Dryden Pence Luncheon Presentation (2021)

Dryden Pence discusses our market outlook and how changes in governmental policy and human behavior will affect interest rates, inflation and investment opportunities worldwide.

Bill Boggs (00:01):

I have the distinct privilege to introduce our next speaker, but first, just a quick introduction. My name is Bill Boggs. Previous to coming to Pence Wealth Management, I was a senior financial planning consultant at the LPL corporate office, where I worked with other advisors on financial planning ideas, strategies, and that sort of thing. After about three and a half years there and consulting on roughly 7,000 plus financial plans with other advisors, I decided to get back out in the field and work with clients directly so I could help them accumulate their wealth on purpose. So it’s really great being back with everybody. It’s great to be in the room with people again, so welcome, and hope you all enjoy the show.

Bill Boggs (00:57):

So, Dryden Pence serves as our Chief Investment Officer, where he oversees the management of all our client assets. He began his career with a degree in economics from Harvard University in 1982. That same year he was commissioned in the U.S. Army as a military intelligence officer. He went to the ROTC program across the river over at MIT after for graduate study in law and crisis management. Dryden served as a military intelligence officer in the Army, specializing in psychological warfare. So Dryden was mobilized then for Operation Desert Storm, and his actions in that conflict earned him the Bronze Star and the Army Commendation Medal with Combat V, which is for valor in combat. meritorious.

Bill Boggs (02:07):

Some of his other awards are the Meritorious Service Medal and the Legion of Merit from the U.S. Army, which is one of the highest awards that a soldier can earn. So after that, he he commanded joint intelligent units and supported both the U.S. Central Command in the Middle East and the U.S. Africa Command. He ultimately retired from the Army Reserve in July of 2015. In addition to being formally trained as an economist, he’s an accredited investment fiduciary and holds the Certified Portfolio Manager designation from Columbia University. In his capacity as Chief Investment Officer, he oversees the investment of over $2.4 million billion in assets under advisement.

Bill Boggs (02:54):

What separates Dryden from others in this industry is his ability to combine that formal training knowledge as an economist and these years of experience in the psychological warfare world to bring a unique understanding of how human behavior affects the economy and the markets. Because of this unique response perspective, Dryden Pence is a frequent speaker at regional and national events, as well as for broadcast outlets, such as Reuters, CNN, CNBC, and Fox News Network. So without further ado, Colonel Dryden Pence.

Dryden Pence (03:38):

Good morning, everybody again, glad to be here. Everybody repeat after me: past performance is no guarantee of future returns. Okay? Now all the compliance people are happy. You know, I mentioned Laila and I been married for 22 years. And even before we got married I attended some of the conferences.

Dryden Pence (04:50):

And we had a very favorite (all clients are favorite, but thid lady was special) and her name was Addie. Addie came to every event, and she was a delightful person. She had been a client of Laila’s for a long time, even before I met her, and Addie would come and she would sit right there. After each event, she would come up to me and she would say, Dryden, I’m so glad I was here. You take all these really complex things and you boil it down and you make it kind of simple and I can understand it. And then you’re up there on the stage and you’re jumping around just like Tigger from Winnie the Pooh. And it’s so fun.

Dryden Pence (05:38):

I got to thinking about that, and I really love being up here doing this. I got to thinking about that. So when I had this suit made, I decided in honor of Addie, I would do this and have the lining of the suit (as Tigger). You know, what’s interesting. Every time I put this suit on, it gives me more energy. So you guys watch out, here we go. So really quickly, there’s a couple of key concepts I want to bring up.

Dryden Pence (06:29):

First of all, supply and demand curve, Everybody knows the supply and demand curve. Downward sloping, demand, upward sloping supply. So, but when you think about what’s going on in the world, the thing to remember is that when supply gets constrained and there’s less supply, what happens to prices is that they go up. The same thing is true when there’s too much money in the economy, right. Then that moves forward.

