The Dividend Cafe - The DC Today - Monday, June 5, 2023

Episode Date: June 5, 2023

Today's Post - https://bahnsen.co/3qnOZyl Ask David “With regards to the debt ceiling compromise, you point out that it suspends the debt ceiling entirely through the end of 2024. What I do not exactly understand is if the spending growth has been capped, then why would an increase in the debt ceiling be needed at all? ~ Mark The part you’re missing is revenue. We can reasonably know what expenses will be now, and they will be reasonably limited. So yes, that should take the need for much borrowing above a given ceiling off the table. But revenue is a big variable, and especially in a deeper recession, it can drop well below the expenditure line, enhancing the need for deficit borrowing. The variability of revenue is massive. Think of a 1% drop in the total GDP of the economy. Then think of an average drop of revenue as a % of GDP of 2-4% per recession. So $24 trillion GDP goes to $23.75 trillion, and then the tax receipts go from 19% of 24tn to 16% of 23.75tn – essentially, lost revenues of roughly $750 billion. That could add 50-75% to the deficit and would be funded with debt issuance. 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. Hello and welcome to the special Monday edition of DC Today. We are now, you know, getting deeper into June and some fun things to talk about today. I love the written Monday DC today. Uh, I did cover a lot of ground, but I'm going to try to go through as much of it as possible with you here on the podcast and the video. I'm going to quickly get out of the way today's market action so we can go to more fun things. The Dow ended up pretty much closed near the

bottom of the day, down exactly 200 points, which is just 0.59%. Futures were pointing positive last night and again this morning, but they then opened kind of flat and we went down from there. And then we just sort of bounced around all day between down 100 and down 200 and that's on the dow in terms of the s&p uh it closed down just 20 basis points the nasdaq down nine so basically kind of flat so really nothing super severe to talk about any of the markets um i will say that that when the opec plus announcement came out yesterday, um, and I was kind of deep into the markets last night, the futures on oil were above $74 up about 4%. You, um, had a bit different of a risk on appetite Sunday evening than ended up being

the case on Monday. But things were just kind of muted all around today. We'll talk about oil and so forth in a moment. Within today's market, it was communication services up the most, but only at 58 basis points. It was industrials down the most, but only at 71 basis points down. And so, kind of a little flattish and not a big deal in the markets. And speaking of flattish, the 10-year bond yield closed at 369, which is where it closed on Friday as well. So you had a totally flat day in the bond market at the close. As far as speaking of not flat and more exciting markets, Friday, which was the biggest rally day we'd seen in the market all year, I believe, and certainly the breadth was

the highest. You had 11 advancers for every one decliner in the S&P 500. You now have 53% of the companies in the S&P trading above their 200-day moving average. It had been as low as 40% last week. And so look, we spent most of 2021 with over 80% of the market trading above its 200-day moving average. It has not been back to that level since about the beginning of Q4 2021. level since about the beginning of Q4 2021. And yet, you know, stuck here around the 50% range would suggest a kind of uncertain market. News-wise over the weekend, I mean, President Biden signed the bill of law when the Senate had passed it, the House had passed it earlier in the week. And so the debt ceiling deal is signed and done. And we're kind of over that. But in terms of the news over the weekend that I wanted to focus on, I do plan to talk

in a moment about the oil markets and what exactly was said out of OPEC Plus. But I think that this release from the vice chair of the Fed, who's the director of supervision, and the early reports that are not official or confirmed, indicating potential plans to make large banks add about 20% to their capital requirements. I think it's a big, big deal. That's a real form of tightening. And they also, by the way, are decreasing the level that they're calling a large bank in terms of what's the level of assets you have to have to be subject to these stricter capital requirements. It was going to be $250 billion in assets at a given bank. And they're now talking about lowering that to $100 billion. So we want to follow that carefully.

I think it all the more speaks to something I wrote in a dividend cafe a couple of weeks ago, but tightening the level of lending capacity at banks and thereby probably increasing appetite for private credit as well. So there's two sides to that coin. As far as within the NASDAQ surge and certainly big tech's move here in the last couple of months, it's a fair question. Is this a more speculative fervor that may not end real well? And I do want to point out that call option buying on large cap growth and big tech names is hitting all time highs. It's really hard to interpret that as anything other than frothy speculation. I don't generally think that you see in call options the best form of sentiment as far as future responsible investor outcomes.

