The Dividend Cafe - Trump and Volatility

Episode Date: August 14, 2019

Topics discussed: Volatility expectations in the weeks/months ahead Trade war Currency Brexit Hong Kong The Fed Asset allocation when the 10-year is 1.65% and equities face uncertainty and volatility Within equities, what looks good? Energy sector Is big tech/new tech dead? Low beta or high beta? Outlook for dividend growth Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. our investment committee, and we've kind of subbed out one guy who was here last time and brought in another guy who was not here last time. So welcome, Robert Graham, first time doing our little group podcast here. Absolutely. Thank you, David. Robert was out of town with clients last week, and then Brian Saitel is out of town with clients this week. And so it works out well because we have five people on our investment committee, and we have four chairs at our podcast studio. So hopefully people will just continue to have different meetings one at a time. And I won't have to pick who will be off the island on a given week.

Okay. So we last got together and it was kind of a couple days after the announcement via Twitter that President Trump was saying we're going to go forward with 10% tariff on the remaining $300 billion of imports. And it's a good thing that we are recording the podcast end of the day Tuesday, because if we recorded it again yesterday, we would have had a whole different conversation than where we are today. So let me do this, guys, before we get into it and update with kind of where things went today in the newest announcement out of the White House.

Since we recorded last Monday, market went down what was about 750 points on the day we recorded. It had been down close to 1,000, made back a couple hundred points. Then it went up 400 or 500 the next day, then kind of broke even. Then it had an up 300 another day and then a down 300 day. So volatility has been very elevated. But actually, from the time we recorded to where we are right now, the market is probably up a little bit. If it's down, it's literally like 100 points, yet with tremendous swings on the way because very big up days, very big down days. So the market as we sit here recording is at 26, let's call it 26, 300, okay, in the Dow. 26, let's call it 26, 300, okay, in the Dow.

And I would say that the initial drop was very rational, anticipation of this elevation, but that right now it's difficult to talk about the trade war impact, and we more have to talk about the volatility because the trade war, there isn't news to price in. There isn't this sort of certainty as to what exactly is going to be happening. Evidence by market action today, Dow up 400 points. Look at the NASDAQ up 150 points. They basically announced that a lot of the tariffs are now on hold again.

Is this the third time or fourth time that they've done this? Announced tariffs and then said, OK, we're going to hold off on it. It's at least the third time. This is the first time that I was surprised that a concession was made early on. I thought it would take a while for the administration to make some sort of concession. And, you know, they came out and they said that they were going to suspend the tariffs. So it was surprising for me to see it. But I mean, it wasn't the first time they've done that.

No, no, no. So when they were back a month or so ago, when they said, never mind, we will let American companies trade with Hawaii, that you were not surprised then? No, I was not surprised because things hadn't escalated at that point. Now it was different. The dynamic between China and the U.S. was different in that it didn't seem like any side was going to give it all. And everybody wanted a safe face, and China wasn't budging,

and Trump looked like he wasn't going to budge. And all of a sudden it looked like, okay, well, you know, we'll suspend tariffs. It was interesting to me. It sounds like you're not surprised over the concession. Well, you got to remember, you said the administration, I think there's a key word there. This is something that the entire administration was against. And it was the president who, of course, has the decision-making authority who was for it. So I think in this case, the heads in the administration, who I'm going to, just for simplicity's sake, call the Mnuchin-Kudlow wing,

although Bob Lighthizer is on their side on this one. He's often a little bit more protectionist. But in this one, even he felt that this is going to hit consumers more directly. that this is going to hit consumers more directly. When Pete Navarro, who's the trade advisor, when he does press, he is saying this won't hurt the economy, that we're fine, this is great, we're going to get a better deal, the economy knows it, markets are holding up together.

And the other guys are telling the president, look, this is going to be impacted. The first time I said, oh, thank God, he doesn't really mean what he's saying. Like if the president really believed it's easy to win a trade war, you know, we're getting so much money out of this tariff stuff. It just it's amazing how well the U.S. is doing from it. He says all that. And I don't mind politicians being politicians, but it would scare me if he really believed it. But remember, this is about six months ago, they started these huge subsidies to the farmers. So you don't go give farmers $11 to $18 billion of offset if there's nothing to offset, if everything's going great. That was them recognizing, look, this soybean thing is hitting them hard, so we have to give them some money to offset it.

What happened today to me was the same thing with farmers, but with American people that buy electronic product. They just said, how are you going to get a tariff in on iPhones and on computer equipment without it being a more clear tell of how tariffs actually work? What say thee, Julian? I wanted to say, I mean, what I found really weird about the announcement today is the timing, like why 12th of August

when nothing is going to happen before the 1st of September anyway? You know, why so quickly after having these 10% on 300 billion? It's kind of strange. And, you know, I guess that's the way it is with this president. So we're going to have to get used to that

and, you know, try to forget the noise and focus on the fundamentals. So back to earnings, back to where the tenure is, which make everything look super cheap when, you know, you have the tenure at 1.6, 1.7%. And so to me, that's really the surprise is why now when there's really nothing to do until the 1st of September and you still, you don't have the Fed meeting until 18th of September, right? So again, like, you know, why do this today when, you know, you're going to have, the markets are going to be good again. And then people are going to say, so what happens with the Fed now? Do we need two cuts before the end of the year? You know, if we don't have this trade tension anymore, it's on hold for another six months, maybe. Things are not as bad.

