The Dividend Cafe - TBG Investment Committee Outlook -Week of January 20, 2020

Episode Date: January 21, 2020

Topics discussed: We are too early into earnings season to have much to say and the impeachment/political 'stuff' is enough to exhaust anyone. But 'global macroeconomics' - this is the stuff that gets us out of bed in the morning. And that's what we did this morning - we got out of bed and we talked global macro for you all. This is a not-to-be-missed Dividend Cafe podcast from our whole investment committee ... Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Hello, welcome to this week's Dividend Cafe with our whole entire investment committee back together here in our Newport Beach headquarters. This is David Bonson, I'm Chief Investment Officer of the Bonson Group. And around this circle I have Daya Parnas, Brian Saitel, Julian Frazzo, and Robert Graham all together on our investment committee. Fresh off of a big week as Daya, we traded over $300 million of client capital on Friday alone. Bonds and group record for a single day. The previous record was $300,000. So we had a huge bump up.

I don't know. I would guess our rebalance a year ago was probably the second biggest day ever. I can't imagine why it wouldn't have been that way. And we'd have to check. I mean, I bet it was $100 million to $200 million. So, yeah, we probably doubled. Yeah, by that. And so not too many screw-ups, right?

Nice work. Yeah. Yeah, things went smooth. There's still some, without revealing uh we're there's still some you know without revealing too much there's still some orders that we're working right now because of the size but uh but yeah everything went went great given the the amount of accounts and the amount of assets and so very very happy yeah it's a good thing and you guys of course did uh you and julian did the podcast last week talking about a lot of our kind of infrastructure and the way in

which we go about doing things. These rebalances, you know, I think are a big deal, but particularly interesting in the ramifications, we technically were slight modest net sellers of equities last week. But then the rebalance was a lot different coming off of a 25% plus year in equities than it would have been had equities done what they did but bonds not done what they did. Remember, it isn't about an asset class going up a lot. It's about an asset class going up in proportion to another asset class's original weightings.

And that's the thing that really could have been much more dramatic is the bulk of trading activity was inside the equity sleeve, the composition of trimming down some stocks that just had monumental gains and adding to some that either didn't have monumental gains or in a couple of cases might have even had slight downticks as of late. But the stock-to-bond weightings, it was because of the bond rally of 2019 that this rebalance was so much less dramatic than it otherwise would have been. Probably the sell-off in the end of 2018, too, probably helped a lot, too,

as far as the weightings not being too far off. Yeah, that's right. Equities outperformed by 5% over bonds. That's right. Over that period of time. Yeah, so like in early 19, coming off of 18, there was a lot of additional buying to equity

because bonds had rallied in December and stocks had sold off so much and the way those weightings stood. But the proportional rally of stocks, bonds, and 19 made things a bit different. But you look at our emerging markets thesis, I think we have that you know, we have that position sized the way we want it. Small cap for those clients that are not fully income intensive,

you know, we had a really strong year with the strategy that we use in the smaller mid-cap area. So there was some trimming going on there, but I mean, that was just monumental gains in 2019. So, you know, we've talked about a lot. I just think we did a lot to reduce risk and position people well. And then now, you know, a lot of focus on those themes that we talked about a couple weeks ago that continue to be our big 2020 sort of perspectives, midstream energy, emerging markets, you know, more neutered expectations in equity markets, and then, of course, preparing for where we want to go with alternatives. All right.

So we're not going to talk about impeachment, are we? I mean, do we need to? Trials in a Star Later? Yeah, I haven't heard anything about that. You know, I actually barely have heard much because I can't even watch the cover. It's so redundant. You know, the same exact thing said on one network and then the same thing. It might be a different message, but the same thing said over and over on a different network.

At my apartment in New York City, they have CNN on in the elevator, and it's on the 34th floor. So that's a pretty good ways up and ways down. And that's exactly the total amount of time I spend listening to CNN is in that elevator. Is that a story that anybody really cares about, you think? I don't. Well, market-wise, definitely not, even nationally. I think there's some people, like NPR listeners in New York. Hopeful.

And then on the other side of it, there's some like Fox News diehard, but across the country, like sitting around having family dinner, like, hey, Johnny, how was your homework and what do you think of this impeachment thing? I don't see it. But you put in a request already to the building to get another channel in the lift? Well I didn't ask for a different channel.

I suggested that it might be more relaxing for people who work all day long in high stress work. Like we're sitting here managing money and there's a lot of other people in money management in New York so I can't be the only one. And some of the New York Knicks live in my building so I don't think they're coming home feeling all happy and relaxed every day either.

And I just thought maybe they might want to put on, I don't know, the Weather Channel or even ESPN, but maybe the Knicks don't want ESPN on. And I don't want CNN on because ESPN might stress them out. They have the worst record, I think, in basketball, don't they? Oh no, I don't want ESPN on, and I don't want CNN on because ESPN may stress them out. They have the worst record, I think, in basketball, don't they? Oh, no.

I don't know. Yeah. I would imagine. None of us watch them, so I guess that's it. No. So, no, I think – but the reason I brought up CNN in the elevator is I'm not joking. I've never once looked up and seen it in the elevator when they weren't talking about the impeachment since these last last few months not one time it wasn't like usually it's on that and then every now and then they're doing some other story you know it's a hundred percent and and so anyways from a market

standpoint it you know markets are up a couple percent in january already what are s&ps on the year i mean as of friday that was three and a half. So I'm more like, yeah. That's amazing. Yeah, I think the Dow is last, but S&P is that three handle. And that's all since the House already voted and we know it's going to the Senate. So, again, that's not new news. I mean, the market has shrugged this thing off since the whistleblower, since the transcript, and then you go all the way back to Mueller and whatnot. the whistleblower since the transcript, and then you go all the way back to Mueller and whatnot. But I think that the reason why we're going to talk today about global economics and a kind of macro perspective is because we're too early in earnings season to have a robust conversation

on where earnings are going, where they've gone, what we think they indicate. I have a few thoughts already, but I think we've got to hold back. We've only had mostly financial companies report. You just don't have enough information yet to really get much of an indicator. So earnings is the most important market-sensitive conversation out there, but we're waiting. It's early innings. I think global macro, though, might be something that we need to kind of dive into a little. We've all read a research report that came out over the weekend from one of our significant research partners.

