The Dividend Cafe - The DC Today - Monday, January 29, 2024

Episode Date: January 29, 2024

Today's Post - https://bahnsen.co/48OKdeA Ask David “What is the best argument for why the distributed independent decisions of individuals, families, and businesses create more beneficial outcomes for most people than the top-down, centralized decisions of government, especially the federal government?” ~ David K. My argument is one of incentives and one of knowledge. These are two different arguments, even if they do overlap at points. Fundamentally, I believe better outcomes take place when the decision-makers reap benefits from their decisions and when decision-makers feel pain from bad decisions. I do not believe “disinterested third parties” (Thomas Sowell’s term) have the incentives to allocate and adjudicate risk and reward the way those with “skin in the game” do. But beyond the classical incentive argument, I am very much a believer in what Friedrich Hayek referred to as the “knowledge problem.” Knowledge is widely dispersed throughout a society and no central entity possesses the knowledge needed to properly steward the affairs of a diverse economy. I read the masterful essay, The Use of Knowledge in Society, by Friedrich Hayek while in high school. It was the beginning of a lifetime journey for me through Hayekian thought, particularly around Hayek’s thesis of the “fatal conceit” of central planners. 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 the DC Today. We just have a few days left in this first glorious month of 2024. have a few days left in this first glorious month of 2024. January will come to an end Wednesday of this week. In the meantime, the last Monday of January is behind us. And I am going to walk through the fun in the market from today, as well as all of our normal Monday categories. So buckle up, because this is about as much fun as you can have. Okay, let's just get the market stuff out of the way. The futures last night as the Detroit Lions were being coached out of a appearance into the Super Bowl opened up 85 points to the downside and then got a better throughout the evening.

points to the downside and then got a better throughout the evening. And this morning, very early, we're only down about 40. And then the market actually opened up about 40 points. And then it really did just sort of mosey around the flat line through most of the day. And then the very final hour of trading, it popped up and the Dow closed up 224 points, which is about 60 basis points as a percentage. But the S&P closed up 75 basis points and the NASDAQ up over 1%. And what really happened with about an hour to go in the trading day was that the Treasury Department announced that they were going to borrow, I want to get the numbers right, 700, let's see, I do this to myself. They were going to borrow $760 billion in Q1. Now remember, that's new issuance of new debt to fund deficits. But then a big portion of that is always money being borrowed to replace maturing debt.

So they need money to pay off old debt. And so the net number is obviously always much lower than the gross number. But see, why would that make markets go higher? Because they had previously announced that they were going to borrow about $815 billion. So there was some lower degree of money being needed. And that's a little less pressure on financial conditions. And it pushed bond yields down and therefore bond prices up. So the 10-year closed down seven basis points on the day, and that's at 4.08%. We looked like about a week or so ago we were going to push back up above 4.2%. So the fact that with a much better than expected GDP number last week, and really most economic data thus far looking either as good or better than expected. The treasury yields have not moved higher. Just shows you how little inflation expectations are being baked into a longer term element of the bond market. Okay, the S&P this week will see 20% of its whole constituencies, 20% of the number of

companies in the market report earnings. But five of the largest companies in the world all report this week that you know, which is your Apple, Microsoft, Amazon, Google, and Facebook. And so you have a big tech-heavy week ahead in terms of company announcements. The Fed also meets all day tomorrow, the Federal Open Market Committee, and then they will announce on Wednesday. It's been in the futures market for several months now at a 100% probability of no rate hike and no rate cut. Extended pause. Then Jay Powell will do his infamous press conference on Wednesday.

And we'll go from there. The top performing sector today was consumer discretionary up 1.37%. And every other sector was also positive except for energy was down just a hair on the day. So 10 out of 11 sectors positive. The big news over the weekend was this attack in Jordan with apparently proxies from Iran that attacked. Well, the location they hit killed three U.S. troops and wounded 25. And there's obviously a lot of chatter right now about what the response will be. On the economic front, you know that on Friday the PCE number was announced. The Fed's preferred inflation measurement much lower than expected on an annualized basis over the last six months.

