The Dividend Cafe - TBG Investment Committee - August 13, 2021

Episode Date: August 13, 2021

David, Brian, and Deiya take on the investment needs of the day for clients of The Bahnsen Group. 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 very special Dividend Cafe podcast and video. You can see I'm kind of sitting in a slightly different place here in the studio and I'm actually not going to go through and do the normal Dividend Cafe podcast content that talks about the topic from the Dividend Cafe. This way, you and we are getting the best of both worlds because I'm going to really force you to go to DividendCafe.com to read the weekly commentary because it isn't on the same subject that we're about to talk about here in the studio. We are going to use this Dividend Cafe podcast and video to have the investment committee come to you and kind of talk about a whole lot of different topics. We have Brian and Dan and

myself all in the same room here together. We haven't done this in a little while, and we just got sort of pumped up to do this today. But there is a special Dividend Cafe written commentary on the subject of structured credit, except for it isn't really about structured credit. Fundamentally, what I tried to do in the written commentary this week is really provide in a way I haven't before, a deeper explanation as to why exactly the Bonson Group last year in our Operation Magnify separated out credit instruments from boring bonds, how we can take two things that are for so much of the world considered to be part of the same asset class and totally and completely make them distinct from one another. I believe we're doing it right. Everyone else is doing it wrong. And I make that

case in Dividend Cafe today and then unpack a little deeper some of the kind of more fun stuff that exists in the credit asset class, more opportunistic, kind of juicy returns, high yield, all the stuff everybody loves. And we unpack the risk and reward of structured credit. So you've got to go to DividendCafe.com for that stuff. So you've got to go to dividendcafe.com for that stuff. But now I want to bring in my partners and fellow members of our investment committee, Daya Parnas and Brian Saitel, who you know. Good morning. Hey there.

Morning. Yeah. So look, we've kind of got different camera arrangement, microphone setup and everything here than we're used to. But I don't know. It feels to me like we're just back at home. Yeah. It's comfortable. This is great.

How we roll. It's good to be here. It's been a while. Why has it been so long? A couple months. We've just back at home. Yeah, it's comfortable. This is great. How we roll. It's good to be here. It's been a while. Why has it been so long? A couple months? Kind of busy. Yeah, I guess so. A couple of things have gone on, I suppose.

Yeah. For you guys listening at home, the three of us converse quite frequently. And by frequently, I mean between our ongoing written chatter and our verbal chatter. It's throughout the day, all day, every day. And, of course, when it comes to like security selection, our core dividend portfolio, those things are things you may know about. We write every Wednesday in the weekly portfolio holdings report why we're buying this stock, selling this stock. But, of course, what feeds into all of those things are the macro viewpoint we have on markets at large, on the economy, different asset classes. And both Day and Brian have joined me in New York City for years

for our annual trip where we go and meet with all of our asset managers. I believe the first time Brian came with me was 2014. That sounds right. And then Day had joined in 2015. So we've done this together for many years. We have another trip coming up here in about five or six weeks and another 20-plus meetings scheduled. But right now, I want to just sort of talk generally about one of the things I think that the listeners care about most. I'll start with you, Daya. What do we think about this market? about this market? So really, the question I get from clients and listeners and anybody that really follows markets is, are valuations too stretched?

We're at all-time highs. Has the index ran up too much? And should- As you're talking, both S&P and Dow, at least intraday, are at all-time highs right now. Right. Okay. Yeah, exactly. So are the indices a little stretched?

And the answer to that, and we were just talking about this before we started the podcast, is really let's look at valuations and let's look at where they are historically. And is that exercise even relevant? And if you look at the forward PE currently, it's a little over 21. A little over 21. The 25-year average's a little over 21 a little over 21 25 your average is a little over 16 so it's a it's a little above a standard deviation away from from its average that being said you have taken account how low let me ask you a question why when you say one

standard deviation above when i hear 21 and 16 i hear 5 and 5 divided by 16. You're talking about 30% higher. Yes, exactly. Yes. Isn't that kind of the way like an investor might think about it? Well, the idea is, is the current valuation that far away from what we've seen normally? And if it's a little over standard deviation, the answer is yes and no. But there are other factors you have to take into consideration, namely where rates are. Obviously, rates affect valuations and rates are extraordinarily low relative to the long-term average.

So rates are a little over a percent right now. So valuations don't seem that stretched to me when you take all those factors into consideration. I know there's a lot to put in in consideration. I know there's a lot to put in perspective here. I know Brian had a lot to share about this, and I'm interested in his thoughts regarding some of these valuations, but there's a lot to unpack here.

