The Dividend Cafe - The DC Today - Wednesday, August 16, 2023

Episode Date: August 16, 2023

Today's Post - https://bahnsen.co/3EicX1X Following yesterday’s dismal economic data out in China and the largest rate cut there in 3 years (mind you, we are only talking about 15 bps), there was some add-on stress revealed in the real estate and financial markets today. One of China’s larger wealth management and shadow banking firms, with over $138B in assets, missed some repayments on some of its investments and is under review. It is too early to tell if more financial contagion will occur definitively, and of course, you have a government there that can act if needed, but having managed client capital through the GFC in the US myself, a declining real estate market followed by several cracks like this in the financial system are eerily familiar warning signs and worth following. I do suspect the likely path is continued easing in monetary policy and, eventually, some form of stimulus to revive the Chinese economy, but since I know David will have more insight in this Friday’s Dividend Cafe on the subject, I will leave it there for now. Interestingly in Asia, however, is Japan’s economic resurgence. Japan’s GDP last quarter was up a shocking 6% q/q on exports (recall how weak the Yen has been), which was the best organic reading since 2015. Going around the horn to the US, we had Fed minutes released from July’s meeting, leaving further potential rate increases on the table and some better-than-expected housing and industrial production numbers out. So what do you get with such a divergent economic paradigm amongst the first, second, and third largest economies of the world? 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. Hello and welcome to DC Today. My name is Brian Seitel. It is Wednesday, August 16th, and it's good to be with you all today. Kind of a choppy session in markets. We had an upmarket in the morning following sort of a giveback last couple of days, but we were up upwards of 150 points sort of mid-morning and got a slew full of different data points and markets just sort of seemed to sell off and trade lower from there. We closed down ultimately 180 points on the day, lower from there. We closed down ultimately 180 points on the day, which was a swing of 360 points peak to trough. So basically closed right around the lows for the day. There was some data out of China that moved markets. There was minutes for the last meeting, the Federal Reserve meeting from July were released today, and that moved markets a little bit around 11 or so Eastern.

And so we'll kind of go through this stuff here. But the 10-year today closed at 426. We were in the morning trading at around 418. So you had a decent move in interest rates today. The yield curve somewhat dramatically, relatively speaking, steepened a little bit on the day. So in other words, the short end of the curve was down just a little bit, long end of the curve was up a little bit, got a little steeper yield curve. We're still inverted by about 70 basis points though. So less than 100, but still inverted.

China yesterday had some decently poor numbers that were released economically, and they cut interest rates. They cut interest rates by the most they have in three years, which is all of 15 basis points. But still, it's indicative of monetary policy that's trying to aid a declining economic reality in the country, along with lower rates, especially when the rest of the world is high in rates and or even increasing rates, you get a weakening currency there. So the yuan to dollar ratio is at the highest it's been in over a year at this point. So you're having a weakening effect on currency. Economy there has poor numbers basically across the board. weakening effect on currency. Economy there has poor numbers basically across the board.

They're still kind of getting out of the fog of zero COVID really. And the expansion just hasn't caught on as some would have thought it would. And then also there's been some supply chain movement around the world. All those things matter. Behaviors, policies, it's all affecting the economy there a bit. And you're starting to see, along with weakening currency and lowering interest rates, you're starting to see some cracks in their financial system. The real estate market in China is dramatically lower and depreciating. It was overbuilt and over levered. And with declining prices, you get issues, just like we went through issues in the financial crisis. It isn't that there yet, but there are some canaries and coal mines potentially. There was a fairly large investment slash shadow banking company. I might not say the name correctly,

but it's Jingzhou, I believe it's pronounced, that missed some interest payments and some investment payments today. And so those are little signs. You've had an ongoing sort of credit watch and financial stress inside of the real estate lending division in the country and all those things matter. All that to say, remember, it's still growing. We still have positive GDP growth there. It's just less than it has been in a very long time. And so they're dealing with that. And again, central bank policy is changing and acting. You may get some stimulus there at some point. It wouldn't surprise me at all. And depending on how bad it gets. But I know David has a dividend cafe this Friday that'll kind of go through that in more depth. So I'll sort of leave it there. But so, you know, in the U.S., we had some housing data. Building starts today were better than

expected of 3.9 percent, I believe, month over month, which was good. A lot of that was single family new starts were up 6.7 percent on the month. That was the biggest contributor to that. Multifamily was sort of flat inside of there. So some decent numbers in the US. You had the minutes released today from the Federal Reserve, their last meeting. And obviously they raised a quarter point, the last meeting. So we know what they did and it was unanimous. But most of those constituents were talking about inflation still being a factor, still being a risk, still being their main concern, and that further rate hikes are on the table.

It just depends on the data. Markets didn't love that release today. You saw, like I said, interest rates move up a little bit on that, and then stocks sort of move lower following that. and then stocks sort of moved lower following that. It wasn't a huge jar to markets, but just some more data on how the Fed's thinking. That all said, remember, we've had a CPI print after their last meeting. And so the futures didn't move a ton. We're still at like a 90% probability

that they're gonna hold rates the same in September. Did move up a little bit farther out. So for November and December were something like 65, 35, two thirds, one third that they'll hold, or they'll go ahead and raise. But the Ask Brian section was pretty simple. It was really just, I get a lot of questions about people's cash holdings and banks and things and why the interest rates are low and why money markets that are elsewhere that we might have are over 5%. And people are curious about how that could be. And I kind of go through it.

But I thought it was a neat segue into some of the stuff I'm talking about with the different monetary policy happening in different economies. So if you look at the U.S., obviously, we've risen rates dramatically here to slow inflation, and we're at five and a half percent. Dollar has been very strong because of that. Rising rates, currency tends to go just like our clients and our own bank deposits go to where interest is. Money flows around the world to where it gets rewarded, and it gets rewarded with higher rates. And so when you have countries like Japan with zero rates or very low rates, or countries like China that are in the process of decreasing rates, you do get capital that tends to move out of those countries. And so you get a depreciating currency effect. And that has

ramifications on exports. And one of the ways we can see that recently is that yesterday, Japan had a 6% quarter over quarter GDP growth, which is far ahead of expectations. And it was largely fueled by exports. And one of the reasons is part of it is that supply chain things and global demand and all those things, of course. But the yen has just been dramatically weak against a lot of the rest of the currencies around the world because they really didn't increase rates. They didn't have an inflation issue to speak of. They had some inflation, but not anything that was runaway. And so they kept rates at zero and currency was weak. They exported more widgets and all those things across the world, call them

Sonys and Toyotas and so forth. And now we're sort of seeing that in the numbers. And I say that because you are seeing a weakening yuan in China. And at some point, I do suspect that'll help with some of their exports. And so we'll kind of see how that plays out. But I think in the beginning, I said what happens when you get diverging economic outcomes in the first, the second, and the third largest country in the world. And I would say that you get divergent monetary policy. And again, I think David will have some more on it on Friday in Dividend Cafe. You get divergent relative

currencies. And because of that, you get divergent central account balances between countries, net imports and exports. And so all those things end up getting tied together. And it's just sort of around and around we go with the pendulum swinging, you know, back and forth and in different business cycles between countries and economies. So all that to say, yeah, choppy day, negative, more or less on the day in markets, but sort of getting through it. I appreciate your time and listening as always, and reach out with any questions and we'll talk to you soon. Thank you. The Bonson Group is a group of investment professionals registered with Hightower

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