The Dividend Cafe - The DC Today - Wednesday, March 6, 2024

Episode Date: March 6, 2024

Today's Post - https://bahnsen.co/3P9T82G After two down days to start the week, we closed higher on the day after Powell’s comments to Congress. He reiterated a peak in rates and a plan to lower rates once he has more data to confirm that 2% path beforehand. We have a more chart-heavy DC Today for you (my favorite), as the information pictorially is too good to pass up. Today, we got ADP payroll numbers largely in line with expectations, and there are reasons employment and, frankly, this market has defied all that doubted it in the wake of this meteoric rise in interest rates. Rising markets, tightening credit spreads, low jobless claims, fiscal deficits at 6% of GDP, and infrastructure spending have all eased financial conditions to become EASIER than where they were BEFORE the Fed began raising interest rates from the zero bound. We have spoken about both consumers’ and corporations’ resilience from rising rates as they locked in lower rates before this cycle, but the financial conditions in green in the chart below show the backdrop of the market’s resilience in light of rates as well. 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 this Wednesday, March the 6th. Great to be with you here. I'm in our Newport Beach, California office studio and a a nice little up day in markets. Not a huge up day. We actually came off of the highs for the day. We were up around 230, 240, something like that a few hours ago. Ended up closing up just 75 points on the Dow. 10-year yields continue to

drift lower. At this point, we've gone from about a 430 yield, I call it seven days ago, to today closing at 411. So on the day, we were down about three basis points. So still a drift lower in interest rates. There was some angst yesterday. Markets dropped 400 points yesterday. And part of that was just worry that Powell was going to say something more hawkish to Congress today in his semi-annual testimony. He really didn't, just like I frankly assumed, which is that he just reiterated what he has said before, that peak rates have likely been set

and they're going to lower rates sometime this year, but they want to see some more data just to confirm a path on 2%. So all fine and good. Markets were a little relieved, and so we got a little bit of a recovery from yesterday out of it. We don't always put charts in the midweek versions of DC Today. We did a few today just because I thought they were really quite good. But the chart in the beginning is referencing the financial conditions, basically. So it's saying, you know, resiliency in markets after rates have gone from zero to five and a half percent was not something most would have assumed. In fact, frankly, nobody did.

You know, the idea that the world would keep spinning, the U.S. would keep growing at twos and threes on GDP, and that earnings would still grow at 10%, and the housing market would not fall out of bed, and the bond market would not fall out of bed, and all these things would still function, not just adequately, but well, wasn't something most people would have thought. And so the chart I show is that financial conditions today, The chart I show is that financial conditions today, meaning the tightness in markets, are easier than they were before the rate tightening cycle. And again, I think it's just worth noting where we're at, and people scratch their head and wonder why markets are hanging in there when all those positive backdrop, all those positive things I mentioned are happening.

And part of it is that reason. Financial conditions are not tighter. They're actually easier, even though we have 5% rates. David had a nice section in there that was far more thoughtful. And I think talking about the velocity of money in some time periods, and he referenced a few white papers that he's written on that. referenced a few white papers that he's written on that. But whether an excessive amount of indebtedness is the cause for a steadily and consistently declining velocity of money isn't necessarily the conclusion, although it likely is part of the reason, an excessive

amount of indebtedness causing a velocity of money to slow down, which in turn causes things like Japanification that we've talked about, which is just a slower economic growth environment, is fascinating. And so I encourage you to click on those links and read through some of those white papers. The velocity of money, while it did decline rapidly during COVID and then rapidly recover, is basically back to that trend line. And what we're basically alluding to, or what he is in that with Japanification, is that that continues, that because of the 30 plus trillion, I guess 34 trillion now, of debt in this country, but around the world, that we're sort of in this environment of low growth and likely low velocity of money going forward. There was also a question that I got recently, coincidentally, that was

about a dividend cafe that David just wrote. So I just, I used the link in there to show people that they can reread it about private credit, because we are seeing double digit yields that are very attractive and we are not seeing a-digit yields that are very attractive, and we are not seeing a lot of volatility in that asset class. In fact, if anything, it's been appreciating in the last couple of years. And so the question was more related to, what am I missing? What are the risks? Is that 10% yield sustainable, those things? And we feel they are, but we also look at it through a lens of higher quality and bigger being better. So not necessarily searching for insanely high yields at 12, 13, 14% and going

lower in credit quality, but staying with the big guys, the big Blackstones and Apollos and things that manage this space the best so that if there is a slowdown or a recession at some point, we have likely more liquidity than we otherwise would in those other pools that can be swam in. In other words, there's no sense of stretching for something higher than what is already high. Tomorrow, we have initial jobless claims. Not expecting much of a market mover from it because Friday we really have the real non-farm payroll number out. And I think there's going to be anticipation around that. We're expecting a 200,000 print on there, which is about in line with what we've seen. And we're expecting that the unemployment rate will stick around at about 3.7%.

There is a chance that bad news is good news. So if you get higher unemployment, the markets might actually like that because it's more reason why the Fed might lower rates sooner than later. But either way, we'll see. I won't get ahead of myself. We'll see on Friday how that number comes out and go from there. We also have some productivity and trade numbers tomorrow. So I'll be back with you tomorrow on Thursday for DC Today and chat through all that stuff and go from there. I wish you all a lovely evening, as I always do, and please reach out with your questions. Thank you so much for listening. The Bonson Group is a group of investment professionals registered with Hightower

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