The Dividend Cafe - The Only Game in Town

Episode Date: December 11, 2020

• Over the last 42 days, the market is up very close to 4,000 points • Over the last 42 days, Joe Biden has won the Presidency • Over the last 42 days, reported COVID cases have grown • Over the last 42 days, weekly jobless claims have picked back up • And once again, over the last 42 days, the market is up very close to 4,000 points Now, I could write you a Dividend Cafe today reiterating a couple of things I have already written 100+ times in 2020 (and they would be no less valid now than they were then) – that the Fed has implemented monetary policies that have indisputably served to boost the valuations of risk assets … that the COVID doom & gloom in the press has unimpressed markets as markets learned the more detailed nature of the virus’s risk and specific vulnerabilities about seven months ago … that markets are forward-looking and with a vaccine on the horizon see a better 2021 looming … that economic damage has been limited in this painful year to a rather vulnerable but less systemically impactful part of the economy … and so forth and so on. And if I wrote that Dividend Cafe, I would hope it would be useful, fruitful, and informative in some of the market lessons it would contain. However, it would very likely miss the most important thing one could say about this market, and frankly, one of the most important lessons one can learn about the nature of capital, period. So that is the ambition of Dividend Cafe today. To explain why the market has been behaving as it has been, not just in the context of the four or five things uttered a couple of paragraphs ago, but in light of a huge lesson for all. And to do this, I will share a story with you that I hope somehow, someway, delivers the message with clarity. Jump on into the Dividend Cafe … 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, welcome to this week's Dividend Cafe, both those of you listening on the podcast and watching the video. I'm sitting here in our New York studio. I think it's the first time I've recorded from here in a little while. There's been a lot of back and forth and we've kind of recorded in some different places and so forth.

But I have kind of a fun one here today, or at least for me it's fun. The number one thing I'm getting asked right now, and it's interesting, you know, in my business over the years, there's always this just kind of thematic rotation of what we hear a lot from. It's very rare that like one client has something on their mind and no one else does. And a real obvious example I talked about a lot over the last several months was with the election. And I made the comment, which was inaccurate.

about a lot over the last several months was with the election. And I made the comment, which was inaccurate. It was non-hyperbolic comment that I got more inquiries about what the election was going to do to the markets this year than every other election cycle of my career put together. And yet that's a pretty obvious example. But there's always these certain things where you get one client one day and then three clients the next, and next thing you know, over a month, you've heard various inquiries, maybe derivatives of the same inquiry, you know, 50 times or something. And that's kind of just the way it goes. And so right now, the big theme seems to be, why is the market doing so well? Sometimes the reason or the predicate behind the question is different for one person than another.

There's people that say, why with COVID cases growing is the market going up? And that gives me a chance to sort of provide a little bit more information on what actually is going on and not going on as it pertains to coronavirus. Other times, it's just simply with the economy. And I think this is probably the most logical one. We still see you saw a bad jobless claims number yesterday. We still see a lot of weakness in the economy. And yet market seems to be doing so well. And so there's any number of different reasons. I mean, certainly I've talked ad nauseum about how one side of people on a political sense can't believe the market would do well when one person

is elected and the other side can't believe the market do well when the other person's elected. And I've tried to sort of correct some of the issues that might be going on in that thinking. But in this particular case, there's three or four or five reasons that people may be surprised the market's doing well. I have my own opinions about what parts of the market may very well be overcooked or frothy. But I do think that when I go through the various, the myriad reasons that I hear as to why maybe the market seems out of its skis, and I explain the role that the Fed is playing in providing liquidity into markets, the forward-looking nature of the market and its ability to price today what it knows about a post-vaccine society, but it knows about a post-vaccine society.

