The Dividend Cafe - Replay - National Conference Call on Market Outlook June 29, 2020

Episode Date: June 29, 2020

This is the audio replay of National Call Market Outlook from TBG CIO - David L. Bahnsen. With Host Scott Gamm of Strategy Voice and Associates. Discussed is the impact of increased COVID cases in certain states on markets, and will attempt to evaluate the latest economic and investment developments, and what we are anticipating as we officially enter the second half of the year. 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. Welcome to the Bonson Group's national video call, Current Market Outlook Around COVID-19, June 29, 2020. Our host for today's call is David Bonson, the Bonson Group's founder, managing partner, and chief investment officer, and Scott Gamm of Strategy Voice Communications. For this call, all participants will be in a listen-only mode. Later, we will conduct a question and answer session. Please send your questions for that Q&A session to covid at thebonsongroup.com. I will now turn the call over to your hosts. Gentlemen, you may begin.

Well, thank you again, Erica, and I'm looking forward to turning this over to Scott here in a moment with, of course, our perpetual gratitude for Scott's willingness to join us and play a role in these biweekly calls. And for those who read the Dividend Cafe over the weekend, you know that, and of course can tell from the scenery, that it's something different. I'm actually doing this call for the first time since we've been doing them in my apartment here in New York City. And not only is that just sort of logistically different, but symbolically indicative of how much things are advancing and moving and what has been a three or four month period for the history books in a number of different ways.

on a couple occasions. My family and I flew back from New York on March the 13th, which was a Friday. March 9th, which was a Monday, and March 12th, a Thursday, were two of the worst three days in the stock market, going back to the Great Depression. And then on the Monday, the 16th, now back in California, we had the worst day in the market since Black Monday of 87. So that sort of sets the framework as to what was going on back in the middle of March, as the uncertainty around the coronavirus was escalating exponentially, and so was the hysteria and concerns in the market. Of course, quarantine ensued just a couple of days later, and at that point, it wasn't really a matter of working in California or New York. It was not only was I working in California, I was working in my home in California for the same reason everybody else was sheltered in place. So I'm back here in our apartment in New York.

Our office in New York City will not reopen until next Monday, July 6th. But even that is sort of a miracle in that, oh, I guess, what, maybe two months ago, I think everyone was predicting that even the offices in New York would be shut down until probably Labor Day. So we're very grateful that our whole team is safe and sound. We're grateful that hopefully all of you are safe and sound. But most importantly, for the purpose of this call today, Scott has a lot he wants to ask me about regarding the market

and regarding our overall investor positioning as it pertains to these things that are continually evolving up and down in the marketplace and with COVID itself. So Scott, let me turn it over to you. I'm sure that you've received a lot of thoughtful questions and my guess is you have a couple of your own. So I'm ready when you are. All right. Well, David, thank you very much and great to see you back in New York. And the stock market, as you mentioned, David, thank you very much and great to see you back in New York. And the stock market, as you mentioned, David, is in a much different place right now than when you were last in New York in mid-March, about a 35% rebound since then. Over the past couple

weeks, though, the market has been choppy, although still choppy at a more elevated level, we've been able to stay above 3,000 in the S&P 500 over the past couple of weeks. So how would you characterize the stock market right now? Well, on a technical basis, which we talked last time about how little that means to me, but I think it's important to point out there's that sort of 3,000 point level, it's sort of held that 25,000 point level in the Dow is sort of held. But the technicians will look at the 200 day moving average and probably say not only is it held, but each time it's tested, it's kind of bounced off of it. I'm really more surprised by today's market action than any day we've had in quite some time. We were down,

we're up a few hundred points Monday and Tuesday last week. We're down 700 Wednesday, up 300 Thursday, sort of like the market didn't want to accept another leg down, but then dropped 700 Friday. And I thought that that was kind of the sign that the market was going to give in a little bit to the headlines around resurgences of cases of COVID. And anybody who was paying attention to the media this weekend knows that they were doing their level best to make sure that people had the hell scared out of them regarding the surges of cases of coronavirus in certain states and areas. And so for the market now to have bounced here this Monday after a weekend like we just had really solidifies for me. Look, there's plenty of reasons the market can go down.

