whenever someone says well maybe now it's different this is the most dangerous line of reasoning in the world what the do com people said to Warren Buffett in the late 1990s what people said about Florida condo speculators in 2006 that maybe now people can just own 10 houses with no equity and they go up 10% a year and eventually they're paying $4 million for a garage on $50,000 of income and maybe now it's just different um there are just things that uh uh get stretched to a point of absurdity David bonson returns to the show he is a managing partner of the bonson group he was on the show last year we talked about his outlook for stocks bonds yields you can revisit that interview in the link down below David welcome back I think two weeks before the election everyone wants to know from a from a reputable large fund manager like yourself how are you positioned ahead of either a trump or Harris Victory or does it not make a difference to you whatsoever it doesn't make a difference to us whatsoever and there's a number of reasons why first of all the way in which we invest Capital at my firm on behalf of clients is very uh purposely rooted to a philosophy that does not require uh the wind to be blowing a certain direction we believe that uh companies growing free cash flow and returning a greater percentage of that free cash flow with investors is a very bipartisan um uh investment methodology now what the impact of the election may be on certain sectors is always of interest to us but you can't position for that in front of an election when it is a 5050 election proposition so after the election is there a possibility and by the way not just the presidential election but getting an idea of the legislative result as well what are the Congressional um implications in terms of the Senate and the house because in theory I'm making up an example but if we thought well vice president Harris is going to be terrible for healthare and vice president Harris just won therefore we got to rethink our health care well that isn't quite the way it works if she doesn't have control of the senate for example so because we are reasonably uh optimistic that the Republicans are going to have some majority in the Senate after the election um there's a divided government scenario that just doesn't motivate us to go make big changes in the portfolio well the short-term risk arguments against either candidate are as follows would be bad shortterm for the stock markets we could see a sell off if she wins because she wants to raise capital gains taxes markets don't like higher taxes we're going to see a wave of selling off if Trump wins he may introduce more tariffs and on top of what Biden already has that's bad for markets do you buy into either of these arguments uh no you cannot raise capital gain taxes in this country as the president you have to have Congress sign it into law Congress has to pass the law president has to sign it the law there is absolutely no chance that if uh K Harris's president that they are going to tax unrealized capital gains um even if the Democrats were to hold on to a 5050 type Senate there are probably 10 Democrats that would vote against that so yes in theory the argument of this candidate will raise taxes could be bad for markets but um the political reality here is such that most of the things the people running for president can threaten to do can't be done uh I will argue the president Trump's threats on tariffs are very possibly volatility enhancing um so could we prepare as we saw in 2018 from the uncertainty of how certain threats of tariffs versus actual tariffs versus negotiated transactions play out could that in certainty enhance volatility it very much could but that is not something that we would shy away from so no neither of these things make us want to limit the stock exposure for those Reon reasons there may very well be other reasons to but it would not be about who the occupant of the White House is so politics aside what are you looking at for long-term positioning um we the problem with the stock market right now is not the president or the future president or the past president it's valuation it's extremely expensive and so cap weighted index investors are paying a very high price for this earnings growth the good news is they've been getting the earnings growth and the earning growth has outperformed expectations for the last several years coming out of covid the bad news is is extremely priced in and then some to a point where now we're looking at something about 15% earnings growth next year which is very possible but also very um optimistic and with that you're paying 22 times next year's earnings so um a full standard deviation and then some above historical mean for for uh earnings valuation that's the problem but for us um being dividend growth investors we tend to run at a much lower beta and certainly a lower PE a lower valuation there are certain things in our portfolio that we think are a little richer than normal but by no means some of the grotesque excessive valuation that you see in some of the big Tech and mag 7 names before we continue with the video let me tell you about a way that you can protect your data privacy a very important topic data breaches are becoming more frequent and it's getting harder to control who has access to your personal information just last month a datab broker breach exposed 2. 2 terabytes of personal data from onethird of the US population that is why delete me today sponsor is more important than ever it helps you remove your personal information like your name address phone number and more from data broker websites that buy sell and trade your data the process is simple simply submit your information and within 7 Days your receive a report showing exactly where your data was found and removed delete me continues to Monitor and remove your data all year long get 20% off of all us plans today by heading over to the link in the description down below or simply scan the QR code here on the screen to get started use my promo code David Lin at checkout join thousands of people who trust to lead me to protect their online privacy and take control of your data today yeah the S&P 500 is uh trading at a higher multiple P multiple than the historic average but let me let me just throw something out of you David just is a thought exercise what if we were to shrink the history that we look at instead of the last 50 years just look at the last five years maybe that's the new trend maybe there's valuations