The Dividend Cafe - The DC Today - Monday, September 11, 2023

Episode Date: September 11, 2023

Today's Post - https://bahnsen.co/4680dH4 The first thing I will say before delving into this September 11 edition of DC Today as I sit here in New York City is that I honor those who were killed that day, and I will never, ever forget the atrocity that it was. I have written about this day in a very special Dividend Cafe before (I encourage you to re-read it), but regardless, whether it has been 22 years or when it is one day, 52 years, I will never, ever forget. 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. I do always enjoy the Monday DC Todays, and yet I also feel it appropriate to mark the solemn occasion of this particular Monday being the 22nd anniversary of 9-11, 22 years ago today. And so it is one of those things where throughout the day, as financial media is on, there are a number of moments in which they do moments of silence on the stock exchange floor and on some of the CNBC, Bloomberg, Fox, you know, networks and things.

And they have interviews with different people and so forth. And so there's just a lot of opportunity for remembrance throughout the day. And I put the link in today's DC Today to a piece I wrote in the Dividend Cafe at the 20-year anniversary of 9-11. So just two years ago, I devoted a Dividend Cafe to some broader takeaways, my own kind of experience, a moment with the story as Jolene and I were flying to our honeymoon. Our wedding anniversary was just a couple of days ago. And so you get a few things there at DC today that I felt worth sharing. But in the meantime, it's a solemn day. It's one that I'm encouraged to say many in my orbit I know will never forget.

And I can assure you that I will never forget. The Dividend Cafe on Friday, just a few days ago Friday, is worth checking out if you missed it over the weekend, looking at the unpredictability of events and the uncertainty of how to invest around unpredictable events when it comes to timing and market outlook. And I used the last five years just going through chronologically to make the case. And I've appreciated the feedback I've gotten on it and encourage you to check it out if you haven't already. And also at the DC Today, there are a couple links to some media appearances.

I was on Hugh Hewitt's radio video podcast show early this morning. And then I was on CNBC midday from this very studio, my studio here at my New York office. And that might be worth checking out as well. So there's some of the housekeeping. Let's go through the market today. The Dow for a second day in a row, and S&P, NASDAQ as well, were all up. Dow was up 87 points,

although it had opened up 160. It never kind of got back to its high of the day, but it stayed pretty consistently higher throughout the day. The S&P was up 0.67%. The NASDAQ was up a little over 1%. The major issue I talked about last week on a number of occasions, but I want to continue making this point, is Treasury supply pushing bond rates higher. And that correlation, for the most part, there are days like today that are an exception. It's not really a day-by-day correlation we refer to, although sometimes it can be that too. But it's a kind of a seasonal and cyclical correlation. And there is $7.6 trillion with a T dollars of U.S. Treasury debt maturing in the next 12 months.

And it all has to be rolled over. And that's an addition to that's a dollar for dollar replacement of debt that already exists. And then the budget deficit is going to be coming in well over a trillion and perhaps as much as $2 trillion. And so there are those basic realities and that $7.6 trillion maturing, that alone, that's one year, represents 31% of all public debt that is maturing in the next 12 months. Real quickly, for those of you that are pretty sharp and love these little gotcha opportunities with yours truly, if you're doing the math in your head and saying, well, $7.6 trillion is not 31% of $32 trillion, and I thought we had $32 trillion in debt. Oh, you're close. You're so close.

But I said public debt, and there is a difference. $32 trillion is the total debt, which includes many trillions of dollars that the government owes itself, left pocket owing right pocket, and that's primarily trust funds and primarily that Social Security trust fund. it is debt does have to be paid but it is not public debt they owe it to themselves and that's different than what i'm referring to 7.6 trillion of real debt owed to real outside people that um it represents 31 of the total amount that is owed to others. So just wanted to save you the trouble. Okay. The fundamental issue, I think, in the market where we talk about these bond yields is S&P valuations.

You can't have an S&P forward multiple at 22 times earnings. You can't keep a multiple at 20, 21, 22 times earnings with 4 or 5 percent bond yields. Now, even if we were to come back from the 4.2, 4.3 percent 10 year bond yield, we have now all the way back to 3 percent, which I most certainly think is going to happen eventually and others do not think it will happen anytime soon. But let's put off bond yield predictions for the time being. Let me tell you something. You can't have that high a multiple anyways. I mean, and so the reality is that bond bond yields pull out the untenability of the market valuation. They accelerate that change. But really, this is the issue, is that bond yields are just too frothy.