Dryden Pence (07:14):

There’s too much demand. What happens to prices? They go up. Very simple concept. Remember that the other thing to pay attention to is the price of the stock. There’s nothing magic about the price of the stock. Everybody wants you to make you believe there is some great algorithm and there’s a black box and it’s all special. They do that so they can charge you sky-high fees. The point of the matter is that price of stock is nothing more than earnings. Earnings is the most important component. Times a multiple, which is confidence. That’s what the market gives you. Then that’s how you get the price. Very, very simple. Remember those two concepts as we go through the rest of today. Our title today is The Next Normal.

Dryden Pence (08:07):

It’s a world post-COVID. The world has changed dramatically because of what happened. Just like the world changed dramatically after World War One and the world changed dramatically after The Great Depression. Many of your parents told you about The Great Depression. It changed how they felt about life. The world changed dramatically post 9/11. Well, we’ve had COVID, and normal is different. So this is a world post-COVID. This is probably something that’s going to be endemic, and come around year after year after year. So when I got to thinking about this, I said let’s talk about the next normal. How many of you remember a movie director by the name of Mel Brooks? So, but the, the, the important thing is the next room. So Mel Brooks did a movie in 1974 called Young Frankenstein. How many remember Young Frankenstein? Well, I want you to do some of, you may remember this scene that I’m going to show, watch this. This has to do with what is normal.

Dryden Pence (10:42):

Are you telling me we put $5.4 trillion into the world’s largest economy and one year, is that what you’re telling me? The next normal is abnormal. The point of the matter is we put $5.4 trillion into the U.S. economy, 25% of 2019 nominal GDP, more money than we put into the entire economy in all of World War II, a conflict that went on for four years. We, in one year, we put in more money into the U.S. economy all at once. Boom, that’s what we did the next normal for the next couple years is definitely Abby normal. We’ve not been here before. As a matter of fact, we never had a case where we’ve had a round trip in the stock market; in about 126 days, it’s dropped 30% and then ratcheted right back.

Dryden Pence (12:02):

Look at our job creation. We were peaking with jobs, and all of a sudden we lost 22.4 million jobs in a period of a month and a half. We only lost 15 million jobs in The Great Depression. Then all of a sudden it comes right back. That’s abnormal, initial jobless times. All of a sudden we end up with GDP that goes down 31% of that up 33%, that’s Abby normal. What’s very interesting about this is that these abnormal moments have created statistical factors that have gone on and on and on. Basically nothing’s going to make sense, As a matter of fact, look at earnings estimates, Earnings estimates are awfully darnn good, up 43.4%. That’s a good number. Probably not going to grow that fast every year. But if you take a look at earnings per share, you can see 46 and 86. These are good numbers, but what’s actually really important to look at is net profit margins. Net profit margins have gone up. You see, as you get into this, people are going, oh my gosh, the stock market’s at an all time high. Well, of course it is; earnings are at an all time high. What’s the thing I said was the most important? Earnings. If earnings are at an all time high, then the stock market ought to be at an all time. High makes perfectly good sense.

Dryden Pence (13:57):

We’re in this environment where people come on the media and tell you all sorts of things typically to scare you so they can sell you gold. By the way, anytime you see someone on TV telling you the world is going to hell in a hand basket, within the next five ads, there’ll be one to sell you gold. The point of the matter is earnings are at an all time high. So the market’s at an all time high, but all the data is going to be crazy for a little while because you see, we took all that money in response to COVID. We dumped it into the economy. It did what it was supposed to do.

Dryden Pence (14:48):

That’s like throwing a big rock into a pond. Boom, you get a big wave. Then, all of a sudden, you get ripples and those ripples take a long time to work their way through. So what’s going to happen here is none of the numbers and none of the comparisons are gonna make sense until about 2024. So when you hear pundits come on television or you see articles in the newspaper, and they go, well, this is up 5% or 6%, or this is a 12%, or this is a 13%, or this is down 23%, just step back and go compared to what? Are you comparing it to a normal number or you’re comparing it to an Abbey normal number? And you’re going to find that most of these comparisons are to abnormal numbers.

Dryden Pence (15:39):

So, they mean very little. So when the data doesn’t make any sense, who should you trust? I’ll tell you what we do at your investment team. We trust people. We trust this: when all the data’s crazy, you look out around and you see what people are doing? Human beings are what drive the economy;, human behavior drives consumption. Nobody makes a penny until someone decides to buy. So, if we can get in front of the decision-making process and we can understand the consumer, we can be predictive about not only what they’re going to buy, but who they’re going to buy it from and how they’re going to buy it.