inflation we have to take into account going forward yeah and this is the most D you're asking hypothetically so I'm not picking on you but this is the most dangerous line of reasoning in the world whenever someone says well maybe now it's different may like the what the dotc people said to Warren Buffett in the late 1990s what I had what what people said about Florida condo speculators in 2006 that maybe now people can just own 10 houses with no equity and they go up 10% a year and eventually they're paying $4 million for a garage on $50,000 of income and maybe now it's just different um there are just things that uh uh get stretched to a point of absurdity and here's my uh uh belief right now for some of these companies trading at 560 70 times earnings um they have earnings growth so you don't have to literally wait 50 60 70 years to get your money back but at a 15 time multiple which is lower than historical average in the S&P it is extremely unlikely that you would find someone who says I would take on the risk of this company all the things that can go right and wrong in the next 16 years just to get my money back assuming they distribute out 100% of earnings just to get my money back in 16 years nobody thinks that way now you get earnings growth year overy year that are used to justify it the rate of earnings growth will begin going down not up so I understand the argument but the notion that we have moved the historical mean uh valuation to 22 times earnings or in the technology sector 40 times earnings these are conversations that always precede a bubble bursting interesting so what does high valuations mean for you practically speaking as a fund manager is a time to sell do you just hold do you just not buy more is it time for Capital rotation into other things well because we're dividend growth investors we don't have to go worry about trying to get expensive stocks to get more expensive we're trying to get companies that are growing earnings to continue continue growing earnings and continue Distributing in the form of dividend and so how do we know something is very expensive I'll give you an example I've owned Walmart most of my career we made 650 per in Walmart on a price basis alone not counting dividend we're selling the stock we've already sold it in non- taxable accounts we're selling it in taxable accounts in uh 70 days and they've done nothing wrong at all they've grown earnings yet again and they've grown the dividend every single year since they went public they went public 1973 I was born in 1974 so therefore I tell people Walmart has grown the dividend every year of my life however they are up 46% in 12 months and that's pushed a yield that our dividend at cost is 10% per year but it's yielding 1. 1% now because the stock price has gotten so expensive long answer to your short question is that's how we measure valuation when the current dividend yield has got so low despite their efforts to grow the dividend the price is simply ahead of itself what what's the cuto off for you below a certain y you say to yourself that's no longer a high dividend yielding stock um well again we're not high yield we want growth of yield but it's when it's below the S&P is a deal breaker so when the yield is below that of the overall Market it's a deal breaker we prefer it be double the S&P uh at purchase for basically every company double the S&P yield is only 2 and a half half% um but if a stock comes below two and a half we won't necessarily sell it but we'll weade it lower but if it uh and again when I say it comes below two and a half because the price appreciation the income is still growing so we have we have companies that have a yield right now of 3% if you were buying it but our yield is 25% based on what we paid for the stock um but below the S&P we can't keep the stock no if you're looking for uh dividend growth is it fair to assume that you prefer low beta stocks we don't prefer low beta stocks we just get low beta stocks it's a great question but I want to answer low beta is not what we're after low beta is what ends up happening because most companies in a position to grow the dividend year-over-year have a business model that is more balance sheet uh stable that has lower leverage in their um Financial structure uh has a uh a revenue model that's more repeatable and therefore is very likely to have less volatility and therefore be a lower beta name we have higher beta names but um dividend growth often lends itself to lower beta but but again we're looking for the dividend growth you know the old Express you come for the dividend growth stay for the low beta now going back to valuations uh let's just take a look at tech for example you're right earnings have driven prices looking ahead earnings may depend on whether or not the econom is going going into a soft or hard Landing what's your outlook there on on whether or not earnings will what I missed the last part a soft or hard Landing for the economy what's your outlook on the economy soft or hard Landing yeah it's we have a humble Outlook uh that we believe that there is a very strong possibility of a soft landing and even a soft Landing that looks like a no Landing that there just simply um almost ends up being no hangover but that's very unlikely historically so we want to stay humble to where there are sof patches in the data the soft patches are not there in labor right now um they're not there in real wages the there are so far reasonably optimistic signs around corporate profits real wages and jobs where there is mixed data is obviously with housing the inability to unfreeze the housing market I don't care at all what happens to house prices but the lack of activity in housing is a a reasonably important part of economic activity and then uh manufacturing has certainly slowed and a lot of the factory construction that was done has not yet led to Greater manufacturing uh productivity leading me to believe that there's a lack of laborers there's not a lack of jobs but a lack of workers so there's mixed data and and these things can change and If the Fed ends up not easing quickly enough as a lot of variable rate uh reset in in levered loans commercial real estate and the bond market that would end up creating contractionary effects but so far the FED got away with an awful lot of tightening because it wasn't really tighter because people just simply weren't paying the higher rates that's a good point let's talk about uh outlook for rates now the Bank of Canada today we're speaking on the 23rd of uh