No, those are the numbers. Average of 16 and current around 22. Take current S&P of 44.50, divide it by around 200 earnings per share of 2021, you get to that 22 level. Even 12 months out, though, I S&P of 44.50 divided by around 200 earnings per share of 2021. You get to that 22 level. Even 12 months out, though, I think you're only now because the growth expectations for 22 have come way down.

I've been talking about this because we got so much of that growth in 21. So I think even then you're not much more than 210 forward. So 44.55 by 210, you're still pretty close. You're still 21, yeah. Yeah, but when you talk about standard deviation, usually it's sort of a trend line that people are looking at of interest rates and the markets, and then they kind of judge how many standard deviations above the trend line on S&P, and so we'd be a couple, two and a half times above trend line on standard deviation. The one thing I would mention, though, in those calculations is that there is a certain risk-free

rate you have to sort of assume in those calculations, which is the yield interest rates on, say, a 10-year treasury. When you look at yields now versus their trend line over historical periods, and you try to juxtapose those together, then you get to a more kind of fair value, actually, in markets. So I would say this, when I look at market valuation, generally, I'd say it's more fairly valued to slightly overvalued. But I would say that there's a bifurcation of which parts and components of the market we're talking about. If you look at the S&P 500, we can look at certain technology sectors and certain things that were really frothy in 2020 into 2021 versus some of the other sectors that are now kind of recovering. And it's sort of this rotation that we've talked about, I think even on the last podcast that we

did. So valuations in my book, when you factor in interest rates are a little bit more fairly valued than screamingly overvalued. But they're they're certainly on the high end. No question. I completely agree. And as far as the if you look at the spread between the valuation on the 80th percentile stock in the S&P versus the 20th percentile, that spread is very, very large, relatively speaking. So like Brian was saying, even if you may think that 22 is high, there's a lot of potential opportunity on the low end of those valuations.

Yeah, but that bifurcation that you're talking about only matters if one is active. It doesn't matter if you're indexed. We happen to be active. We do. And so I think that this makes that point as to one of the thesis behind active management and value selectivity is that there is that bifurcation. The last point, that 80th percentile point you make, the last time at which it was this severe really was 1999. And so it is a lot more helpful. The way you guys are both framing it is a lot more helpful in talking about the expensiveness of the market, to talk about the extreme expensiveness of some parts of the market and mostly normal valuations of a lot of other parts when adjusted for the discount rate, when adjusted for the reality of a zero-rate environment. I think it does do two things, though.

It's true you can say adjusted for the risk-free, that the valuations become a little bit more palatable, but it does intensify the risk around that risk-free rate. It does intensify the risk around. It makes the markets much more dependent upon the loving hand of the Federal Reserve. 100%. And that's where we are. It's destabilizing and it makes us fragile.

It does. And it's not a place I wish I would want to be here, but it's just sort of where we are. And you're seeing that with the Federal Reserve and the things that they've done coming through the pandemic and all of the extraordinary measures that they took to buy actual risk assets through SPVs and things that they hadn't done before. And so now we have this, it's not just in the US, this is a global phenomenon. But you know, this is the world

that we live in. Yeah, absolutely. The rate markets are definitely distorted through intense manipulation by central banks. And maybe it's a good time to talk about the other asset classes. And obviously, we live in a bit of a TINO world, but maybe there are other opportunities out there. Well, actually, let's put a bow around about the US equity valuations. OK. And then definitely move into those other asset classes that you mentioned. We've kind of all shared our conclusions about what the earnings valuations seem to

indicate. But I wonder if you guys have any thoughts on other valuation metrics besides PE. Does the market capitalization to GDP concern you? Does the price to book or price to revenue concern you? Because those tend to be even more stretched than PE. They do. And the market cap to GDP one is extraordinarily stretched. So this is sort of the old school Buffett indicator that he is forever and ever. That doesn't overly concern me because I think that just like interest rates have changed paradigm of where PEs are historical standards, I also think that the fact that the GDP of this country is measuring the output of the u.s and the market

cap of companies in the u.s is measuring the market cap of those companies earning 60 of the revenues from planet earth outside of the u.s and so i just think there's that that ratio has been a little skewed over the past 20 years i completely i don't think buffett has mentioned this indicator forever it's no it's totally unreliable it's 40 years old it's been called a buffett indicator from something he mentioned like in the 70s. Yeah, and it worked back. It did work for a long time, but that has decoupled in my opinion.