Dryden Pence (16:45):

Then, those are the companies that we want to invest in, because they’ll be resilient. Regardless of all those numbers and data around, I trust personal consumption expenditure. Every dollar is a vote. Every time you spend a dollar, you voted to spend that $1 on this item versus this item. This item was worth a dollar more to you than this. Every dollar is a vote. So you can actually look at what human behavior is as what are people spending their money on. And what do they spend money on? Even if the prices go up, what do they don’t spend money on? When the prices go up, we spend a lot of time and a lot of research following this and asking those questions, because we recognize that we’re the kind of the largest economy of the world.

Dryden Pence (17:39):

U.S. consumption is the largest coming in. Just our retail sales in the United States alone are as big as the entire Japanese economy. It would be the third largest economy; and e-commerce is on its way to a trillion dollars. That’s a lot of money. I can remember when Howard Hughes was the richest man in the world and had $1 billion. So how do we pay attention to this? How do we figure this out? If you took a psychology course in college, you saw, you’ve seen Maslow’s Hierarchy of Needs. He did groundbreaking research in 1943, in advance of our entry to D-Day; he asked the question, why do people do what they do?

Dryden Pence (18:37):

Why do human beings do what you do? The interesting thing is that 6,000 years of human history tells us that we will first fulfill our physiological needs. Then we’ll fulfill our need for safety and security, then our need for love and belonging, then our need for self-esteem. Finally, there’s our need for self-actualization. In that order we will not vary. I spent a lot of time in psychological warfare. When you’re under pressure, you revert to the lowest levels. When you’re scared, you revert to the lowest level. You fall back on your base. That is why in March, a year and a half ago, everybody went out and bought rolls of toilet paper in response to a disease that has absolutely no gastrological effects.

Dryden Pence (19:31):

Of course you did. Why? Because you’re paying attention to your physiological needs.Then we went to safety and security. Six feet away. People that we used to spend a lot of time up close and personal became a threat. So our safety and security changed how we thought about things. Our space became our physical security, and we reacted to that. It was important.

Dryden Pence (20:11):

The other thing is, let me ask you a question. How many times have you stopped the car, turned around and going back to the house because you left your cell phone? You’ve gone back to the house to pick it up, or you’ve panicked because you couldn’t find it. Or, worse yet. you have a teenager that goes into absolute frenzy when they can’t find theirs.

Dryden Pence (20:50):

Welcome to the return of your security blanket. When you’re a three years old, if you couldn’t find your blankie, it really bothered you, and everybody in the house made sure that you found your blanket. It’s the same thing about your phone. We all have them. They’re just electronic. But here’s the thing. The next thing: love and belonging. What did we do? We spent more time together with those. We spent more time as a family. You might have spent more time on the couch watching TV and binge watching on Netflix. More people watch more television streaming with their family than ever before. These are the things. We did this because we felt a need to expand our love and belonging. Here’s the thing we know about humans. Humans are the most adaptive species on the planet. That’s why we’re at the top of the food chain.

Dryden Pence (22:08):

We are only predators. But the important thing to recognize is that we’ve had challenges before. We’ve had economic challenges before. We’ve had military challenges beforE. We’ve had emotional challenges before. We’ve had biological challenges before. We’ve overcome every one of them as a nation and as a species and as a world and as a planet. That’s going to be what happens now. Yes, we had a biological war exist in the last year. Doesn’t really matter who started it or what it was, but that’s what it is, a biological event. So your investment team began to ask the fundamental question: what was the last time we had a major event that shut everything down, or shut a particular human behavior down? And what is the half-life of inconvenience? How long does it take us to adapt over that? So we went back and looked at another key event that happened roughly 20 years ago. We went back and we looked at 9/11. That was the last time all the airlines stopped. That’s one of the fundamental things we do. We’re human beings. We like to move around.

