The Dividend Cafe - TBG Investment Committee Talks Trump, Tariffs, Taxes, and Brexit

Episode Date: December 16, 2019

Topics discussed: On Friday the regular Dividend Café for the week went out, and it included as much of an update as possible around the UK elections and the China trade war … But within hours of the submission there was more news, and then the next day even more, and then over the weekend even more still. I don’t want to wait until Friday to provide the latest and greatest … Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. there had been a little bit of a break with all of us getting together. And now in our last week before we go into the holiday break, we're able to not only come back together, do a special podcast, but do it around really what has been one of the most newsworthy weekends in a very long time. And the fact of the matter is that if it weren't for the kind of new normal of there constantly being like huge news-breaking events that don't seem to really be that big of a deal on a relative basis anymore. Just with the, you know, like for example, they're going to impeach the president Wednesday and nobody cares at all. No one's paying any

attention. That's kind of the world we're living in now where I think maybe the shock and awe of new stuff has gotten too much play. But economically, from a market standpoint, I certainly think the things I'm about to talk about here with my colleagues is indeed a very big deal. So before I introduce the guys, I'll tee this up as to what it is I'm referring to. The long awaited phase one trade deal between the United States and China was verbally agreed to by both sides as of kind of last Friday. And it really was sort of a roller coaster. There was some just shamefully irresponsible news coverage as to what was going on and not going on and rumors and someone said this, someone said that. Finally, you got to a

point and frankly, even I don't say this often, even in the media's defense, there were times where the US, the White House was saying things and the China was saying something different and vice versa. So it took them about 24 hours to get their releases aligned. But as of Friday, a phase one trade deal has been announced and we're going to talk about what is in it and what it means. And of course, the market has just been rallying dramatically. And as we're talking here on Monday, markets would open a few hours and we've been up about a couple hundred points on falling up on what was a market rally last week. However, it doesn't stop there.

In addition to the phase one U.S.-China trade deal, by Thursday evening in U.S. time, pretty early, it was later into the night in Britain, but the results and really from the exit polls, this is one time where the exit polls were spot on. Just absolute blow away numbers for not only the re-election of Boris Johnson to the prime minister and the very risky special election he had called in the UK, but then in terms of the build-up of Tory votes in Parliament, the Conservative Party, now with a massive majority, Labour Party, most diminished they've been since the early 80s, and all stars aligned for the successful orderly Brexit event to take place, as has

already been negotiated between the European Union and Parliament for January or so of 2020. I'll throw in, I don't want to spend a lot of time on today just because it's too ambitious of an agenda, but then even this NAFTA 2.0 becomes this other event where if the Brexit vote didn't happen last week, and if the China trade deal wasn't going on, on a standalone basis, you know, NAFTA passed almost 30 years ago, 1993, you're talking about the renewal of one of the most significant trade agreements in world history with North American trading partners. The House Democrats are now behind it.

Labor unions are behind it. The White House, of course, is behind it. Over the weekend, there's some noise around it. So we'll talk about that, too. But in theory, NAFTA 2.0, U.S.-China trade, Brexit, all kind of resolving themselves just sort of over the weekend. And you could add maybe a fourth story that the cowboys just beat the heck out of the unfortunately the rams yeah um okay so i have daya pronounced on my

left i'm gonna start with day we're just gonna go around talk about these different things china trade deal i'll spill the beans my perspective is that it is a big deal and is overwhelmingly bullish, positive, optimistic, and yet. The only thing that I don't feel resolved on is the biggest thing I wanted to be resolved on, which is whether or not it gives enough certainty to reestablish some business confidence and capital expenditures. But because we don't have the written version, they haven't bilingually written it yet. And the legal language in a bilingual is a whole separate process. But because we don't know exactly how the business confidence response will play out, all the other things that are so important, and I'll walk through those as I'm talking with you all.

But I wonder if maybe there's still an uncertainty out there. As far as, yeah, so the text of the agreement isn't yet completed, right? And nobody, no, either party hasn't signed anything. Nothing is being signed until January. Until January. And the bilingual legal version, now there is text that is not legally binding of the – like a deal memo that both sides have said is accurate. Just the legalese of everything is not completed yet. Okay, okay. table. But net-net, there's been a reduction in uncertainty because of what both sides have

announced in the phase one of the deal. I think that as far as business confidence goes, I think exactly what happened as far as rollback of existing tariffs and the tariffs that were supposed to be put on this Sunday are not going on. I think that is a very bullish indication that both sides are willing to communicate. They're willing to work together so that there's not going to be an escalation going forward. And I think that reduction in uncertainty is going to be helpful for business confidence, but there's still some on the table. It's not exactly clear sailing for the rest of 2020. So yeah, I think overall bullish for business confidence, but still a bit of a wait and see for me as far as the month of January

is concerned. Brian, is it as simple as that, diminishment of tail risk but not elimination of uncertainty? Yeah, I think so. I would agree with that. I think until you actually get the phase, whatever it is, that ends up being the final kind of deal and you get a commitment from both countries to sign something. On the phase one. Well, so if there's a phase one and then a phase two and then a phase three, uncertainty will go down along the way. But as far as business confidence goes, we're going to get CapEx going again. I don't think that really is going to turn on until it's actually done. So this was a good first step. I mean, they haven't actually signed it yet, but

you've got removal of tariffs on Sunday. You've got decrease by half or so. It was September. Yeah. If you don't mind, maybe I should recap for our listeners the specifics on that. for our listeners the specifics on that. You were going to have $160 billion of imports begin being tariffed. Tariff is a synonym of taxed beginning on Sunday. That is off. And then there is $120 billion of imports that began being tariffed at a 15% rate, but only in September. imports that began being tariffed at a 15% rate, but only in September. And that's been cut in half to 7.5% tariff. However, there are $250 billion of imports that were tariffed beginning in 2018. No change in that at this time. There was a report from the Wall Street Journal Friday that that was going to be peeled back to some degree. And then the president denied it. And then there were tweets and then there were pressers and all the things. The $250 billion is still on. China says, and I quote, there's a formula for

