The Dividend Cafe - Running & Eating

Episode Date: July 17, 2020

In this week's Dividend Cafe we focus on the trade-off of volatility and expected returns A market summary of the week that just was Where the next stimulus bill may be heading Why QE is not acting like debt monetization (yet) ... and so much more Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to this week's Dividend Cafe Market Commentary. I am recording before the market is opened on Friday and it has been an interesting week in the markets. It's three weeks in a row now. Coming into today here on Friday, the market is up about 700 points on the week. The futures are pointing up about 100 points, but who knows what the market will do today, Friday. But this would be three consecutive weeks in a row, the market being up, and that happens all the time. We almost got five days in a row of the market up that doesn't happen very much but um uh the market was not up uh yesterday thursday uh but the um thing that is certainly noteworthy about the market this week and and the last two weeks before that is that you have a three-week run of positive returns in the Dow

while you're having the three-week surge or outbreak or case growth, whatever nouns and adjectives you like to capture what's going on at varying degrees of reaction. It's heightened in florida and texas um it had been heightened in arizona it started to back down there a little um we use our coveted markets daily writing and podcasts to try to provide more holistic perspective around all of that. I won't dive into it all now, but I do think the market's response is indicative and you can say symbolic, but I also think substantive to where we stand with that.

We are not out of the woods in the COVID health pandemic by any stretch. There are very serious things happening that will continue to be monitored and addressed. But there's also just simply a very different response, a very different awareness, very different understanding, very different facts on the ground to where we are now versus where we were in March and April. And market prices seem to be, in a weird way, one of the few aspects reflecting that understanding. So that's where we are with the market.

There's a number of other things I'll talk about economically, but here's kind of something I want to elaborate on this week in light of my talk last week about trade-offs. And it was my statement that there was a risk, I think it was sounding patronizing, and that was certainly not my intent. And I really appreciated some of the feedback I got and support, gratitude for the analogy. It seems to have been received well, which is good. About trade-offs in life being the understanding of trade-offs, appreciation for trade-offs, the reality of trade-offs, is being one of the marks of a grown-up,

and that it is a kind of exclusive understanding to the adult world that most of the decisions we make involve a trade-off, that there is a risk-reward calculation, there's a cost-benefit calculation, but there's not necessarily decisions we get to make very often that are all good. And, of course, there usually are not decisions that we make that are all bad either. Most of the time we're in some sort of a tension, and it can be just a very minor issue. You know, if I park here, it's closer, but if I park there, you know,

like parking space stuff or whatever, I made that up right now. But, I mean, my point, there's kind of trivial ones that don't have a lot of significance in our day-to-day lives. And then there's really, really significant ones, a lot of ramifications. But that's life. And that's where we are in the COVID moment, the decisions we make and what we are willing to do and not do and health risks versus other needs and wants in our life. And of course, where I'm headed with this is going to be is more specific to financials, you know, on a real easy basis from just a cash spending standpoint. For most people, there's trade offs around vacation they they may take you're going to get

certain memories you're going to have certain fun and enjoyment there's going to be a certain opportunity but then is spending that money on that vacation it's it's sort of taking away from some future saving or opportunity or other expenditure you may want or what have you and so so we go we do these things. We make these decisions. We have these mental conversations to evaluate and analyze the tradeoff and make calculations. And so I already talked about this a little bit last week,

but this week I was – let me just set it up real quick. Maybe you can tell, maybe you can't. I had lost about 25 to 30 pounds from the middle of 2019, last year, going into the quarantine. And I had no interest with all the gyms closing and everything and going backwards on that progress. I did not want to put the weight back on. I also, you know, I find exercise like most people to be very important from an emotional, spiritual standpoint in addition to the physical benefits. And I really was determined to maintain some exercise throughout quarantine. And we were at our

