The Dividend Cafe - TBG INVESTMENT COMMITTEE CORONAVIRUS UPDATE – WEEK OF FEBRUARY 24, 2020

Episode Date: February 24, 2020

The ongoing spread of coronavirus and uncertainty surrounding such pushed markets down a thousand points on the Dow (as of press time), and brought the ten-year bond yield to very near an all-time low. This 3%+ drop in stocks brings the equity market to where it was at the beginning of the year. Bond values continue to surge, offsetting much of the equity value drop for diversified investors. In this special edition podcast our Investment Committee unpacks what is happening, why, what it means, what it doesn’t mean, and what we are doing (and not doing) about it. We also reiterate our theme of illiquidity-investments for 2020, and shout from the mountaintops the message that we are owners of business, not speculators in the stock market. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. this morning to futures down over 700 points. At one point, they were down about 1,000. Market opened down roughly 900 points and then came back to only down about 730 or so. And as we're sitting here recording mid-market day, exactly at the halfway point, we've now reached our low of the day. We're down a little over 1,000 points on the Dow, over 100 points on the S&P. It's 3.5% of downturn in one day on the Dow and the S&P and 4% on the NASDAQ. So obviously, a bit to chew on here, and we want to give you our best thoughts as to what we're doing and what we're not doing and what we're recommending and

thinking. And obviously, upon you listening to the podcast or watching the video, reading some of the commentary that we're sending out, we welcome any additional questions. And for those of you that are clients of the Bonson Group, I do hope you will be in communication with your private wealth advisor on any particular questions you may have for yourself. Although I would imagine when you hear our perspective on things that will cover a lot of what may be on your mind, but to the extent you want something more than just our investment committee here speaking to you, please do reach out and we'll have plenty more to say. I will, first of all, Brian Sattel

is not with us today, but we have Robert Graham, Da Pernas, and Julian Fazio to my right. And we're going to not really cover this. I'm not going to ask anyone today when coronavirus is getting better. Can we stipulate from the top that you guys don't know? Do any of you know something? I don't know. I know we need to change. Apparently, now it's called COVID-19 for some reason.

They changed the name. Nomenclature, I guess. And nobody still knows when. Yeah, I'm not going to do that. Yeah, but we do not have some sort of crystal ball to let you know exactly when this will be contained, that would behoove the listeners to hear us also point out the probably more significant fact, which is that neither does anybody else. And any attempt to say that one knows how exactly it will end is dishonest. Perhaps those who would have an overly bold view of how it's going to end and when it's going to end and what it's going to look like and so forth. Perhaps they have an agenda. Perhaps they do not. Perhaps they're just an arrogant

and naive person. More likely, they may have a particular agenda, either a real bullish view or a real bearish view or something like that. That's okay. If it wasn't this, it would be something else that would be kind of provoking it. But I mean, I think on the medical aspect and the global pandemic fears, it's important to start off with that idea of just not knowing exactly how one may twist it. I'm here doing what I've been really kind of focusing on since about 3 o'clock in the morning Pacific time today, which is the reiteration of the concept of asset allocation and the market perspective historically, and particularly where we are now. We had a client that, you know, would email uh some concerns about about where market has from all this and you know i all i simply said was yeah we're back at you know new year's eve numbers how are you feeling on new year's eve and and they wrote back laughing like oh i was feeling great on

new year's eve and so so i don't i don't think it takes away from the fact you're down a thousand points today and market's given up some gains it had in january And then what happened is we'd given them away a few weeks ago. Do you guys remember that? Does that all sound familiar? And then we got them back, and so it's kind of the second time a give and take. But anyways, I guess that's why I want to tee it up to you guys and let us share with our listeners the best wisdom we have to offer. Down 3%. It's happened like over a thousand times and and um yet there is an

uncertainty as to how far this could go where it would go a few incidents in north north italy that people don't seem to have a lot of clarity this is exactly where this came from no one is daring to pretend that there's like an actual specific economic agenda attached to Italy. It's more just the kind of like, oh, well, if it's in Italy, it could be somewhere else and so forth. Here in Orange County, California, where we're sitting right now at our Newport Beach headquarters, there is a movement to put about 50 quarantine people in Costa Mesa, California, which is next door. And we have people that are involved that are going to court this afternoon trying to fight that, people that I've been talking to over the weekend. So there's questions logistically

