The Dividend Cafe - Special Edition Dividend Cafe - Part 2 - Year Behind 2020/Year Ahead 2021 - National Call

Episode Date: January 6, 2021

In-depth discussion of the Year Ahead, predictions made last year, and the impact of the Senate race. 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 special 2021 kickoff, Market Outlook, January 6, 2021. 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. Gentlemen, you may begin. The biggest rookie mistake after nine months of Zoom, staying on mute. Welcome to 2021, everybody. And Scott, thank you for joining us here today. For those of you joining this call for the first time, my name is David Bonson, and we'll just do a little quick housekeeping here, because this is kind of a special event today. I am the Chief Investment Officer and the Managing Partner here at the Bonson Group. My friend Scott Gamm here, you see on your screen,

works with the Bonson group as it pertains to all of our media communications, Scott and I relationship going back a number of years. And we began doing these calls together in the peak of the COVID moment, uh, back in the spring of 2020, which either feels like two weeks ago or two decades ago, depending on maybe who you're talking to, or maybe the mood that you're in. That's how it is for me. The calls are going to continue throughout 2021. We've gotten a lot of great feedback and we believe and hope and think it's a value to you all. And we want to stay current with what we're talking about. And we think this forum and format has been a good way to do it. The subject today, though, we normally might go 30, 35, 40 minutes,

but today we're going to take the full hour because we want to do a special 2021 preview, allow us to sort of deliver to you our viewpoint from the Bonson Group on the key themes and forecasts, perspectives, and outlook we have for the year ahead. We have always done this as a special white paper that I've written for many, many years that contained together the year in review from the year behind us and a year ahead from the year we're now entering. And this year is no exception. That white paper went out to our subscriber list this morning. We also have printed bound versions. A number have requested a copy of that, and we're sending those out as our

little complimentary gift to you all. Like I said, I believe it is 22 pages. I should know that because I wrote every word of it, but once the graphics and edits and so forth get in there, word of it, but once the graphics and edits and so forth get in there, I'm not totally sure. But the 2020 portion, we didn't want to try to cover today. Scott and I had a conversation a little while ago where we realized that we're going to bite off more than we could chew to do both the review of what has been one of the most monumental years in American history, politically, economically, and for investors across all of this sort of societal turmoil of last year. And so I did a special podcast reviewing 2020 that went out on Tuesday. And so we kind of did a part one, part two, and today is intended to be

the part two with our 2021 forecast. So that's the context for this. I'm going to turn it over to Scott, who's very well prepped. Of course, we're going to kind of start talking about the full year ahead, but we're doing that literally right now as the market is up 600 points on the Dow. We have passed 31,000 and we have the basic finality out of Georgia that both of those seats, as really the polling and the betting odds had been indicating the last few weeks, had gone to the Democrats, both of which had lost in the November election. But because there wasn't the 50 percent threshold, it went to a runoff.

And with all the turmoil since resulted in those results actually reversing. And so therefore a 50-50 tie. I talked to Scott about this in the kind of waiting room before we started. And I decided I would just address it now to kind of get it out of the way as opposed to using up a lot of our time today. The reality is that I'm not remotely surprised that markets are flying higher in the face of this tie in the Senate. Now, one of the instinctive objections would be, well, wait a second, why would the markets like the idea of a Democrat majority? I don't believe this is a Democrat majority in the way that the markets would, in fact, probably dislike when it comes to certain investor-friendly policies, regulatory and tax treatment, okay? And everything I'm talking about

right now is what the response of markets and investors would be. It isn't so much the political aspirations one may or may not have. In fact, to that point, and this is something I'm highlighting in the DC Today, though you'll get later on today, recapping today's market. I can't think of anything more historically ignorant and empirically misguided than one taking what they want to happen politically and confusing that with what will happen in markets. You take the want versus the will and the politics versus the markets, and you have ample opportunity for confusion. It's totally human nature to believe that what you want politically is aligned with what is best for anything. Markets, the economy, world peace, et cetera. I get it, and that's not, all I can tell, I don't have any objection to the fact that that's how we're wired,

particularly at this time in a very tribal and political America. But many people who were very opposed to Donald Trump had to accept the fact that they were wrong about what it was going to do to markets. Many people who were opposed to Barack Obama had to accept that they were wrong about what it was going to do to markets. We've seen it with Reagan. We've seen it with Clinton. This is as nonpartisan and apolitical as it comes. And the truth of the matter is markets are responding today, first of all, in pretty select areas. It's a violent rally, but it is not all encompassing. The bulk of the big technology

stocks are down on the day. So we're not talking about the entire risk on appetite. However, to the extent that it's pushed the yield curve higher, it's been good for those sensitive areas. And that's primarily in financials and energy. You're seeing small cap catch a big bid. So a lot of those out of favor things on the expectation that there would be greater stimulus and that there would be, that in this yield curve environment, there is going to be a rotation leadership. We'll talk more about that thematically and how that might persist throughout the rest of our time together. But as far as today's response, I think it is just a wonderful thing for investors to be on the other side of that various election commotions. And we've had plenty of it. We've had too much of it. And a lot of people right now

don't like how some of the races went and they do like how some of the other races went. That's my response to the 2020 election. There's a lot that I'm celebrating as a very politically involved and frankly, center right oriented guy. There are certain races I'm happy with the way they went. There's other races I'm not happy the way they went. That's what it means to be an American citizen. But as far as that market response and what it means to investors, I've said it so many times, I can't stop saying it. We vastly overestimate the influence and importance and relevance of politics into American markets. With that said, let's talk 2021. And let me, after that very long introduction, bring in Scott Gamm, who's going to drive our time together today. Well, David, thank you and Happy New Year. Great to be with you as always. And you mentioned