Anytime somebody says this is what Buffett did or takes a sniff from Buffett, I start to, I stop paying attention because it's almost always manipulated to put their own agenda. It's so selective. It's not helpful. And they obviously are saying it as if it is supposed to be authoritative. And yet then they won't on other times.

So when the media wants to portray a negative connotation, they'll talk about something Buffett's selling. But then when you're going through a real bad time and they want a negative narrative, they don't mention like, oh, I don't know. He still owns all these things. Let's look at what he's not selling today. Yes. I mean the whole thing is so stupid. Yeah, it but so biased but from a valuation standpoint though i do think when you take the aggregate of all of them okay price book price sales price earnings i agree i think there's holes

in the in the market cap divided by gdp i don't see how anyone could deny that on a relative basis, things are pricey. Totally. It's extreme priciness is the question because pricey has never helped us on timing. It's never helped anyone on timing. But I think from extreme pricey standpoint, I would stand behind the belief that we have articulated in the past that those very frothy that are more speculative oriented asset classes we won't mention any particular names and it's not even really just fang we're talking about right now it's it's even like riskier than fang tech stuff yeah i think that is the stuff that just the risk reward ratio is unfavorable it absolutely is and it doesn't mean that those companies won't

be around and it doesn't mean that eventually they won't grow into that. It just means that when you look at that stuff in the 1990 era, whatever name you want to pick, those mega cap tech companies, the forward returns were zero for 20 years. And so that's where you're going to find yourself. But there's plenty of parts of the market. So when I talk about valuation, there's plenty of parts of the market, individual securities and individual names that we own that I feel great about and I think are not overly valued.

In fact, they're below average of the S&P and offer a lot of forward-looking returns. So it's not all overvalued. Obviously, you guys speak to clients all day long. How do you get them to understand the difference between what a great – so a lot of these companies that are very frothy in the S&P are great companies, but they're not great investments. And those two things are different. How do you – I think we do it by what you just said. Valuation matters.

They're great companies, and at some point maybe we'll own them when valuation is attractive, but now they aren't. Yeah, but I think that that distinction between a company and a stock, it's easier to help people understand the distinction when you're doing it all the time. So like right now we're talking about a negative that, oh, we may like the company that is, let's say, the largest e-commerce company, but we don't like the stock because of valuation and so forth. That's a negative application of this principle. But I try to do the same thing on the positive side. We may like the company that we own that makes diapers and household detergent and is one of the largest consumer product companies in the world. But I don't refer to it as liking the stock of this particular company. It's the business that we like. It's the operating enterprise.

And that cuts both ways. There's two sides to that coin. Yeah. I have more cliches. Just keep them rolling. So, Dan, other asset classes. We look at the equity side. We, of course, have our convictions where we think valuations are reasonable, where we're invested, dividend growth, U.S. equity. But then now we want to package other asset classes to make a holistic portfolio,

provide appropriate diversification for a client. Valuation story is never about the S&P 500. It's always about everything. And that's the thing that's so hard people don't understand. Just like you talk about the dollar and they go, dollar's expensive. Well, compared to what? Dollar's cheap compared to what? At the point at which someone says stocks are expensive and we just had this 10, 15-minute conversation, you then have to go, okay, well, about bonds.

Right. More expensive. Because if we're going to do a standard deviation way of measuring it, I assure you the 10-year bond is more expensive than the S&P 500. I completely agree. Yeah, it's a relative conversation. I assure you the 10-year bond is more expensive than the S&P 500. I completely agree. Yeah, it's a relative conversation. Obviously, we're multi-asset class investors. When we invest client capital, it's not just about stocks or bonds or alternatives.

A portfolio approach is what is required. And when you're taking a portfolio approach, you have to look at different areas of the market. And asset classes compete for capital. Where do you place your capital if you're looking at the equity market and bond market well then you have to take into account valuations and it the dave is absolutely right the valuations of the bond market are a lot more stretched than the valuation the equity market the equity market looks cheap uh compared to the bond market uh not not every and not every sector of the bond market is overvalued, but it's incredibly frothy. The 10-year yield is a little over a percent. I just don't understand

how you can be a fixed income investor and be happy in this environment. I don't know if there's ever been a worse environment for fixed income investing in history. Do you mean by that long-term, long-duration boring bonds? Or do you mean all fixed income? I mean the risk-free side of things. Okay. So like a 10-year treasury or a double-A-rated corporate bond. I agree.

