The Dividend Cafe - The Kamala Cafe

Episode Date: August 14, 2020

• Market Recap of the week that just was • A little reality check on interest rates • A report card for earnings season for Q2 • Anyone remember China? • Commercial real estate lending • Restaurants looking for some help – and possibly going to get it • Is our monetary system working? • Economic report card for the week (jobs, retail sales, consumer credit, and more) • Politics and Money – a bit more of a look at Kamala Harris as the VP pick and what it means to markets and policy (and so, so, so much more) • Chart of the Week Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to this week's Dividend Cafe. I am actually recording, believe it or not, in Moscow. Moscow, Idaho, that is. I was up here for a meeting yesterday afternoon and then spoke at an event last night, and now I am flying back here in a few minutes. So just a very quick in-and-out trip, but lovely to see some longtime friends and some clients and participate in speaking at this event last night. And then I get to record here today in my hotel room. I want to do a few things with our time today. I am hoping that you podcast listeners will be able to take in what we have put up at the dividendcafe.com. But I do really want to share with you some sentiments right now around the US election. Because I think that we're really in a transitional place right now where the primary story, the narrative, I don't know necessarily

what's actually going to be moving market prices the most, but I certainly think it's what's going to generate the most market discussion and conversation for the next two and a half months will be more political, more election-centered than COVID-centered. I'm not really convinced that the market has been that COVID centered here for a little while. As news regarding COVID has seemingly, when it would get worse, markets didn't seem to be bothered. When it would get better, markets didn't seem to have a big effect. Because I believe that the bulk of the COVID-oriented market narrative is baked in. And that is that something happened that caused an incredible economic disruption. And the worst case aspects of that

are off the table. The predictions of those things are not happening. And yet there remains all the economic uncertainty into the future. And all that the markets really have to sort through is on the margin. Are we looking at a different shape recovery? There's different scenarios of what the shape of the recovery could end up looking like. So those things are there and on the margin, but when cases go up one day a bit or hospitalizations drop another day and so forth, you know, and it is my opinion that there's a lot of sensationalism out there around the COVID

narrative that the markets have shrugged off. And I don't really see that changing. So then it leads you to the political side. And I think that the Vice President Joe Biden selecting Kamala Harris, Senator from California, to be his running mate this week, it wasn't surprising. It wasn't unexpected. But, you know, we're now – it sort of indicates or signifies that we're in the final stage.

You know, this is kind of now where people start paying attention. And there will be some debates and there will be obviously peak campaigning. There's going to be obnoxious amount of television spending. And so I believe that you're going to see, I'm already receiving, of course, incredible amount of folks that are really worried about one outcome or another. And this is, by the way, the mentality about everything, that everything is binary, one or the other. Where I think this election, like everything else, isn't so simple. There is going to be some nuance. There will be certain outcomes that have bad implications, that could have good implications, that have mixed implications.

But there's not just a sort of one versus two involved. There's a whole lot of variables and subsets that play in, and that's what I'm making my job over the weeks and months ahead is to analyze those and be prepared for a number of different outcomes. And as best as I can do that without polluting objective market and economic analysis by, you know, my own political views, your political views, the various cultural ramifications that most certainly are at play here in this election. I think there's an awful lot of heat and a lot of noise that is at play in the present political environment. lot of noise that is at play in the present political environment. But markets, as has been proven through COVID, have incredible resilience to a lot of heat and noise. Markets care about corporate profits. Markets care about pricing in the expectations for profits to what that means to people who hold units of ownership of those profits.