Dryden Pence (23:22):

So we went back and we looked at 9/11, and then we said, wow. You couldn’t get on a plane. Then when you could get on a plane, what did you have to do? Go through a massive inconvenience. You had to get strip searched. They had to go through all your bags and all of these other things. It was very inconvenient to do things. You had to go through screening. Make sure you don’t have any weapons. Now we’re going through screening to make sure you’re wearing a mask or vaccinated. So when was the last time we had an event like that happen, and how long did it take us to get back to some semblance of normal? So at 17 months after nine 11, we had 95% of air traffic loadings back. Now we’re roughly 17 months after COVID, the same thing is happening. The same restrictions, occurring only on a different path. We’re back to about 70%.

Dryden Pence (24:25):

My point is, that after about 18 months, Americans get fed up with being inconvenienced and get back to a normal form of life. They find a way. So it’s important that if we can recognize those things as an investment team, we can be in front of that behavior and learn how to capitalize on the value. In addition to that, some other things have happened. Not only did we put $5.4 trillion of government stimulus into the economy, we’ve got $1.5 trillion worth of excess savings. People didn’t spend money for a little while. Now, not only do we have pent up demand, but we’ve got money.

Dryden Pence (25:21):

There are a few sectors of the economy that are more negatively affected, but in general, this is the math, folks. There’s a lot of pent-up demand. There’s a lot of money. Payrolls, we’re back to where we were at the end of the Obama administration. The same number of people employed at the end of the Obama administration. Now some particular sectors have been very negatively affected. Those are the stories that you hear. It’s been horrible for people in leisure and hospitality.

Dryden Pence (26:13):

But the point is, as these sectors recover, you could read it like a roadmap, but you know, there have also been some major dislocations. Real quick, I was talking to a guy in Branson, Missouri. He said, look, this is crazy. My 17-year-old granddaughter had a job. COVID came. She lost her job. She went on unemployment. Her unemployment benefit was $10 a week based on the job she had. But because of all the programs put in place, she got $300 a week from the state and another $300 a week from the federal government. So you have a 17- year-old kid who is only entitled to $10 a week getting $2,400 a month as a high school student from all the government programs.

Dryden Pence (27:20):

A little bit of distortion comes into the economy as unintended consequences of these things. Now, here’s the problem. Up until this month, we’ve been paying a lot of people not to work; paying them more not to work than they were making when they were working. As a matter of fact,, in the month of July, we had 10.9 million job openings and 8.3 million people unemployed. We’ve got 1.3 million jobs out there for everybody who wants it. You’re going to see some weird numbers over the next four or five months, because all of a sudden, all these people that were being paid not to work are going to start looking for a job.

Dryden Pence (28:19):

They’re going to find one and a half of them. So the employment numbers are going to be really wacko for the next couple of months. Not only that, here’s the other thing. As an economist, I don’t necessarily always look at how many people are unemployed. I look at how many people are employed, and how much money is going around in the economy. Real wages and salaries, Even with all these people unemployed, they’re are higher now than they were at the peak before the pandemic.

Dryden Pence (28:59):

So when you ask me about the economy? I’d say it’s pretty good. When you asked me about earnings, how are they going to be? Pretty good. And what does that support in a stock market? Pretty good. So let’s talk about the things that you’re worried about. People are worried about inflation and interest rates, Those are the questions we get. The big question is, is this inflation transitory or permanent? Let’s talk about that. Two types of inflation here, scarcity and abundance. Scarcity: there are not enough products out there. Abundance: there’s plenty of money, Or scarcity: we don’t have enough money. Or, scarcity in the sense that we have supply chain disruptions. Supply chain disruptions create temporary scarcity and drive prices up. What happens when it all shows back up again and goes back down? What happens when we have tons of money in the economy chasing too few goods? Prices go up. So these ideas of scarcity and abundance are working their way through this. The thing is, when we talk about inflation jumping up and things like that, you can recognize that by various segments and sectors, it’s a little out of whack. Energy prices, for example. We had to look. We had a major change in energy policy in this country with the election, short answer. And this is what happened to energy prices.

Dryden Pence (30:40):

That’s it. Check out these empty shelves from the start of the pandemic. It’s called price elasticity and demand. You need it. It’s not there. You’ll pay a lot. That’s a supply chain disruption. That’s what it looks like. Now, are you going to pay a $5 premium for a roll of toilet paper today? No. But when you look at what’s going on, we’re back to this: major supply chain disruptions caused by instability in the market and too many goods and services showing up with the ports. Ports are constrained. The port of LA in Long Beach, we had real peaks, and then it began to straighten itself out.

