The Dividend Cafe - The Sobering, Thrilling Reality of ‘Back to Normal’

Episode Date: May 22, 2020

And in this week's Dividend Cafe we are going to dive into a bunch of these subjects - not because they are abnormal or extraordinary, but because they are normal. The normal reality of financial markets and of being engaged in the management of such continues its beat. And though I far prefer to do my analysis and work from my office with my team versus the sub-optimal conditions of quarantine, I embrace this normalcy, and welcome the challenge of both this moment, but all future challenges and opportunities as well. 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 podcast. Those of you watching on video, welcome as well. My name is David Bonson and I am the Chief Investment Officer and Managing Partner of the Bonson Group. And I am thrilled to be bringing you this Memorial Day weekend version of our Dividend Cafe. I'm actually thrilled to have been in our office in Newport Beach this week. A good portion of our team returned.

We have some that are coming in some days but working remotely others we have some that are in every day still a couple that aren't able to get back in yet and our entire New York office is still awaiting but even as I sit here on Friday afternoon at my desert house which is about an hour and a half away from Newport Beach, you feel this certain sense of some resumption of normalcy. Me putting on a suit every morning this week and going into the office, me being out here at the desert house with my kids. It's a good feeling.

And yet I had a sensation this week that I haven't had in some time, which wasn't a positive or negative or anything. It was more just this kind of realization. I was a participant in the Malden Strategic Investment Conference, one of the top investment conferences in the country, just absolutely stellar economists and speakers and pundits and analysts. And then they threw me in as well. But both as a participant and an audience member, and obviously the conference was done virtually because of the state of affairs. I was sitting here listening to all of these forecasts and all of these analyses of the present situation, and I was simultaneously appreciating this week this modest feeling of some resumption of normalcy, like I mentioned, going back into the office and so forth. And it occurred to me that a lot of the speakers of the conference were talking about things that are not COVID-related.

And certainly some are post-COVID that the way they're analyzing and viewing it would be different if it were not for the COVID moment. There's no question about that. But when – and I'm about to really unpack for you a lot of things related to the Federal Reserve, related to government spending, related to the ongoing debate about inflation versus deflation. and resumption to normalcy, a return to whatever that normal context is, I'm not so sure that the world in which I live and the career that I've chosen, thank God, because I truly do love what I do, as do all of my advisors and partners and colleagues. We have a blessed life. We love this business and we love the clients we serve.

We really do. I don't just say that. But normalcy for us really does mean the absence of normalcy, meaning that when COVID is gone or all the constant discussions of COVID or all the immediate economic implications of COVID. And we're talking about this like before a significant part of the country has even reopened. I mean, even here in Southern California, when I'm talking about going into work this week, we're not even close to normalcy. All right. I mean, it was just an hour ago or so I'm hearing the president of press conference talk about the reopening of churches. Like we're just now getting to a point

where our houses of worship in this very religious country from a historical standpoint, rooted in so much Judeo-Christian ethic, the churches have not even been opened. I mean, think about that. And so we have a long way to go to normalcy. We have unemployment right now that is at levels we haven't seen in many, many decades. So I'm talking about a return to normalcy and we're not even close to it in the COVID context. And yet the point I've been trying to make and I'm taking a long time set it up, is that when we get there, it will be something else. And I don't just mean market turmoil. I mean questioning, forecasting, ambiguity.

Oil prices are doing this or they're doing that. Inflation is doing this or deflation is doing that. The euro is here. The dollar is there. Conflicts with China. Question marks about Japan. I really cannot remember a moment in all of my years stewarding client capital that there was required really severe and engaged intellectual, emotional, analytical participation that required presence. And to the extent that COVID has a really severe differentiator in its societal health impact and the risk it posed to human life for so many people, particularly vulnerable folks in our society. That alone makes it very different.

But I am referring specifically to the financial category that normalcy really in markets does mean the lack of normalcy, the absence of something that you could just sort of call smooth waters. Now, I'm not an idiot. I know some moments feel smoother than others, but I think it's an illusion. I think even when there isn't a high volatility in markets and even when we feel like PE ratios are expanding and corporate earnings are growing and gross domestic product has a healthy trajectory higher, all of those things could be there. Yet even then, there are underneath the still waters just tremendous uncertainties, tremendous vulnerabilities, tremendous fears, tremendous questions. And yes, lest it sound like I'm just simply making a comment that things can always be difficult, there's always tremendous opportunities. And if you're not seeing them, you have to be looking for them. You have to be understanding where the

next opportunity might be, what sector, what asset class, what company, what is a modest dividend payer that's about to become a superlative dividend payer. Yeah, if you're wondering, am I just simply rehashing over what, seven minutes, the three or three-word cliche of markets never sleep? Maybe that's all I'm really saying. three-word cliche of markets never sleep. Maybe that's all I'm really saying. But biographically, I guess this week, I was a bit more introspective about the fact that whatever resumption to normalcy might mean for an awful lot of people, I don't really think that that's coming for those who care and are as deeply connected to the world of financial markets as I believe we are. And I believe an awful lot of people are.

