Canadian markets and mid-stream names in particular have performed better this year, generally. There has been more capex in Canada in the space, leading to more access to international (non-US) markets, and multiples have expanded. As such, there has been increased production relatively speaking in the US. The C-Corp vs. Partnership question in the US is more nuanced, with varying returns company by company. C-Corps have generally fetched a higher multiple, partly due to them having simpler tax structures and being included in major indices like the SP500. They also typically have been more aggressive in using free cash flow for capex, which is why you see lower current dividend yields, but the potential for higher growth of dividends relative to their partnership counterparts. Our MLP positioning includes all three: US Partnerships and C-Corps, as well as Canadian names.

The conversation about where passive index volumes and mechanics are and are not relevant to pricing in U.S. capital markets, and yes, to potential efficiencies (and inefficiencies), is a big topic and a worthy one. I prefer to devote a whole Dividend Cafe to the subject because it covers more ground than it used to, and I would want to give it a thorough treatment. That said, the drive-by answer is that I believe there are different [structural] risks in passive investing now than there were when the index craze first took off. And I also believe that nothing has or ever will change the reality that, structural noise notwithstanding, price always reverts to value eventually. Always. In other words, I believe the popularity of index investing (and sheer size of it) has created some dynamics that are different from those we have had in the past (mostly on the buy-side of a bull market, thus far, but would apply to the sell-side of a bear market, too). And I believe that those dynamics are noise, and not anything that supersedes the reality of price and value.

I do believe I erred in not discussing this in Friday’s Dividend Cafe because I think there is simply no doubt that one of the more structural challenges the Fed faces is aligning monetary policy with the structural fiscal reality they are forced to deal with. While it is not unique to this quarter or this meeting or this rate cut, the embedded reality is that, as much as massive resets of commercial real estate or levered loans matter, there is no question that the term structure and cost of borrowing of the $30 trillion of U.S. public debt matter, too. And I do believe a structural accord between monetary and fiscal policy exists. And I believe this accord contributes to Japanification, even when the accord is softer than the one in Japan.

The Fed funds rate can affect everyday borrowing rates from credit cards to auto loans, to lines of credit, to adjustable-rate mortgages.  So, while I would say that it affects both Main Street and the ‘big guys’, it’s indeed disproportionate to the former as a percentage of real disposable income.  Small-caps tend to be more sensitive to borrowing rates because they generally hold more debt overall, particularly more floating-rate debt tied to short-term rates.  So, we are tracking on the first few comments in your query.  However, the Fed’s balance sheet and its effect on the economy are a little more complicated to unpack. 

The expansion and contraction can indirectly increase or decrease the money supply (M2), but only if new credit is extended.   Ultimately, providing liquidity as a buyer of last resort can grease the wheels to keep them turning within the financial system during periods of dislocation. But I would argue those most susceptible to losing jobs that rely on those incomes, paycheck to paycheck, for survival during large-scale economic downturns that would otherwise develop, would be even more impacted.  Main Street and Wall Street are more interconnected in all of that calculus.  As far as the Fed balance sheet continuing to decline with the current QT plan in place, I am all for it; I am just not convinced that path will be linear or lasting, for that matter.