When The Illusion of Safety Trumps Safety – Jan. 11, 2019

Dear Valued Clients and Friends,

We have an entirely normal Dividend Café this week, filled with commentary on the Fed’s mea culpa last Friday, and all the other action that made this market week what it was.  By now you likely now the market went up 750 points last Friday (after last week’s Dividend Café had gone to press).  This week, as of press time, the market is up another several hundred points on the week and within a hair of being back to that 24,000 level in the Dow it broke in the sell-off of December.  I’ll talk about everything going on in this week’s Dividend Café!

However, I don’t want to take any attention off the annual white paper which went up this week [available here] both recapping all of 2018, and forecasting all of 2019.  It is a really exhaustive look at our present perspective, and how we plan to be positioning clients into this new year.  Please reach out if you would like printed hard copies (nicely packaged), and also take note of the:

Dividend Café Video – 2018 Recap & 2019 Forecast

Dividend Café Podcast

So beyond the significant work done to capture 2018 and delve into 2019, let’s dive into this week’s Dividend Café …

Click here to subscribe to Dividend Café

In all thy getting, get this

No lesson my business mentor ever taught me has been more profound and meaningful to my business than this: For the significant amount of investors who carry with them the reality of human nature, it is not safety they are most after, but rather, the illusion of safety. 

I am inundated on a daily basis with people who have found debt instruments, or real estate offerings, or who-knows-what-else that “guarantee” certain returns, or “can’t go down” (statements that get to be uttered because of the lack of “mark-to-market” pricing in most asset classes outside of the traded stock markets, best case; other times, the statements are just complete balderdash).

There is nothing wrong with this reality of human nature.  We are wired to lie to ourselves frequently in life to protect ourselves.  What would be wrong is a financial professional sworn to protect their client’s well-being capitulating to the dark side of human psychology, and actually acting on such delusion favorably.

The notion that equity markets lack risk is a lie, but it is not as big a lie as the notion that any other asset class doesn’t.  The mental gymnastics and self-deception people go through to avoid understanding this is (a) Forgivable, (b) Sad, and (c) Something that The Bahnsen Group will be vigilant in combatting until kingdom come for the betterment of our clients and their families.

To further quote my mentor, if “profit-seeking businesses run by highly compensated executives who respond all day every day to price signals sent to them by seven billion individuals intent on improving their own lives” is risk, it is a risk I will be compensated for, and it is a risk I believe in.

Fixed on what?

I go to great length in my 2019 annual white paper to defend the inclusion of bonds in a portfolio, albeit at a reduced weighting with rates once again so low, and the yield curve so flat.  “Fixed Income” is a weirdly accurate term for the bond asset class, because the income the instruments offer is, well, fixed.  In a world of rising prices and fluctuating interest rates, I would suggest that highlighting the “fixed” nature of the income in the actual category title itself is impressively transparent, and yet probably not the best exercise in Marketing!

But it is important to remember why we advocate for a weighting to bonds: To counter-act the inevitable volatility in other risk assets (including dividend stocks, real estate, and more).  This counter-act comes with a positive return via the coupon of the bonds, and when properly managed, can be a good contributor to the risk-reward management of a balanced portfolio.  But as a core building block to a portfolio, with inflation that is not fixed, spending needs that are not fixed, economic conditions that are not fixed, and interest rates in the economy that are not fixed, to “fix” the income of a portfolio is to force a very unnecessary handicap on one’s portfolio.

Diversification.  Asset allocation.  Blending of asset classes given all circumstances.  These are the needs of the hour.  In this hour, and every other hour.

Jobs number

Last Friday’s jobs number was exhibit 1,348 as for why we believe in running averages of the jobs number, and not just an isolated month like November’s.  The December number expectation was high (200,000), yet the actual number blew that away (312,000).  It was a stunning number, and the revisions to past reports added another 58,000.  Perhaps the most encouraging part was that the unemployment rate went UP, which sounds bizarre but is actually a direct by-product of more people looking for work!  How do you add 370,000 jobs and see the unemployment rate go higher? – because the labor participation force INCREASED!  Wages were up 3.2% year over year as well.  It is hard to find anything negative in this report.

