The Dividend Cafe - The DC Today - Wednesday, May 24, 2023

Episode Date: May 24, 2023

Today's Post - https://bahnsen.co/3Mxdgto While everyone tosses and turns about the debt ceiling debate in Washington, I want to remind everyone what is the real scenario playing out in the economy. The Fed’s tightening may or may not “succeed” in their mission to destroy those inflation-creating jobs (their words, not mine), but it certainly will succeed (and has already) in tightening credit. Essentially a trillion dollars leaving the banking system is a lot less monetary base for lending. Funding costs for banks are much higher. And overall bank lending is collapsing. These things are all known. Now, one can argue much of it is priced in. And one can certainly debate if it leads to a deep recession, or a shallow one, or a soft landing, or my own hypothesis, a more “narrow, targeted” recession, but it is the issue in front of us. What ends up being the impact across the broad economy and to corporate profits of the inevitable decline in credit as a result of this financial tightening? And then, of course, how does the Fed handle their inevitable back-peddling of the mess they create? It’s all so weird to watch play out. The impact of tightening credit – the variables around that will be real in six months. Almost nothing anyone else is talking about right now will be. Food for thought. 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, still representing here in Nashville, Tennessee. Extremely busy day, lots of wonderful things happening and markets dropping a bit today. Again, on just, you know, volatility and debt ceiling discussion and different things like that. The actual chart of the market, it did open down and then it kind of zigged and zagged a little bit throughout the day. It made a little bit of a rally, about 100 points up with 45 minutes to go in the trading day. And then it gave that back near the end. So the Dow closed down 255 points, which was 0.77%. The S&P was down about the same percentage-wise. NASDAQ down a tiny bit less.

Keep in mind, too, bonds have sold off a little. The yields have come up. Today, the 10-year was up 4.8 basis points. So you ended up with a 10-year Treasury yield at 374. And it had been at 350 a couple weeks ago. So you've had a little sell-off there in Treasury bonds. Energy was up again today. And energy was the only sector up again today. So that's becoming a bit of the contrary sector in the midst of this market stuff. Energy was up a little over half a percent, and then real estate had gotten hammered. It was down 2.2 percent. Oil was up near $74 a barrel now, up 1.43 percent. The main comments I want to make, and I don't want to keep us long on this,

but again, most focus on this, the Fed, excuse me, the debt default discussions, debt ceiling discussions, whatnot. I've been pretty clear how I feel about all of it. And there's a couple of links in the DC Today about, you know, from some of my commentary to Barron's and, and fortune and some other media outlets. Uh, and, but it's something you guys don't hear first and that I don't say often, uh, through the podcast and my writing and whatnot. Um, the issue I just want to remind us about is that, look, I don't believe that jobs are inflationary and the Fed's saying that they're concerned, you know, that they haven't been able to destroy more jobs to get inflation down is either because they're lying or because they're telling the truth. And I think

they're wrong. Either way, it's not really my favorite thing in the world. But what I do believe is the case is that they will succeed in tightening credit. And indeed, I believe they already have. I think there's no question that credit is tightened. And a trillion dollars, it's $981 billion that has left the bank deposit system, I think that that's a legitimate tightening of a monetary base that leads to a decrease, a significant decrease in lending. And the funding cost of banks have gone much higher, and the quantity of bank lending has collapsed. And that's all well known. So the question then becomes, well, what is priced in? And one can debate. And we do debate, is it going to be a deep recession, a shallow recession?

Will it be a soft landing? My own hypothesis continues to be a narrow and targeted recession. But again, the issue in front of us is not so much predicting exactly what kind of recession you end up getting, but just noting that, you know, what ends up impacting the broad economy and specifically from investors, corporate profits, I think is the inevitable decline in credit. And what that impact will be, this inevitable decline in credit as a result of this financial tightening, that's the sort of TBD. And then, of course, the other TBD that comes, I imagine, almost immediately after that first TBD is determined is what the Fed's inevitable backpedaling looks like. And they will backpedal, I believe, out of the mess that they will create. And so it's kind of weird to watch it play out. And that's what I think we're going through. The impact of tightening credit, the variables around all of that, those are real things that will happen in six months. And pretty much in terms of broad market economic stuff, everything else people are talking about

right now will not matter in six months. So I would just keep that in front of you when you're thinking about this market. All right, so we went through all the market sectors. Someone had asked me why regional banking crisis may be affecting Western banks primarily. And I just want to point out that I get the question. But as a matter of fact, there's been three bank closures, and one was Western-based, clearly with Western deposit base, Western focus. And that's obviously Silicon Valley Bank that was marketing to Silicon Valley in an obvious sense. And then the other was actually New York based bank. And that was signature bank of New York. And it was largely crypto driven depositors and things like that.

So you had kind of one East Coast, one West Coast, then you have First Republic and someone could say, okay, well, they were West Coast, they were based in San Francisco. And yet, actually, they had a pretty heavy concentration of branches in the Northeast, in addition to in the Bay Area of California. And then they had a significant lending book in the West Coast, but also in the Northeast. I think I mentioned before that I think they had banked like 71% of the Hamptons for residential mortgages. So I wouldn't be comfortable referring to them as this sort of Western bank distress. I think it was much more nationalized, you know, their issues and spread out. So really of our three bank failures, I don't think you have one that you could put into a West Coast classification. Ultimately, what you have in common is where depositors were vulnerable and where they extended and or where they extended loans that were too generous from a rate standpoint

and then faced a rising rate environment. You know, of course, you're going to have more of that in coastal affluent areas because there's more money in the coastal affluent areas. more of that in coastal affluent areas because there's more money in the coastal affluent areas. So that part may have felt more concentrated in West and East Coast, but not specific to the Western part of the United States, in my opinion. It's more of a money center related issue. That's all I have today in the DC Today. We'll come back with another DC Today tomorrow, Thursday. We'll see what continues to go on out of this DC stuff. And in the meantime, perhaps there will be something else noteworthy in the press to talk about. But I do know this, if you have any questions, we are going to answer them. About anything and everything related to financial markets, send them to questions

at thebonsongroup.com. Thanks for listening. Thanks for reading. Thanks for watching 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. Advisory services are offered through Hightower Advisors LLC.

This is not an offer to buy or sell securities. No investment process is free of risk. There's no guarantee that the investment process Thank you. or warranties as to the accuracy or completeness of the data 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.