It goes into a number of pretty significant research trends. But I guess I'll kick it off to you guys, and we'll just kind of go back and forth. We don't have to take turns. We can fight, argue, interrupt, do what we want to do to make this interesting for our listeners. Robert, what is your assessment right now of the global macro picture? Is it healthy? Is it unhealthy? Or is it mixed? I think largely what's happening now as people are looking at a partial resolution of the trade deal as kind of taking off some of the makeup. And they're addressing maybe the finer issues across

the macro landscape. So they're saying, OK, now that the China situation with regards to U.S. trade is solved for a little while, what does it really mean regionally? What's actually happening in all these different countries now that the trade picture is a little bit cleaner? Similar in Europe. There were fears about a trade spat going on with the Europeans. Macron and Trump kind of resolved that a little bit with regards to the tech company tax. So now people are digging in, looking at the specific situations. I think, you know, largely there's signs of, you know,

a little bit of a bottoming having happened across the world. I don't mean to group everything together, but I think the picture largely is a good one. I wouldn't say rosy, but there's signs of increased growth in places that have, you know, been stagnant, quite frankly, in the last couple months. Julian, do you see anything that might be pertinent to the picture right now, one, that a lot of people are talking about, and maybe two, something that others aren't talking about? That people are not talking about is a good question. But maybe start with the easier one.

What do you think that a lot of people are talking about that you find to be... I guess you have to look at by regions, but basically if you look at, just to quote the OCD's leading economic indicators, what they're seeing at the moment is that global activity will bottom and is expected to rebound in the next six months. And then by regions, you look at China and they have stimulus in place and now they have the phase one China US China trade deal that you know is hopefully gonna go and help the Chinese economy as well in Europe which and Germany in particular in the eurozone being a big export country it looks like it's starting to bottom as well and it's getting better so you have signs as well of some improvement in Europe. And also with Brexit not being a big risk anymore,

but something that's, you know, you can assume there's not going to be a hard Brexit and you know that there's a past. Brexit is happening. It's not a question mark. And I think, you know, people are moving on. What looks like, what is giving you reason to believe there's some bottoming in Europe?

That's definitely a view others have, including our friends at Strategas. But what are you seeing that's indicating a bottoming process? Is it the LEIs? I guess it's looking at the economies that are big exporters like Germany, where there's been the threat of US, European tariffs, and so far nothing really has happened. And the manufacturing PMI indicators in Europe and Germany are getting better. So I think it's early signs of really leading indicators coming out of the leading manufacturing countries in Europe, like Germany in particular, that are going the right direction. Yeah, we look at the chart of PMI in Germany and we're all, of course, looking at it right direction. Yeah, we look at the chart of PMI in Germany, and we're all, of course,

looking at it right now. It's not up on the screen for our listeners. But you see the just massive collapse in manufacturing that actually took place in Germany and in the United States, in exports, imports, overall trade, back of the financial crisis. And since then, in exports, imports, overall trade, back of the financial crisis. And since then, you really do have a very different looking chart for U.S. versus Germany. The shape isn't altogether different, although Germany had a more significant second bout down in 2011, 2012. But then they got kind of a reflation of manufacturing in 2016, 17. a reflation of manufacturing in 2016-17. And I think that's one of the things people will point out,

that it wasn't just U.S.'s pickup, but you kind of had a global coordination of monetary policy that also led to improvement in European conditions. And so it argues for the fact that the monetary policies have been just as big a driver as some of the U.S. fiscal policies. But then it's utterly collapsed. It started collapsing much earlier than the U.S. trade war, China stuff. You see a tiny bit of pickup as of late. Is that sort of the indicator on page three there at the bottom?

Is that kind of the reason why we might feel Germany is bottoming? kind of the reason why we might feel Germany is bottoming? It's a big question because I've had a bullish U.S. and neutral global view for some time that was bearish European. I don't know how anyone could forfeit a bullish U.S. and even stay neutral global if Europe goes from the bearish to even neutral camp, let alone bullish. So Europe's fate, you know, I think it's possible to be bullish globally and bearish Europe. I don't think it's possible to be bullish Europe and bearish globally. It sounds like there's even glimmers of hope that right now Europe is in a better position. Is that kind of what you're getting at? And is the PMI that little dip up what you're looking at in manufacturing?

Yeah, I would say on the margin, Europe recovering, but I think it's always like Europe has a tendency to underperform in terms of growth. So it's going to be sluggish growth and it's probably going to be still below the US in that scoring 2%, 3% Europe. I guess it's getting better, but it's still not going to be great. It's still going to be be sluggish European growth. Muddle through growth, but not recessionary. What do you think, Brian?