The equity market is ready again. And then we start discounting less cuts, I guess. So we are back in the circle. But are you in the camp that actually believes the Fed is going to cut and not cut around where we are in the trade war? Or are you just referring to the perception in the market that there's an inverse correlation? I think it's nonsense. I don't believe the Fed's going to make their decision around the trade war whatsoever. Probably not.

But I guess the Fed doesn't. I mean, my experience is that they don't like to do anything that's not – they don't like to surprise the market. So it's really important to look at where the implied implications, you know, cuts are in the market. So they will always try to direct the market to not surprise it. But I would think that regardless of what happened, probably because it won't have a real impact on the economy yet this year, I would think that what the market is pricing

is probably right, which you're going to have another one in September. 100%. Well, they say 90% chance at the moment, I guess. It was 100% last week. It's at 90% now. Yeah, it's at 88% today. I checked.

88% of one chance of a one cut and 12% of two cuts. No, so that's okay. Still today. So it's 100% chance of one cut or more. Or more, exactly. And then 12% of a second. Of a second one. Yeah, that's right.

And then I haven't checked later on in the year, but I'm assuming it's still pricing. It's like 70% for that third cut by the end of the year. So, Robert, what's the answer? Why did President do it today? I'll give you three choices. We'll do this multiple choice. Is it just complete random, just Trump being Trump and absolutely no rhyme or reason? Did he panic from the stock market or is there some back channel negotiation going on that we're just not privy to?

You know, as close to option B as I could get is what I would say. You know, Trump, in my opinion, is looking at the stock market as a feedback loop for the policy he makes via his tweets, right? And I think these days policy is following tweets more so than it has before, and we need to come to terms with that. I think, echoing what Julian said, though, fundamentals are what we need to look at in the long term. And I think the Fed continuing to say that it's data dependent is important. But look, look at the probability of the cuts going forward. I think that that speaks volumes about it. And Trump is getting the cuts that he wanted through this increased tweet volatility that he's making.

So so you both you sound like you're on the other side of that. You believe that the Fed is actually responding to Trump, that it is responding to fears in the market about the trade war, that these cuts that they're going to do, they would not otherwise be doing if it wasn't for Trump shaking things up a little. Yeah. I'm interested in why you don't think that's the case. So nothing that comes out of this hoopla of the trade war you think is affecting the Fed whatsoever?

Well, that's exactly what I said. I think that the trade war is, in fact, very much domino in the underlying business investment and the underlying economic growth that the Fed wants to see sustained. So there's a cause and effect, but it is not the same as the volatility or noise from it. If the trade war is ended tomorrow, they announce the China deal, I think that the damage to business confidence has already been done and that the Fed is viewing their need for this, quote unquote, insurance cut as still on the table. That would be there anyways. So they have never rationalized this around trade policy. They've rationalized it around we're below our inflation target. And I believe, as I've written countless times, it was really the mistake they think they made in December, October of last year.

The impact added to credit markets. They needed a way to unwind that. They began unwinding it in January with their microphone. Then they began unwinding it with rate policy in July. The trade war has increased the implied probability it's going to happen from the noise. But even then, the trade war goes away. We're going to talk in a second about five other things that could be jacking around with the stock market. If the stock market is something below 26,000, is there any doubt they're going to be cutting that rate? So in other words, the trade war happens to be the fill-in-the-blank symptom, but it's ultimately market volatility. Robert made reference to the fact they are coddling risk assets, and trade war gives them an excuse to do it, but they would find another excuse if it wasn't for the trade war.

They want to cut this rate to unwind the tightening they did in Q4 of 2018. That's my belief. And I was going to say, actually, it's your second bullet point on the list, which we haven't addressed, which is currency. And I would say it's probably the main reason for the cut. It's not trade war. I mean, trade war gives another reason. But the bigger issue that the U.S. has is the strength of the dollar. And when you listen to earnings calls, you know, companies complain about the trade war, about the uncertainty in China.

But they also complain a lot about the US dollar being so strong. And then when you have, you know, all these negative yields in the rest of the world, and with the US being the only place where you can put money to work in, you know, in the government bond, And with the U.S. being the only place where you can put money to work in the government bond, that impacts the currency and that makes it harder for U.S. companies to compete. Well, that's right. And it also invites other action from our own Treasury Department that could then become shocking into global markets. shocking into global markets. And so the threat of the U.S. intervening, you know, this is where the rate policy requires the Fed to act, and that impacts currency.

But the Treasury Department has a lot of authority from Congress to intervene in currency markets as well. And to the extent the Fed can kind of get their dollar where they want it to be without Treasury having to get involved, I think is a big factor. But here's the other piece to what you're saying. And I think it reinforces my point. What was the 10-year before this latest escalation of trade war? Let's call it 2%.