The Fed is not the only player with weak knees

The markets loved hearing the mea culpa from Chairman Powell last week, but I am increasingly wondering if there is another catalyst for a melt-up out there: An unexpected but dramatic stimulus announcement from China!  China’s leverage is so high right now, it would be recklessly stupid for them to do so, but that does not mean they will not, and if they did, markets have historically loved it when China has offered relief into their monetary, fiscal, and regulatory regimes.

Midstream projections 2019

In our 2019 forecast piece [available here] I elaborate on the bullish (and patient) case for energy infrastructure.  It is my belief that the fundamentals are adequately constructive, and that new projects going into service, all drive a revenue growth which will enhance distributable cash flow to investors.  We may even have the first year (in a while) where there are not dramatic changes (or talk of changes) around tax treatment, business structures, funding, and business models.  Of course, this doesn’t mean investment sentiment or commodity prices will not face uncertainty.

European projections 2019

I see the risk-reward trade-off still skewed to the negative in Europe, with the possibility of a Brexit outcome, markets like being one possible catalyst for a positive move there, but the overall secular conditions remaining stagnant.  And of course, it also represents a potential risk as well (as the outcome there is anything but certain).  What is hard to find is a domestic driver of growth in Europe, which is still buried in excessive debt, declining demographics, a crowded out private sector, and unresolved tensions in their union.

Politics & Money: Beltway Bulls and Bears

  • It is worth noting that last Friday, as the market was rising 750 points, the headline running in the political sphere was President Trump’s line to Chuck Schumer that “this shutdown may last many months or even years.”  Obviously, no one really believes it will last years, but the point is that the market took all that rhetoric and all this hubbub about a few portions of a few departments being temporarily shut down, and ignored it altogether.
  • Incidentally, what if they announced that a big part of the shutdown would be permanent?  Would markets be afraid of a reduced government, reduced budget deficits, and less crowded out private sector?  Just sayin …
  • If the Democrats raise the temperature on impeachment talk, will that rattle markets?  My own little theory is that it may do the opposite.  Markets may begin to worry that some of the tax reform and deregulation of the Trump administration is vulnerable if the President were to lose in 2020, and yet an escalated impeachment talk now likely increases the chance of a Trump victory in 2020.  All of this is speculative, of course.  The final Mueller report is not released, and the market’s appetite for Trumpian tax and regulatory policies have been in conflict with the market’s appetite for Trumpian trade policies.  But at the end of the day, the market has an ability that political actors and enthusiasts simply do not have because of human nature, and that is to separate emotion and preference from the mix.  Until facts change, markets will see impeachment talk and efforts as a negative for Democratic prospects in 2020, and a positive for President Trump.

Chart of the Week

Why are we so obsessed with the theme of corporate credit and economic liquidity this year?  The growth of debt in the “Triple-B” space (the lowest quality credit rating of the still-investment grade world) tells the story.

Quote of the Week

“Fear is the foe of the faddist, but the friend of the fundamentalist.”

~ Warren Buffett

* * *
Forgive me for beating this dead horse, but there is nothing I want you to read more this week than the 2018 Review/2019 Perspectives piece I reference above.  We are living in such a key part of the economic cycle, with so many variables that remain unknown as to how capital markets will perform this year, I truly believe you will find my work in this paper to be beneficial.

In the meantime, enjoy your weekends, and reach out with your questions and comments.  This is the life we chose.

With regards,

David L. Bahnsen
Chief Investment Officer, Managing Partner

The Bahnsen Group
This week’s report features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet

The Bahnsen Group is registered with HighTower Securities, LLC, member FINRA 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, 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 and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.

About the Author

David L. Bahnsen


David is a frequent guest on CNBC, Bloomberg, and Fox Business and is a regular contributor to National Review and Forbes. David serves on the Board of Directors for the National Review Institute and is a founding Trustee for Pacifica Christian High School of Orange County.

He is the author of the books, Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It (Post Hill Press), The Case for Dividend Growth: Investing in a Post-Crisis World (Post Hill Press) and his latest, Elizabeth Warren: How Her Presidency Would Destroy the Middle Class and the American Dream (2020).