I think if you look – and I think I wrote about this in DC Today a little bit. But if you look at real yields, so like a 10-year treasury yield at 132 as of today minus inflation, you kind of get to a real number. It's a negative number. So to your point – More or less been negative most of the post-financial crisis. It's been negative post-financial crisis, but it's in a new low now. It's the most negative it's been for a long time. And the 10-year – you just said the 10-year, right?

Yeah. The Fed funds rate has been negative real the entire time. No, no, no. Fed funds have been negative. But the 10-year rate has popped above the 10-year, right? Yeah. The Fed funds rate has been negative real the entire time. No, no, no. Fed funds have been negative. But the 10-year rate has popped above and below depending on where inflation comes in. Yeah, there's been times when you could have got almost like 25 basis points. I know. Of real yields.

Of real yields. I know. Talk about a compounding mechanism for your wealth. But the point is, yeah, it is a tough time to invest in those kind of boring bonds that we have. Although it's tough to be devoid in a portfolio of it, too. You do need the what-if scenario. What if, you know, the asset class that will save the day if we're off and things really take a turn for the worse. But it's just not a lot of return to it.

So you limit the exposure. What about the other sector? What about high-yield, for instance? So high-yield spreads today, $3 332. I mean, they're tight. Usually we're at 500s when we're talking on this thing on the podcast about where we would like to start putting high yield in there. But again, relative to where things... Tina, there is no alternative. There's still something to be said about that. And what we've done in our credit sleeve, which is also fixed income, but a little lower credit quality, a little higher yielding, a little bit more nuanced to the different sectors, is we've selected certain areas of that high-yield bond market that offer returns for our clients.

And part of that is, and we can probably talk about it, in structured credit, part of it's in mortgages. And we're able to get sort of these nice go to 3%, 4%, 5% yields with upside on it. And I actually love that part of what we're doing almost the most right now. I think the concept of spread is an important thing for clients or laymen, novice investors, people that don't use financial vocabulary that we have to live with obnoxiously. So I'm sure because spreads are an important concept at understanding that when you say a high yield bond is at 10% or you say a high yield bond is at 5%, it's entirely possible that you've described the same risk and reward because at a different point in time,

the spread may have been comparable. The relative benefit or uptick in yield to the risk-free rate of a treasury or a comparable maturity. And the fact of the matter is that at any point in my career until this last year, if someone had said, forget spreads, we're just sitting here talking about a nominal yield on a high-yield bond that is about equal to the 75-year history of the 10-year treasury of the United States government and that you can get a double B or B minus credit, which is what they call a junk bond that's yielding the same. The issue is that by only looking at nominal yield,

you ignore the fact that there is a relativity over time, economic conditions and available counter options that really are the relevant factor. And so therefore the spread gives you the ability to constantly measure an apples to apples basis. I have more or less become pretty numerical about this. I think, and again, I'm not talking about structured credit right now.

We're just in the high-yield corporate bond space. More or less, I'll load up when they start getting north of 400 wide. The spreads become 400 basis points or higher. They haven't done that in a while. They did it COVID briefly. It didn't last. And when you're sitting there in the 200s, you're just going, what in the world is going on?

The problem is, do you see yields and income star people? They'll take it because they'll say, look, it's 4% and maybe I'm going to be down 10% in value, but I need the 4%, not the 1% or 2%. You can't think that way. You just have to think total return when it comes to high yield. I absolutely agree. And so, exactly. And I should have described that better. When we're talking a 330 spread over treasuries, treasuries at 132, so you're like at a 4.5% or so yield.

Is a 4.5% yield historically worth the risk of default in a high-yield corporate bond? It wouldn't be in my book. But when you sort of compared it to the world that we live in now, it's not all that bad. And there's a huge demographic demand for this stuff you know there's a huge retiring population in this country that needs fixed income they need to live off of it you're not getting it in cds anymore you're not getting it in checking accounts or savings accounts and so these things there's just a lot of demand there and that's part of the reason spreads have collapsed but how do you feel day about the fact that those 450s which brian argues

and i agree with them are relatively I agree with him, are relatively acceptable? That they are companies – relatively acceptable. Are companies that if the Fed got out of the way, these companies should be gone? These are zombies. They're companies that don't deserve to exist. I completely agree with you. I think if you – I forget what stat I saw the other day for the Russell 2000 about how many of these are non-earners. Yeah, it's getting to a very high level.