But I think that the market is rather fervently protesting the media's posturing around COVID. I think the market is taking a smarter understanding to what is happening in the COVID data than the headlines and sensationalism would suggest. Now, to the extent that market vulnerabilities exist around valuation, around economic data, around slowness of the monetary supply that has been growing rapidly as that levels out. There's all sorts of China tensions, election tensions. I can go on and on. I can give you five or six reasons the market could go down. But I think that the particular areas that the press is most

focused on right now, if you only read headlines and those sorts of nuggets around COVID growth, case growth, I don't believe that's the reason. Well, and perhaps, you know, look, the market may be very headline sensitive right now. We had an increase in COVID cases over the past couple of weeks. Perhaps that was reflected in the stock market last week. You mentioned today's market action. We did get some strong pending home sales data for May, maybe a lagging indicator, but just more evidence of perhaps that V-shaped recovery in certain sectors forming, recovery in certain sectors forming, which would certainly be a good thing for the markets or just further confirmation that the market's rise was justified over the past couple months. Well, I agree. I think that that home data point that came today was more confirming a couple data

points that had already come suggesting that you really get a great tease of home data from the new mortgage applications, new purchase mortgage apps, which we got last week. There's no question there's been a lot of pent-up demand in new home purchases. But the kind of narrative that's formed around this sideways market thesis that we have is not so much good economic data conflicting with bad health data. I don't believe that the health data is negative to markets. All things being equal, everybody would desire there to not be new cases. But there's this avalanche of new testing about triple where it was a month ago. And yes, there's been new case growth that's come with that. And there's a couple of states where the case growth has even outpaced the

testing growth as of late. But I think that the market is seeing through the fact that the really economically systemic vulnerabilities in the health data are around hospital capacity, equipment capacity, and around mortalities. And the fact that those numbers have not moved in a negative direction on the mortality side have actually continued to move in a positive direction. I'll share this with you. We are at minimum, after the last couple weeks of case growth and reportedly new data, 75% lower in our running average of mortalities than we were in middle of April. I believe the number is really 90% though, because even when I say 75%, that's including backward additions that are kind of catch-up numbers to mortalities. So on a real run rate basis of apples to apples, we're 90% lower in mortalities.

That's a byproduct of a number of things. There's no question people are getting out of the hospitals quicker. I have to think a lot of that is related to therapeutics, remdesivir, other treatments that are now at play, hospitals being less anxious to put people on ventilators. And then also just the very obvious and indisputed fact of younger demographics of people who are contracting it. it. I don't know, honestly, Scott, how anyone could conclude that there's not a correlation over the last couple of weeks of case growth between the protests and the sudden escalation in cases. It's very difficult to prove, but the reality is that regardless of why, there's been case growth. The reason why I think the protests make more sense as an explanation than I previously thought is because I previously thought the lack of

escalation in New York, where I'm sitting right now, and where there were significant amounts of protests in highly congregated areas over a month ago, three weeks ago, et cetera. But part of me thinks New York is the outlier now because New York has more herd immunity than other states because of how severe their COVID exposures were back in March and April. And I can just tell you being here in the city, walking around, there's an incredible caution, mask wearing, distancing. So it's not totally illogical that a lot of high protest states would have had escalations and that a state like New York may not have. But again, I don't really think the causation matters that much other than it anecdotally supports,

gives explanation as to why it's a lot of younger people that are contracting. I mean, in Florida, we know the median age is all the way down to 35, the median age. So you have a lot of people in their 20s and younger 30s. That's all a good thing in the sense that it means less drain on equipment and less drain on hospital capacity, all of which has to continue to be monitored, none of which can be considered fully out of the woods. But back to that systemic ramification for markets, I think that we're going to have a bit of period here where the overall society gets used to the fact that we're going to have cases of coronavirus until there's a more or less vaccinated society, either from a vaccine or from herd immunity. And yet those things are not on the same path of economic deterioration that they clearly were a couple of months ago.

