The Dividend Cafe - Stock Market Sensibility

Episode Date: March 19, 2021

If you want a better understanding of the present state of the equity land, this is a good Dividend Cafe for you. If you want a realistic assessment of the risk of correction, this is a good Dividend Cafe for you. If you want to know what to make of higher bond yields, this is a good Dividend Cafe for you. And if you want more clarity on what the Fed is doing and not doing, this is a good Dividend Cafe for you. 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 this week's Dividend Cafe podcast and video. It's kind of a different little thing we're doing this week. Believe it or not, I've actually already started working on next week's Dividend Cafe because I want to do a really singular, single topic, deep dive into this subject of bubbles, the subject of kind of manias and speculative excesses that take place in the market. And so I'm going to go back to the way I've been writing Dividend Cafe next week of just kind of a single topic that I dive into a little. And so I'm going to go back to the way I've been writing Dividend Cafe next week of

just kind of a single topic that I dive into a little. And this week I did the opposite where it's a bit more old school. I'm jumping all over a little. And that's all I'm going to do with you right now on the podcast a little is just kind of take you around some of the topics that I covered in Dividend Cafe. I was able to get caught up on some research reading the last couple of days, and it sort of inspired me on a number of different topics. But all of the themes and all the things that are right now most prevalent in my mind are generally what end up working their way to my keyboard. And this week is no exception. I think there are a couple comments and commentaries that are due around the sort of state of the market that we're in. This week, the Dow was continuing to make new highs, having some big up days,

even on days where the NASDAQ was having big down days, that bifurcation between a number of different categories of market investing has been continuing. And then you did get a really big sell-off in the NASDAQ on Thursday. And the Dow had actually been up most of the day. It ended up dropping itself, I think, 150 points. But compared to a really violent sell-off in the NASDAQ, not a big deal. And as I'm sitting here recording Friday morning and the market is open, but we're somewhat early into the market day Friday, the Dow is down more, but really pretty much out of the financials

is the Fed. I wouldn't say it was expected or unexpected. I think there was a lot of uncertainty as to what the Fed was going to do, but the Fed did decide to not extend the provision of capital reserve requirements they had given a year ago that was a little more favorable to banks and how they count treasury bonds in terms of their own capital reserve requirements. And so it was an odd ruling, in my opinion, but I wouldn't say it was expected or unexpected. The Fed was definitely getting pulled in both directions, but that's having an impact on markets this morning. So regardless of some of that, I want to talk about a few things, and I'm going to sort of peek along at Dividend Cafe as we go.

I think that with a Dow that's hit 33,000 this week, and really throughout the whole COVID recovery, it's more than any time in my career, I have heard this kind of ongoing questioning as to how can markets be going higher? What is making markets do so well? Why are things so good at this level and so forth? And I believe that the answers are not that complicated. I don't think it is all that tricky, but I certainly am sympathetic to the basic human intuition, particularly at some of the peak levels last year with COVID and economic shutdowns and so forth, that there seems to be a disconnect between what people see with their eyes and what the market will see. At this point right now, as we all face this day by day by day improved

economic recovery, the day by day by day eradication of the COVID risk, and all the positive things that are happening from the vaccine front and the economic recovery front, from the vaccine front and the economic recovery front, not to say any of it's done yet. The COVID thing, I'll withhold comment, but the economic side, we have plenty of work to do. But the reality is that it would be very odd to me if the market were experiencing a lot of greater distress. experiencing a lot of greater distress. In other words, I think the market is acting reasonably in line with what one may expect. First and foremost, you have to understand that bear markets, generally speaking, the catalyst to them are recessions. You end up having a significant drop in the market when you have a significant drop in economic conditions. And when an economy is on its way towards recovering,

and by the way, doing so very, very quickly, it isn't just like, well, we got done going lower, and now we're kind of treading water. The economy is, for all practical purposes, recovering at breakneck speed. Now, it's just doing so off of what was really tragically low levels. But yeah, the economy is doing the opposite of what the economy would need to do to create a bear market. Now, the other thing that can often create a bear market is tightening financial conditions. If a whole lot of credit comes out of the economy or access to credit, if the cost of credit becomes much more inhibitive, then logically, that's generally going to work its way into financial markets.

