Bulls, Bears, and The Bahamas
Dear Valued Clients and Friends,
Greetings from the deep seas of the Caribbean where I am with my kids celebrating the near-end of their summer. This little annual family vacation is a real blessing, but the WiFi bill I incur each year is not. One of these years I am going to learn how to vacation unplugged. Until then, at least I am able to keep reading and writing. I actually do intend the format in which we present this week’s Dividend Café to be potentially used again. I wonder if the format we have been using combining those various segments was too disjointed, too stale, etc. Please email us feedback on this format, which we think is more readable and raw, and certainly intended to be valuable for you. Our suspicion is that these bite-sized snippets are readable and digestible, and allow us to cover the whole world each week in terms of what is important to you. With that said, let’s get into it…
Watch the Video Dividend Café, this time featuring Bahnsen Group Partner, Brian Szytel, at this link.
(There will be no podcast for this Dividend Café but we will resume the following week with our audio recording of the Dividend Café. Listen to archived podcasts on SoundCloud at this link or on iTunes at this link.)
Apples to orthodontics comparison?
In making my point recently to a doctor client regarding the futility of “benchmarking” a balanced portfolio to an index fund, I wondered if it would be fair to blame a neurologist for not getting the same results with crooked teeth that an orthodontist did…
Is China going to get the last laugh?
The best argument China bears use for their continued problems (including yours truly) is the massive leverage in their financial system that will have to be worked through. An analysis we read from UBS last week indicated banks have already written down $271 billion of bad loans and raised adequate fresh replacement capital. Look, they are nowhere near out of the woods, as our analysis indicates there is surely 2x that or more to go. But, frankly, the idea that they could have pulled off even this level of write down and capital raise under the radar is stunning.
The more things change, the more they stay the same.
Few things aggravate more than when one uses excessive home purchases or home ownership as a sign of economic health, or when one uses healthy, moderate, realistic levels of home purchases as sign of a declining economy. Those in the analyst or pundit community should be forced to watch months upon end of 2008 financial crisis news coverage until they absorb this basic truism: Irresponsible purchases lead to bad things; they are not a sign of good things!
When you see the whites of their eyes…
The biggest argument from bears around contagious trauma from the oil price collapse of 2015 was that the industry’s capital would dry up. Our argument was that the bears were underestimating the resourcefulness and sophistication of American capital markets. Sure enough, private equity funds sitting on loads of dry powder had sat on their hands, and now are buying up undrilled land, busted debt, and all sorts of energy sector opportunities on the cheap. Patience is a virtue. And a profit-creator.
Deja vu all over again, cheerio.
There are two historical events related to the UK’s relationship with the European Union that warrant comparison to this post-Brexit environment. First, there is 1992 when the Brits withdrew from the European exchange rate mechanism. Second, there is 1998 when Britain famously declined to abandon the sterling pound in favor of a common Euro currency. In those cases, as now, critics insisted the UK would lose their competitive edge in a global economy. In hindsight, we see that five years after both of those events the reality is that an extraordinary opportunity had been provided to to buy U.K. value stocks (especially of the dividend variety).
The safest house in town is in the most dangerous neighborhood.
A reasonably fair summary of the value proposition around emerging markets stocks has always been that an investor accepts the extra geopolitical risks they entail in exchange for above-average growth. But what if the “trade-off” of additional risk is now misunderstood? Is the biggest embedded risk — or at least unknowns — in geopolitical risk, or rather in the use of unprecedented experimental monetary policy? If it is the latter, who has invited more of that risk — Europe, Japan, and America, or the emerging markets? Geopolitical realities persist, but by our scoreboard you have actually positive interest rates, above average growth, and no overhang of unorthodox monetary policy.
Teddy Bears are lovable. Perma-bears are disposable.
One of the most incredible things to me as someone who is constantly held accountable for the decisions I make, and who puts extraordinary pressure on himself to make wise decisions on behalf of clients, is that this doomsdayer cottage industry still exists. These shameless exploiters of fear and paranoia somehow find people to buy their books, advertise on their blogs, or subscribe to their newsletters, despite a track record that is inexplicably embarrassing, and despite the fact that they have no skin in the game, ever. What makes things particularly frustrating for someone like me who makes his living telling the truth, even when it isn’t popular, is that there will inevitably be another bear market (there always will be another bear market), and the perma-bears who have missed out on the last 12,000 points of the Dow will be right there to say, “We called it.” Yep. Broken clocks, and all that jazz.
Welcome to the White House. Your economic team is waiting for you in the kitchen.
Some political candidate is going to be celebrating on election night, and the polls are more and more indicating it will be Hillary Clinton. But will she be celebrating this time next year? For over 110 years, there has been a recession in the first year of a new Presidency when following a two-term President every single time. Will the next recession be a deep one? Possibly not, as the recovery has been so tepid. But besides various historical indicators, which do not necessarily establish causation, there are fundamental factors at play, as well (the need for inevitable Fed tightening, global weakness, future consumption having already been brought into the present, etc.).
The Smartest Guys in the Room
More and more is coming to light about the utter incompetence of the International Monetary Fund and their role in enabling the Euro experiment, and now in facilitating an ongoing depression in Greece and sustained dysfunction in the healthier parts of the European Union. Got that? In the “bad” parts of Europe, you have depression; but in the “good” parts, you merely have sustained dysfunction. The IMF is an ideological unit, and their ideology is the European bureaucracy. They have recently admitted to getting almost every single thing wrong imaginable in a decade of analyzing and advising the European situation. If “IMF” were a stock ticker, we’d be going short…
I’m old enough to remember December of 2015.
I was reading my Cornerstone Macro Survey Research this week while on vacation with my kids. 16% of institutional investors said last month that their biggest concern regarding the U.S. stock market was fear over a European break-up. Just 2% said their biggest fear was a crisis surrounding oil. Rewind all the way back to the end of last year, just eight months ago… 16% said their biggest fear was an oil-related crisis; only 2% said it was fear over a European break-up.
Chart of the Week
An ode to the compounding of dividends! Note that in the last 25 years the reinvested paltry dividends of the S&P 500 added 500% to the return; imagine where a conscious focus on dividends and dividend growth existed!
Quote of the Week
“Doubt is not a pleasant condition, but certainty is absurd.”
Originally posted on HighTower Advisors.
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