Yeah. And of course, we hope for those cases to continue to decline and get rid of this virus once and for all. David, let's talk more about the market though so far this year, because I took a look at the year to date performance, because it's hard to believe we're coming up on the end of the first half of 2020. The numbers were pretty fascinating. The Dow is down about 11% so far this year. The S&P 500 down about 6%. The NASDAQ up about 10%. Did anything strike you about those numbers for the major averages so far this year? Well, yeah, there's a couple of things. A particular company that's very well known for handheld phones and devices that they make is up 23% on the year, and that company represents an over 10% weighting in the NASDAQ. The largest operating system of software in the world is a massive constituent in the NASDAQ and is also up on the year. So a lot of it has to do with the weightings of some of these big tech companies that perform

very well. Your numbers were year to date, right, Scott? Not from peak to trough. Yeah, exactly. So when you look, because both the Dow and S&P were up about 5% before they began their decline. The numbers down from the peak level are worse than the year-to-date levels, obviously. But the point is that the numbers actually, if you just sort of went to bed on January 1 and woke up today, the numbers are not that significantly down in terms of the broad market indices.

And I think that speaks to this significant in both magnitude and speed recovery that we've had. As we get ready to close out the quarter tomorrow, I think that the massive numbers to focus on are not just going to be second quarter stock market, regardless of what index you look at. But I think it's going to be the bond spreads, credit markets, municipal bonds, oil prices, probably the highest performing quarter in oil I can imagine in history, just from where it was

starting to where it is now. So it's a very broad, high breadth, democratic rally in risk assets. And it is the type of rally that one might expect if they have studied the history of liquidity injections into an economy. And what the Fed has done by way of monetary stimulus in the last three months in our country is utterly historical. Utterly historical, and yet perhaps there are still more for them to be doing, right? I mean, they've kind of given that indication that their job may not be over yet. Right. I think that's a great point. I think you have to divide Fed actions going forward into two categories,

and those are the actions that are still coming, that are known, that are already expected, that they've already telegraphed. That's not to say they don't continue to have import. They do, but they have less import when they've already been announced to the world. They do, but they have less import when they've already been announced to the world. And so I think of $120 billion a month of ongoing quantitative easing. They've telegraphed that as far as the eyes can see. That's made up of $80 billion a month of treasury purchases and $40 billion a month of mortgage-backed securities.

We think of a zero interest rate policy that they've most certainly made clear is going to continue for the foreseeable future. So this is ongoing. And I mean, for potentially a couple more years that they have said it's going to happen. So we know that's on the table. But then I would add the second category of monetary interventions that would be more market impactful are things that perhaps the Fed ends up doing that are not right now known or priced in. Either categorical things, meaning an entire subject matter of monetary intervention like yield curve control, or something more marginal like expansions of the Main Street lending facility or relaxing leverage rules around some of their special purpose facilities that they have. These announcements and the underlying activities that go there with

all have the potential to be market impacting. And one thing I've been watching, a lot of the listeners on the call know we've been obsessed with structured credit here. I wish we could have gotten even more organized and high conviction around it earlier. But really, we had to have the right conviction before we could act. And that took a little bit of time to organize it. But through all of the stock market volatility of the last two months, which has been more up than down, but it still had plenty of these down days, as you pointed out here in the last couple weeks, I don't even know that there's been a negative day in structured credit. There's been a couple flat days, but when

you look at the non-agency RMBS, the residential mortgage back, much of the bank loan activity, much of the commercial mortgage back, whether it's single asset or conduit vehicles, it's been almost a total straight line up. And a lot of that has to do with Fed intervention, and a lot of it has to do with Fed providing more detail that is generally favorable to some of these structured credit asset classes. Arwo, let's shift to some questions we're getting from folks who are listening. First up, David, what are you doing asset allocation-wise for the second half of 2020? Well, as we've talked about quite a bit, we're getting ready to act upon the cash that we raised that we got out of some of our bond portfolios, either municipal or taxable bonds.

On the margin, we raised cash in the range of 7% to 12% of a bond portfolio that we then have side-pocketed that cash to put to work in clients' equity allocations. And we want to average that in, believing it's the best risk-adjusted way to exploit where we are in equities and take advantage of what we think will be a range-bound and volatile stock market for the rest of the year. So the asset allocation targets for equities are not changing. They will probably end up being a higher allocation by the end of the year than they are now. But the target allocation is the same as it was at the beginning of the year.