about what they're going to be doing with things. But Robert, let me start with you and we'll go around the circle because there's a whole lot of connected events and maybe not as connected as we may think, but relevant to everything going on around interest rates, treasury yields, what the Fed now may be more likely to do as opposed to before, all these things. But just as it pertains to the broader subject of how investors respond to highly volatile downside events, what are your thoughts this morning? I'm thinking that there's a lot of folks that are grateful to have some fixed income exposure in their portfolios, that asset allocation that you were just talking about. What are your thoughts this morning? today and I think the 10-year is floating around 1.36 or so, right? So, I mean, it's kind of strange to me. But again, if we were doing our jobs, if we were telling people, hey, if you can't take

the volatility, which is inevitable in equities over the long term, have some bonds if you need that, people are probably smiling today a little bit. So, I guess it's a really good question. If the whole point of asset allocation is for the various volatility things that can come up as equity investors. So you look at multiple asset classes and you go, well, stocks have the best long-term return. I'm a long-term investor. So you start with the premise that you probably would therefore want all stocks except for what? Volatility.

That's right. Controlling those things that go wrong along the way and the drawdowns. So that is the whole point. I guess this is my question. Is the point of it for 3% drops or for 7%, 9%, 15%, even, God forbid, 20% drops? It depends on the person, right? And that's why you weigh how much you have in something like fixed income versus the equities because there's different risk tolerances out there. So there's folks out there who say, hey, I can't take the up and down something like fixed income versus the equities. Cause there's, there's different risk tolerances out there. So there's folks out there who say,

Hey, I can't take the, you know, the up and down 79, 10% in equities as a single asset class. I'm going to, I'm going to float that with a little bit of fixed income exposure. Yeah.

So that's why there's no cookie cutter approach to do how much it is or what it's for. Everyone's different. They need more or less fixed income accordingly. But dad, do you think that for the investor that says I can can sleep at night if my total portfolio draws down 15%? And let's say in that case that person might have 50% to 60% of their portfolio in equities. And then equities drop 3% from the highs, you know, because we were down last week too.

So let's say 4% or 5%. And then the bonds are up. Alternatives are up, so maybe their whole portfolio is down 3%. And do you think that it should be different when the cause of the equity drawdown is coronavirus or the cause of the drawdown is known? It seems to me that people have a higher risk tolerance in the abstract. It seems to me that people have a higher risk tolerance in the abstract. The just generic draw down of 10 to 20 to 30 percent is fine. But once it gets attached to a headline, then it has a certain different fear dimension.

Yeah, and I think specifically a headline that we're seeing today, I think it's awful scary. It's very easy to let your imagination run away with you and just completely forget the historical precedent and say, oh my God, this contagion is going to take all over the world. And all the supply chains will be destroyed. And who knows when containment will ever happen. So I think that type of uncertainty can lead to that kind of fear and somebody not really being rational about their risk tolerance. As far as this drawdown, look, we haven't seen a move like today in quite some time. I think volatility has been so compressed. Well, it's been five and a half months. Since August or so?

So yeah, it's been quite – so I can understand. I'm actually asking not to argue or be sarcastic. I'm curious. When you said quite some time, did you mean five and a half months or did you think even longer? No, I do remember seeing it somewhere in August. Okay, so you're considering five and a half months quite some time. Did you mean five and a half months or did you think longer? No, I do remember seeing it somewhere in August. So you're considering five and a half months quite some time. Right. Well, yeah, it's been quite a while.

It is younger than I am. Quite a while since we've seen a daily move of this magnitude. Got it. OK. But but as far as fundamentals being affected, I saw I saw Warren Buffett on CNBC today and he was talking about, look, based on this short term, what happened today, do you think the prospects for American businesses have changed in the next 10 to 20 years? And I don't think anybody can seriously answer that they have. So, yeah, there's been some deterioration on the fundamental side. China most likely won't see any growth this quarter.