No, I would agree with all those assessments. I mean, if you look at the chart, I mean, the turn up is really not a whole lot yet. So we're kind of looking at leading indicators going forward, and things are getting a little less bad. Things are starting to bottom and turn up. And, I mean, in Europe, it's like they were in the middle of this trade issue. You know, there's Brexit that they've got, you know, issue dealing with. And there was a China trade deal and they're huge exporters there. And I think that's why you're seeing Germany. So it's looked at as sort of just the area itself. The Eurozone is looked at as sort of this this indicator for the world going forward. To your point, I agree. It's hard

to be bullish on Europe and not on the rest of the world, if. To your point, I agree. It's hard to be bullish on Europe and not on the rest of the world, if you were to have that thesis. I do think it's important. So I would agree with those things. It's difficult. I don't know how you guys feel. I think that you have to be able to look at it in two different ways. One is the secular condition, which I think is much more long-term, generational, decade-oriented. And one is cyclically within the period we're in, could you have a long-term view that Europe is doomed to secular stagnation? As you talk about, Julian, just very muted growth prospects. Just demographics. Demographics and policy and debt drag and shared currency.

Other than that, how was the play, Mrs. Lincoln? Right, right. But then within that, being a bit more open to, and actually, I'm going to switch gears, ask you about something different than I even said I was going to. And actually, I'm going to switch gears and ask you about something different than I even said I was going to. Is it possible to then be open to the idea that cyclically Europe could have a little improvement and yet not feel that it fits into an asset allocation plan? Do you need to accommodate overweighting Europe just if you start to think maybe the indicators are looking a little better? And I'll speak for us what we've traditionally done. If we don't believe in an area to invest, we don't invest in it. We don't

invest in something for diversification's sake. So as far as Europe goes, if we feel that there is those you referred to, maybe cyclically it's okay, but secularly because of a plethora of reasons, you know, you said policy, demographic, share currency. If those things are going to keep Europe down, then it'll continue to have a muted weighting in our portfolio. It really is. And I'm going to go back to Brian on this because he and I, you know, we're beginning to manage money at a similar period of time a long, long time ago. I think that was the last time that this idea that, oh, things could be real bad in the U.S., but you could be making money in Europe or you could be making money in EM or even vice versa. Like things were going real well in the U.S., but not so well in Europe post-crisis.

It was.com. It was the aftermath of.com. US but not so well in Europe post-crisis. It was.com. It was the aftermath of.com. And you had this period where S&Ps had really muted returns 2000-2005 and the EFI didn't. And we know, we've talked before

about BRIC and the period that they had in those 2000s. So you could look and just say, there is an incredible non-correlation, a diversification benefit on both sides, risk and reward. I don't know if I believe decoupling at all. I cannot picture right now an environment where things could be horrible in the U.S. and good elsewhere. I really can't.

Yeah, it is hard. I mean, I would say back to those 2000s, that period of time, that was when the euro was new. They went on this new currency. They kind of united things. And there was sort of an initial shine to that paradigm, I think, in economic growth. And it did decouple. We were dealing with their own dot-com kind of blow up at that time. And since then, that sort of shine of that single currency has worn off. And then you kind of peel back the onion and you see the issues with it, which is some

countries are weaker and some countries are stronger. And they're all sharing the same currency. It's hard to devalue or increase its value for growth purposes. But at this point, you're right. It's like the correlation of European stocks and the US stocks is what it is. They're pretty correlated. The equity markets tend to be pretty correlated. So where are the better fundamentals?

Demographics, diversity of economy, all of that. Liquidity, all those things are here. And so if you're not getting bang for your buck to kind of step into those issues, why take it? Go ahead. Sorry, just the decoupling you're talking about. Are you talking about economic growth-wise or market-wise? Well, I am actually talking about economic growth, and I would accept that there could be a lag with markets from that. But I think that just painting a picture of, hey, if you envision any 20% drawdown in S&Ps, so I don't care about 5% drawdowns, nor should anybody listening. They're inevitable and unavoidable and unpredictable and untimely.

Sure. Other than that, let's get in front of it. So you have 20% potential drawdown in U.S. that no one wants to go through. They're painful. So we're going to try to diversify the risk of S&P bear market with Europe and EM and China and Japan. I'm not sold on the idea that you could have a 20% down S&P and a 4% down Europe, let alone a 4% up Europe.

It would probably be a negative 30. It's never up. Probably negative 30. Like in these corrections, like all betas go to one or even more. So I would think you're more likely to have a bigger correction. I think that betas go to one for the assets that are generally sub-one betas, and they go to more than one for ones that are usually higher betas. So, Robert, to Brian's point, though, would you say EM could be different in the sense that the demographics, the fundamentals, all the things that make you want to be a risk equity investor, and maybe Europe is not looking so divergent from U.S. and, in fact, looks inferior from a macro?

EM, though, we would say the opposite, right? I think so. And I would even, you know, give you another point there. I think EM is different and has been different as well in its ability to be divergent from one another. You touched on it, and it was a great point. There's been this, I think, illusion and luster around the EU since its formation that it was, to some some degree a cohesive unit. It's not. I mean, we're seeing the BRICS fall, Brexit, you know, North Macedonia, Albania being barred from joining temporarily. But there's never been that illusion around EM, but for the kind of the BRICS and those classifications. We've been talking about it for a long time, and I think it's been true for even longer that we've talked about it. EM markets are so dispersed

in terms of the specific demographics and specifically the investment opportunities in all those different countries. So I think that will continue. And like we said before, finding managers that can dig in and look at those opportunities is going to be a stronger way to invest than ever. There isn't like this overarching policy that is preventing any sort of growth or free market or trade or anything like that. That's right.

And all those demographics are the exact opposite of Europe. Yes. They're very favorable. The younger populations, growing populations. The triangle is upside down. The whole thing. Well, so you can't really talk about global macro and decoupling and these kind of topics without bringing in China.

