The Dividend Cafe - SALT on The Big Apple

Episode Date: September 17, 2021

As I have teed up all week, I am devoting today’s Dividend Cafe to the takeaways from this week’s SALT Conference here in New York City. The quick qualifier I will offer is that this is not going to be a boring recap of all the speakers, all the events, and all the things that you don’t care about. I did not attend the Chainsmokers concert on Tuesday night, and I did not attend the luncheon address from Paris Hilton on Wednesday, either. In the ten years I have attended the event in Las Vegas I don’t think I ever got a concert either, despite such names as Lenny Kravitz, Duran Duran, Train, One Republic, and The Killers performing. I did attend past luncheons with Dennis Miller, Magic Johnson, Coach K, and the now late Kobe Bryant. In fact, that lunch event with Kobe Bryant started a domino train that led to me doing a real estate transaction with Kobe – but I will save that story for another day. But as much as they have always done to make this a pretty fun event with a powerful complement of entertainment to the symposium of content, whether in Las Vegas or now this year in New York City, there is nothing that they can do to make me a fun person. I absolutely love the speakers, and for the last two events, I have been honored to be a speaker myself. But whether or not you care about this conference, I believe there are some takeaways from the event this year that are going to make this a meaty and substantive Dividend Cafe. So read on, and I promise I won’t let you down. 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. Well, hello and welcome to another weekly Dividend Cafe podcast and video. I am really excited to be recording from our New York studio. And I emphasize New York because the Dividend Cafe today is going to be about the first ever New York SALT Conference. And so I want to recap for you a number of the takeaways that I had from this extraordinary event this week that was here in New York City.

For those who aren't familiar with the SALT Conference, I'll try to do this very quickly. It was here in New York City. For those who aren't familiar with the SALT conference, I'll try to do this very quickly. I kind of give a little longer historical deal in the written dividend cafe. back post-financial crisis and the immediate aftermath of the financial crisis as his sort of contribution to what was just the dying economy in Las Vegas. The corporate conventions had gone away altogether. There was a sort of infamous or famous or whatever you want to call it moment where President Obama said, now is not the time to be going to Las Vegas. And you took an already really hammered city and it kind of hammered it more. And so Anthony decided his part would be to bring a lot of hedge funders and money managers and folks from New York. He was in that business, still is to this day with his hedge fund firm, and create a conference. And over the years, it grew substantially.

I've attended almost every year, I think, but one year out in Las Vegas. And it became a major event. Former Presidents Clinton and Bush spoke before he was president. Joe Biden spoke. But, I mean, really significant, like evening entertainment, some really big, you know, groups would come and, and yet in the daytime, you really had just kind of a who's who, the A-lister, so to speak, of folks in hedge funds and in Wall Street, in Hollywood, in Washington, DC, public policy, and then really even developed

more in science and innovation and technology. Very well done event. I've enjoyed it thoroughly. First time I ever spoke at the event was in 2019 in Vegas. Enjoyed that a great deal. But then in 2020, it was canceled in the immediate aftermath of all the lockdowns during the spring, of course, through COVID. So the reason I say first time ever in New York is in kind of keeping to the history and the legacy of what Salt was in Vegas, Anthony chose to do it at the Javits Center in New York City this week, Davitt Center in New York City this week, and New York being the desired location for the very reason that Vegas was chosen before. The economic impact in New York City, the amount of people that have left the city, having financial markets and so many things have impacted the way they were. Look, it was a very tough period through COVID for much of the country.

But obviously, I think the epicenter will always be sort of thought of as the Big Apple. And so the kind of, I think, symbolic message about reopening, about normalization, about getting our lives back, and about the fact that we just simply cannot live our lives on a computer screen, that these things need to happen in person. And I've been a part of a lot of virtual conferences since COVID. I've spoken at plenty, but I've even listened to many more than I would like. There's some I just refuse to listen to anymore or be a part of, including ones that I've never missed, but I just am done with it. I want to be back together. I want people face-to-face and that kind of interaction. And to see 3,000 people come to Javits Center, this beautiful new center that they've opened. It's like the new wing of the Javits Center,

right on the Hudson River in New York. It was absolutely energizing. And his gamble paid off. There were just a ton of people that obviously feel the same way about this that I do. And so it was an energizing and encouraging event to be a part of, to attend. But on an investment standpoint, there are a number of things I want to be able to share with you. And so, you know, for purposes of the podcast and the video, I want to try to edit as much as I can, because I just simply can't go through everything. But there are a few takeaways that I want to spend some time on. The overall theme, I guess, you know, there's all these different angles I could talk about. We talk about the juxtaposition of policy and markets right now, different things with the Fed,