Yes, and if there wasn't this cheap capital out there, a lot of these companies would not be able to survive, and a lot of them would go out of business. And it's hard to live in a world where you're looking at investment opportunities, and also in the back of your mind you're saying, well, if things did become cataclysmic, then maybe everything would just get bailed out. And I think that starts to distort your investment thesis. And it's not a traditional way of analyzing the capital markets. I guess my point is there's been so much distortion that traditional fundamental way of looking at capital markets to me has changed slightly because you have to factor in another actor being the government that is constantly – or central banks that are constantly manipulating everything. And so when we look at the high-yield side,

you can see why we have a relatively low weighting there, risk-reward. Obviously, I'm a big defender of the asset class, but on that valuation basis, it might be a little less attractive. I talked about structured credits, the theme of Dividend Cafe today. You mentioned that. I'll start with you, Brian, and go to Daya. Well, I don't want to risk us going in a place that results in me saying, oh, yeah, I've already put all that divot in cafes. Let me get out of the way.

I know my conclusion is – I haven't read it yet, but – Yeah. No one – I hit send to the production guys, the communications team to get this up and running right as I walked in the studio. So I know you haven't read it. I vouch for that with the audience. I basically talked today about how structured credit became hyper dislocated during COVID, as it always does during times of severe

distress. And that you get an illiquidity component, you get that mismatch of buyer sellers, which is the illiquidity, you get very difficult mark to market, you get price inefficiencies, very widespreads, and they don't last long, but they're ugly. And so there was this sort of opportunistic trade in structured credit. We largely participated in it in the actual moment of a bloodbath. So what would that have been? Let's call it March 12th through 24th. So it kind of was pretty bad for a week and then real bad for a week. You know? Yeah.

So, so, um, I think the buyers there are just like the most evil people on the planet, but, but I love them. Yeah. But they're like blood in the water geniuses.

Okay. No one's, you're not buying structured credit in that, in that environment. You know, the sellers are levered, you know, they're desperate. And you're

not looking to make anyone a friendly deal. You're looking to invoke pain upon people. So that happens for a certain period of time. Then you get a little normalcy back. We came in and it was a very profitable trade. My conclusion was that we had a structured credit thesis that's fully played out. And now we still have a structured credit thesis, and we're still long, and we're still bullish. It's just a different thesis. The first thesis was distress, opportunity, dislocation, NAV discount, accrual to par. The new thesis is on a normalized risk-reward basis with these asset classes trading at their pre-COVID levels, post-COVID, I think that there's still superlative yields and underlying economic fundamentals to justify it.

Yeah. No, I totally agree. And there is that premium in yields because there's still the risk that whatever else can happen and cause another dislocation. And you have these more complex vehicles, structured credit is more complex than just a fixed income security. There is usually a little premium in the yield. And when you kind of go through that huge, you know, sell off in 2020 into a year later, there's still opportunity there. You're still getting to say a point or so higher in the yield because of this stuff is it was so dislocated. There's still some PTSD with it, in other words. And so from an economic standpoint, recovery is still underway. And so there's fundamentals that are additive to the credit backdrop of this stuff.

And also you're getting a little yield premium to what else there is, you know, the Tino, whatever else is out there as far as high-grade corporates and things like that. So still attractive. But if the credit fundamentals are positive, as Brian says, does it have to mean that there's still ongoing forward movement? Or is it good enough for credit fundamentals sometimes to just defend the cash flows? I think the cash flows – and structured credit is a bit of a different animal. It requires almost another degree of sophistication because you can have underlying collateral and the underlying cash flows can all be there. And that all looks great.

But the piece of the structure you own can be risky. So you have to almost bifurcate your analysis of the structure and the analysis of the underlying collateral. Does it cut both ways though? It can be risky, but it can also be opportunistic. Absolutely. There can be inefficiencies that a skilled manager can exploit. Very much so. For example, if you think about the ABS market, so you've got like auto loans, for example, or airline, securitized airline loans, those types of things.

When you think of the backdrop of those two different sectors and securities, the credit background was really terrible in COVID, the worst. And now it's hugely improving. And there's opportunity there. If you think about where car prices are and used car prices and all those COVID, the worst. And now it's hugely improving. And there's opportunity there. If you think about where car prices are and used car prices and all those things, the debt that's behind all that stuff gets more attractive. It sold off to zero, basically. It came back, and there's still opportunity there. Same thing with the airline stuff. Yes, yes.

Those things are inside of the structured credit we're talking about. So when we look at the credit asset class, we're a little lower on the high yield. at the credit asset class. We're a little lower on the high yield. We like the structured credit. But then outside of the credit sleeve altogether, let's look at some of the other equity asset classes. Obviously, core dividend is our bread and butter. But then you go into small cap, you go into emerging markets. And there's a couple of negative things to say about both of those more growth-oriented. We use them what we call growth enhancements. First of all, small cap has just performed lights out and, of course, most equities have. But there was quite a big movement higher recovery of small cap.

