The Dividend Cafe - The Death of the PermaBear (Dare to Dream)

Episode Date: January 12, 2018

This week, David covers all sorts of things that matter to you as an investor..... Topics discussed: What Dow 25,000 really means How I feel about perma-bears Some timely coverage about value investing The Fed Links mentioned in this episode: http://dividendcafe.com

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. I am very thrilled before we kind of get into this week's Dividend Cafe content to just sort of make sure we're clear. Advice and Insights is our new podcast where we are doing fresh material each and every week. This week we've started off our launch podcast edition is about a 45-minute talk from me on all things politics. The Washington landscape coming into 2018, what it means for your portfolio, what it means for the investing landscape itself. And so we're going to try to do special content, totally unique for the Advice and Insights

podcast each and every week. Next week at that location, which again, is available at iTunes and Google Play and all the places you may be getting this podcast. But we're going to next week delve into the 2018 portfolio positioning, kind of how we're forecasting 2018 and recapping 2017. It's kind of a special end of the year, beginning of the year, hybrid edition. Other weeks we're going to go into interviews with other people on the team. I'm going to talk to other members, other partners at the Bonson Group, other members of our investment committee. I'm going to talk to outside guests certain weeks. I mean,

we're going to do a lot of fun things with it. So Advice and Insights is that podcast. And then, of course, we're going to continue on a weekly basis to record this podcast, the Dividend Cafe, just kind of an eight to 10 minute summary of our weekly commentary and what we're doing there, which is largely mirrored at the DividendCafe.com website and represents a lot of the core thinking week by week, more timely of things happening at the Bonson Group and our investment mentality and so forth. Okay, so that's a little housekeeping. Let's get into what's going on right now.

The Dow 25,000, I mean, does it matter? Is it a big deal? If one means, well, what does it tell us about where we go next? Then it does not matter. And whatever investment decisions one did or did not make before the Dow hit 25,000 are not able to be changed now. Does it have tremendous symbolic significance to the greatness of American enterprise? Well, yes, of course it does. I think it is a major symbolic event. It's a sort of vindication for those who maintain their belief in the basic reality of markets

even though even excuse me even through the great bear markets of 2000 and 2008 would i argue that dow 25 000 matters because it pulls in more people and gets them excited about dow 30 000 or some such thing no i wouldn't I wouldn't stoop to an argument so stupid. It matters because faith in the risk-reward principles embedded in equity investing, essentially, you take on the pain and aggravation of perpetual price volatility, and in exchange, you receive the risk premium of compounded returns through time that are far superior to bonds and cash. Take on price volatility, receive a risk premium. That's the trade-off. And I think that that concept has been validated. I mean, it was true for the last 100 years, but I think it is,

the Dow 25,000 has symbolic significance because it is so validating for those who went through the pain and misery of the last couple of brutal bear markets. Well, where are the perma bears now? That charlatan class of newsletter writers, fear mongers, and click baiters who were screaming that there would be a 50% to 90% drop in stock prices when the Dow was below $10,000 and then again at $12,000 and then again at 12,000 and then again at 15,000 and you get the idea. Well, those guys are still getting clicks and hits. PERMA pessimism is a sociological condition. It's a psychological condition. It is not an

economic worldview. The fear-mongering industry knows this and there's no interruption in their pursuit of people who want to pick up what they're putting down. They know that fear and paranoia sells. But at some point, stock prices will drop, and then these people will come out of their holes claiming they called it. Stock prices that after the next correction, after, will be up, let's say, 200 to 300 percent from when these clowns made their calls, will do nothing to embarrass or silence them. They're the ultimate argument for skin in the game as a necessary precondition to listening to anyone about anything, if you ask me. But no, I do not believe this class of degenerates is going away. They have a permanent customer base. Our job is to keep good people from being led astray by their shtick.

Readers of our 2018 Outlook white paper, which is up on our website now at thebonsongroup.com, will see that one of our themes for 2018 is the rotation of assets from growth-oriented equities to value-oriented equities. Two widely used investment categories we actually do not really care for, but are fine, I guess, as far as it goes. Growth is often said to be the category of investing that's less valuation conscious, less cash flow sensitive, and more momentum oriented. A high P.E. ratio that goes higher because of the rapid growth prospects of the company, etc. Value is often said to be deep bargain, where though a company's growth is not necessarily really high, the price level has made the company a compelling buy in terms of the bargain its price represents. I find the binary thinking unhelpful.

Wong stated our goal is for a good value price to pay for a great growing company. We do all of this, of course, in the context of dividend growth investing, where the growth of the dividend serves as a barometer for both a price value and the company growth prospects. But there's a reason that value can be expected to outperform growth using the industry kind of euphemisms in a period of rising interest rates, which is what a lot of people are dealing with right now that are fearful of. Growth stocks are said to have value because of what their company will do over time, right? Rising inflation eats away at that value.

