The Dividend Cafe - The DC Today - Wednesday, March 22, 2023

Episode Date: March 22, 2023

Today's Post - https://bahnsen.co/3TAGcni All that matters today is what the Fed did and said. And what they did was raise rates a quarter point. And what they said was that “financial conditions have tightened” (well, there you go). And he said that these tighter financial conditions and tougher lending criteria from banks will “factor into their policy decisions” (phew). As for a First Republic deal – the bank whose depositors basically now have a backstop from the FDIC but has now seen enough deposit withdrawals to warrant a deal with a bigger back to shore up its capital strength – the issue appears now to be what government backstop or assistance will be a part of any deal (something I predicted last week … any buyer in a position of strength knows the issue is systemic risk, and therefore has the leverage to ask for some sweeteners to come with the deal). Some of the items being discussed (per reports) are liability protection and/or relief on capital requirements and/or other regulatory relaxations. Keep your popcorn handy. 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. It is Fed Day, which is the best day. today. And you may think that today wasn't the best day because the market dropped in the final minutes of trading, but I will make a case for something different. First, let's just talk about what the Fed did. As expected, raised rates a quarter point. As expected, they've more or less telegraphed it. I think that they're done. In fact, the futures market, as I got up from Bloomberg, was at 58 percent chance of the Fed not raising rates at the next meeting, 42 percent chance that they'd raise another quarter point. So it's not quite 50-50, but it's also not quite 100-0. So we'll see how those futures kind of process this in the days and weeks ahead. The next Fed meeting isn't until the first week of May. So you have

about five, six weeks to go here. Look, Chairman Powell said the incredibly profound and bold thing that financial conditions are tightening. So there you go. They are. And then he said that tightening and the restriction, the more restrictive lending conditions would factor into policy decisions. So there you go again. I do think those are two ways of saying that we're done or we think we're done. All of it really could be interpreted as we know we already should be done and have already gone too far, but we're kind of stuck here. It doesn't really matter. I don't think a critique of face-saving or something like that is very helpful. I'm not looking to dunk on anyone. I mean, there's nothing like that. It's just simply that I don't believe in the objective they have of stating, well, we think we're going to counter inflationary pressures by trying to slow down economic activity. But to the extent that one were to say that is, in fact, the objective, whether I believe in its legitimacy or not, I will tell you that the chairman is exactly right, that the slowing down is being

done for them. What you would call tightening through the policy rate is a little less necessary when you're getting tightening through financial markets and things like banks closing down and so forth. And also just a broader withdrawal of deposit funds, which removes reserves from the banking system. And obviously an incredible pressure for banks to be very tight and restrictive in how they're going to lend right now. And so I think that Chairman Powell's going to, his comments are going to prove to be a massive understatement. And I do not expect that they'll raise rates again um but we shall see here's the interesting thing before i get to the stock market today the uh bond market dropped anywhere the yield so the bond market rallied the yields dropped anywhere from 15 to 24 basis points

at each point on the yield curve from one year to 10 years. And I think the 10 year was down about 15 basis points. It closed, you know, around three, four, three, four, five, big rally in the 10 year in the middle of the curve, kind of the belly of the beast. You got like a 23, 24 basis point drop in yield at the three-year, and you were around 15 or so at the one-year. So that yield curve action, it has not un-inverted, but it has moved in the direction of an un-inversion, of a flattening, and I think market acknowledgement, financial market acknowledgement of the Fed being overly tight and not expecting that party to continue on the short end of the curve. So here's the thing. The bond market today said, yeah, the Fed is almost done. And then

the stock market did at first, too, in the sense of markets were pretty flat and boring all day. It dropped a little here and there. And then they were up 250 points. And they were up there basically like 45 minutes later. So it wasn't like they spiked in the first 30 seconds of the announcement, but then things kind of settled differently. For nearly an hour after the Fed announcement had come out, the market was up 250. the Fed announced it would come out, the market was up 250. And about a half hour after, maybe 20 minutes after Chairman Powell's press conference, the markets were still way up. And after that peak level of the day, they did kind of spike up and down a little bit here.

And then you got to the very final, and it wasn't even 15 minutes. It was like the final 13 minutes of the day, market was down 500 points. And so I feel very confident in telling you that what happened was there were traders, very short term people that had positioned for the Fed to come out uber dovish today. And the Fed came out dovish. It's debatable if you'd call it uber dovish, but you got a bit of a rally. The bond market validated it. The stock market held it. And yet the traders were not taking it off. We're trying to see if there was going to be a next level of movement forward. And you had a little up-down movement. And then the final 15 minutes, it was clear the markets were not going to accelerate more. Keep in mind, they were already up 700 points in the last two days. And then I think you had the people that were in it to win it for that trade,

the Powell-Pressler trade. And then all of a sudden you had a lot of selling pressure that took 500 points out in the last 15 minutes. So if there's a better theory as to what was moving things so violently in such a quick period of time, I'd love to hear it. But I don't think there is. And I think that the bond market provides a counterfactual.

And I think the stock market's behavior in the first hour and 30 minutes after the announcement validates my theory. So I don't really care much about the short-term volatility today. Markets are made up on the week. We do not have much resolution on First Republic Bank, and I don't think we're going to get that right away. I do believe that there are suitors that are looking to come in and play the role of a rescuer of a bank that has taken on some reputational things in the last week and a half, but that they want some FDIC help in the deal.

And that can come without the FDIC backstopping losses directly. There's other ways they can provide regulatory relief and other capital requirements, which would be more the Fed than the FDIC. There's things that they could do to sweeten the pot. And I imagine there's haggling going on. In the meantime, the bond market has rallied dramatically. And we will see tomorrow how markets respond the day after. Because sometimes the day after the Fed can be a brutal day as well, or it can be a rally day.

But usually, lately, not much of a boring day. So that's my take on what has happened today, what the Fed has done, where I think the Fed will go. Whether people think it's a good thing or a bad thing, they did raise rates a quarter point today. I find it utterly preposterous. Whether people think it's a good thing or a bad thing, I don't think they will raise again. And I think that the reasons are that the financial conditions do not warrant it and the tightening is being provided by the financial markets themselves. What a thought. Thanks for listening to, watching, and reading the DC Today.

We'll see you tomorrow, Thursday, as the beat goes on. Hope you've had a happy Fed Day. The Bonson Group is a group of investment professionals Happy Fed Day. LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. 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 Thank you. and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for

informational purposes only. The opinions expressed are solely those of the Bonson Group and do not represent those of Hightower Advisors LLC or any of its affiliates. Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client's individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor

for any related questions.