The Dividend Cafe - Trading Earnings for Tariffs

Episode Date: August 3, 2018

This week we get into the state of the economy Topics discussed: State of Economy 4.1% GDP Growth Successful Investor Behavior TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. This is David Bonson, the Chief Investment Officer at the Bonson Group, and we're just bringing you our never-ending weekly commentary on all things market and economy related. The market is sitting substantially off the lows of Q1 and Q2, and yet with the significant headwind of trade and tariff uncertainty continuing to linger, it's been a big factor off and on this week. This week was case in point of the underlying tension in markets as investors grapple with

the tailwinds of earnings versus the headwinds of trade uncertainty. This week I'm going to get into the state of the economy, what four percent plus economic growth means to you, and the be-all and end-all of investor success wise behavior. So let's jump into the Dividend Cafe. Did someone say 4%? The story that missed last week's Dividend Cafe by a couple hours was the Q2 GDP announcement measuring economic growth and to be precise measuring real economic growth that is net of inflation. And as had been somewhat suspected the number did indeed top 4% a 4.1 real GDP number. If you're interested, go to our YouTube channel. There's a clip of me live on Fox Business talking about it right as it came out, giving a

little commentary there. But look, the message to markets was not merely the 4% number, which I guess critics of the Trump economic plan have every right to say may prove to be transitory. I don't happen to believe it will, but it's certainly possible. But it was evidence within the number that this economic growth may prove to be much more sustainable than those critics have suggested. One of the things I mentioned in the clip is that business investment was up 9 to 10 percent in the first half of the year, a stunningly high number that I believe is the key to productive non-inflationary growth. A shot in the arm with exports or with consumer spending could indeed prove to be transitory and therefore unsustainable, but business investments suggest a longer-term acceleration of economic growth. It's why we have to keep talking about capex etc. 3% real GDP growth or higher is the number that many feel is no

longer sustainably possible. It's the trendline number our economy needs and by the way that the servicing of our national debt needs and I should say it's the minimum number that we really need to see. But achieving it will come down to business investment. And the Q2 numbers are a healthy encouragement along those lines. Are 25% tariffs coming on $200 billion of imports from China? The president's announced his interest in doing so, but no, it's not been formally proposed or implemented yet. It's in what we call the public comment period. Nothing can happen earlier than September. Get used to more of this, but clarity

around what is a bluff and what is real remains the big need for market actors. ETFs, exchange traded funds, single security tickers that seek to replicate a certain index or basket. They now represent $5 trillion of investment assets worldwide. Just crazy to think about. On the real estate front, the dollar volume of U.S. residential sales to international buyers declined 21% year over year, the surest sign yet of a cooling effect in high-end markets, which have been beneficiaries of large foreign interest.

Foreign buyers represented 8% of transactions last year, down from low double digits the last couple of years. China remains 15% or more of that foreign purchase block, the top country buying U.S. real estate for six years in a row. Keep an eye, we'll be doing the same on the level of foreign buyers and foreign dollar volume in real estate. It has represented a significant crutch in the high-end market. It'll be very interesting to see if that continues to decline. Inflation watch. It is putting us out on a limb to share our view that actual substantive, secular, sustainable inflation is not on the horizon in U.S. markets right now. We acknowledge

market volatility will elevate where even transitory inflation is seen or suspected, but that is a far cry from allocating to client portfolios around the belief that a significant increase in inflation is coming. We have seen a shortage of workers in the labor data, but no significant move higher in wages. We have seen oil prices move up substantially, and the inflation needle was largely still. The 30-year bond yield has told us long-term inflation expectations are muted to say the least. None of this should be taken as our belief that inflation of two to three percent is off the table. It is very much on the table,

pretty much always, nor is that benign. Two to three percent inflation slashes purchasing power every decade dramatically. And we have to manage for several decades of client retirement, for example. I always want to say to my inflationista friends, be afraid of inflation without distorting what the fear should be. The behavioral nugget of the week. This is my favorite part of this week's Dividend Cafe. I maintain for a very long time that the number one secret to wealth accumulation and wealth preservation is to not do stupid things. That the bulk of bad things which happen to people with their wealth over the years comes down to bad decisions. It's why we promote a behaviorally wise approach to wealth management rooted in careful decisions and fact-based implementation that ignores or avoids the excesses of human emotion in order to acquire and sustain wealth over time. people are allured by and one that can do unspeakable damage to one's financial

well-being, especially those who fancy themselves untouchable in the financial comfort category. And that is the irresistible allure of novelty. Put differently, many wealthy people of a particular psychological DNA find that which is unique, different, complex, and unconventional ever so attractive for how it grants them a differentiation, a feeling of exclusivity, the veneer of wit and intelligence? And do some of these highly creative, out-of-the-box, uncommon strategies sometimes work out? Well, sure, of course they do. But the question is not what percentage of these things work out. Rather, the question is what percentage of blow-ups take place from things of this description. I fear the answer

to that second more important question is nearly all. Novelty scratches ego itches. It rarely scratches planning and goal itches. An investment is not attractive just because it is out of the box or provokes some sort of differentiation from one's peers. Sometimes liquidity, simplicity, clarity, and objectivity trump everything else. What is at the heart of behaviorally wise investing? Fundamentals, cash flow generation, liquidity, transparency, tax sensitivity, rules, discipline, rebalancing, diversification, matching goals to solutions, avoiding the big mistakes that emotions and human nature pushes towards. Rinse and repeat.

I do have a section on Japan and their currency and interest rate policy, as well as Chinese currency issues and an incredible chart of the way the China yuan is traded per the U.S. dollar since the election, up, down, up, down. I'd really love for you to look at that at DividendCafe.com. Well, let me close, though, by encouraging you to go to marketepicarian.com or listen to our Advice and Insights podcast. I talk more there this week about the Federal Reserve and what I view to be the real fear around the present state of the Fed. And it is not merely what they will do as it pertains to actual monetary policy, but whether or not they become an enabler to the Treasury, enabler to the

government in runaway deficit spending, I think is a highly inappropriate aspect of central bank and could lead to much greater instability in economic and financial markets. It's worth reading. We talk about it at the other podcast as well as at DividendCafe.com, but I won't get into it more exhaustively here because of time. Finally, this week's chart of the week shows the stock buybacks and dividend growth have not merely been a new byproduct of tax reform but we look at a trend line since the financial crisis of how stock buybacks and how dividend growth has been climbing and you see that yes they're certainly enabled by tax reform they're facilitated they're supplemented they're assisted but the fact of the

matter is we've had a really phenomenal move higher in stock buybacks and dividends ever since the financial crisis that trend continues and what drives the trend earnings always earnings I'm going to leave it there for this week's dividend cafe podcast thank you so much and we really encourage you to reach out with any questions anytime look forward to coming back to you more next week in the Dividend Cafe. Thank you for listening to the Dividend Cafe. Financial food for thought. for listening to The Dividend Cafe, financial food for thought. is free of risk and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance is not a guarantee. The investment opportunities referenced herein

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