We're just simply restoring that allocation through averaged in cash over the next six months. that allocation through averaged in cash over the next six months. And then from a broader and longer term viewpoint, there's no question that our asset allocation commitment to fixed income is coming down. And we're in the process right now of reorganizing our portfolio construction, where we will never again view all bonds in the same asset class. It won't be a sub-asset class or kind of divided up between risky and safe. We're viewing credit and we're viewing bonds that act like bonds as two totally distinct asset classes, which is something I think that investors probably should have been doing for

decades. They act differently in times of distress, and the reason why you have bonds is for times of distress. So therefore, we are looking to kind of segregate credit from safety and fixed income and lower weighting those asset classes and increasing the alternatives exposure. Those will be some of the significant moves we'll be making over the next six months. You know, something you wrote about in one of your missives recently was the sort of added benefit of the alternative or even the private investment space, which was illiquidity, right? private investment space, which was illiquidity, right? That illiquidity could prevent you from making a knee-jerk decision to sell something too soon. Talk about the benefit of that in a portfolio. Well, it's interesting. The way you worded that was it could keep you from making that mistake.

And what I wrote about was even about how it could keep someone else from making the mistake, which impacts you. And so there was sort of a protection in illiquidity that we receive from the decisions of other investors, public equity investors, public bond investors, do not receive the same benefit in fully liquid asset classes because even when we don't go hit the sell button or panic out of long-term equity positions, our purposes, just to use broader and I think still helpful in defining characteristics, we'll refer to it as private equity, private credit, and private real estate. That illiquidity definitely protects us from our own behavioral vulnerabilities, but it protects us from the behavioral biases of others. And therefore, the drawdowns that one sees, the up and down movements of volatility

in one's portfolio are significantly dampened. A lot of the volatility that people experienced in the month of March, and this is almost entirely true in municipal bonds and high quality corporates, all of which have recovered nicely throughout April, May, especially June. But look, there was a totally unjustifiable drawdown in those fixed income asset classes. Even if you or I didn't sell a dollar of bonds, there were so many other people either panicking or needing to raise cash, having to deal with the leveraged financial realities. And so I think private assets and illiquid assets give us an insulation from that. If you're at home listening and you're saying, well, why don't I have more illiquids?

First, let's start off with the fact that you may very well end up with more illiquids. It's a process we're playing through. But there are reasons that we can't load up a client portfolio with illiquids, and that is their need for liquidity. It's answered in the title itself. So to the extent that one's own portfolio has to absorb their own liquidity profile, and then from there we can build illiquidity into the portfolio. I think we've done something that's both opportunistic and defensive. David, another person writing in wanting to know your view on cash as sort of an asset class

for the second half of 2020. Well, it's not an asset class. And so if the question is just simply, do I view cash as an asset class? The answer is no. I guess one can make an argument historically that there's been those periods of time where CDs or money markets were offering 4% or 5% was cash and asset class then. And the right answer is even then, no. All that did was reprice other asset classes if we're being economically technical about this. But at least I could argue in those periods, it was a non-asset class that provided a bit more of an incentive

to be in it at given points of time. But right now, it's a very easy question to answer because cash is either at or going to be at a 0% yield very soon. It's already at a negative yield net of inflation, a negative real rate of return. And it's going to be there for a long time per the Fed. It's my belief it's essentially going to be there forever. I don't believe we're going to get back to a place where cash offers a positive real carry. I can be wrong about that, but I don't think I am. But regardless, as an asset class, I'm defining it as something outside the risk-free rate that is in search of risk premia. Something that is out in search of a rate of return that's higher than one could get

in the risk-free rate of T-bills, which we'll consider to be an equivalent to cash. consider to be an equivalent to cash. And so to me, cash has two very important functions, but neither one of them can properly take the label asset class. Number one is a medium of exchange for spending. And so to the degree one has accounts payable, has a need for liquidity, has a purchase coming up, has a potential purchase coming up, things like that, spending dry powder, which is different than investment dry powder. All of those things are a legitimate function of cash. They're under the mattress money, they're checking account money, they're savings account money, but they're not an investment allocation. The second function of cash is where you're basically using it on the margin

as a market timing vehicle. You're saying, I believe there will be lower asset prices at some point in time in real estate, in equity, in fill in the blank, and having cash on hand is more a surrogate to a future purchase of a real asset class, stocks, real estate, bonds, alternatives, what have you. And to the extent that we are willing to use minimal amounts of cash for that function, I'd still see it as a byproduct of our active management of that given asset class, not treating cash like an asset class itself.