reduction in the phase one deal on this. Bob Lighthizer seemed to declare over the weekend that there wasn't a lot of specificity, just sort of an openness to repealing those legacy tariffs. So the specifics are still monumental if you measure it as what could have been the tariffs that were going to come on $160 billion and a cutting in half of tariffs on $120 billion. But the high tariff on $250 billion stays on. Yeah, I think it was sort of that, you know, the idea of openness around that $250 billion was sort of similar with like the verbiage they had in there about the intellectual property. And it's also like, yeah, in the spirit of this thing that we're going to work on that, but there's not actually anything official in the phase one deal on either of those things. deal that really got the president behind this. And it's certainly on paper, the most headline popping of it is China's commitment to buy 200 billion of U.S. imports over the next two years. It would be, and supposedly 40 to 50 billion a year of additional agricultural

purchases. It would be the largest pickup year over year in history of China buying from the U.S. And there's a lot of doubt that there's even the bandwidth for them, like how many soybeans do they really need? Is there ambiguity in your mind about the feasibility of China buying $200 billion more things from the United States? I guess they have a history of not delivering on promises. So I would, you know, I think we have to be a bit worried that this is, you know, it looks great on paper and what the reality of this deal will be. But I guess at the end of the day, it's, you know, step in the right direction.

It's, I guess it makes it easier for, you know, management teams who are going to meet like us, board meetings and think about, okay, what do we do next year? Can we, is it more, how does it look, the environment for us? And I feel like with this phase one happening and then you're still going to have risk out there that it's never going to go away completely.

It's a trade war, so you're going to have to live with it. But the economy can take it, and you're going to have to get used to invest in that environment, I guess. So I think it's never going to be like total green lights, but probably good enough for business as usual, I guess. But isn't that interesting, Robert, that what Julian's describing, I think, is totally accurate. There's kind of this permanent uncertainty that now is sort of brought to the table. And yet the market rallies at any relief around the uncertainty. And yet it is kind of an uncertainty that the president invited by going down this path, do you think that we'll finally get to a point where the import-export tariff side gets separated from the intellectual property, the technology relationship, that those things will be separated? Or is it going to stay all conflated together?

You know, no question when I think about it, it's a good deal. So everything that Julian said, I would agree with. It's good. It's not a bad situation. It's good what's happening in terms of income and progress. But with regards to tariffs as a main tool versus what maybe the predominant aim should be like IP, I mean, Trump is a tariff guy. He called himself tariff man.

So first and foremost in his mind, and possibly that of the democratic mind going forward too, are tariffs as a tool. So I do not think that tariffs will be separated from a major deal going forward. I think now with this, and you also see with UMCA to some extent, he's looking primarily at agriculture as the main tools in this trade. We're not the underlying, maybe more structural aims that we and maybe some members of the business community would look for. Agriculture is important, certainly, but the bones of a good trade deal are not, in my opinion, being addressed thoroughly yet.

So there's maybe a political advantage in some of the farm states if you do end up seeing a big pickup of revenue there. I'd be curious to know if the pickup gets us above where we were before the whole thing started. I mean, that's what's interesting is right now a lot of the pickup is just making up for what it dropped, and I wonder where net-net you end up. Dan, it's interesting to me, and I don't know if you've had to think about this at all, so I don't want to catch you off guard, but all the talk is on the agriculture side.

There's $200 billion they've committed to. Why aren't we talking about energy? Where's the natural gas imports here? billion they've committed to, why aren't we talking about energy? Where's the natural gas imports here? As far as more of an energy story

to all this, yeah, that's been very, I'm totally devoid of any sort of headlines and stuff that I've read, but won't that be a natural result if both sides come to the table and more of an agreement being stamped out? All I can tell you is I don't know what we're going to sell them if we're not selling them soybeans and liquefied natural gas.

I don't think they're going to be buying pillows and toys from the incredibly cheap labor of middle America. Yeah. So, I mean, I think that – and again, I'm not exactly sure. I do think it's a big deal for markets. I think a lot of this has been priced in. I know you think maybe some of it hasn't been as far as maybe the existing tariffs being rolled back. Maybe you don't think that's been priced in.

I think the way I would summarize it is that – and I think it's rather evident. The fact that December tariffs did not go forward was totally priced in. Okay. Yes. Had the December tariffs gone forward, markets would have roiled. Okay. The September cutting in half of tariffs was maybe not fully priced in. That's why you're getting maybe a couple hundred points. But to the extent that all of a sudden the $250 billion of 2018 imports,

if some of those tariffs were coming off, I do not think that's priced in. Got you. It's also not happened yet. Right. Okay. Yes, it's not happened yet. We're still waiting on the text, like you said. I think that this is a good step for if you are any sort of involved in the energy market and you are an exporter, this is great news for you.

And I can only see this helping energy names. So I think it's a positive. I'm not exactly sure, like this deal that has currently been done, this phase one of this deal, how exactly that ties into exports. But I do think that it is a positive. This is the part that's bothering me, Brian. Farmers got to farm. And then if they don't have buyers and they end up with overcapacity, overproduction, oversupply, it affects prices, affects yield. But on the energy front, it's different because they have to go build terminals so this

comes into the capex if china's committed a certain dollar amount of of energy then you have a shovel ready project to go do capex around if you don't have specificity there it's a little more ambiguous then it seems to me the agricultural community is getting less ambiguity than the energy side is. Are we going to get, or is the energy side maybe able to just deduce, as Dave is suggesting, obviously there has to be some net positive for crude and natty gas exports for U.S. producers, and maybe they can go build around it. I'm wondering if they're going to be stuck in kind of a purgatory. Yeah, I mean, energy was in the list of things that they had sort of loosely committed to buying in that $200 billion. It was $30, $40, $50 of agriculture goods, and then it was energy and manufactured goods and services and so forth. But I agree with you. I think it's strange that

it's low-hanging fruit, in my opinion, to have a certain dollar figure associated with something that we can produce a whole lot of as the world's largest producer of it and ship it over there. And the world's cleanest producer of it, too, I would add. Yeah, exactly. And so natural gas, for example, which we've invested in. I agree. I think that's low-hanging fruit. I don't know why they haven't addressed that.

