The Dividend Cafe - TBG Investment Committee Talks The Year Behind and The Year Ahead

Episode Date: January 9, 2020

Topics discussed: But first, I would direct you all to the annual white paper I do every year recapping the year behind us and offering our perspective on the year in front of us - Year Ahead/Year Behind. I believe you will find it to be an informative and useful tool in understanding the recent past and considering the immediate future. Share with any you would like. Links mentioned in this episode: A Year Ahead/A Year Behind DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. perspective. We're going to kind of sit around here and discuss everything that transpired in 2019 and offer our major themes here at the Bonson Group as we enter the new year. In addition to this podcast, or perhaps you're watching on video, whatever, we have prepared for you a white paper. I think everyone, most everyone at the table kind of has a copy of it. And it's going out to everybody this week. Probably by the time you're listening to this, you've already received it in your inbox. We can give you printed copies as well. But it's just a summary that we've written every word of ourselves to kind of summarize our best thinking as we go into the new year.

So first, let me say Happy New Year to our team here. Hello, everyone. Happy New Year. Feels like last year wasn't that long ago. It seems like just a few weeks ago. Just a moment. Happy New Year. around a little today, catching you off guard because there's a lot of different topics and things. Let's start with just kind of that basic summary of 2019. For those listening, the S&P 500 had one of its best years in the last 25 years. It's actually kind of interesting. Best year since 2013 doesn't always sound that dramatic, you know. And when we talk about the idea, I think most Americans have embedded in their understanding, most investors, that S&P sort of does about 10% a year or something. It's really absolutely amazing how infrequent it is that it does around 8%, 9%, 10%, 11%.

Almost never. Almost never. The fact that it averages that really comes from negative years and 20% plus years. And 2019 ended up being one of those. So you had a Dow that was up a little over 22 on the year you had an s&p somewhere around 28 29 percent um but i want you to think back to a year ago we had a chart in the same white paper had a list of all the major asset classes it had treasury bonds it had corporate bonds it had commodities it had real estate it

had international it had um emerging markets uh real estate, it had international, it had emerging markets. There wasn't a single asset class that had a positive return. I think U.S. Treasury bonds, because of the month of December, clicked out a few basis points of positivity at the very end of the year. Now you fast forward to this year, same chart, nothing negative. The exact opposite. Exact opposite. Brian, what was the story in your mind of 2019? What made it such a risk-on year for investors? I think you had, I would say, two things.

I mean, I'm cheating here a little bit because we've written about it in your white paper. You've written about it. But it was sort of this de-escalation of the trade war. Things got a little bit better. So de-escalation of the trade war and then a Federal Reserve after Q4 of 18, which basically reversed all rhetoric and instead of being hawkish, turned dovish. And of course, we've got three rate cuts in 2019. So a combination of Fed rates and trade war getting a little bit better. Earnings were sort of flat over the year. But those are the main themes.

So the themes about the Fed and the trade war, I actually don't think we have to spend a ton of time today talking about it because we spent all last year talking about it. And our listeners and our readers and certainly our clients are aware of the impact that those things played in. I think – does anyone else have something to add? Like can you think of a major catalyst to market performance in 2019 besides the two Brian highlighted. Obviously, there's things on the edges. I think the TINA factor, meaning the kind of superiority on a relative basis of American risk assets compared to the rest of the world, was some degree of a factor. But Fed and trade, Julian? No, I totally agree.

I think I would say mostly Fed and trade a little bit. But really the big, big change in 2019 was the Fed reversal, you know, going from tightening to easing and then starting QE again, which I guess they don't want to call QE. But really, effectively, that's what they started the last few months last year. And that's the reason why we're here. And I guess the one thing we should probably add is. Well, but before they started that, what you're calling QE, the market was up 25% before they even started that. That's right. That's right. So was it more the not tightening?

I guess not tightening. Yeah. Not tightening anymore because I guess they did at the same time. They were raising rates and reducing the balance sheet. And that was, I guess, too much for the market to swallow. And then they completely reversed beginning of 2019. And then a year later, that's where we are. But I guess also it looks like an amazing year because of the arbitrary way we look at it from January to December.

And December was a low point. So if you look back from the summer of 2018, we're only up like 10%. Maybe that's the way to look at it. Julian read the white paper. Although I said that on our last call. Yes, you did. Yes, you did. You did.

And it's a very important point that both of you have made in recent times here because it speaks to the notion of where we're priced now. And people could say, oh, geez, we just got done going up 29. Feels expensive. Even that comment is actually mathematically incoherent. It doesn't necessarily speak to where we are now from a valuation standpoint. But just to frame it and contextualize it, if you view it the way – it's not viewing it the way, it's just math. We're up 10% from where we had been before the drop of last year.

That sounds to me much more palatable for investors right now. Robert, what do you think? I agree. It's reasonable. It's funny you say that. I was just thinking in advance of the podcast how we focus so much on the calendar year by necessity. It's what everyone does. But more and more, I start to think, hey, what are the cycles we're working in? Is it the Fed tightening, the Fed loosening cycle, the business cycle?

So it's kind of that mismatch for me. But when you bring it back to the hard numbers, it makes total sense to align it that way. Well, so what do you think, Daya, on this question of Fed and trade as a big catalyst? I kind of am going to throw out a little third issue. But do you have any thoughts as to what drove markets and not just U.S. stock markets? Do you have any thoughts as to what drove markets and not just U.S. stock markets? Do you think that there are other considerations economically and in the investor landscape we ought to be thinking about from 2019? As far as how markets performed in 2019? Just catalyst to what made markets perform the way they did.

I mean, it's difficult to find another checkbox other than what you guys have already indicated. I mean, it's trade. The majority of it is the complete reversal of the Fed, of just the Fed communication in the markets and the subsequent rate cuts. But as far as any, yeah, I mean, relatively speaking, equities look better and better. I mean, it's difficult to come up with another catalyst. Yeah, I can't think of another one besides those three, really.

So raise your hand. This is important for our readers and listeners and clients understanding our thought process and the philosophy behind equities investing in stocks. Raise your hand or start yelling at me if you disagree with this statement. I've been saying this statement out loud for 20 years. Equities always and forever follow earnings. Always and forever follow earnings. Does anyone here disagree? No, over time, absolutely.

And I think they're – I'll let you go. It tracks all the – No, you're stealing the – over time. So this is the thing is earnings were up huge in 2018. Market was down about 6% worldwide over 8%. Earnings were barely up at all in 2019. Market was up big. So there is this school of thought that could say the data suggests differently, but it does not.

