The Dividend Cafe - What China Thinks of Us and Why it Matters

Episode Date: August 20, 2021

I got a lot of feedback on the special “China edition” Dividend Cafe two weeks ago, but I promised a lot more to come on the subject, and that is what we have today. I don’t only want to walk through various perspectives on Chinese investment, but really want to make sense of what much of this means for hemispheric changes taking place in global monetary realities. There is a tremendous investment relevance to all of this, and that will be just as true for anyone who never buys a dollar of Chinese stocks, bonds, or currency. We ignore this topic to our own peril. It has been a historical week in a lot of ways, and I have written about Afghanistan and its potential impact on American domestic policy throughout the week at The DC Today. We will know more next week about the sausage-making on capitol hill. Market volatility this week was largely Fed-driven and seasonal. I don’t believe the events in Afghanistan this week will be remembered by markets for minutes, but I believe they will be remembered globally for decades. And globally, we have much to consider if we are to be smart investors. So to that end, we work … Join me in the Dividend Cafe (where as a special bonus today, some pretty hardcore facts about dividend growth superiority will be presented). 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 the Dividend Cafe. I am recording for the very first time in our brand new studio here in our brand new New York office. in our brand new studio here in our brand new New York office. We had a studio down on the 20th floor here in the Graybar building in New York City. Now we're on the 22nd floor of the same building and in our kind of new and

improved offices for the Bonson Group and in a new and improved studio. So hopefully it looks and sounds good for you. I did my first television appearance for Fox Business yesterday in the new studio, and I like it a lot. So we're far more important, I'm sure, than the look and feel of wherever I'm recording for you all is what we're talking about. And what we're talking about today is more of this subject of China. And I began two weeks ago, I did a kind of dedicated treatment of a number of facets of what is happening geopolitically in China, what its ramifications are for US investors, both on the equity and the debt side. I think there's an awful lot more to unpack in terms of what it means globally. I'm really intrigued by those who believe that it might mean a lot to them

if they were invested in Chinese stocks or Chinese bonds. But if they just avoid Chinese stocks and bonds, then it doesn't have to affect them. And I think that's an unbelievable error in thinking. I'm not talking about something that is limited in its impact. I'm talking about something that is global in its impact economically and certainly in terms of the sort of hegemonic forces at play between the US, China, between the world's reserve currency that is the dollar and what China's aspirations for its own currency are. So I want to do a little follow-up on it, but I'm not going to spend all of our time today talking about China.

It'll be the bulk of the comments I make. But I'll switch gears at the end, and I have a few things I want to say about dividend growth that came from a new report I read out of Standard & Poor's this week. And then we're going to conclude with a couple of thoughts on all-time highs in the market. The number one thing that I didn't share a couple of weeks ago on China that I want to share right now is when we talk about American perception and frankly, world perception of what's going on in China, those things matter a lot. Those things are a big difference.

They're at the core of what a lot of people believe right now as to what they want to be the case and what they think should be the case and even what they think will be the case. And when you look at the political risk that the Trump administration took five, six years ago in taking a stronger anti-China stance, that was not in vogue then. Now, I happen to believe a lot of what they did was not well done. And I had certain parts of the policy I agreed with, and there are certain parts I disagreed with. And I've always been very public and transparent about that. However, my point was that whether it was good or bad or in between or mixed, which is frankly what most of these things are, it was not politically expedient. There was no

politically expedient. There was no sentiment in their favor against trade with China, relations with China, the currency dynamic. You had come off a pretty long period through the Clinton administration, the Bush administration, and the Obama administration of growing fraternal relations with China as it pertained to trade, commerce, and capital transactions. And I think that it is really something else how much has changed in six years. That six years ago, taking a somewhat, for lack of just simplistic summary, an anti-China stance was somewhat politically risky. And right now, I think, an anti-China stance was somewhat politically risky. And right now, I think taking a pro-China stance would be politically suicidal. And I don't care what side of the aisle anybody's on. I think people have got to be pretty surprised, and in a lot of cases, pleasantly surprised. But nevertheless, it's noteworthy in the surprise how almost identical the posture and relations and

policy prescriptions are right now, eight months into Biden administration, as they were previously, meaning there is not a policy inclination, there is not a certain sensibility, and there's certainly not public sentiment that would be driving policymakers to kind of reestablish some touchy feely with China. And that has a lot to do with trade, has a lot to do with capital. But I obviously think one of the huge paradigmatic shifts in this political reality was COVID. And not just in the US, I think all over the world. And more or less, I think we've underestimated what that shift has been economically. I don't feel that I underestimated it politically. This was something I had a pretty strong feeling about around a year ago that you had really seen 20%, 30%, 40% movement in US sentiment regarding this dynamic.