It may have been 205. It had been 190 before that. So, yes, this dropped the 10-year 2025 basis points. We're now in the 170 range. So the yield curve is inverted further, but the yield curve was inverted, and that was the issue the Fed's trying to deal with. They have a 90-day rate of money from their policy that's at 2.1% and a Fed that was at a 10-year that was at 2%.

and a Fed that was at a 10-year that was at 2%. Now, they widened the inversion from the trade war, but I think the Fed has to try to un-invert the yield curve no matter what Trump is tweeting. Yeah, I think the Fed, like you said, I think the Fed has to try to deal with the inversion of the yield curve. Going back to something you wrote a while ago, which talks about the Fed is a truly independent, you know, obviously, you know, on paper it is.

But, I mean, I'm not so sure that all the Trump rhetoric and, you know, China is taking a steal on our lunch and all this kind of talk is having no impact on the Fed whatsoever. My opinion might be a little different if I didn't feel like Powell kind of kowtowed a little bit in Q4 of last year. You mean in Q1 of this year? Oh, right. Okay.

As far as letting the markets know that there was going to be some sort of cycle of reduced rates and so on. That there was going to be some sort of cycle of reduced rates and so on. So, yeah. I think that that is making my point. What Powell did after months and months of Trump jawboating him was tighten in the face of Trump. Then the Bernanke and Yellen move was to kowtow to global markets, not to Trump and Twitter. Stock market dropped 14.4% in one quarter. And high yield spreads blew out 550 basis points. Then Powell capitulated.

But I'm not only not sure that that's true that he's responding to Trump, I might even argue he is responding to Trump the opposite. I don't know. None of us can read his mind. But you could argue, would he have done 50 basis points instead of 25 in July if he wasn't afraid of the perception of people saying, oh, he's just kowtowing to Trump? Everything he said economically rationalized two cuts at once, and they only did the one. So it almost made me think if Trump's having an influence, it's the opposite direction. He's keeping him from acting because he's afraid of the perception of exactly what you're saying. I don't think any of us could really conclude what's going on because it requires reading his mind.

But I've always felt this. I've felt this way even – I've been very critical of all the past Fed chairs. I'm not critical of them about their earnestness. I take them at face value. It's just that I guess you could argue that they may be subconsciously affected by it. They can't enjoy Trump tweeting at them and so forth. But I think that these are serious people, serious economists, that a lot of times they're driven by a seriously faulty ideology, in my opinion. But I think that he is trying to be data dependent and so forth and so on. I just think they're stuck in a position there's no easy way out of. And to the extent that it was someone said that last rate cut was because of Trump, the reality is Trump was wanting a lot more than one rate cut and he didn't do it. So do you see the Fed put what we've been calling the Fed put for the last 10 years- The rest of my life.

It's still very much alive, right? The rest of my life. I guess, yeah. The rest of my life. That's what it feels like. It'll never go away. I don't know any historical precedent for a society getting used to low rates, for a society getting used to central bank coddling risk assets. And most importantly, and again, we could do, we should do multiple podcasts on this subject. The government spending, the Fed doesn't have to monetize.

um the government spending the fed doesn't have to monetize central banks now become a quasi fiscal tool not merely monetary because there is no spending discipline in europe there's no spending discipline in japan no spending discipline in america so central bank becomes a tool which is where these negative yields really come from has everything to do with the size of government spending, really nothing to do, I think, with macroeconomics. Okay, volatility. So we're up 400 today, we're down 400 yesterday. We talked about volatility last week. So we've talked about trade war, Trump, Twitter. Julian brought up the currency impact.

I wrote an article last week about exactly why this is kind of an issue. So far, there's not been a lot of bite around the bark, but God, the bark is scary as could be. The idea that the president could order the treasury secretary to go intervene and sell up to $90 billion of dollars without involving Congress or declaring a national emergency. To what extent would that be unprecedented going back? I mean, that would seem to me as highly destabilizing to our credibility as a nation here. I think it would be highly destabilizing and it would have a tremendous impact on dollar demand and U.S. investment demand. Now, the counter is they haven't done it. So the threat of it is scary, but as long as it doesn't happen, you don't have anything to worry about.

But you like to think you don't even have to worry about it being discussed. And they have an emergency provision. He can order the Fed to go do things. I will say this. I'm not being critical, President. I'm making a comment on the environment we're in. They said there was a national security emergency to implement steel tariffs on Canada. So I think they're willing to call things an emergency that most people in the plainest meaning of those words would not consider to actually be a national emergency. What say you, Dale? Yeah, I think

with this president, a lot of those superlatives kind of lose their meaning. I could see Trump calling out the stops to do whatever, make any sort of excuse and use any sort of uh any sort of presidential action um as far as uh trying to weaken our currency and uh you know anything to that effect i'm like robert like robert said i'm totally against that type of manipulation i don't think it's uh i don't think it's good for us i don't think it's good for china in the long term i don't think it's good for anybody so um yeah i i i hope that doesn happen, but I assume that there will be some more volatility in the event that it does. I will defend the president for a second here, but in this sense, one of the things I talked about in my article last week and what we talked about in 2016 with

China, the agreement reached in Shanghai, it was global coordination where everyone got together and said, let's all agree to do this together. And I don't really agree with those things. And Trump would refer to it as globalism and this and that. But in that case, it was, and also the accord that was reached with the so-called Plaza Accord of President Reagan in the mid 80s, there was this sort of agreement as to how all these interests of varying countries come together. I don't want us to go intervene in the dollar and destabilize. But if they deemed that by not doing it and other countries are, it would not so much

be our action or inaction. It would be the divergence. We just haven't really had much global currency divergence for most of my lifetime. I mean, excuse me, my adult lifetime. Because for the most part, currency volatility has been dramatically suppressed since the 80s. And there's been bouts of it here and there. But the point is, it's always been short lived. It's usually been emerging current Russia, Thailand, things like that. But really, I think that the issue here is, could China end up going another direction violently that forces the U.S. to go another direction? And then does President Trump at that point appeal to the nationalistic impulse to say,

hey, this is where, yeah, we're doing this. Yes, it's destabilizing. We're being forced into it. Because I think that the American people largely bought that argument on trade. The idea, we didn't start this trade war. There's been a trade war for 40 years and China started it. And then you kind of dig a little deeper and there's rhetoric around it.