But I'll just share the facts with you for now and let you interpret it yourself. There is a link in the DC Today that I would check out if you're so interested in keeping an inventory of the different levels of crypto coin failures going back a number of years. It's quite funny and also quite fascinating. All right. So we know the Senate passed the debt default bill. We know Vice President Pence has pulled papers to announce the presidential bid himself this week. And we know New Jersey Governor, former New Jersey Governor Chris Christie is said to be entering the race this week as well, along with North Dakota Governor Doug Burgum. The D.C. Today actually talks about New Hampshire Governor Chris Sununu potentially getting in, but he very late in the day announced that he is not going to be running.

in the day announced that he is not going to be running. And then we're still kind of waiting on confirmation from Miami mayor, Francis Suarez. If he does indeed jump in, I believe that should be near the end of the field, but you know how that goes. Really one of the most important actors, I think, in 2024 for the election is going to be J-PAL. I think that the Fed has a lot to do with what's going to be happening on the political climate, whether they want to or not. I mean, consider a couple of these scenarios. One, you avoid a recession, you claim a soft landing. You see unemployment stay low, even as inflation was clearly beat back. All those facts together, if they were to play out, that becomes a pretty compelling Democrat Party campaign commercial, right, as the incumbent party.

But let's say you enter recession, you see credit tighten to a point of pain across the economy. and you see credit tighten to a point of pain across the economy, job losses finally come, and yet all the while you're still saying inflation is a problem. It's pretty hard for any incumbent to run against that set of circumstances, no matter who their opponent may be. So do I think the central bank has a political agenda? Yeah. I mean, I don't think that they're politically neutral, has a political agenda? Yeah. I mean, I don't think that they're politically neutral, but do I think that they are going out of their way to consciously drive monetary policy around

one of those two outcomes? No, I don't think they are consciously. On the economic front, the jobs market Friday showed 339,000 jobs created. It was well above expectations, about 150,000 better than expectations. As a matter of fact, unemployment rate came up from 3.5% to 3.7%, largely because the labor participation force number increased. The household survey, by the way, showed 300,000 jobs lost in May. So you're not getting alignment of indicators the way you might want to see. But the BOS survey itself showed a decline in hours worked from 34.4 to 34.3. Not a huge decline, but nevertheless, you're not seeing that greater work week. So it was a mixed bag.

It was a very classic mixed bag, probably skewed slightly to the positive side, but there were a couple of detractors in there as well. But here's the thing is if you believe there is job growth, which I do, and you believe there's muted GDP growth, which there obviously is, that is called really poor productivity. More people working, producing the same, just means that there is less productive activity in the economy. This is in line with my Japanification theme I talk about all the time. By the way, ISM services came in today barely above expansion,

much lower than had been expected, 50.3 versus 52.4. You saw new orders fall quite a quite a bit prices paid dropped as well so not into contraction mode but nevertheless a little a little downer of a services monthly number i love the chart that i have in the dc today today regarding house prices and it's adjusted for inflation the The chart is not looking at what the inflation is, but it's actually adjusting for the inflation that basically, you know, home prices, net of inflation are up 120% over the last 50 years, while income is up, you know, barely 18% net of inflation. I think that basically the better way to put it is relative to income, median home cost about two times median income 50 years ago.

It's now basically about four, four and a half times. So the percentage of what you have to spend on your income to get a home has gone through the roof. And I think that speaks to our just really monumental need for greater housing supply. Affordability is the key issue here. So more and more looking very likely in the futures market, like the Fed will pause next week, not raise rates, but then the odds in the futures market are about 64% for a hike at the July meeting. So 79% chance right now in the futures market of no move next week, 64% chance of a hike at the July meeting. And we're now down to only 47% implied probability of a cut by the end

of the year. That number had been 100%. Again, that's by the end of the year. On the oil front, first of all, oil prices have now hit $65 three times in the last three months, and all three times rallied off of that number to the upside. Last night, Saudi Arabia announced they'll cut oil production production additional million barrels per day in the month of july um that uh brings their production to the lowest level it's been in years opec plus did not agree to additional production cuts but the ones already on the table will stay and then saudi is agreeing to additional cuts opePEC Plus, though, on the other hand, as a body, these 23 countries, I believe it is, have agreed to extend their current production cuts all the way through 2024.

So not a lot of help on the supply side for those who want to see oil prices come down. Check out the chart at the dctoday.com against doomsdayism. Tell me how 500,000 plus deaths from geographical disasters per year coming down to just hundreds per year is not a sign of some really tremendous improvements in certain global conditions. The chart of the number of deaths of geographical disasters to where we are now is something to behold. I will leave it there. We have another DC Today coming to you tomorrow. Check out the dctoday.com for the Ask David and, of course, other charts and information we may have missed here.

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