I think probably one of the points I've underestimated or under-reported in my commentary to you all over the last few months is the reality of pent-up demand. I don't think it's getting discussed a lot. I don't think I've discussed it enough. And I'm becoming increasingly convinced that we have this society full of people that are literally ready to go pounce on an airplane and a hotel resort and a dinner and this, that, and the other. I think that those people

who have bet the farm on nothing ever going back to normal are about to be sorely disappointed throughout some point in 2021. All of those things are really relevant. All of those things definitely play into market pricing right now. And yet I kind of had a little epiphany this morning, excuse me, this week. It was on Monday morning, actually, that is sort of serving as my inspiration for today's Dividend Cafe. I told the long story of it in the written DividendCafe.com today, but I'll give you a shorter version. But I think it summarizes what is most important for people to understand.

And it's important to understand it right now in an ad hoc context to market pricing, but it's important to understand it as an evergreen lesson about markets as well. Look, I want to be someone who stays in shape as much as I can. I wrote about this early in the summer about trade-offs, and I was using exercise as then my analogy to the trade-offs that exist in our society, the trade-offs that exist in risk-reward in a portfolio. And back in the summer, my point was how I want to be in shape and fit in my clothes and not be unhealthy, but I don't want it so much that it's going to sacrifice my productivity

and I'm not going to go run 14 miles at Central Park every morning just to train for a marathon or something. There's kind of like a happy spot in between. And it's basically a calculated trade-off. I want to run enough that I can still eat the steak I want to eat. But I'm definitely a live to eat, not eat to live kind of person. And so anyways, not to revisit that old point, but when I bring up exercise here, you know, the quarantine and when we weren't allowed to kind of go out and all that stuff, it was happening at the same time that I was in an unbelievable amount of anxiety. You can imagine an unbelievable amount of stress.

I was getting up sometimes 1.30, 2 in in the morning every single day by 3 in the morning and I knew that gyms were closed and I had a high degree of anxiety and I had been in a pretty good place of trying to be consistent in my workout and diet and whatnot for about nine months or so I wanted to keep it going and so I just made myself go run in my neighborhood at that point we were quarantined in Newport Beach and just made myself go run in my neighborhood. At that point, we were quarantined in Newport Beach. And I made myself go do that every single morning. And then, you know, things started reopening. And some stuff in New York was reopened. And some clubs in California weren't.

And that's kind of vacillated around. Well, the place that I really most enjoyed working at in New York in the four years that we've been bi-coastal with the Bonson Group, and my family and I have been bi-coastal and the company's been bi-coastal, is like halfway between some of the apartments I've had and where our office is. So the club at the top of the Peninsula Hotel I joined so that that would be my workout place because then I would walk like halfway from the apartment office to the club and I'd be able to work out in the morning and get all ready there. And then they had kind of amenities and space where I could go sit and read and research

and write. And I'm such an early morning person, I had plenty of time before the market opened. And so it's just this great little routine and I had consistent exercise and it worked out geographically. Well, that hasn't reopened yet and they're probably not going to reopen for a few more months here. So that option's been out. But then I have a club fitness center at the top of my apartment building and they've now reopened. But this particular week at the beginning of the week, they were shut down because they had to do

this sort of special, they're doing a new cleaning and sanitizing thing, and so they were shut down for a few days. Well, out in California for a number of years, I've always worked at a place called Orange Theory, and it's this sort of circuit training thing, and it's a really, really hard workout. I actually love it. Even though I don't really like the group exercise thing, I just sort of stay to myself and get a very hard workout in. And it's been back open in California, but in New York, it's sort of kind of open, kind of not,

and it's a shorter class, and it's a little weird. And then I happened to show up at five in the morning for the class on Monday, and I just, I had a little tear in my mask, and they didn't have another mask, and they wouldn't let me work out. And so it's like just freezing cold. And this is getting now to the market lesson of this story for those of you that are really anxious

for me to quit talking about my exercise habits. I would have loved to go on the peninsula, but it was not an option. And I would have loved to have worked out at my apartment fitness center, and it was not an option. And I would have loved to have worked out at Orange Theory, and it was not an option.