But you're like, what do you mean? And they say, oh, because they're stealing intellectual property you go well that's not really what you said that's a separate deal so there's like bad actions but they all get stirred in the same pot and i think that that's what where we could go with the currency deal too and that would be my my concern is that the president probably is not as afraid of going there as past presidents would be do Do you follow what I'm saying? Yeah, I see what you're saying. But I guess, you know, at the end of the day, if you, you know, he talks always about where the market is and, you know, having the Fed lowering rates. So he's very worried about, you know, the wealth creation from having asset prices at the all-time high.

I think whatever it does, at the end of the day, it has an agenda that's done a lot of good things for the economy, including lowering taxes. So I don't think whatever it does will destabilize 100 years of the U.S. dollar being the reserve currency and this country being the best place to put money to work and invest. So, Robert, how about it? Can he say, hey, I want a weaker dollar. Everyone else is doing it.

We're going to do it. Can he say that stuff as long as he doesn't go take an extreme action? Is that OK? I happen to think he's not afraid of much except for losing the next election at this point in time. So I wouldn't put anything past him. He can go ahead and say that. But, you know, in my opinion, I don't think it's the right thing to go about doing that. Being the reserve currency is, you know, a privilege. And I think we need to uphold that as much as we possibly can going forward. It's not inevitable that we stay in that position

forever. But with the rest of the world acting as they are, I see it for the foreseeable future. Hopefully my my adult lifetime, I would say. So currency is a source of volatility for these reasons we're discussing, and particularly the lack of certainty around what exactly the president would and would not do. Same exact thing can be applied to trade. Brexit, they have a hard deadline of October 31. Boris Johnson, new prime minister, has said if there's not going to be a deal, we will go. I think most European Union believes him at this point. By the way, National Security Advisor John Bolton, colleague of mine at National Review, stated that they have

told UK we fully support a no-deal Brexit. I've been kind of longing for no-deal Brexit for the last several months because I sort of want to just call everybody else's bluff. The idea that the world would end if they don't have a deal in place, I think, would be very quickly called out. And immediately Germany would be in such a worse position than England that all of a sudden a deal would get done. But even I say it certainly could enhance volatility. So we have an uncertain outcome in Brexit and they cannot politically punt that again. He has to do something, either

full-blown exit or get a deal done with the EU. That's assuming he's still in the job by the end of October because it's quite possible that he loses his majority by that time and you have new elections. I think the betting odds say that's like an 11% chance. They just got walloped over in Wales though, right?

He lost a couple MPs in one of those elections, right? Yeah. But again, the overall complexity of their parliamentary support is still overwhelmingly in his favor. My worry there is that we have another delay. And to me, I think the worst that can happen is what's happening is that there's no decision. They keep delaying.

So whether you stay, whether you leave, make up your mind, and then you can move from there. But until you make a decision, nobody wants to invest. The rules aren't clear. And that's the worst thing you can do to the economy. So it's a potential source of volatility out of the uncertainty. Yeah, I think it's a potential source of volatility out of the uncertainty. Yeah, I think it's a potential source of volatility. I do think that out of all the geopolitical things we have on this list here, trade war, currency, I don't know we're going to get to Hong Kong in a moment. I do think that Brexit is a little lower down on the list just given the length of time it's been going on.

It's been telegraphed. And it's been going on. It's been telegraphed. There was a real well-known British band once called The Who who had a song called Won't Get Fooled Again. We've been told Brexit was going to ruin the world about five times now, and I think people are sick of hearing it. Yeah, I think so too. So for reasons that the market snapped back a few times on some of those scares, and think it's lower down list I mean obviously I could be wrong maybe I know everybody freaks out over a no-deal brexit but I don't see it happening so Hong Kong is that a legitimate source of volatility is a more political story

than a market story it's certainly a political story and I'll just say that the the whole one country two systems philosophy isn't dead it's gone and if it's not a big signal to Taiwan, I don't know what is in this case. In my opinion, I think Carrie Lam is gone. I think she'll resign. I believe Beijing expressed support for her. How much that actually means, I don't know. This is different, though. You know, everyone remembers 1989 Tiananmen Square, right? There weren't global reporters there necessarily. We saw some footage. China, I'm sure, would like to do something, whether it's the little blue men infiltrating the police forces, what have you, but they can't on a public scale go in and crack down on it the

way they really want to right now. The other thing I fear is- One famous shot of that dissenter at Tiananmen Square was big enough, but 4 million iPhones. Oh yeah. Oh yeah. But you think that's what's holding them back, and I would agree with you. But is there an economic contributor to volatility out of Hong Kong? Well, I do think so, because Hong Kong is still providing a good deal of exposure for