I think that was the huge economic fallacy that got refuted a decade ago was this idea that the rest of the world had decoupled from China or that China had decoupled from the rest of the world. And, you know, S&Ps went down 50 in the financial crisis and China went down 70. So that's where you got this great kind of illustration of what the theme we've talked about of levered cyclicality. They're levered to that kind of global cyclical condition.

And if all you do is export to other environments, China, Stephen Roach, our old economist at Morgan Stanley, has talked about this over and over again. Again, China's desperate and generational need and even desire to transition from a producer economy to consumer economy, from export to domestic production. I don't know that they've really moved the needle there. Certainly the data would show that it's a bit different than it was 10 years ago and 15 years ago, but not much. I mean, it was like this and now it's like this. I mean, they have a lot to go. So I guess the question is, does anyone buy the story that China is potentially bottoming and showing signs of improvement? We know the trade war, that having tariffs not escalate further has got to be better, but is it going to improve China's economic standing or just not worsen China's economic standing I'll start you Brian

I mean I would say I would say a little bit of both you know I would probably err towards the latter of what you just said which is that it's going to continue which is it's not it's more of it it's not a headwind anymore and maybe it's not really a tailwind either but at least it's not a headwind I mean GDP was still six percent inflation is low. They're still positive fundamentals. There's still growth, those types of things. And so generally, the trade war kind of phase one deal is a positive thing for them. And you're seeing that, I think, in some of the leading indicators there as well. So is copper pricing, you know, we have, I'm looking at a chart right now that's attempting to show copper as sort of a leading indicator, a very similar chart to their producer goods and their industrial production, but with copper leading both by a little bit, that copper prices offer some predictive value.

You've seen a little pickup over the last few months in copper. Are these commodity price indicators useful? Yeah. Why is that? Why do you think? Okay. Well, I mean, why is it? It's because I'm looking at a chart. The reason is it's 20 years of a chart I'm just looking at, showing it. Okay. No, no. As far as copper being a leading indicator. Because there's virtually no utility for copper anymore that isn't industrial. And China is too large a percentage of industrial production for copper to not be necessarily correlated to that kind of activity. Okay. Okay. So I think commodity price indicators are generally useful, but not foolproof.

No, I mean, I don't think I would create an investment strategy around which direction commodity prices are going necessarily, but they can definitely be telling. And I think copper is obviously one that is highly correlated to global growth. It's hard when talking about China because I personally don't trust a lot of the data that comes out of China still. And without seeing inventory data, other things that are perhaps influencing copper prices as a result of demand being driven by China, it's hard for me to comment on that one specifically. I think a larger picture with China, though, when you have a command and control government, right, you're fully dependent upon policy tools, right? So monetary policy, fiscal policy, I think a lot of people agree those are extremely influential here abroad elsewhere. But when you expend all those tools or you get down to the lowest ever one-year deposit rates,

you have a lot of debt floating in the system that's not necessarily what some people would say is good debt. You have a limited capacity for market dynamism to come in and take up the slack. We've seen in the United States if we have, for instance, bad state or federal tax policy or we have tariffs or things like that, there is this competitive drive and spirit that can kind of come pick up the slack. And I worry about China not having that sometimes. So I'm skeptical a little bit. So that's a very good point and a very important one when we kind of formulate and think about the top-down concerns or risks that might be in China.

But, you know, the most popular one that has circulated the last few years is a bit different, which is this overall concern that their financial economy, that their credit growth has just gotten out of control and is this sort of cartoonish bubble. And some real famous short sellers, Kyle Bass, Jim Chanos, Drunken Miller have all been in front of this and really, no pun intended intended got their shorts handed to them by being short way if they are right they were so early i don't know they can ever make money on the trade because they've been so wrong for years now and yet the data is on their side the the credit growth it looks to be being propped up by government but you know julian we talked a lot about fed policy here in the US. I'm looking

at their one year deposit rate right now, it's 1.5%. Their one year lending rate, 4.3%. Both are the lowest ever. Yes, I was going to say, it sounds like the trades these guys are doing in China are similar to going against, betting against the Fed. It's kind of asymmetric. If you bet against somebody who has the printing machine, you're bound to lose. Absolutely. It's kind of like don't invest what should be,

invest what is type of thing. It's hard to really fight the Fed there or here. Especially since rates are a bit higher too, so they have a little bit more room than many of the developed countries. Well, they have another policy tool. See, these guys equate to 08. And, of course, the vindication that took place for the famous short sellers in 06, 07, around 08, it provides everyone this permanent talking point about how credit insanity can't go on forever.

That's fair enough. I'm with them up to this point. But then, I'm sorry, China could nationalize this stuff tomorrow. That's fair enough. I'm with them up to this point. But then I'm sorry. China could nationalize the stuff tomorrow. They could inject it. They have no House of Representatives to account to. No Occupy Wall Street. No. I mean, it's like they can do whatever they want. And the idea that they would let, I don't doubt that it's probably trillions of dollars over levered, equivalent to US. But I don't know how you could probably trillions of dollars over levered, equivalent to U.S. But I don't know how you could use that to formulate a trade. But my question is not whether hedgies are doing or not doing.

Let's all stipulate they're going to be fine. Those guys are okay. I'm wondering global macro. Look, the Fed, they can kind of paper things over, but as far as the fundamental health and what it means to China's contribution to global it from a export-led economy to that consumption-based economy. And that may take a generation. They've been doing this for 10, 20 years. And if that doesn't work out and if it doesn't transition at some point, then, yeah, I would assume that there'd be some piper to pay in some way. And probably the fundamentals would get worse over time.