But have prospects fundamentally changed? If you are a long-term investor, we maintain they haven't. So all in all, we consider it a buying opportunity. Well, Julian, I'm going to maybe even do one better than Dea. If we believed that 1,000 points ago on the Dow, there were a bunch of companies that offered a great forward return context around their cash flow growth, their earnings growth,

and the dividends they pay back to us. And now those same growth scenarios and expectations are 1,000 points cheaper. Don't we like it better? Yeah, I mean, that's really, that's how you should look at it. This is a bad day for people. We need to raise cash and we need to sell equities.

But if you buy off equity for the long term, this is actually a good day. So if you had your savings account and now you need some, and it was all in the stock market, and you needed to withdraw from your savings today, this would be a bad day. Yeah, it would be a bad day. I mean, you could have, you know, you would have had 3% extra if you withdrew on Friday. But, you know, that's the exception.

I guess we, you know, for the- So maybe that is something that needs to be said when you're getting ready to make that down payment on your house, when you're getting ready to go buy a boat, when you might have an emergency rainy day need. Go ahead and don't put that in the stock market. Well, and I guess- What do you think? Absolutely. And make sure you have some type of cash flow component

great advice and there's the whole idea of capital allocation and it's really based on your age and if you can be invested for the next 30 years you should mostly be in equities but if you need that cash tomorrow you probably shouldn't have too much equities,

right? So I think that's really, at the end of the day, that's what we're trying to do for investors on a case-by-case basis. So Buffett said something else this morning on CNBC I thought was interesting. In addition to the kind of obvious thing we're reiterating that things where their long-term fundamentals have not deteriorated from headline events, as significant and real as headline events are, that's the thing that's really important for me to point out is for those that are headline investors that invest around the headlines or fear of headlines, they put themselves on a hamster wheel of bad timing. You could argue that unless there was someone like predicted coronavirus, that's kind of weird. I don't know. I haven't heard anyone say that. I'm sure there will be people claiming that.

I'm sure there will be. You don't even call them investors. No, you should call them traders. Investing. Yeah, but I don't even think there's traders that were predicting coronavirus. All I know is that someone could say, oh, I could have gotten out and then I can get back in. And, you know, that's just, it's so insane.

And by the way, that's not just like the entry of coronavirus and the exit of coronavirus. Those two things would be ridiculously impossible to time. But within it, you already had, at the end of January, a thousand point drop. At the beginning of February, a thousand point increase. So, yeah, now today, one day we've had a thousand, but my point being we've gone like three or four times just in the last four or five weeks. This is very much in line with our call that we've, we've been talking about for the last several podcasts about the enhanced volatility

till there's resolution. But my point being take coronavirus out. Could we not imagine, I'm not kidding, 10 other things that could cause us to be sitting here right now saying, hey, the market's down a thousand a day. What are we doing? What do we think? What do we like more? related um but my point being could it not be an unexpected announcement from japan or or a panicking thing in china or uh geopolitical flare-up in saudi arabia you know the the we don't need to be very imaginative this stuff happens it right now it happens to be coronavirus so you're saying the markets mark wants an excuse to come off all-time highs pretty much and the coronavirus is a pretty oh i don't know if it's an excuse. I know what you're saying, though. But I guess what I mean is more that the headlines have things permanently. Always.

You could have four months. You could have six months. You could have like a year. I don't think so. But you could have a long period of time with no real disruptive event. But, okay, right now today we're down 3.5%. In the entire year of 2017, the market never went down 2.9% or more. The largest drawdown for the whole year was at 2.8, 2.9%. So you do have low periods of very low volatility, but that was literally the lowest

volatility year in market history. I'm only trying to make the point that three to 4% drawdowns, this one is from coronavirus, the next one will be from something different, but there will be a next one. And investor response to me ought to be the same in this one as the last 56 of them and the next one. And that's what I was about to say Buffett said, is he said he thinks that in his 80 years or whatever, that there's been 1,000 3% drops. And he said, I can't think of one of them that I wish I hadn't been buying more stocks. Here we are.