China to the global markets. I believe the Shenzhen-Hong Kong exchange is still a decent source of liquidity for them. Who's going to want to access those markets in a situation when there's turmoil, total command and control? And don't forget, we have a lot of the Commonwealth judges retiring here in the next couple of years in Hong Kong. So as a center for legal resources or to administer your company in Hong Kong, I don't know that I'd want to do that in the next couple of years going forward. So in terms of

domiciles, liquidity, I think it is an economic factor interesting Julian has a pretty cynical view about this that I happen to probably take his side on it a little bit but if you take a side on it you can't say Julia correct if I do no, I mean, I was saying to me, I think it's not a big deal because I guess for me, I think Hong Kong is really the zone of influence of China. They, you know, it's been 22 years now. I mean, we're going to protest Europe and the US are going to protest as diplomatic channels and we're going to do nothing else than protest because there's nothing you can really do about that.

What's happening there? At the moment, you have just the airport blocked by 5,000 people. I think the Chinese let that happen because it's been two days. It's no big deal. There's been, you know, I guess the economy is still working. They are, you know, I guess it's not big enough that they really have to intervene yet. But, you know, if it gets really out of control, there will probably be some blood, and they will do what they have to do to stop the protest.

But is that going to really impact the economy? Probably not. Do a lot of global investors not necessarily understand the nuances of what investing in the Hong Kong exchange means versus investing in China? Probably, yeah. Yeah, I would think. I notice sometimes we look at emerging markets portfolios, they even lump sometimes Taiwan, Hong Kong, China all in together.

And I think that there is a sort of baby with bathwater effect on this, that it just has, it could be very modest, but there's some compression of valuation that you expect from investing in that region as they associate all of it into sort of an unstable context. Yes. But then again, if you look at the underlying companies that are listing in Hong Kong, I mean- That makes the case worse.

That makes it worse. How much of their business are they doing in Hong Kong? Probably like 1% or 10%. And so- Oh, but I think that the blend of China, Hong Kong, and Taiwan for most U.S. emerging markets investors is north of 50%. That blend is often north of 50%. Not 1% Hong Kong and 50% China. 10, 20 in Taiwan, 10, 20 in Hong Kong, 30, 40 in China.

That much. Oh, yeah. Just as far as the companies they own. The exchanges they trade on. The exchanges they trade on. The exchanges they trade on. Okay. You're talking about the revenue. No, I was talking about the impact on the earnings, like where the revenue is generated, earnings are generated.

Yeah. No, no. I don't think it's a big fundamental thing to underlying earnings. But these things, though, if they only traded off fundamentals, it would be worse, not better. better. So you have like really unattractive fundamentals combined with the uncertainty, I think, in that part of the world. Well, then the last thing we've kind of already talked about, I listed the Fed and we've discussed what might be motivating, what might not be, what they're going to end up doing. I'm 100% with you, Julian. I think we look to the Fed Fund's futures to get an idea. And I believe here's my probability. The probability that the Fed will do something different than what the futures market

says they're going to do, I'm putting it 0%. Everyone agree with that? Yes. So we get two more rate cuts by the end of the year, one September, one December. Do we get three more rate cuts by the end of the year? 2 September and 1 December or vice versa? What are we at? 50 more to go? 75 more to go, Robert? I don't think it can be 75. I'm at 50 here.

I'm a probabilistic guy. I like to assign probabilities to things. But if I'm making... I have to make a guess, I would go 50 too. I think things. I don't see them cutting that much. 50 base points more on top of the 25 they've already done. Yeah, on top of the 25 they've done.

So Fed funds futures rate about 150 base points. Yeah, that would be my guess. I agree. I would say three cuts this year. That's what we were expecting a few months ago and that's probably still the case. When is the next tightening on the balance sheet, meaning roll-off? What is the next dollar that they let come off of their balance sheet, which presently sits just a little shy of $4 trillion? Want me to cheat and just tell you?

Yeah, never. We won't see it again in our lifetime, possibly. I don't really believe that. I do not believe we will see it until after the next recession. There will be no more tight until after the next recession. Okay. Yeah. Yeah.

So what's this? Why would that enhance volatility? The markets are not stupid. The markets know that the Fed is going to go into the next recession with, according to what all of us at the table just said, a Fed funds rate of 150 basis points. What was the Fed funds rate when the financial crisis started? Good question. Like 2008? Like four and a half, maybe?

Four and a half percent? They'd been higher. They'd already cut a little in advance of it. So they had 400 base points of ammunition they're not going to have now. And they had $600 billion on the balance sheet. And now they have $4 trillion. I think that adds to volatility too. If it doesn't, it should be. People wondering, what is the Fed's ammunition going to be if and when another, or not if,

but when another recession happens? So we're making a case for there being good excuses out there for volatility to be enhanced, but we're not focused on short-term volatility. You made the comment earlier, what are the fundamentals? So we believe there's an overall reasonably healthy fundamental environment in the context of a elevated volatility environment. We haven't had that elevated volatility for a lot of this year. It's back now. First of all, let's just get a consensus. Is that the outlook right now? Modestly positive fundamentals with significantly enhanced volatility. That's my call in the current environment. Robert? Agreed. Dave?