It actually is a huge reinforcer. But this to me is one of the more interesting things in the white paper. And it's important that people understand where a market multiple, a PE ratio, a valuation, and it hits Julian's point about the role of the Fed last year and where the Fed ends up impacting the ratings of assets, the valuation level of risk assets. Because I believe so much that markets always and forever follow earnings, then it behooves you to look at shorter periods of time. And I would argue that markets were moving higher in 2017 in the belief that earnings

were going higher in 17 and 18 and re-rating somewhat higher in a higher multiple. But markets went lower in 2018, anticipation of a slowdown in earnings in 19 and a re-rating that went along with that, the Fed being a big factor as they were tightening. But it's fascinating that now in 2019, market was up a lot and earnings were flat. And yet, I would say if we were going to add a third list of what happened to markets in 2019, it's hard to say, hey, earnings were flat. That helped move markets higher. Except for they were expecting 2% to 4% to 6% earnings contraction. How many times did we hear those stupid words, earnings recession, in the first half of the year. So even though you don't necessarily think of flat earnings as a bullish catalyst,

if you're expecting 2% to 6% decline and you get zero, you're plus 2% to 6% over expectations. So I do think that that's sort of – and again, this isn't totally separate from the Fed consideration. It has to do with market multiple. But my point is that third factor I guess that they're out there is that the earnings story just didn't end up being as negative as we were told it was going to be all year long. Yeah, things were less bad in markets like that, both with trade and with earnings.

And then I also think market is looking forward and it's looking at an earnings rebound in the following year. And so you get sort of anticipation of that going up. And that's a part of it as well, I think. So we'll wait for the 2020 themes because that's the first one, and I don't want to start going through 2020 yet, but the first theme is have earnings will prosper. And I think it's going to speak to one of the big both opportunities but also risks in the market for 2020 around what the earnings story will be. But when we look through 2019, we talk about the Fed and the trade war earnings risk assets all those good things but i also think it would behoove us to really remember the the volatility in two different ways a the lack of it just basically how mostly non-volatile it was we have the chart in here

um the biggest drawdown on the year was 6.9 percent that sound right yes peak to trough the biggest drop was in month of may it was 6.9 averaged a 14 percent entry year peak to trough drop for 30 40 years so you had about half of the normal drawdown now compared to 2017 it you know where the biggest drop was 2.9 and that's just something i still am not i'm not even fully digested what that was like uh but yeah 2019 uh would people what do you guys think because we were sitting here doing podcasts when trump was talking about retaliating in a currency war and china was talking about you know uh there were tweets about Jerome Powell

being worse than a communist Chinese dictator and enemy of America. I mean there was some stuff that sure felt volatile. We're going to trade war with Mexico over like avocados and stuff. And then you had 10 out of 12 positive months, draw down only half of the historical average. months, draw down only half of the historical average. Is volatility muted right now because in a secular sense, there isn't much room for volatility? Or was that the Fed too? You know, it's difficult.

And I look back at some of the podcasts we did, and we were forecasting that, okay, volatility. And really, it was probably more a mean reversion play than we would like to admit as in, okay, things can't – this volatility compression can't last forever. It's got to reverse at some point. And maybe this is a good time for that reversal. And it really hasn't happened yet. Like you said, the – well, I mean obviously we got some – the intra-year drawdown for 2018 was about 20%. There's some volatility there in the fourth quarter of 2018.

And you had vol throughout all of 2018, even though the 20. Throughout all of 2018. Quarter 1, 2, 3, 4 all had about at least 8, if not 10, 12, and then 20% drop. So 2018 was a more normal year. More normal year, right. In 2017, like you said, that was kind of freakishly, I mean, it's just a straight line if you look at it on a graph. As far as what is going to have to happen for us to see increased volatility, I imagine just some geopolitical risks here and there probably won't do it. And it's probably going to have to be something from the Fed, which I don't think we'll get.

Granted, if there is something politically that is very surprising. And even then, I don't know if that brings volatility back. So from my perspective, it has been more of a secular play. But going forward, to be honest, I don't have a good opinion. So geopolitical is your theory. I have a feeling you're going to say it would have to be Fed. Yeah. I mean, to me, I I think the only thing that matters

is the Fed and earnings. As far as increasing vol. Or even justifying the valuation where we are and really if we want to worry about something, I worry mostly about the Fed. A policy error, that's how we got to the end of 2018.

That's, I think, what can really move the market or move volatility more than anything else. So Fed policy and then earnings. But you think the Fed will – do you think the Fed will do anything? Well, I'm not – I don't think so. But, you know, I guess you – So let's just say hypothetically, Dan mentioned like a geopolitical thing. Like, I mean, Robert, I know this is kind of a crazy idea. But what if we just hypothetically started off the new year with like the head of iranian intelligence being taken out at the baghdad airport and four straight days of talk of us going to war in the middle east do you think that would increase volatility well that would be something right yeah because hypothetically i would think that

would and i think the market response to this has been a yawn. We're down 90 points today. We were up 50 points yesterday. Up 200, down 200. So flat on the two days last week. So far, in four days of all this stuff, the market is net, net 40 points. I mean, dear Lord, that is really below average volatility. I think 2019, for me personally, I think maybe for prudent investors as well, was educational in that it's so important to separate out the noise and what seems like micro volatility from the substance of what really moved markets in the long term, the earnings, the long term drivers of performance. And I think more and more, for better or worse, we've become accustomed to the noise. I mean, in an election year especially, I think we should all be wary of, hey, these tweets are comments, but they're not going to be the long-term drivers of market performance.

So is there a risk, Brian, of it going the other way? To Robert's point, the volatility has been too high from noise. And then now does it get to – do we get to a point where vol goes too low, where the markets are complacent? I think it's definitely possible that things can get complacent. I mean, geopolitical events and things going like that are hard to model. They're hard to predict, all of those sorts of things. I mean, to the Iranian deal this year, I mean, there's a different paradigm than in years past.

We are a larger producer of oil than we were. We're a little less dependent on that. Shocks matter a little less. And then I think the market has become a little complacent to it. It's sort of like, I'll believe it when I see it. You're talking about a war, but sure, we get tweets every other day about that, so I'm complacent now. I have to actually see that happen before I'm going to react to it.

So I think it's a combination of all those things. So you're thinking geopolitical type stuff, foreign policy. You're talking Fed. I'm calling multiple. I'm saying, and by the way, I'm calling multiple. But I think it's the election. I think that by the end of 2020, there will be enough uncertainty. Ironically, the one thing that would not enhance volatility is a clear, decisive direction. Like if Trump's up 15 points in the polls, I don't think it's going to enhance vol. And if Trump is down in every single poll in Pennsylvania, Michigan, Wisconsin, Florida, I don't think it's going to enhance vol.

I think that if you're going to have a very tight close uncertain election which is most certainly my forecast then i think you'll end up getting a little pickup in vol august september i don't not necessarily march april yeah i agree good when was the last time just um on election years where there was like somebody really leading so much that you know you don't have to worry about it like it's being given and there's no volatility from that. Well, I will tell you that it may not have felt this way for me politically and preferentially, but in a market standpoint, 2012, Mitt Romney was never leading in a poll in Ohio or Florida. So the markets never really believed that he was going to win the election. And yet there was never a point at which it looked like the House was going to flip. And in fact, even though they didn't flip the Senate, they should have. The Republicans gave

away a couple races in Missouri and Indiana with some bonehead candidates. But the fact of the matter was, the market was able to price in the pure boredom of split government. So we had had split government in 2011, and we were going to keep split government in 2013, and the market said, fine by us. I remember seeing a strategist, I think, survey. They asked PMs what they thought about the election. I think the market is saying, like, the money manager had 85% chance of Trump winning.