earlier your 2020 review, and I'll just echo that in that it was such a detailed, almost daily summation of what took place during those dark moments in 2020. And I know no one wants to relive that, but I think just sort of understanding, you know, from your point of view, what took place during that time can give us a lot of good fodder and insight as we kind of look to 2021. So maybe just start off just kind of going through your reflections of 2020 just briefly. Were you surprised by the market rebound from the March low? And kind of where do you see us in terms of the landscape as we enter 2021? Because we should point out that with everything that went on in 2020, S&P 500 still rose over 16% for the year, NASDAQ up 44%, so pretty remarkable. That's right. And those are the numbers from January 1. If you look at the numbers

from the March 23rd bottom, it's even more violent. Look, some people may find what I did kind of boring, and some may find it really engaging. I don't know, I respect anyone's response to it. But I kind of walked through day by day by day back to those dark days, starting off in kind of February, and really in detail into March, to provide, when I say historical, you're talking about 10 months ago. But you know, a lot of time has gone by. And I think we forget what the real context was medically, economically, culturally, and then what that impact was to markets. And I went to great length in my white paper to defend the idea, which I'm completely right about, that what took place in markets in March was the first whammy of uncertainty about what the hell was going on with coronavirus and what it would mean to society. And then the second whammy of every forced seller having to hit the sell button and a panic sell of risk assets. It is very easy to tell when something is a stock market sale versus a panic risk off sale. It's not always easy to tell in the moment, that one was,

but it's always easy to tell in hindsight moment, that one was, but it's always easy to tell in hindsight because you have things totally unrelated to what's going on sell off as well. And I mean, dramatically, municipal bonds, corporate bonds, but there was even a lot of dislocation in other safe assets. The dollar ended up having a terrible year, but the dollar rallied big right away in the month of March. That happened back in 2008 as well. Gold sold off before it ended up rallying and then kind of sold off at the end of the year. The reason it sold off was the same exact reason, indiscriminate need for forced selling on a national margin call. So you ask if I'm surprised, and I think that anyone who addresses that question has to answer truthfully that of course they're

surprised with how substantial, quick, and violent the rally back was. The notion that we went from 27,000 to 18,000 back to 27,000 in three months is utterly insane. And one of the things that I highlighted in DC Today yesterday, and I didn't get a lot of feedback on it, but I wouldn't expect people would have. It may seem kind of granular or technical, and I don't know if you caught it or not, Scott, but I find it really profound that last year, the market in the middle of the year dipped below its low of the prior year and closed above its high of the prior year. And that has only happened twice since 1950 and only three times ever. That's from a technical standpoint, really kind of amazing. And by the way, in those three times that it's happened, all three times the very next year in markets were up quite substantially. Now that of course is not predictive. There's no way to tell that what took place in one year would, in one situation, repeat itself another. But my point

is, as far as internal technical market action, I think it's really quite significant. So yeah, we had an unbelievable year in 2020. We had an unbelievable year in market resilience to COVID, in markets being able to really discern and understand what was actually happening. and understand what was actually happening. Throughout the year, there are moments at which I think we created this sort of binary understanding of, well, the whole world's changed. It's gotten real bad, but these work-from-home things actually benefit, so those stocks are going higher, and some of the technology stocks associated with them are going higher, and then everything else

is kind of going lower. And that lasted for a couple of months. It made the overall market levels go higher, but it was really deceiving because there was so much within the market that was actually still in a lot of distress, including a lot of the value areas or dividend areas or particular sector areas that were quite invested in. And then into the fourth quarter, a lot of that changed. The election story, the post-election story, it's intertwined with COVID, but from a market standpoint, those became kind of two separate stories. You think to that sell-off in late October and then that rally into November. And so I hope that people will find the white paper useful walking through what took

place in 2020 and my kind of sequential remembrance. You know, someone made the comment to me, it must have been easier for you to record day by day what was happening in March, only, you know, nine, 10 months later. And I said, I'll be very honest with you, I will be able to make that exact same recording in 20 years without looking at any notes or calendar, I will remember the dates and the days and the events vividly well into the future. That's how profound they were, what we all experienced as investors in March of 2020. And the way I know I'll be able to do it is I have the exact same memory of certain key dates in September and October of 2008 as well. Well, and David, I think that muscle has stayed with you because you were talking about dates from early, notable market dates from early last year prior to COVID, which was very impressive.

But, you know, David, I think after a year like last year, I think a lot of people right now are thinking to themselves saying, OK, glad that market turmoil is kind of over with. Seems like everything's fine now, smooth sailing. You know, we're hearing some people talk about euphoria, which is almost never a good word to describe markets. describe markets. And I don't know what your take on euphoria is, but one thing you wrote in the white paper, risk and uncertainty are permanent conditions for investors. And this is no less true as we enter the new year. And I think it would be worth you expanding on that because people might think that the risk and uncertainty is over after the market rebound. Well, this is really important to understand as a basic fundamental of economics and as a basic fundamental of financial jargon. There is a risk premium embedded in certain assets. And what that means is that you have a

potential for obtaining a premium to the return you would get versus other alternatives like a treasury bill or a money market. And yet the reason you get that premium is because of a risk that you're adopting. And I don't think that we understand enough how unchangeable that condition is and how wonderful it is. See, the compensation that we get, meaning the total expected return, an expected return is synonymous in investor language with demanded return. It's what investors demand to get in exchange for something. So for the risk they're taking, they demand this level of return. It's what investors demand to get in exchange for something. So for the risk they're taking, they demand this level of return. A basic example would be a high yield bond. Okay. You may say, I'm going to get paid back in a month and the payer is the United States government. So I will

