and i should have asked the question just a practical question like how do people find companies that produce dividends to grow in can you find these companies i assume you can find them in the private market can you find them in the stock market too

Well, it's a lot harder to find them in the private market because a lot of companies in the private market aren't able to pay a dividend yet or they choose not to.

Their exit in mature private companies is usually to try to go public, so they're not distributing cash yet.

But in public markets, it used to be, how do you find companies that don't pay dividends? Because institutional and private investors alike demanded a dividend.

there became a trend that said, you know what, we don't need dividends, just keep growing.

And then the question became, can the company holding on to your cash, it's your cash because you're the owner of the business, the shareholders in aggregate, can the company get a higher return on invested capital by holding that cash versus by returning it to you? And the answer is always yes until it's no.

that there is the second project, there's the core business, and then there's something else they do that requires capital.

Now, you're managing... portfolio so you're invested in you know 30 40 i don't know how many businesses that produce dividends um what is the general like roi for kind of this dividend growth investment

and i should have asked the question just a practical question like how do people find companies that produce dividends to grow in can you find these companies i assume you can find them in the private market can you find them in the stock market too

Well, it's a lot harder to find them in the private market because a lot of companies in the private market aren't able to pay a dividend yet or they choose not to.

Their exit in mature private companies is usually to try to go public, so they're not distributing cash yet.

But in public markets, it used to be, how do you find companies that don't pay dividends? Because institutional and private investors alike demanded a dividend.

there became a trend that said, you know what, we don't need dividends, just keep growing.

And then the question became, can the company holding on to your cash, it's your cash because you're the owner of the business, the shareholders in aggregate, can the company get a higher return on invested capital by holding that cash versus by returning it to you? And the answer is always yes until it's no.

that there is the second project, there's the core business, and then there's something else they do that requires capital.

Now, you're managing... portfolio so you're invested in you know 30 40 i don't know how many businesses that produce dividends um what is the general like roi for kind of this dividend growth investment

Do you think there's a signal here that there may be a risk of default or is the economic problem something else?

Well, let's be very clear to tell the whole story here.

France's yield has gone much higher than it had been.

You know what France's 10-year cost is right now? It's 5%.

You know what the United States' 10-year cost is right now? 5%.

So this is by no means a dire straits situation.

It's just much more expensive than it had been.

Do you think this is a genuine business response to this particular negative incentive, the tax?

What decisions brought this country to this point, and how much of the current crisis is the result of promises that government made that they can no longer afford to keep?

Yeah, France is an interesting subject because all of Western Europe has made excessive promises to, as you rightly pointed out, Tony, social programs.

France is more dramatic than some of the other Western European bloc countries.

And so essentially, there's two things going on.

First, they have put a ton of debt on the country's balance sheet that has to be paid.

And that's a huge problem.

And that's what most people focus on.

Is there are there warning signs here for America?

We're not making progress on the housing crisis front, are we?

No, we're not.

And so I'll say two things.

The caveat is that one month of data can always be a little misleading.

It can be lumpy.

There can be various seasonal factors that distort it.

So it isn't so much just the September print, which on both counts was pretty bad, but then the other side is it's all been bad.

So explain that relation and how it works and it's playing against ending this housing crisis.

But I'm curious, how do dividend yielding stocks and how do dividend growth stocks do in the sort of environment of rising interest rates and high inflation? How do they do during recessions and bear markets? Roderick

Well, when you have a beta that is about 0.6 to the market, you naturally have less sensitivity by definition to the market itself.

The only two stocks in the Dow that were up in 2008 were Walmart and McDonald's, which were two of the great dividend growers of the last 50 years.

They tend to be much more defensive.

However, I will also point out that in terms of the offense against inflation, there is no inflation if oil prices aren't going higher, if cheeseburgers don't cost more, if soap and towels and Pepsi soda pop doesn't cost more.

So there's an inerrant inflationary benefit.

And the fact that the dividend growth has always in every calendar year been higher than whatever the growth of prices are, the inflation rate.

I'm like, aren't you the world's biggest issuer of debt? How is a tiny announced buyback going to do anything to the long end of that? But go on.

So what do you say to an investor when they say, I'm just in the S&P?

Well, I say that that has been an incredible place to be with a decent amount of volatility, not extra historical volatility, but decent amount of all and a wonderful premium return since March 6, 2009.

Okay.

I believe that starting in November 2021 and in 22, the S&P did have its only down year since financial crisis.

2018 doesn't count.

