The Dividend Cafe - The Dividend Cafe Monday - August 12, 2024

Episode Date: August 12, 2024

Today's Post - https://bahnsen.co/3M5kPrn Dividend Cafe: Market Stability Amid Geopolitical and Economic Uncertainty In this Monday edition of Dividend Cafe, David recaps a relatively calm week in the financial markets, highlighting a flat S&P 500, minor tech sector gains, and fluctuations in the Dow and Nasdaq. The discussion touches on the absence of speculative shorts in the yen-dollar trade and geopolitical tensions in the Middle East. Politically, the focus shifts to the U.S. presidential race and Senate seat contests, emphasizing how market expectations are influenced by current odds. Economic forecasts include upcoming CPI, PPI, and retail sales data, along with an exploration of disinflationary trends. The episode concludes with insights into Treasury bill holdings by Berkshire Hathaway versus the Federal Reserve, emphasizing different financial strategies and objectives. 00:00 Introduction and Market Overview 00:39 Market Performance Recap 01:30 Sector Highlights and Bond Market 01:48 Currency and Valuation Insights 03:13 Geopolitical Concerns 04:21 Political Landscape and Market Implications 08:21 Economic Data and Inflation Trends 09:47 Federal Reserve and Housing Market 12:51 Midstream Energy and Treasury Bills 15:03 Conclusion and Final Thoughts Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to the Monday edition of the Dividend Cafe. It's a quick and easy one this week, actually, partially because there isn't the melodrama that we had a week ago. And in fact, markets were quite boring. The S&P 500 today was up 0.00%. I think many of we don't have that happen very often. But also, I would say that there just was like a little bit of information I wanted to pass on this week in each category, but not a lot or an excess in any one category. So let me pull up a few things here and we'll get into it.

I want to start just by talking about the day that we had with the Dow was down 140 points. The S&P was dead even. NASDAQ was up 20 basis points. The Dow had gone down right at the open, a little over 200 points. And then it really did zig and zag throughout the day. But again, a pretty benign day all around in markets. Not a lot to report coming off of the big rally day that had happened Thursday and Friday

of last week. A lot more breadth in the Thursday rally last week, meaning wider participation in the market than there was Friday. But still, nothing changes the fact that you had a big sell-off at the beginning of the week that by the end of the week had been neutralized. And so, do with that what you please. And then today, another microcosm of kind of a boring day. Now, technology was the leading performing sector today. Energy was second. The worst performing was real estate, but it was only down 60 basis points. The bond market was positive again. The yield was down three basis points the 10 year back to 3.9%.

One of the things that I will say just based on the context of what we talked about a week ago was that speculative shorts in the yen dollar trade are basically, there's pretty much no open contracts right now. So all of the shorts covered and they'll end up coming back in to some degree. But at this point, the notion of getting a lot of sell-off from covering a short that was not going well, I think that trade on the currency side seems to have played out. And we'll see what that means on the equity side lately is the valuation excess. That story hasn't even come close to going away. Whether or not the immediate sort of drama of a yen cover, over leveraged excess situation, unwinding a carry trade, that may have subsided for the time being, but I would not be betting

that it's gone for good. I just point out that when you see no open interest in short yen relative to dollar, a lot of short covering took place last week. What else do we want to go through here? I don't want to ignore the geopolitical side, but it's hard for me to talk about what's happening or potentially happening on Israel, Middle East issues as it looks like we're preparing for a potential escalation with Hezbollah and Iran, which are one and the same in a lot of ways. And the reason I say hard to talk about is because we don't know. And news reports are going to end up being reliable looking backwards, but those predicting, I don't think no. So we know there's a bit of heightened volatility there. It's a little hard for me to say that oil today was up

almost 4%, like 3.8%. But when I say up, it's back to $79.69. It had been in the low to mid 70s most of last week. I don't think oil at $80 is exactly pricing in World War III or pricing in the shutdown of Strait of Hormuz, for example. There's just not a lot of reason to believe that something dramatic is imminent in the region. And yet there's always the potential of something dramatic and imminent in the region. I'm going to leave it there. Okay. On the political side, I try to do this in a way it isn't going to upset anyone because it just, I know as a fact, I'm saying the truth when I talk about this presidential race, because I get a very even amount of hate mail from people that think I'm talking down President Trump or people think I'm

talking down Vice President Harris. I'm doing neither. I'm just objectively calling the balls and strikes of this race. This momentum has moved overwhelmingly to current Vice President Kamala Harris. That's undeniable. The betting odds are what I'm now referring to. Former President Trump had a 70%-ish range that he would be the winner at his peak in the betting odds in the prediction markets. And right now it has gone down to 40% and with Harris at 60. So it's gone from 70-30 Trump to 60-40 Harris. Now those things are one data point and you can take them with polls, you can take them with momentum, you can take them with whatever. I am talking to people inside the Trump campaign, adjacent to the Trump campaign, adjacent to the Democratic Party, various pundits and whatnot that are pretty connected, just an overall beltway, some more nonpartisan than others. I know who has what views on all this stuff, okay? I'm trying to get information as to what state of the race is,

and I stand by my belief. I actually wouldn't call it a 50-50 race right now. It's not Labor Day yet. The Democrats have not had their convention yet. There's a long way to go. I don't think this race looks like it's going in a good direction for President Trump, and yet markets are not going to respond to that with anything that even when it moves, it's likely still something in the 53-47 range as far as probabilities for one candidate versus another. That's because of the divided nature of the country and it's because of the reality of the electoral college. Now, what I point out here in Dividend Cafe today, what I want to share with you, is that I think Harris is more likely than not at this point, certainly more likely than things we're looking for President Biden a few weeks ago to win the presidency.