And then with emerging markets, you do right now get some questions. The dollar had dropped. Now it's come back. You have a kind of a currency play. Where emerging markets investors have China exposure. A lot of those things have got hit. How do you feel today about emerging markets and small cap in this context? I think that relatively speaking to other indices, U.S. indices look frothy.

I think there's some opportunities internationally and opportunities within emerging markets. Clearly, we don't view emerging markets as a homogenous group. We take a company approach. We like the idea of buying companies that are growing at fair prices or at cheap valuations. And those opportunities still exist in emerging markets. valuations. And those opportunities still exist in emerging markets. And if you look, I don't have the day in front of me, but over the past 12 months, it's one of the areas that has lagged a little bit, emerging markets. And I think that there's opportunity going forward. So I'm bullish on the space, secularly speaking. I don't know about you, B. I'm looking forward to our

conversations with our emerging markets partner in October, because they're actually,'ve been in a relationship with them since right after the financial crisis. They're very bottom-up, very fundamental-driven, very aligned with us. We have an awful lot of client capital with them. They really were so severely underweight China for a lot of years. They have a bigger China exposure now. Do you feel that there is – let's put it this way, we're not, but if we were direct investors in Chinese internet companies, would this be a good time to be selling? Gosh, well, yes and no. Would it be a good time to be selling now after the 20% sell-off or 25%

sell-off that they've had over the past couple of months? I guess I would say no. But if we were direct investors in those equities, we would be having a more – we'd probably dedicate a whole separate podcast to just that topic. Because honestly, there are more risks around Chinese equity ownership now than probably there have been in a lot of years. And it's just because of government intervention. It's sort of a self-inflicted wound that they're causing for other political agendas. And that makes it a tough environment to invest directly. The manager that we use, which we've used for a dozen years or so, obviously we use them for these reasons, you know, that they're able to do this bottom-up fundamental work for us and really analyze these companies and kind of help us navigate these waters.

And they do have some China exposure there. They're very, very large companies there. But yeah, there's definitely risk involved with the space for sure. That being said, that is why, to your point, why the valuations are so much cheaper there because there's a baked-in sort of inherent risk to just investing emerging markets in general. Geopolitical.

Geopolitical. Currency. Currency, the whole thing. Yeah, I know we've talked about some of the ideas and thoughts on fixed income side, on the sovereign side. I don't know if we'll have time to get into that now or not, but there are opportunities in China and elsewhere. Equity part in emerging markets, you just need to navigate that very carefully.

And then small cap, and I'll go to Dea. Small cap, yeah, it's had a great run. I think that the way that we're approaching it is the right way, which is the same thing on the domestic equity on? Small cap, yeah, it's had a great run. I think that the way that we're approaching it is the right way, which is the same thing on the domestic equity on the large cap, which is just very actively managed and very bottom-up centric. And so you get companies in the portfolio that we're running that I feel great about. If you looked at buying like whatever ETF or something index of what it exists, I think it would be quite expensive. That said, I think if you put it in relative terms to interest rates, again, you'd get

probably a little more normalization on that expensive comment. But still, active versus passive, 100% with small cap. Same thing with large cap. I completely agree. I think I would – you know how I feel about indexing. I think you could get me to buy an S&P 500 fund before you could get me to buy Russell 2000. I 100% agree. Yeah.

And same thing with like a high-yield bond index. It's the same idea. There are opportunities in there. There's things that we own in there that we love that are great values. But a lot of that stuff is just not appropriately priced. It's had an incredible run. It's had an incredible run. It's overvalued.

But you brought up the percentage of companies in Russell that don are don't even uh generate ebitda positive ebitda i think that um it's over 30 you can't get 2 000 publicly traded small cap companies and say you focus on quality right so the index is inevitably going to just simply be a risk on risk off uh benchmark and when risk is on you'll get big returns when risk off, you get really bad returns. I'm not doing that to my clients. It's not going to happen. I think it's protect yourself. It's like boxing. If you're in the small cap space, protect yourself at all times. I think it's a minefield out there. You have to be very selective. And yet, speaking of selective, I think our small and mid cap manager in the growthy space has been very selective, very low turnover, some really monumental returns over the years.