lend the government my money for 30 days and I only need a tiny bit of return. But I'm going to lend money to a kind of more skeptical, you know, sketchy, questionable company situation, and I'm going to do it for five years. Then I demand this level of return. And so, and you imagine that happening with the course of trillions of dollars and millions of actors transacting simultaneously, it makes a market. Well, the same thing happens with equities. It's embedded in the reality of stock price investing, that we have this certain understanding of risk being taken and what that level of return

that we want to get is. And the fact of the matter is that the lower level of volatility that we are expecting, the lower level of return, we're willing to accept. So the inverse of that is completely logical, and it really ought to be very obvious, but it's behaviorally and emotionally very uncomfortable. And that is that the less volatility, the less return, and the more volatility, the more return. And that is being priced into the behavioral realities of capital markets each and every second, let alone every day. I believe that risk and uncertainty are not only, as you phrased the question, the reality about equities. They're the reality about being alive. They're the reality of being a member of society on planet Earth, that there is a certain, sometimes uncomfortable reality that we just simply don't have certainty

around geopolitical conditions, around climate conditions. And of course, in 2020, we got the great example of health and medical conditions. These uncertainties are a part of the human condition. And when it comes to how those get monetized in the life of an investor, you can like it, you can not like it, but you certainly cannot pretend it doesn't exist. Yeah, it's very well said. And I mean, just look at, you know, kind of what we were all doing a year ago today. And, you know, we didn't know what was what was coming, both on the health side and the market side. Well, and I think I think, too, if I could be so bold, throughout my years managing money, I have conversations one way or another every single day with someone who's talking about some concern that they have and risks they have, fear of risks they have.

And the fact of the matter is that when someone shares a risk that everybody else knows about, it is just virtually never market impactful. And in fact, often is market reversing because the fact that someone is bringing it up is proof that everyone else already knows about it. And therefore markets have already priced it. Where we've had these moments of severe distress, not the two to 5% downside volatility that nobody should ever even notice, let alone care about. When you talk about real market volatility that is deeply unsettling, COVID, March of 2020, financial crisis, 9-11, the dot-com crash, Black Monday, these very famous events, and I always just use those four or five to keep it in modern history, okay? When you talk about those events, they're always

predicated by what is often referred to as black swans, but certainly unknowable events. So the unknowable risks and uncertainties are the ones that are out there, and I always ask someone, what is it they want to do to defend against an unknowable risk? Well, one thing is to just not take the risk to begin with and therefore not take the return. That isn't a very pleasant solution. It is not recommended. But the other is to acknowledge the embedded reality of the risk and account for it in one's asset allocation so that the blend of various types of asset classes in their portfolio all speak to the up and down movements one can expect in various circumstances and be within one's comfort zone and within one's need for future or current

return. You know, one key theme of 2020, just from a market point of view, obviously, was the Federal Reserve, which you talk about in the white paper, and we probably talk about the Fed on each one of these calls. But, you know, what is the current landscape of the Fed right now? We know that they did so much to stimulate the economy back in 2020. of the Fed right now. We know that they did so much to stimulate the economy back in 2020. You even talk about sort of a, maybe it's a hidden risk that not enough are talking about, but how the Fed has punished savers with low interest rates. But I guess, how do all those dynamics fit together? And what are you expecting from the Fed this year? Well, so I would say that you're not being remotely exaggerative of what my position is.

And if anything, I think that I would be understating this point. I want, if there's anything people take away as the stuff that I think is important, the Fed, the new realities of the Fed, and the entire landscape of monetary policy and its intersection with fiscal policy going forward, I think, is as important a conversation in the macroeconomic sense that we are going to have. The issue you bring about savers and the risk that's there, here's where it becomes a risk. it becomes a risk. It's if someone denies it and goes into investments believing that there are certain yields or interest rates available that match the yields and interest rates that they used to get with the risk level being the same. If a money market paid 5% 15 years ago and it pays 0% now and there's something else that pays 5%, that's not equivalent to the risk level of your 15-year-ago money market. That's equivalent to an entirely new set of risk. And it may be a really good investment or it may not be.

But people denying the reality of risk reflected in interest rates is incredibly dangerous. That risk can be exploited. It can be incorporated into a portfolio construction, but it cannot be denied. And I think that there's a really strong human tendency to want to do that, to just assume, well, this thing is offering 3%, 4%, 5%. I've always gotten 3%, 4%, 5% with my old muni bonds or whatever the case may be. It is not the same thing. And 3% or 4% or 500 basis points doesn't seem like a very attractive return, but 3%, 4% or 500 basis points these days in a world of zero interest rate policy comes with risk, period. So there's a lot to say about the Fed. And that's one of the key themes for us this year is the fact that fighting the Fed

can be a very, very silly endeavor. And I'm really particularly speaking to those out there that are critical of what the Fed's doing, because I'm very critical of some aspects of it. I believe that there are things the Fed has done and will do that are misguided. I do not, by the way, criticize their motives. I do not criticize their intent. I simply disagree that one of the roles of the central bank is to hug or coddle or provide a sort of protective endeavor around risk assets. all things considered, driving better returns from risk assets trickles down to the rest of the economy. And the better environment for risk assets is a necessary byproduct of what they're really doing, which is keeping liquidity into the economy. I do not blame the Fed for why they have to buy so many government bonds. The government bonds have to be bought because the government is in so much debt.

