The Dividend Cafe - The DC Today - Tuesday, August 15, 2023

Episode Date: August 15, 2023

Today's Post - https://bahnsen.co/44d1yL0 One of the things I used to get most frustrated by in the 2000-2007 period of artificially low interest rates, or 2010-2016, or 2020-2022, is how people assumed a central bank reducing rates was a good thing, when the only reason the Fed was doing it was because they believed things were bad. In other words, yes, a rate cut or low rates may (in many cases but not all) boost asset prices, but if the rate cut is coming because of fears of economic weakness (or actual economic weakness) there is ample reason to believe the celebration should be delayed. Now, I believe the Fed has rates way too tight right now and I further believe it is for all the wrong reasons. Yet if the Fed were cutting, not because they realize they over-did it, but rather because we were seeing screaming, severe recessionary conditions, does anyone believe that would be a positive thing? The People’s Bank of China unexpectedly cut rates last night because things there are terrible. The Shanghai Composite Index was down -0.49% and the CSI 300 was down -0.31%. U.S. futures dropped -250 points and as I type the market is down -300 points (the final closing numbers are below). The reason risk assets responded negatively to what people intuitively (and naively) think is a good thing (i.e. unexpected rate cuts)? Because the rate cuts are due to things being, ummmm, bad. China’s situation now is case in point. This was the PBOC’s second rate cut this summer. Consumer spending, industrial production, and business investment were all less than expected. And everything happening there is teeing up this Friday’s Dividend Cafe on what I see as pending Chinafication – not the economic softening itself, but the response to the softening and what that creates. 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 Tuesday edition of the DC Today. Once again, I'm recording from San Diego where I've been at different meetings. And I am purposely recording, again, before the market close. All the data and so forth will be updated in the DC Today at the final close. But because I will be in a lunch meeting with a money manager for the hour before the market closes and after and won't be able to record after that, after and won't be able to record after that. I will, I wanted to do this myself as opposed to having someone else do it with updated information, because there's something I wanted to talk to you about. And so, you know, it doesn't happen very often. I think yesterday I said it's only happened twice before, but you know, sometimes the recording with the final updated numbers is

really not that big of a deal. Now, truth be told, it's never a big deal because I don't even know anyone else who does this at all. And I don't even really know every day why we do it. But I hope you get some information out of it. I hope you find it valuable. I know that a lot of you who started listening to or reading or watching the DC Today back during the COVID days that the COVID markets missive, if you remember that term, was part of what we were wanting to regularly communicate on. I don't care what the market closes at every day, and none of you really do either, even if you think you do. But nevertheless, just for consistency and updated data and information, it's kind of

nice to have that rhythm of the daily numbers of where the Dow and S&P were and the data and information. It's kind of nice to have that rhythm of the daily numbers of where the Dow and S&P were and the sectors and the bond yields and oil and all those kind of things. But the qualitative message for today is more important to me than the quantitative closings. And what that qualitative message is has to do with China, which it's interesting that last night all the buzz was about the economic data coming from China. Futures dropped on the news very early this morning. Futures indicated a down market. And we've kind of run with that here throughout the day. And so there are people saying, you know, it's really surprising. The People's Bank of China announced a surprise rate cut. And I thought rate cuts were

excellent. I thought rate cuts were great. And so why would anyone want to be selling off when the interest rate is going lower, and it was unexpected. So it wasn't even like it was priced in. And it's their second rate cut, unexpected rate cut this summer, they had another one in June. Pretty small overall. But nevertheless, in a world in which you see higher rates and upward pressure on rates with Europe, with US, with Canada, with UK, and then you see China cutting, you would think people would just be so happy that a central bank cuts rates. And this brought me back this morning to what was such an amazing frustration in the Greenspan years pre-financial crisis, post 9-11, where there was clearly rate cuts taking place that were totally disconnected from reality.

