The Dividend Cafe - The Two Sides of the Coin in Normalization

Episode Date: April 16, 2021

This week’s Dividend Cafe is going to dive into the “abnormalcy” of the economic contraction during COVID, the abnormalcy of the economic recovery we are currently in (and will be in for months to come), but then also the “normalcy” of pre-pandemic economic life, and what that means on the other side of this. I will humbly suggest that despite the changes in the economic landscape brought about by the fiscal and monetary monstrosities of the last year, “normalization” will mean “resuming our obsession with the question of _____” That __ is what today’s Dividend Cafe will fill in. 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. Those of you listening on the podcast, watching on the video, I hope you've had a wonderful week. I am really excited about this week's Dividend Cafe. For one thing, I love being here in New York. You can tell I'm recording from our New York studio. It's been a very productive week,

a lot of really interesting things going on in the market and the world. We write about that every day at thedctoday.com. I am going to talk today solely and exclusively about the chosen topic of the week, which is the post post-COVID economic recovery conditions. And what I mean by that is not post-COVID where we are with the economy and where we come out on the other side of the vaccine as all the airline travel comes back and the restaurants continue filling up and that sort of pent-up demand thesis. It's a very important topic. It's just one we've talked about a lot, continue to talk about, and one that almost everybody that I read, study, and analyze seems to have at one point gotten it wrong, underestimating economic vibrancy coming out of a hundred year flood condition called the COVID-19 pandemic. That's not what I'm referring to, though. I'm referring to a further out time period

after the kind of sugar high and the wonderfulness of economic recovery and GDP restoration is done where we find ourselves. And the way I set this up in DividendCafe.com, the written commentary that kind of drives the theme and message and so forth every week, was around the topic of normalization. It's a word I've used myself countless times, and it's a concept and an idea and a belief that I hold to very dear. I want normalization. I want our economy back to normal. I want our society back to normal. And we talk about these things generally around a cultural reference that's important to us. So people that maybe have season tickets to their favorite football team, they want to be able to go back to the games. They want full stadiums, snack bars open, you know, the whole deal, that experience.

Nothing wrong with it. I want it. I demand it. I get others who want it. And it could be the Broadway theater, which looks set to reopen here later this year. It could be, obviously, all of the people who very righteously have been pounding the drum on school reopenings. And there is there's both a process of normalization and then there's an end result of normalization. The process has been we were here and now and now we're here.

You know, we're moving forward. And when you go from from 1% restaurant being restaurants being filled to to 75%, you have not achieved normalization, but you're in the process of normalization. You're going in that right direction. And that's what we see in every data point we look to, other than the ones that are already back to kind of normal levels, which is a different topic. But you see restaurants way higher. You see unemployment way lower.

You see jobs getting filled. You see manufacturing picking up. And now the airlines are really on fire. And it's interesting to talk to people that don't travel or are not so much engaged with this idea of normalization. Maybe you don't quite feel as passionate about it as I do. I just talked to a reporter this morning from NBC News who was interviewing me about another topic and made a comment in the context we were talking about how she doesn't know 20 people that have gotten on an airplane yet. She can't believe that there even are 20 people who are flying again. And of course, I've flown

like 50 times or something since COVID. And I said, well, Newark last Sunday, when I came back from a trip to Nashville, was the most crowded I've seen it in years. And Nashville was very crowded both there arriving and departing. And I talked to a client this week who was in Charlotte who has flown in and out of Charlotte dozens and dozens of times last several years. Said the same thing there. So I think that a lot of people who are kind of involved in normalization are observing it. that a lot of people who are kind of involved in normalization are observing it and others that maybe are still kind of on the sidelines a bit wouldn't have that reference point, obviously.