Government's in so much debt because they spend so much money. They spend so much money because the people who vote for them demand they spend so much money. pure excessive debt with making it easier to take on more debt than what you have sort of created a hair of the dog monetary policy. And the result is a deflationary spiral, pushing on a string, a diminishing return. There's all sorts of either cliches or literal economic vernacular I could apply to that dynamic. We're living through it. I have no capability in my career to change it, but I have every capability and every intention of recognizing it in the way I invest my clients' money.

You know, another theme of 2020 was the stock market versus the economy, and I think that dynamic was sort of under the microscope throughout 2020, just because there were many times where we had pretty bad economic data, but yet the stock market would rise. And I think that reminds me of something else you talk about in the white paper for 2021, which is just sort of the difficulty in forecasting the near-term economy first quarter, but maybe the sort of irrelevancy of that to markets. And so maybe explain that dynamic and how you're looking at the economy as we head into 2021. Yeah, we're going to finish up the first week of 2021 and the first quarter tomorrow, right?

We're in the first quarter. The markets are not responding to economic realities of the first quarter. They're thinking about pricing in something further out than that. So it isn't that market mentality is identifiable and that it is pigeonholed to specific time intervals like a calendar quarter, but that becomes a convenient way for you and I to talk about it, right? My view is that there are going to be three phases in the economy this year, and it's loosely the first quarter. It could be a little shorter. It could definitely be a little longer that I'm calling a wait and see phase. The market, the economy will be growing. It will not be recovering back to the level it needs to pre-COVID. It will not be the robustness

of the third quarter 2020 when it was coming off of the national lockdown, but it will be good. It just won't be great as we wait to see the impact of the vaccine getting through and particularly some of the larger cities and states that are still implementing various levels of restrictions on economic life. The second phase, though, is the one that I'm really very surprised is not getting more attention. It is both anecdotal and I think very analytical that that I am seeing a pent up demand that finally gets a voice and gets an ability to express itself with this big blowout vacation a family has wanted to do for years and with more travel and more expenditures and more nights out and more, you know, this and that and the other.

Those are areas to focus on, particularly in the travel, hospitality, leisure, food, beverage, but also certain consumer goods, luxury items, rewarding oneself with a new house, new car, whatever the case may be, I believe that there's going to be a pen of demand that then distorts the level of rebound. It's going to give us a real big kind of expansion. But it won't be just simply the math of coming off the big contraction, which is what Q3 was last year relative to the distorted math of Q2. Instead, I think this is going to be real, but it's not sustainable behaviors because a lot of it is that pent up demand. Then whether that's Q2, Q3, probably a little bit of both, maybe late Q2 into Q3. I think then you get into a point that I'm just calling Q4, which is that's the real test. That's the real like, okay, where are we?

We're not in COVID and we're not even immediately post-COVID anymore. So we don't have the election to blame for things. We don't have COVID uncertainties. Where are we economically? We know that a bunch of stimulus was pumped in. Maybe everyone liked that and that did some things in the economy. We also know there's a big debt overhang now from the stimulus, so we have to kind of deal with that.

We have all the Federal Reserve interventions, good, bad, or ugly. What kind of organic economic position will we be in on the other side of all this? And I think it's going to be a mixed bag. I think it's going to be a mixed bag. I think it is also unknown. The areas that I believe are going to most telegraph where we're going are not the receipts from what people are spending on their favorite e-commerce retailer. They're not the receipts from what takes place when movie theaters reopen or concert halls reopen.

takes place when movie theaters reopen or concert halls reopen. What they are are business productivity endeavors that people are investing in new technologies, new research, new development, new factories, new widgets. That's what makes an economy. My supply side economic convictions have never been remotely political. They always have been economic. You need production to drive an economy. Once you have productive activity, then someone can consume it. And once someone has produced, they now enable A, someone else to consume off of their production, and B, themselves are able to consume off of the fruits of their own production. Production drives these things. And I think we have a lot of questions as to what the business investment productivity will be into the economy. That's what I'm looking to as the question mark going into the later part of 2021 and thereafter.

mark going into the later part of 2021 and thereafter. And that's a good segue into the other theme you're watching for 2021, M&A activity. And you have a couple of sectors that, you know, I mean, it seems like almost every sector from what you wrote is ripe for M&A. Debunk that or explain that and what are the conditions that have led to that outlook? or explain that and what are the conditions that have led to that outlook? Yeah, by the way, I'm not sure that I would say every sector is as ripe for M&A as others. And by the way, it's a good question you bring up because I could argue that some sectors might be ripe for M&A for different reasons than other sectors that are also ripe for M&A. So I'll use technology as an example. I don't think there's as much distress in technology, but I absolutely believe that there's high stock prices that traditionally have been used to affect

acquisitions. A high stock price for a technology company becomes a currency. And traditionally, late cycle, you get a chance for companies to do a lot of acquisitions using their stock as a tax efficient way to acquire another company. But then when you look into the healthcare sector, where I think that it is incredibly primed for high M&A activity, it would be for a totally different reason. First of all, lack of M&A over the last several years, they're due to see a new round of acquisitions, but also from economies of scale. I think that whether you're talking about pharmaceuticals or particularly in biotech, there are just a lot of companies that it is cheaper to acquire their R&D than it is to build