But anyways, okay, let's clear one thing off the table real quick because I got a note this morning from someone, and they're going to ask me to comment on it on Fox in a little bit. That is some of this related to Bernie Sanders having won the Nevada caucus so hands down over the weekend. And I'm going to stick to the contrarian view I offered up a couple podcasts ago that that doesn't make sense. Trump's odds of winning the general have gone higher as Bernie's odds of winning the Democratic primary have gone higher. Bernie is now at a 65 percent betting odds of winning the Democratic nomination. Trump is up to 56 percent odds of winning the general election. Those two things have been inversely related. percent odds of winning the general election those two things have been inversely related now by the way i think the 56 percent for trump is too high and i think the 65 percent for bernie

winning the nomination is too low but my point being do we think the market is responding in february to an event that actually makes the general election going the Republicans' way and maybe even the House and very likely the Senate coming the other way towards pro-market, pro-Trump. Yeah, I was just going to ask what you thought about the down-ballot effects of it because I think you're absolutely right. I think it strengthens Trump's case. But, I mean, does it help those kind of in-limbo types of Senate candidates? I think if you have some sort of generic democrat moderate

i hate using the word because i don't really think any of these guys are moderate but let's pretend you had bloomberg or biden i think that trump has a 50.01 chance of beating them but i think the house would be about 85 likely to stay democrat okay with bernie as the nominee, the House is 50-50. The Senate is extremely likely to stay Republican. Probably is in any scenario. But yeah, if anything, I think you're looking at better odds of even

the House going back Republican. Not sure thing, though. It's tough to win 20-something seats. Yeah, like you said, as far as if you're trying to attribute the down move in the market today to Bernie, the likelihood of Bernie clinching the nomination is higher. I totally agree. I don't think that makes sense at all. Because rationally, if you look at it, the odds of Trump getting elected have increased because those things are inversely related. So without any sort of

coronavirus headline, we might in all likelihood see an uptick in the market. And what is the sector that you would think Bernie would be the biggest threat to? It would be healthcare, right? The healthcare sector is down today, but it's outperforming all other sectors. That's another great example why

that's not a sub-case. Energy is telling you that it's the coronavirus, I think. That's clearly the reason for the big bucks. Energy is telling you that it's the coronavirus, I think. That's clearly the reason for the sell-off and not the election. Here's what I would guess, and I say this all the time and I really mean it, and I think we have to believe this cohesively as an investment committee, and I think we do. It's impossible to always state with certainty what percentage of movement

can be attributed to what, but this one's an easy one it's primarily coronavirus fears but then you do get an add-on effect like like if there was sort of a divine market movement which there isn't what would what's the right amount that would be attributed to coronavirus today let's and we're down a thousand i would say it might be 600 points with then 300 points of computers and algorithms and momentum accelerating it because you do see an awful lot. I can't say the names right now, but of the four or five largest companies, S&P 500, they're getting pummeled. And some of them have less coronavirus exposure than others. And yet it seems to be indiscriminate.

And I think that's index fund selling. Yeah, selling begets selling because of algorithms or fear, but the instigator behind that selling, I think we all agree, is the coronavirus. But I guess the question is, at what point does it become self-fulfilling, what's happening with coronavirus, because now you're starting to, you see the inversion, you know, in the year. But I don't think you started to see the inversion of the yield curve oh weeks earlier but it's getting steeper and now we you know you hear again people talking about

uh you know are we gonna have a deflation again now you know i would you know of course yeah i mean if someone says are we gonna have deflation, then I think they need to lose their license to practice economics. Because, of course, what do you mean again? Has deflation gone away all of a sudden? When did the 10-year, when it hit its low of last summer, let's call it 150. I think it hit 146 for a minute, but let's call it 150.

Where did it rally back up to? 190? Yeah. Was 190 a non-deflationary 10-year yield? Yeah. Right? I mean, so that deflationary backdrop to the U.S., but especially global economics, has been embedded in interest rates.