The proper weighting to cash in an investment portfolio is zero. When it is giving you a negative rate of return, you're striving for a positive rate of return, net of inflation. Therefore, the use of cash should be purely tactical and very minimal and very temporal. So, David, for someone looking to put their money and sort of be safe with it, as they say, and stay ahead of inflation during this uncertain time, where would you direct them or where in your existing portfolios do you have that kind of dynamic? Well, it depends what one means by safe. So if somebody means by the question, let's say I believe the rate of inflation is going to be 1.5% to 2%. The Fed's trying to target a 2% inflation rate. We've averaged more than that over the last 30, 40 years.

We've averaged in between 1% and 2% since the financial crisis. So someone wants a rate of return of 2% or better, and cash is paying zero. Maybe T-bills are paying 0.3%, 0.4. Short-term AAA municipal bonds, AA municipal bonds are paying 0.3, 0.4. So you can't get that rate of return within the safe rate. So the question becomes, what are you willing to do? Now, what most people do is lie to themselves. And I think that's fine. I think people get away with it a lot. They can go into a short-term bond fund. They can go to a stable value fund. They can get marketed to by a mutual fund company and then tell themselves,

I'm getting 4% and it's safe. And as long as nothing goes wrong, then at the end of the day, it doesn't really matter what risk they may have taken because it all kind of panned out. However, this is just a tautology. By definition, just because something worked out didn't mean it was safe along the way. There is some risk to par value when you're not in cash. And if you're getting a premium return above the risk-free rate, you're exposed to that vulnerability. It may be a small risk, so that's why what the person in the question means matters. I would define the greater risk as not being able to see one's income grow into the future, so they're purchasing power declines, and they're not able to receive a rate of growth that's necessary to their own accumulation of capital objective. So I don't define dividend growth equity as a risk category in the sense that I think it helps facilitate financial goals,

which is the antithesis of risk. But I think what most people do mean, and I'm very sympathetic to it, is the up and down movement of price in the short term. And we know that 53% of market days are positive, which means 47% are negative. Now, when you go to a week and a month and a quarter and a year, you get greater and greater up volatility and less down volatility. volatility and less down volatility. But the point is that if one needs to avoid that up and down movement, and they're just looking to have their cake and eat it too, give me a rate of return above inflation, but no risk to par value, that simply doesn't exist. That would be the holy grail. Let's say it existed for one day. That's how long it would exist for. Because everybody would discover it, and they would buy it in droves, bid the price up, and then it would no longer be that risk-free and return premium asset that everyone wanted. So I'm trying to give a little bit of a refresher in economics here.

These things answer themselves, Scott. One cannot have their cake and eat it too because markets are too dynamic. They price in those realities. So my recommendation to someone is to manage their risk level by first defining what they mean by risk and then setting an allocation of assets around that accordingly. Well, I'm glad you mentioned the pricing in mechanism of markets, because I feel like that is always worth repeating, right? Because many times throughout the past couple of months, we have seen some pretty devastating economic data, and yet the stock market rises. So maybe that's worth just sort of repeating your thoughts on that topic right now, David.

Yeah, I think that the last few months have been difficult in terms of people trying to understand why markets are doing what they're doing, because they see a lot of the carnage in the economic data and they expected the market will respond. And we've talked ad nauseum on these calls about markets as discounting mechanisms. And yet I also want to humbly admit that people can be forgiven for kind of, you know, losing sight of that disconnect between the backward-looking economic data and the forward- looking market pricing, because the Fed's done a very good job of helping people to lose sight of it. There's a lot of distortions and manipulations in capital markets that make it difficult to kind of have a full alignment of these understandings.

But if there was no Fed intervention at all, the reality still is that markets can go higher in the middle of bad news when markets believe that there's going to be good news into the future. news into the future. And so the complexity for good or bad, it cuts both ways of markets pricing something today about the future is not a lesson I think people are ever going to fully understand. It's something that they're always going to be confused by. And I think that's okay on a basic human level to see a brutal unemployment report and see the stock market up and go, what in the world is going on? This makes no sense as long as you don't mean it. It's okay to say it. It's okay to feel it. But I think that you shouldn't mean it in the sense that, of course,

it makes sense at a deeper level of how markets actually work. And we'll get another unemployment report on Thursday of this week, given how markets are closed on Friday. I think that'll be very interesting just because obviously the market, even prior to COVID, had been reactive to employment reports. Those were always very important. But now, coupled with this extra scrutiny on the employment data, and then of course the market's closed on Friday. Does that make the case any different this time around, given that unique dynamic that we have this Thursday? Yeah, we have kind of a double whammy Thursday because you'll get the weekly initial jobless claims along with some update in the continuous jobless claims number, and then you'll have the monthly figure from BLS on the

