The Dividend Cafe - The DC Today - Monday, August 21, 2023

Episode Date: August 21, 2023

Today's Post - https://bahnsen.co/44nVfEQ A Monday DC Today, the way it is supposed to be today. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the DC Today, your daily market synopsis of the Dividend Cafe, brought to you every Monday through Thursday to bring you up-to-date information and perspective on financial markets. Well, hello and welcome to the Monday edition of DC Today. It was kind of an interesting day in markets. We're going to cover all of our daily market action. And I want to give you listening on the podcast, watching the video, the normal kind of walkthrough of the different categories. I have a few things to say about housing today and certainly the Fed and a little Chinese version of the Fed in terms of some of the People's Bank of China, their Fed activity that has taken place over the weekend as well. Just on the market action, the futures opened up last night, pretty flat, stayed flat through the evening. Very early this morning, they were pointing to about 100 point upside on the market open, and the market opened up about 80. Then within a couple hours, the market was down almost 300 points. So it had a pretty big reversal, yet that was really only in the Dow.

The NASDAQ and S&P more or less stayed positive. And so you just had pretty poor sector action today in energy, consumer staples, financials, and you had a good rally in technology. So then the second half of the day, though, the Dow closed that gap and rallied back basically to even, went positive, made back 300 points, went positive for a little while, and then closed the day down 37 points. So practically flat on the Dow. closed the day down 37 points, so practically flat on the Dow. And yet the S&P was up 69 basis points and the NASDAQ was up over one and a half percent. So a good rally in some of that risk stuff. Both technology, which was up, I think, two and a quarter. Yeah. 2.25% in technology. And you add

even consumer discretionary was the second best performing sector. The worst performing was real estate, which was down 88 basis points, but you really didn't get much help from energy, financials, or staples either. The story right now in markets, and has been for four weeks, is bond yields. And that correlation between the bond market and the stock market is extremely high at the moment. The 10-year was at 3.75% about a month ago, and it closed today at 4.34%, which was up nine basis points today. So bonds have continued to sell off. And yet, you have 59 basis point increase in the 10 year in the last month. That's massive. But inflation expectations have only grown by 11 basis points. Almost all of

this spread widening of this, excuse me, rising yield, almost all of it has come in terms of rising real yields, not from higher inflation expectations, a higher nominal yield. What is the bond market doing? Well, first of all, it's pricing in that there is some degree of lower recession risk for right or for wrong. That is the expectation throughout financial markets over the last several months. And the bond market had not priced to that on the long end of the curve. There's definitely a lot more treasury supply coming to market. I think there have been underweighting of new issuance prior to the debt ceiling resolution. And now they're making up for lost time.

There's been a lot more supply coming to market. resolution and now they're making up for lost time. There's been a lot more supply coming to market. Japan very modestly has allowed their yield curve control to push the 10-year up, not a lot, but a little in any directional common ground. Globally, kind of un-anchors a lower spot and allows things to move a little more forward. And then the quantitative tightening has definitely continued. And that's certainly to the extent that the Fed is not rolling over some of the bonds on their balance sheet. And that is also putting upward pressure on yields, downward pressure on bond prices. So that's been the story in the bond market. And then, like I said, the correlation of stocks with bonds has resulted in stocks selling off along with it.

You have the Dow down about 1,000 points over the last month. Not a lot, 2.8%, but it's something. And then you have the S&P down about 4%. Getting past one month's worth of market action, there's a chart at the dctoday.com today showing, and I've had variations of this chart that I've put up over the years for sure. Um, but showing the correlation, uh, or excuse me, the relationship between growth and value and the way in which they tend to move very counter cyclically, uh, from one another and, and not over a one year period of

time or a two year period of time, but over a decade. And that there will be a whole decade in which value really outperforms growth. And then another decade where it's the opposite. And we've teeter tottered here for four or five decades in a row. And now what you see here in the 2020s is yes, last year certainly value just trounced to growth. But now people are looking at it saying, okay, well, did that reversal already come? And you can look at the chart I provided. And of course, history can do whatever it wants to do. My own thesis would be that the lesson in past history teaches me that it's not likely to be the case that growth has mean reverted and restored equilibrium and its relationship to value. I think that the historical precedent is very likely to be what will play out again. And you can look at what that data looks like.

And you can look at what that data looks like. In terms of news-oriented stuff, we know the debate for the Republican side of the primary is this Wednesday evening. We know that former President Donald Trump will not be participating in that debate. news is President Biden at Camp David this weekend with the Prime Minister of Japan, with the President of South Korea, and this possibility of a sort of tri-party agreement between those two significant Asian allies in Japan and South Korea with the United States versus China, and formulating some strategic value out of that partnership. That was a major event over the weekend. Now, in terms of economic news, there wasn't any big data points that came out today. There will be some throughout the week.