although that was not as obsessive of a theme this week as perhaps it's been in Bonson land and Dividend Cafe land and whatnot this year. A lot on crypto from some of the different conference speakers and panels that they had put together. Some A-lister type hedge fund guys who spoke and really, I think, provided incredibly valuable insights, some of which I'm allowed to share, some of which I'm not. They did some off the record stuff. But Steve Cohen, Daniel Loeb, Ray Dalio, these are some of the biggest names in that industry. And obviously, when they talk, a lot of people listen, including myself. And there was a significant amount of interest in the subject of the opportunities right now in investment markets. We know how expensive equities are. We know how low bond yields are and where do people think there's value.

And I was really taken back by the contrast of the distress opportunity, deep value, stuff that really got hammered and now could be bought for pretty cheap and potentially provide investors exposure to really outsized returns. And this has got to be the biggest difference from an investment standpoint between the 2008 moment and the 2020 moment, where the bulk of things that became deeply distressed out of COVID, it lasted in some cases for a few hours. And even in the cases of highly illiquid assets, real estate, credit, some of these more idiosyncratic things, it may have lasted a couple of weeks, where there was true deep value, dislocation in price, post-2008,

still in the marketplace in like 2011, two, three years later. And a lot of that did with the Fed. Some of the Fed's aggressive and quick actions, compressed spreads and flooded liquidity and took away a lot of it. A lot of it had to do with the nature of what was creating distress. You know, in 28, there was a very systemic solvency problem. And in 2020, it was much more transitory around the nature of the virus, the uncertainty of the virus. And there was a bazooka of fiscal and monetary response that came from that. I believe that the credit lesson in this is very important because you have the COVID moment, you have what took place in March 2020, but you also have well before COVID and well after

the fact that we live in a different world than financial crisis. The post-financial crisis world, the Dodd-Frank world, is one where the commercial banks have been largely disintermediated. They have no interest really in lending against anything other than assets. So cash flow lenders are largely non-bank lenders. And this is where the structured credit opportunity comes. This is where the private credit opportunity comes. And this is where yield is mostly available. There are liquidity issues. There are obviously credit risk issues to some degree, but a lot of this exists very, very high atop the capital structure. First lien, senior secured type loans guaranteed by the entire asset base and capital stack of the company. entire asset base and capital stack of the company, senior claim on cash flows. There are cases where there could be distress and negative credit events where defaults have to lead to recovery, and recovery can take a long time.

But recoveries can be very, very high. So there's a risk-reward ratio here for those who don't have to worry about mark-to-market, for those who don't have to worry about daily net asset value. That, to me, remains an incredible opportunity. It was one we really liked before COVID. We did very well with throughout COVID, some of the private credit stuff, and then even some of the more opportunistic structured credit we've added. But I really encourage you to read

Dividend Cafe this week to hear more about what we are talking about in that space, because I actually believe that it is a theme that needs to be understood in a post-COVID context now. Stuff that was at full par value that went down to 90 cents in the past, you start wondering what's going on and analysts come in and they can research and they can do all of the work necessary to form an opinion. But when it just trades straight down to 50 cents, like it happened in March of 2020, there was no time to analyze. One of the really premier distressed managers who spoke at the event, not that the manager is distressed, but it's a manager who specializes in buying distressed assets.

Their point was, if you prioritized caution over speed, you couldn't have made money from it. The only way to have exploited the deep distress of the COVID moment was to just say, we're throwing away deliberation. We're throwing away caution because we have to act quickly. And those who did that were richly rewarded. It's not the process I advocate. It's not our orientation. For managers in that space, they may have been able to ring the cash register a bit. But buying a dollar for 50 cents is not on the table right now. It was barely on the

table throughout COVID at all. It was on the table a lot longer post-financial crisis. Real estate's a very similar situation, by the way. Related companies, which is one of the largest real estate owners here in New York City and other major markets, it's a very substantial national real estate footprint. They have a huge multifamily portfolio in New York. They were having to give out rents. First of all, they were only about 80% occupied a year ago, and they were having to give away three or four months of free rent as concessions to get some of their properties rented out. They're now at 99% occupancy with no concessions. They're giving away no free months of rent.