So at the moment, clearly, this is not 85% chance. Everybody's assuming Trump is going to win. But that's an institutional investor poll. Yes. The betting odds are saying more like 54% or something. 85% chance. Everybody's assuming Trump is going to win. But that's an investor, an institutional investor poll. Yes. Money manager. The betting odds are saying more like 54% or something. So I guess which one is wrong because if we go into September, October with people thinking that 85% down, then they won't see any risk. No, but that institutional investor poll I don't think has a correlation to this. I think you can look at the regular polls like RealClearPolitik averages, things like that. You can look at betting odds.

But any poll of a particular targeted group, the polling is always correlated to what they're rooting for, not what they're predicting. It's impossible for them to go say what they predict. There's a cognitive dissonance at play there. I try to be as i try to be as objective as i can possibly be about it no one would accuse me of being a big cheerleader for president trump although i am obviously on a more you know conservative uh world view on these things but i'm just saying as objectively as i'm capable of being i think it's a 50 50 election

it's toss-up and right now we don't even know who the candidate that's it yeah yeah and i think that's a big. And right now, we don't even know who the candidate is. That's it. Yeah, and I think that's a big component to it as well. We don't know who the actual candidate is going to be. So as far as it being 50-50, I would actually lean more towards a 60-40 for Trump just because there isn't really a viable candidate that is electable at this point, in my opinion, on the other side. So why don't we move forward to 2020 discussion and spend the bulk of our time uh walking through some of those kind of themes that we have for the year um last thing though on 2019 is set it is the sector performance last year that is interesting to point out you see the technology sector up about 45

percent uh skewed to some degree there was a lot of dispersion of result among subsectors in technology. The semiconductors just had a smoking year. It was an interestingly pretty good year for old tech. It wasn't just one of these years where new tech and social media dominated. You had some just kind of differing results within that, but technology being that massive performer. within that, but technology being that massive performer. But who was talking about financials being up 30% at the beginning of the year, and then as interest rates went lower, not higher? I mean, the only bullish case I was hearing for financials was that, oh, because rates are going

to go higher, and you're going to get net interest margin expansion, that would bode well for financials. You got the very opposite premise and yet the same conclusion. So I think that there was a lot of interesting response. But the point I would make on it, you have the best performing sector of 2018 was the second worst performing sector of 2019. That happens almost all the time with healthcare. We're not going to get into individual That happens almost all the time with healthcare. We're not going to get into individual stocks right now. I would say that we actually had a few different healthcare stocks that really helped buck the trend.

Drug makers ended up having some really good results last year and some bad results. But the thing that I guess sticks out on the page is energy being up 7% or 8%. Yeah, even after, yeah. If you have a year where the worst performing sector is up 8%, you are going to have a very good year in the stock market. Odds are. Yeah. It's funny with technology, too. I mean, this calendar year, it was up, whatever, 45%, 49%. But what was it down in Q4 of 2018?

Probably 30%, 40%. Yeah, that's true. It was a pretty big recovery. But actually, for all of 2018, it was still positive, though. But still, it's also coming off of that pretty bare Q4 of 18. But there's also a weighting factor because of market capitalization. I think that just two companies right now are the highest weighting of the S&P they've ever been in history, a real big phone maker and a real big operating software company, cloud.

And then there's another like 10 companies, I think, are the largest weighting. And I didn't really think that would ever happen again. From 1999, the percentage of cap weighting of what just a few companies were, and it took a full 20 years to come back to that, but it's actually surpassed that. So you're're very top heavy in some of those big mega cap technology names anything stick out there to you in the technology in the waiting sectors in the s&p last year uh as far as performance goes i mean energy just being uh another laggard uh and i know we have we keep talking about it uh just as far as uh you know when is energy going to reverse? When are MLPs specifically going to reverse?

And our response has kind of been we don't care that much and we just keep adding along the way. So I think it presents a really great opportunity. And if you look at, like you said, they're tense. Generally speaking, the worst performing sector is not going to be the worst performing sector the subsequent year. And unfortunately, energy has been a lagger for a couple of years. But, you know, I mean, with the amount of carry and income that you're enjoying as a result of being an MLP investor, you know, you almost don't care that much and you continue to accumulate.

So that's looking good. Do you guys think that MLPs should be thought of as one and the same with the energy sector, Julian? No, not really, I guess, because I would say it's a different business model, really. The one we own is more like the midstream, so they're not so much exposed to the underlying price movement of the underlying asset or oil price or gas prices. price movement of the underlying asset, the oil price or gas prices. So you have to look at it more as like you could compare them to REITs, you know, in the sense that they own the right to, like, you know, the tenants being, you know, they're all going through the pipes and then you just charge a rent for that, basically. And so it's much more stable and I guess much more comparable to REITs

than to like the oil majors the sense of the business model. So I guess that's what we like. They're a landlord of pipelines that charge rents on what is flowing through their asset. I guess I'm kind of torn on this subject because there's all this conversation about energy, and it's sort of unavoidable. I don't expect the media in a three-minute soundbite to do all the parsing and discernment that I would expect us to do as investment professionals. But do you guys really care if the low C credit-rated upstream companies don't make it,

if their stocks go down 30%? That has nothing to do with our bullish call on energy. The integrators matter. The midstream sector matters because we're invested in it. But I don't have any thesis that weak, poorly managed, poorly financed, junk bond dependent energy companies are going to make it. Yet, I think that's what's happened at 14 15 16 as those c rated d rated you know companies have sort of gone to the wayside and private equity has come in and it's made better players in the space and i mean the thesis of having it be a pipeline so there's transportation of energy back and forth and there's sort of a toll road type of fee structure to it and so it's less commodity price sensitive is correct except for we've gone through periods of time when it wasn't correct and so what i would say is at at this point, because of this sort of, you know, change in that landscape with what you said, the junkier company is kind of going away, the

stronger players thriving and being better. I think going forward, it's a very investable thesis. And I think it will prove to be quite profitable going forward. I think we're even going to talk about that in theme number six of 2020. I was just going to say, it maybe presents opportunities to find value in the space. Because when the media is talking about these poor credits and things like that, it perhaps obfuscates the fact that these companies have changed their structures. A lot of private equity came in. They're not as dependent on M&A models for funding at this point in time.

So when they're kicking off yields in the low single, high single digits, excuse me, that's a great opportunity for us. It's interesting too what this does to the index as market cap weighted. I think a lot of the people have been arguing to go even weighted in index exposures have been just like the value growth debate. They've either been wrong or they've been early, which is oftentimes the same thing. But I will say that going into 2020 now, how much more dependent the index is on technology and how completely irrelevant energy is. Like energy is a weighting of the S&P right now. It's practically like the material sector.