June unemployment. And there's a lot of granularity that markets want out of that data, not just the headline unemployment number, but where do things stand on the jobs that are considered temporary, the lost jobs that are considered temporary layoffs versus permanent job losses. And so in the month of June, looking at the May data, it was one of the biggest catalysts to a market rally that we've had since COVID when it turned out, lo and behold, that an awful lot of those jobs that people had said were temporary were in fact beginning to come back. And if every individual who has been laid off and been told by their employer this is temporary and they've replied to the BLS that they are temporarily laid off,

if all of those people are correct in their own assessment of their employment situation, people are correct in their own assessment of their employment situation, then we're going to be in a much, much better economic position. What holds some of us back a little is the thinking, well, not all those people are correct. Some believe they were temporarily laid off, but it's going to turn into a permanent layoff. There's a lot of room as to where that can go. And I think that the report coming this Thursday will be important to get a gauge of where things stand. The vulnerability has most certainly been in the leisure and hospitality sector. But what I'm most curious to see in the month of June is where PPP might have helped jobs start to come back. And then again, what employees that are still replying that they're

looking for a job but unemployed, what they're saying about the temporary versus permanent nature of their job loss. So we just talked about unemployment, but David, somebody writing in wanting to know what are the most important things to be watching in the economy right now? Well, short term, I think it is employment. And I think it is the various metrics of consumer activity that help us kind of see some trajectory that goes, you know, up instead of down. So I've been trying to provide a dividend cafe each week as much as I can, updates on retail numbers, consumer spending. This coming week's Dividend Cafe, I'm running that PCE indicator,

personal consumption expenditures that was a dramatic lift that we saw last week. The restaurant reservation data, the airline travel data, that type of stuff is useful in the short term to get an idea of sentiment. But I've said it to you at least once or twice on these calls, Scott, and you know how I feel about this from some of our other interviews and

exchanges. It's the business data that's really going to end up driving the overall robustness of this economic recovery and will have the most to do with Q1, Q2, even Q3 of 2021, industrial production, durable goods orders, manufacturing. The ISM data in both services and manufacturing goods is very important to sort of create. goods is very important to sort of create, it stems out of business confidence, but it creates the capital investment necessary for economic growth. It's formative, it's foundational to what you need for other job opportunities and industry growth. And this is me talking as a supply-sider, that data is brutal right now. And it has started to pick back up, but it's only started to pick back up a little, where retail spending has picked up a lot. And I don't want to be guilty. I never believed the retail numbers or consumer numbers were going to stay down forever. The notion that our consumers

were not going to spend anymore because of COVID, I don't have any familiarity with that consumer. I haven't met that consumer in the American economy that can be held down. They just love to spend money in this country. Now, I'm not saying that it's a good thing or a bad thing because sometimes it's, it can be a bit of both. But what I do know is that the productive capacity of the economy has got to come back online for us to have sustainable economic recovery and growth. And those data points are going to be most manifested over the next several quarters in business investment? Well, the business investment side, I think, is very important and probably doesn't get

as much attention as it should. What factors do you think are going to be needed to get that business investment to rebound, perhaps at the kind of pace that we've been seeing the consumer rebound at? Well, I mean, the number one thing that drives business investment, the biggest surge we had of business investment since the financial crisis were the first couple years of the Trump administration. And I think it came about as a result of a lot of supply side reforms. It was corporate tax reform, and it was deregulation. And that came out of a business confidence. So the

correlation between small business confidence and corporate CEO confidence, and then business investment is almost one to one. And so are you going to see an environment where companies have greater confidence in long-term growth and medium-term growth? That's what's going to have to drive it. On one hand, they're going to have ample access to credit. They're going to have the perceived opportunity to create a delta between their return on invested capital and their cost of capital, because the cost of capital is so low. But overall, is there an environment in which it seems that there's enough demand for goods and services that supply can get out and lead that and foster it and create that virtuous cycle that we love to see in an economy?