it. And that's really what I think the driver of M&A would be in a lot of the healthcare sector. So the combination of low interest rates, of tons of liquidity, of an eagerness for lenders, both non-bank and bank lenders. That non-bank lender thing is very important. There's a lot of alternative capital sources. And then coming out of the COVID moment, competitive realities, strategic realities, strategic imperatives that for a lot of people say, okay, it's time for us to maybe find a different partner. And so that merger and acquisition appetite then picks up. You can have periods where there's high appetite, but bad capital markets, you don't get M&A there. You can have periods where there's great capital markets, but low appetite, you don't get M&A

there. I think we have both. I think 2021 is going to bear that out. You mentioned the tech sector as one of your examples for M&A. And that, of course, brings up sort of another debate, growth versus value. Where do you stand on that? You know, and the whole debate that kind of was sparked, I guess, maybe late summer, early fall, that's kind of when the growth versus value debate really heated up. And where do you see that going in 2021? See, Scott, I love you because you're a media guy. And so you think the growth value debate started a few months ago instead of a few decades ago, right? I mean, I know what you mean, though.

You're, of course, referring to how it's really elevated over the last few months. And I totally get that. But in all honesty, I think I'm right, too. This is a debate that is somewhat perpetual, at least since the 1970s. I think that with the advent of pensions and a lot of third-party consultants that were calling on institutional investors, it was easy to segregate or bifurcate categories in the market around what they called growth and what they called value. And I've said so much over the years of my criticism of the vernacular that right now I feel almost a little bit surrendered to the fact that it's somewhat unavoidable, even though I disagree with it. I know what people mean by it. So I'd just rather not sit around correcting people's language all the time. I'd rather say with what you mean by

growth and what you mean by value, yes, I believe that growth is going to do this or value is going to do that, et cetera. From our vantage point, I think it's a little easier to almost look at it as really, really in favor versus out of favor, which is largely correlated to the way it's indexed as growth and value, because most of what was really in favor was growthy. And most of what was out of favor was more in the value category. But generally speaking, what you need for a growth rally to end is a blow off top, where valuations become perverse. And I certainly think that one could argue that some valuations, if by perverse, I just mean valuations you've never seen before, well, that box is checked. Now,

it's difficult because you have an incredible amount of index fund buying for a lot of these names. You also just have really well-run companies that people are hesitant to sell when they know it's a great company, regardless of what the valuation level may be. But you also need interest rates to not continue going down. And when rates keep going down, it keeps boosting multiples up, meaning valuation levels. levels. And to the extent that interest rates just sort of flatline or even now bid themselves up a little higher, it's just a mathematical axiomatic fact that multiples come down. And therefore, that brings valuations of some of the growthier parts of the market up. There's also

a distinction I'd make, Scott, within growth between really established, kind of, you know, frankly, they've been around a long time, 10, 20, 30 years that are big phone makers or e-commerce retailers or social media companies. They're big and they're hot and they print money. But I think you have to distinguish those from up and coming, younger, hotter companies that also lose a ton of money. See, a lot of my concern in the growth areas in the market are not the established big tech names and fang names. A lot of it is some of the stuff that did really well last year. But I don't know how you could possibly get a better environment for some of those growthy areas than the work from home quarantine type environment. And some of those companies still couldn't make a profit last year.

And so part of me wonders, is there a path to profitability? I will never join the chorus ever till my dying day that says, no, a company never needs to make profit. A company needs to eventually make profit. I totally understand that stock prices can surprise us longer than we think. And it's happened to me. However, at some point, a path to profitability is a prerequisite for continued existence. And I think there's some parts of the growth areas in the market that I question that path to profit. So that is why my favorability bias is more towards companies that have recurring cash flows and profits. But their problem has been a were achieving greater growth attributes elsewhere. Understandable. Those things tend to zig and zag. It just zigged one way much longer and much higher than I would have expected. And I think a lot of other people expected. Do I think that that zig will continue in the same direction or in a reversal in 2021? I'm firmly in the reversal camp.

I don't know if it's tomorrow. It's actually been playing out quite substantially the first few days here of the year, but that, you know, that could all change in a couple of days too. But yeah, I think that generally speaking, the better risk reward trade-off, the better proposition is into things that would feel more value-y than growth-y. And I think in a related discussion, the importance of dividend growth stocks, which is a core principle of what you do and what your team does at the Bonson Group. That's right. I don't think that you want a dividend growth portfolio filled with names that don't make money.

If they're not making money and growing profits, then those dividends are not sustainable and the thesis of their ownership is not defensible. I also don't think you want dividend growth where you have to substantially overpay and you're entering at a very low yield. We had a name that's actually been a great dividend payer and a great dividend grower and one of the best return-oriented stocks in history last year that we sold just simply because that dividend yield was at such a sub-1% level, it didn't fit as a dividend growth name. There could be other reasons to purchase certain stocks like that. But our thesis around dividend growth is one that is very well thought out and one that I'm perfectly ready to defend. And I believe that you have a lot of names last year that did very well because of their endurance, their durability as companies, particularly in the consumer staples sector. And those did reasonably well on a relative basis during the panic of March and the difficult times,

but then actually generated pretty great returns. And those are the names that really always get ignored. Okay, the top performers last year, the big growth stuff, the FANG stuff, the tech stuff, we talked about it plenty. And I talk about the real out of favor stuff. If I'm placing bets on where I think the greatest return opportunity is, I'm going to the bottom of the barrel