I would say that I don't think the volatility is going to be as bad as it has been this past week or two, but I would say that, yeah, enhanced relative to earlier this year or so. I'm also a believer of lower volatility. I think this got people by surprise, clearly, this big announcement, and you're not going to have that many like that, hopefully. And then it's the month of August. It's pretty quiet. There's nothing else to talk about.

The earnings season is over. When you go back to September, we're going to talk about the Fed. Then October, November, you're going to have Q3 earnings, so other things to talk about. The Fed comes out in September and cuts rates one quarter point as you're forecasting. And then he does a press conference and says, oh, we don't think there's a whole lot more to go. Brexit is not resolved.

Trump is tweeting one day, we're going to tariff him and it's awesome. And the next day, oh, it's a lovely letter I got from North Korea. So those things have all been volatility creators. All of those things are likely to last at least another month or two, no? We could get volatility back in the 20s like we've seen, but are we going to see like 30, 35 like we've seen- You're talking about the VIX level? Like VIX, yeah. I'm thinking of the VIX.

I guess we're used to like 12, 10, 12. 10 to 12. Yeah. So 20, if you're predicting 20, you're predicting enhanced volatility relative to the median of the last couple of years. Yeah, I guess I think so. But I mean, the last couple of years were probably exceptional in terms of low volatility. So I wouldn't expect that to be the norm.

I think more like in the mid-teens, like 15 with some spikes around 20% vol, which we've seen, but not a lot of 25% days like we've had the last few days, I guess. So what you're describing is exactly what I think will happen, but I would call it enhanced volatility. I think these days, for right or for wrong, it feels like that's more volatile to investors, partially because they've gotten complacent from 2017's hyper low volatility. So what do we do from an asset allocation standpoint if that is sort of our assumption, reasonably healthy fundamentals, and correct me if I'm wrong, no one's talking about screamingly healthy fundamentals,

just reasonably. They're good fundamentals, good earnings, economy is in a good position, but we're not necessarily talking about unprecedented economic growth and earnings growth acceleration, correct? The US.S. is doing okay. I think the problem is the rest of the world, right? And if you look at the U.S. consumer, 70% of the economy is fine, but the business confidence is deteriorating, and the rest of the world, like Europe and Asia, is not doing very well. So that's where you have to be worried about earnings, I guess,

and you have to be worried about, as you said, like it's not all green well. So that's where you have to be worried about earnings, I guess, and you have to be worried about, as you said, it's not all green lights because of that. But what we have for us is the interest rates. Like the 10-year is back at 1.7%. So if that's all you can make earning risk-free assets, where are you going to invest? Yeah. Where are you going to invest?

Yeah. I'm uncomfortable with the thesis being that it's okay to put risk on because we have faced a pretty good period of asset price distortion in front of us. I like the fundamental argument more than the great like the Fed's going to muddy the water so much you won't know that you're making bad investments argument. I'm having almost a little deja vu here because the conversation we had in 2017 around, you know, probably solid fundamentals, increased volatility, then as a result of our projection for rising rates from the Fed. And we were talking a lot about alternatives at that point in time. And I'm kind of seeing right now that this conversation lends itself to talking more about alternatives as well right now. And for those out here who don't know, alternatives, we're talking about hedge funds, perhaps private credit, private

equity, things like that. A period of enhanced volatility lends itself to alpha generation on a relative basis now, right? No question. No question. I think, especially by the way, if you're at primary equity diversifiers, fixed income and the 10 years at one point seven percent. You still want that fixed income on for your kind of extreme deflationary hedge. But alternatives make a lot better sense to me as a diversifier. And you have opportunity to make money around the volatility. Some hedge funds are very good at exploiting the volatility. It's not something we would try to do directly with a dividend portfolio, something that alternative

managers can do. Private credit, I don't think they're going to suck away any liquidity from these guys anytime soon. So I agree. I think it's a good way to get some return without having to play beta. Dale, you agree? Yeah, I think so. And we've been steadily increasing our exposure to alternatives for quite some time now. And I think that that argument makes a lot of sense, especially if you look at the data. Alternatives tend to do well when there's a good bit of dispersion, when things are pretty volatile out there. I think that clearly in this environment, when you're talking about fixed income, what's really important about fixed income is understanding the downside because the upside is limited. And right now with the 10-year at $1.7 or so, I think that maybe, like David said, you're going to need some in there for some sort of deflationary hedge.

in there for some sort of deflationary hedge, but maybe looking to take a little bit of fixed income off the table and allocate, like Robert said, towards alts or equities. Equity valuations are not stretched by any means of the imagination. So how about adding a little to dividend growth stocks? Well, I'll tell you, some of them did get a little cheaper last week, and I think we've done a good job staying on top of that and some more activity still to do so let's uh let's conclude with a little equity conversation um i'll tell you what i like right now and and obviously we've talked about as a committee but i want you guys to kind of elaborate a bit on on some of this i think the energy thesis thesis. Right now, this is misunderstood as I've seen it in my professional career. I really believe that, first of all, so much of the bearishness focuses around downward pressure

on the commodity price, which I don't even agree with that. I don't believe that they're going to get the crude oil price into the 30s and low 40s and hold it there. I think that the risk is to the upside there around Saudi Arabia's Aramco IPO next year anyways. But even if I believed as a U.S. company energy investor, even if I believed in $50 oil instead of $65 oil, I think that you just have screaming opportunities right now with the better run companies in energy infrastructure. You agree, Julian? Yeah, I agree.