It just is a non-event. And so the ability to kind of go add alpha into a portfolio with sector weighting and then selection within the sectors, I think is a great opportunity right now. So we enter 2020. I'm going to go through eight themes. We'll take the time we need on each one. But the first one was earnings will matter. And I immediately clarify in the first sentence the better way to have worded it is have earnings growth surprises will prosper.

I think that the market has set itself up for pretty ambitious expectation in earnings at an 18 times forward. I understand that you have a pretty high valuation in most other asset classes. I also understand that you have a Fed that is by nature of diminishing the risk-free rate, boosted the market multiple. But I think that the market is priced for roughly 10% earnings growth, certainly 9%. And if it were to get 8% earnings growth, that would not be a plus eight, that would be a minus five. And if it were to get exactly in line with earnings growth, that would not be a plus eight. That would be a minus five. And if it were to get exactly in line with earnings growth, it's not going to move much. So you're going to need some surprises in the market, I think, to differentiate this year. What do you think about this? I'll start with you, Julian. Yeah, I guess that's the challenge is we're going to end up 2019 with $163 of S&P earnings. Next year, the consensus is around 179.

So as you say, it's a multiple of 18, and that's assuming a 9.5% earnings growth. So it's a big number to achieve, and that's kind of discounted already. So you're going to need a surprise on that, or you're going to need to look at 2021, because that's what we do. Market being discounting mechanism, we're already looking at 2020.

And now people are going to start rolling their models. The analyst, the sell side, the buy side, starting to look at next year. And so the question is going to be in six months, where is 2021? Well, 2021 earnings are. So it's a tough target. I'm tired of underestimating corporate America. What about you? I mean, I wouldn't dare underestimate corporate America over the long run.

In the short run, that double-digit earnings growth is a high hurdle. I think, obviously, earnings will matter. And if we surprise, I think that, obviously, that will be a boost to markets. If we are a couple percent lower and the Fed continues to remain accommodative, and there's nothing crazy happening geopolitically or election-wise, I think we could still see another solid up year. So I think earnings matter, but I'm not exactly sure with everything moving together how it will shake out if there is a small miss. Is there a sense in the short term where the diminished CapEx, which I think is a net negative to markets long term, but could it be a boost to profit margins in 2020 as companies are spending less in CapEx? It's boosting EBITDA.

It's a great question, actually. I mean, in 2019, I would say that there wasn't a whole lot of CapEx, and I think it was trade related and things like that. So for 2020, I would say as trade tensions go away and companies do spend money on CapEx, I think it's great for the country. I think it's great for earnings. But in the very short term, just spending more money on your business to have future revenue increase, does that decrease margins in the shortterm or increase the price that decreases them in the

short-term? But all that to say, I think there's still a margin here. So we're expecting 9.5% earnings growth next year. I think markets have kind of discounted them pretty well. But all of those expectations, say 179 for the year, have been kind of on the low side, this entire bull market. So we've beat them almost every single time. So I think that's a positive too. And then I would say if you look at current levels of markets and you put that kind of earnings growth on there, the multiple being 18, technically 19, even pushing 19, if you just take 163 and add 16 points and put a 19 multiple on it, you only get about 6% upside in the S&P 500 from as we sit here today. So my point to saying all that is that they're all important factors,

but I don't know that there's anyone at the table that's expecting another 2019 and 2020. I'm not. I don't think any of us are. And I would expect that returns will be moderate. So that's, of course, as you know, going to be theme number seven. It's a coincidence every time. Better economy and worse markets. But I think it ties into this earnings theme.

I guess one question I put out there, Julian, is do we have a possibility of the broad conversation being true? Earnings maybe go up 9%, 10%. It's a good year in that sense. You have a positive year in market. It's not big, but then that allows for the backdrop for bottom-up investing and stock picking to really have a breakout year because it forces people to be more selective in what they're buying, as opposed to when it's not earnings-driven but multiple expansion-driven.

None of us are anticipating a 22 multiple at the end of the year. That would help everything under the sun. That would be a time to be an index investor. If the multiple is going to be somewhere between 17 and 19 at the end of the year, you can't really make or lose money on the market multiple this year. So you got to pick earnings growers. That's right. It looks like this is a year that's for stock picking and that's for bottom-up stock selection

because you're not going to have, like last year, you shouldn't have a 30% year where everything basically goes up. And so if you assume that the rates are on hold for a year and that multiples are likely to stay where they are, it's going to be down to earnings,

earnings quality, and sectors valuation, with some sectors being much cheaper than others like energy or even financials after a 30% move are still very cheap relative to the S&P 500.

So earnings growth, we all are in agreement, is a big theme. We'll move to theme number two. I love this section. Return to quality. So it's not about the debate between value and growth. I made the analogy from 1998- 2000. I would like to say that 2019, one of the most positive things that happened was most investors' rejection of insanity. I agree. These unicorn companies were not going to get into particular names.

Some companies had failed IPOs. Private sector valuations of $50 billion coming back down to $2 or $3 billion in the real world. Look, I don't think human nature has changed, but I wonder if there's a little bit of investor sanity that is suggesting that they do care about quality, they do care about reasonable economics, and that 2020 will be a year to monetize high-quality investments. What do you think? Go ahead, Dan, then I'll come to Rob.

Okay. Oh, yeah, okay. No, I remember being very pleasantly surprised over how much the market punished some of those companies with how they were going to completely change accounting statements and metrics that they used as far as it isn't about the shareholder anymore. Just total insanity like you're referring to. S&P 500 up 28%, 29% last year. Only two IPOs had a positive return. You had over 10 with a negative return.

The two highest profile IPOs, which again we won't say names, kind of glorified taxi companies down 30%, 40%. That's absolutely unbelievable. Absolutely. A huge surprise, which obviously feeds into that theme. And maybe there is – I mean and this is also at a point where – look at where things are socially. I didn't think would happen at that level of rejection. I didn't think – I was very, very – again, very pleasantly surprised, which does bode well for quality. So investors still care about quality, still care about profits,

and there is a rejection of companies that are all promise and no substance. So, Robert, maybe play middle ground on this. You have companies that lose billions per quarter that investors have soundly rejected. However, you do have money-making companies that are still trading at 30 times and in some digital streaming cases, 100 times earnings. So investors are not entirely rational overnight, are they? No, I actually take a multi-year horizon on the whole benefit of maybe value in our definition. So 2017, a lot of investors, perhaps those starting out, got a free lunch, right?

Tech companies are soaring. A lot of things are doing really well. 2018, someone stole their milk money, right? It was kind of a rude awakening. Perhaps know, perhaps last year, they got a little more prudent. And then we saw maybe the early innings of a rotation of value, I think, in September. So people started realizing, hey, these quality companies that are making real money, they have cash flow, they do really well, too. So I think it was a very educational experience to see perhaps across the board performance, particularly from the quality companies last year.