Dryden Pence (31:48):

Now we’re back to huge numbers of ships. As a matter of fact, I talk about this, because this is creating major disruption. There’s also unintended consequences and supply chain disruptions. One thing, really quick, to understand: it cascades. It’s not only at the ports, but it’s everywhere else. We can’t get trucks. You know why we can’t get trucks? Because we can’t get truck drivers. You know why we can’t get truck drivers? Because a bunch of truck drivers retired, and they can’t train any new ones because all the schools that were training them were closed down because of COVID. See how this works?

Dryden Pence (32:28):

Then a year later you don’t have any truck drivers. Then you can’t get anything delivered anywhere. Therefore, you have supply constraints. Then what happens to prices? Now your investment team actually does boots on the ground research. In this case, it’s boots on the air. We actually took a helicopter out. We’ve done this a couple of times. We fly the port, because I want to know what ships are out there. I want to know what they’re holding. I want to know where they’re coming from. We even take a look at how low the tankers are sinking in the water. So we know, and it can be predictive about how much, whether they’re loading or unloading petrochemicals and all these various containers. The point of matter is is you go look out there. There’s a whole bunch of them.

Dryden Pence (33:17):

Are they going to be unloaded by Christmas holidays? Also, don’t expect anything to be on sale when things are supply constrained. What does that do to prices? If there are no sales, prices are up, but this is the part of what’s going on. This is what’s going on in supply chains. This is why you’re seeing spikes in inflation. Then you have to look at it by segments. This is used cars and trucks, These numbers get Abby normal, used cars and trucks. You couldn’t get the ships to offload any new cars. Since somebody needed a car, they had to go get a used car, more demand than there is supply used. Car prices go up 40%.

Dryden Pence (34:14):

But the thing is, nobody tells you that until four or five months later. But if you go back and you look back in May, we’re taking a look at this stuff. Of course inflation was, everybody said, oh, it’s 4.8%. It’s crazy. It’s going to go wild. If you pull out used cars and trucks, which is a temporary phenomenon, inflation was 2.3%. That’s why you have to look deep at the numbers. Actually, you don’t have to. We do it for you. That’s our job. So when you begin to see consumer prices peak up, you have to ask the key question here. Is it going to be permanent or temporary? Is it supply chain or is it a general increase in rise? We are seeing inflation.

Dryden Pence (35:06):

Let’s talk about interest rates and why is inflation important. Inflation is important because when you have inflation, people get worried about the Fed raising interest rates. How much are they going to raise the interest rate? Now here’s the thing to know: the interest rate is no more than the price of money. Remember that? So the second thing I learned at Harvard, the interest rate is no more than the price of money. If you have to remember that, and supply and demand, you can explain what the Federal Reserve does, and you can be really smart at the country club. You can predict everything they’re going to do. Lower interest rates stimulate the economy, higher interest rates slow it down, simple as a can of corn. That’s what they do. Let’s take a look at what happened during COVID.

Dryden Pence (35:55):

Prices picked up, then they went down because everybody panicked. Then all of a sudden the red line is low interest rates, massive money supply. Now you see prices go up. This gives you the whole story. The effect of inflation is that it erodes purchasing power, but it’s also the indication of a growing economy and healthy demand.

Dryden Pence (36:37):

The Fed wants an average inflation rate of 2%. They haven’t been able to get that but two times since 2007. This is a gift to them. Inflation could be 3% for the next five years before we ever get back to the number they really want to be at. So if inflation goes to 3% or 4%, is the Fed going to panic and raise interest rates dramatically? No, they’re getting what they want. The next time somebody tries to panic you about that, go in. I saw this thing on supply and demand. It’s no big deal. So when asked the question, is this inflation transitory or permanent? The answer is yes.