But I put a link at thedcda.com to an article at NBC, which, you know, NBC News, NBCnews.com. I don't think a lot of people would think they're generally super allied ideologically with my views of culture or my views of economics. ran an article that I posted to directly talking about how, okay, well, the Biden infrastructure bill, the various forms of infrastructure spending, clean energy spending, CapEx, that there's a lot that's been invested from governmental levels in job opportunities, in certain well-paying blue-collar type jobs. And yet what they are seeing is a lack of workers, a lack of ability to recruit workers to take these jobs. And some of you may recall, it was only about four or five weeks ago, I wrote about this in Dividend Cafe regarding the reshoring, onshoring phenomena and the big resurgence and builds of factories in the

United States and the possibility that we'd build the factories, we'd build the widgets, so we wouldn't have any workers to come work at the factories. I just think that that's a major cultural story. I'd encourage you to read the link. Let's talk about housing real quick. Fundamentally, we are, of course, a little frozen, as I've written about, with so many mortgage holders having a mortgage rate that is substantially less than what a new mortgage would be. And what you get there is essentially not only buyers that have incentive to not buy because the current rate is so high and they believe it will go lower, and sellers not motivated to sell because they'd have to replace a low rate on what they currently have with a much higher rate if they bought something new. bought something new. But then in the force of that freeze, you just end up with a lot less supply. Whenever you have non-motivated sellers, there's a lot less supply on the market. And when you have lower supply, you tend to get upward pressure in prices,

but a lot of people aren't transacting at current prices. And so this kind of domino effect leads to just sort of a frozen market. That is what I more or less believe is playing out. There's more nuance around it. There's other factors that are involved. I have a chart at the dctoday.com today showing you current supply levels, and you can see just how extremely low it's gotten. And then you combine that with a 30-year mortgage at 7.55%, And then you combine that with a 30-year mortgage at 7.55%, the national average right now. I think that speaks to the valuation, you know, just the affordability issue we're dealing with. Now, speaking of where shelter prices are, rents, the inflation of rents, price levels.

You know, I've had a theme now, I think it's been about six months of me saying that the shelter contribution to the cpi is way overstated but ironically the fed the san francisco fed on their website their research group officially from the official san francisco fed wrote out a report that I linked to at the dc2day.com, basically making the same argument that shelter is overstated and is showing significant signs of coming way down, not just potentially disinflation, but maybe even outright deflation in the shelter number. I think it's fascinating to read the report. The research was excellent. I think it's fascinating to read the report. The research was excellent. I felt like I'd seen a lot of it before.

And yet the idea that the Fed is still persisting with this hire for longer policy is, to me, a real head scratcher. So speaking of central banks, China was expected to cut their five-year policy rate last night, and they didn't. They left it flat, and they were expected to cut their one-year prime rate by 15 basis points. They only cut it by 10. So you add a bit more hawkish of a PBOC than people have been expecting, and this speaks to something I wrote about in Dividend Cafe just on Friday, that if China's going to be Japanifying, they're going to be throwing kitchen sink with monetary policy. But that my own theory of the case is that they will Japanify with fiscal, but maybe not so aggressively with monetary. Anything can change.

It's very early in their kind of distress period and setback, but that remains a very probable outcome in my mind and kind of got a little reinforcement in their monetary activities or lack thereof last night. Back to our own Fed, they will be convening at Jackson Hole at the end of the week as they do the last week of August most years. I wouldn't play into the press hype much. It is true last year that Powell's comments did evoke a meaningful response to the downside in markets. But we've been talking about the Fed at Jackson Hole since the Greenspan days of the 90s. And I think there's been like three times since then out of 15, or excuse me, 25 years

15 or excuse me, 25 years that it has meaningfully impacted the market. So there, you know, who knows what surprises could be out there, but I'm not, I'm not expecting that. Moving to energy real quick, oil closed still above $80, but it was down a little bit. And the rig count to me is the big story here in the U S obviously we knew rigs had collapsed in the COVID shutdowns, and then they rallied back hard. In 2021 and early 2022, a lot more rigs were reactivated, brought back online. And then now we've seen that number drop by 100, from 625 to 530 in the last eight, nine months. And I think that sets a very high floor for oil prices. And it continues to be a story I want to watch. Should you be a doomsdayist? Well, if you were 34 years old, excuse me, if you were trying to live to be 65 years old in 1870, then maybe you'd be a doomsdayist because you only

had a 34% chance of getting there. By 1940, the 34% had grown to 56%. You had a 56% chance of living to age 65 by 1940. Right now, today, it is almost 79%. And so basically in 150 years, we've gone from a 34% chance to a 79% chance of living to be 65 years old. That, my friends, is against doomsdayism. The other regular recurring feature at the dcda.com is the Ask David. And I do have a thoughtful question and hopefully thoughtful answer about various global activities taking place and what I thought it meant for U.S. investors. So that is today's DC Today. I do appreciate you listening.

I appreciate you watching. I very much welcome any questions you have. Questions at thebondstonegroup.com. I hope you'll subscribe. I hope you'll share. I hope you'll rate us. And I hope you'll have a wonderful Monday evening. Thanks for listening to DC Today.

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