And if they were at 18 times, if S&P was at 18 times, I said bond yields are too frothy. I meant S&P valuations are too frothy. If they're at 18 times and then you got a bond yield going from 4 to 3, that might start to paper itself, to rationalize itself, to reconcile. But no, I just think that that's what the fundamental problem markets are dealing with is right now. As bond yields go, so goes P.E. ratios, and one is not aligned. By the way, the 10-year close today, 4.29, that was up three basis points on the day. Still sticking in between that 4.25 and 4.3 figure.

The top performing sector is consumer discretionary, up a whopping 2.77%. One of the only negative performing sectors was energy. It was down 1.3%. It had done very well last week. But right now, we are exactly in the middle, 50% of companies in the S&P that are above their 200-day moving average and 50% that are below. So it's very weak breadth. And we shall see kind of how this breaks, shall we say, in the weeks ahead. One thing I note today, the dollar finally sold off a little bit, especially relative to Asian currencies. There were comments out of both Japan and China today that helped that. But that comes off a pretty monstrous rally the dollar had had. And yet today, yuan, Singapore all advanced in between 0.6% and 0.8% on the dollar, I believe,

which is healthy for a daily move in currencies. So just a couple of quick news items. I'm going to work down the list of everything I cover in D.C. today, going through especially some key things in public policy, the economic front, the Fed, all our favorite categories. There was a really awful earthquake. It looks like the death toll is over 1,300 people in Morocco over the weekend. So, you know, these bad news events just have to be mentioned,

and it obviously is cause for prayer, concern, support. On a happier side, Coco Gauff won the U.S. Open, her first major tennis title. She is only 19 years old and a wonderful story for this phenomenal young American athlete. You know, and I don't think it would be right for me to not mention that what may be USC's last game with Stanford for a long time is 105 year, excuse me, goes back to 1905. So you're talking about 118 years ago that USC and Stanford began playing. They played 102 times over that period. There were some years with like world wars and things. It didn't happen. But look, USC beat Stanford Saturday night 56 to 10 to kind of just make a statement about the lifetime 64 wins and 34 loss record that USC has against the Stanford Cardinal.

All right, nice goodbye gift. So public policy, I would guess that you'll get a government shutdown in 19 days. I would guess there'll be a political story there. I would guess it will hurt politically, marginally, but not much. House Republicans. I would guess that the media will do what they do. And I would guess it will have no impact on markets at all. I think we've had 10, might be 11 market shutdowns since the early 80s, government shutdowns,

government shutdowns since the early 80s. And eight of those 11 times, the market was up during that period. So do with that what you will. The, you know, So do with that what you will. Why do I think a shutdown is likely? Besides the kind of short-term funding debate, which they're nowhere near having cleared up between the White House and the Congress, but there's Ukraine aid issues, there's disaster relief requests, and I just don't think that they're on the same page

and they'll end up getting on the same page. But, you know, these things go. I try my best to ignore it before my own sanity, because it's just an incredibly annoying subject. By the way, on the public policy front, net interest costs were for the U.S. debt, the monies U.S. Treasury has to spend to cover the interest expense of their debt reached 14% of tax revenues in July. Now, when you add on deficit spending, it's less than that, obviously, by a lot of the total outlays. But my point is moving up meaningfully largely because tax collections were lower than expected in July, which has a lot to do with higher bond yields. Small business tax refunds have dropped by tens of billions of dollars. And it seems to me the biggest reason is that this would a lot of cases looks like it was a boondoggle, but the employee retention tax credit in the aftermath of COVID has definitely started to slow quite a bit. President Biden was in Vietnam over the weekend.

Well, there was the G20 event, and then he gave a press conference in Vietnam, and he referenced economic challenges in China, making it less likely they'll invade Taiwan. I'm not sure I buy that argument but he did also focus a bit on some of the strengthening economic partnership with Japan, South Korea, and the Philippines which which appears to be a bit more encouraging and not getting a lot of coverage. It's something we've been studying a bit and like what we see. So the CPI number comes out for the month of August this Wednesday, and it will reflect higher energy prices in August that I think last month's number barely missed capturing just with the kind of timing of the way prices moved. I think the

bigger question will be in core inflation, which excludes food and energy versus headline. And particularly if that shelter number that I've been saying for so long is vastly overstating the state of rent prices and home prices, that if the shelter number is catching up to reality, it may move things lower relative to expectations. Annualized job growth is positive, no question about it. The absolute level of unemployed people relative to those that are looking for jobs, which is what the unemployment rate is, is very low.