I think that's exactly right. And I think that it's nice to be able to talk about this in the context of offense, because we talked about it a year ago, defense, like the fourth quarter of 18, the market fell apart. And we say, hey, look at this telecom company, look at these consumer staples companies. They're down 4%, 7% when the market's down 14, 18. So you have this defensive characteristic that's always been there for quality and for value. But I think offensively you're starting to see some of it. I will just point out the analogy on milk money. Those hipsters don't have to worry about their milk money getting stolen because they use a digital payment processor. Yeah, that's right.

Totally cashless. It's very cool, milk money. Is the trade war on hold? I haven't had a chance. I guess I'll say this for our listeners and viewers. I don't know if my investment committee agrees with me on this or not. And I think that this is the biggest issue I went out on a limb with. Some of these themes are rather safe.

Some of them not so safe. The next couple are actually, I think, pretty bold. We've talked about the trade war a lot. We don't have to revisit where exactly things could go sideways with China. The phase one deal is getting ready to be signed next week. I think we all agree that's sort of behind us and what it means going forward. We're not expecting any big movement. But the point I make here is this concept of trade war flip-flopping.

I'm not predicting it will happen. I'm just simply predicting that it is a greater than 0% chance that it will. And then the kind of caveat to it that's related but separate is Europe, that we're totally accustomed to speaking about trade war risk as a China phenomena with US relations. And yet, as we saw in May, which was the largest drawdown last year, it was not China trade that got sideways. It was Mexico. It was fixed in six days. Not China trade that got sideways. It was Mexico.

It was fixed in six days. But my point being, I think Trump has a free political pass at tweeting trade threats with Europe. I don't think there's a person in his base that cares what he says about Macron or about Merkel or about the EU or what have you. And yet I don't think the markets are prepared for the potential volatility of some trade war noise throughout the year. I'll start with Brian and go to Julian. No, I think it's absolutely a good thing to put in there that it shouldn't be ruled out. But you know, and if there's anything that this administration has taught us, or that Trump has taught us is that you almost can't rule anything out because you never know. But you're right, nobody's talking about that. I think it's a very viable thing to put in there because I think it's possible. And I would not rule out more trade rhetoric with China

in and of itself, too. I mean, maybe phase one gets done, but then there's other things along the way. So it's not gone. I think it's going to stay with us. Julian, is the risk that a phase two deal doesn't happen, which I don't think anyone's expecting it to, so it'd be hard to argue that's a risk. Or is the risk that throughout the year in enforcement that something happens where the president just says, hey, phase one isn't going well, you're not buying the $40 gazillion of soybeans you're supposed to buy or whatever. I think that the trade war is on. I mean, what's off at the moment is just the tweeting is off. And that's really the main difference.

I mean, last year, he went from very aggressive to completely change his tone, realize, okay, maybe I need to win the election and I cannot win with the economy. But some 25% tariffs went to zero. They never happened. Some 15% tariffs went to seven and a half. So there's still a significant amount of drain from the U.S. economy in the form of phase one and phase two tariffs. But three and four came down or went away.

I think that's legitimate. That's more than just tweets going away, right? That's right. But I guess I'm talking about new threats. I don't see them doing new threats. Now we're talking about with France. In France, they have what's called the GAFA tax, so trying to tax the big tech companies.

And retaliation is taxing champagne 100% and stuff like that. Is it going to really happen? Probably not. They'll find a compromise. Is it going to hurt the economy? This is the big one out of this China. I feel no offense to our friends in France here,

but you would like to think that the U.S. had more, there'd be more leverage than champagne, right? I mean that's the only – like there's got to be something else. Well, there's Airbus, airplanes. There's other stuff, but that's the one I care about is champagne. Yeah, sure. You're here.

So essentially the resolution is mostly political and you can see it staying quiet because the political motive will still be there for it to stay quiet. Yeah, so I would think the trade war is still very much on, but I guess maybe it won't make headlines.

And also probably we're getting used to these tweets about trade wars and the impact now when there's a new threat is, okay, we know it threatens Mexico, but at the end of the day it's rational and it's not going to do something crazy.

Or even with China, like there's some huge numbers that, you know, were a threat. And then when he realized, okay, it's, you know, now is the deadline. He just, you know, back off because he doesn't want to help the economy. Robert, you have an appreciation for these things as I do and I think have a fair understanding of the political dynamic, is it possible that what Trump has to do politically is maintain a message of nationalism and America first-ism but find a different way to do it? The China trade thing has played out and he can't risk market volatility, economic risk. Is this maybe where this Iran thing comes in?

Does he have a way to portray what is a very popular message? And by the way, I also think he believes it. I don't think it's just purely the politics of it. There's no wag the dog accusation going on here. I think it's sincere. But does 2020 maybe present America firstism except for not with China and trade, that the subject has to change but the objective maintains? Yeah, absolutely. I think it's – you got to step back and look at how economic nationalism during the Trump initial election cycle was viewed as something new and perhaps a little bit strange for typical Republicans or conservatives. But it's become kind of a popular issue on both sides.

There hasn't been any punchback from the Democrats really on all these trade tit-for-tats, essentially. They're petrified of the Rust Belt states. It's not an issue that I think the Democrats are able to fight him on because they're more or less aligned with it. And so he's kind of checked that box and moved on. I think more or less not losing some of these trade battles counts as a victory for Trump. I mean, because we kind of forget where we started, and we just don't want the volatility from it anymore. I think the foreign affairs side of things is maybe where you're going with the question. Trump hasn't really established his chops there as of yet. He's gotten criticized for responses to various situations. But I think maybe to your point, this whole Iran deal, while vindicated in some sense the strike, it's an opportunity for him to reach out and say, hey, this isn't the only problem, economic nationalism. There's a foreign policy arrow in my quiver as well. And I think that may be where he goes with it. And so far, the Democratic response not to get political with it. It's been kind of confused as to what they're saying about the recent strike and so on and so forth. Yeah, I wonder if that could be an interesting theme

throughout the year of how you can have a cake and eat it too. You know, that's what he ran into in the summer of 2019 with the trade war, was there was a popularity around standing up to China. There was, as you said, a lot of the conservative establishments sort of decided that they were comfortable with certain protectionist rhetoric and whatnot. I maintained all along that an aggressive posture with China was the right thing, but he did it in the wrong way because I didn't think the trade deficit was remotely pertinent to intellectual property theft. But the point being, he found an audience. But then, of course, he took on macroeconomic risk, and you can't get reelected with macroeconomic volatility. So how do you get the cake and eat it too?

And I think that that's where maybe it will be interesting to watch some of this foreign policy. Can Trump portray some America firstism in a nationalistic message that resonates in battleground states? Something to think about. Merging markets. something to think about. Emerging markets. Daya, Brian, you guys have sat with me across the table from both of our senior portfolio managers in our emerging markets group. We have adopted a very thorough understanding of the long-term generational opportunity. You had great performance last year in the sector, and yet it still looks woefully undervalued to me. Am I getting ahead of myself to keep emerging markets as a key theme of 2020? Yeah, I can go. I mean, it has been a

secular theme of ours for quite some time for good reason. There simply is nowhere else to go to find that type of earnings growth at those prices. And we continue to find a lot of bargains, if you look at emerging markets from a bottom-up perspective. So it continues to be a theme of ours. And we're invested with great managers in that space. So I'll leave it at that. Yeah, I would agree. Everything Dave said, I think it's not that having it be a theme in 2019 hurt us or anything. they were up 18%. And they were on a relative basis up more than the index. And so I think it worked out quite well.