You know, that's what it's going to take, to answer your question. Do I think it's going to happen? I think the jury's still out. So David, you know, we've been getting a lot of questions about the 2020 election and what that means for markets. So just curious about your views there. Yeah, I'm going to be working next week on a pretty significant white paper on the subject, providing a lot of historical analysis and a lot of current events analysis around some of the different outcomes, some of the different scenarios. I'm pretty sure that my paper will upset everybody. And that will make me think I did it right. Because I do believe in politics, there's an incredible desire to align what your outlook on markets or whatnot

will be with your political aspirations. And I think it's totally understandable. There's a lot of historical data that's pretty inconvenient around this. My view right now is that it's very possible that we're going to go from uncertainty in the political realm to more certainty, and yet that certainty will not necessarily be positive. It could be much more negative. The polls are increasingly going in one direction, which is that the incumbent President Trump is in a lot of trouble, but the markets have gone that direction. The markets have begun reflecting that the institutional investor surveys for months and months, all through the Democratic primary, never at any point had anything less than 55% chance that President

Trump will be reelected. At one point, it was well into the 60s. That's all come down now. There's now a majority that are speculating that Biden will win the election. But markets can't fully price it in this early because of what I said on our last call. It's just too early. It has not been, politically speaking, a good two weeks and it has not been a good four weeks for President Trump. But there's still silver linings for his campaign that he's still in polls that he does very poorly across the board. He's still in those same polls, overwhelmingly does better about the economy. So any number of things could end up changing. And it's not for me to speculate on where the campaign will go. But as far as market response to it, there will

come a time in August or September, if you're still looking at a really wide delta in the polling and betting odds, particularly in battleground states, where the various outcomes of the election won't get priced in in November, December, they'll get priced in sooner unless it's going to become a closer election. So I can't speculate here at the end of June on what's going to happen. I can speculate as most people could as to what would happen if the election were tomorrow, but the election isn't tomorrow. So I just don't know. The basic question a lot of people really mean, Scott, is if Biden's elected, is the market going to tank? OK, I get asked that every day by somebody.

And the answer is probably not in and of itself. If it's a total surprise to markets, the Biden wins. And if the Senate overwhelmingly goes to a kind of far left progressive corner, then I think markets would revolt against that, certainly. But I think the more likely scenarios would be a closer election. And the Senate's going to make a big part of this. Whether or not the Republicans lose one seat, three seats, seven seats,

a wave election for the Democrats is different than a close election. All of these things are going to matter. But I don't think that there's a way to price any of that in right now. And those who have taken a strong political view on either side, if Trump's elected, markets are going to tank. If Obama's elected, markets are going to tank. Now, Obama was elected and markets did tank thousands of points,

but we were in the middle of the financial crisis. Then he got inaugurated. They tanked a little longer. But then six weeks into his presidency, markets bottomed, and then they never had a down year the entire time he was president. And I'm the first to admit that a lot of that was despite some of his policies, not because of his policies. But I still just want to give the objective historical reality that markets did very well under President Trump. And a lot of people were surprised by that.

Markets did very well under President Obama, and markets were surprised by that. And our politics very rarely line up with what markets do. And the reason for this, and by the way, anyone who's listening to this long answer still has to read my white paper. But markets, companies have an unbelievable and uncanny ability to work around the various impediments that they face in the political sphere. to work around the various impediments that they face in the political sphere. Well, let's talk about that, you know, pricing in the election and whether it's too early or too late, because I think we mentioned this on a past call, but if you go back four years ago, David, I mean, you and I were doing interviews in the summer of 2016. Four years ago today, the market was just getting over the Brexit vote, right? And we still

had, you know, four months to go until the election. I guess my point is that there, you know, 2020, just like 2016, there is so much more to think about in the June calendar, July calendar year than the November 2020 election. Right. And I think that that is kind of the point I'm making is that right now, Mr. Market, this sort of symbolic person that represents a trillion different decisions that are taking place simultaneously in the economy. Mr. Market right now is absorbing, yes, some uncertainty around the election, but that's not good enough to say that. What does that mean to Mr. Market? It is questions about environmental policy. It's questions about energy regulation. It's questions about financial regulation. It's questions about the culture war.