It was 4% as child's play.

Only year of real downside.

It's the end of the month, right? I guess it's next week already.

What happened and what is the lesson, the big takeaway for the world listener?

Yeah, so this particular money manager is someone I've worked with and known for 19 years, and he's now managing hundreds of billions of dollars.

And as recently as one year ago, he was writing extensive white papers on a lot of the vulnerabilities in the AI story, the semiconductors, where he believed there was a lot of risk that we could learn from past history and technology booms and the way investors were thinking about this stuff.

But of course, as a lot of those stocks were still playing out and so forth, he was up and doing fine, but other things were going up more.

And a year later, he just decided, if you can't beat him, join him.

And when the whole space dipped quite a bit in the month of July and August, at that point of that dip, he decided to put the vast majority of the money he manages in in these names and and and so um you know look the the point here is not to either criticize or not criticize his particular investment decision it's to criticize the um uh pliability of one's own investment principles i believe that when one just decides i i need to follow the crowd and if it's all going to go down i don't mind going down with it but i'm not going to go out on a limb and have an opinion different than the mass consensus I think that that is an unfortunate issue.

It's resulted in our decision, obviously, what we have to do in terms of not allocating capital there anymore.

What do you make of the OCC's findings now? Does this report tell you the problem was widespread or that particular people inside banks were making decisions they shouldn't have been making?

Right.

Um, let, let's be clear about something.

Oracle is down 65% from its high last year, and they just had their biggest year of revenues you could imagine, and they have 200% debt to equity.

CoreWeave has 700% debt to equity.

It's down about 50% from its all-time high with significant negative earnings.

There, there's a lot of uncertainty in those types of companies, and when we isolate the risk to thinking it's just these semis that you point out are still up 60%, they were up 100%, at some point, it does trickle down to the entire ecosystem.

Everything becomes interconnected eventually, and that's the story of history.

Yeah

Mm.

Whatever happened five, four, three, two years ago is irrelevant.

Year over year, twelve-month period, what did things go higher? And if you get a twenty percent move higher in one year and then zero percent for four years, you still have very high prices, but the inflation now is zero.

Our problem is that prices have not stopped going higher, and all of that COVID moment and the spending and all the other prior excuses are out of the way.

So there's supply shocks, and there is still an excess of money supply relative to production.

So what you need is great productivity in the economy.

This is where Ronald Reagan gets a bum rap because even though people do rightly credit him for so much of economic prosperity, they sometimes will say Paul Volcker, the Fed chair, whipped inflation.

Otherwise, it really isn't a, a big number to live and die by at all.

So where do you see that crowding out effect showing up elsewhere in the economy? Where are you seeing it?

Well, the issue I think you're bringing up is more about what it's done to bond yields to-- that the AI, uh, hyperscaler story has now put out, let's call it two hundred billion dollars of w- of debt this year at the longer end of the curve, all these new loans and bonds.

But there's no, um, commiserate two hundred billion dollar increase above and beyond what was already there in terms of appetite for debt.

There's a certain amount of market force activity that's organic and natural.

It is not necessarily a negative in the way that governmental crowding out is inherently negative.

But in the short term, it's just a tautology to say that there is not two hundred billion new dollars in planet Earth, and yet two hundred billion, which is a lot of money, went into debt for AI companies, which means it didn't go into something else.

And every day, projects and investments are competing for investor dollars, and capital has a way of migrating to its most rational use.

So why do investors seem to think these tech companies won't be hurt by higher interest rates that they are helping to create?

Right.

And it's why many of us refer to it as the woke right.

Because while I found left-wing locism to be utterly disturbing to my bones, and the notion of trying to separate our society on the basis of class, race, gender, sexual orientation, all these things, and implying, as cultural Marxists do, that the world is divided between oppressors and oppressed, right-wing wokeism, right-wing populism that says, you know what? You're a working class white man and you've been a victim also.

And now what we're going to do is offer government handouts, government subsidies, government programs, government interventions to deal with it.

I'm sorry, but what is the logical consequence of that? It's to run with it and say, okay, now we're just haggling, to quote Winston Churchill.

Now we're agreeing on the premises.

So what is the limiting principle, my friend? Once you've accepted those premises that you're a victim and the government's here to right the wrong with redistribution, with intervention, with distortion, if people believe it's gonna stop at the little ideas that Vice President Vance has and not the big ideas that Bernie Sanders and AOC has, I got a bridge to sell them.

Yes.

Right.