I think you have going into 2020 a potential for some other catalysts aside from just the valuations being attractive and the fundamentals and those economies being attractive. But trade war de-escalation is positive for emerging markets. being attractive but trade war de-escalation is positive for emerging markets and technically having that continued trillion dollar deficit and a weaker u.s dollar with lower interest rates could you know have a little bit add a little more wind to the sales but i think just the way we look at it it's just for from a valuation perspective and just from the thesis of having that um opportunity in that in that realm there's short-term catalysts there is yeah like there's some good to have yeah some pretty those catalysts have been headwinds for a while. To borrow from my own writing, I think that

Dave's focusing on the idea of the relative valuation, that you have the catalyst around the better-priced risk assets in the EM versus developed markets internationally in the U.S. The valuation story is important. I think that that economic growth will be superior. I think by what catalyst, exactly what Brian's talking about, you have earnings revisions that are improving, bottom-up companies. And then if indeed this trade war issue is somewhat muted, I think the slowdown that has really impacted EM, that you will find that global manufacturing did bottom in 2019.

I'm fairly confident about that. That dissipates some of the global headwinds. And then, of course, the dollar. That becomes the big question mark. I don't ever want to make the thesis dependent on the dollar, but that's different than denying that in the short term, a declining dollar or at least a dollar that stops appreciating against EM currencies would give a further price boost to that sector. Theme number five, I love me some illiquidity. It's a real behavioral economic lesson. I won't fully unpack it here on the podcast, but the idea being that,

especially we talked about second half of the year, volatility potentially increasing, that in those assets that frankly don't expose the price volatility because of the illiquid nature of the underlying asset. Investors are less likely to panic out of things that they don't see moving up and down on price every day. And yet you still have the same risk reward characteristics functioning in private credit, in real estate, in private equity, in a number of different things. Is illiquidity a story that we want to be on board with in 2020? Julian? That's interesting to have that as a theme.

Actually, when I was reading the piece, I thought that's, you know, you hear people talk about emerging markets or earnings, but I don't think I ever read anything like that. And it's so true, actually, to talk about illiquidity as a risk and an opportunity. You don't have a mark to market every day to worry about. If you don't have a mark every day, like when December happened and you have like 20% move, December 18, 20% move within weeks,

you would not see that. You'll see in the next statement at the end of the quarter and you wouldn't know anything that happened. And in the meantime, you would not see that. You'll see in the next statement at the end of the quarter, and you wouldn't know anything had happened. And in the meantime, you would stay very well. And so I guess that's, I think it's having some illiquidity and not having to worry about daily moves could be quite helpful. So, Robert, there's a risk in what we're saying because on one hand we're presenting that as a benefit to the asset class,

the concept that people don't see the daily volatility, therefore they're less prone to make mistakes. But, of course, they also may be able to lie to themselves about real risk, about real danger. Is the private credit world overcooked? Is the private equity world overcooked? Is the private equity world overcooked? And are we just simply papering over what is a fundamental fear? If you want to look at things at a macro view, you can always, you know, say a multiple of like the S&P or something that is higher than average, but it's so idiosyncratic. You have to look at the individual talent, the managers that are generating alpha in those spaces, right? It's just, you know, every market,

I mean, real estate in the US could be priced at a certain level, right? But it's very regional. The same thing holds true for different companies, whether they're in the private credit space and the private equity space. There's expensive companies, maybe those that wouldn't do well in the public markets as we saw a little bit last year, but you have to look for talent. It should not at all be underestimated the embedded behavioral modification benefit of some of these illiquid strategies. That's one of the reasons people love real estate, particularly in Southern California, because you look at the price you bought it at, you look at the price you sell it at, and you say, hey, wait, I did great. You don't look at the in-between movements that are actually there. Yeah. So, Dan, do you think that there are some illiquid opportunities that are more attractive than others in the alternatives world?

opportunities that are more attractive than others in the alternatives world? Yeah, I do. As far as, I mean, when we're talking about illiquids, I mean, the umbrella is pretty broad there. I think there's all sorts of weird risks you can take. And just because the marks don't move, it doesn't mean that there's no risk there. So there's clearly some opportunities. That there's no risk there. So there's clearly some opportunities. And it really narrows down not so much to the asset class per se, but as Robert mentioned, really the manager talent and their reputation, the firm's reputation. And making sure that a lot of things that we look for in a company is some of those factors we also look for in an alternative manager. Making sure that that stable capital base is there,

making sure that track record is there. So I think you really have to isolate it down to the manager, pick the right manager. And the marks at the end of the day, what they really do is encourage the right type of investor behavior. They don't promote anybody freaking out and jumping out at the wrong time. They're closing that behavior gap a little bit. Exactly, exactly.

So, Brian, I'm actually proposing in this theme that the illiquidity premium is dissipating to some degree, that you could almost argue there's a discount in illiquidity, and yet I'm now proposing it to be a tactical and valuable addition in thematic focus. What say thee? Well, I would say, I guess, so I'll answer that directly. But to go back to this whole IPO thing in 2019, I think one of the reasons why a lot of them performed so poorly wasn't because investors got smarter. But one of the reasons is because there's so much access to private capital in the private market. So that illiquidity has caused those valuations to become higher. So when they came to market, you know, they were already overpriced. But to speak to the paradigm in 2020 going forward, in a market that is at 18, 19 times, bond market has gone up and look at the landscape of the world and where value is, we've talked about emerging markets and energy things. The illiquidity market is something that

is unique and that provides certain opportunities and you get a premium for being illiquid for a future return. You get the also side benefit of having it being a little out of sight, out of mind. The marks aren't really there during volatile periods of time. But you get things like middle market lending and just some other opportunity sets that really just don't exist in the real liquid space. And so that's kind of what we're talking about there, whether it's private equity, whether it's hedge funds, those types of things. And definitely they serve a purpose in portfolios going into 2020. That's a good point. Or if they do exist in the public space or in the liquid space, it's totally different quality.

Different quality, and the returns have been had. It's already frothy there, and so we're finding the value in the more liquid space in those asset classes. Illiquidity often enables investors to tune out their worst behavioral instincts. It feeds a self-deception about asset pricing, which in turn creates a positive feedback loop when investors persevere through challenging times because the pricing enables them to see it less and therefore feel it less. You have this behavioral reality Robert was highlighting. And yet I think that at the end of the day, it can go wrong with bad manager selection. So you have to have a discipline where you're talking

about asset managers. They can be buying public equity or private equity. They can be buying traded bonds or they could be buying very illiquid middle market pools of loans. At the end of the day, the managers have to be talented. They have to be disciplined. They have to be selective. And you can just see the dispersion of returns in alternative managers is so high. Ever referring to private credit as an asset class is ridiculous. It's really incumbent upon us in our role as asset allocators to find that right quality. But I think it's a good theme for us to focus on good quality and illiquids next year. I think investors will benefit.