It's questions about corporate tax rates. Look, you do have one person running for president who's saying he wants to raise corporate tax rates, but he wants to raise them to a much lower point than they were when Trump took office. So there's nuances that have to be understood. The Democrat nominee is not running on a platform of a wealth tax, which several of their leading contenders were, including one I wrote a book about, right? So there's just kind of nuances in there that have to be understood. But I think what your point is, is very important, Scott. Right now, Mr. Market is looking at COVID, an economy reopening from the real epicenter of COVID, which was March, April, from the real epicenter of COVID, which was March, April,

questions around these surges in Florida and Arizona and Texas. The questions as to what the impact of unprecedented stimulus will be. Is the fiscal stimulus that they've spent going to be as powerful as they intend? Is there more stimulus coming? What's the Fed's role in all of this? Mr. Market's got his hands full right now, and the election is only one thing that he's juggling, believe it or not. Well, and David, you mentioned earlier trade. We've talked about this on past calls, but update us on your take on that. Where do we stand on sort of the trade situation between the U.S. and China in your view? Yeah, so my view is exactly the same as it was two weeks ago,

which is that there continues to be a lingering and unappreciated risk about the overall dynamic with U.S. and China. about the overall dynamic with U.S. and China. And there is, to me, some chance that those things will come to surface before the election. There's a greater chance they will come after the election. But along the way, they represent a kind of underappreciated opportunity for volatility. If all of a sudden there's a peelback of trade and so forth. What's the reason to think that this will be held at bay until the election?

I would say it is because the president has a lot of political motivation to not add more source of volatility to the market, to the economy, to vulnerability in the overall economy that we're trying to see strengthened, not weakened. Now, I'm just throwing this out there because I have been giving it some thought. What if the president became convinced that he was going to end up being a one-term president? that he was going to end up being a one-term president, would he have more motivation to push the issue with China and make some lasting China realm a part of his legacy? I think that that's something that could very well be on the table. But ultimately, but even then, how would markets respond

if they were interpreting it in the realm of a new president coming in a couple months later? It's hard to say. I think the better conclusion's hard to say. I think the better conclusion is just to say that trade issues and currency issues and overall U.S.-China dynamics represent another source of uncertainty in this very complicated market. Yeah, that's right. And you bring up a good point just because in past years, right, when the economy was strong, President Trump would say now is the time to tackle the trade issue. But with the economy in a much weaker position, you wonder where that puts that thought. I think that's fair. I will say this.

The president right now has shown a really interesting instinct over the last couple months to not be impulsive in what he's doing with China. There is a lot of political support to take a stronger stance against China post-COVID. And those days are coming. And longer term, regardless of who's president, I think there's a lot of rethinking that's going to come about where America's national security interests are, where their supply chain vulnerabilities are, and particularly things that are specifically related to pharmaceutical manufacturing as the overall health consciousness of the country around the pandemic is front and center. The misbehaviors of China may or may not drive a lot of it. But my point is,

regardless of what one's motive is, there's a bigger appetite for addressing some of these pretty complicated issues. And it doesn't seem to me so far that the president has played into that with impulsive actions and kind of inflammatory tweets and things like that. There seems to be a little bit more thoughtfulness and a little bit more time and patience behind where we're headed with it. Inevitably, some volatility is going to come about because they're serious issues. But I'm more and more of the hope, hopeful confidence that these things will stay at bay for the right time to be dealt with. Well, and David, stocks are climbing their way back from last week's declines. And we've got about an hour left in the trading session and stocks still holding on to their gains.

And we are just about out of time for today. But David, thank you so much for your thoughts. It was great to be with you as always. And we look forward to more of these in the coming weeks. Yes, we'll be back at it again in two weeks. I believe, let's see, when is that going to be? Probably July 13th, I believe. So we'll have a full recap, a second half of the year,

and who knows what will come up between now and then. But as always, Scott, thanks for you taking time to do this. If anyone wants to send additional questions my way, covid at thebonsongroup.com, those questions will get to me and I will personally write back. And we appreciate your participation in the call today and look forward to wherever things are in a couple of weeks. Take care. Thank you. Last performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice.

The Bonser Group and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the Bonson Thank you. Tax laws vary based on the client's individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for any related questions.