Sometimes I almost want to feel like small cap is daily NAV, private equity. I mean you get way less of the maturity than large cap and yet obviously you're not still illiquid like private equity but a lot of these companies are in early stages and can become kind of more impressive players so you still like that idea bottom up small and mid-cap very much so and i think uh what's probably added to this is the spat craze where a lot of these companies were taking public i mean i'm amazed that there's some of the companies that are publicly traded that came to market and they they don't even have revenue they don't have revenue it's just an idea yeah i mean it's a platform it's it's absolutely incredible i mean we're talking about no earnings i mean at least those companies have revenue yeah so um yeah it's it's

it's uh you have to be yeah i'm gonna make you i'm to make you a list of some dot-com commercials from the 1990s. There you go. But at the time, that was also completely unheard of. Companies did not go public without profits. All of a sudden, they were going public without revenues. And so then it kind of blew up the world to some degree. And then here you are now and there's a little taste of it again, which is interesting because the SPAC craze now has companies going public very early. But the unicorn phase of the last 10 years had companies delaying and delaying and delaying going public when by the time they went public, the valuations were very high.

A lot of early investors had already cashed out and they were very mature brands. Again, we're not saying specific names right now, but any name we could say, people would know what we're talking about. So I guess I want clients to understand that these things that are happening, what happened in.com, what happened with all those unicorn companies in the last 10 years, what's happened with SPAC, this is purely about what's in the best interest of the companies. At various moments in time in capital markets,

these companies are doing what they should do, which is in what's their best interest to feed their capital needs. It has nothing to do with what's best for investors. And so investors become victims to the cyclicality of some of the nonsense that happens in capital markets. I don't know what could be done or should be done to stop those things. They're just different trends that happen organically throughout time.

But I don't think that someone should say, oh, there's a great opportunity here. You just have to look to a company. Do you like this company and do you like its future projection or not? But, yeah, the SPAC thing and it's slowed down quite a bit uh I think they were getting worried about the headlines around it they you know the the biggest thing that no one's talked about that really I think slowed it down was that accounting change on the warrants saying that you were going to have to account for your warrants as debt instead of equity is uh well first of all ridiculous yeah and second of all

was pretty much done to kind of... Yeah, it took the punch bowl away. It cooled the party down a little bit. Yeah, that's it. I mean, a lot of those companies that were coming to market had already extracted all of the value out of private markets and private equity markets beforehand. And so they're coming to an IPO at a $40 billion valuation already.

And it's just not like yesteryear, where the public markets were used to raise the capital that wasn't as needed anymore, you know, with private equity so much. Yep. Well, I guess we can't quite have all of us together talking about all the different asset classes and macro without going into this spending bill and tax plans. You guys have the fortune of being, I think and I hope, slightly less politically obsessed than I am. Probably true. It's probably accurate. Which I think is probably why you're both so much more balanced and well-adjusted and happy in your personal lives than I am.

But with that said, I think we're all following this intensely as it pertains to the expected economic impact out of policy right now. Democrats this week passed by a 50 to 49 vote their budget resolution, which is necessary to at least put on the table the now discussion period for a potential bill that can go through reconciliation. They spent all night passing a lot of amendments, both Republicans and Democrats putting amendments out. Quite a few, I think it was 47 amendments went out there. They're non-binding, but they give you a little foreshadowing of how you expect some people may vote around certain things. There's a lot of complexity on this stuff because you have intra-Democrat party fights. You have Republican Senate versus Republican House and different chambers and different parties. It's complicated. Net, net, net. Tell me if you believe taxes are going higher and that will impact the market.

That's a great question. And as David alluded to, I'm not as in tune politically as he is. Typically, my political opinions involve around – developments really politically involve around asking David what he thinks and then copy-pasting. You can do worse, my friend. You can do worse. is that whatever is happening politically and whatever the mood of the moment is, there's an ocean of difference between that and what actually gets legislated and what actually gets changed. And if you are placing a lot of confidence on your predictive abilities

based on what you think politically, generally that's a bad way to think. And I try to go back to historically, changes in tax code, despite who might be in power at the moment, are difficult to foresee. So the question is I don't really know. To Dave's point, a few months ago we were being told every single day by the president, by the media, by all the worry warts. They want to do a $2 trillion infrastructure bill and raise the corporate tax rate by 30%. This week, a bipartisan basis, an infrastructure bill was passed. The House Democrats still have to vote for it.

It's very hard to believe they're going to deny their president a victory. But it doesn't raise any taxes. And it's one fourth the size of what they had said. Yeah. So is they onto something that what people talk about, the bark in politics is often not the same as the bite? It absolutely is true. I completely agree.