Dryden Pence (37:32):

It’s both. It’s transitory because supply chain disruptions of temporary length pushed segments of the economy up and prices up, but supply chain disrupts level out. There’s toilet paper back on the shelves,. That’ll straighten out, but is it permanent in that we have more money supply and we’re trying to grow. They’re trying to make that happen now, but let’s ask the next question. The Fed adjusts interest rates to affect behavior. That’s why the Fed raises interest rates. They don’t do it just for fun. It’s not in their mandate to make sure that bond people make money. So the question is at what price of money does the Fed get the behavior that they want?

Dryden Pence (38:31):

Now, when I graduated Harvard in 1982, interest rates were 18 to 21%, in some cases, right. Inflation was about 13%. I bought my first car, and I paid 14%. I thought I got a bargain. Right. We know what high interest rates are. We know what high inflation is. We thought for the longest of times that 10% was an acceptable interest rate, like if you got 6% on your home mortgage. Guess what? We’re not as important as we used to be, because millennials are the largest generation in the labor force since 2016. They’re the ones who are out buying houses.

Dryden Pence (39:34):

Because the millennials are the largest group, they have a different viewpoint. Their behavior is different. Interest rates are relative. What this means is that to them, 6% is completely crazy. They will react much faster. As a matter of fact, we’re already seeing that. This is 2016 to 2019. What happened? What happened when interest rates went and picked up over about two and got close to 4%. What happened? Housing demand dropped. I mean, it dropped like a rock. First, everybody bought and closed on their deal because they were afraid it was going to go higher. Then they said, no more, boom. Housing demand dropped. Then, we saw it as creep up again.

Dryden Pence (40:31):

What happens? Housing demand drops for the largest piece of the economy, the people that are buying homes. Now, their price elasticity of demand for houses peaks out at about 4%. You get house mortgage rates up around 4%, and they’re not going to buy. Does that mean that the Fed gets it? The Fed will get what they want at lower levels than they have before. Because the biggest piece of the group of people in the economy are going to go, I’m not doing that. So it’s important to know. So interest rate increases should achieve the desired result from the consumers at lower levels than previously at lower levels. That’s important because if you’re sitting there panicking about interest rates going back to 10%, I think it’s pretty safe to say, I don’t think you should be worrying about it.

Dryden Pence (41:32):

When you look at the big knowable thing, there’s tons of stuff with stimulus and capacity. It’s hard to have things in the economy go badly with this much money being pushed into it. It really is. Our quick outlook on earnings and fundamentals should continue to be strong throughout the rest of 2022 and 2023. It is all about earnings. They should continue to be strong through 2022 and 2023. By the time we get to 2024, we’ll have active, meaningful statistical comparisons about what’s going on. We’ll take a better look at it. So we’re positive on both the economies in the markets or anybody. Somebody asked me that question of what do you think?

Dryden Pence (42:15):

We’re positive about the economy. You can’t put this much money into the economy and have things go badly. Now it can be volatile; the markets may be volatile. They go up and then they go down. The important thing is the market will go down and then we’ll go back up. That’s pretty much what we see. That’s the pattern that goes on. Are we going to have some volatility around here at the end of the year? Probably. Why? Because there are all sorts of headlines. Those headlines are going to create market volatility. But what do I always say? Take advantage of volatility and do not be its victim. Because the fundamentals are still pretty good. Headlines are going to create some volatility, and excess cash will be the counterbalance. What are going to be the headlines that create the volatility? Let’s run through it quickly. COVID; you can see the cases are coming back, and the Delta variants are out there, but what’s important is mortality is a little different.

Dryden Pence (43:42):

We can look at what’s going on in Britain. They get the second wave. People that are vaccinated have a much lower mortality rate than people who are not. The point is, human beings adapt. We’re finding ways to deal with this. The other things that people are going to talk about this, they’re going to say, oh, the Federal Reserve balance sheet. So COVID is going to be the thing that creates headlines, and it’ll move the market. Then they’ll say, oh, the Fed balance sheet is out of control. It’s really not out of control. What it is is that they’re monetizing what they need to do to take care of getting us through this biological war that we’re in. Then they had the bill and they have proved they can adjust about sheet over time without tanking things.

