these well-known stocks. Maybe it's even young people who are experimenting with stock trading apps, people who don't normally invest are now suddenly getting into this field. Maybe this point is not so relevant for your clients because, of course, they've hired you to do this for them. But should we be worried or be watching the retail investors' impact on the broader markets? Or do you disagree with the dynamic that some news reports have been suggesting? Well, it's interesting. I actually do disagree with that assessment that a lot of the news reports are presenting, but not because I think it's categorically wrong, just because I think

it's mostly overstated. And yet I don't disagree that we should always be paying attention. I put in covidandmarkets.com every day a lot of technical indicators and I focused a lot lately on the put call ratio, which is an assessment of how much people are buying puts protection against the market versus calls, which are speculative, bullish positions. And the viewpoint there is that the more bearishness you see, it's a contrarian indicator, but flows into and out of mutual funds or exchange traded funds would be another example of watching retail investor behavior. And the very simple reason for that is that oftentimes investors are prone to follow the crowd. And so they end up buying a

lot of things at the wrong time and selling a lot of things at the wrong time as the panic and euphoria get on the wrong side of markets. This has a four or 500 year track record to it. And I believe it is important that we understand the dynamics that are driving a lot of retail investor behavior. As far as in the short term, these kind of trading apps and their ability, there's no question they can move the market around a certain stock. You get kind of a $3 stock, they bid up to $5 and that kind of stuff. $3 stock, they bid up to $5 and that kind of stuff. More speculative, more gambling oriented. But it's such a tiny portion of the market that the idea that what's really under the hood,

moving the overall global equity markets would be retail investors on their apps, I find kind of silly. Laughable. That's why I'm laughing. David, we should also get to some other questions. Shifting gears completely now. Where do emerging markets fit into your sort of worldview right now? Well, I'm very bullish long-term on emerging markets, but I'm becoming more bullish short-term as well, although some of that will depend on a number of different factors. Let me give you a holistic answer.

I think the biggest thing that's held back, the approach to emerging markets that we have, which is focused on domestic growth of really high-performing companies in emerging economies economies has been the surging dollar. And so when you factor in the currency impact to those returns, it's muted a significant portion of them, even as the operating performance of the companies has been phenomenal. You've had, in a lot of cases, very low valuations accompanied by very high profit growth. And that normally should be a formula for great total returns. Emerging markets has had a great run here in the last several weeks and not just as overall markets have. But emerging markets has surprised a lot of people. You look to a country like Mexico and Brazil,

they're not on the kind of backward-looking phase of COVID like Europe and the U.S. and Japan are. They're right in the midst of it. And so there's questions as to where the COVID impact will go to some of these countries. I think a lot of people believe that some of the South American, Central American dynamic is somewhat insulated because of heat and weather. But I don't know. Certainly the health data there has been problematic.

Africa has been, by and large, immune from a lot of the COVID impact. And so there are certain pockets that are not going to so much be COVID-centric as the U.S. was. But then so much emerging markets is China exposed. And forget even for a moment where China's vulnerabilities are going to end up being around coronavirus and around the way that the global economic community responds to China because of Wuhan. Just purely on a trade basis, I think that there is vulnerability as to other trading partners, not just the U.S., but even other European countries that may decide they want to remove parts of their supply chain from China. And I think that I would not want to be an emerging markets investor that is dependent on China's export capabilities in the years ahead. So I'm very bullish on EM, but very selective on EM, Scott. And so, David, with that, I mean, you mentioned China and trade. Those fears, right,

have from last year have really not gone away. In fact, you wrote something recently in one of your missives that you expect a heightening of trade tensions between the U.S. and China to come perhaps at some point before the 2020 election. I do. And so I am sort of conflicted internally as to what I think the timeline will be. What has played out so far, you recall that the president had a big high profile press conference two Fridays ago, and he was expecting to announce some big things on China. The market dropped like 300 points, was kind of waiting and seeing. He had the press conference. He hammered China, verbally said all the things.

