The Dividend Cafe - You Can Keep Your Doctor AND Your CPA

Episode Date: July 20, 2017

You Can Keep Your Doctor AND Your CPA by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. it's great to be with you this week it's been a very exciting week and and we hope you'll not only get a lot out of this message this week but consider subscribing at either iTunes or SoundCloud to the weekly podcast we always want you to check out dividend cafe calm where we do a written version of our weekly commentary have lots of charts and an interaction and things there you can subscribe to that as well we care deeply about providing the best quality thought leadership that we can that we can creating content for our clients and for the investing public that would be value-added in their investment IQ and

then we can take a combination of timely and current circumstances affecting investors and synthesize that with permanent timeless principles that we think matter to all investors at all times. So that's our agenda with any medium of the Dividend Cafe that we provide. We look forward to your further interaction with it. Let's get into it this week you know running seasons off and running and and it's kind of nice for for me for as the chief investment officer of the group to be so integrated with individual companies right now to be on the call with

analysts reading over quarterly results, getting an idea of forward guidance. There is a refreshing change from this sort of bottom-up individual stock interaction versus the kind of weekly macro big picture stuff we're often dealing with. Dysfunction in Washington, D.C., central bank, Fed action, things like that. Of course, this week didn't exactly give us a total break from that. You had the spectacular failure of the GOP Senate to pass an Obamacare repeal and replace bill. So there's a lot of things to invest, to pay attention to this week. And also the subject of active versus passive investing

is going to get a little airtime as well. Well, you're going to need health care if you don't get tax reform. The Senate did make official this week, as I said, their inability to pass a repeal and replace package for Obamacare. Senate Majority Leader McConnell is putting a straight repeal up for vote next week. It's possible that vote will get blocked and not even be able to happen. It's near certainty that it would not pass even if the vote does happen. You never know. But assuming all this dies, at least for now, the political and legislative attention will emphatically move to tax reform.

And at that point, the interests are somewhat more aligned. The complexity is relatively lessened compared to Obamacare. This means the chances are higher of getting something done, but it also means the stakes are higher. I mean, way higher. We'll stop the presses. The big buzz throughout the first half of this week was the shock, but pleasant surprise so many seem to have in the Trump administration's preparation for their tax bill. From the communications plans to the political steps needed that are

teed up, many seem to feel that unlike the situation with the health care bill um secretary mnuchin those in the business community of advisors in or near the administration have really prepared this time around for good or for bad and separate from what everyone thinks of the various policy merits the administration has not earned a lot of comments thus far. The specific policy aspirations have been well strategized. This is one in which the markets would love to see both the policy and the technique. A term we want you to hold on to. I wrote a market epicurean last week, and you're always welcome to check out marketepicurean.com, where we do some of our more advanced investment writing. Last week about the Fed and monetary policy,

and we have a lot of space in Dividend Cafe devoted to the same. I did a Facebook Live outside of the New York Federal Reserve last week about it, and I continue to speak with quite a few strategists and economists in my world about the entire impact of central banking and monetary policy on capital markets. Rather than overload you with data and perspective yet again about central bank policy, I want to propose that the following vernacular will serve as a helpful summary to the entire conversation for the foreseeable future. The distinction between normalization and tightening. In that tension and in the delta between those two things,

we will gather real investment and portfolio significance. Yes, the Fed is clearly on a path to normalizing monetary policy after eight years of hyper-accommodative policy, ruled by zero interest rates and quantitative easing. But normalizing means taking off excess easing, which is different from actual tightening. Will we get to a place where tightening, is different from actual tightening. Will we get to a place where tightening, that contracting of money supply becomes necessary and takes place, a real limitation on credit markets? We sure could. Would that likely represent a very difficult point for capital markets? Well, history says yes, but normalizing has thus far been loved by capital markets. We want to do our best to stay focused on the difference between those two things.

At what point will normalizing look like, smell like, feel like, and taste like tightening? When the Fed funds rate is actually a positive number after netting out inflation, for one. We would also argue that the normalizing would have to get to a point that the dollar rises substantially to be considered tightening. And thus far, not only has that not happened, the opposite has. The Bonson Group's ethical, legal, moral, fiscal, economic, urgent reminder. Pick any category you want, but the responsibility to remind clients of the reality of market corrections and the impossibility of timing around them

is a massive part of our duty and obligation. We have presently gone 261 market days without a peak to trough correction of even 5% since the post Brexit days in late June of last year. The market is up 21% since that post Brexit dip and that comes from a somewhat misleading start point because the post Brexit dip proved to be, well, a joke. But this is the fifth longest period without a five percent correction since 1928 and next week it would become the fourth longest if we get there the third second and first place records are a ways off there but

there are only two dumb things an investor can do in response to the present environment of low intraday volatility and low market drawdowns. 1. Assume normalized volatility will never ever return. 2. Assume it will definitely be returning tomorrow, next week, next month, etc. Normal volatility levels will come back unless the laws around business cycles have been repealed, and more money will be lost trying to time such a correction than will be

lost in the eventual correction itself. Emerging and developing markets. The index of emerging market equities is just now returning to its spot of 10 years ago, a fact somewhat complicated by the fact that nine years ago the index began a swoon of nearly 70%, and it spent 2009-2010 making up from that violent 2008 drop. But of course the S&P had a similar thing happen in 2008, quite not as bad, and it also needed 2009 and 2010 to come back to pretty 2008 levels. But now the S&P is up more than double from that level. Emerging markets from 2011 to 2016 mostly just sat still, measured by their index. With some moves up and some moves down along the way,

the emerging markets benchmark is pretty flat for five, six years. It's just now starting to make new highs that predate the financial crisis. But this is the active versus passive point we want to make. That long, frustrating crawl for emerging markets has not necessarily been the case for those invested in emerging markets outside of the index. As long-time clients and listeners and readers know, we have been singing from the hilltops for years and years that this is an asset class where passive indexing makes little sense and almost guarantees that the portfolio will end up looking like a commodity play and a China export play. The S&P has some undesirable

companies in it, but the Emerging Markets Index is riddled with undesirables, and only an active approach can avoid those. The political realities of many countries in the emerging world, those. The political realities of many countries in the emerging world and the total difference in data available and how data is generated make indexing a vast and nuanced world like emerging highly flawed. Because indexes are market cap weighted, you often end up with one or two companies in a given country dominating the impact of that index. Bottom line, active managers and emerging markets have the flexibility to find wonderful bottom-up companies in countries that have the rule of law, which is a sine qua non for us in the investment world. The data is what it is. Getting outside the emerging market index world, finding an active

strategy does not guarantee your active manager will be the one outperforming. But within a philosophy of real value, real growth, domestic expansion, repricing power, transcending currency fluctuations, we heartily recommend it. And we do post a chart at DividendCafe.com this week showing 60% of active managers outperforming in the emerging world versus only 20% in the U.S. domestic stock market. There are some more pieces of information at the Written Dividend Cafe this week about passive versus active investing. There's an incredible chart that shows the de-correlation between oil prices and stocks that has taken place. So we really encourage you to check out the written as well. I've gone on a little long here for this week of podcasts so we're gonna let it go but

please reach out anytime you want more information about the Bonson Group. That's www.thebonsongroup.com. Any one of our advisors happy to talk to you anytime and even if you are not interested or have the capacity to be a client of ours, if you just want to reach out the question, we want to give an answer. So use our website to send that. We're happy to interact with you. Thank you for listening to Dividend Cafe Podcast. We look forward to coming back to you next week. The Bonson Group is registered with Hightower Securities LLC, member FINRA, MSRB, and SIPC, and 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

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