because I look to some of those really distressed names in maybe financials, utilities, energy, infrastructure. But the fact of the matter is the stuff that was never up huge, but never down huge, that seems to often get missed. For us, we have a lot of names of consumer staples and healthcare, I think fit into those sectors. And people might, you know, those, those valuations aren't cheap, like energy and financials, but they're not as frothy, you know, as one may think, and particularly benefiting from a weaker dollar with a lot of multinational exposure and benefiting from the low interest rate environment. You know, David, another theme you talk about for 2021,

small businesses, which of course, you could argue bore the brunt of the economic carnage we saw in 2020. But you talk about the birth of new businesses in 2021. I wonder what the market implications of that might be both in 2021 and even more long term. Well, the market implications are important, but really I would even add overall economic implications and overall societal implications. Because I think that a lot of the pessimism that came out of the COVID moment was in the black and white statement of this happened and then a lot of businesses are going to go under. And their explanation of the cause and then that effect were accurate. And yet what I'm trying to do is cause my clients and those reading my material to understand that there is a little more to the story. As a human, I'm really unspeakably distressed.

Pretty much every day I am in thoughts and prayers, I mean this seriously, about those whose businesses have been destroyed by this COVID moment and the whole kind of response that we've had to kind of go through here. But I will say that there is an entrepreneurial DNA in America that while it may not help Mr. Jones, who lost a business, that business going away is replaced immediately by Mrs. Smith and her new business. And I put a chart into the white paper. You look at the, that was shared with me by my dear friend, John Malden. You look at the

number of business license applications that skyrocketed higher during the moment. There are a lot of businesses that were failing, but there were people applying for new business licenses. Some of those businesses are dogs. I get it. Some are going to be world-changing enterprises. Some are just going to kind of get by. But that's the nature of the American economy. That's the DNA that we have as a country. And these difficult times, we have to have a policy response and we have to have a societal response, um, to, uh, to help those that, that are impacted, but on a macro standpoint, that it's not the end of the story. There is still this drive when one fails to then go succeed in a new endeavor. restaurants are going to go out of business, and I think a lot of new restaurants are going to be started. And I think some retailers are going to go under, and new retailers are going to be started. And I think some businesses are not going to fail. They're just going to have a really bad year, and they're going to reinvent some things and come up with a new product and a new service

and a new way of doing things. And then they're going to come out and flourish again. I don't think this makes me Pollyannish. I just think this makes me an American who has lived here 46 years and seen this reality about our great country. We will get through this. And the way in which we handicap that into our economic expectations needs to account for that. Well said. And, you know, I think when we talk about kind of the DNA of our country, it's very interesting because the other theme you talk about for 2021, China. And obviously there's a lot of uncertainty there just in terms of US-China relations and trade tensions, which really dominated the headlines in 2018, 2019, maybe not so much last year, but how should investors be viewing China in 2021,

at least as it relates to their portfolio? Well, and isn't that one of the great ironies of 2020, that China, in a sense, was not really in the headlines, and yet the virus that had originated in China was the major theme throughout markets. And yet, our early kind of concerns about coronavirus were centered around American companies that had Chinese factories that might have to slow down or shut down as they were dealing with the initial levels of the pandemic in the Wuhan region. And as those things kind of slowed down a bit, it wasn't until it sort of spread into Italy and South Korea that it was becoming more of a global story. And then, of course, by March, when it was more known that it was here in American territory, that COVID became that big story. But my point I try to make in the white paper is not that the Biden administration is going to come in and fight

with China. And it's not that they're going to come in and capitulate to China. It's that I believe investors sort of developed this thought that, well, the Trump administration is rhetorically pretty aggressive against China. And then we remember in 2018 that they went into a trade war with China and that hurt markets a lot. And so then therefore, with that rhetoric of the Trump administration gone on China, and more than likely some of the trade barriers being loosened a bit with China, ergo, the China risk leaves markets or leaves our thoughts around global economics. I don't think that's true at all. Regardless of what I want to be the Biden administration's policy with China, I don't believe that investors can take for granted that everybody's sort of on the same plane here. I think that we're going to continue to get more information around, around a lot of things related to COVID. I think that unpacking the trade deals as they were set by the departing Trump administration, I'm skeptical that, that Biden's going to want to

come in and rip them up altogether. So there could be some uncertainty around what they keep, what they don't keep. It's very clear politically that it's not a good play to come in and be the big friend to China. I think he may not approach things the same way the Trump administration did, particularly with some of the policy particulars. But I have to imagine his posture is going to be more muscular than dovish as it pertains to China. That certainly seems to be what the American appetite is. So therefore, with China being such a pivotal component in the global economy, we've seen this time and time again that there is no scenario by which China can catch a cold and the rest of the world not catch something worse. And maybe that old example or cliche I just used is somewhat inappropriate now,

you know, a post COVID scenario. But my point being that they have the ability to have something happen to them that then becomes, you know, really impactful to the rest of the world. becomes really impactful to the rest of the world. And so their foreign, their currency reserves, their relationship with their currency to the US dollar, not to mention their own economic growth, these things matter to us. You can limit your exposure to China as much as possible by simply not buying more of what is being bought in China or made in China or companies that are listed in China. But you can't have economic hands-off relationship to China in any portfolio. It cannot exist. So my encouragement to people is to understand that that story is not going anywhere. It's just going to kind of move to a different chapter.