We kind of spent some time on midstream energy already. And if you don't mind, I'm going to skip over this because we're going to do a whole dedicated podcast. Julian has prepared a kind of presentation deck about a lot of our themes around oil and gas pipelines. We have some big plans we're doing from an investment standpoint that we can't get into detail right now as to how we want to get exposure to the space coming up into the first and second quarter of the year. But suffice it to say, oil and gas pipelines continue to us to represent one of the great opportunities in the investment market.

And with very high yields, people are getting paid while they wait. Theme number seven, Brian talked about earlier. The economy will do better in 2019 than 2019, but markets will not perform quite as well. Does anybody disagree with that assessment? And I assume if they did, it would be on the first one. No one's predicting 40% this year in stocks? Okay. So suppose you're okay with saying stocks will deliver somewhere between negative 6 and positive 20.

It's a pretty broad range. I'll go with that. In all cases, that would be worse than 2019. But the first half of that, the economy itself would do better. Anyone disagree? I'm, of course, laying that out on the basis of less global headwinds, GDP, being able to expand if you did, in fact, get some bottoming of business investment in third and fourth quarter, which is what I expect last year. And also that the monetary juice that is

flowing through, you know, is enabling further economic activity in 2020. Yeah. From that perspective, I just don't see many obstacles to economic growth. And as far as if the CapEx does pick up, obviously, we're going to be looking at that metric very, very closely. Then that could be tailwinds to the economy as well. Obviously, we haven't seen CapEx pick up meaningfully. That's a metric I will be looking at. If it doesn't pick up at all in 2020, that is going to be a bit of a red flag. As far as if these companies aren't seeing opportunities to invest capital, then that tells you something.

So let me ask you a question on that, and I'll let a couple of you jump in on it. Does President Trump in a second term or President Biden, Warren, Sanders, Buttigieg, or Bloomberg in a first term see it at recession? See it? Do we have a recession? I have to look at those Democratic candidates more closely.

I'm not sure if you can just clump them all together like that. Well, one of them would end up being the Democratic president. But I guess the point of my question, I don't have to ask in such a cutesy way. It doesn't really matter as president because I'm not suggesting that any of the people would be causative at all. Is our economy going to have a recession between 2021 and 2024? Or are you suggesting maybe it depends on who's president? I think this presidential election matters more as far as markets are concerned than past presidential elections. The economy or markets or both?

Two markets, really. Perception more than long-term economic growth. Again, is there going to be a recession? I don't see any obstacles. And the data just isn't there at the moment. So I would have to say no. For 21 through 24. Oh, for 21 through 24? Yeah, that was the question. Oh, that's a pretty long window. It is. Okay. I thought I was giving him a softball.

I'm putting 2020 odds at as low as you can be. You can't ever say zero. It's not zero. The odds of a recession in 2020 are low single digits. Does anyone disagree here? No. You'd go higher or lower? Goldman's is 20%. 30% or 20%. I mean, it's almost irrelevant.

I mean, it's one or zero, right? Are we going to have a 20%? I think there won't be a recession in 2020. Yeah. So what you're saying is that you can't put a number on the odds of a recession. It's a silly exercise. I think that's probably true. But, you know, there's like a percentage odds of like the Boston Celtics winning the NBA championship.

Or like the Titans actually winning the Super Bowl. Yeah. If you make a market and that's… Those odds are higher than where we could go. Okay. So I would say that we're all over the opinion to make it binary. No recession in 2020. Agreed.

And a recession in the first term of the next president. I don't think so. Yeah, I mean, I think... Then we go four or five more years without a recession? I think it's possible. I love this. This is like Kudlow over here. This is my dog right now.

That's economic optimism. I love it. I think it's very possible. And look at Australia. I mean, they've been, what, 17 years running? I mean, ask Jay Powell. I mean, if he pulls helicopter money every time there's a bit of a slowdown, there's no reception forever. Well, if you let the deregulation kind of take hold a little bit more in a second term.

I mean, it depends who wins, certainly. You can throw helicopter money forever and avoid recession in Zimbabwe and Argentina. I don't know how much a dollar will be worth in Bitcoin or in gold in that case. But yeah, I mean, that's, I guess... I think I just thought of a new podcast topic we're going to have to hit.

So this economy molds into the politics discussion. I think this chart is fascinating. President Obama was reelected with 70 percent of people in late 2012 saying that they thought we were in very or somewhat bad economic conditions. There were only 30 percent saying that we were in very or somewhat good economic conditions. Right now, 76 percent say we're in very or somewhat good economic conditions. Right now, 76% say we're in very or somewhat good economic conditions, only 22% saying bad. You can take a guess as to what the political affiliation of those 22% are. You talk about people, you know, whatever.

The presidential election, is it going to be the defining story of markets in 2020? The defining story of markets in 2020. But let me cheat. Not cheat, but help you. Yeah. I'm assuming the Fed does nothing all year. They don't tighten and they don't loosen. Yeah.

Fed funds is flat all year. Okay. I'm assuming that they keep buying on the short end of the curve with the non-QEQE for at least four more months. And there's no quantitative tightening that kicks in after that. And I'm assuming that the trade war doesn't escalate in any kind of meaningful sense. Then I'd say probably not. I don't think it will be the defining moment. If all of those things happen, then I think that the –

Well, then what would be if those – As far as moving markets? What would be the biggest factor? I guess I would say this. Incumbent winning and those things happening I don't think would be the defining moment of – Oh, well, but you're assuming the incumbent wins then. I was going to get both sides. I would say if the incumbent wins, then I don't think it would be.

I would say if the Democratic president gets in there, depending on who it is of those four or so candidates, it very well could be that defining moment. Do markets go higher in November, December if Trump wins? If Trump wins, they go higher. Yeah, I think so. Julian? I think so, too. I mean, it depends where we are at that point in time. But I guess to me the big question mark is the Fed.

And we're assuming a lot. I mean, we're assuming a lot. Last year we would have thought they would do three cuts and start QE again. So who knows what they do between now and the end of the year. Titan? Well, maybe they're going to try to stop the QE4, which was supposed to be temporarily. As far as the repo market, you're talking? Yeah, the repo.

Maybe they do, and then that could create volatility. They really say, okay, now that's it. And then they have to go back, and then it becomes permanent. And then that will help. I mean, at the moment, the market is pricing zero cars to maybe one car at the end of the year. What if, you know, it's hard to imagine anything else happening, but maybe that's where you could have really the big surprise. I mean, I think you could have earnings missed. I think you can have an unforeseen Democratic president get in there that wasn't consensus.