But that's a pretty long ways out. And from an investment standpoint, that's a hard thing to time and get right in general anyway. So in the meantime, yeah, it's like Julian said, don't fight the Fed. I wouldn't fight the Bank of China either. Yeah, I think sensitive to those that would bring it up, not in a trade environment, but in the sense of macroeconomically what it indicates for these different competing forces. Like you could argue that they have the ability to kind of artificially prop things up. To Robert's point about their data reliability, I don't think one could say my whole bullish thesis is based on 6% real GDP growth in China, and at the same time say, oh, don't fight their Fed there. They can just paper things over. Because what it means is one thing is undermining the validity of the other. And so you kind of have to be able to pick which

side of it. And I think what you're saying, and I'm agreeing with you, is it behooves us to not have our global health thesis dependent on the shakier parts of global macro conditions. And I think that China right now, there is a black swan potential there. We saw it in August 2015 and in January 2016. And the really frightening thing, by the way, was it wasn't that big of a deal what they did. It was just sort of the equivalent of a little pump fake about currency reserves. And they all of a sudden, it was about from peak to trough, about a trillion dollars that came down

off their foreign exchange reserves. But the point is, is that that capital flight, and I wrote about this all been playing kissy face together for a little while. But I don't know that we can really go to sleep every night thinking that you couldn't get another resurgence of some tension there. Sure. Yeah. And that was a big deal in 15 and 16. That moved markets a big way. 10% in a month in both months. Yeah. So it's definitely out there. Okay. Well, let me go to you, Daya, on other places. We've picked on our friends in Germany and China, but let's move around the world. I did hear this morning, actually, that Macron thinks he and Trump are OK on champagne tax. They're going to work out this digital tax and maybe not have some European trade threats this year.

maybe not have some European trade threats this year. I have not fully got my arms around the idea of a tariff on champagne becoming systemically threatening to the U.S. economy, but maybe I'm too far removed from the bubbly to appreciate that economic risk. But when you look outside of France, Germany, and you look outside of China, what else, Daya, would you think is pertinent to global macro right now? To global macro? We can look at Japan. I mean, some of the indicators out of Japan. And we tend to focus more on supply-side type indicators as far as leading indicators go. Business confidence, foreign direct investments, especially when it

comes to some of the emerging economies is very, very important. But as far as here, I mean, it looks like some of the business confidence has recovered after falling for several quarters. Looks like CapEx, capital expenditures, is trending a bit sideways. I mean, it's not going down. Obviously, if it was going down, there'd be a bit of a I mean, it's not going down. You know, obviously, if it's going down, it'd be a bit of a negative. So it looks like on the business side of things, things are okay. I mean, current account deficit, that's something that I think is a terrible indicator for a non-indicator. All right. Well, what is an indicator? I mean, we know the story of Japan since – I don't even want to ask how old you were in 1989. I think it will depress me.

Okay. But, I mean, think about that day. It's kind of like your whole life that Japan has been in this deflationary spiral. Yeah. Look, how ironic is what I'm about to say? Their price inflation with the GDP price deflator third quarter was up 0.5% year over year. Okay, that would be very underwhelming inflation in the United States and certainly most parts of the world. That's like the best, if you want inflation or if you want to fight disinflation, that's the best number Japan's had in 30 years.

It's amazing. Are they out? Look, that's not inflation, right? They're at about a 0.5% CPI growth. Their wages are still shrinking, basically flattish wage growth. But those indicators have all been in disinflationary conditions for a long time. Is some of this Bank of Japan bazooka stuff actually reversing the deflationary spiral, Brian? Gosh.

I mean, in the short term, yeah. I mean, it's hard to champion a 0.5% inflation number and think that the 30 year long Deflationary environment is completely over but it's like yeah, I mean rates there are slightly negative 10-year treasuries JGB is what negative 0.01% So as far as inflation goes the market is telling you that there is none for 10 years basically with those rates So yeah, the bazooka helps without Without the bazooka, would it be negative? Probably. They're also dealing with a lot of demographic issues, too. It's a shrinking population. It's hard to really grow out of that. Julian, do you think that the aggressive central banking in Japan helps?

Well, it helps limit the damage. But as you said, what they should add to their mandate is population. I mean, they should really open the borders. You need more people if you want growth. I don't know how much- Should the central bank start procreating? Is that- Maybe. That's really what's Japanese. That's more like a government policy, but they need an incentive, open the borders

or create some incentives so that people have at least 2.1. You need 2.1 child per woman to just renew the population and they probably have the one and a half or something. Oh no, they're below one. Yeah, they're low. Below one, okay. They're below one. We're not even at 2.1 now in the United States.

We're a tiny, tiny bit below that. And Japan's been below one for quite some time. But you have a lot of immigration that helps as now in the United States. We're a tiny, tiny bit below that. And Japan's been below 1 for quite some time. But you have a lot of immigration that helps as well in the U.S., which they don't have in Japan. How much deficit do they run, the government, per year? As far as the budget deficit?

Hundreds of trillions of yen. As a percentage of GDP. In Japan, they're not running a budget deficit actively. It's the debt of GDP. No, in Japan, they're not running a budget deficit actively. It's the debt to GDP. As far as their addition to it or the level, they're at 260%. Yeah, which is as a percentage every year of the GDP. Right, right. That's right.