And, and a dividend is another choice, which I argue is the choice to reward the owners of the business for the risk they took.

And it becomes a self-amortizing issue where you are essentially reducing the risk of your investment because you have less capital extended that you're seeking to get paid back.

And yet, unlike a real amortizing investment, like let's say a bond where there's a maturity and then the principal's paid back and y- there is no more, your equity's perpetual.

So you maintain ownership, and yet you're receiving cash that is amortizing away the risk.

And, and, uh, naturally investors love this.

And it wasn't just the early 20th century.

Sure.

So is there something actually new here? Why do these stories keep showing up? Or do you think the press is just reaching for an easy explanation for a more complicated move?

Well, the reason that the journalistic space has decided to jump onto the, oh, the all the debt is causing bond yields to go up narrative when it is obviously incoherent is because it's a simple narrative.

It's readable.

It's translatable.

It fits into a headline.

It's easy.

Um, it isn't just that we went from thirty-nine to 40 and, and why didn't we take it seriously at thirty-nine? We went from thirty-nine point nine to 40.

But what follows? What would we still have to know before concluding that the widening gap itself is a problem?

Visit SpinQuest.com for more details.

Well, Gary, it's not only helping to drive the economy right now, it is the highest percentage of contribution to economic growth.

that we've ever seen as a percentage of where we're seeing our real GDP growth come from.

You know, I joke all the time that the greatest friend Barack Obama ever had was fracking because as really tepid and low, slow, no growth as those post-financial crisis recovery years were during the Obama administration, they would have been really bad, including double dip reception, if it weren't for horizontal drilling and hydraulic fracturing.

And yet, even then, it was about 50 to 60% of business investment.

And now you're talking about the AI data center story that so many seem down on, being in some measures 80%, and in other measures, over 100% of it.

So, We can't kill the goose that lays the golden eggs in terms of what our economic growth engines are right now.

The application... of the improving internet it's gotta be a big plus is lowering costs it's increasing profits and it's improving productivity

Thank you very much.

Well, Mary, it's not only helping to drive the economy right now, it is the highest percentage of contribution to economic growth.

that we've ever seen as a percentage of where we're seeing our real GDP growth come from.

You know, I joke all the time that the greatest friend Barack Obama ever had was fracking because as really tepid and low, slow, no growth as those post-financial crisis recovery years were during the Obama administration, they would have been really bad, including double dip reception, if it weren't for horizontal drilling and hydraulic fracturing.

And yet, even then, it was about 50 to 60% of business investment.

And now you're talking about the AI data center story that so many seem down on, being in some measures 80%, and in other measures, over 100% of it.

We can't kill the goose that lays the golden eggs in terms of what our economic growth engines are right now.

The application... of the improving internet it's gotta be a big plus is lowering costs it's increasing profits and it's improving productivity

And yet, how concerned should we be?

Well, I mean, if you want me to answer theologically, I don't think we should ever be susceptible to doomerism on the unknowns.

Being afraid of things we don't know is, in my mind, much worse than being not afraid of things that we don't know.

In other words, there's a sort of Christian wisdom involved in prudence and discernment.

The Book of Proverbs exists.

to deal with the fact that there's things we know things we don't know there's things in between um so i'm having a hard time right now there's extreme rhetoric on both sides this issue when um the president and others in the ai space say we have to allow anything no matter what never ask any questions because otherwise china will beat us i continue to ask people that are really high up in the space what in the world that means i continue to not not get any answers I think that the American people are not buying that rhetoric.

And even if there ends up being kernels of truth to it, it's too bad that they've overplayed that hand because now nobody is really taking it seriously.

And that is not the kind of fear we're to live in.

So what happened between now and then?

First, the good news.

The tip spreads, which is what we call inflation break-evens, that tells you how much of the overall 10-year is from inflation expectation and how much is from real growth expectation.

The inflation expectations have gone higher, but not by much.

So there is some confidence for some real growth that's implied in a 10 year that is sitting at around 5.1 to 5.2%.

The answer is connected to the AI story, Nick, that there has been absolutely no corporate debt issued at the 10 year, 20 year, 30 year for a long time.

And at this level, this kind of supply, you're seeing long term debt from very high quality credit issuers.

So how do those pressures reinforce each other?

For the housing crisis, which has been an inventory issue as well as an interest rate issue, how does it impact that?

Well, so it's a very difficult thing on the housing side in the sense that their policy objective is to create affordability.