And that politically, it did not seem to me it was going to even be possible, even if there was an ideological inclination, which I'm not saying there was or wasn't. I'm simply saying it wasn't going to be really politically possible, given where public sentiment had gone post-COVID, to kind of alter a lot of this trajectory in the U.S.-China dynamic strategically. But economically, though, I believe that it has been underestimated by myself and by many others and will continue to be by many others. I don't want that to be the case for us. What do I mean by this? What do I mean by the kind of growing, solidifying rift, like it's becoming just sort of baked in, that there's going to be this ongoing tension between the two countries? And what do I mean by that having greater economic ramifications going forward?

I mean this. You have got to understand how China thinks about it. And that is not the same as saying you have to be empathetic to the view or you have to agree with the view. What I simply mean is if you're going to have an idea of what you think China's next moves are going to be on the global stage, it would help to know what is driving their moves, what their set of beliefs are about this. It is totally irrelevant if they're wrong or not when you're just simply trying to assess what they're going to do next. OK, and I think that we're already pretty aware of what a lot of the American sentiment is around China, around the whole Wuhan lab and COVID dynamic and what human rights violations and what the issues around intellectual property theft. I think that there's a lot that the sort of American populace feels, that American leadership feels, the majority of which I kind of agree with. I don't agree with all of the blame being on China about America's Rust Belt de-industrialization. I think there's plenty of factors besides the importing of Chinese goods that has affected that.

But nevertheless, that's out there as well. So we kind of know what Western sentiment is about China. What is the issue here that is driving their policy decisions right now as it pertains to the management of their economy? And I don't think I can be any clearer about this. I don't think I could be any more overwhelmed with confidence than I am that they believe the US's position with the dollar as the world's reserve currency gives the US a decidedly unfair advantage on the global stage, that we run a significant trade deficit. And more technically here, it's a current account deficit. I won't get

into all the economic vocabulary, but we know that we export a lot less than we import. And you know intuitively that if as a country, you're shipping out $10 of goods and you're bringing in $20 of goods, that there's another 10 bucks in there somewhere has to be made up. And we make up for it with debt and currency and a payment. There's a balance of payments that has to equal zero. And we're doing that with the currency that is the world's reserve currency. So we have a tremendous strategic advantage in being able to alter our currency, interest rates, money supply, foreign exchange, and have that be strategically beneficial to the US. strategically beneficial to the US. And yet there's a sort of, you know, forced participation in this because for a lot of countries that have a friendly relationship with the US, we provide a

lot of protection for them in theory. And certainly most of the countries, whether we're allies or not, that like in the case with China, we're buying so much of their goods. So you had this sort of mutual dependency. We wanted cheap goods. They wanted to sell us goods. They wanted US dollars to run foreign exchange surplus. We needed them to buy our debt because we were running large budget deficits. So there's these number of things that are at play that all came in together that really sort of define the first 20 years of the global monetary order on the world stage. And it is my belief that China views this as a structural unfairness.

And of course, there's very little that can be done about it. The world is most certainly not interested at this time in adopting the Chinese currency as the world's reserve currency. And so what is it that China can do? And my argument is creating the most stable store of value that they can from their own currency allows them more leverage. first of all allowing a payment system to take place as asian countries trade with asian countries weakens the dependency on u.s dollar would devalue the dollar it would weaken the demand for dollar and would create greater demand for chinese currency so they kind of create a self-fulfilling prophecy with a stronger currency unit. There's more that can transact with the currency. And the more transaction with the currency, the more strength in the

currency. And that is the virtuous cycle they need to see created that they can't allow to be broken. They have to maintain significant foreign exchange reserves and obviously avoid the budget deficits that really are kind of the driver of US current account deficits at the end of the day. We're not a country that saves a lot, as you know. And so I think that this is very important to understand that China right now has taken a position of really going to war with their billionaires and with their capitalists, their entrepreneurs. And that is impacting U.S. investor results in that region. weeks ago, it's entirely consistent with their desire to diminish their dependency on that Western flow of capital, that Western access to Western capital markets, Western technology, Western social infrastructure. But that when you look to almost every aspect of the sovereign debt,

forcing the debt to have to kind of trade within their limited market, not allowing a total unfettered trade of capital. That limited portion has the impact of liquidity, but it enhances that value. If you're going to have limited liquidity, the one thing you're going to do to make sure you get a good bid is that it maintain its value. So you have a yield premium, you have to have stability and dependency and so forth. And so I elaborate a bit more about this in Dividend Cafe. And I think even the way I'm saying it right now, a lot of it may seem a bit more high end, academic jargon or things like that. I'm trying my best not to do that. I want this to be understandable. If there's something I've said that I can unpack a certain sentence or vocabulary, I'm happy to do it. And maybe you're getting all of this. There's different levels of kind