It's heightened in the last couple of weeks. And then you get the technical factor of flight to safety i'm still amused when people talk about gold i know what they mean the fear trade has a sort of vernacular and gold got above 1700 ounce today and they go people flying to the safety of gold and find the safety of the 10-year treasury's always receive that quote-unquote safety, but it's sort of mysterious why something that has a beta and has a vol of gold is considered a safety trade. The safety of having a negative compounding

for seven years now. You're underwater for seven years, and that's safety? I don't understand it. Yeah, I don't understand it either. And the correlation, obviously, is very, very weak behind inflation and the price appreciation of gold. I know we've talked about that quite extensively. But do you think, Julian, that the interest rate signal is something that we should be discussing even apart from the coronavirus sort of piling onto it.

The reality is you do have a 10-year right now that may very well close today at an all-time low. It's flirting with it now in the high 130s. And I believe the 90-day is sitting there at 155. So you're going to be 18 basis points inverted, 90 day to 10 year. See, to me, this is where if someone wants to be bullish, they should try to blame it on coronavirus. Because that is, that that is, again, reflecting something else in the long-term views of the economy that is very deflationary and not good? Yeah, I agree. I guess it's interesting to see how the implied probabilities of cuts have moved so much in the last few days.

And now we're talking, you know, we have a few meetings, the March 18 meetings, which is the next one. We're still expecting, you know, no cuts, but it went from 5% probability to 25% in a few days. But if you go to June, you get to only 25% chance of zero cuts. So the market already has a 75% implied probability of cuts coming by December,

and then you go to December. Where do you have it on June, as of this morning, on the Fed futures? I have 25% chance of a zero cut. Oh, so 75% chance of a cut in June. At least a cut, one cut. Yeah, see, so that means something.

The March thing means nothing. Okay, 25% chance in March of a cut. Yeah, no, for sure. It is the same thing as a 90% chance of no cut because that 25% are just people fording with a very leveraged option trade. You have to get to the 60s, 70s, 80s to where it's actually the market expecting it. Exactly. So a June chance of a rate cut. And by December, you have a market that says 5% chance of zero cuts.

So clearly very much saying there will be cuts, and there will be one, two, or three cuts by the end of the year. At least one. So that's quite a big move. And two weeks ago, we were already assuming some cuts. I'm having a hard time knowing what to do with that, okay? Because there's nothing in that that's telling me the market is now saying because of coronavirus, the Fed's about to cut.

They're basically saying they're not going to cut in March. And the odds on a June cut, I don't know, that's four months out. It's not meaningfully higher. It's almost that sort of divorce from coronavirus. I guess they're saying that the coronavirus is going to impact Q1 earnings. It's going to impact inflation expectations in the short term, and that's going to be enough to justify another cuts by probably the summer. You consider that bullish or bearish?

As far as... If the Fed were to cut rates again in the summertime. It's further market manipulation, but as far as if you're an investor, I think it's bullish as far as market appreciation goes. Robert? Yeah, I think it can be just a little bit more of the punch to the party.

Julian's right. I mean, if they're getting hard data and they act on it, that's one thing. But I worry with not as much our Fed but around the world when there's talk of things that are not directly related to monetary policy. They're talking about climate change. They're talking about that's not generally speaking the mandate like i i prefer they act on the real data but to your point if the data comes in and necessitates a cut they're going to do it and we'll have a little rally i view it um as potentially bullish in summer 2020 i'm not even sure that but i see it as really bearish for 2022, 2023. And I can't speak for everybody who's listening right now.

I would hope those people listening intend to be investors in two or three years. But I know I speak for me and I speak for my partners here at this table. I intend to be managing money in two or three years. I'm not looking forward to them having to unwind whatever additional booze they put in the punch bowl now. And the pushing the string effect, how stimulative is it at a 2.5% or 3% Fed funds to come to 1.5%? It's a certain amount of stimulus. It is what it is. Relatively speaking, what is the stimulative effect of going from one and a half to 125?

I would argue it's almost nil. And if anything, they're just dinking around with investor sentiment and psychology. Yeah. I mean, clearly, I wish they would stay out of the whole thing. I mean, who knows what they're incentivizing by keeping the cost of money this low. And then, I mean, how do they expect... It's stock market. It's pure and simple stock market. I mean, yeah, the whole thing is very, very distortive. And I agree. What kind of nefarious effects or risks are building up because of the distortion of monetary policy? But, you know, unfortunately, this is the Fed we got.