And rather than creating affordability with wage growth and new supply and all the healthy things that I believe in, one of the tools they want is to lower the cost of borrowing to increase affordability.

Now, why would they have to do that? Because they first created excess access by having them artificially low.

So we're just back to the same thing I said a moment ago.

That rates right now are impeding borrowing is only the other side of the coin to when rates were used to artificially stimulate borrowing.

And so I think that they're now just having to deal with the back and forth of their policy mistakes.

What about inflation?

Why do you think this quarter point increase won't do much to bring down the inflation we've been seeing?

Well, by the way, I'm not saying that negatively or pejoratively.

I don't believe that if Chairman Warsh joined us here on MoneyBeat, he would disagree with any of what I'm saying.

I mean it as performative in that it had already happened in financial markets.

The very domino effect I just described for you and the transmission mechanism for tightening monetary policy already played out in financial markets over the last several months, wherein The interest rates, both short and long term, had moved up when the Fed had not hiked rates.

And so this rate hike was the Fed catching up to the market.

So now in doing so, it doesn't do any new tightening because the financial markets had already done that tightening.

Which sounds like straightforwardly good news, but what is included in that household income number that makes you cautious about treating it as a verdict on how Americans are doing? And what measure would you rather look at? Yeah.

I'm not sure how that's accomplished, but I'll let you address that.

One thing I've tried to do, Tony, as an objective economist who's a Reaganite, a conservative, and hold true to my principles of what I ideologically believe about a market economy is be consistent.

And so what I recommend people do is say, if a Democrat— A Democrat left wing Treasury secretary came out and said, we're going to give one point two trillion dollars out.

We're not going to have any new revenue to pay for it and it won't add to the debt.

What would we say? Of course, they don't believe that.

And the use of the term dividend is helpful from a marketing standpoint.

My company manages a ten and a half billion dollar wealth management firm where we are totally focused on dividend equities, dividend stocks.

So, you know, this would probably be along those same lines.

What is the current, for a normal person, what is the significance of what happened yesterday, both on the actual interest raise and on the relationship between the president and the Fed chair?

Well, they're both great questions.

They're separate issues.

So let's first just look at the rate move itself, what it means to normal people.

In theory, people would expect higher rates would mean higher mortgages, and that affects regular people that are trying to borrow for their homes and other borrowing costs that can be impacted as well.

In reality, the rate hike the Fed did doesn't affect any of those things because financial markets had already done it.

The long end of the yield curve, meaning 10-year and 30-year long-term borrowing, had already gone up.

So how are investors like you, sophisticated investors, viewing this just as a business, not as a planetary revolution in so many areas, but just as a business? How do you see them? Are they good bet, bad bet?

uh with things he hasn't already delivered on with the tariffs uh he now wants to do if you vote for republicans uh that's inflationary but debt tariffs the impact of tariffs these are things congress and the president could control but once you have an inflation rate what it is the fed's always going to tap on the brakes a bit aren't they

Well, they are.

There's a lot of other moving parts that fit in there.

Let me just say this, because you always say you want me on as an economist and is what I do for a living.

I want to make very clear, I do not agree at all that debt is inflationary.

I understand that it can be.

I understand that's the sort of normal party line.

I mean, why am I having to be the one to come out and say it?

I want to give you five minutes, just runway, to explain to people what dividend growth investing is so that they don't have to read the book, though they should read the book because it's written for laymen.

Well, first of all, thank you, Hugh.

And I knew our 30 years of friendship would pay off.

Hugh, profit from the profit is the term that I want to attach to dividend growth investing.

It's the idea that all investors are trying to extract risk premia.

So that sounds like a fancy term.

You're taking risk of your capital because you want to get a bigger return in the future.

How many others do this, and how are they different from income funds of the sort that a lot of seniors have?

In principle, what would you say would have to be true about future earnings and cash flow to justify that kind of evaluation?

Well, I can't justify it because I believe that valuations are a byproduct of future expected earnings and cash flows.

And nobody in their right mind thinks that Anthropic or SpaceX are being valued off of that.

Now, in fairness to Anthropic, which is not words you're going to really ever hear come out of my mouth again, and I'm kind of upset you made me say it this time, but I think their annualized revenues are $60, $65 billion, and SpaceX's were $18 billion, and they IPO'd at about a $1.5 trillion valuation.

So relative to SpaceX, on a revenue basis, the Anthropic IPO is cheap, but...

But it's all speculation.

Anthropic has what is effectively a couple trillion dollars of liabilities, of commitments out there.

Tell us the distinction.