I'd sure love to see them do that, but so far they haven't. They've just sort of lumped energy, quote-unquote, into the list of some stuff that they may spend money on. But your other point was good, too, which is I'm curious on where they actually get back to. So $200 billion, in addition to what was already decreased over the past couple of years, gets us above maybe where we were in 2017. But I don't think it's astronomically above where we were in 2017. astronomically above where we were in 2017. No, I agree. And I think that it reads to me like it's for the headline of saying the trade deficit came in as opposed to the economic substance of a greater amount of global trade that is mutually satisfying.

Good point. Yeah, I mean, 400 and what's the deficit we're trying to, $420, $30 billion. So we're chipping away at it with these things, but it's never going to go to zero. A larger trade deficit with South Korea and Taiwan and Mexico. Julian, what is your thought in terms of the market impact on a bottom-up basis? Do you think that there are individual companies that all of a sudden there's a kind of actionable benefit here? Or do you think it's more still a top-down macro story that, as Dave and Brian both alluded to earlier, on the margin risk is reduced, but you don't necessarily see something specific enough to go,

this got more investable today than it was yesterday? Well, I guess there's like with the, you know, three green lights we got from, you know, Brexit and trade war and then USMCA, clearly it's like great for, you know, top down approach to like, you know, risk assets in general. Then specifically on trade war, I would say, you know, you know, big exporters, of course, are like the semiconductors, you know, sector that are more exposed to trade than, you know, big exporters, of course, or like the semiconductors, you know, sectors that are more exposed to trade than, you know, retailers in the U.S., I would say, for instance, probably would be, you know, would have a bigger impact. So it could be interesting for these sectors. Semiconductors, I'm thinking in particular, I guess there could be more. But from a bottom-up, yeah, perspective, I can see.

And you can see some of the sectors are moving already quite a lot on this. But what do you think about the idea that a phase two deal, which really at this point is very likely to not be discussed until 2021, that it will be over a year, kind of sidelined for the entirety of 2020, that phase two is where you're going to actually pick up the technology war? that phase two is where you're going to actually pick up the technology war. Is there going to be uncertainty in the supply chain, semiconductor space, the overall idea of technology transfer of IP that's taking place in China? Are we kind of on hold with that? Well, I think more than phase one, phase two, the way I think about it is more about elections. And I think you have elections, and until the election is behind us, nobody's going to want to shake the tree of the trade war too much.

Trump realized that. He wants the market up. He wants the economy being in the best shape so they can be reelected. So that's probably why it completely changed course in the last few months. Now, I agree with you, but do you mind if I play a devil's advocate? I agree completely, by the way. So I'm worried about after the election. Because once he's reelected, then what?

And I would argue, even if he weren't reelected, I don't know what Democrats are going to come in and right away look soft on China by saying, oh, I'm taking back those tariffs. A Democrat would get hammered for doing that now, ironically. And so ultimately, there is some 2021 2021 risk regardless of where the election goes. But I wonder though if it's true. I believe it is and I certainly believe it should be that net-net, the positive thing for Trump to do is now lay low, take a headline victory on phase one and not let any economic disruption come in. But what if the text of the agreement comes out and the hawks, both in China and in the U.S., hammer the deal like, oh, this didn't do enough and the president looks weak, hits all his buttons. People calling him weak, people saying he folded, people saying this isn't much of a deal. Do you still have some uncertainty with the president politically that he wants to look like he really socked it to China?

I guess we're always a tweet away from disaster with him. So, yes, I guess you have to. We've seen that before. So I think you always have that tail risk of some quick reaction to something completely unexpected out of the blue that could spook the market and create some volatility. But I guess ultimately, usually it's been quite reasonable.

I think the way it's been, its communication is erratic. It can be very aggressive. But at the end of the day, it kind of makes sense. The tariff that was going to come in December 15 would have been really bad. It was just a threat. Here's the gift to markets on that risk.

I'm going to do the ultimate alliteration here. A Trump tariff tweet risk. A year ago in December, he was calling himself, I'm Mr. Tariff Man. Now he's getting impeached. Mr. Tariff Man. Now he's getting impeached. And I think the risk of an unpredictable tweet that could kind of throw things off would have been, we live with it being 10%. I now think it's 1%. So it's not zero, but it's way lower because it behooves him to really have this stand-up economy and economic story and economic feeling in the face of the impeachment story. I think the impeachment helps the cause. But you're right. We're always a treat away. You don't necessarily know.

But it's very hard for me to believe. And again, now I'm reversing my devil's advocate from before. I don't believe that the hawks of the administration, like a Pete Navarro, were not told ahead of time, you will not come out and bad talk this deal. It makes no sense to me that he would allow that to happen in his own administration. He would get fired for less than that in his administration. So yeah, you would think. So Robert, do you have any thoughts on the politics of this all? Do you think this is net net beneficial to the incumbent president running in reelection? I do. And I think that's one of his aims. I mean, you want a strong economy, strong markets in the year running up.

I think from a lot of perspectives on uncertainty, it does a lot of those things. Something else I wanted to touch on too, what do we think about financial services in light of the deal? Because there was some supposed opening up of the Chinese markets there. I mean, my perspective is, you know,

hopefully that lends a little bit more visibility to what's going on there. We've talked a lot about how there's that disconnect between the economy in China and then access to that economy through the financial markets. Do you think there's any benefit to that? Well, thank you. Let's discuss that because we've only discussed two of the four points of the deal. There are four numerical points in the phase one deal that they've centered around. We've talked a lot about the trade deficit, ag purchases, and tariff aspect.