I feel like the Fed has lost control of the monetary policy and it's really the market that decides now for the Fed and sets expectations, and they never go against the market. So the market is asking for a few cuts, and they're going to deliver them. Yeah, the problem from a credibility standpoint, I not only agree with you, but I think that's not true forever. Forever. I think it's the implied takeaway

from the entire rain of Alan Greenspan. And so here's the thing. The market, the Fed can never admit that. And I think it would be very undermining to financial credibility. But at the end of the day, if that's really what we have, once that

awareness is fully baked in, then I don't think it has any efficacy either. At the end of the day, they can go manipulate that short-term rate lower, but they clearly have lost any ability to control the longer-term rate. And what they would have to do is come out and say QE needs to become a permanent fixture of American monetary policy as a non-emergency measure, that in order for us to maintain some curve, some steepness in the yield curve, we will have to be at ZERP and as manipulators of the longer part of the curve through bond buying transactions until Kingdom comes.

That's scary. It's scary because it sounds almost likely, you know, in a non-emergency situation, that there would be that type of QE to manipulate the long end of the curve. I don't know what to say. Julian, where's the $60 billion a month of bond buying T-bills now? Why is the 90-day at $164? Well, I guess because QE4,

that they don't want to call QE4, is ongoing. But isn't that supposed to bring down the ultra short-term rate? Well, I guess you should, but it's not really working. I think it's not working, but I guess I'm wondering, are they doing it? Are they doing it?

I think there could be a technical issue, patterns. There's something that seems to be throwing off that movement of rates in the short term because $60 billion is plenty enough to pull that short-term rate down. Okay, so the Bernie theory we're not into if we don't like the idea that Nevada has caused 1,000 points today. The bond market is cause and effect of things going on right now, Fed fed questions julian's wisely pointed out that the fed futures market is now asking the fed for additional cuts but they don't seem to be doing it here into the short term they're pushing that out a little bit later in the year um okay so the 10 year right now it's forwarding with the all-time low a little trivia you. It's okay if you all get it wrong.

137's the magic number. When's the last time the 10-year was at 137? 2013. Incorrect, but close. Brexit. Oh, okay. Brexit went down 1,000 points in three days. Where was the market a week later?

Plus 10, plus 5. Rallyed pretty much in a week. And the 10, plus 5, something like that. That rallied pretty much in a week. And the 10-year was back to 175. Yeah. So is that to say it will play out exactly the same way again? No. One thing I thought was interesting, and your screen will show you the VIX is up 40% today, but there's actually something really odd about that because it was only at 16 or 17 so it's such a low denominator

that now sitting over the vix at 26 um i gotta be honest 26 isn't that high of a vix i mean still very low relative to other alleged you know extreme fear spikes. So, Robert, actionably speaking, what should we be thinking about with our equity portfolios right now? Do we look to buy? Do we look to nibble? Do we just sit on our hands? Or do we even throw in the towel,

say we want to sell and get out of the way a little bit? No, I think as the volatility increases, it's going to continue to lift that fog and show us the water where the opportunities are, I think. I'm keeping an eye on emerging markets even so. You know, strong dollar has been kind of a persistent theme this year, contrary to what a lot of people thought might happen coming into this year. And, you know, you can talk about the supply chain disruptions, et cetera, et cetera, possibility of lower rates here all being factors with EM. But I think more even than Friday, EM is becoming a good buy if you're selective about where you're going.

So looking to add to EM, Dale, what about within the U.S. equity positioning? We see energy is down, oil is down about 5% today. It's not a big deal there. But do we just kind of look to fill in things to get lower? Yeah. Clearly, some sectors have more value than others. I think that for – and we did this this morning for clients to have some cash sitting on the sidelines waiting to be put to work. We took advantage of today's down move.

So we're not really buying a singular stock or focusing on adding a lot to a certain sector. But clients have cash on the sideline. We've been putting that to work today. So that's where we're at. to work today. So that's where we're at. Well, behaviorally, I think that it would behoove us to offer that reminder. You will be surprised. You can't say pleasantly surprised. If your bonds pull your portfolio up 2%, 3% and your equities pull it down 4%, 5%, so you're net down, that's something people deal with, think about. It doesn't bother me because I'm a pretty experienced investor and it's my job to not be bothered by things like that. I've seen this movie many, many times.