So what does that mean in the here and now? Let me kind of move forward to the subjects of the week. The three things that we talked about back in March as the COVID moment became very, very real in markets was that primarily markets take their P's and Q's from the fiscal response, the monetary response, and the health data. And I made the comment that the health data would not have to get fully better for markets to really move. It would have to be a simple change in trajectory. It was very difficult for markets to recover when the health data was still spiraling out of control. Once there was some degree of confidence, even if the confidence was ill-founded, once there was some confidence on the table that those worst possible outcomes were off the table, table that those worst possible outcomes were off the table, that the potential millions of deaths that had been forecasted were likely to not happen in America, the total overwhelming

of our American healthcare system, hospitals, hospital beds, PPE, that once those things showed a lot of stabilization. Fact of the matter is cases did keep growing. They at one point had brought the death projection from 2.2 million down to 240,000 down to 60,000 to 100,000. And now that death count is at the higher end of that 60 to 100. So we went from bad news getting better and then better and then better. And then from that place got a little worse, right? I think we're going to end up with a death count that is horrifying. Really.

I'm only talking in the context of markets that the health data at some point evidently reversed from something that was going to have this sort of systemic impact that could very well have led to lockdowns that would last a lot longer. All of these things. Now, you know, we still don't know exactly how it will end. We don't know when a vaccine will come, how many vaccines will come, what the response of the population will be, what the immunity across our society will look like in time, post-vaccination immunity presumably. There's a lot of things we don't know still. I'd refer to as the absolute collapse of positivity ratio in the tests, meaning the percentage of people testing positive divided by the number of people that are testing. And I would point to the skyrocketing of daily testing. One month, that's not a long period of time. One month, we have gone from 150,000 tests a day to over 400,000 tests a day.

We have gone from 150,000 tests a day to over 400,000 tests a day. And we've gone from over 20% of people being tested being positive to about 5% being positive. So both numbers have gone exactly in the right direction. One collapsing down, one skyrocketing up as the markets would want and, of course, all human beings would want. want and of course all human beings would want. And so that I think is probably the more significant factor in the here and now in the direction of markets, the trajectory of markets, the sentiment than even the fiscal and even the monetary side. I put the monetary ahead of the fiscal. So in terms of where we go from here, this particular week markets moved up almost a thousand points Monday gave back three or four hundred Tuesday earned back three or four hundred Wednesday we're down about a hundred on Thursday and then as I'm sitting here recording now we're pretty

close to even Friday so pretty big week up net net still high volatility And we're going to enter a point where the health data will not be the primary factor. Now, ultimately, we're going to hit a point where corporate earnings and the trajectory of more traditional metrics, that's probably third quarter, fourth quarter. But there's no visibility right now in corporate earnings. There's too much ambiguity around the overall economy. So that's not the primary driver. Whatever is happening is being interpreted in the context of its overall direction, which is, you know, I have a chart dividend cafe this week. Restaurant reservations picking back up.

There being some of these spots that are starting to look better. Now, they're all looking better off of just catastrophic lows. That has to be stated. But the point is that there's a feeling that economic reopening is going better than expected. The feared surge in health, you know, bad news has not come thus far, thank God. In a lot of states, it had begun reopening. And you hear more and more talk, including from the White House COVID Task Force, people who have been very hawkish about economic shutdown, starting to say, no, I think it's time. I think it's time. And that economy will reopen. And in a couple quarters, markets are going to say, okay, well, we got off of our depression level.

That's good. But this is really still slower. These margins are still really impacted. Or this area is still, you know, what have you. Or, of course, there could be areas where the markets say, wow, this really picked back up quicker. This ended up having a lot of pent-up demand. You got a V-shaped recovery here. You got a U-shaped recovery there.

It's going to be spotty. I believe very confidently it's going to be spotty. It's going to be spotty, but it's going to be good. The economy will bounce back. And so then what that does when you say, okay, well, the health news, we've already kind of priced in that it's better and headed that way. And you get this sort of conversation that will feel post-COVID-y. The monetary policy at that point is going to be a big deal. And it's something I write about extensively at DividingCafe.com this week.