of immediate comprehension, I expect from those who listen to Dividend Cafe. But it's important to me that you kind of understand the thinking here. At the end of the day, this is sort of the summary line, I think, of what we're facing. There is one thing that is, I think, paramount right now to Chinese policymakers through their hegemonic aspirations, and that is to maintain their currency as an attractive store of value

that on the margin enhances its competitiveness to US dollar. And there's one thing that fixed income, boring bond investors want is a good stable store of value. And so there's a sense in which these interests become very aligned, just as the interest between US investors investing in Chinese equity growth and Chinese policymakers right now may be non-aligned, antithetically aligned. The opposite case taking place here on the other category. I'm going to try to devote the Dividend Cafe podcast to an interview with Louis Gov of GovCal Research, who I believe to be one of the foremost experts on this subject in the world and someone who has been a tremendous influence on me with it.

There's a number of the conclusions he's drawn that I agree with. There's a number he's drawn that I have not sold on yet. But I want to unpack this and continue this dialogue for listeners and viewers of Dividend Cafe. A couple other subjects real quick, and we'll wrap it up. Dividend growers within the US equity market, the inherently defensive characteristic. We came out of the COVID moment where that really stable, really consistent, really normal, historical, defensive reality didn't play out as it normally does with the carnage in the energy sector. But the fact of the matter is that S&P has made available the data around the downside, the drawdowns, the level when the market has gone down X, how much just the dividend growers have gone down through the past several significant checkbacks.

And in fact, even over 15, 20 years, the upside downside capture, how dividend growers have a larger capture of upside than they do downside. how dividend growers have a larger capture of upside than they do downside, where of course the upside and downside captures even for the whole index. But then also just the risk-adjusted returns, the total returns available when divided by the underlying volatility, what we call the standard deviation. And doing so over three years, five years, seven years, 10 years, 15 years, all put into DividendCafe.com today to see the superior risk-adjusted results, even in this post-crisis fang world of dividend growth,

let alone, as I've been documenting for years, just the basic absolute return improvement over 30 years that dividend growers have provided. So a number of metrics there on dividend growth that I just think are very interesting that we've put into Dividend Cafe today. And then finally, the chart of the week. The markets were up five days in a row last week. It closed at new all-time highs when I was recording a week ago. And then you ran a bit of volatility this week, because I'm sitting here recording in the middle of the day of Friday. Markets are rallying a couple hundred points. I think I hit pretty hard a couple of days in the middle of the week. And there's always this talk.

And I've talked about it a lot in Diven Cafe. It's something I'm continually dealing with because it's a pretty persistent question that comes up from clients or people that we're engaged in conversation with at the Bonson Group. And that is, you know, I just feel uncomfortable at all-time highs that the market's at. So I point out that going into 2013, the S&P 500 was at 1450. And it's essentially at 4450 here now today. It's up right in that range of 300% over eight years. And in that eight-year period, just in 2013 alone, I believe we had 52, it may have been 45 new all-time highs just in that year.

But we have had 320 all-time highs since then. And so I want people to understand, at least if they're clients of the Bonson Group, because that's all I can really ultimately care about. The mathematical reality that every single time the market has ever been at a price, it was the all-time high until a new high was made. That factoid itself doesn't really mean anything. The valuations matter a great deal. Prices, of course, do not matter

in the same category whatsoever. And then the just utter futility. Can you imagine believing going into 2013 that one was uncomfortable with the all-time high and saying they were going to wait for, I don't know what really. And I don't think the person who says it does either. But there's a kind of an understandable,

intuitive, emotional aversion. So I'm going to wait, you know, this all-time high thing scares me. And you get 320 new all-time highs and the market triples. So, I mean, we would never allow that to happen for a client. We will do the work of talking through the very things I just talked about. But it pains me to even think about non-clients that allow this rhetoric about all-time highs to get in the way of their proper planning, proper allocation, proper construction of an investment portfolio aligned

with their long-term goals. And so there's a chart of the week at Dividend Cafe today that kind of just highlights how many new all-time highs have been hit on various days over the last eight years. I think it's worth taking a look at. So that's the kind of triple whammy of Dividend Cafe today. I hope it's been of interest. Please do reach out with any questions and looking forward to finishing up the month of August. Next week, kids going back in school. Hallelujah. All sorts of good things.

In the meantime, reach out if you have any questions. Every single one of the advisors of the Bonson Group is on the ready to talk with you anytime, anything we can do to help and assist. Thanks for listening to and watching the Dividend Cafe. Thanks for listening to and watching the Dividend Cafe. 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 opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable.

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