Number two is the currency we're going to get to. Number three was IP protection and technology transfer we've already talked about. Number four is what Robert is bringing up, which is greater access to China's financial markets, not merely trade markets. And so I think there's a lot of question marks around where capital markets activity could benefit there. And yet it certainly strikes me as asymmetrical. I don't imagine there's any risk of things worsening. And I think there's a lot of

potential of things opening up i'd have to look at how some of the the big u.s investment banks are trading off of it but to the extent you have greater access to a marketplace that large and u.s investment banks that are as good as they are it strikes me as impossible to think they will not find ways to have more profit centers around greater access to these capital markets. Do you follow me, Brian? I do. I mean, I would say, especially in that arena, we would have by far the competitive advantage. So if they're going to open that up and there's all that opportunity there, our firms would be in the place to take advantage of it the most out of any other in the world,

in my opinion, just because of the size of our capital markets and the experience. And I'm ordinarily quite skeptical of any time China is saying they're going to open up the markets. But let's not forget, China has had issues, whether publicized or kind of held close to the vest on this whole shadow banking system over there. So they could perhaps use quite a bit more expertise and efficiency in the form of United States financial services banks. Yeah, I mean, I see those two things as benefiting them as much as benefiting us. Like not manipulating your currency and then allowing access to capital markets,

those two things go hand in hand in some way. Like the currency will be more trusted and unmanipulatable, less manipulatable if capital markets are open and big and efficient and liquid and the whole thing. And that actually is good for their country. So I think that's low-hanging fruit for them to agree to. So in terms of the sector aspect, we've talked energy, there's agriculture

angles, but in terms of public equity markets, Julian, is financials up at the top of our list of where we see this affecting technology, energy, financials? I'm just looking at the list of sectors. Without any names. I'm trying to think about the sectors. I mean, I guess, I think financials probably a long shot, you know, what China can do to the earnings.

I mean, I guess I would be much more focused about the yield curve and the Fed and, you know, the U.S. economy or even Europe, where you have pretty big presence and Europe is, you know, with Brexit now behind happening and the uncertainty probably gone. That could have quite a big boost in Europe. So I guess I would say maybe materials,

industrials, tech. How about autos? We don't own autos. But they dropped the tariff on incoming autos into China. That's an interesting thing, by the way. The deal has not told us what China's reducing the tariffs they imposed on our imports is. I'm really mystified as to why that is. I just assume it goes without saying that they're reducing tariffs, too.

But no specificity was provided. What tariff are they charging on this additional $50 billion of agricultural buys? We don't know. I guess U.S. Trade Representative, you call him Lyle Iser? That's how you say it? Okay, yeah. That's how I say it. Over the weekend, he was answering questions, you know,

this number everybody's asking. And so he just said the specific breakdown of target in individual communities will be classified, but it won't be public. So we will never know even when it's signed. So it's just secret sauce. I guess that might be for the best. It could keep the hedge funds from being able to front run it or something. Sure. Yeah, I could see that.

So, Dave, overall, what do you think from a currency standpoint when they say that they now are agreeing to transparency and what they're doing with interventions in the Chinese currency? You saw that it dropped about 1% – excuse me, it rallied about 1% a dollar on Friday. Are we overstating the case to say that that might be one of the bigger benefits is the kind of subtle removal of risk in global currency markets, that uncertainty that has sort of persisted. So just as far as kind of a reduction in the currency wars or the manipulation of their currencies so that their domestic producers have an unfair advantage? Yeah, you know, we don't want to be condescending to our listeners, so I'll just say it without trying to do a simplified version.

The problem is that there's so much deception and disingenuity about what's really gone on that the coverage of this is sort of half right. They're saying, oh, China's agreed to manipulate their currency less to the downside. manipulate their currency less to the downside. However, China's been doing nothing for four years but manipulate their currency higher, and all they've been doing lately is less manipulation higher, which we're in the U.S. calling manipulating lower. You following me? I know it's complicated, but it's a really important distinction.

And so if China just took no intervention at all, hands off, that currency skyrockets. And yet there's a narrative that's been very important to protectionists in the US and to the Trump administration that, oh, China's intervening to weaken their currency to give their exporters an advantage. It's just not been true. It was certainly true for over 10 years and throughout the Bush administration, but it hasn't been true for a long time. So now the coverage of it gets a little skewed. The reason I'm bringing it up and making this point is that we talked a lot as investment committee back in August, and I wrote in Dividend Cafe about the thing that really scared

me more than anything. And again, the risk may have gone from 1% to 5%, but the risk went higher of the US for the first time, threatening really insane currency retaliations. It feels to me like that went away mostly in September and now is completely gone in the ash heap of history where it belongs. I don't want to be melodramatic and say that something no one's talking about is maybe one of the biggest deals of all this. But that is really how I feel. I don't want there to ever be geopolitical and economic discussions and activity that in undergirding it is the threat of the U.S. doing really destabilizing things with our own currency. I feel like that risk is off the table. Yeah, I believe you. I think that risk is off the table.