Secretary Pompeo had taken a hard line stance that week. And then as he was talking, the market went up 300 points, closed up on the day. And that's what my expectation has been, is a high bluster and low action combination around U.S. and China until the election, followed by, if President Trump's reelected, high action issues with China. And now I'm not so sure because I can see a scenario where after the convention, he can view escalating tensions in China as a political positive. This is not me saying he would do it to go get votes because he believes this stuff anyways. It's part of his ideology. It's part of his platform. And I honestly don't question that. And everyone can have different opinions on the wisdom of what things to take a hard line on and how to do it and whatnot.

I myself have never been that convinced that the hard line comes from increasing tariffs, which are paid by U.S. importers, but I'm perfectly comfortable with certain hard line escalations, particularly around national security and around pharmaceutical manufacturing. security and around pharmaceutical manufacturing. But I'm not sure that the president believes it's a political liability anymore. I think that the American sentiment towards this issue is categorically different than it was a year ago. And so it's entirely possible that you could see some escalations before the election as well. So it would enhance market volatility, but the devil would be in the details. Well, you brought up something so important, I think, the difference between bluster and action. And just from a market point of view, I mean, I'm sure you'll agree with this, but last summer, right, the market was very sensitive to

bluster when there was not really action. And I'm just curious if you think that dynamic would still play out should more bluster come about in the coming months. Yes and no. I mean, you got to remember too last summer that it ended up being more bluster than action, but those were massive tariffs that had been put on throughout 2018 and that were threatening to go on into 2019. And so the phase one trade deal that suspended at the time we were talking about phase three and eventually phase four. And it's interesting how all of our COVID vernacular now, phase two, three, four, can be confused with the fact that we used to talk about these trade deals and these different phases. But there was a significant amount of tariffs that were really contractionary to economic growth. They were very contractionary to CapEx and capital goods orders here in the United States. So that did go beyond bluster, but also there was threat of the currency war and how that was escalating.

And China allowed the yuan to depreciate against the dollar at the highest level it had been in a long time. And then the US was threatening retaliation. So there was those concerns that were at a high level. Well, look, if that stuff were to come back into play, markets would hate it. Markets don't want to see big escalating tariffs, and they don't want to see a depreciating currency fight either. And by the way, I don't want to see either of those things. Where I think that it could be different this time, and maybe part of it is I'm talking my own wishes here as opposed to what may end up happening out of the administration, because I really don't know. as opposed to what may end up happening out of the administration, because I really don't know. But I do believe there's room to take a hard line stance with China on certain things in ways that may very well enhance the market volatility, but are not specifically related

to us threatening more tariffs or threatening to weaken our own currency. And so a lot of that is going to have to kind of be seen in the months ahead how it plays out. But the notion of giving U.S. companies big incentives to relocate some of their supply chain, particularly when you're talking about issues of national defense sensitivity or pharmaceutical, I think that there's going to be a lot of bandwidth to do something like that. pharmaceutical, I think that there's going to be a lot of bandwidth to do something like that. Yeah, it's pretty interesting. I mean, I feel like it was exactly a year ago that we just got a barrage of tweets on everything related to trade. And it was almost like, you know, the link between tweet and market action was just totally correlated, right? A correlation of one, you could argue. Totally. And I think that even right now, to the president's credit, as he's talked tough with China here, even he, knowing the economy is vulnerable, this massive recessionary impact from COVID lockdowns, he has not come out and said, oh, I'm going to go throw a bunch of tariffs at China. Like I think he even knows, and a lot of his economic advisors, some of whom are very good

friends of mine, have cautioned him that you can take a hardline stance without it being in a way that impacts American economic strength. So the bluster and the policies have to be differentiated, and not only in the current tense, but in the future tense. After the election, that's going to be very interesting. First of all, let's say Biden wins. I'm not convinced that he can just sit here and pretend status quo with China. I don't think he would be quite the China hawk that President Trump is, to put it mildly, but I don't think he can do nothing either. I think there's going to be a lot of political pressure for him to take some action, redefining that relationship. I think a lot of Western democracies are under pressure

to rethink their relationship with China. And so regardless of what happens in the election, this issue is not going away. All right, well, David, we've got about a couple minutes left in our call, another hour left in the trading session. Stocks near session highs right now after being down pretty deep in the red this morning. I'll toss it back to you for some final comments. Well, thanks. Thanks again, Scott. I appreciate your continued willingness to do this. I do want to close up with an encouragement to people to read