However, to the extent that one is always wondering why they have bonds or other such volatility reducers in the portfolio, I think that a week like last week, day like today, people are going to very likely, we still have a few days to go in February, they're very likely going to get a statement that shows their bonds way up on the month and their stocks way down or at least modestly down. And that is, of course, the intention of offsetting that volatility, as Robert said earlier in our podcast. But can I bring up something different? You guys

can push back on me on this if you want. I want to go back to something we talked about in our themes for 2020, which was get me some illiquidity. I'm thinking about where private credit, some of the real estate positions, some of the hedge funds set their marks, the timing that goes along with it. Flying back from new york last night i watched the big short on the plane and it's a real kind of a heretical movie of historical revisionism about financial crisis but the people like ryan gosling and brad pitt are so good looking that it just and and and celebrity filled you know it just reminds me of every hedge fund trader I've ever met. They all look exactly like Ryan Gosling, I assure you.

I'm being sarcastic. They do not. But my point – but there was something going on in the movie that I was thinking about in the context of where we are right now. And that was the ability to use your marks to sort of delay an actual reaction. You can never delay inevitable forever. But the reality was is that in the movie, the whole premise was that their value of these swaps that they had bought, credit default swaps on the mortgage bonds,

that the subprime market was falling apart. And so they bought this insurance that should have been going up through the roof and it wasn't moving because the people controlled the pricing. And I don't think that can go on forever either and I don't think manipulating pricing is an investment strategy. And anyone listening knows I don't think that look at the mark every second, if no one knew the market was down today, would we even have to be doing an emergency podcast, special edition podcast, if people only got a mark on the Dow every month or every quarter? I don't think we would. Yeah, absolutely not. I think that if – and to me, I kind of relate this to the price of people's homes, how the price of your home, I mean, if you're actually trying to buy and sell it every second throughout the day, the price is going to change a little bit if you actually knew what people are willing to pay for your home at that particular second in time.

because you don't you don't see how the price of your home changes and it it seems very very stable and you don't worry about the fluctuation of uh your you know the price of your home conversely the stock market things work the exact opposite the the price is always being uh uh you know marketed as far as there's buying and selling it's always happening that everybody's privy and all that information is public and instantaneous. And so the changing of the price, when it actually should be more transparent, it encourages the wrong type of behavior because you're focused not necessarily on the value

of the certain investment, but you're focused on the price, which is kind of an ethereal thing of what people are willing to buy and sell at that specific moment in time and maybe pretty divorced from the value of the investment so i guess showing the the theme about illiquidity being a self-fulfilling prophecy of benefit to a client portfolio because the investor psychology is eased and of course the asset asset classes themselves are less correlated to direct equity prices.

But is there sort of an experience, is there a teaching out of what we're dealing with now that reinforces that? Yeah, I mean, I guess that's why, you know, people who are not in that industry, who don't invest for a job on a, you know, do that on a daily basis need us and hold their hands. do that on a daily basis, need us and hold their hands because it's kind of scary to see the volatility in the markets, but you don't want to focus on price but on value. And when you look at the value and then you feel comfortable with the companies you own, it might be volatile. They might change prices all day with 5% moves,

but the value is there. And last week you had headlines about the S&P being at 19 times earnings, which is the highest level since 2002. But, you know, what people forget to say is that in 2002, the 10-year yield was at 5%. Well, we don't forget to say that. Well, some commentators on CNBC, we don't,

which means that the premium you're paying to earn equities is much lower now. So it's actually much more attractive buying the S&P or buying equities at 19,000 speed today than it was in 2002. So you cannot compare really without comparing on a relatively relative basis. I would push back on that, though. I agree with you, except for I don't think you can't compare. I just think you have to acknowledge that there is some distortion of comparison. I still think that asset classes have to be measured absolutely and relatively.

