The Dividend Cafe - The DC Today - Tuesday, March 7, 2023

Episode Date: March 7, 2023

Today's Post - https://bahnsen.co/3mrIiJz Key Economic Point of the Day: Futures market completely flip-flopped – went to a 70% chance of a half-point hike at the next meeting, with a 30% chance of a quarter-point hike (had been 30% and 70% just yesterday) ASK DAVID “What do your most recent observations in the city tell you about the state of the New York City office market?” ~ Anthony The fact of the matter is, anyone walking around the 40’s or 50’s (streets) on Tuesday through Thursday can tell offices are not merely 50% occupied in midtown – it is closer to 85% on those days. Where the vacancies lie are in bad and antiquated “old” products. The better quality class B and certainly class A office product is full 3-4 days a week, and tenants are renewing leases. A 10% vacancy rate that has gone to 20% inclusive of ALL NYC office products is really not that bad considering everything that has transpired. If you asked any office landlord 30 months ago if they would be content with the scenario they face now by February 2023, they would have killed for it. The leverage landlords are carrying is case by case, too, but if you all are asking whether or not foot traffic is back, New York City is utterly packed. There are moving parts, no doubt, and a new and class-A product is in the best position. But once again, the death of office, the death of going to work, and yes, the death of New York City, as painfully misdiagnosed. 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 on a beautiful Tuesday in New York City. It was a big down day in markets, and I want to be able to explain why and talk through a few things. I'll kind of just get right into it. First, just so you know, the Dow was down 575 points. The S&P was down 1.5%. The NASDAQ was down 1.25%. And so most of this kind of took place early in the market day as Chairman Powell, Jerome Powell, the chairman of the Federal Reserve, was testified to the Senate Finance Committee. So I would love to share a kind of contrarian theory that in tandem with some of these pressures on the market from Chairman Powell, there were other things at play as well. market from Chairman Powell, there were other things at play as well. And I think to what I woke up to this morning, and I want to read you word for word, the foreign minister in China

saying, and I'm quoting, the U.S. claims that it seeks to out-compete China, but does not seek conflict. Yet in reality it's so-called competition aims to contain and suppress China in all respects and get the two countries locked in a zero-sum game. And so that's an escalation in rhetoric between China and the U.S. And a part of me would be happier to attribute some of the downside today to concerns about escalating tensions between U.S. and China if the anecdotal evidence that came throughout the day was not so overwhelmingly rate sensitive. And so the fact that the Fed funds futures totally inverse today. futures totally inverse today. Yesterday, there was a 70% chance of a quarter point rate hike in the futures market and a 30% chance of a half point. And today it flipped to a 30% chance of a quarter point rate hike and a 70% chance of a half point rate hike. Now, for what it's worth, I think the futures market is wrong on this one, and that's rarely true. Now, 70-30 is very different than 90-10. If all of a sudden the futures market gets to a 90% chance of a half-point rate hike at the meeting coming up on March the 22nd, then yes, I think it's very rare that the futures would go that high and be wrong. But there was nothing that Chairman Powell said today that indicates to me a half a point rate

high coming. And you already know, I don't care. I'm not saying I disagree with the futures market because I really hope there will be a quarter point versus half point. This whole thing to me is so dumb for long-term investors who are not trying to guess what someone else is guessing about the Fed. But I want to quote word for word what Chairman Powell said today. If evidence points to persistently high inflation, if persistently high, they could increase the size of interest rate hikes and borrowing costs to higher levels than previously projected. So he's certainly

setting the table that, look, certain things could happen that could make us go higher than we anticipated before. I don't believe those things are there. I don't believe those things will be there. And yet, if they go half point, they go half point. I don't believe those things will be there. And yet if they go half point, they go half point. I say this as a disinterested party. I don't care. And yet the market cares a lot in the short term. Traders care a heck of a lot.

And then look at how the bond market responded. The 10-year yield today was down two basis points. It's at, where did it close at? About 3.96%. It's been over 4%, I think got as high as 4.1 last week. The short end, the six-month and the one-year jumped 17 basis points today. So that obviously was what you were seeing in the repricing and risk assets, both, and then again, in the yield curve. You saw a huge inversion of what's already an inverted yield curve with the short end pricing in this higher expectation in that six month to one year timeframe. Personally, there are a lot of people on my side as well that believe once the Fed has sort of set the table at a quarter point at a time, that's more likely to play out. Interestingly, the odds didn't move on the

meeting after that. So there seems to be some positioning that the Fed will do 50 all at once in March and then not go necessarily at the meeting thereafter, which I believe is in May. I just have a very hard time carrying, and I don't really believe that's actually a very logical sequence of what the Fed will do. But when you see that consumer staples were the best performing sector today, down only 1%, when financials and real estate, two of the most interest rate sensitive sectors were down 2.5%, the worst. And the other activity you saw with the yield curve, as I mentioned, and of course,

the overall market action, it makes sense to me to believe that Powell was a bigger factor than China today. The other issue that I don't think the news is going to cover at all, because of what happened in the markets, and again, this ongoing Fed obsession, is that Joe Manchin of West Virginia has effectively killed the nomination of Gigi Sohn to the FCC commissioner, federal communications chair, is not going to happen. That commission is not going to see her. They don't have the votes. There was some question before, but now with a Democrat, there's already been one or two others that expressed a no, but Manchin confirming his no. This does mean that her nomination is all but dead. And she would certainly have been,

I think, one of the most dramatically unfriendly commissioners for the communication and technology aspects. So maybe that gets sidestepped today as a story, but I think it's a real story. Of course, he still has to nominate a different candidate. So I don't want to take up a lot more of your time beyond the big theme today with the short end of the curve. Chairman Powell is back in front of microphones tomorrow instead of the Senate Banking Committee like it was today. It's the House Finance Committee. Powell did take a lot of criticism today from the likes of Elizabeth Warren stating, look, the inflation is now not your issue. And she wanted to blame it on corporate greed and other such nonsense, but stated you're going to put a lot of people out of work. And so if there is to be an escalation of political noise against the Fed's path,

it's very fascinating for me to be in the position I'm in, where I really disagree with what they're doing and the reasons they're doing it. And yet I disagree with other people really disagree with what they're doing and the reasons they're doing it. And yet I disagree with other people who disagree with what they're doing and the reasons they're doing it. I find myself in that position in life a lot lately, by the way, politically, economically, et cetera. I'm comfortable with it. All I'm going to do is call it how I see it. I derive my viewpoints on such things from principles. And sometimes that puts me in alignment with certain pockets that I'm often aligned with. And other times it doesn't. But it does eliminate the pressure day to day of having to try to repackage what you believe about things around groupthink or the crowd you want to be groupthink with. I just, I think in this case, I believe I'm being very objective, even if I'm wrong, objectively wrong. But I don't think that's the case.

So there you have it. We'll see what Sharon Powell will say tomorrow. We'll see how markets respond. Markets have been up quite a bit in other recent trading sessions. And so this unwind today, I don't think is much of a issue. But nevertheless, the yield curve, where it's going, I mean, you're talking about a full hundred basis points between the short end of the curve and the 10 year, really a couple of different bold claims

being made by the bond market. That's all I have. I'm going to leave it there. I appreciate a lot of you for your support the last couple of days. And I appreciate you guys know what I'm talking about. And I also just want to say that those of you who have questions on markets, please send them to questions at thebonsongroup.com. The market, the economy, and any adjacent facts and categories and questions in that domain, that's what we're here for. Thanks for listening to, watching, and of course, reading 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.

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