And at one point, I even joined the Equinox gym that's here in our building in New York. And they've had a bunch of issues and challenges and that was a disaster. So I tried everything. I tried four different things. And so then I ended up saying I want to work out and I went and ran Central Park. And I had run Central Park earlier in the fall a ton. I love doing it. Everyone should love it. It's gorgeous.

But it's freezing right now. And particularly for a born and raised Southern California kid. And then it was kind of windy. And so you could think 30 degrees. I think 30 degrees is cold. If you don't think it's that cold, it isn't really 30 when the wind is coming off the Hudson River through the middle of the park. It can feel like it's 10 degrees. And that's how it felt Monday morning.

And so I was sitting there running, finishing up the three or three and a half mile run. And I look up and there's a building at Columbus Circle that has the temperature on it. And I snapped a picture. And I go, what in the world is making me run at 31, 30 degree weather? And the answer was, I have no other alternative. I would have done Peninsula and Oasis and Equinox and Orange Theory, but I couldn't. And so now maybe you see where I'm going with this and where that epiphany was. And at this point, you're either connecting the dots and thinking I've come up with a

very clever analogy, or you think I'm some kind of an idiot, but it's okay. I really do believe that that's an incredibly important reality of capital markets for people to understand. This notion that there's this sort of fictitious mattress at which people can, the global capital markets of trillions of dollars, of real dollars, and not to mention global currencies that are in circulation that we can just hide them under the mattress the way parents might hide $1,000 of emergency money under the bed or something. No such thing exists. And so not only is there the reality of money needing to be allocated and deployed and placed, but it needs to be allocated, deployed, and placed right now at a time where there's more

money flowing than ever. Money supply has increased dramatically. Credit markets are very loose. Interest rates are very low. So you have a lot of money sloshing around. Some of it's sloshing around trying to find a parking lot, a money market, commercial paper, tax-free municipal bonds. But there's plenty of money sloshing around that has to go find a return. It has to go find its optimal allocation. And these pension funds have future long-term liabilities that are tied to long-term asset returns. And insurance companies are all predicated on the same concept. Foundations and endowments have a giving requirement every year of money they're going to bestow upon charitable beneficiaries that requires the sort of return on capital.

And this is just trillions of dollars that are flowing around the universe. And yet we sort of wonder where that capital is. And I guess what I'm trying to say to you is that is the analogy to me ending up running the park in the morning. Hey, I love running the park. It wasn't like it was a bad place to be. I probably wouldn't have done it at that temperature in normal circumstances. But the truth is that the global capital markets right now at a 0% interest rate on the Fed funds at 60, 70, 80 basis point yield on a 10-year treasury, negative interest rates around the world and $15 trillion worth of global sovereign securities,

there are a lot of people that are looking for another option and not finding one, and U.S. equities becomes the Central Park run in my analogy. I won't keep beating the dead horse. I think you get the idea. But that to me is a really interesting kind of parallel to what's happening in the global markets. And it does not necessarily mean that it ends poorly. I do think that some things continue to be undervalued. Some things are most certainly overvalued, but there is an appetite for overvaluation because I think people would rather have a little overvalued equity

exposure than go guarantee no return in some of the various options that have been created out of cash markets and fixed income markets. You could even look to some of the international equity options and the concerns that people have with either European or Asian markets and so forth. The U.S. equity market becomes that TINA trade that we've talked about over the years. There is no alternative. And so I found myself running on a TINA decision this week, and I think an awful lot of global capital is functioning the same. And I hope that that analogy is of interest to you or useful to you.

By the way, at Dividend Cafe this week, in addition to that story I told, there is also a little more information on the midstream energy sector I'd love for you to check out. And a couple charts and normal things we like to put at the website. So please do check out DividendCafe.com. I'm going to leave it there for the week with our podcast and those of you watching on the video, please do have yourself a wonderful weekend and we'll look forward to coming back to you again next week as we continue through the month of December, getting ready for 2020 to end. Have a wonderful weekend. And thank you for listening to and watching the Dividend Cafe. The Bonson Group is a group of investment professionals

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