And I guess it's interesting to see the performance here today. It's the worst. The sector is up like 3% against the S&P. Healthcare was behind it for a while. And now in the last couple of weeks, healthcare has passed. Healthcare is slightly better. This week, the worst are energy and financials, I guess, in anticipation of the rate getting lower, getting cut.

It's not helping the whole sector. But year to date, energy sector has been really weak. I guess if you own the strongest player, the one that have seen the test of time and be able to raise dividends and grow earnings for decades, I think they can deposition to do that, whatever the environment. And we've seen back in 2015-16 when the oil price was so weak, they didn't cut dividends. They were doing fine. When the oil price was so weak, they didn't cut dividends. They were doing fine.

Yeah, yeah. I think that energy, like you said, I think it's very misunderstood. I mean, if you look at a lot of the reasons out there why energy is not catching a bid, there's so many different competing reasons. Global growth is slowing. Manufacturing isn't doing well. China. I don't think the market really is – I don't think it's justified, and I don't think anybody really understands why with oil levels are where they are, why energy companies are trading at – as far as valuation goes, historically speaking, to the lower end of the range. So because of that misunderstanding, I think there is opportunity. And I'm not exactly sure what the catalyst is, honestly,

but I do know that we're being paid to wait. A lot of these companies have yields in the 3% to 6% range, and you're getting substantial carry. Midstream closer to 8%. Yeah, midstream closer to 8%. So I'm almost indifferent if the market gets it in the short term or not. I don't care, given that we're being paid in the interim. Two answers to that.

My own portfolio, I hope it stays down longer. Yeah, exactly. For client psychology, I guess I'm supposed to root for it to go higher. Yeah. Okay. Big tech, new tech, cool tech. Is it days as the leadership sector over, Robert? Not quite yet, but soon.

I say that both from, you know, just my perspective and also for my desire. A lot of these companies, you know, are operating in some countries illegally. They're going to come under increased scrutiny when you look at anything politicians from both sides agree on I get a little scared there and the deregulation of tech is one of those sectors so I would be worried a little bit if I was overly heavy and a lot of this cool or new tech type of stuff from that perspective and

then you also look at you at the global regimes around tech. They're chasing revenue. We look at what's been happening in France, taxing some of the big tech companies. That's a little bit scary if I was a holder of those companies as well. Julian? Well, I think as long as there's the Fed put and the risk appetite is very high, there's always going to be buyers for the big tech companies

because they have growth, because they get financing for not making profits. I'm not going to give any names, but these strange businesses coming with new business models, they don't make any money, but the market is ready to finance them. And with money being so cheap, it sounds like it's not going to go away anytime soon. Yeah, I don't agree that because something's been happening, it ensures it continues to happen. I think that we have lived decade by decade by decade to stories like that ending with no warning whatsoever. The difference here is I think we're getting a great warning,

a bipartisan support for somebody for different reasons, different agendas, different politics. People wanted to take that down. And you're not saying this is like the financial companies in the early 2000s, the energy companies, the early 80s, they were brought down with secular forces. But they were brought down as they were cash flow generating machines, like the just nastiest return on equity creation you've ever seen. These companies don't even have that.

It isn't like it's Elizabeth Warren versus the cash generating prowess of this cabal of big tech companies. They're not even cash flow generating machines. They're just high valuation companies because the markets continue to support it. And so I think that those forces up against each other, at some point, something gives. And to me, if we're late cycle, which I believe we are, the tradition, it's not perfect. I recognize that. The tradition of you don't go from high tech, high valuation, high beta growth to cash. You go from high tech, high beta growth to value to cash.

I think you're going to see just a rotation that takes them out, not necessarily just a cataclysmic collapse. It would be a rotation of leadership. That's my take. Daya, last question. Do we want to play in low beta or high beta right now? Oh, okay. Well, I think that maybe that is a bit of a softball. I think that we want to, given the higher volatility,

we want names that have a better risk-reward skew, have better downside protection. Those are low beta names. So that would be my bias. It would be towards low beta names. Okay. Joanne? Our portfolio, the dividend equity portfolio, is built with a low beta. The idea is to have income stocks, you know, defensive.

So I would say by definition what we do is more low beta. The idea is to have income stocks, you know, defensive. So I would say by definition, what we do is more low beta. That said, at the moment, it's cheaper, you know, the ones that have suffered are the higher beta stocks. So probably, you know, if you want to, on the margin, be buying, I would say today we're probably going to be buying, you know, stocks that are relatively higher beta, but still in our universe of low beta stocks. I mean, I think our portfolio beta is about 0.8. And I'm not sure if people know what beta means, but I guess the idea, what it means is basically

when the market goes up 1%, if you have a beta of 0.8, that means that your underlying stock, so if whatever stock has a beta of 0.8, is going to go up by 0.8%. So it's the correlation to the market, the coefficient of correlation to the market. And that's basically the lower the beta, the less correlated you are to the market, which would be ideal if you could make returns