Dryden Pence (44:31):

When they first start tapering, there’ll be a little tantrum about it. Don’t worry about it. They’re going to change. They’re going to play with the balance sheet and stop bond buying long before they try to raise interest rates. Don’t get overly worried. Now, let’s talk about the deficit. Everybody says, oh my gosh, the deficit’s out of control. Our deficit is high in this country. There’s no doubt about it. I won’t make light of it. But the other thing is, interest rates are low. The Federal Reserve has the ability to keep them relatively low. We’ve already established the fact that if they do need to raise it a little bit to tamp down inflation, they’re going to get the behavior that they want at a relatively low number, which means that we’re in a position that the interest rate okay is lower than the growth of GDP.

Dryden Pence (45:21):

So, our GDP is growing faster than the interest rate. That means if you think about it in a business, your business is doing better than your interest rate for those people. For right now, for the next couple of years, we’re not overly concerned about it. Something to watch out for, but not overly concerned. We do think that federal government spending and stimulus is important on areas that increase labor productivity, which is why we support large infrastructure projects and money going to that relative to everything else. The reason why is it makes us more productive; think of how many hours are wasted on the 405. If you could turn that into productivity, that would be a good thing, By the way, there are only about 30 companies that are eligible to do all this work.

Dryden Pence (46:09):

For many of you, they’re already in your portfolio. You have a trillion dollars running into infrastructure, and there’s only about 30 companies doing that work. Looks like it ought to be all right for them. Good for earnings, labor, productivity, capacity utilization. This is the big thing I want to go to: we are the most efficient manufacturers in the world. We’ve gotten much better at it, and that has driven down prices. That’s why we haven’t had inflation for the last 20 years, because we’re more productive. Labor productivity has doubled. So when labor productivity doubles, what happens to prices? They go down and you don’t have inflation. This is basic math. Here’s what’s happening. We’re taking the technology that made us the most productive manufacturers in the world, and now we’re putting it into the service industry. COVID has actually accelerated this. Now you can go to McDonald’s and you can go to one of these kiosks, and, shazaam, your order is in.

Dryden Pence (47:31):

This allows the owner of McDonald’s to pay the other people that are human beings working there a little bit better, because they don’t have to have as many people in front of the counter. Technology moving into the service industries is going to be the next big wave of how we do things. So I’m going to give you this summary, then I’m going to what’s next. The next normal is abnormal numbers. They aren’t going to make sense until 2024. So don’t worry about them. Massive government stimulus combined with excess savings and pent-up demand.

Dryden Pence (48:28):

Stimulus is driving both stability, inflation and earnings. Watch their earnings. That’s important. The Fed’s patient increases will be smaller than expected to get desired results. That’s big, and material supply chain will normalize over time. Do your Christmas shopping early, because if you wait for it to go on sale, it won’t, and it won’t be there when you want it. Because it’s not going to get off the boat. Market volatility is going to be driven by COVID and headlines. Just kind of sit back and begin to take advantage of it. Most people are going to overreact. Excess cash comes into counterbalance. The deficit is less of an issue. As long as interest rates stay low, inflation and interest rates are going to go up, but less than expected.

Dryden Pence (49:24):

Technology may continue to lower costs and prices. So what’s next? What’s next is paying close attention to the things that we do. We’re human beings. We eat, we communicate, we consume, we move. Look, what we demand, changes very little. You’ve demanded about 2000 calories a day since the beginning of time. How we satisfy that demand changes. What doesn’t change that much, but how changes a lot. So we spend our time when we see that we think it’s the beginning of a trend. If we see it’s the beginning of a trend, we want to get in front of it. Because if we can get in front of a twin, we can win.

Dryden Pence (50:39):

Let’s go back in time. Once, you had to cook every day, because you had no refrigeration. Once you had that, then all of a sudden we started having food at restaurants. Then with COVID, the restaurant came to us. We consume, we do the same thing. But the how changes. When we look at communications, originally it was face-to-face, and then it was up close. That was the only way we could communicate. Then we began writing. Then we got a phone. Then we got a phone that walked around with us.

Dryden Pence (51:25):

Now we’re back face to face, just a thousand miles away. We do the same things. It’s how we do it that changes. That’s the trends we look for. Once, you sat around the catalog, you looked at all the things you wanted to buy. You filled out the card. You sent them a check and you waited for six weeks.