Yeah. And a lot of news this week about various public companies listed here in the US. And did you see, Scott, that they reversed that back the other way now? So the New York Stock Exchange had delisted some of these Chinese companies, then announced they were reversing and we're going to let them list. And now they've reversed the reversal. So they're now re-delisting three major Chinese telecom companies from the New York Stock Exchange. So just within a few days, you get a kind of illustration of what I'm referring to. It's not that it's good news or bad news. It's just simply that there's uncertainty and it's still in flux. You know, one area that I think we should spend more time talking on about the private equity,

talk about kind of what role private equity played in client portfolios in 2020 and how, if at all, that will change in 2021. Well, if there's any regret I have, I wish that I had had a higher weighting into private equity going into the COVID moment. And that is not, by the way, because these privately held companies would not have been impaired. I would imagine a lot of them were. But I think that the illiquidity premium I spoke to a year ago would have been, and for those that had a proper private equity exposure, was very appreciated. about mark-to-market pricing, that seeing the minute-by-minute movements and what other people are doing with their stock sales has a particular emotional and psychological effect on investors. And when there isn't the ability to go sell out of something, it not only keeps the mark from being impacted in that valuation, but it becomes much more comfortable, I think, that valuation, but it becomes much more comfortable, I think, behaviorally for the investor as well. One of the things that is so different right now, this is the bad news,

going into 2021, coming out of COVID-2020 and this really kind of bizarre recession versus 08-09, is nobody was positioned to make money off of private equity out of the financial crisis. People were so shell-shocked that recession really lasted from late 07 through early 09. So you had a full 18-month period of a tremendous implosion of global credit markets. And by the time risk appetite came back into private markets, and by the time people understood, hey, I think a lot of these private equity guys are out buying companies for 50 cents on the dollar, a couple of years had gone by. And you look at the returns of some of the 09 vintages of private equity and 2010 vintages, they're huge, but they didn't raise as much money. Then you get 2013,

2014, they have good returns, but they're not like what the initial stage was, but they raised a ton of money. And I think that right now what I've seen is that there's just far more investors that said, I'm not getting fooled again. We do believe private equity is attractive. We're not selling out of it, and we're actually going to try to buy more of it. And I don't mean retail investors, but I mean large institutions that maybe missed some of the opportunity set post GFC. So right now, the private equity environment, what I can tell you is that the greatest name brand private equity sponsors have hundreds of billions of dollars of cash to spend.

And per my earlier point about M&A environment, corporate finance, low interest rates, there's plenty of companies out there that can be sold. There's a lot of companies in America that want liquidity for founders. There's a lot of strategic opportunities. So from the LBOs into more strategic pairings, we're big believers in the opportunity set in private equity. That's the really good news. I'll close it up with the final bad news. You can't just go buy private equity beta. You can't buy an index fund of private equity. private equity beta. You can't buy an index fund of private equity. This takes manager selection. This takes manager talent. It takes execution. It takes culture. It takes corporate infrastructure.

It takes pricing the deals right. There's a lot that goes into it, but I'm very bullish on the approach that we're taking at the Bonson Group to private equity. And David, we've got one more theme to talk about for 2021 before we have a couple of questions from people writing in, but fixed income. It's interesting because I think it was last night that the 10-year treasury yield crossing 1%, which was pretty notable for those who follow every tick of that. But you say higher yields don't mean that stocks suffer. That's pretty interesting because we always hear about the correlation between the two. Yeah. Well, to be very, very clear, what I say is that they don't necessarily mean stocks suffer because you have to look to the reason yields are going higher.

So if yields are going higher because of strong economic growth, because of a normalizing yield curve that is properly recognizing spread across the term structure so that you're getting a more sloped yield curve as it should be in a healthy and normal economy? Why should someone not get paid more to lend money out for seven years than for one year when seven and one years are paying the same? A child should understand that there's something wrong with that. Okay, because obviously there's more risk for a person lending out for seven than one. So when you get the yield curve adjusting, that means rates on one end of the curve going higher. That can be a very healthy thing. Curve sloping to normalcy is good and yields going higher because of organic growth in the economy is good.

Where higher yields can hurt stocks is when they're totally unexpected, totally violent, totally shocking, and when they are often driven by inflationary pressures. So the 1970s are a great example where you had yields moving higher and it was hurting stock prices, driving price earnings ratios and multiples lower on the backs of inflation pressures that people were expecting less real return from the stock portfolios because even when they did X, inflation would eat away at a big portion of what X might have been. Well, we do not have that inflationary environment right now. I am highly confident macroeconomically that we're

not going to have it in 2021. The very bad news is that the reason I don't believe we're going to have the inflationary environment is because I don't believe that the Fed can create such because I think that they're stuck in a disinflationary spiral. So I'm always very hesitant to make it sound like I'm being bullish here. When I say we're not going to have inflation because I think we are suffering through deflation, that is an economic outlook. It can totally be wrong. It hasn't been wrong for well over a decade, but it is not bullish. It is just me. The example I kind of use is instead of talking about a hurricane, I'm talking about an earthquake. You know, these are two different sort of global economic headwinds that have to be

dealt with. Yeah, I believe that we're going to see higher yields that are almost inconsequential. And if anything, including like what we're seeing today, they actually benefit more than they don't. And David, we've got a couple of questions that we'll try to fit in as, as we come to the end of our discussion, but somebody wants to know just your thoughts about a looming market correction, kind of what your take there is, just given where valuations are

right now? So, you know, if someone wants me to predict when there's going to be a correction, I can't, but really good news, nor can anyone else. If someone wants me to say, do I think a correction is coming? The answer is yes, of course, corrections always come. But if markets go up 14% and then correct seven, the correction came and someone who didn't do anything about it is better off, not worse off, right? So it's just very unhelpful. My view is that corrections are like risk and like uncertainty, A, an unavoidable reality, and B, an actually good thing in that they are like risk and like uncertainty, A, an unavoidable reality, and B, an actually good thing in that they are embedded in the risk premium and push market expectations higher. Look, I would not be an index buyer right now.