October just cut by 50 basis points do you think there's a race to the bottom around the world central banks around the world well with currency there's certainly is but um I I think that you can look at the way different central banks are handling their own monetary policy and they don't have a lot of choice but to follow the FED there there are none that are going to be able to lead the fed and I think some would prefer to go slowly and lowering their policy rate uh but they simply can't handle the stronger currency that it would create If the Fed is easing at a much faster Pace than they are so that's what you'll see with guard and and the uh ECB uh it's what you'll see what you will see with Canada China's got its own stuff going on with um their housing market and their monetary policy objectives um and and then uh Bank of Japan of course is in a totally different position having come from negative rates to barely positive rates so yeah there's a race to the bottom in the sense that um everybody would rather have a weaker currency than a stronger currency there's no question about that well what is your expectation for the uh for the FED how many rate Cuts could we expect into 2025 well uh my belief on this is that the FED follows the market the market doesn't follow the fed and so um right now the market is pricing in uh three to four Cuts uh another 100 basis points beyond the additional 50 they're expecting this year so 50 this year another 75 to 100 next year and I think that the Market's probably right about that um I think the FED would like to do a little bit more than that um but if the economic data is not weak enough they'll have a hard time rationalizing it the um the question is really housing that the FED knows that there is not any inflation anywhere right now year-over-year other than trying to clear out housing but that sellers are unwilling to sell 3% mortgages to buy 7% mortgages and so they have to get mortgage rates back down into the fours or fives and that's not going to happen in a year it's going to take a little while but that's the that's really I think the secret driver of monetary policy right now um is getting a couple hundred basis points out of borrowing cost for businesses before they reset at higher rates like I mentioned and then trying to unthaw this Frozen housing market well uh the housing market is is very uh frothy right now according to some people look uh going back to politics I'm not trying to make this a political talk but kamla Harris wants to build 3 million homes okay so is the future of housing to the downside if politicians are talking about more Supply as being a priority well the I think I know what you mean but the problem is I vehemently disagree with the premise that there's anything downside about lower prices housing is a place to live and um it is not a speculative investment and you uh uh the better thing for housing the upside from the way I view it in terms of a healthy and sustainable economic situation is to have affordability uh right now artificially constraining Supply may very well put a bid in for homes of baby boomers but it is a Preposterous economic solution for society so um I would very much like to see housing prices normalize I don't need the government to say what house should cost or shouldn't cost um and that's not a political statement it's a very economic one uh I I own four homes I I I have no vested interest in housing being cheaper um my kids are teenagers I'm not looking to go try to buy houses for my teenagers right now but when I say housing should be cheaper it's because there is an affordability crisis so people with $150 $200,000 of income can't afford to buy a reasonable middle class home that's not sustainable camel Harris can't build 3 million homes we don't have a deficit of 3 million homes because of the federal government we have a deficit of 3 million homes because of state and local government so clearing the um impediments that are zoning and environmental and and approval regulatory based that is going to unfortunately take something a lot more than just Washington DC the the the big question regarding affordability is whether or not it will ultimately impact consumer spending now retail sales came in uh last week new highs um beat expectations the longer term Trend that I've heard is that Millennials are starting to become at the age where they're starting families they're going to switch their spending from discretionary to the ne to necessity spending as their families actually come to fruition spending patterns and affordability how do you see those Trends playing out in the medium to long term well it's why when people believe that high housing prices are good for the econ I don't think they understand economy works if you're spending 28% of your disposable income on your house payment then there is 72% that's going to your restaurants and your vacations and your apparel and other elements of household spending this one of the great blessings of middle class um e uh economy in America over the last 50 years is the percentage we spend on food and gas has come way down but the percentage of our wallet that we spend on housing has come way way up and that comes from something so if all of a sudden someone has to spend 50% of their income on their rent payment or house payment that's great for the landlord or owner of the home but it is not great for the restaurants down the street that are getting less patronized so there's a zero sum fallacy in the way a lot of people think about this um I have no fear about the American consumer's appetite to spend I mean it's the great flaw of keynesianism is they just do not understand that human beings do not need to be told to want things they want them and as long as they have credit they're pretty much going to go get them the problem is the production side is we have to produce more goods and services that pushes prices lower and it creates new opportunity for growth for Innovation for a higher standard of living for a higher quality of life so my concern is not on the consumer um but it is on the production side of the economy finishing off on the economy looking ahead we're looking at potentially a widening deficit under either a trump or Harris when um this has been projected by uh several think tanks including the pen Wharton study uh down the line the CBO the Congressional budget office is also projecting debt to GDP to hit more than 122% by 2034 widening deficit widening debt levels higher interest outlays what does