home in California and I literally ran every single day, every day. I would get up even earlier than normal and work for about two and a half hours, peer reading research markets every morning. And then I'd go get in a two and a half or three mile run and and a few other little exercise things and then and then get going back with my day and so I've kept that going I'm back out in New York now and I've been running in Central Park every morning and it's easier out here because you're in the eastern time zone so I have even more time for work reading writing and a run and more work things before the market opens at 9 30 it's one of the things I love about being in New York is the

eastern time zone suits my work life so much better and I'm such a morning person anyways but here's where I'm going with this I I was running in my neighborhood in California during quarantine by myself and or sometimes I'd run by you know an older couple you know walking together or something but when you're running in Central Park for any of you ever done it you know there's some like real serious runners and there's a bunch of people and so you know it you can feel inadequate real quickly. And I had this moment one day this week, I can't remember which day, of runners passing by. And I looked and saw this one gentleman and he was running at such a faster pace. He was in such good shape.

And there was this sort of sense of like, I've been running every day for, what is it now, four months? And I lost this weight and so forth. And, you know, what would I have to do to be able to kind of be like this guy and have this sort of conditioning and what, you know what I'm saying. I went to Del Frisco's that night and had a ribeye for dinner. Okay, this is the point I'm making. I could run seven miles or ten miles a day or build up to that level, but I don't. I'm willing to do three miles, and maybe one day I'll do more.

But it's a tradeoff that I've made. It's a decision I've made of I want to work out, I need to work out, but I also have my work responsibilities. And this is that kind of calculus. This is the push and pull of the competing interest in my life. I also like to eat. I don't drink. I don't have all these other recreational activities

i love food so i want to fit in my suits but i it's more important to me at least whether i well i guess i'm admitting it now but even if i didn't admit it it really is just being honest and self aware it's more important to me to be able to enjoy a ribeye than it is to be at that really, really fit level of this runner blaring by me in Central Park. That's not to say I don't care about exercise, and it's not to say, it's to say the tradeoff is where we are, that there is this kind of equilibrium that has to be found, and that is exactly the case for investors.

When it comes to dealing with the comforts of a portfolio, one can say, I want to remove some certain amounts of distress, and the trade-off will be that I will have lower income or cash flow or a lower growth rate or a lower long-term opportunity or a higher tax burden or something. And one can say, I'm willing, I want a higher return, I want this, that, and the other, and they will invite more volatility or more liquidity risk or more inflation or more tax burden or something. So those trade-offs, not just in the obvious categories

from a personal financial planning standpoint of spending, you know, consumption now versus more money later, those things are all true, but they're a little bit obvious. But I think within the microcosms of investment decisions and in portfolio decisions and in asset allocation and in behavioral finance. Those same principles are at play as to what goes into something so silly of an old dad who works 16 hours a day trying to figure out where exercise and food fit into his life.

There are people that just choose to not do exercise at all, and there are people who literally live for it. And most people find trade-offs in between. And I think that's exactly the situation in our investing lives. And the only reason I bring up the exercise example is because it's such an easy one. And I had this little moment this week in Central Park where I kind of went through the mental exercise myself.

But it's true in so many other aspects of life too. You know, you want to get to a place faster, but then you risk a speeding ticket or an accident or this or that. And I don't think we often are consciously thinking about it. You know, I went after my run and I sat down on the bench and was going through emails and doing some things. And I was like consciously thinking through all this stuff. I think that we most of the time are engaged in trade-off decisions without even having to think about it because it's embedded into human nature.

It's embedded into the logic of human living. It's embedded into human nature. It's embedded into the logic of human living. And in our lives as investors, it is really a matter of how aware of it we want to be because it's happening anyways. And the notion that we have temperamental, emotional, psychological discomforts is there, and those things are often having to be properly harmonized with other wants and needs, and those trade-offs dictate where we end up. So I hope that's helpful.

