The Dividend Cafe - The DC Today - Wednesday April 19, 2023

Episode Date: April 19, 2023

Today's Post - Day-to-day bond volatility continues to be quite elevated, and very few are really talking about it. I believe as QT inevitably moves to QE (or at least non-QT), you will see bond volatility come down. Equity volatility already has. 80% of days in January were up or down > 1%, 74% in February, 65% in March, and just 36% so far in April. Hmmmm … I have spoken a lot lately about the American consumer slowing down only when they lose access to credit. Until then, spend spend spend (in fact, the predominant economic philosophy of American policy for the last 75 years has actually sought to intellectually codify this behavior as our patriotic duty). Revolving credit right now is 6.2% of disposable income, not even up to the 6.6% average it was for the last ten years, let alone near the 9% level it averaged in the decade up to the financial crisis. All that to say – debt levels for consumers seem high; debt levels as a percentage of income are not. So my expectation is … spend, spend, spend. Beware of people who tell you, “The consumer is about to crash and burn,” when they have been saying that over and over and over and over again for years. There is an incorrigibility to perma-bears that can only be called dishonest if we don’t see it all for what it is. Also, who cares if people spend a little less and save a little more? Do you really, actually, seriously think that would be a bad thing? Come on. Anyways, another pretty boring day in markets and all the recap is below, along with a great question on commercial real estate and the banking sector. 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 Wednesday edition of DC Today. another boring day in the markets. And by boring, I mean the S&P was flat on the day, the NASDAQ was flat on the day, the Dow was down 79 points, and the 10-year bond yield was up two basis points. Oil was down a couple percent, despite actually a larger drawdown in inventories than expected. So there was a few things that were moving out there. But any day that utilities is the best performing sector in the market, it's not likely to have been a real exciting upside day. And then communication services was the worst performing sector.

The thing I kind of want to talk to you about real quick, first is update on that volatility. The thing I kind of want to talk to you about real quick first is update on that volatility. The equity volatility has been quite high. We talked a lot about how intraday volatility was significantly high in 2022 relative to historical averages. I want you to consider this as far as just the trend right now. And it's only one metric of volatility. I mean, the VIX is very low. So that's a pretty darn good one as far as what people are paying for protection, what we call

the fear index. But it really has a heavy implied volatility component to it. There were 80% of market days in January that had an up or down 1% movement intraday. And then that went down to about 74% of days in February, but then down to like 60% or so in March. And it's been 36% of the days in April. So each month, the amount of days having that higher degree of up or down movement has come down quite steadily. So you see equity volatility right now a little lower, and then bond volatility still quite elevated. And it hasn't really soothed out a little. We're still having these days where you're going down 10 basis points in yield or up 10 basis points in yield. And that increased volatility in the bond market, I think will soothe itself out at some point. But it's just very different.

Well, let me put it this way. The Fed, in my opinion, has had a lot of their tightening done for them. And I think you're going to see some form of quantitative easing and additional liquidity back into the system, either against the Fed's will or in line with the Fed's will. And that will probably bring back some reduced volatility into the bond market. That may not be for a little while, but that's what I would see happening. And I would see it as more or less inevitable. The other thing I wanted to bring up that I wrote about in the dctoday.com today is this talk about the consumer. I bring it up a lot because I'm one who doesn't care much about what the consumer is doing when I think about the health of the economy as a forward-looking

indicator, not a backward looking indicator. If I see that all of a sudden the consumer didn't spend a lot of money last quarter, I don't think that tells me much about next quarter. I think it tells me the last quarter credit must have tightened because I do not think that the American consumer decided to buy themselves less things. And I just want to point out that this is not me being a smart aleck. Okay, well, probably it is a little bit. But I'm actually being quite consistent in portraying the predominant economic ideology of our day,

that the whole Keynesian approach almost intellectually codifies the idea that heavy spending is sort of your patriotic economic duty. And I don't really agree with that for a whole lot of reasons. I could go into another time. But my point being, people say the consumer is 70% of GDP. They're looking at consumer confidence. They're looking at retail sales. That's all fine. I do think it's a textbook lagging indicator. It's purely backwards looking. Even consumer confidence, by the way, is lagging because it reflects how people were feeling about things previously. And I don't think what people were feeling is generally an indicator of what they're about to do. I think it's a reflection of something that

already happened and then it caused a certain feel. So it's lagging. But this is the point I'm trying to make. For those who say, oh, boy, the consumer is going to tighten at some point and then that's really where we'll get some recessionary activity. I mean, the consumer could spend less and that could, you know, really exacerbate a recession. But my point is simply that when you look at the absolute levels of indebtedness for the consumer, the percentage is not about the level of debt,

it's the debt divided by income. And this is a stat we've gone over many times. Your revolving credit divided by disposable income is not even at its 10-year post-crisis average, where there was no talk of recession. We're in recovery. It was mostly kind of moderately good times. We weren't looking at contraction and yield curve inversion and housing correction and all that stuff. And at that period of time, it averaged about 6.6% of revolving credit to disposable income. And right now it's at 6.2%. And neither of those numbers are anywhere close to the 9% or 10% that we were in the decade coming up to the financial crisis. Now the household's consumer was way overly levered at that point. And that was a

big part of that purge. But where these ratios are now, I'm sorry, it's just simply not that high of a number, historically or on an absolute basis. And so it can change. It can get worse. I probably won't care a whole lot if it does, but I'm talking about within their vocabulary. Those who live and die by what they perceive consumption to be, I don't even think the data speaks to something catastrophic for them, let alone for people like

us that believe the consumer spends until they can't because credit's gone away, not because they decided to, you know, chill a little bit. And if they did, if God forbid, people denied themselves a couple expenditures at the mall or online or what have you and decided they wanted to save a little more, and I'm supposed to believe that that's bad for the economy, I want you to tell me who's crazy. It's not me. Thanks for listening. Thanks for watching. Thanks for reading The DC Today. See you tomorrow. Thank you. 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

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