without having any market correlation. Robert? Low beta with support from growing dividends. So I'm going to borrow from all three of your answers, and I hope those of you listening get an idea of how smart the people I try to surround myself are because they're all right, and I'm going to pull it together in this sense. I don't believe that we are aspiring right now to buy low beta or high beta. We're aspiring to buy dividend growth, and one of the often accompanying features of fundamental dividend growth is lower beta, as Dave referenced your caveat. I think to Julian's point, there are some higher beta names that have even become more distressed in this recent market

volatility than some of the lower beta. But beta is not a driver of a portfolio philosophy. It's a result of a portfolio philosophy. It's a result of a portfolio philosophy. And the fact of the matter is that as long as we're focused on companies growing free cash flow and growing dividends from that free cash flow, you generally get an experience that's lower beta to market. Interestingly, some of the companies right now that are most attractive in cash flow generation have had higher betas, not just higher betas than we're accustomed to in our portfolio, higher betas than they are accustomed to having in their own averages relative to stock market. And some companies that you would think of traditionally as being higher beta, higher volatility, they've become

kind of lower beta names. You look at some biotech companies that have a very low beta, you know, it's very interesting. So I think that that's important for investors to take hold. When we talk about those low beta names in fourth quarter of last year that really defended the portfolio, that were much more defensive, this was not something that we said, hey, let's hold these names in because they have less correlation to market and they're lower risk. They were fundamentally more attractive on the thesis that we make our driving decisions by, dividend growth, and that just provided the ancillary benefit of lower beta. So I don't think any of us are saying anything different.

I'm just sort of trying to crystallize that collective message. Yeah, that low beta experience is incidental to our stock selection. Yeah. And I think that's true of a lot of other parts of our portfolio. Julian will run the reports and you look. I think sector allocation is another thing that's incidental. Yeah, me too. And that's just kind of the way that having an actual governing philosophy

of how you manage money, you focus on the drivers that you believe in, but then you let these incidentals come and analyze them for what they're worth. But, uh, okay. We're going to leave it there for the week. Anyone have any closing thoughts,

Robert? All set. Yeah. That was, what do you think? First time. I'm in a good company to say the least. All right.

If we have time for one more thing, I just wanted to ask you about one asset class. We haven't mentioned because everybody talks about it all the time. CNBC is always on the topic. It's one of the, you know,'s one of the assets that have done very well this year. It's gold. And I'm sure we're listening to a podcast as a viewer and like to hear what you think about it. Well, I don't believe gold is an asset class. We used to, so I view, um, we used to be owners of gold for many, many years, including most of the years that it was going from something in the range of $250 an ounce to, you know, 1500 an ounce. It was $1,900 an ounce eight years ago. And now it's

it went to 1200, stayed there forever. It's come back up a couple hundred bucks. So everyone's talking about, oh boy, gold's moving higher. That's everyone being defensive, protective. You want to talk about non-correlated quote unquote asset class. Gold goes down all the time when risk is coming off. Gold goes down all the time when risk is going up and vice versa. There's no rhyme or reason to why gold performs the way it does. But the reason why we reject it as a holding in our client portfolios is very much tied to this reason why our equities are cash flow generating companies, because I want some internal rate of return. I want some cash flow generation to measure the risk and the reward of the investment over time. And gold, I have to own as a ranked speculator. And my clients don't pay me to speculate with their money. That's the way I view it. That is not the same as saying that I don't

see a technical argument for gold to go higher or lower at any point in time. But the most common argument people make for owning gold is its inflation hedge. And I read a whole chapter in my dividend growth book about the fact that gold has been an atrocious inflation hedge. The fact of the matter is that we are now about 40 years from a high level of gold where along that time you have seen inflation between 2% and 3% per year. So a lot of compounded erosion of purchasing power. And gold is sitting at about 50% of its inflation adjusted level from 40 years ago. 40 years is enough time it's supposed to have kind of caught up to inflation if it's this world's great inflation hedge. So it has psychological benefits for people.

There's trading arguments and so forth. But the biggest thing I'd say, this is scary what I'm about to say. and so forth. But the biggest thing I'd say, this is scary what I'm about to say. You can't even make up in a fairy tale how creative and aggressive central banks have been in the last eight years of world history. And gold has a negative return in that period. So gold's supposed to be this hedge against the craziness of central banks. In this period of time of $15 trillion in negative yielding assets, of quantitative easing that ran up our balance sheet $4 trillion, God knows where European Union's balance sheet is, the Japan going and using their money to buy corporate bonds and index funds, I mean, from Operation Twist to quantitative easing to Draghi's bazooka to negative interest

rates. This has been a period of central banks run amok and gold is down. So I just don't buy the argument that gold represents a sensible safety solution. Look at that alliteration. I think that was a really good explanation. I mean, I guess after that- I haven't really thought about this much. I can see. I think that was a really good explanation. I mean, I guess after that. I haven't really thought about this much. I can see. Okay. So we'll talk more about gold, but thank you for giving me the chance because I do have strong opinions on the subject.

All right, guys. That's it. Thanks, everyone, for listening to this week's Dividend Cafe. Coming back to you more. Market volatility continues. Thanks for listening. Thank you for listening to the Dividend Cafe, financial food for thought. 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, 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. This is not a guarantee.

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