And I agree that 19 times when the tenure is at four and a half, excuse me, at one and a half versus 18 when it's at four and a half, that you have to combine both factors. But I still think that there is a sense in which on a standalone basis because as many people said to me and they're not wrong about this you act as if my only choice is between buying a bond and a stock and they do have other choices they could buy neither right they could you know in theory they could buy something and take a zero percent return and allow inflation taxes to erode a little bit or things like that. But I think that your point is not contradictory to the idea that stocks is an index, especially

with the technology weighting therein. This is what's very interesting. The S&P X tech, its multiple compared to S&P X tech historically is below average. That's how much of the S&P's valuation is being brought up by excessively overpriced technology. And so if you're willing to view the stock market as a whole bunch of companies in financials and materials and industrials and consumer. Yes, energy, although that's a very small weighting these days. But my point being all these other things, ex-tech, it's not that expensive.

So you're saying on a relative basis and an absolute basis, there are a lot of pockets of the equity market that are pretty inexpensive. There's only one I think is deep value. Deep, meaning above 20% disconnected from fair market valuation. That would be energy. And then I think there's a bunch that are kind of fairly valued. Only one, and maybe I would include consumer discretionary, not to the same degree of technology that I would consider excessively overvalued. But of course, that excessive overvaluation has a reason.

It's true that just a few weeks ago, I think there was two-thirds of the S&P performance was due to four stocks, were the four obvious suspects in the tech sector. But now when you look at our core dividend growers, the multiple is much lower than the market. We are like around 13, 14 times P and twice the yield. And I guess that's why you feel comfortable owning.

And, you know, days like today, you can add, you own them. Well, I'm going to close this out with another one of the highlights from Buffett's interview. And, you know, I quote Buffett from time to time. There's a lot of stuff he says I fervently disagree with sometimes in the political realm or whatnot. And I don't know how directly hands-on he is anymore with the affairs of Berkshire Hathaway. They have a lot of very smart people there. And Buffett's been a very successful investor over the years. But he has certain nuggets and principles of investing that we

would be very foolish to ignore. And he made a comment today, and he's made it a gazillion times in the last 50 years. It's something that we've talked about at the Bonson Group when we look at our small cap approach, when we look at our emerging markets approach, when we look at our private equity approach, and especially when we look at our dividend growth equity approach. And that is, I do not consider myself an investor in the stock market. I consider myself an owner of companies. And I would just ask everyone, as we're dealing with coronavirus,

the companies could have some impact. What's going on? They could have some supply chain disruptions. They could have their customer base interrupted. They could lose access to certain geographical markets. It could last a week. It could last a quarter. They could have, God forbid, customers or employees that actually face the health scare themselves.

There's exposure, and we don't know the outcome, and we will not make a decision that could do significant damage to a client portfolio when we don't know. And so we have to sit here and analyze this thing the way we always do from a risk-reward standpoint. But when you look at the stock market moving down a significant amount in a day, you know, 2%, 3%, 4%, that is a classic case of price being disconnected from value. And yet if you don't view yourself as invested in the stocks, if you view yourself as an owner of the businesses, I really don't think there's anything to even think about. Now back to that joke earlier as someone needing to make the down payment on their house with their stock market account tomorrow. Yeah, that was probably not very good planning. And we are really adamant about people not having short-term savings aspirations and things that are connected to volatile risk asset prices. that are connected to volatile risk asset prices. But whether it's private credit or stocks,

and by the way, whether it's a 10-year treasury bond, every single investment you ever have a chance to make is right now priced on what people expect about its future cash flow generation. That's what an investment is. And we do not believe that anything we own on behalf of our clients has had its long-term cash flow generation impacted. Therefore, to the extent that the present sentiment and news cycle and whatnot has brought prices down,

we have increased the expected return for long-term investors. It's something to think about, something to understand mathematically and economically, but emotionally to the extent that there are things that still just sort of feel a little uncertain, feel a little disconcerting. Don't hesitate to reach out. We want to be that ear for you and, more importantly, a voice of reason because you will not find the voice of reason, I don't think, on the television or the internet right now, especially not the internet.

What an awful place this is. Anyways, let's go back to work, guys. Anything else? Anybody have anything else they want to close with? Those were great closing remarks. Thanks for listening to The Dividend Cafe. We look forward to coming back to you later. Thank you for listening to The Dividend Cafe.

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