And as far as the currency manipulation goes, I'm not sure what hurts economies more, either some sort of currency war or the tit-for-tat tariffs. But yeah, I mean, that's completely off the table. And to the extent that China was – so you're saying that because – so you're saying they weren't manipulating their – isn't that manipulating their currency to the downside if they're not letting their currency appreciate as it should? No, they are intervening to, yeah, they are holding their

currency in place and manipulating it up to the upside. It would be collapsing. Okay? And they are manipulating it to the upside, largely to control capital outflows. And now

they decelerated in that process since the trade war. And just as a note for listeners, too, a significant amount of non-reserve currencies, so mainly the dollar, so many countries and central banks intervening their currencies around the world. Because if you're pegged to the dollar, you have other ties to the U.S. dollar, other reserve currencies. You kind of have to if you have foreign denominated debt, things like that. Well, some of us would argue that any manipulation of the interest

rate is a manipulation of the currency. That's right. It's a defect, yeah. I think that's the needle they have to thread, or they have been threading in China, which is they have to keep it weak enough to stimulate exports and keep their economy growing, and they have to export-led economy. They've got to keep it strong enough to stave off huge capital outflows like

what happened in 2016, the first time they kind of devalued that way. And that's what they've been doing. So, yeah. I think there's more research to be done around the parallels to Japan in the 80s after the famous Plaza Accord. Ultimately, China's free reign as this export giant really kind of ended when the Plaza Accord took place and the currency was sort of forced into some kind of bandwidth with a ceiling and a basement. But I think that really, when you start hearing the Treasury Department talk about their ability to intervene to retaliate against what China had been doing, not only

because what they described China as doing was not even accurate or it was painting half a picture, but we're the world's reserve currency. And that's the slippery slope where that whole status starts to change if you start to do reckless things like that. Yeah. Or threaten to. Threaten to. It's ridiculous yeah uh so larry carlos said yesterday and the morning news shows that he

believed this has adds half a point to gdp growth in 2020 relative to what it otherwise would have been the phase one deal the phase one deal um perhaps he was also coupling that with the with the nafta 2.0, the USMCA. I'm inclined to believe that projection when I look at the economic impact just dollar for dollar of taxes paid was about 0.3% of GDP. I would certainly argue that you could get another 0.2 out of renewed business investment. Half a point higher in GDP. Were we going to be two and now we're going to be two and a half? or are we going to be one and a half and now we're going to be two? Someone throw out the truth.

I'd say in the middle of those two, I think we were going to be just slightly sub two and maybe now we'll be two four or something like that. That's my estimate of it. But I agree with Kudlow. I think it is stimulative and I think it will result in a higher GDP than otherwise would have. I hope that part of that is because of CapEx. I just think that, as you've said, it's like we have to get, as you mentioned, we have to get through the election and kind of see if the tune changes before businesses really kind of buy into it and really go spend their own money to build and do their investments.

So, well, so, but it sounds like you're saying, though, is that that business investment will not be a measurable factor in economic growth in 2020. I think that it will be, but I just think it won't be as big as it could be. Muted. It'll be muted. Julian? Well, I guess I think the forecast is consensus by 1.8 at the moment for 2020. So it's probably half of it is already priced in. So I would, I would guess the revisions are going to be a bit higher and then we might

reach two, which is still a bit lower than last few years. But I'm, I guess I'm really thinking more like after the election and I'd like to, I'd love to, to hear what you have to say about, you know, if we go to a scenario where Trump is reelected,

how do, how do you run business when you have only your second term is the last one? Basically, you're not going to try to be reelected. So you might go for a very tough trade war. You might do stuff you wouldn't do otherwise. Yeah. I mean, obviously, any historical rulebook doesn't exist with the current president. I think there's a lot of things he would do

that historically would not be done, for good or for bad, I don't know. But I will say this, in terms of what's a governor on how a second-term president generally has to be held accountable, and this I think would apply at least equally to President Trump,

if not more so, they all care unbelievably about their legacy like i do not believe a second term president trump is interested in governing over a massive recession i i don't think he would mind if he got a mild recession early or middle of his term and then he could take credit for curing that recession. But I don't think that sort of erratic and dramatic re-escalation of trade conflict in a second term, just because of the political risk of re-election, I still think he's going to care deeply about the headline story of the greatest economy ever and all those things.

So, you know, the motivations are probably still in place. That doesn't necessarily mean the execution and the policies will be. Do you guys want to switch gears to Brexit? Sure. Let's do it. Yeah. What a great election. Yeah.

Indeed. What a great election. I wish they'd done that two years ago. Yeah. Well, you're right. Yeah. What a great election. I wish they'd done that two years ago.

Yeah, well, I think that there is a noticeable difference in the way in which Prime Minister May, Theresa May, prosecuted her case. And the package she was delivering to what is a very politically diverse British people versus the way in which Boris Johnson teed this up. People can debate on that forever. And I doubt that many of our listeners right now are very versed in the nuances of British politics. I don't even know what I am. I really need to get some hobbies or something. But I think that the risk of a new referendum on Brexit, which I'm thoroughly convinced if they did it, it would have passed again. But it would have been just an utter affront to the whole concept of democracy. That's gone. no deal Brexit, which I've teased out all year, a big part of me wanted to happen because I just

wanted three days of high volatility followed by, oh, this is a total complete non-event to permanently chastise the melodramatic media and the elites of the European Union for their utter disingenuity. I cannot comprehend something that would be worse for Germans than cutting off the British as a customer. It's just utterly ridiculous. So they will get a trade deal, and they will end up with a bigger trade arrangement with the United States. And most importantly, they will have reestablished national sovereignty

over their own trade deals, whoever that trading partner may be, and the way in which they execute their own immigration policies, national security, etc. Tremendous event. Now, that volatility that could have come from uncertainty around Brexit is now presumably removed. Do you guys buy the story? And maybe you can tell by the way I'm asking the question that I don't fully buy it, that this is kind of a global indicator that no, the world is not going crazy left wing. Corbyn lost because for the same reason the Sanders-Warren wing is, it's all hype. The world is actually still pretty conservative. And the countryside of England delivered this election despite the big city elites. And the same narrative plays out in the United States.

Is there a parallel in the British politics to the U.S. politics? Because most would argue that there was in 2016 is 2020 about to repeat robert i i mean britain is very specific i mean i corbin's kind of a loony by by a lot of people's standards too so i think it's a leadership issue by what standard is he not a leader i'm trying to be nice i think that word that word is actually from no yeah i think you're right yeah that's a nice point that one um you know i i think it think it's largely a reaction to the degradation of national sovereignty more than anything else. We saw a lot of that in, you know, Trump's rise in this country, you know, the hunger both on traditionally, you know, labor-intensive left-leaning groups in the United States. And we saw it largely in the U.K. as well.

