The Dividend Cafe - The DC Today - Monday, May 8, 2023

Episode Date: May 8, 2023

Today's Post - https://bahnsen.co/3HL0cPd There are reports about the White House being open to a short-term debt ceiling increase, and I actually don’t doubt the White House would do that, or even that they may be willing to give up some energy permitting reform as a trade-off to getting that done. What I am skeptical about is whether or not the Republicans would agree to that (it is possible, but not assured) and then whether or not Democrats would agree to the energy side of that (I consider that improbable). We shall see. 43 Senate Republicans signed a letter over the weekend supporting the House measure for some spending restraints tied to a debt ceiling hike, so even apart from House blockage, if a clean hike is put forward, it faces a filibuster in the Senate. More and more Democrats are wanting some negotiations to take place. A lot of eyes are on what may or may not happen with FDIC coverage in light of the current regional bank saga: Congress sets the statutory limit on FDIC deposit coverage, not the executive branch and not the FDIC itself. The key word here is “statutory.” There is not a lot of Congressional momentum for broadly increasing FDIC limits, though there probably would be if some legislation came forward with nuances (i.e., company payroll accounts, etc.) The FDIC has the authority to name a bank a “systemic risk” and therefore ensure all of its deposits (as they recently did with Signature Bank and Silicon Valley Bank two months ago, but did not need to do with the First Republic since JP Morgan took over) “Big” banks already have systemic risk classifications (and received various increased regulations out of the Dodd-Frank legislation because of the SIFI classification). The aforementioned labeling of SVB and Signature as “systemic risks” happened ad hoc 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 DC Today special Monday edition, my favorite day of the week to bring you DC Today and a handful of things I want to go through. We'll get the kind of boring, what happened in the market today stuff out of the way first and then talk a little deeper about debt ceiling and a little deeper about FDIC. The Dow ended up being down 55 points. It was kind of flattish up a little, down a little in the futures last night. Into this morning, it opened up a little, down a little in the futures last night into this morning. It opened up a little. It stayed in a tight range all day. The S&P 500 was basically flat on the day, and the NASDAQ was up 18 basis points. So pretty boring action as far as a start to an end goes

in the market day. The top reporting or top performing sector for the day was communication services up 1.27%. Real estate was down 0.69. That was the worst. Oil was up a little over 2%. It's back above $72 and had been about 60 something, 66, I believe last week. So you've had a, oh, excuse me, 69. And you've had a little move higher in the last couple of days. The 10 year closed today at 3.52%. So up seven basis points, not much movement, still sitting there right around three and a half on the 10 year yield. And again, every single point on the yield curve has a yield at a lower level than the current Fed funds rate. Friday, as you know, the market was up over 500 points. It had been down 500 Wednesday and Thursday.

So this ongoing volatility right around a Fed announcement and then some sort of response the day after and then some sort of further response after that. And all packaged together in a two or three day thing that brings you right back to where you started. It could go way up and then comes down or it can go down and then come up. But I mean, really just got almost no movement net Wednesday, Thursday, Friday last week, despite a lot of volatility. no movement net Wednesday, Thursday, Friday last week, despite a lot of volatility. But on Friday, you had a six and a half to one advance to decline ratio. And really, when there's a more profound indicator, it could be eight, nine, 10 to one, I mean, you know, more extreme reading. So it was it was noticeable, but nothing to write home about. And right now,

you're at half of the market that's below its 200-day moving average and half that's above it. So the breadth of the market is still not there, even though indices are kind of holding in there. All right. Is that everything I wanted to go through quantitatively i think that's kind of your update uh as far as key market metrics go um okay so the jobs report came out friday and there were 253 000 new jobs created in the month of april and it seemed like wow another report quite a bit above expectations um i think they were looking for 180,000 or so. But then something happened that hasn't happened in quite a while. And that was a meaningful downward revision of the month before and the month before that, the last two months, down 150,000 net. And so you really ended up with only 100,000 new jobs for the month, which was 84,000 less than

had been expected when you net that out. So you get this ambiguity where there's one headline number that looks strong. Another report that with the revisions looks clearly weak. you net it out, and you have this mixed signal. And you can do with that what you please. I strongly recommend against taking a high conviction stance on what exactly is about to happen with the jobs market, because I just simply believe those with high conviction saying it's about to get a lot better or stay really strong, do not know. And I think those predicting it's about to just get brutal and you're going to see meaningful job loss, they do not know. We've been going through this for well over a year now of ambiguity in the labor data, and I think we're still there now. But a 3.4% unemployment rate with 4.4% year-over-year wage growth. So far less than the inflationistas had

worried about, but still nevertheless good wage growth, particularly for lower income tiers. Debt ceiling. Okay. The fact of the matter is that they could very well go with a short-term Band-Aid that is agreed to bipartisan where they kick the can a little bit more. I just don't believe that's going to happen. I don't think – I know that there's whispers. I know the media is talking about it. But I don't believe that the stuff that would get the White House to agree to it will be palatable by the Republicans. Now, the tradeoff you're being told right now is, hey, kick this a little bit down the road in exchange. You don't get your spending cuts, Republicans, but we'll give you energy permitting reform.

We'll green light some more energy? I could see enough Republicans getting behind that to get it done and then still holding the line for the longer term spending cuts for a more significant debt ceiling increase. In other words, get a pretty good trade off just for a Band-Aid. Now, they don't want to give the Band-Aid. They want to get the spending cuts. But to give a Band-Aid now for a short-term extension of debt ceiling and then get energy permitting, in other words, to trade a short-term thing for a long-term victory, I think a lot of Republicans would do it. I don't think there will be enough votes in the Democratic House or Senate to do it, more so on the House side. I just don't think that they will agree to the energy tradeoff.

But perhaps I'm wrong. It's being rumored. And no one I'm talking to believes that it's likely to happen, but I wouldn't say the odds are 0%. Ultimately, I still think we face some brinksmanship as we get further down the line. I also want to clarify on the FDIC side that the FDIC cannot change the limits for deposit insurance.

Only Congress can. Now you say, oh, wait a second. The FDIC did it without Congress for Silicon Valley Bank. And that's true. There is a systemic risk exception that Congress has given the FDIC, but that exception only applies bank by bank. So they could say, this bank is a systemic risk, and we're going to raise all its depositors limit, and this bank is, and we're going to do it. And that's what they did with Signature and Silicon Valley. They did not do that with First Republic because they didn't need to, because they found a private market solution with JP Morgan. But as far as saying there's a systemic risk, we're going to increase all FGSE limits. They cannot legally do that. And I don't know if Congress is on board to do it or not. I suspect they're not. I don't think

the Republicans are ready to increase a full deposit limit. Maybe they increase it, but not by much. I certainly don't believe they're anywhere close to having the votes to do unlimited deposit or coverage. But I could see a nuance where they offer a higher limit for payroll accounts. no on, as is often the case. So just be aware that whatever they're doing at the policymaker level on some of the deposit of protections, that there's no scenario by which the FDIC can just carte blanche rule higher deposit of protection as a matter of policy. That requires an act of Congress. And anything FDIC does on a systemic risk basis is a bank by bank decision. Okay, there's a bit of policy that requires an act of Congress. And anything FDIC does on a systemic risk basis is a bank by bank decision. Okay, there's a bit of information for you.

In the written DC today, we have another against doomsdayism. In a lot of ways, the entire dividend cafe that went out Friday wasn't against doomsdayism. And then as always, the Ask David section where you have your Q&A and we'll take your questions anytime. Questions at thebonsongroup.com.

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