That's not the case right now either. It's quite the opposite, isn't it? You have an incredibly accommodating central bank policy, not just in the US, but worldwide. incredibly accommodating central bank policy, not just in the US, but worldwide. So the conditions for very bearish market environment are what are lacking. From a bullish market environment, it always and forever has to be considered kind of on a relative basis. And on a relative basis, the Fed funds rate sits at 0%. Even all the way out the term structure, which is not how you necessarily want to think about these things, you're still looking at a 10-year bond yield with a one handle. And so I think that the relative conditions, relative state of reference rates and financial metrics

and the accommodation available in the monetary system all speak to a more risk on favorable environment. Now, we can look at it and say, oh, well, you know what? Some of the stuff I'm looking at is up 70% from its bottom. It's just too high. And I never want to say that numbers are lying when they're accurate, but numbers lie when they're accurate. When the person is using the data in a selective and incomplete way, it becomes disingenuous. So I would encourage anyone that wants to look at a trough, a low-level, post-COVID, low-level price of a stock market index, of a stock, of a sector, of a commodity price. And they want to try to tell a story from, oh, look, it was here, and now it's here, and it's up, whatever.

To do that, but then also go do part two, which is what it was at its high before COVID and where it is now. And if all of a sudden you see a certain commodity had gone down 50% and now it's up such and such percent. And the net net from this point to this point is actually, it's only up 10% over a year. Well, that could be high. It could not be. But my point is it's going to tell a very different story. It's going to leave a very different impression. And I think to not do it that way is somewhat disingenuous.

And so when we look at the present lay of the land, looking at pre-COVID levels to where we are now, and you just sort of get this historical and economic context that a lot of the COVID thing will become a blip, this awful blip, socially, culturally, societally, economically. But you had massive drops and massive recoveries. And then you're kind of back to where you were and you look at it to where we were before we started and yet one of the things that is different is that zero percent interest rate and central bank accommodation and and and and stimulus and things the fact of the matter is

that um there's a lot more logic and coherence to how one may look at markets. Does that mean there is not froth? Does that mean there is not pockets of excess? There absolutely are pockets of excess. Some of them perversely so. I've talked about it ad nauseum. But I would not make the argument that there is this total lack of clarity as to what's going on in markets right now, because the fact of the matter is that when you line up all these different things,

it makes a lot more sense than one may believe. We move on a little. I wrote The Dividend Cafe a couple of weeks ago about this concept of money creation. And the fact of the matter is that I was trying to explain that the Fed cannot just go simply create all this money in the society, that the mechanical tools available to them are not quite the same thing. It resonated with some people. It may not have with others. same thing. It resonated with some people. It may not have with others. But what I'd like to be able to do for our purposes, for your understanding, reread some of the stuff I wrote in today's

Dividend Cafe, if you don't mind. But do this. Understand that at the end of the day, I am not referring to QE as having no side effects, quantitative easing. I believe it is a policy tool intended to manipulate monetary markets and financial flow of money. And that just because I'm saying it is not the same as money creation does not mean I'm not suggesting that there is not an impact from it. But the lack of an inflationary impact from it after the great financial crisis has got to humble us and help us to recalibrate what our expectations are this time too. And my view is that Fed efforts to add liquidity and to incentivize lending and to control the cost of borrowing and all the things that a central bank does. Some can be good, some can be bad, but they're not the same thing as

creating money. That until a borrower receives a deposit in the form of borrowed money, then they go put out into the economy. There is not new money circulating in the real economy. they go put out into the economy, there is not new money circulating in the real economy. And so you have a Fed that can't even do the thing most people are worried they're going to do. And the Fed most certainly can't do the thing most people are hoping they will do. They can't just ex nihilo create the velocity of money that is necessary for inflation, which if they could, I would argue would be a bad thing. But they also can't do what would be a good thing, which is wealth creation. They cannot create productive opportunities. They cannot create innovation. They cannot create risk-reward

trade-offs. They cannot create the dynamics that go into free enterprise. And so this is why I want us to be able to understand our view of the economy, and our view of the direction of markets more around what is helpful, productive economic behavior for good and for bad, versus the interventions that play into it. The interventions matter. They matter a great deal. They impact decision-making.

But we seem to have lost course to some degree when all of our conversation centers around the intervening and peripheral elements and not the core elements that drive so much of capital markets and drive the return on investment drive so much of capital markets and drive the return on investment that makes all of this worthwhile. So a whole bunch of charts this week in Dividend Cafe, a lot of different topics covered. Unfortunately, I have to leave it here from a time constraint standpoint, but please do read Dividend Cafe and I'm really excited to come back to you again next week. Always a pleasure, and please reach out anytime with questions or comments.

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