Because I think that's one of the structural issues with Europe. In the U.S., I mean, the economy is doing great, but that's at the price of 5% that you know that you know deficit every year in Europe with the eurozone in particular with the Maastricht Treaty you're not allowed to have more than 3% and all these countries like Italy and Spain were struggling they still cannot you know try to stimulate the economy with a lot of government-induced policies because of the rules of the Eurozone. And that's a very structural issue is that until they change that, Europe will never

be able to grow very much. Mm-hmm. Well, Rob- I was wondering if that was the same in Japan. Good point. Yeah, but see, I kind of wonder, we don't have a significant exposure to Japan. We have a couple of companies, pretty small weightings in our dividend portfolio that are Japan-based, but those are really bottom-up stories that have a dividend growth thesis behind them. But when you look across the totality of our asset allocation,

I don't have a strong opinion. I certainly believe that their deflationary spiral is far closer to over than beginning after 31 years. And I'm willing to say that they may have flattened it and be in a period of non-inflation and non-disinflation for some time. But this idea of the central bank helping, I get what you're saying. And I think a lot more people would agree with that than would agree with me. But Robert, I guess I'd ask you, would agree with me. But Robert, I guess I'd ask you, has it helped growth to have their central bank tell every economic actor, you're relying on us to totally play gimmicks within the economy? I don't want us right now to relitigate 30 years of policy, which certainly has contained periods of good

decisions and bad decisions. But on a go forward, the reason it's so important for us in this podcast is Japan's the best example and case in point we're going to get for what U.S. faces around potentially troubled growth and excessive debt levels. And you can't look to Argentina and Zimbabwe as a precedent, but Japan is a reasonably developed and educated and technologically sophisticated economy. I wonder if it's true that their central bank has helped and not actually hurt. Well, look, Japan's central bank is doing what they know, if I'm not mistaken. They kind of pioneered the whole QE approach well in advance of the United States calling it a fiscal experiment. Totally.

And just so our listeners are aware, the criticism they've taken from American MIT and Harvard economists is that they didn't do more of it and didn't do it sooner. But as far as the notion of buying debt securities with money that doesn't exist, that was done in BOJ long before our Fed did it. We just didn't call it QE. We're way better at acronyms. Yeah. So I'm not surprised that they've been doing this for a long time. With Japan, largely, that hasn't necessarily worked in terms of stimulating growth, right? I think that's putting it diplomatically. I still am in favor of what's called the Abenomics, the multiple, you know, quivers and arrows in the quiver approach to, you know, revitalizing the real economy. Julian touched upon it. They have, you know, demographic issues. We all talked about that. They have, you know, restrictive immigration policies. They have an aging workplace. And I

think corporate culture could be, you know, spiffed up a little bit. We saw a new spotlight on that with the whole Carlos Ghosn situation and all that debacle. Debacle? One of the greatest things I've ever seen in my life. Yes. He came out ahead, it looks like. So far, so good. But I just worry when you're fully dependent on the central bank. And I know it's going to sound strange because the United States, some would say we are as well, but you know, you have, you have to look at the more structural things that have been holding back an economy like that. Again, the demographics, the growth, you know, I, I'm, I'm also troubled when I said corporate culture, you look at a big CEO of a huge tech conglomerate over there. That's,

you know, investing in all kinds of things around the world. If you are a corporate leader and you look abroad and say, hey, that's where the growth is, what kind of signals does that give people in your country about their prospects to grow in the workplace? I think wage inflation is important over there. We talked about what's going to stimulate people to have more children, what's going to stimulate immigration. It's a lot of these consumer confidence figures, the wage inflation, and they need to do a little bit more there. The VAT certainly didn't help from the confidence perspective. Yeah, I think that's the VAT tax. I'm glad you brought that up. I think that's one of the reasons

why Japan is being looked at in this report. And kind of generally, as it's getting less bad, it's kind of getting a little better. Because the VAT tax did hurt the economy, but that's in the past. It's sort of muddling through still. So that's considered kind of a good thing going forward. Yeah, I think that it's difficult to academically to do analysis relative to Japan, U.S. economic conditions relative to Japan, because you're trying to hone in on the things that we share in common. And yet there's these things we don't share in common that do potentially skew the data and make the parallels or analogies a little more questionable. And so the banking system, the way in which they allowed their banks to survive post-1989, people forget that asset bubble made our 08 look like a anthill. I mean, just utterly insane. And keep in mind, our Dow was at 10,000 and went to 13,000 and came back down

and well below 10, and then took a couple of years to get back and make a new high. well below 10 and then took a couple years to get back and make a new high and then now is obviously just dramatically moved higher the nikkei right now in 2020 is barely half of what it was in 1989 that's how much of a bubble they were in in their stock real estate and credit markets and and the reason i bring this up as far as the difference in Japan was they allowed these zombie banks to stick around for so long that I don't know where things we hold in common with them, where we don't. The things I do know that I can look to is debt to GDP. The demographics are obviously different, and you brought that up. The ability to organically create output is just not something the U.S. has ever really had to question. And so right now, the part that I'm focused on,

and I think most economists are focused on, is the drag that excessive debt, sovereign debt, brings to a country. And Japan produces this great analogy, but there are other things that are not analogous that makes it more nuanced. It makes it difficult to say pure Japanification in the U.S. and no Japanification in the U.S. I think the truth is going to play out to be somewhere in between, and it's just something we have to continue to monitor and study. Well, all good input around the Japan front. So let's just kind of bring it to some conclusions, Well, all good input around the Japan front.

So let's just kind of bring it to some conclusions, not so much specific to Germany and China and EM and Japan, but just here in the U.S. in light of all global conditions, I think that we already have talked to listeners a lot and our belief capital expenditures are the big trillion-dollar question, business investment, business confidence. are the big trillion dollar question, business investment, business confidence. Do we believe that 2020, the global economic conditions are going to be a net positive to U.S. or a net negative? I'll start with you, Brian.