Dryden Pence (52:00):

Now, the catalog is on your laptop. You look to it digitally, you order through your mobile device. So you pay for it with your credit card. It shows up in six hours. Pretty cool. We do the same things. We just do it differently. How do we to get around once? We had horses which ate grass. Then we had trains, which were coal-fired. Then we had the automobile, which uses gasoline. Then we had jets doing the same thing. We just got a lot faster, and use different types of fuels. In the end human beings find a way, just like we’ve adapted through COVID. We find a way. What we want to do is be in front of that trend. Those are the investment themes that we pay attention to, because those are the opportunities that are ahead of us. So when we think about automobiles, we’ve moved from gasoline to electric. Basically, by 2030, the majority of cars being made by the major manufacturers are going to be electric. Pretty cool. We do much the same thing. They had a Coliseum in Rome.

Dryden Pence (53:25):

What do we have up the road? So far, we’re still spectating. We love watching sports. It’s the same pattern. It’s the same activity, but it’s also changed. Guess what? This is e-sports, which shock me. But guess what? There are more people paying to watch other people play electronic video games than there are watching the NBA. As a matter of fact, there are more people paying to watch people play video games and e-sports then there are any other sport other than the NFL. In two years, it’ll eclipse, the NFL. 70% of us households have a gamer in it, 70% for the grandparents out there. You want to make your grandkid happy, give them a game, an electronic game. It’s easy. Hurry up and do it now, because it won’t be here in December. Technology, it gets in front of things.

Dryden Pence (54:33):

Technology is now moving into things that it wasn’t being fully adapted in before. Medical costs are some of the highest things that we have. Now, when we’re able to use companies like Intuitive surgical or others that help us have this kind of scale of expertise globally, we’re able to use that technology. In time it’s going to drive down the cost of medical care. Teladoc is driving down medical costs. Well, what’s the most rapidly rising part of your expenses for older Americans? Medical costs. This migration of technology moving to services is a huge trend. That’s what’s next. This is over the Tokyo Olympics. Every one of those dots of light is an autonomous flying vehicle. It’s flying in the air. It’s not being controlled by anybody. All of those little dots of light are computers communicating with each other to position and create those designs.

Dryden Pence (55:51):

They’re been able to autonomously act and fly in space and be exactly the right place at exactly the right time to create these beautiful image in a 3D form. That technology is the same technology that is going to move into autonomous driving, which will allow people to be active longer, stay in their own home longer, get from point A to point B more efficiently. At some point we will have flying cars. I think that’s kind of interesting, but these are the technologies that are going to change what we’re going to do and how we’re going to do it. We’re going to buy companies that have the ability to pass price increases onto consumers.

Dryden Pence (56:52):

We just want to make sure that these companies can maintain margins longer term. We’re going to look for companies that occupy the choke points of how consumers consume in the future. We’re going to do what we always do: look for big knowable themes, identify the choke points, target the best of class in our entire investment process. We just focus on consumers and how people do what they always do. Volatility is going to come because the headlines are going to give us some great opportunities. So if you’ve got cash sitting around, send it in, okay? Because there’s going to be some opportunities here between now and the end of the year and early part of next year. As everybody in Congress talks about crazy things, the market’s going to react.

Dryden Pence (57:44):

Then there’s going to be some opportunity to slide in and make some good, good bets on companies that are going to change the way and take advantage of the way our future is evolving. Our process has not changed. We look for big noble things. You identify choke points. We target best of class. I’m going to capture the cash flow and manage your risk and focus on your personal index so that we get for each of you. I had it for each of you, you know what you need and when you need it.

Dryden Pence (58:35):

It’s our mission here, and the whole team working together. It’s why we serve to give you greater comfort regarding your income and in a world and time and place where a lot of things are going on that are making people uncomfortable. We want to try to make sure you’re comfortable about your income and what you need. We’ll be there when you need it for as long as you need it. That’s our mission set. We want you to have confidence in your wealth when there are plenty of things going on in the world to make you lose confidence. That’s our mission set, and I’m really thankful and appreciative of all the faith and trust that you all give us for all this time. So thank you very much and I appreciate it. Thank you.