United States. And we saw it largely in the UK as well. I mean, to your point, something you mentioned, they converted labor strongholds that were held for decades, relatively strongly by comparison over to the Tory side, that might have gotten them over, but did it get them over by 50 seats over majority? You know, those things might have been good for the incremental voters, but people swayed big time to the cause. And I think Brexit was to Brexit. And you can see that to Nigel Farage and the Brexit Party said, Hey, off you know you're johnson's going to get this done for us so those votes swung over to him too oh totally yeah it's a big part of it so do you think uh day is your is your instinct that there is a um foreshadowing to american politics out of what we just saw last week in britain um i don't i i i'm gonna go with robert on? I don't. I'm going to go with Robert on this.

I don't see a clear connection besides the whole protectionist. I guess here's what I'm saying. As far as the conservatives winning, I think that's great. I wish it would be more around traditional conservative values of free market and minimal government

versus protectionism and anti-immigration and those kind of things. In the U.S.? Well, just generally speaking. Well, if you're looking at the conservative victory in Britain. But do you think the conservative victory was centered around anti-trade and anti-immigration? No, not anti-trade, but as far as anti-immigration. Real quick on that. So Britain's kind of an unusual case to make for like an anti-immigration policy

because you look at Britain and the Commonwealth, they have had some of the most integrated immigration routes in history over the last couple of decades, right? London is one of the most multicultural, diverse cities in the whole world, right? Largely due to immigration from former colonies and things like that. So I would certainly push back against the anti-immigration edge of it. Now, there's certainly some voters that might have taken issue with migrants in the Middle East coming across unfettered with no borders. And with the European Union setting the rules about it.

That's right. I think that's what it was more about. Yeah. Yeah. It's not having control over whether you want more immigration or less to not having the ultimate say-so. Yeah. Yeah. Well, I think that we are entering 2020 now with three facts on the table.

And as much as we all can, let's just pretend that these facts had been on the table one year ago and think about how much it would have impacted our assessment of risk assets and influenced the asset allocation decisions. We are going to have a federal reserve in our country that is on the margin going more accommodative on balance sheet and in no way threatening to go tighter. OK, polar opposite of where we were one year ago. We have a trade war that is worst case on pause with some relief and best case could even get a little better over the next year. And we have a global environment at which Brexit is going to happen. It is a rule. It is now a model for other countries asserting greater

freedom, greater sovereignty. I stand by this just prehistoric idea that greater freedom and sovereignty is ipso facto better for markets, better for prosperity, and that the tail risk of uncertainty and volatility from a disorderly Brexit is now off the table. And so you have Fed trade and Brexit issues basically removed from the same risk calculus that they were one year ago. Now you enter 2020. The first question is, what the hell are we going to talk about? What is actually going to influence markets in 2020?

But the second question is, how is what I just said, which are reasonably indisputable facts, exactly what they mean, there's room for disagreement. But empirically, those three things are all in this sort of enhanced environment. How do you not have a reasonably sanguine positive view on risk assets entering 2020. Julian? Well, you have to, but the thing is, you could say it's how much is priced in because the volatility is very low. Our markets are all-time high, a lot of stocks.

We own our all-time high, our new 52-weeks high. So if you look back a year ago, you would say, okay, who would have thought we would be here? And with these events, I guess you have to think, okay, in 12 months, probably we're going to be a very different place than what we expect today. And the question is, what's the next known that's going to happen that could make me, do we have the recession coming that way?

We're clearly not expecting, or is it just going to be another maybe year of very low volatility with S&P not moving more than 1% for a few days in a year? The only thing really that could move again, I mean, the big elephant in the room is the election, obviously, coming. Robert, I think that's probably

the answer, right? 2020, the election is the big story in the market? Election is the big story. I market election is a big story you know i'll go out on a limb i think the the fed may see some inflation indicators tick up a little bit if if a lot of this trade stuff comes on i don't think people are thinking about that as of yet um i think it would be small and maybe just once maybe a minor rate rise but i don't think they're going to do much in the end of the year especially towards the election cycle you're not just saying you think inflation could pick up you're saying they would going to do much in the end of the year, especially towards the election cycle. Oh, you're not just saying you think inflation could pick up.

You're saying they would respond to that by increasing rates. I think just marginally, just some maybe small token action beginning of the year and then just say, hey, we did something election year and then hands off through November. Would you be willing to put a wager on that with me personally? I would. A 10 to 1? Yeah, off the books maybe. 10 to 1? 10 to 1.

Oh, you got to take that. It's 10 to 1. Yeah, off the books maybe. 10 to 1. Oh, you got to take that. It's 10 to 1. Can you imagine the power rates, what Trump would do to him, the power rates after these three rate cuts? Well, he just alluded to that even if there's inflation in his last statement, that they're going to let it go for a while. They now say their target has to be in averaging, and this is a very big subject in academia, but it's what you're alluding to.

If they get 2% inflation, he's going to say it doesn't count as 2% because we have an average 2%. So we can run 2.6 to make up for 1.4 to get to a 2% trailing run. Love that financial engineer. What if this was the year where the Fed comes up with different targets? New

targets. 3% inflation or 2% unemployment rate or whatever. I think we go a 20X overnight. Exactly. 20 times. 20X and you'd get a real estate bubble. Maybe that's what happens. That would just be definite.

We'd party like it's 1999 again. Oh, God. Yeah, I think that it would be a big boost to valuations of legacy risk assets and it would be highly constricting a future growth i think it would be what yet again uh another way to prop up risk assets already in circulation in the economy and it would be a great disincentive to create new uh productive innovative uh uh innovations into into economic growth be a very bad idea. 3% inflation as a target. I don't see it, but I guess you never know. Politically, they couldn't even do it.