I think there'll be a net positive, but in a very small way. So global conditions are turning up a little, and that's kind of what we've been talking about here today. But there's by no means this giant resurgence and a powerhouse of global growth. It's just not getting worse anymore. It's not slowing anymore. It's getting a little bit better. So I think that'll be a little bit more of a tailwind than a headwind going into 2020. And I think fundamentals here in the U.S. are generally pretty good. Dan, U.S. economic activity in 2020 benefits from global, suffers from global, doesn't care about global. I think I agree with what Brian said. I think it benefits a little. And really the cause of that benefit is just the de-escalation of the U.S.-China trade disputes.

And I think that's the leading story here. And I think, obviously, as far as the thematic talk goes, I think that's going to remain a central theme is how these – one budding superpower and the other incumbent superpower deal with each other for the coming years. Good points. Robert, other factors besides the trade deal? Does Brexit matter here? Does potentially stabilizing political environment in some countries where populism was running amok, what positives would you extract globally other than the obvious about trade? I mean, I think you could dig in more on the populism issue. You look at, you know, consolidation of power in a couple of countries, notably Turkey, Russia, so that, you know, kind of narrows the distribution, but perhaps adds a little tail risk in some of those places. You look at structural reforms, you know, Argentina

just changed administration. So we'll see what happens there. They're kind of known for, you know, borrow, default, rinse and repeat cycles. We'll see how that plays out here with the prior administration coming back in. But again, I think, you know, to your point, I would agree with you completely. I think that they are going to add emerging markets to global markets will add a little bit to the United States. And I think we're going to know sooner rather than later. I think a lot of the headlines are going to shift to what's happening reform wise, structurally, populism, etc, in those countries. But I think the United States is still, I wouldn't say the Tina trade, but I think we're still the best alternative in my eyes. Julian, where would you maybe add to what your colleagues have shared here? I guess it's going to be probably a second half of the year question for where we're

going to land in 2020. So we're expecting like some modest recovery in the first half and then better in the second. So it's back and dated. So that's a big question mark. For me, U.S.-China trade relationship still like number one, you know, not talking about the Fed, but after the Fed in terms of what I'm worried about or focused on. And it could go really both ways. You could have some, you know, bad blood and it goes back to escalation, and that could really, even if it doesn't impact the economy immediately,

it impacts business confidence, and then CapEx investment goes on hold, like we've seen last year. Or it could be the other way around, actually, because there's still 360 billion of tariffs at the moment that are there, and that Trump can... In fairness, you mean tariffs on $360 billion of trade? Yeah, of trade.

So I'm saying it's like, who knows if you need a boost before the election, the president could decide any time to have some good gesture and just take some or all of them away and that would really be a big boost. And nobody, I think, is pricing that at the moment because I think phase two is expected after the election. Yeah, you know, it's interesting.

You just brought something up that I think from a probability standpoint, it warrants comment. We would argue that there has not been enough discussion of the probability. I think last podcast we said 10 to 20 percent probability of trade war escalation, particularly maybe with Europe or something. Low probability, but being kind of ignored. But there would be a higher than that probability of the president offering some sort of relief in an election year. I think so.

I mean, I guess we've seen how the whole rhetoric changed last year when probably he met with someone, and they either realized, oh, we're one year to the election, and now we have to really, you know, it's hurting the economy, you want to be reelected, it's, you know, just look at the S&P 500, look at where the economy is, and he knows that, and there was a really big reversal,

and so I would expect, you know, it's more likely to surprise that in going the same direction than the other way around, so I would, you know, I think that's more likely. Yeah. Although the only political sort of anecdotal comment I'll make is you know, I think that's more likely. Yeah. Although the only political sort of anecdotal comment I'll make is you could, there's a potential of that not helping him. If he wants to run on America first, Rust Belt, Industrial America, the stuff that got him elected,

it could be viewed as a sign of weakness if he capitulates on the early tariffs as well. That's true. So that could, I could see both sides to that. It's probably like an ace in the hole that he'll play over the year is my bet. Some tariff relief here and there and maybe not do it all at once. I guess otherwise there's like what's not priced in. So we've already had one kind of event

that was unexpected, the escalation with Iran and that went away in a week. Now there's another one we haven't talked about, but this virus, like the last time in 2003, that was, I think, that put an impact on the economy in 2003. I don't think so.

Bird flu? Yeah, I mean, I guess it's more like people stopped freaking out and stopped flying. I thought about it, and I didn't include it because I'll tell you why. You were very critical of financial media on our podcast, but primarily in our relationship with clients.

We serve as an antidote to misinformation and exaggeration and things like that. And I'm not suggesting that thing couldn't become a big story, but I woke up this morning and saw this thing, read a little. I got back from the gym and then I saw flu, virus issue in China disrupting markets. And then I saw Dow down 32 points. And I said, you know what? I'm not going to play into this nonsense. If it becomes a story, it becomes a story. But they can't have their cake and eat it too. You can't present a lower than average volatility day and say, oh, this volatility is coming from the, it's like, give me a break.

For sure, it's early days, but I guess like now I'm just curious to, I want to go back to see what, you know, what happened in 2003 because I, you know, I would bet that, again, this is not really big for the economy, but that's enough. If people get scared and stop flying, you know, that could help the economy just because. Help me. I don't need all the clients. 2003 was actually like a 2000 and like 2017 if i remember i mean there's like no volatility in the entire year yeah the market was up the entire year it

was like 10 points a day for the entire year so i'm not i'm assuming that the asian bird flu yeah i would think it's a non-event but 800 people died and i don't know what impact he had on the economy but i'll just i'll just have a research it No, it's a good point. Our friend of the Bonson Group, Nick Murray, and myself, we'll keep our list going of things that become this big story for about four days and you never hear about it again. So I wonder what the, on a day like today, what the media kind of does. They're like, if there's any sort of volatility at all, they try to find some sort of causal link for that volatility. There's no volatility.