I'm boiling it down to a very simplified and actually quite literal representation of how stock prices work. But markets are not just stock markets. Markets include interest rates. Markets include bonds and debt securities securities markets include commodities currencies there's a lot of financial instrumentation that goes into capital markets and goes into a global economy and so as we think about these things for the remainder of the year and how we want to be properly positioned um there are more is more than just candidate A is going to do something that hurts company B or, or sector B or whatever there. I want to be able to think through the different aspects across all capital

markets. And I also want to be able to do that in the context of the actual system of government that we have in our country, as opposed to just, I don't like this candidate and I do like this candidate. You know, I'm an open book. I don't ever shy away from this stuff. I don't like either candidate personally, but one of them is going to win. And there are certain things personally that I might think are more compatible policy-wise with one than another.

personally that I might think are more compatible policy-wise with one than another. And yet the temperament and personalities may still bother me. But my point is that that's actually not really going to be the crux of what ends up driving markets, whether Biden or Trump wins. It will end up being how the presidential side goes along with the legislative branch. Because of our system of government, to analyze this presidential race as it pertains to markets without looking at the senatorial implications is just going to be totally unsatisfactory. And so the Kamala pick this week helps kind of go into the future. I

don't think that there's a particular market implication. Some people said, oh, maybe markets are relieved that he didn't pick Elizabeth Warren. It's possible. And I do think from a headline standpoint that the pick of Elizabeth Warren as a vice president and then therefore a potential you know president in a succession type scenario would have would have been probably unsettling to markets but I would point out I'm not sure it's off the table that there could be some market concerns around Elizabeth Warren because he could still pick her as treasury secretary could still pick her as attorney general and then there's actually a real policy portfolio. There's actually real control. The Vice President's always been more of a symbolic and much less potent role in administration.

So, you know, the personnel side of it is out there. This week, Vice President Biden, former Vice President Biden, received an economic briefing, and Janet Yellen, the former Fed chair, was driving it. So it appears that she has a senior economic advisory role in this campaign team. Jared Bernstein's a longtime economic advisor to Biden. He's sort of a center-left, Keynesian type guy, nothing really unexpected in his kind of worldview. Yellen, Bernstein, others, there's about three or four other professors that are in his group, some of which I'm more familiar with than others. But all of them are very much on the camp of, hey, look, now is not the time to peel back spending. We understand how big deficits are.

We understand how big debt is. but with heavy liquidity sloshing around and with interest rates so low, you have to ignore debt and deficits, spend, spend, spend. And that's a partisan thing. And I'm not saying it critically because both parties are doing it. Both parties feel the same way. But my point is, is that markets will probably like ongoing heavy spending. Both scenarios are likely to give ongoing heavy spending. Then you've got to get in the weeds, and that's what I have to do in the weeks ahead. And I'm really working a lot this weekend on this white paper I've been outlining to kind of provide my clients and provide you listeners and readers a bit more information as we go into the final stretch of this election

season. So with that said, there's a few other things at the Dividend Cafe I want to kind of go through from this week. The market, by the way, is up about 500 points on the week. It's sort of flat here as I'm recording Friday, so forgive me if the market moves a lot by the time that you're reading this, but I'm recording early on Friday morning and coming into Friday, the market was up about 500 points. So it's really been a very positive and constructive environment for equities and for risk assets. Gold was down 150 bucks an ounce or so this week. First down week for gold in a little while.

It's dipped now below $2,000 an ounce. I'll give you the same answers to why gold goes down as to when I answer why gold goes up. And that is I don't have the foggiest idea. And as far as interest rates, I just want you to think about this for a second. They're talking about this incredible move up in bond yields, a 10-year at a new high. It hasn't been out for a few months. It's at 70 basis points. The 10-year bond yield is at 0.7%, and we're talking about this big move higher in longer-dated interest rates.

The curve has steepened. The yield curve has steepened as a result of that. That's been good for financial stocks this week. But that's the kind of world that we're in right now. On an earnings season basis, as we kind of now come to an end, there's a couple of stragglers still, but more or less over 80% of companies beating their expectations, the highest in a long, long time, many, many years.

But it's a ridiculous thing to focus on because a very high amount of companies beat a very, very bad expectation with just a bad result instead of a very bad result or what have you. So I think I've already talked about more or less, we're expecting a 43% earnings decline. We got a 32% earnings decline.