So here's the setup I'm trying to get to, okay? I'm defining and constantly contextualizing normalization and in a positive sense because I think that normalization is itself a very positive thing for the sake of society, it's emotional health, relationships, experiences, physical health, gyms reopening, just that kind of feeling of, okay, we had this awful thing happen and we're on the other side of it. And there's a lot of cultural markers that will, you know, until those things kind of go away, I don't think it's going to feel totally normal. But I know we're getting there and I'm doing everything I can to push us getting there sooner than later. And a lot of it, of course,

is out of my hands. All right. This is the thing as we get back into markets and economics. Pre-COVID normalization, normal conditions, back to where we were if you think to late Q4 2019 going into Q1 2020, well, there were a lot of great things in the economy. We had a very strong foundation in terms of really low unemployment. We had come off a really good wage growth, but we still were at a 10 year plus economic expansion coming out of financial crisis with a lot of questions as to what the sustainability of economic growth looked like. And that as I read back to what I was writing about and studying and looking at in late 2019, going into early 2020, before COVID and coronavirus was on our minds, there was a fork in the road moment that I think we were going to get to, which was, OK, let's say we're in the sixth or seventh or eighth inning. Are we going to get an extension of this? Is there going to be tailwinds that push things forward around the supply side benefits of the tax reform that took place, around deregulation that pushed up a lot of corporate confidence and optimism, that we were getting kind of a new wind in the financial sector, the energy

sector, the industrial sector, or were the headwinds of a lot of uncertainty around global trade and questions as to how frothy things could be and sustained in the credit markets. You know, there was a lot of open- endedness about some of these topics as to which way it was going to go. And my thesis was really, really committed. I wrote about it a lot in 2019, a lot in 2018. Business investment was going to be the necessary ingredient. It wasn't like we said, OK, we've had a 10 year run in the economy. Consumers really out running up the credit card. They're buying Netflix subscriptions and and going to the mall and they're buying Netflix subscriptions and going to the mall and we just need them to buy more things. This notion constantly that you need just more consumer spending and that's what drives

the economy. It is just so silly and so wrong. The sustainability, you obviously always are going to get high consumer activity when there's wage growth and there's more disposable income in people's pockets. You never have to worry that the American consumer is going to get a raise and say, you know, I really want to kind of save this money. It's just not going to happen. The consumer is fine. The consumer is probably fine even when they don't get a raise. They're going to spend money. They love doing it. And sometimes there's less access to money than others. But that's not the same thing as saying the consumer appetite is down or demand is down. The consumer may not just have the resources.

The issue is always on the production side. Are we producing more, which sets off the virtuous cycles, the positive feedback loops that create economic growth? the positive feedback loops that create economic growth. And so my question then was the small business optimism that had been so down after the financial crisis and as it came back up, stayed muted. Corporate confidence, meaning Fortune 500, Fortune 100, CEO confidence that had been so muted and down and negative

and yet kind of that low level that wasn't wasn't declining after the crisis, but just never got back up to where it needed to be to then create significant commitments of business investment, what we call capital expenditures, new money and resources in R&D, in innovation, in factories, in plants, in inventories, in new hiring, that investment into the future that creates productive economic growth and sets off the virtuous cycles necessary for ongoing economic expansion. CapEx took off in 2017

with the tailwinds of a new level of both small business and CEO confidence and optimism on the promise of tax reform that was very supply side oriented, and it did come. And of course, some deregulatory benefits and things like that. Not to mention just new technologies, new advancements in biotech. This is not all about the policy framework. There was just a really positive period there. It got muted a bit with some of the uncertainty that came from the trade war. There were credit markets that tightened in 2018. 2019, the Fed said, OK, never mind. We're not tightening credit markets. Rates went back down. Liqu liquidity came back up as they stopped quantitative tightening. We're off to the races, then COVID.

So now, for our purposes, we're in a time machine going back to December 2019. And we're saying COVID didn't happen, and the COVID recovery didn't happen, and we were there, and now we're back here, normalization. Now, of course, there's one problem that's really quite fallacious with what I just said. happen and the COVID recovery didn't happen. And we were there and now we're back here. Normalization. Now, of course, there's one problem that's really quite fallacious with what I just said. COVID did happen. And therefore, there are some things on the other side of this that are affected, that are not just the transitory down and the transitory back up. There is, of course, $5 trillion more national debt.