It's not even about volatility. Whatever it is. There doesn't even have to be volatility because the headline doesn't require a real vol. They just need a headline. Yeah, exactly. I'm on a tangent, but I think that there's a whole long, long list of things that obviously they could be newsworthy and maybe become market stories but the point is is it's something like 99 to 1 of the ones that end up becoming legitimate versus

not of ones that are illegitimate versus ones that are not yeah i think i think that um that right now all the stuff we've talked about today it sounds like we're in consensus view the u.s is still the best house in the neighborhood. The neighborhood overall might be getting a little better, but we don't want to get carried away as far as global economic neighborhood. Leading indicators showing some signs of life and potentially this possibility, maybe not priced in, that Europe and China have seen some of their worst days and we could get a little improvement. So I don't think any of us are disagreeing with any of the big picture. Does anyone have anything else they want to add

that they've been dying to say? And then I'm going to take us out with a couple of closing comments. Anyone got anything else? I would just say there's also the chance that the Fed would give you a gift this year if the data is not as good as expected. I mean, they clearly said they're not going to do

the first half of the year, but the market is not as good as expected. I mean, they clearly said they're not going to do the first half of the year. But, you know, market is kind of pricing for more than 50% chance of a cut by the end of the year. So it looks like the Fed could have our back if it doesn't, you know, if the economy doesn't recover as much as we hope. That's a good point. So I am looking at a chart right now that shows the Fed funds rate since financial crisis. And, of course, they had been raising a little bit, and then they cut it last year.

But then I'm also looking at the actual money stock and how much the money stock, M2, dropped when they began quantitative tightening and began unwinding some of the QE, and then how much it has skyrocketed up in more recent times. And if you want to find a really, really strong correlation to how markets have done, and this is global as much as U.S., it won't be connected to GDP, and it won't even be connected to Fed funds.

It will be connected to liquidity. Velocity of money. And the ability to have velocity of money, which, again, is not one causing the other. It's both them feeding off each other. You get a velocity of money in a better economy and you get a better economy when there's more velocity of money because there's more liquidity and credit driving economic activity uh it's not good for us to be so dependent on priming and artificially boosting liquidity and even for those like you i know what you meant but when but when you talk about

the Fed giving a gift, there's some gifts I'd be careful of unwrapping because you get a big gift of candy and you unwrap it and you eat it and it's wonderful, but then you're going to have

a stomachache later. You have to pay for it one day. You got to pay for it. And we learned it in late. I just made that analogy up right now. That was good. I think that the late 2018 market gyration proves that there's some Fed

things that have been done. They felt like gifts at the time, and then they weren't a gift when they had started taking it back a bit. And they're going to take it back at some point. So that's, to me, the story right now in global macro is the entire world, Japan with their bank, Europe with their bank, China with their bank, China with their bank, the U.S. with our Fed, how reliant we all are in Federal Reserve activity and how incapable a lot of countries have been. Luckily, the U.S. has done better than most, but nowhere near our full potential in terms of output gap to create organic and healthy economic growth that's decoupled from monetary interventions.

I think that's the big global macro story. And unfortunately, it's still going to be a monetary economy for as long as we can see. Now, the positive side, I really was feeling about four or five months ago that the services sector looked like it was starting to decline and the ISM non-manufacturing had some bad prints. Those seem to have really rebounded. I feel that we're pretty exclusive right now in the manufacturing area of our economy where we're seeing weakness and that lack of business expenditure. However, getting that to kind of – I don't know if it reverts 2016 17 excuse me 17 or early 18 levels or not but u.s macro business expenditures global macro it's just going to be a 30-year story of dealing

with the prior 30-year story uh spending run amok and how everyone has to go around balancing that and putting their fingers in the holes on the dam to deal with it. And in the meantime, you've got to be focused on fundamentals and individual companies and their profit-seeking activities. It's the only thing you can invest in unless someone has figured out a mousetrap for how they're going to invest in and around the machinations of central bankers. I don't see that as being very feasible. I'd rather bet on the Super Bowl. Niners or Chiefs?

You know, we've had some action the last couple years, haven't we? We have. I think I got you last year and you got me the year before. Yeah, I think we might be even at this point. Of course, we don't bet real money because that's not allowed. But, I mean, we have this gentleman's bet. It's a handshake. Yeah, yeah.

You know what? It's really difficult. I don't like San Francisco. And the Mahomes guy is so fun to watch. But it's really difficult to bet against San Francisco what they did to Green Bay in that first half. Solid. Yeah, it was destruction. They're just really good.

But they're both new quarterbacks in the Super Bowl. We saw at the Rams last year that a first-time quarterback in the Super Bowl usually struggles a little. They don't necessarily get to come in and just play like their normal regular season selves. My prediction is that this Super Bowl will at least be better than last year's Super Bowl. Won't take much. Won't take much. That was the worst. Well, for all of you listening, thanks for checking in on this special edition of the Dividend Cafe Investment Committee podcast. Took you on a little trip around the world. Maybe next week we'll do a special global macro discussion of Mars, Venus, and Neptune because we are out of places on Earth to check in on. Don't forget to listen

to this Friday's Dividend Cafe where I'll be coming back with all the things near and dear to my heart throughout this week in the markets and more. A lot of politics things happening, so forth and so on. But if you have any questions or comments on this week, reach out to us anytime. Happy to elaborate further on some of the subjects we delved into here today. We would really appreciate your positive reviews, shares, and forwards and things like that supporting this Dividend Cafe podcast. And with that, we bid you adieu and thank you for listening to The Dividend Cafe. Thank you for listening to The Dividend Cafe. 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 and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not

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