Inflation is now running below 2%. For the month of December, personal income was up 0.3%, which was in line with expectations. For the whole year, 2023, personal income was up 4.7%, and of course includes more than wages. And then consumption was up 5.9%. So savings not exactly moving in the right direction. The job openings data comes this week.

Jolts, I'm particularly interested in where the quits data comes. You get a real good measurement over three, four months of a kind of trend in the either tightness or looseness of the jobs market based on people voluntarily quitting their jobs. In a tough job market where there's not a lot of openings, you don't really see a lot of people usually quitting without knowing they have a high flexibility and high optionality of finding new work. On the housing, mortgage, real estate, commercial estate side, I'm going to go through a couple points for you real quick that I think are interesting to note.

The residential rents nationwide dropped in December for the eighth month in a row. So a month-over-month decline is called deflation. The number is not just merely going at a lower rate of growth, which is disinflation. The number is actually negative. And the CPI, the Consumer Price Index, is still registering an inflation, and not deflation, inflation of rents of nearly 7%. Popular markets like Orlando, Dallas, and Austin are all seeing rent declines in

multifamily. There was just such a surge of new supply built to meet the new demand. And so it's somewhat logical these would be the areas where things have gotten frothy in price and then somewhat heavily built in terms of supply. I've spoken a lot about this. The commercial real estate carnage in 2023 was not so much evident in prices. You didn't see a ton of new defaults. You didn't see a ton of new distress. What you did see was just a total cessation of new projects, of new development. And in fact, what the data actually shows us is that total transactions in 2023 were $374 billion, which is a 51% drop compared to 2022 levels. But then really significant high quality properties. Blackstone just sold the

Arizona Biltmore out in Phoenix for $705 million, over $1 million a key. Heinz just picked up a 250 unit apartment complex in San Jose for $118 million. Both these were above expectations. So it's still very selective. Certain projects, locations, and operators are not reflecting distress, but you're not seeing new development with rates this high. What else do you want to go through? The average time period when the Fed does their last rate hike to when they do their first rate cut, for 60 years, the average has been eight months.

It has now been eight months since the Fed's, excuse me, in March, it will be eight months. So right now in the month of March, there's about a 50-50 chance in the futures market. I happen to think it should be lower than that, but there's a 50% probability priced in in the futures market of a rate cut in March. And if that happens, it will have been eight months since they last hiked rates. In May, right now, we are looking at a 88% probability of a rate cut that by then would either be 25 or 50 basis points lower than it is now. Okay, oil closed at $77. That was down 1% on the day, but it hit over 79 over the weekend in response to the Iranian attacks.

Midstream was up huge last week, rallying significantly. So far, companies have reported have 5.5% dividend growth already across the midstream sector. Okay, this is interesting. Against doomsdayism, a 37-fold decline in the chance of an American being killed by a bolt of lightning since the early 20th century. Now you say, come on, what are the chances of getting hit by a bolt of lightning? Well, apparently it used to be 37 times higher than it is now. So there you go.

Finally, a very thoughtful question came in from a client about why one might believe that the distributed decisions of individuals, families, businesses creates more beneficial outcomes than the decisions that come top, you can answer a deep question like this with brevity in an Ask David format in the blog by pointing out that there are really two categories. There is incentives, where I think people that stand to benefit from good decisions and suffer from bad decisions make better decisions than disinterested and unaffected third parties. And that incentive argument is sort of at the core of classical economics. But then there is knowledge, which is a very Hayekian answer rooted in the Austrian tradition. Friedrich Hayek famously wrote The Use of Knowledge in Society in the earlier 20th century, arguing that knowledge is dispersed so broadly across the society that you cannot give a central plan or a central organizing authority enough knowledge to properly make decisions that are themselves a byproduct of more locally held information and time and place circumstances that enables people

to make better decisions than a central authority. So my two answers are incentives and knowledge. They are separate answers that have some overlap to them. Great question. All right, that's it. I'm going to leave it there. I will be back with you again tomorrow in the DC Today. Thank you for listening. Thank you for watching. And thank you for reading the DC Today. Thank you. indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice. The Bonser Group and Hightower shall not in any way be liable for claims and make no express or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein.

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