The Dividend Cafe - Three Problems in Search of a Solution

Episode Date: May 28, 2021

There is no shortage of investment symposiums to attend in my business. Whether it be events put on by the big firms I have worked for over the years (UBS, Morgan Stanley), or symposiums sponsored by various money managers and asset management firms, or just independent groups putting on their own show, I am quite sure I have attended over a hundred such events in the last two decades or so, and probably spoken at a couple of dozen myself. While there is always something to be learned at every event, some are surely better than others. The quality of the events, the quality of the speakers, and the candor of the speakers in the message they deliver can vary a great deal. I consider myself an incorrigible consumer of information and perspective and have been obsessed with growing my capacity for investment and economic thought since the turn of the century. These events can be a waste, or they can be utterly thought-provoking or somewhere in between. One develops an instinct over the years for which events and organizations and speakers will be worthwhile and which will not. And this brings me to the subject of this week’s Dividend Café … I have already revealed where I am going with this the last couple of weeks, so there’s no need to hide the ball. The Mauldin Strategic Investment Conference took place (virtually) in mid-May, and it most certainly represents one of the truly spectacular conferences I have ever been a part of in terms of content, speaker quality, and diversity of thought. I chose to turn my major takeaways from the conference into a Dividend Café because I basically think Dividend Café exists for me to share what is most on my mind with our clients … And I assure you these takeaways from the conference are what is taking up most of my headspace these days. 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. Well, hello, welcome to this week's Dividend Cafe. I think it's been a little while since I've gotten to record from this location. We recorded quite a few, I believe, last summer, but I'm out actually at my house here in East Hampton and came out very, very early this morning and spent a few hours writing the Dividend Cafe this morning. So it was kind of fun to be able to write it all together, made the trip from the city

into East Hampton go by very quickly. But it was a lot of fun to write because I was sort of recapping and discussing some of the things most on my mind out of this recent Malden Strategic Investment Conference. I had talked about it the last couple of weeks that I was going to get to it, and that's what we wanted to devote our time to today. This conference is one of many investment conferences that exist out there. I'm pretty sure over the last 20-ish years, I've attended well over 100 conferences and probably spoken a couple dozen in this vein. Whether it be an independently run conference like John Malden's, one from one of my prior firms I worked at at UBS or Morgan Stanley, different money managers, research firms. There's all kinds of these different occasions to have a

symposium or whatnot. But John's is kind of interesting because what John Maldon has done is build a conference around a lot of different speakers that often do not have the same point of view. There's obviously no product to sell. There's no real particular agenda. But there is a diversity of thought that I really admire out of these conferences. But see, it isn't diversity for diversity's sake. And one of the points I make in Diving Cafe today is I get how politically correct it is to kind of talk about all that. But that's what we mean by diversity of thought is not merely differing opinions for the sake of differing opinions. There's some really fringe opinions or radicalized opinions that would be of no interest to me to get shelf space in the library of ideas. Sharing stage time at a conference with a lunatic is not good just because it's diversified.

or the lunatic is not good just because it's diversified. And so what I think you have here is really credible. And I was one of the speakers, so I have to kind of exclude myself from these compliments. But for the most part, really intelligent and respectable speakers that often have differing opinions. And it forces the audience to wrestle with issues. It forces someone who does this for a living, who's engaged daily in the intellectual battle over investment acumen, to consider differing viewpoints and rethink the premises that lead to their conclusions and so forth. This year in particular, around a couple of different topics, I found the conference special for that reason that varying opinions were presented with a view towards challenging the audience to hear all sides and not come down with a conclusion. Like it wasn't that at the end of the conference, now the house view comes in.

You know, the house view is your view. It's what you kind of walk away with. And so for me, I'm going to focus right now for sake of my podcast and video, my podcast listeners and video observers, three particular issues, all of which are just riddled with charts at DividendCafe.com. So there's just no excuse to not go to the website to get a little visual aid behind this. But of course, it is the prime issue taking up space between the ears for economists right now, which is the inflation deflation debate. The second for me was China, its future role in the global economy, and its potential role for Western investors in the next era of the global economy.

And then the third is the Fed, and not merely with the handicapping what the Fed may do or may not do, or what will happen when they do this this or what will happen if they don't do that, more understanding and fully appreciating the severity with which the Fed's interventions have relevance to all investors and to overall economic outcomes and where this is somewhat historically different and what that means and maybe what it doesn't mean. On the inflation-deflation debate, which is something I talk about so often here at Dividend Cafe, look, there's a couple of different people who spoke. I'm going to highlight some of them because they were sort of some of my favorites.