But the rate of growth of job increases has slowed from 3.1% to 1.5% year over year. So it's net positive, but that's about half the rate of growth that we had had before. And that's from the middle of 21 to 22 versus the middle of 22 to 23. OK, so I think it's worth mentioning in a crowded field of labor data that there is that little number indicating some degree of moderating labor speed and health. Just two quick economic points. I'll move on to the next. A study I read over the weekend from Anderson Economic Group, if a UAW strike does happen, and even though it lasted just 10 days, they think that would put the state of Michigan

in recession and cost the US at large about $5.5 billion off GDP. And there are 10 to 14 percent of U.S. consumers normally over a 25 year period at any given time. The number vacillates between 10 and 14 percent that say they have plans to do foreign travel. And that number is at 22 percent right now. it continues to reiterate the nature of where the boost in travel, hospitality, those food and beverage services, airline, that I think are continuing to benefit from the pent-up demand that the COVID shutdowns generated. And I would argue too that it's in reverse as well, that there was a lot of pent-up demand of tourists from outside the U.S. wanting to come in, and that this is sort of a global phenomena in terms of the travel space that continues to be quite evident in the data, let alone evident for anyone who walks around Central Park on a weekend these days. What else do I want to cover? Real quick, two quick quotes

from Fed governors in recent days. John Williams, the head of the New York Fed, we've gotten monetary policy in a very good place, indicating, leaning into this idea of pausing and not hiking. And then Christopher Waller has been quite a hawk on wanting to raise and tighten monetary policy more, saying that they had a hell of a good week of data with nothing that is saying we need to do anything imminent anytime soon.

And I think that that is indicating to me central bank rhetoric leaning towards not hiking. We're a 93% probability of no hike at the next meeting, but we're still only at a 55% likelihood in implied Fed Funds futures probability for the November meeting. So that's still more of a jump ball if you go a little further out and maybe the CPI number Wednesday tilts the scales. So WTI crude oil closed at 87.25. It was down just a quarter of a percent. Gasoline prices are nowhere near the $5 or greater than $5 level we saw about a year and a half ago, a little over a year ago. But we are at $3.93 now of a national average, and we were just above $3

earlier in 2023. So two things are true at once. You're way down from where you were and you're way up from where you were. And I think that generally people remember where they more recently were. We're at 650 million barrels in the Strategic Petroleum Reserve that was drawn down to 350 million. And there's all this conjecture about when they're going to refill it. I myself have been quite critical of the Department of Energy decision to not act more when oil prices were lower earlier in the year. Now we're not only not really hearing much about when they're going to refill, but there is

starting to be conjecture about them drawing down further as oil prices get, you know, around this 9090 range. So a lot easier to do something than to clean it up later. A life metaphor that applies to the Strategic Petroleum Reserve quite a bit. So against doomsdayism, I just want to share with you, I put a link in DC Today, a little ad for a copy machine in 1956. And this copy machine could make 300 whole copies of a piece of paper in just one hour, about five copies per minute. And the price of the machine today's dollars was $5,430. So, you know, a 99.9% reduction in price for vastly better technology. Well, you can extract my anti-doomsdayism lesson there. Peter T. had asked me about catastrophe bonds. They have gotten

more coverage, particularly in the Wall Street Journal lately. And with some of these national disaster issues with the fire in Maui, the hurricanes in Florida, I wanted to reiterate, it is true that there is an asset class, a sub-asset class called catastrophe bonds that tend to be very high yield, pay right now into low double-digit yields. And I just want to explain why we don't touch them at the Bonson Group. Essentially, you generate this high yield on the amount you buy the bonds for. And the amount you pay for the bonds goes into a kind of account where it gets held and the insurance companies who are the issuers they're basically laying off some of the risk for real bad catastrophes they then get to draw from those bonds if some of their losses after a

disaster exceeds certain levels so if there's no hurricane no fire no earthquake no tornado then they there's no need for these catastrophe bonds. Investors can walk away with really good money. You'll forgive me that I can't really, in good faith, put a lot of client money on a bet about Mother Nature and about the weather. And then what the argument is, is, well, yeah, but you're not betting on if the weather gets bad or not.

You're betting on whether or not it exceeds certain policy exposures. And that's another area where I actually think that's still betting on the weather, the severity of a storm or an incident. But also the particulars that are just totally unknowable. It, to me, represents a risk that we're not comfortable with. So that's why we don't touch them. Certain hedge funds buy catastrophe bonds, and I say more power to them. Thanks for the thoughtful question, Peter. Okay, CPI data on Wednesday.

I'll be bringing you DC Today from New York every day this week. I'll be on Varney tomorrow morning from 9 to 10 Eastern for those interested. And we have a busy week ahead. I do think the CPI data will be interesting? And of course, you'll have a Dividend Cafe on Friday, as always. Thanks for listening. Thanks for watching. Thanks for reading the DC Today.

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