I won't stay on this theme forever. It's kind of embedded in our lives as investors, whether I bring it up each Friday or not, but I won't. I just hope that was some kind of interesting anecdote to reinforce the principle from last week. Let me quickly look through here, dividendcafe.com today, the things that I've written about in today's market commentary. We've already talked about the market had done this week. I think that one of the next potential catalysts to markets is in wherever they end up going with this quote unquote stimulus 4.0. It's very obvious that the conversations have intensified around making something happen there

there is a sort of either artificial or not artificial gun from a timing standpoint because the unemployment benefit the supplement of six hundred dollars a week from the federal government ends in two weeks and so there is the notion, we're nowhere near out of the woods. There is still many, many millions of unemployed people, and some degree of additional support is needed because I think to some degree, rightly, the belief is that those benefits have filled some of the gap for consumers and so forth that have less income.

So the overall national income has benefited. But then on the other side of it, an equally and perhaps even more important point, and when I say more important, I mean macroeconomically, not to any individual, is that it is most certainly distorting our ability to get job restoration because there is some degree of people, it's high, it's not all of them, but it's high, that are earning more money to not be working than they would be to working. And so they have to be able to reconcile those two different things. I think they're going to extend it past July 31, but I don't think it's going to be at the full 600 a week. And so some compromise notion will come out of that.

But President Trump did say this week he is still viewing a payroll tax cut as a line in the sand, as this must happen in order to get stimulus done. That is interesting because it seemed as if they were letting go of it. I know there are other economic advisors in the White House that are adamant that that be there. I do not think the market has discounted that in whatsoever. I think that would be a huge boon to markets if there were a payroll tax cut that's implemented into stimulus. I'm skeptical the political will is there to get it done, but it'll be interesting to see where that goes. The thing that is not two weeks away imminent, but is maybe two months away imminent,

that's also lingering, producing some time pressure, is state and local relief. And that's going to end up being another big source of debate in the bill. We know they're not going to go less than a trillion. The Senate GOP has already said they'll do a trillion. We know they're not going to get to three trillion, where the House has said they want to be the House Democrats. So my view continues to be there'll be something between $1.5 and $2.2. And that the president's probably willing to go on the higher end of that. They are talking again about direct payments to taxpayers, although a lower threshold.

So it would be a lower income level of people that were just getting money sent to them. So there's a number of components that are on the table, but that whole package, I just know is going to be sloppy getting done. It's obvious both sides are throwing things out there for political markers. And I'm just skeptical that they'll meet a two-week deadline. And I'm skeptical that they'll get it done smoothly. I think we're in for some real sausage making. So stimulus 4.0, we're in the middle of earnings season. Commodity prices are moving. Industrial metals, lumber prices. I have charts in Dividend Cafe this week. Very hard to not see some of these reflationary things happening. Whether or not the economy really gets going again in one month, three months, six months, there is some forward optimism, and I think that's good.

I was basically surprised this week that the small business optimism number was as high as it was. Industrial productions moved in the right direction. I've been saying and will continue to say those are the most important metrics, but me believing in their importance is not necessarily me believing that they're going to go where we want them to go. And right now it's looked pretty good. So those are some of the metrics that we want to look at. A lot of really interesting stuff about volatility, about municipal bonds and about Europe in the dividend cafe this week.

So please read the dividend cafe.com,cafe.com and get a better understanding of all the stuff we're looking at. And I hope you can appreciate the antidote I used. I'm sure there's nothing more thrilling to you than hearing about me jogging in Central Park and then eating a steak that night. But I don't know, it just seemed relevant to a lot of things going on in a weird way. So with that said, thank you as always for listening to and watching the Dividend

Cafe. Please reach out with any questions you may have, anything we at the Bonson Group can be doing to help you in these utterly crazy times. We are here and I wish you a very wonderful weekend. Please share Dividend Cafe with anyone you'd like and rate us on your player of choice, whatever amount of stars you want to give. But subscribe and it helps us in our podcast feeds and so forth. Okay, thanks so much for listening to Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC,

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