And by the way, Julian, they don't have to, right? Because when you say 2% as a target, which is something that would have been unfathomable to the Paul Volkers of the world, may he rest in peace, by the way, who passed away last week. But they can now redefine how you get what 2% means. So you don't have to come out and say three.

You can just simply move the measurement around two and accomplish that. Dave, do you think there's a risk in the Fed surprising us next year? I don't think so. Like Brian alluded to, given all the rhetoric that's come out, it's pretty much they're going to be hands-off, I think, for next year. As far as the big story, look, I don't see many catalysts to the upside, but also, relatively speaking, it's hard not to like risk assets, especially with, as you had said, so many of those issues being now out of the risk calculus brexit uh you know as far as a trade deal and so on uh so i think general election i think if you see the democrats uh rising in power

and having more uh clout and you know if there's a democrat that's going to win the general election and they're gonna they're gonna have more majority i think that there could be more of a chance of the corporate tax cuts of 2017 being reversed. I mean, I think that's possibly a risk, but I think one that's very minimal if you look at the polls currently.

Yeah, I think it's general election, but I don't see too many catalysts for the upside, but it's also hard. I mean, it's hard also not to like risk assets, so I feel't see too many catalysts for the upside, but it's also hard. I mean, it's hard to also not select risk assets. So I feel like I just said nothing. Brian, do you have some words of wisdom on it before I set everyone

straight? Yeah, no. So let's see. So I would say, what are we going to talk about in 2020? So first of all, the things we talked about... More just the question of is the risk asset picture significantly better as a result of these three events? Okay. So the short answer is that it is.

So I think that the risk asset picture is better because of these things. But I would say this. A couple of things. First, none of them have actually happened yet. So, like, they still have to go through Brexit and get it done in some sort of way or not, like you said, and rip it off like the Band-Aid and just let the chips fall where they may and then deal with the aftermath and negotiate new trade deals over time and the whole thing. So that has to still come to pass you know we have phase one deal and lighthizer showed us the paper but no one's signed it yet so that has to come so there's some things that still have to happen the other thing i would say is the market's only about seven percent higher than it

was at the peak of last year yes this year is up it's been great it's up 20 25 fantastic just because we sold off so much in fourth two-thirds of it was making back for the losses exactly it's what i would say is yeah multiples have expanded a little bit but it's not like this market has been like you know okay fine we're at all-time highs but just seven percent or so above where we were so i'd say that there's probably more to go should those things come to fruition yeah i think you're exactly right it's a very good point and the the calendar coincidence of how things played out last year with a crash in Q4 and a rally that picked up right at the end of 2019 has somewhat misstated the case of things. However, 7% growth, price growth with flat earnings is still something.

It's still a turn. It still represents a whole turn in the multiple. still something. It's still a turn. It still represents a whole turn in the multiple. Here's what I will say, and I think we're all on the same page around it, but I'm going to get more specific in the thing that is overwhelming me all weekend

and overwhelming me all morning and that I really believe as we formulate our 2020 projections and perspectives on the landscape we're entering, I think needs to be front and center. I cannot possibly paint a picture that calls for a more positive landscape around emerging markets equity investing than the one that has come together in the last few weeks. You have

S&P 500 up 25% in the year. You have a MISC EM that is up about 10. You have a multiple of around 11 times forward in emerging markets. And the things that have been holding it back have been currency questions largely answered. Global trade slowdown to a large degree answered. Uncertainty over Brexit, large degree answered. Overly strong US dollar, I have got to think, between China, certainly yen, obviously sterling pound, to a lesser degree euro. Compelling argument to make for U.S. dollar coming back off of some of this successive strength, further boon to emerging markets, and then finally the Federal Reserve and all of the dollar-denominated debt and EM being a threat to their earnings, having relief around the cost of capital and access to dollar liquidity is a macro story

that is boring, academic, and technical, and yet profoundly important. And I would just add one last thing to all of those things that you just said, which is the actual fundamentals in emerging markets have been slowing and i think some of these things the fundamentals will pick up as well fundamentals and sentiment combined yeah yeah so i would argue and we're going to spend a lot of time talking about this as a committee in the couple weeks ahead as a matter of fact when we quit recording here we're going to meet to kind of talk about some of the positioning on a security-by-security basis. I think that our 2020 perspective has got to focus on now what on U.S. equity. Okay, I've already spilled the beans on my viewpoint on emerging based on this landscape macro. But on the U.S., we're talking Fed, okay, that's out of the picture.

Central Bank, out of the picture. And trade war, earnings, earnings, earnings. And I just don't know the answer. So I'm going to make an argument that we're not excessively overpriced, but that we are, a lot of it is priced in. I think both of you are right. The question is which win kind of wins. I think you're going to end up with a largely flat-ish equity year unless earnings growth outperform, then you get a little bit of a rally, and then the election really takes over. It's hard for me to believe from July

through November, a lot can really happen if polls are close. And then you set yourself up for either a late year rally or a late year crash in 2020. Would not be surprised at all if it's binary outcome that way. In the meantime, I think emerging markets becomes a compelling story. And then is corporate America ready to surprise us again with further margin expansion, further organic top line revenue growth? I'm unwilling to bet against it, but I'm not willing to excessively bet for it with client capital. Anyone disagree? No, I would agree. I think we're on the same page with the overall assessment. Yeah, as far as margins, I mean, gosh, I mean, that story's been played out

here for 10 years. So at some point, I would assume that either goes away or it just isn't possible anymore. Margins are what they are. So yeah, I think we're on the same page. Multiples are up there, but they're not outlandish. They have room to go potentially. I hope it's actually the earning side and the multiple stays about the same same that does it. I think we've kind of come off of a year where earnings didn't grow much, and so next year should pick up a little bit. And I hope CapEx picks up, too. But we have to kind of see how this thing goes with the trade deal. Dave, give us some closing thoughts, words of wisdom. What do you got? Just as far as, I mean, I think the story is that there's been a lot of uncertainty.