I mean, those things can definitely move markets, either one of those things. Yeah, I mean, the market is the – or, sorry, the election is the known unknown this year. I mean, we talked on the last podcast. I think I was maybe – I threw something out there, and I was promptly shut down about the Fed. I mean, I think the Fed is – status quo is what's going to happen. I don't think they would dare to raise rates this year. Oh, I don't think you're getting shut down by me on that. Julian might disagree, but I am with you completely.

I think the Fed is absolutely solidly sitting on their hands this year. What if you have another one or two cuts? I mean that's – I don't – that's not priced in. What would cause them to do that though? I mean I think there would be some positive sides to that as well if they're going to go ahead and move. If they're going to very clearly say, we're not going to do anything in 2020. But you're creating an upside risk. Yeah.

I'm trying to think more of an upside and downside risk. Like they're even more dovish than we can imagine at the moment. Yeah. Okay. Okay. Yeah. It's possible. All of these things are possible.

Trump will campaign with Powell. He cuts rates twice. He's like, I'm going to make him Treasury Secretary. No, I see your point. I think it's more likely they cut than they raise rates in an election year. I think the only thing that could surprise is probably a cut or two cuts that we don't expect. Yeah. Okay, that's fair that it's more likely they cut than raise, but I still am going to stand with Robert that I think they do neither.

Yeah. So my question comes down to is there a response to be had from markets into what happens in the election if we just sort of assume that the trade stuff and the Fed stuff is already baked in and how that plays out. List of things in our white paper that the president has control over at an executive branch level that don't have to go through Congress at all. Financial regulations that can include executive compensation, capital standards, consumer protection, oil and gas drilling on federal land, all approvals for pipelines and terminals. federal land, all approvals for pipelines and terminals. Effectively through financial regulations, stock buybacks can be heavily administered at an executive branch level, renewable fuel standards, all kinds of environmental regulations, merger approvals, both DOJ and state have a lot to do with that goes in control of the National Labor Relations Board,

various efforts to increase union participation or decrease, as the case may be, student loan policies, antitrust enforcement. Think about the implications there with big tech companies, trade and tariff policies, net neutrality. These are all things that are controllable executive branch level. at a branch level. So I still believe that the biggest issue is when people talk about Medicare for all and massive tax increases and so forth, that it is the fact that that has to go through Congress as to why markets are not worried about the big things. President Sanders doesn't worry markets about that stuff, because that stuff's not getting through the House of Representatives. But the things I just listed off are. So maybe that makes the point that even if the market's expecting Trump to win,

it still has further room to go if he does because they see a favorable response here, and maybe markets could drop further if you end up with a different result. Absolutely. And let's say an Elizabeth Warren gets elected president, and as far as coming, you know, no more stock buybacks. We're going to kill executive compensation and completely rework boards. You know, I mean, obviously that affects corporate America directly and has to have an effect on markets and it would be justifiable. So, yeah, I imagine if that type of candidate were elected president, you would see some significant volatility in the market.

And yet, can we position for that right now, months and months ahead of times? My last line in the white paper on the section, forecasts and predictions are challenging given the unorthodoxy of the moment. Humility is in order. Yeah. It's unactionable right now, friends. I'm telling you. I understand people who have strong opinions on the political side. We all have strong opinions on things,

but this is not investable stuff at this stage in the game. And when it is, you'll hear it from us first. When you look back at historian stats and the fact that it's hard to find an incumbent losing with a great economy, I mean, everything points to a re-election. So now we have to, in the tea leaves, find any signs that it's not going to happen this time would be the exception. But I think that's the point I'm making, Julian. I would push back against that a little. The point I'm making is that the history in the tea leaves may not be helpful because you're right. It's virtually batting a thousand in terms of where non-recession wage growth disposable income there's all these different metrics a lot of them of course in our

paper and things we talk about all the time but i would suggest that there's an awful lot of things that are right now taking place that are outside historical averages. For one thing, Trump's approval rating is 20% lower than it historically would be with this kind of economic- Wage growth. And unemployment. And so we already, that doesn't necessarily translate to an election. Disapproval ratings, excuse me, his approval ratings are not any lower right now than Obama's were going into the final year before his first term was up. So I'm not disagreeing. And certainly, if the economic data were what it is

now, and Trump were to lose, it would be an incredibly ahistorical event. However, Trump getting elected was an ahistorical event. Very good point. We just were living in unpredictable times. And I hesitate. Look, the day after the election, we made to say, yeah, we should have seen it. It was so obvious, unemployment, the economy, the market. We knew Trump was going to win. But I'm just simply pointing out the humility of the moment is we really don't know. We live in weird times. Absolutely. That's the humility. This time could be different. And like you said, you don't know. History is a great guide.

It's never gospel. I mean, that's a good quote to hang on to. And it's very important. I mean, Julian's talking about some data that's pretty ironclad. But it's purely backward-looking. It's very, very good. It's been a great predictor. But like you said, there's a lot of forward looking data that is out there now that hasn't been there in the past.

And it's important to try to reconcile those two things. And at least go through the thought experiment of this time could be different and arrive at the conclusion of this is unanalyzable or we don't know what uncertainty. It's very hard to actually think of a single scenario. So we're going to prepare ourselves for a range of outcomes. I'll violate my own expectation of humility with one prediction. If Trump wins Pennsylvania, Michigan, and Wisconsin, he's going to be reelected. How's that? Everyone good with that?

Those are pretty good odds. Yeah, there we go. In conclusion, first of all, thank you all for bearing with us on a long and fruitful discussion. What a year 2019 was, but as we get ready here into 2020, a lot of key themes.

We do expect more muted results for investors, but not necessarily negative results. We're keeping our risk radar up and very cognizant of market valuations, trying to be selective in a higher quality dividend growth equities, maintain best of breed type exposure, meaning high quality manager selection in illiquids and alternatives and small cap stocks in emerging markets and in those that are handling fixed income. We want to be selective and do the extra work necessary to manage risk in this period. We're aware of the fact that various cyclical bouts of inflation could be

out there but continue to be primarily concerned in a secular sense of the deflationary stories that have really dominated global economics for over a decade now. And I think that 2020 will be another enjoyable year for those of us who are blessed on a day-to-day basis with getting to manage capital for real-life people who have real-life goals that that capital can help play a role in fulfilling. That's what we do every day. So the group of esteemed gentlemen around me do. And I look forward to working with all of you in 2020. Reach out to us with any questions. We've talked a lot about politics and markets and economy today. And if you are interested in writing a little review of our Dividend Cafe podcast,

sending us a screenshot of it, it can be a really horrible review. We don't need you to say good things about us, but we will send you a free copy of my new book on Elizabeth Warren and her implications to the U.S. economy. So take us up on that offer. Let's have a great year, guys. And any closing comments? Are we all good? We've covered a lot. Yeah, that was a good one. I noticed the coats on and coats off here. We got kind of like a little rivalry. All right. With that, I will close this out. Thank you, as always, for listening to The Dividend Cafe.

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