The Dividend Cafe

It is appropriate and perhaps entirely ironic that the subject of this week’s Dividend Cafe comes in a week where we have seen some of the most bizarre, insane, and silly market activity, ever, and that this bizarre, insane, and silly activity is accompanied by totally incoherent commentary from various pundits, politicians, and “pros.”

Whoever said investing was all math and science is an idiot.

But the drama of this week’s market, and even the circumstances around the big headline story of the week (which has actually morphed into a multi-faceted story), really do serve as a reinforcement of the major principles, beliefs, and applications I want to highlight in this week’s commentary. I began writing this Dividend Cafe last weekend, and had conceptualized my thesis well before the drama hit the tape into the week. And I haven’t altered that thesis or even the way I unpack it at all. To the extent some of this week’s Dividend Cafe connects dots with other news stories, great. But my purpose in this week’s commentary is not to make sense of a four-day story, but a four-decade story.

And I really hope it will help you in your journey and understanding as an investor.

I have long believed that all professional investors are irreversibly shaped by the era in which they grew up as an investor. This is more true of the lessons learned in that era that proved to be negative lessons than positive ones. Put differently, the major events that damage us in our formative years teach lessons that don’t go away easily.

I want to do a little history this week, talk a little investment biography, and ultimately, offer some lessons about my outlook on the present investing era that ought to transcend anything you will find in a chat room, on social media, or in the madness of the moment.

It’s a low bar.

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Strong discussion on the market happenings shaping the lives of investors with David Bahnsen, Managing Director and CIO of The Bahnsen Group and Scott Gamm of Strategy Voice and Associates

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In this episode, the point I am making is more than just “politics is overrated in evaluating market conditions” (even though that is very true). I not only believe this subject of Inflation vs. Deflation is more important than anything else in understanding the 3-year, 5-year, and 10-year state of financial markets, I also believe it is a welcome reprieve from what is just overdone, over-covered, over-saturated, and ready for a break.

Inflation vs. Deflation Part II – jump on in to the Dividend Cafe.

DividendCafe.com

The Crux of the Matter

If you believed that interest rates were going to be 0-2% would you invest capital differently than if you believed they would be 5-7%?

If you believed that inflation would run 1-3%, would you invest differently than if you believed it would run 4-6%?

Does one’s view on interest rates and forward-inflation impact their expectations for P/E ratios (market valuations)?

If credit is going to tighten (ease of access to capital and cost of capital), would that alter one’s allocation to corporate credit, private equity, public equity, and a host of other risk asset classes?

Would one’s view on the U.S. dollar potentially influence their allocation to domestic vs. foreign assets?

And regardless of how one’s views on interest rates, inflation, credit, and currency impacts the decisions, they make on investment decisions, will all of these things impact the expected return on all asset classes (whether or not it alters your weightings in such asset classes)?

And if these things impact expected returns in various asset classes, does that have practical significance to one’s financial planning, accumulation goals, withdrawal goals, and other such tangible dimensions of wealth management?

The answer to every question above is YES, and pretty much all emphatically so, which means that every person reading this has a real dog in the hunt when it comes to the great economic debate of our time:

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Where to begin, indeed. It may have been exactly the kind of week investors wanted to start off 2021, but it certainly wasn’t the kind of week anyone wanted to start off 2021 from the vantage point of our country, her peace, her well-being, and her example to the world. The concept of a city on a hill is not working well, and this patriot feels total exasperation and desperation.

But I do know the readers of Dividend Cafe do not come to this publication for perspective on national conscience or psyche, especially not my clients. I believe there is a lot in this week’s Dividend Cafe that you will want to read, that matters to investors, that can better inform your beliefs and understandings in financial markets. So I am going to do what I normally do, and welcome any questions and comments any of you may have – as always.

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In-depth discussion of the Year Ahead, predictions made last year, and the impact of the Senate race.

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Our very special annual white paper is here, wherein we exhaustively recap 2020 and the year that just was (yes, even beyond the obvious stuff), and provide our key themes and perspectives for the year ahead. Reach out with any questions, and feel free to share/forward as you wish! Contact us at www.thebahnsengroup.com for your copy.

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Last Friday, December 11, marked year number 25 since December 11, 1995, when my father passed away. His name was Greg Bahnsen, he was 47 years old (the age I will be next year), and he was my hero and my best friend. I have to imagine many of you have experienced things (including losses) that do not feel like they were as long ago as they actually were. I know those cliches are tired, but it just simply does not feel like it has been 25 years since my dad died. Yet it has been, and I imagine when another 25 years go by, I will be saying and feeling the same thing.

Time becomes a weirder thing as we get older, I suppose (some of you will have more expertise in this than I do), and I am sure that time dynamics get even muddier when we are talking about a loss. Last weekend as I was isolated away working on a project, I spent abundant amounts of time reflecting on this and many other things. Regardless of what it feels like, 25 years has gone by since dad died, and my entire life being upended and forever changed. Over these last 25 years, not just in my own personal life, but across society, the news, the world, the culture, and yes, the economy and markets, there are a whole lot of things that have barely changed or haven’t changed at all. But, there also are certain things that reflect substantial change. Not just “evolutionary” change, but real paradigmatic change.

And the biggest of those changes is the subject of this week’s Dividend Cafe …

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National Call with David L. Bahnsen and Scott Gamm

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• Over the last 42 days, the market is up very close to 4,000 points

Now, I could write you a Dividend Cafe today reiterating a couple of things I have already written 100+ times in 2020 (and they would be no less valid now than they were then) – that the Fed has implemented monetary policies that have indisputably served to boost the valuations of risk assets … that the COVID doom & gloom in the press has unimpressed markets as markets learned the more detailed nature of the virus’s risk and specific vulnerabilities about seven months ago … that markets are forward-looking and with a vaccine on the horizon see a better 2021 looming … that economic damage has been limited in this painful year to a rather vulnerable but less systemically impactful part of the economy … and so forth and so on.

And if I wrote that Dividend Cafe, I would hope it would be useful, fruitful, and informative in some of the market lessons it would contain. However, it would very likely miss the most important thing one could say about this market, and frankly, one of the most important lessons one can learn about the nature of capital, period.

So that is the ambition of Dividend Cafe today. To explain why the market has been behaving as it has been, not just in the context of the four or five things uttered a couple of paragraphs ago, but in light of a huge lesson for all. And to do this, I will share a story with you that I hope somehow, someway, delivers the message with clarity. Jump on into the Dividend Cafe …

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