I think that when you look to forward-looking earnings expectations in the S&P 500 and in the NASDAQ, and when you look at the current pricing and what that embedded PE ratio is, I think on a risk-adjusted basis, it's very frothy. Earnings could be a little worse than expected. They can't be much better than expected. So really to get a forward return, you have to see the PE go even higher. To me, what that investor is doing could play out. But what it is, is just simply betting that more people will come in and buy up that return. And I don't view that as a sensible investment policy. I don't view that as a sensible investment policy.

So while I am market agnostic about when a correction might come and what it might look like, I'm a fundamentalist. So my fundamentals have to be driven by cash flow generation. Do I believe in the sustainability of the companies we're buying for clients to keep making free cash flow and sharing it with clients, sharing it with their investor base? Do I believe management has a business model in place that will allow for that? And do I believe they have a culture in place and a historical preference and tradition of being dividend payers and dividend growers? That's the way we have to value markets. And so I think some of those companies that we own could have a correction in pricing. Some of those PEs are a little expensive with a couple like a particular semiconductor name or a couple of consumer staples names we own. We're not selling those stocks

though, because if they do correct, then we're going to be reinvesting dividends at lower prices. And we see that as a good thing. And if they do correct, we have no worry that the dividend will be going away and our clients will still that need income will still be receiving the cash flow. This is the whole point of dividend growth, to not have to worry about the totally unpredictable reality of market corrections. Okay, we've got one more question about Bitcoin, which had an incredible surge in 2020, almost similar to the surge seen in late 2017. But somebody wants to know if Bitcoin is adopted by major businesses and they reference a very large online e-commerce player. So if Bitcoin is adopted, do you see a place for digital currency investment in client

portfolios in 2021? Well, first of all, if a huge, huge e-commerce player adopted Bitcoin as a means of transacting, it could kill the price. The whole point of it is supposed to be that it's off grid and that it is not uh embedded into the american currency system but fundamentally um the whole value proposition around the concept of cryptocurrency is its ability to be removed from the uh the normal mainstream economic condition system that is so dependent on the dollar and on the Fed and on treasury rates and things like that. And I don't know what the price of Bitcoin has to do with greater adaptability of using it as a means of exchange. So that to me has always been the irreconcilable problem in this investment

proposition. Are we defending crypto as a means of exchange? Because that's one conversation. Or are we talking about Bitcoin as a price for the underlying instrument, which is a separate conversation? Generally speaking, people play both sides of it. They say what we want is stability. Outside of the dollar, what we want is stability. Outside of the dollar, crypto can bring us stability. And I go, well, it went up like 4,000%, and then it dropped 90%,

and now it's back up 2,000%, and it goes down 20%. So the stability part isn't really there. And then they say, well, no, no, no, but you want this violent kind of move higher, and it could go to 100,000 or this or that. In, in which case I simply say I don't have an opinion. I don't have any way to believe that Bitcoin will be at $100,000, $30,000, or $1,000, but I certainly believe all three are possible, and I actually believe it could be both. I think it could go from $30,000 to,000 and up to 100,000. But again, one, before going into things like that, needs to be able to know what their thesis is. And if the thesis is a greater adaptability because it's becoming more mainstream, then you just have to understand that's a direct contradiction to what most people's thesis is. Once it becomes adaptable in the mainstream, the Fed, the big,

large money center banks, the ability of Congress to regulate, there is a huge difference between what the price of Bitcoin trades at and how other people decide to adopt it into its mainstream form of economic transaction. So I think there needs to be a little bit less intellectual schizophrenia about this. All right. That's a good answer. Well, David, I think that's a good place to leave our discussion for today. I'll toss back to you for some closing thoughts, but thank you so much for your insights. And it was a great hour and I learned a lot and happy new year. Thanks so much, Scott. Appreciate it. Thank you to those who kind of stuck with us here for this full hour.

And I will leave you with just saying that I don't think I can in the closing minutes here do justice to what I tried to write about in the annual white paper, not only the various points that Scott brought us through here today in this discussion, but even just from a concluding standpoint about the key themes that we're going to be focused on. You talk about themes like M&A, and we talk about the Fed, and we talk about the macroeconomic environment. Those things matter, and we have opinions on those things, and we talk about the macroeconomic environment. Those things matter. And we have opinions on those things. And we're investing money around those opinions.

But then when you look to the key traits, when I talk about conviction and humility and discipline as the driving factors in what we did in 2020 with some good results and some bad results and yet staying power within client portfolios that is goal aligned to individual investors. There's nothing that is going to make a bigger difference in 2021 or in any other year than the ability to have conviction in what is being done, humility about the various outcomes and twists and turns that are embedded in something as uncertain as financial markets, and then the discipline to properly respond to adversity. I'm committed to it. Our whole team's committed to it. We had a wonderful team meeting yesterday,

kicking off the new year. All of us that are out here in California together, really reiterating our commitment internally to conviction and humility and discipline. We want you to trust us because of our conviction humility and discipline and out of that trust there will continually be from us a response of trustworthiness that we think is at the heart of the relationship we have with our clients

so as i said earlier welcome to 2021 may this new year be all you hope it would be. May all of us go about our investing practices with the right discipline. I promise you we're committed to that here at the Bonson Group. Thank you, Scott. And with that, Erica, I'm going to turn it back over to you to close this out. This concludes today's call. Happy New Year. Thank you for attending. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Securities LLC. Advisory services are offered

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