And that's why I tend to be a little agnostic to it. I don't want to ignore it. Neither do you. We pay attention to it. It's important. But as far as markets moving around in anticipation of what may or may not happen in politics, it's tough to really skew a portfolio one way or the other based on just that feeling because of exactly what has turned out. So as far

as where tax rates go here in this term, in this administration, do I think that they could drift higher and go up in certain areas? I do, but I don't think it is what was floated out there in the fear of a capital gain tax treatment going to ordinary income, and those types of things. I think that on the margin, there'll be some tax increases doesn't look like in this package, that it's even in it. So it's kind of business as usual for us in that regard. And frankly, even when there has been tax changes over the years, that did not mean a certain outcome in the market. It just didn't. Well, that's, that's very true. And so I guess it's a question, and maybe we're all just speculating. We don't know. But I have my own

thesis, but I want everyone to have their own independent thought here. Has the market been right about this all year? Or was the market just underestimating the risk, and the market could end up still being surprised in the end. What do you think? Why does the market not seem to think that taxes were about to go up significantly? Well, I think that if taxes do end up increasing, I do think that would affect. I think there would be some volatility associated with that. I think the market is expecting that not to happen. So I'm of that opinion. Yeah, I mean, I think that the market looks at fundamentals and those Trump

other things that may or may not happen. Yeah, but after-tax earnings are a fundamental. Yeah, absolutely. And I think there is a small discount maybe in markets because of that reason. So in other words, it's sort of baked in there a little bit. So if you didn't get something changing in taxes, I actually think markets would go up a little bit. And if you did, I think they'd go down, but less so, because I think some of it's sort of baked in there a little bit. So if you didn't get something changing in taxes, I actually think markets would go up a little bit. And if you did, I think they'd go down, but less so, because I think some of it's baked in. So there's three people involved here. And I don't refer to Daya, David, and Brian.

I refer to Mr. Market, Alexander Hamilton, and James Madison. And Mr. Market is apparently good friends with the other two guys, because Mr. Market is understood what so many people on all kinds of TV networks have not understood, which is the way that Mr. Hamilton and Madison constructed our former government in this beautiful country, is that one person cannot come impose their will, and one party cannot come impose their will. Now through time with the right majorities and right legal maneuverings, some good legislation can get imposed or voted in, and bad legislation can get voted in. But it isn't so easy. And this is where I think Mr. Market has been closer to the founders in our separation of powers

and in the unique sausage-making of legislation to understand that we're not perfectly insulated from bad legislation, but we're reasonably hedged. And reasonably hedged is pretty good when you can't get perfectly insulated. Yeah. Yeah. Here, here.

Totally agree. And I think that part of the reason with some of these other countries and economies and emerging areas that we talk about there being more volatility in markets because it's less so that way. Wow. Amen. Look guys, we got,

we are up against our timeline. So you got a closing thought you want to give? And then Brian? I like your statement about our founding fathers and separation powers. And I think that was a good idea. I'm leaving that. I wonder if Mr. Market was wearing the same wig as these guys were wearing. They should make a Broadway show about Mr. Market with Hamilton.

I bet it would sell tickets. We could call it Hamilton. Yeah, it'd be good. Good idea. Closing comments. Look, Broadway show about Mr. Market with Hamilton. I bet it would sell tickets. We could call it Hamilton. Yeah, it'd be good. Good idea. Closing comments. Look, we talked about valuation. I think there's valuation and opportunities in this market. And part of it's overvalued, part of it isn't.

And that's where we're playing. Dividend stocks, part of the credit market, and alternatives are probably the three asset classes that I would point out to having that opportunity going forward. And let's do that in our next podcast together, which we won't let many months go by. We'll do sooner than later. Let's talk alternatives. Let's do a whole podcast where we really unpack.

Maybe we even bring Kenny in from our Alternatives Investment Committee to talk about why we do think that the hedge fund space and those more idiosyncratic opportunities are important right now in a holistic portfolio. I love it. Love it. Love it. With that said, thank you as always for listening to and watching the Dividend Cafe.

Check out DividendCafe.com for this week's written commentary. And please reach out to us with any questions, comments you have. We hope you've enjoyed this group discussion as much as I've enjoyed having my friends back in the room with me. And we look forward to coming back at you next week with yet another Dividend Cafe. 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 Advisors LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Thank you. and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as

of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the Bonson Group and do not represent those of Hightower Advisors LLC or any of its affiliates. Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client's individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for any related questions.