They're people I read every single day. And I happen to have a differing opinion than them on this issue. day. And I happen to have a differing opinion than them on this issue. But they presented such an incredibly thoughtful and important set of perspectives around the present inflation discussion. Peter Bouvard and Jim Bianco are really thoughtful economists, have their own publications, their own research firms. And Jim's a little different than Peter. I think Peter has been kind of afraid of the inflation bogeyman for a long time, where Jim was more in the camp that I'm in as one who believed we were living in a period of secular deflation. And he's changed and provides a really compelling apologetic for why that is. My view is that there is a lot more potential common ground

between the inflation camp and deflation camp than maybe either side wants to admit. Because I think that when you look to what's happening in lumber prices, and when you look to what's happening in food prices, the commodity price indicators, I think that guys like Jim and Peter would freely acknowledge a lot of it as base effect, coming off of very low levels. But Peter makes the thoughtful argument that basically services were growing at a 2.8% inflation rate well before COVID, and then it was goods that had disinflation. And now goods are seeing price inflation. And therefore, if services get back to their pre-COVID level, the combined impact of goods and services will most certainly be inflationary. And he does a sum of parts mathematical regression to get

there. And I think it's a very valid argument. But I also think it's entirely possible that that amounts to something cyclical that then gets watered out by the secular deflationary forces that others believe naturally stem from the debt dynamic that we find ourselves in. walking away from is that all of the arguments guys like Jim and Peter, very thoughtful, very intelligent economists are making, do not necessarily contradict the argument that people like Dr. Lacey Hunt make, which is that excessive government indebtedness is inherently deflationary. That is my view. It's a view I've studied now for well over 10 years and believe that ultimately, the velocity of money is a necessary ingredient to inflation and that where debt as a percentage of GDP is growing, it is a velocity suffocator. And therefore, loan demand that is necessary to create inflation cannot get off the ground, and you fight against disinflationary forces till kingdom come. I do not think that's a good outcome. I do not say that as a positive thing. But I also think it's entirely possible,

Peter and Jim are right, that you're going to have higher lumber prices for a period of time. There's some base effect in there. There's some supply chain in there. And there's also some cyclical inflation in there. But that what will, as a matter of secular gyration, win out in the end, evidenced in longer term bond yields, there's no greater measurement than the term structure of the yield curve is ultimately these deflationary forces. But if the other camp is right, that excessive government indebtedness is an inflationary force, then I think that the deflation camp will prove to be wrong. But I am of extremely high conviction around our thesis, which is that excessive government debt is inherently disinflationary. In terms of the China issue, I do believe that Louis Gove is one of the finest economists alive today from Paris,

based in Hong Kong now, a foremost China expert in the global economic stage for over 20 years. And he historically backs up his position that it turns out the key moment of the turn of the century was not economically, it was not 9-11, but it was China joining the WTO, the World Trade Organization, unleashed a massive amount of productivity as a lot of countries outsourced their production to China. It unleashed about 500 million workers in the global economy, which had a radically deflationary force, deflationary impact. And then ultimately, as the iPhone and some of the digital and technological components came around a few years later, you ended up in a situation where an awful lot of productivity was able to come as a byproduct of these couple of events.

And now China is in a totally different paradigm. is in a totally different paradigm. And their currency is not just the highest performing currency of all major countries since COVID, which was enough of a surprise for me, but the highest performing currency for three years, for five years, and for 10 years. And a lot of us are used to thinking, you think of even like candidate for President Trump five years ago, constantly talking about China's trying to weaken their currency. China's trying to weaken their currency. And here you have China with the strongest currency in the world for a year, three, five,

and 10 years. My how things have changed. The only country on earth of developed nations with a positive real yield in their bond market is China. You have negative nominal yields from a lot of countries, but you certainly have negative real yields, meaning net of inflation, including in the United States in the bond market. And yet China has a positive, obviously nominal and even real bond yield, attracting a lot of foreign capital. The implications to this investment-wise have a lot

to do with where investors in the West may want to consider putting money from both a currency and a yield carry standpoint and fixed income, and where some of that economic strength is likely to consolidate in the decade ahead. The U.S. has made decisions, both fiscally and monetarily. People can debate them. People can have different opinions as to what were necessary, what were not. But I don't think there's a lot of debate about the fact that there's going to be a hangover from those decisions and that economically, China and some of the neighboring Asian countries, ex-Japan, stand to benefit from that. Powerful presentation from Louis. XJapan stand to benefit from that. Powerful presentation from Louie.

Finally, I'm going to wrap up with the material about the Fed. I happen to host the final panel of the conference. John Malden, the host of the whole conference, was one of the panelists. John is one of the most thoughtful economic minds I've ever been around. He and I will routinely spend five hours debating on an issue. And sometimes we'll both change each other's mind. You know, we start off with X and Y, and then I take on the other and he takes on the other. I mean, we're all over the map, but it's one of the things I love about my relationship with John. However, this particular case, one of the things John brought up in our panel that was largely centered on monetary policy and the Federal Reserve is that he fears the Fed losing control of the narrative and that there is no precedent for what could happen if the market were to lose confidence, if financial

markets were to lose confidence in the Fed. And I cannot say that that possibility does not exist. I think it does. But I am more, Lizanne Saunders and some of the other speakers that still believe don't fight the Fed is the prevailing mantra until it isn't. And I think that's right. I think an awful lot of money has been lost trying to fight the Fed. But I think we have to understand that this is a more interventionist central bank than we ever thought possible in our country. Dick Fisher, Richard Fisher was one of the Federal Reserve governors out of Dallas for many years. He was on that panel. And I asked him, do you think the Fed will ever forgive the debt that they hold on their balance sheet, United States government? And he said, not a chance in you know

what. And yet, do I believe that he's right? And yet there could be some other creative outlet by which the Fed does things heretofore thought impossible. I do. And so there is a lot of implications of this open-ended Fed that need to be unpacked in the weeks to come. With that, I am going to let you go because my next video is coming in. But thank you very much, as always, for listening to the Dividend Cafe. member FINRA and SIPC 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. There is no guarantee that the investment process or investment

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