Let's discuss the state of the U.S. dollar, the "safe haven" of bitcoin, the politics of oil, the nature of…
Dividend Cafe provides market perspective rooted in first principles, not the fads of the day. Authored by our Managing Partner, David Bahnsen, it covers a wide array of topics, it doesn’t try to do what it cannot do, and it strives to offer needed perspective not readily available in most financial commentary.
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Let's discuss the state of the U.S. dollar, the "safe haven" of bitcoin, the politics of oil, the nature of…
Question:
“I’m really curious as to what your take is on this idea that higher rates are generating so much interest income (spendable cash) that it currently overwhelms the economic dampening effects of higher interest rates on households with a lot of rate-sensitive debt. Thank you ”
~Chris T.
Answer:
Yes, higher interest rates do increase interest income and benefit savers, and vice versa, and conversely have a negative effect on borrowers on the interest expense side.
The part, though, that I would differ from the vantage point of the article you sent is that higher interest rates have derivative effects within the economy that far outweigh any benefit on added interest income. What new small businesses didn’t start, what leveraged buyouts did not take place, and what other investment-related activities failed to happen during the time when rates were higher, and these transactions failed to “pencil”? The longer-term effects of that I believe are more damaging than the short-term benefits to a smaller investor base with a higher interest income.
The point on the total debt outstanding being now at 35T versus a lower number in past rate tightening cycles that is causing such an increase in the interest income to savers and purportedly helping the economy is intuitive. However, remember who the largest holder of that debt is receiving those higher interest payments – The US Government. The Fed’s balance sheet of $7.5T (down from over $9T in QT) matters, too, as the interest paid is not spent on the economy. Also, the wealthier person who has enough savings to notice an increase in interest income from savings rates being higher has a lower propensity to spend more than someone less wealthy must spend less.
All this to say, I would take the other side to the author you were kind enough to share with me. Thanks for your question.
Brian T. Szytel – April 18, 2024
Question:
“I know that David Bahnsen was highly influenced by The Intelligent Investor by Benjamin Graham. David works hard to explain dividend investing in his writing and work. How would you compare and contrast or explain the difference between dividend investing and value investing, if there is one?”
~ Jason A.
Answer:
Indeed, Graham’s The Intelligent Investor is a masterpiece, and will always be canon for value investors. Dividend growth investing and Graham’s intrinsic value investing have a shared space on a venn diagram, but are not 100% the same thing, but nor are they at odds with one another. Dividend growth as an investment objective uses capital return as evidence of the investment’s value, whereas Graham’s value approach speaks to an entry point of value as a means for entry. I believe Graham’s approach in the 21st century is a lot easier to use with private equity investing than it is public markets, as it is just a lot harder to find companies trading at a discount to intrinsic value (in expected earnings or in price-to-book). We seek to use principles of not overpaying for companies (Graham 101) in tandem with companies that return profits to shareholders via dividends at an escalating rate. The two concepts marry well.
David L. Bahnsen – April 22, 2024
Question:
“Don’t you believe that tax rates are likely to go higher in the years to come due to the unrestrained spending of Congress? Should we plan on intensified tax minimization with this in the horizon?”
~ Lisa R.
Answer:
I am very much on board with doing all that can be done legally and pragmatically to reduce tax burden. I feel that way whether or not marginal tax rates increase. I do not happen to agree that our national spending means individual tax rates will go higher. With certain political outcomes, they certainly could, but history is a very important guide here. The national debt has gone from well below $1 trillion to over $34 trillion since I was a kid, yet tax rates are significantly lower than when we started. One of the great outcomes of the Reagan revolution was to democratize public opposition to high tax rates. Is a value-added tax coming? Perhaps. Are there other tax mechanisms that may come? Of course. But the math of assuming high spending will lead to greater individual income tax burden has to also count for the politics and the public dynamic, both of which strongly suggest that it is much harder than people think to raise tax rates at this point. Regardless, tax efficiency and optimization are paramount.
David L. Bahnsen – April 20, 2024
In September of 2008 the world’s financial markets were brought to their knees by a debt bubble, the likes of which we had never previously seen. The turmoil in financial markets was severe and Wall Street banks were falling by the wayside daily. In this time period, David Bahnsen was working as a Managing Director at Morgan Stanley, responsible for the well-being of his clients. As their anxiety of clients intensified, David began writing a periodic bulletin to them. One bulletin became another, and then another, and all of a sudden, a weekly bulletin was organically born! Well after markets pulled out of the abyss of 2008, the weekly edition continued, evolving into something far more positive than its September of 2008 origins. This commentary distributed by simple email with an ever-growing following morphed into the Dividend Cafe when David and his team launched their own practice in early 2015.
Today, Dividend Cafe is still attempting to do what it was doing in the fall of 2008 – offering truthful perspective that may not be easily found elsewhere. The topics will vary from our dividend growth philosophy, to bedrock investing principles, to the challenges of interventionist monetary policy, to anything else that inspires David in a given week. The underlying objective is the same now as it was when we began – to build trust by telling the truth, not what people want to hear.
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