Rising interest rates lower the comparative value. The discount rate goes higher, so the long-term expected rate of return shrinks. But value stocks have value now via current cash flows. So are we entering a period of rising interest rates? Well, I'll let you answer that. I mean, obviously, it's been something discussed a long time. Many people have been early in making the call. So certainly, the yield curve has flattened a great deal. Let's put it that way. As for which category of equities would make more sense in a secular period of rising rates, we stand behind our proposition

that quote-unquote value stocks that are rooted in strong balance sheets and attractive current cash flows are the way to be positioned. New band members, same songs. Several months ago, I was convinced that one of the greatest unknowns in markets at that given time was what a new Federal Reserve Board composition would mean for the yield curve, for monetary philosophy, for global rates, etc. Most of that questioning went away once President Trump nominated Jerome Powell to chair the Fed. But the new vice chair who was selected to replace Stanley Fisher and other new governors, Fed governors that are about to be selected, they may not end up being carbon copies of Powell, but essentially, now that we have Powell at the chairmanship, I am convinced that there will not be significant change in thinking at the Fed through this transition of personnel.

Well, and what is that thinking? It's more or less that normalization of monetary policy needs to take place as slowly as possible to avoid disrupting capital markets. A pace this cautious in rate hikes and balance sheet reduction has thus far proven to be immaterial to risk assets. But tightening is tightening, right? Well, or is it? Excuse me. If you believe, as I do, that a significant amount of risk asset pricing is relative to the monetary framework in which the assets are being priced, it's perfectly reasonable to believe that the Fed, however modest the pace may be,

that hiking interest rates and taking liquidity out of the financial system eventually catches up to markets. I don't disagree. But the problem is that we're not in a state of central bank tightening on a global basis. Because even after factoring in the snail's pace of Fed normalization, the fact of the matter is Europe is still adding liquidity to the system through their own QE program, as is Japan. Net-net global central banks are in accommodation mode, making the ability to handicap what the Fed is doing or will do very difficult. High yield anxiety. Our view in exiting high yield on a tactical basis last year was that they were trading with equity-level risk.

And if we wanted equity-level risk, we would just buy equities. Credit spreads were and are so tight that the space struck us as lacking compelling value on a risk-reward basis. That being said, there is an argument to be made that the new tax law actually helps high-yield investors. And this is somewhat of a contrarian thesis here. Essentially, the new tax law limits the deductibility of debt interest, subjecting it to a limit of earnings. One would think this is a negative for the companies used to issuing this kind of debt. Okay, well, it is a negative for them, but it does two other things that force us to think more intelligently about all this. A, it encourages companies to

delever their own balance sheets, a net positive for the asset class. And B, it limits supply if it cuts down on new issuance. In both of those cases, a negative for the company's issuing high yield debt could very well prove to be a positive for the investors owning said debt. Something to think about. I want to reiterate something about our Japanese thesis. I've read paper number 100 now this year suggesting that the big question mark for the year is, in 2018, will the central bank of japan continue with their quantitative easing and other loose monetary policy tools versus the possibility of surprise tightening sorry um i find that whole discussion silly if japan central bank

which is over the last few years acted as the most dovish and accommodative and desperate central bank in world history, were to all of a sudden tighten, the only possible reasons would be that they've seen the achievement of inflation targets. So in other words, it would be a positive on the other end of what it is they're trying to accomplish. A steeper yield curve in Japan would benefit their financial sector. It would be reflective of a very opportunistic corporate sector. You see my point. In reality, our thesis for Japanese equities is not dependent on what their central bank will or will not do this year, all of which can be expected to generate volatility. It centers around the expectation of rising corporate profits for years to come, combined with a secular cycle of growing dividend payouts.

Yes, we do stand behind that call. So listen, I've gone over 12 minutes now. I always want to keep this Dividend Cafe podcast a little shorter. Yes, go to DividendCafe.com. You can get the whole weekly there, some charts, some more material on MLPs and things like that. And then for you real podcast listeners, which I have to say I've become over the last couple of months, especially in time I'm in New York City, as I walk all around the streets of Manhattan from meeting to meeting or walking to my office in the morning,

I'm taking in a lot more different podcasts and things, political commentary, market commentary, sermons from the churches I'm fond of. I just love it. And it's something that we want to use as a medium to give you more information as well. Okay. So that's our scoop. Thanks for listening to Dividend Cafe. Look forward to next week. And please, please, please subscribe at Advice and Insights. And if you're listening to this Dividend Cafe podcast but not subscribed to it, please do subscribe. Write a review for us, something like that. And it helps us and hopefully helps you.

Okay, there you go. Have a wonderful week. Thank you for listening to the Dividend Cafe, financial food for thought. The Bonson Group is registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there's no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance Thank you. Opinions, 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 in Hightower shall 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 reference herein.

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