And then the post-financial crisis, where they got us to the zero bound and stayed there for about seven years. And then of course, during the COVID moment, take away the first few months of kind of insanity and shutdowns. But then staying, it was basically two calendar years at a zero percent federal funds rate. And then, you know, this natural sort of response from people like, well, isn't this excellent? Isn't this great? But I just want to remind people of something. The central bank is cutting rates because something is bad. Now, right now, if the central bank in the US, the Federal Reserve were to cut rates, it very possibly would be because they realize that they've overhyped, that they'd be

responding to an excess in policy the other way. But China is not cutting rates because things are good. And China is not cutting rates because they want to boost their dot-com stocks or whatnot. It is a byproduct of using monetary policy to offset something they believe is bad. The notion of a central bank, like in Dave land, where they want to be at the natural rate, get out of the way, let market forces set prices, that doesn't really exist. And so I freely admit that there could be some scenario where a rate was getting cut, and it's not because things are bad. But when these central banks today cut, it's because they see something being negative. And so China announced substantially worse results in consumer spending than had been anticipated, substantially worse results in industrial

production. I think that the ongoing business investment, particularly what is needed into their property sector, real estate construction, which they've relied on so heavily for some time, is very underwhelming. And so to kind of juice the results there, their central bank is resorting to trying to use monetary policy to create some form of stimulus. I'm going to talk about this in Dividend Cafe on Friday, what they may end up doing, what I pray they don't do, what the precedent has been with other developed nations that have gone down this path. But my point being that you have a Dow selling off 300 points today as of the time I'm speaking.

We'll see where it closes on the day. We're down 270 at this very second. It's been down roughly around 300 all day. You have that happening because there is some concern of weakening growth in China and then that weakening effect being exported and having an impact in the U.S., a sort of global interconnectedness. And I don't think that people should view rate cuts as initially or instinctively a good thing. You know, a lot of U.S. investors, when they would look to rate cuts as something that they were after, it was no other.

something that they were after, it was no other, there was no deeper reasoning than I'm a levered borrower and a levered investor, and I will benefit from lower rates. Fair enough. I don't know why people wouldn't necessarily root for their own self-interest. But that's very different than saying like, aren't rate cuts good? You know, when they're cutting rates because demand is weakening, because there's no incentive for production, where business investment is tailed off, productivity is tailed off, and they're trying to help the weakening patient by giving them a little bit of juice in the form of rate cuts, you could hopefully see why that's not like a great thing. And yet, I think the perception has been different for 20 years, 20 plus years now, I've been kind of fighting this, this dispersion in this in instinct about how to respond to this stuff. So China over the last 12, 15 hours gave us case in point. Fitch also warned today that they're looking at a few credit downgrades on banks. Moody's had done the same thing last week, and so there's a little catch-up here around the credit ratings

of some of the small regional banks. I'm not sure how substantial the story. That ought to be an economic data. Core retail sales were up 1% in the month of July, and that was double what had been estimated. Online shopping, by the way, is up 12% year over year in the U.S. The negative data point today was the NIHB Home Builder Survey. It had come down to 50. It was expected to be quite a bit higher. And you had four, five, 6% drop between the prospective buyers traffic, future view and present situation, different

ratings that take place in this home builder survey. And each of those categories saw somewhere between a four and a 6% decline. So there's, you know's kind of a little renewed anxiety about where we stand with the home builders. All the final closing updated numbers of the dctoday.com as well as the Ask David where someone had a very thoughtful question about an individual treasury bond versus a portfolio of bonds or a managed fund of bonds and what the different reasoning is around that. Might be worth your read. So I'm going to leave it there, get to my meeting. And I really do appreciate you reading, watching and listening to DC Today. Brian Saitel will be back with you tomorrow, Wednesday and Thursday. I'll be with you in the Dividend Cafe on Friday.

But I will be out the next two days taking my son to college. That's my plan. That is all I have to say in the DC today. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an Thank you. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice. The Bonser Group and Hightower shall not in any way be liable for claims and make no

expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the Thank you.