this mean for valuations for stocks return on equity in general well first of all the higher debt is assured and I say that um very uh uh sadly higher deficits are assured and I say that very sadly higher interest expense is not assured because that's one thing we've learned from uh history is that the uh cooperation between the central bank and treasury is a political given um that as debts and deficits grow the accommodation enabling comes in the bond market as the Central Bank puts downward pressure on interest rates and besides about an 18month period or 24mon period over the last several years that's been the norm since 2008 when our deficits blew out and our debt to GDP went from 60% to 100% And when we had 60% debt to GDP we were paying more in interest than we were when we had 100% because rates were at zero bound and uh Japan has kept their interest rates at zero for 30 years uh despite 250% debt to GDP so I believe that it kind of gives you a backdoor answer that yes higher debt yes higher deficits but no not higher interest expense because the central bank will have to intervene and I don't say this as a positive thing I say it as a discrep criptive thing what does it mean to stocks um it puts a lot of pressure on companies to grow earnings and not be dependent on a growing PE ratio back to valuation an environment like that um real actual stewards of free cash flow get rewarded and speculators get punished if the argument is that central banks need to issue more money to potentially pay off the debt does that not mean a more stimulative economy overall which may be good for risk assets it can mean an artificial stimuli to risk assets for a short period of time but as we learned in Japan you can't stimulate just by lowering the cost of capital producers do not make decisions only on what it costs them to borrow but there has to be an opportunity of an uh of something that they view as being opportunistic a good investment to put a shovel in the ground for the greater percentage of economic resources in the economy going to serve as government debt the less Economic Opportunity there is and so you put D this is what we mean by Financial repression you can boost up the value of incumbent assets but you're not creating new assets so the economy doesn't get the growth it needs if all you got was a more expensive Apple and Google well what you need is a new Apple and a new Google and that's to me the challenge that we face um it's a economic term I write about all the time at dividend Cafe which is my weekly investment writing called japanification that's what I think America is living in uh I'm 50 years old and I think we're going to be living in it for the rest of my life japanification just close off with this what what what can you elaborate on that you mean it's where you are using stim you're using fiscal and monetary stimulus to try to address problems of economic growth and the more fiscal and monetary stimulus you use the greater challenges to economic growth you create so you create a vicious where the patient needs more and more medicine and the medicine is working less and less How likely Can America actually experience what Japan saw in the early 90s which is to say deflation not just disinflation outright deflation High savings rate because of deflation and like you said stimulus that didn't work stagnating economy the N didn't return to its highs until 20 years later um I think that um in the category description it's not just that it's inevitable we exper ER it but that we have been experiencing it but but at the magnitude I'm very skeptical at least for the time being our real GDP growth in our country for 70 years was 3.
13% from 1946 to 2007 um we are uh right now averaging half of that for 15 years so we are not in deflation um we have a very different demog graphy in our country um different uh economic productivity than Japan and and that is a a a blessing for America but we are living off of half of our real economic growth output now and I see continued downward pressure and the bond market obviously does the fact that you have a a a a 10-year basically around 4% if you believe you're going to get 2% inflation then the nominal GDP uh assumption is that you're getting about 2% real GDP growth we've averaged over three so that's what I mean by japanification um look candidly if we're getting 4% nominal GDP growth that's a lot better than 3% and and that's where I worry that will go is if you're getting 1 and a half% inflation and one and a half real GDP growth that's what we got for all the preco years after the financial crisis and that uh takes its toll the rich get lot richer the middle class do not get richer and it creates a lot of social angst in society uh that's my final question actually is what the bond markets are pricing in in terms of inflation take a look at my screen here this is the 10-year um huge jump from just a few weeks ago this is the two-year uh it didn't move up as much over the last month or so but it's still on a flat if not upward trajectory why are bonds both short end uh yields rather short end and long end kind of inching up what are they pricing in well again uh they're only right now inching in uh inching up 4% in the tenure and inflation expectations didn't go up you can look at the tip spreads so that means that they're looking at real GDP growth being a little better than they thought three months ago where there was a few worries about unemployment ticking up about the GDP growth underwhelming the Atlanta uh GDP now looks a little better the uh uh weekly jobless claims have stabilized a bit so 4% is a way to basically say 2% inflation 2% real GDP growth over 10 years um but all of that increase from 370 or 365 up to four that's all basically in real expectations not inflation expectations are you are you are you bearish bonds is this trend going to continue no I would be very bullish bonds there uh because um the the like I just said about japanification we are not going to get to trendline economic growth with $35 trillion of debt and either PR president adding another 1 to2 trillion a year to it um we will not get back to 3% real GDP growth so there is some ceiling in place for uh bond yields where nominal GDP growth is 4% or less in my view excellent thank you very much David where can we learn from you I I I I know you mentioned you have a your own media you have a book as well yeah dividend cafe. com is the best place where people can stay in touch with my weekly investment writing and from dividen cafe.