So you had everything you expected you were going to have in Q2 when the United States economy was shut down. It was bad. Companies are managing. The forward guidance is reasonably optimistic. And there does continue to be this general feeling that there's an appetite for normalization and and that's what markets are pricing in the ability to kind of get some things going back and people continue to point out we have a restaurants here aren't open and airline travel here is down those parts are

true the the very uh my friends at strategas Research call it the scene of the crime sectors, where right there in ground zero of the airplanes, the cruise ships, the hotels, we understand those industries are just in dire straits. But there is a very, very big economy outside of those particular industries, and that's really the aggregation of what markets are sort of dealing with. What else do I want to cover for you? I do think at DivingCafe.com, it's worth a couple little nuggets, even beyond the earnings issue. I don't want to lose track of our China conversation. I want you, speaking of politics politics let me ask you a question can you think of anything i mean anything that is there's more bipartisan consensus on right now than the way people talk about china

can you imagine a candidate from either party in house race senate race presidential coming out with a real pro-china sort of rhetoric right now. Each party may be critical of the other party for not being tough enough or not being effective here or this or that, but I'm saying the basic rhetorical slant is unbelievably anti-China from both parties. There's no way that Joe Biden's going to try to run against Donald Trump as being more friendly to China. The national mood and appetite on intellectual property theft, on the virus, on trade is very skeptical with China. So they're having discussions this week to evaluate the trade negotiators to look at how

phase one trade deal is going. I just want you to think back to September, October of last year when they announced that they were working on a deal, how bullish that was for markets. When they gave the outline of the deal in December, how bullish that was for markets. And then when the deal got signed in January, how bullish again that was. So will there be appeal back from the phase one trade deal? I don't think so.

Could there be? Maybe. I think that right now they're going to look at where each side is with their agreed upon purchases from one another and the currency side of things. But it would just be really, really insane to let go or forget of the idea that there is volatility and vulnerability in capital markets regarding U.S.-China relations that are profoundly, profoundly impacted by everything going on right now. And you have the Huawei deal, you have this TikTok deal, you. Questions on their soybean purchases. China's a bigger importer of crude oil around the world than the U.S. is. Will China potentially throw a bone to the U.S. in the midst of these trade relations by buying more oil and gas from America's energy sector? There's upside risk and downside risk. And what's going on right

now, in my own personal view, is that it is not something I'm sure is going to get really bad, or I'm sure it's going to get really good. It's something I'm sure is going to be significant and relevant and needs to be monitored, not forgotten about. I think I'm going to probably leave it there. By the way, I'm going to have more about this in the COVID and markets and our policy outlook on things in the coming weeks. But there is an increasing conversation about the possibility of a standalone restaurant support bill. The Restaurants Act called for $120 billion to go to restaurant support that would be administered by the United States Treasury Department.

And Chuck Schumer, Senate Minority Leader of the Democrats, came out in support of it. There's 170 House Congress people have already said they support it. So I really do think that that's a sector that is obviously in dire straits, as we talked about. You could end up not getting a stimulus bill anytime soon and maybe get a standalone bill just for that sector. There's at least more conversation on that. I'm going to keep watching that as well. But with that said, please reach out with any questions, any comments. The political world remains quite exciting, and I'll do my best to cover it. I'll

do my best to cover it objectively. When I say objectively, it doesn't mean I'm going to hide how I feel on given issues, but I'm saying my analysis as to what it looks like to markets, I can promise you, will be very objective and is sure to generally alienate some people on both sides. But I feel strongly about the idea and the principle that it requires more nuance and it requires more depth in how one views the political world's effect on markets than we often give to just our own analysis of politics in general. And so that's what I'm committed to do. In the meantime, thank you so much, as always, for listening to the Dividend Cafe podcast or watching Dividend Cafe video. It's time for me

to leave Moscow and go back home. Thanks again for listening to Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Thanks again for listening to Dividend Cafe. Thank you. referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice. The Bonser Group and Hightower shall not in any way be 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. The data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

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