The Dividend Cafe - The DC Today - Thursday, May 11, 2023

Episode Date: May 11, 2023

Today's Post - https://bahnsen.co/3MjilGN The Ask David is so long below I will put most of the writing attention on that today (see below). Interest rates all dropping and fed rate expectations in the futures markets strike me as the major market story of the day (and week). And seeing bond yields collapse on the front end of the curve in perfect concert with the media wailing over imminent debt default is, well, a perfect encapsulation of everything. People are paying higher prices and accepting lower yields for something about to default, eh? Okay. Off we go … 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 DC Today Thursday edition. Another kind of odd day in the markets. I'm going to give you a quick rundown. And then I want to talk about producer prices. And then I want to tell you what my answer was in today's Ask David, where I ended up kind of writing almost a little mini essay around a very thoughtful question that is sort of fun to play with. OK, the Dow was down 222 points, but it had been down 400 at one point. So it came back quite a bit. The NASDAQ was up 18 basis points.

The S&P was only down 17 basis points. So it was definitely one of those days where clearly there was something sort of idiosyncratic that was bringing the Dow down, and that didn't even hold. That thing today was a little stock, the happiest place on earth. Just happened to have a big announcement yesterday. It was not good results. It brought the whole index down. And so those things will happen every now and then.

We have one thing kind of stick out and give a disproportionate response. Oil closed at 71.50. The 10-year was down another three or four basis points. So I still think the big story of the week, in fact, I know the big financial story of the week is the way the Fed funds futures market has responded to this inflation data. I'm going to give you another update on wholesale inflation in a moment. But yesterday on consumer prices with the 4.9 handle year over year. Today, the producer prices with a 2.3 result year over year. It was up 0.2% last month.

It had been expecting 0.3. Goods inflation year over year. Again, these are producer prices, the wholesale level at 0.8%. 0.8% year over year. Services are only 3% year over year. It's blending to a 2.3. To give you the gravity of what's happened on the producer side, which again, consumers look at consumer inflation, I understand, but we've been saying the whole way up with inflation that these things were integrated and intertwined. And so I think you ought to look at it holistically. Intermediate processed goods are down 3% year over year.

Intermediate non-processed or unprocessed goods are down 19% year over year. So there is significant goods deflation at a producer level. There's been no inflation at the consumer level for goods for some time. And where you think this goes from here, I'll let you decide. But the fact that shelter is the only thing carrying it all, and that that number is not accurate in the real world in present tense, I just can't quit hitting the drum. And so that's the update on PPI yesterday with CPI. The Fed funds futures now pricing in 100% chance of rate cut by end of the year, 80% chance of a rate cut by September, and even July has a significant chance. So that's where we are with the Fed and rates. And of course, anything can change,

but I'm just telling you what the futures market's telling us. So someone had asked if I could be in charge of monetary and fiscal policy, knowing what I know and believing what I believe about Japanification and the downward pressures that exist on future economic growth. And what I have really devoted much of my economic life to is this both moral, but really economic policy, holistic case for economic growth as a necessity. And saying that in a time where people are accepting stagnation as a reality in the face of excessive indebtedness, this individual asked me what I would do if I were king for a day, and he threw out a few things he would do. And, you know, the caveat is just so important is that what I would do, you know, we don't have a king. We don't have a king for a day. If we did, it wouldn't be me. If it would be me, I wouldn't

stay for just one day. Okay. So all that stuff. And then again, in our form of government, the politically possible matters. What can get done? And a big school of thought, I moderated a panel yesterday at an investment conference with four other distinguished economists who all believe that there will be a significant crisis that has to come before some of these things can get changed. And there's a great argument for that. I don't fully subscribe to that view, but I'm not against it. I just don't believe it has to be that way. But nevertheless, that's their prediction. And I think one of the indicators is the lack of precedent for Americans, American voters

often changing their mind or taking big, bold action before a crisis comes. Generally, we're responding. We're not anticipating. So I get all that. But to the extent we're talking about things like monetary policy, if I can set the rate right now, my answer is I wouldn't set the rate right now. I want a rules-based approach. So I don't want to set the rate. And even someone much smarter than I am, like Jay Powell, I don't want him and his colleagues setting the rate. I ideally wish that we had, ideally, I wish that we had some form of rules-based approach. And with a rules-based approach, I'm quite confident that the rate would likely right now

be right in the middle of the zero bound, which I hope we never see again, and the five, five and a quarter that we're at now. So two and a half, three, pick your number. I'm fine with that. But my point being, I would rather get there via a discovery process, not an imposition. Tax rates. Yeah, I think something flatter. So it's not that I'm talking about higher or lower. It is not using the tax code as a form of social justice. I think you need an appropriately, you know, by definition, you have progressive tax code when you have progressive income in your country. People earning more should be paying more. And I get all that. But the rate at which it's paid, I think, should be flatter. And I think that that has proven to be

far more stimulative to productivity, which I think is the need of the hour. And I think that the spending side is far more important than the tax side. I'd love to set tax rates at a level that will fund the government we choose to have. And I'd like to choose to have a government that's smaller than what we have for the purpose of better allocating capital. And so a balanced budget is something I would recommend. I make a living running a wealth management firm that has a high degree of very, very qualified fiduciary advisors, many of which are certified financial planners that sit down and talk to clients about not spending more than they have.

And so if I got asked to be king for a day, I would not change my fiduciary duty for the $5 trillion outlays and 330 million people that would become that new client, if you will, I would not recommend spending more than you have. But obviously, I'm saying this in the context of fantasy land right now. If I were king, a balanced budget would be a great place to start. And ultimately, the long term deal that really starts, I think, to make a bunch of things possible, including signaling to the bond market that we're serious about not falling off a cliff is entitlement reform. And I'm not going to get into that now, and I know how politically toxic it is, but the notion that we would cut benefits to seniors is ridiculous, I believe, in keeping those promises. But in terms of turning the knobs

longer term, of course, it's not everybody knows it's going to have to happen. The question is when and where and what, how intentional and how effective we want to be about it. So entitlement reform, flatter taxes, balanced budget, a high degree of removal of impediments to economic growth from a regulation and tax cost standpoint, energy independence, rules-based monetary policy. There's a menu in there somewhere for an economic platform that helps to remedy Japanification. What it doesn't do is do it without pain. What it doesn't do is all of a sudden

clear out the entire credit card balance. You're not clearing that credit card balance out without somebody hurting. That's a fact. But there's my long answer. I gave a little bonus here today in DC Today. I hope it's interesting. Maybe I'll expand upon it sometime in a Dividend Cafe,

but I thought I'd lay that out because somebody asked. So there you go. Thanks for listening. We got Dividend Cafe tomorrow. Thanks for watching. Thanks for reading. Have a wonderful Thursday evening. Go Lakers.

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