covidandmarkets.com today. I'm very excited to cease doing COVID and markets missive every day, but I'm not going to cease doing a daily missive. Even when the COVID and markets specific focus becomes less relevant to our day-to-day communication, we've decided that I'm going to continue doing a daily market briefing because I think a lot of people have benefited from that real-time communication. What I say excited is I'm excited to have the focus be on macroeconomics, on monetary policy, on the news cycle, on politics, on corporate profits,

and less on the impact from this coronavirus affair. I want to unpack in fine detail what this supposed talk about second wave means and doesn't mean. I'm sitting here looking right now on one of my screens at the Arizona official government website. They have very different states have different levels of daily data, but Arizona is one of the states that's had an increase in coronavirus positive test in recent weeks. It's not fake news. They have had an increase in cases. We estimate about 20% of the increase comes from cases from Indian reservations where there's a lot of health vulnerabilities and things like that. But I want to make a point to you about something. Headline after headline saying Arizona is seeing a surge in cases. And a lot of places that have had increase in cases, when you adjust for the

increase in testing, they actually have had negative positive case growth. Arizona is not one. They're one of the states that even adjusted for testing has seen an increase. They had four hospitalizations yesterday. They had five the day before. They had seven the day before that. They had 13 the day before that, 13 the day before that. My point is that with all of these headlines around what's going on, the hospitalizations are not going higher. Where there are increased hospitalizations, they're getting out of the hospital about 65% quicker than they were back in March and April. I think there's really logical reasons for that. So I have no interest in telling you that things are all rosy everywhere.

I'm just simply saying that some people do have an interest in telling you that things are far, far worse than they are. The overall trajectory of empirical support around places that have reopened their economies in Western European countries, in the majority of American states, at varying degrees of nuance and specificity, it's been by and large a very successful reopening. It's so indisputably available in the data, and even where there is negative data, that negative data, once you unpack it a little, once you unpack it a little with hospitalizations, with cases of severity, with mortalities, it is becoming a better story, not a worse one. And I'm talking right now about markets. I'm talking about the economy. I certainly plead with you to not interpret anything I'm saying

as belittling where there has been an impact to human health or human life. I take it very, very seriously. But I'm trying to give you a reference point on a big picture, because I think a lot of people that are trying to give you a reference point in a big picture are doing it for clickbait. I think they're doing it disingenuously, and they're doing it divorced from facts. And so I'm going to try to not be guilty of that in the way I present things. And in the meantime, as it impacts markets and impacts investors, if God forbid, we did get a surge that really tested hospital capacity at a county in Texas here, or at a region in Florida there, I pray it doesn't happen for human reasons. But even macroeconomically, I have to tell you,

it doesn't happen for human reasons, but even macroeconomically, I have to tell you, I just simply do not believe that it's really a story. I think that overall, the macroeconomic realities are such that the mortality rate and the hospitalization rates are not going to break the back of the American medical infrastructure. And I know very few people that don't primarily buy into that. We have a lot of great precedent in South Korea and Japan and Western Europe and a significant portion of the United States that tells us this about mitigation, about containment.

I certainly hope everyone is still being safe. There's no part of me that is wanting the American economy to be opened up recklessly. I think that mask wearing, I think that daily hygiene primarily is everything I've studied and read. I'm very blessed from some of my investment and economic relationships to have gotten connected to some of the really primo medical and health experts in the country.

Everything I've studied tells me that this is primarily behavioral and that people's ability to mitigate comes from their own wise decision-making. There's obviously some cases where there's a certain vulnerability we have to be deeply conscientious of as a society. But as far as the macroeconomic impact, we have a lot of things to worry about. I just don't believe that this second wave COVID stuff that all of a sudden has come back into the press in the last five days should be at the top of your list. So Scott, you probably didn't ask for such a long closing, but I felt like it was important to get that material out there. And I'll elaborate more

in covidandmarkets.com today. And I guess elaborate more in COVIDandMarkets.com today. And I guess with that, I'm saying goodbye, aren't I? Okay. Thank you again for joining us. Reach out any time of questions. Thank you as always to our host, Scott Gamm. And we look forward to you reaching out with any questions, any comments, anytime. Be safe, be well, and be free. Be safe, be well, and be free. Thank you. 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. The Bonser Group and Hightower shall not in any way be liable for claims and make

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