It's been let out of the market. And there's really no big of, and things are going to be muted headline-wise. And I think I'm looking forward to a little bit of quiet, to be honest. So, you know, we're not going to be focused too much on media headlines, but more portfolio and fundamental work. So I'm looking forward to just that. Robert? I would say the same thing. Quiet would be nice. We always look for information to adjust and

put into action, but I would largely agree with Dea. Julian? Well, I guess the UK election was really a referendum on Brexit and I'm wondering if the US election is going to be a referendum on Brexit. And I'm wondering if the U.S. election

is going to be a referendum on Trump, but that's in six months, and I guess nine months. And in the meantime, it's going to be back to earnings and green lights in terms of macro. Consensus for 2020, I think, for S&P 500 is around 10% gross in earnings.

It's probably achievable if you don't have a trade war, if you have more certainty in the market. The one is, you know, margin may not grow. Top line can grow mid-single digits, but with the magic of buybacks, you just reduce the number

of shares, and that's how you create EPS growth. And that's what a lot of U.S. companies are doing. Just, you know, same number of earnings, not necessarily growing much, not necessarily growing 10%, but you... You've had no increase in dollars extended for stock buybacks and capital return for five years, other than 2018, where you had a big spike up and the market was down, not up. I do not think that the issue has been driven by our stock buybacks and earnings per share growth.

I think it's been driven by organic earnings growth. But to your point, organic earnings growth has got to come from revenue growth. Sure, sure. I mean, earnings, you know, top-line growth, we've seen still like even this year, like 5% organic. We should be able to, I mean, we're in better shape for next year. So hopefully earnings growth will drive without even margin expansion, we'll drive some earnings growth.

But the expectations for earnings next year are on the high side. 180 or so? Is it about 180? 178. But from a percentage standpoint, you know... 3,200, 1,700, 3,500, so you would get like 19.5 multiple or something if we hit 3,500 by the end of the year on the S&P, which is

3,500 is over 10%. We're at 3,200 now, so it's like 8.5, 9% for the year. That's not a crazy picture to paint. Nope. There's some interesting question marks going into the year. I think you made the comment, the British election was a referendum on Brexit, and I'll close

this out with this comment, and that the U.S. election could be a referendum on Trump. Well, it will be, although it will be a referendum in this. Will the narrative get painted as it being a referendum on progressive extreme socialism or on the kind of uncertainty and the erraticness and behavior and temperament of President Trump. If the narrative is able to be painted by Trump's opponent as it being a referendum on him, it does not bode well for his reelection. If the narrative is able to be painted as a referendum on prosperity and the DNA of American economic vision, it would almost, to me, assure a Trump re-election. How that referendum goes will largely answer itself. If it ends up being a referendum on one, it probably means Trump is

elected. If it ends up being a referendum on him, it probably means he's not. But that really depends on who's going to run against him, right? Because if that was Warren, I guess, you know, she's falling off. Yeah. And but if it's Biden, then it's going to be tricky because it's going to be about – Well, that's interesting because I don't – I think that you have people that are not at the same policy level of leftism that Warren and Sanders are that have had to pretend like they are. And so I'm not sure that the political possibility is not there to no matter who the Democrat is painted around that entire portfolio of leftward drift. This has happened in the Republican Party for years. It's happened in the Democrat Party for years. The farther out

your fringes go, the more you move the middle. And the middle of the Democratic Party is far more left than it's ever been. And so there's a lot to be said on that politically, but I think that's what the markets will be looking to. My final thought here is off subject from these great things that we've discussed today. I hope you've gotten a lot out of our discussion. I appreciate all of my partners in the room for their contribution to this discussion. But I do want to say, as I mentioned earlier, that Paul Volcker was the Federal Reserve Chair, appointed by Jimmy Carter in 1979, all the way up through the Reagan administration to second term in 1987, at which point Alan Greenspan took over. I had a chance to meet the chairman on several occasions. He was a giant of a man, and I mean that in reference to his physical stature. He was about 6'8", but a giant of a man as a central banker as well.

Not every single thing he stood for or did or contributed did I agree with. I was a big critic of his contribution to the concept of the Volcker Rule and the Dodd-Frank legislation, though highly sympathetic to what he was wanting to accomplish with it, but critical of the way it got executed in the Obama administration. But I think that the notion of being totally appalled by monetary policy being used to create malinvestment and to create asset bubbles, and instead believing monetary policy needed to be used to create sound money and that interest rates should go higher to stave off excesses instead of go lower to help stimulate excesses. I don't know that we'll ever have a central banker again who is less interested in his own popularity than Paul Volcker. So we say rest in peace to Chairman Volcker

and our thoughts and prayers to his family. And then over the weekend, many of you have never heard the name, but in our business, it is a significant name in the history and annals of Wall Street. But Felix Rotten from Lazard, incomprehensible for me to think of an investment banker

who has been more profoundly important to Wall Street over the last 50 years, passed away. Both him and Volcker, by the way, passed away at age 92. Something may be good in the water there in the East River. I don't know. I don't think that's it. And those who love capital markets and love history and love people who made a profound impact on economics and on capital markets, we lost two giants in the last week. So we'll close with that thought. Wish all of you a wonderful couple weeks here before the holiday. And we will be coming back again with another Dividend Cafe in advance of the end of 2019 and going into 2020.

Thanks for listening to The Dividend Cafe. Thank you for listening to The Dividend Cafe. Financial food for thought. The Bonsai Group is registered with Hightower Securities LLC, a member of FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor of the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. Thank you. Investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinion, news, research, analyses, prices, or other information contained in this research is provided as general market commentary. It does not constitute investment advice. The team at Hightower should not be in any way liable for claims and make no express or implied representations or warranties as to the accuracy or completeness of the data and other information or for statements or errors contained in or omissions from the obtained data and information referenced herein.

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