There is an interest rate that's now 0%. There is a couple trillion, soon to be, let's call it $3 trillion more on the Federal Reserve balance sheet. So some things are going to stick that were transitory during COVID. But I think the great question as we go into the future, Q3, but probably more Q4, Q4 into Q1 of next year, post-post-COVID recovery is going to be CapEx, is going to be business investment,

it's going to be business productivity, business confidence, the supply side of the economy that then feeds demand and feeds the virtuous cycle of economic activity and productivity. And then from that growth and from that prosperity. Simple, right? What could get in the way? Right now, manufacturing is increasing. Industrial production is increasing. Machinery use and investment is increasing. All that looks good. The problem is a lot of it is sort of still in that coming out of COVID data set, not post post. I think the biggest thing getting in the way is not,

I, by the way, do not want to see the marginal corporate tax rate go higher. And I think that is a problem if it does, whether it goes from 21 to 25, which is where I think it's going to go, or to 28, which is what the Biden administration has put forward in their first draft. Either way, I think it's going to go up. And I think that will hurt on the margin. But the bigger issue I'm looking to right now is on the small business side, the incredible correlation between small business

expectations and nominal GDP growth going back 30, 40 years. I think that you are talking about to national income over $1 trillion a year that comes through from pass-through entities, LLCs, S-corps, partnerships, sole proprietorships that flow through the income to the owners, the operators, the managers of a business, small business, family-owned business, mom-and-pop business. That's America. And I know big corporate companies matter. And obviously, we own them in stock portfolios. But when you talk about the engine of economic growth and optimism, I believe that if they repeal the 20 percent deduction on pass-through income, which was meant to equalize for pass-through entities, the tax benefit that C-Corps got from the prior tax bill, that to me could be the type of thing that disrupts small business confidence. It's now the number two sided thing as an impediment to their business growth. Number one is a labor shortage. How could there be a labor shortage? We've had this big

unemployment problem. One, on the lower skill side of things, with federal subsidy combined with the normal state unemployment benefit that's part of our various states on insurance, unemployment insurance programs, people are able to get somewhere in the range of 18, 19, $20 an hour to not work. It's very hard for a business trying to hire in the lower tier of employment, low skilled, low wage type work, when they're

competing, come work hard for this wage or don't work for an equal or even higher wage or even, you know, it could be even lower. There are people that would take 18 an hour to not work over 20 an hour to work. And I'm not saying it's everybody, but I don't think any of us can doubt that that is true, you know, as far as things go. But then you have the whole opposite side of the equation, which is the skilled labor shortage. And that right now there are millions of job openings for various certified positions, credentialed, pedigreed, higher skill, higher technical proficiency required, and not availability in the labor pool to meet that demand. So you have businesses that have a mismatch of supply and demand in labor, and then they have capital concerns around tax policy.

I don't know where these things will go. People that have bet that finally this time it's going to be what really reverses American productivity have been wrong over and over. There is still an incredible engine of prosperity in our entrepreneurial system, and it has overcome bad policies. It's overcome transitory economic conditions, and maybe it will again here. But I just think normalization of a post-post-COVID recovery economic environment puts us back to where we were in late 2019, which is where are we going to be for business expansion,

business investment, CapEx going forward? And very candidly, we also now have to do that with whatever crowding out effect there's going to prove to be from an additional $5 trillion in national debt. That in the national output, there is a percentage of GDP that has now pushed down the private sector and pushed up the government sector. And yet on the other side, obviously, it has in the short term put a lot of money into the economy. It's added pocket money for consumer spending and things like that.

But long term, I think it suppresses growth. What it helps in the present, it takes away from the future. That's a very non-political and rather non-controversial thing to say. So we have questions in the future, and I'm not going to answer them here right now today, but I am going to be studying them religiously as we continue to go forward and analyzing, because every bit of economic analysis right now seems to be focused on how many people are in the airlines

today and tomorrow and the restaurants next month, and I think that's all important, and I want a good jobs data number at the beginning of May. And I want a good wage growth number beginning of June. But what I really want is a great CapEx number in January of 2022. That to me is a bigger economic story for the picture I'm talking about when we talk about normalization. Okay, that's all I have for you today. Thanks so much for listening to Dividend Cafe. I cannot tell you how many charts I have about all this stuff at DividendCafe.com. If you listen to the podcast or watch the video, you have to go to DividendCafe.com because every point I made, I accompanied it by a different chart to reinforce what we've written

about here this week, okay? Please do please do, uh, forward this around anyone you think would be interested in the topic. We'd love to build up more folks that are listening to the podcast and drive some of those higher ratings. These, uh, you know, Apple, Spotify, Stitcher, Google, uh, the, all these little, uh, uh, podcast players are very clever in how they can rank things and sort things. And so the more that we get reviews and people forwarding and talking and all that, it really helps us. We appreciate that. And other than that, have a wonderful weekend.

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