So the entire space in multifamily around the country has changed. High quality assets. I look at some of the returns we're seeing in some of our own diversified income real estate. There's just a very high pay rate, very high quality assets, very good for the owner, not for the renter, favorable supply-demand relationship. And so the real estate theme has actually been reasonably strong. I may have heard one manager this week say that they actually like

the office and retail side right now from an acquisition standpoint, but most of the themes are on what we know to already be doing well, multifamily and of course, industrial. The hospitality space is not trading poorly. And the reason for that is most people are saying, yes, cash flows are impaired right now, but cash flows are going to be restored. And they're being valued at five-year pro forma, not one-year pro forma. So there you go. Interesting environment. I don't want to sit here and go through all of my notes on, I can't even see my notes without the right glasses. I don't want to sit here and go through all the nuances about structured credit and direct

lending. I do want you to read about those nuances, but I want you to kind of just understand in a nutshell that there is not a huge theme right now in the alternative investment world trying to figure out if the S&P should be at 26 times earnings or 21 times earnings. There's not a lot of people that don't know that we're late in the cycle of equity expansion, multiple expansion. These are not index investors that I spent a few days with this week. They're looking for opportunity. They have a philosophy. They have a theme. And I felt a lot of conviction around one particular hedge funder sharing that process that we have to formulate themes that we believe are investable. But then from the themes, we then have to investigate the people, management, the leadership. And then from there,

we have to execute. And that business has to execute or that investment opportunity has to execute. So from a theme to management to execution, I think is the right path for successful investing. It's one that kind of rhymes with a lot of what we believe in and do. And when I look around the hedge fund industry, I know a lot of underperforming funds or ill-equipped funds have died. That is incredibly Darwinian space, which I think is very good for capitalism. You want failures to go away and best of breed to rise to the top. And there's a lot of forgiveness in other parts of asset management industry that allow, in financial repression, in 0% interest rates, in heavy QE and monetary accommodation, some strategies and companies exist that otherwise wouldn't.

And I'm not sure that's going to be the case for all of the next 10 years. not sure that's going to be the case for all of the next 10 years. So you see a lot of optimism from the active guys and the alpha guys and alternative guys, the hedge fund guys and gals, of course, I forgive the figure of speech, that you don't see in the passive space. You don't see in the index. And I think that's for good reason. I think there's a lot of reason to fear some of the speculative excesses that exist in markets right now. And I think there's a lot of reason to fear some of the speculative excesses that exist in markets right now. And I think there's a lot of reason to be very optimistic where there is talent, where there is opportunity, where there is definable philosophy that has followed up with good cogent execution.

So those were some of my major takeaways from this delightful experience with Salt. I'm going to close you with four quick things. Something may pop, the various asset bubbles that may or may not exist out there, but it will not be the Fed. The Fed simply is at a point now, I'm not saying the Fed doesn't help create the asset bubbles, you know I believe they have. But one of the speakers this week, I think, shared some wonderful insights. The Fed can't do it. They're all in on the bubbles. That's not to say the bubbles can't burst, but it has to be another factor that bursts them, not the Fed. I shared this one already, that investment opportunity path theme, then people, then execution.

Even when the Fed does taper, this is a mathematical statement that I did not realize, although I had never thought about it, but it was pointed out to me. When they begin tapering, let's say in December, January, Q1 of next year, they will still be buying more than at the peak of the QE, post-financial crisis. So yeah, tapering, meaning the level of buying is coming down, that is tightening in the sense that there's less than there was before. But the absolute level is still going to be higher than when they were increasing quantitative easing post-crisis. The central bank is not merely, and this is a line that Ray Dalio

shared on the record, the central bank is not merely a buyer of debt, they are a holder. Their balance sheet is holding trillions of dollars. They are inherently invested now in downward pressure on rates. And I think this is just crucially important that we understand the reality where central banks around the world, including our own Fed, are. And then finally, just so I can address that issue of crypto, I talk about it more in Dividend Cafe. But crypto is not an antidote to excess liquidity, which is a case a lot of folks make. It is caused by excess liquidity. The craze around a lot of the crypto space is being made possible by the excess liquidity. And yet so many believe it to be this sort of protection or immunity against excess

liquidity. There's a real irony in there. So I enjoyed the conference a great deal. I enjoyed sharing some of these insights with you. I do feel that the writing better captures a lot of what I wanted to share than this kind of oral repeating of some of it for the podcast and the video, but hopefully I've done my best for you. So we'll leave it there. We'll get off of the salt carpets next week. I'll actually be back in California next week and we will have a more normal Dividend Cafe next week and one I look forward to a great deal. As always, reach out with any questions, any comments, anything you want me to kind of rehash once you do read Dividend Cafe or have listened to this podcast. And I thank you as always for your time. Thank you for sending Dividend Cafe far and wide,

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