The Dividend Cafe - The DC Today - Monday, May 22, 2023

Episode Date: May 22, 2023

Today's Post - https://bahnsen.co/3Mz8Q5k All eyes are on the talks between Speaker McCarthy and President Biden regarding the debt ceiling and what negotiated bill may or may not be possible. They met earlier today and re-convene this evening. Over the weekend, President Biden said they were considering invoking the 14th amendment to declare the debt ceiling unconstitutional, something he previously said was a non-option. Most pundits do not believe it will go there, and if it were to, the Supreme Court would certainly have to take it up immediately with almost no chance of the court ruling with the White House. Discretionary spending caps are reportedly the new sticking point, which is just dumbfounding to me. (00:00) Introduction (00:45) Markets Today (02:00) Is it Sustainable? 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. I'm recording from our conference room here in Nashville, Tennessee, at the TBG offices here where I will be working all week. Quite a few meetings scheduled, time with our team out here, client meetings, and a couple speaking engagements, all the fun things that I often do with the different cities that the Bonson Group is located. The markets today, kind of interesting. The futures had opened down last night a bit and got a little better throughout the evening. Opened this morning up. They had improved overnight. And then you ended up with an S&P 500 on the day that was dead, dead, dead flat. A NASDAQ that was up half a percent and a Dow that was down about 140 points,

not that much, less than half a percent on a percentage basis. So kind of different stories throughout different market indices. One of the things that not a lot of people are talking about, but I'm seeing more of and within kind of deeper financial circles is getting some discussion is Japan's market. You know, the Nikkei is up 20% in the last seven months. That brought the Nikkei back to a level that hadn't been since 1990, a 33-year high. And yet it's still, you know, what is that about? 8,000 points from its all-time high from late December 1989, the bubble of all bubbles. So on one hand, you've seen quite a bit of price recovery. And of course, the question is, you know, you've had these head fakes in the past. The question is, is it sustainable? And the thing that people have always been waiting on is multiple expansion to come back. I mean, the market's always been pretty reasonably cheap out there, but it's been cheap for a good reason. And without a lot of capital coming in, it's hard to get fully priced equity valuations. and then you're up against interest rates that have been held down at zero,

a lot of artificial intervention, and a lot of zombieism in the way that their fiscal and monetary policy. I guess you can't really say that Japan is Japanified because I talk about U.S. going through Japanification, but since they're sort of the story I'm modeling it after, they can't borrow from their own personification. So they made up the concept and we're living through it. I'm certainly rooting for them.

Will there be more incentive for companies to deploy cash than there has been in this hyper deflationary environment they've lived in it's hard to say but they've had you know no robust uh gdp growth for a long time and it's tough to have companies deploy cash in that environment so you get a lot of low valuation as a lot of company book value is just simply cash that sits on the balance sheet undeployed. It's not a great recipe for profit making, risk taking, etc. So anyways, back to our own market today, the 10 year bond yield didn't move a lot. I think it was up to basis points. The communication services were top performing sector consumer staples got hit quite a bit. We know in the news side of things, the G7 had their meetings a lot of, you know of discussion around their shared support for Ukraine. Politically, Tim Scott announced his candidacy for the Republican nomination for

president here in the US. And Governor Ron DeSantis is planning to announce this coming Wednesday. But the policy standpoint with markets is all about these meetings with Speaker McCarthy, President Biden. They met earlier today. It wasn't a lot of news out of it. They took a break, and now they're supposed to be recongregating here in, I think, just another half hour. So we'll see what happens in the evening there. I still have no expectation at all. You know, they could have progress.

They could have progress that then goes away. They could have meetings fall apart and then reconvene. Ultimately, a deal ends up happening. And ultimately, it's hard for me to believe a deal happens before first falling apart. So I expect all the above and I don't care. The talk about the president invoking the 14th Amendment when he had previously said and Secretary Yellen had said they couldn't do so, I guess was interesting. Doesn't seem to be going anywhere. I don't think it's a great option politically for the White House. And then the Supreme Court

would take it and that ruling probably wouldn't go in their favor and you'd create a little political friction along the way that might not be very helpful. From what I'm hearing, the discretionary spending caps are the new sticking point, and that is very surprising to me. But we will see where they go with that. Okay, a couple of housing tidbits. 44% of home builders now believe they will start building fewer houses this year than last year. It had been 75% saying that six months ago. It had been 75% saying that six months ago.

So a little optimism creeping in about home builders saying that they see themselves coming back into the notion of new supply. One other fact that just kind of caught me, I wanted to share with you all this hand-wringing over commercial real estate. Commercial real estate debt in aggregate was 80% of GDP before the financial crisis. It's about 50% now. So you are dealing with a much lower contagion factor across the size of the economy for whatever that's worth. Interesting issues in the oil and gas sector. Oil is still hanging in there around $72 a barrel. Gas rigs declined by 16 week before last.

That was the largest weekly decline in seven years. Those are the kinds of things that definitely clear through extra supply in a hurry when rig count drops. That's more on the natty gas side than crude oil. Then there is our against doomsdayism in the Monday edition of BC Today where we point out that right now the odds of a fatality flying are 0.000025%. The inflation adjusted cost of flying is down 50% in the last 40 years. And that safety of air travel is 2,100 times better than it was 70

years ago. These are the realities that we take for granted all the time, especially those that complain about various things traveling. So there is an Ask David I'd direct you to in the D.C. today regarding my outlook on housing. I've talked before that prices are sticking in. Buyers and sellers are just content to not transact right now. And I think mortgage rates have to drop for transactions to pick up. And then the question is, does the rate of inflation of housing pick back up when that happens? And I think the answer is no. I think prices stabilize.

I still believe they probably end up reaching about a 10 to 20% drop below their post-COVID bubble high. So still a really high elevated price where they stabilize from. But then there, the rate of ongoing asset price inflation and housing, I don't think comes back to where it was because even with lower rates, you need rates that are low and going lower still. It's the movement of rates, not just the level of rates that dictated some of that kind of bubblicious activity in housing. I don't think we get back to that. And I think that's good for affordability and clearing market level transactions. So anyways, that's the scoops. Questions at thebonstonegroup.com for any new questions you may have.

And we look forward to engaging with your questions, publishing them in the DC Today, certainly writing you back privately. Thanks for listening. Thanks for watching. Thanks for reading the DC Today. We'll see you again from Nashville tomorrow, Tuesday. Take care. services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or

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