I think the Fed is at the zero bound for two years or longer. I think that even the longer dated spots on the yield curve, 10-year, 20-year, 30-year, they want the yield curve sloped in a steeper way but they need those rates low too because they have to finance government debt, massive government debt. Could be trillions of dollars more than expected this year in treasury issuance. And the Fed will play a role in its backdoor monetization because they are going to drive the rate to a point where that debt can actually be serviced. And so the investment implications are that we're facing an

environment where I think you're going to have very low rates for a very long time. I think you're going to have credit spreads that stay pretty tight as opposed to spreads that get wide and then can come in and make a lot of profit for investors. There are still structured credit areas that remain wide. I think those spreads are going to come in. A lot of spreads have already come in where the difficult economic times because A, the economic fundamentals are perhaps not going to be as bad as they've been feared two months ago and B, because the Fed's support. It's difficult for bond buyers to fear credit spreads widening when they think the Fed is there at the ready. And so it becomes self-fulfilling prophecy. Spreads don't widen because people believe that the Fed will keep spreads from widening.

And so the post-COVID life is going to have a lot of Federal Reserve fingerprints on it. And I think in the most profound way, not just the zero bound of interest rates. I also am forecasting that we won't have negative rates. But I think it's the moral hazard that will be embedded in credit markets. And I don't think I'm being fair if I don't say this has been there since the financial crisis. How could one not believe right now that over-indebtedness, over-leverage, illiquidity, insolvency fears in corporate America. Not with every company, not every sector, but I'm saying systemically that the Fed has built a sort of embedded put protection against significant credit impairment in the economy,

which leads to malinvestment, which leads to dislocations. But more than that, it leads to moral hazard. It leads to decisions we made that otherwise wouldn't be made. What are the investment implications of that? What are the things we have to avoid? I have to figure that out. My investment committee has to discuss the prime candidates for being alluring and moral hazard because you got to avoid those things.

When my phone starts ringing again, it's going to happen. We have people talking about tremendous returns that have no risk. These are conversations that don't just come about from Ponzi schemes. They're conversations that come about because people actually believe it in low-rate environments that distort price discovery and that distort the discovery of risk-reward tradeoffs. And I don't necessarily say this speaking about what the Fed should not be doing right now. I have plenty of opinions about that too, but that's not really my subject at hand. I'm saying it in the context of what is going to be the case in the future.

For good or for bad, for right or for wrong, for justification in the short term even though it leads to certain things in the long term, all I'm saying is longer term. I think we're embedding greater moral hazard out of central bank activity that is going to have an effect on the way we invest client portfolios. It's going to have a significant impact in the way we think about indebtedness because I think a lot of people are wondering, is the Fed there to support corporate debt or government debt? And the answer through this crisis and the financial crisis appears to be both. And the answer through this crisis and the financial crisis appears to be both.

So this is the normalcy that we have to look forward to is while the opportunities of an ongoing free society lead to entrepreneurial innovations, opportunities. I'm so with Buffett on this. I'm not shorting the American dream. I'm not shorting opportunity. I'm not shorting the things that have made the American enterprise system what it is. And I don't just mean not shorting it literally as a financial instrument. I mean I'm not betting against it. I'm not thinking against it. I'm not betting against it. I'm not thinking against it. I'm not downplaying it.

Yet in the context of the full scope of financial markets, there's a lot of questions that we have to deal with now. And I look forward to that process. It's certainly my job, certainly my obligation. my job, certainly my obligation. But that's, you know, even when you think about me and my family being able to get back to New York City, my kids being back in their school instead of the Zoom school every day, the, you know, the whole entire team back in our respective offices, all of you in your lives have various things that have been disrupted and there's some path to normalcy. All those things matter a whole lot more.

I don't think anyone really cares that much what I'm focusing on. I'm just sharing it because, first of all, it's my podcast. And second of all, it does have a tie-in, I think, to the thinking we have right now that we are navigating the best we can in the present moment. But we don't want to do anything that takes our eye off the ball for the future moment. And here's where we find ourselves. Please do read Dividend Cafe this week. Significant more about the Fed there. Really great charts, a lot of information that I think just simply unpacks more of what I've already said.

So when I look here at the screen, I'm proud of this week's Dividend Cafe. And I'm really excited right next week's Dividend Cafe because I'm going to unpack a lot more details, some COVID related, some not COVID related. But that's just normalcy from this investment conference. So anyways, I hope you've gotten my point this week. I thank you for listening through it. Please do review our Dividend Cafe podcast. If you don't mind, your podcast player, just throw some five stars on it.

Share it around as you please. Help us grow that rating traffic and algorithm that they use here. I think you know what I mean. Reach out to anyone at the Bonson Group anytime. And thank you as always for listening to and viewing the Dividend Cafe. Thank you. or future performance and is not a guarantee. The 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 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 expressed 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 information are provided as of the date referenced. Such data and information are subject to change without notice. Thank you.