But I would also add that the Republican Senate race in Montana, it's a very hard state to poll. There's now been about three new polls that have really indicated not a one-point lead, but a three, four, five-point lead for the challenger, Tim Shih on the Republican side, to the longtime incumbent, Jon Tester. If the Republicans win that race, then you're going to be in no other race that they're competing for, then you're looking at a 51-49 Republican majority Senate. I think that's what markets are expecting now. I think markets are expecting Harris to win and the Republicans told the Senate. And a lot can happen in the next few months that could jeopardize that Senate seat for the Republicans, that could jeopardize the White House for

Democrats. Nothing is set in stone, but I do not believe either side gets to claim, oh no, we're about to face this awful market response, or oh no, we're about to, or oh yes, we're about to get this wonderful market response. I think that the divided government likelihood tempers and neutralizes a lot of those left tail or right tail, no pun intended, outcomes. And I will do my best to objectively keep you posted along the way. If you want to get a feel for what markets are probably looking at more than anything else, it's not the Senate seats in Nevada, Arizona, Ohio, Michigan, Pennsylvania, that all look to be three, four, five, six point leads for the Democrat. It's not even the presidency. It's probably the Montana Senate seat. Okay. Let the mail come. This week, economically, you have the CPI number coming

Wednesday. We have the PPI number coming Tuesday. You'll have retail sales coming. There's a lot of economic data this week. The state of inflation can be succinctly summarized this way. There is absolutely no question we're in a period right now of disinflation. And that disinflation is a byproduct of supply chain normalization, post-COVID, and money supply contraction. It had gone negative at one point. It's now just barely positive, but that massive increase in money supply is long gone. And where people choose to put the primary emphasis between supply chain and money supply, I'll leave alone. But my point being both of those things are in a disinflationary thematic. And I would say to you

that what is really going on right now in the inflation conversation is the fact that some are taking advantage of the fact that disinflation is not something that plays out in a linear, fact that disinflation is not something that plays out in a linear, consistent month-by-month basis. The trend line is very disinflationary, and some months have more noise than others, and it gets everyone ruffled up a bit. But my view is that's totally irrelevant, and it's also irrelevant to the Fed. The Fed would conveniently prefer data points that help go in line with what they have to do policy-wise. But policy-wise with the Fed, where we are, is that right now there's 100% chance of a rate cut in September in the futures market with exactly 50% chance of a quarter point cut and a 50% chance of a half a point cut. And it's evenly divided as to whether or not it'll be a quarter or half point.

But what is interesting is that there is a, let me get this right, 70% chance in the futures market of a full 1% lower Fed funds rate, 100 basis points out of the Fed funds curve by the end of the year. And it's 100% chance of a 75 basis point reduction. So whether it's quarter each September, November, December, or 50 and then a quarter, or 50 then a quarter, that's all going to change around in the futures market too, let alone pundits like me saying things. That's why I don't say things. I think you're going to get 75 to 100 out of the Fed funds rate by the end of the year, three to four cuts,

whether it's a half and a quarter in September versus December, November, all that. I don't care much. 70% chance of 100 basis points. Just keep in mind, we got a couple jobs reports coming and we have a couple more CPI reports coming in that those cosmetic results matter for the Fed, in my opinion. On the housing front, there is a 260 basis point difference right now, 2.6% between a current mortgage rate and what the average person with a mortgage is paying. That is as much of a differential as we've had going back to the 1980s. That to me is the issue as to when you unfreeze this market. You have to have the differential converge down to something much closer to zero. Maybe there's room for a little spread, but the reason that there's no activity buying, selling, I don't mean

in prices moving, but just not a lot of activity transactionally is that differential. And whether that number comes down because the average rate people are paying goes up by a quarter to half a point as over the next year, certain rates reset or something. I don't know that will happen, but maybe that happens. And then you also get 200 basis points out of the mortgage rates to bring you to 250-ish, something in that range. But that differential is the key number. I'm going to keep talking about that as we go forward. What else do we got?

Fed, oil, big week for midstream energy last week with the markets going through all their drama at the beginning of the week. You still ended up with midstream up on the whole week, including Monday, 1.5%. I did get a question I'm going to quickly go through and I'm going to let you guys go on the podcast and video. The answer is written out at DividendCafe.com. But someone asked about

the report that had come that Berkshire Hathaway, Warren Buffett, owns more T-bills, more government treasury bills now than the Fed does. They're up to about $235 billion of T-bills, and the Fed is only at around $200 billion. And that's true, but let's just understand something. A treasury bill is a subset of treasury bonds that is the maturity of generally about six months, three months. I think it can go up to nine months, but it's just a narrow definition. The Fed owns 19 times more treasuries than Berkshire does. They're still up at around four and a half trillion of treasuries. It's just that their duration is longer. They own very few that are six-month maturities and a lot more that are longer. And Buffett had sold a bunch of Apple and that generated about $100 billion of cash that then they're holding in

very short-term notes that's like a cash proxy waiting to deploy. And I don't really read anything into that. The Fed is still the significant owner of treasuries, but they have successfully gotten a trillion dollars plus off their balance sheet. They're still in quantitative tightening. They're only tightening right now about 20 billion a month, reducing the balance sheet by 20 billion a month. It had been closer to 80 billion a month, but I think it just speaks to a very different objective. Berkshire managing cash and deployment and tactical opportunity and the Fed managing monetary policy with the policy tool of quantitative easing versus tightening and balance sheet bond purchases and so forth. So just food for thought. Okay,

I'm going to leave it there with you all week in New York, Brian and I are still figuring out who's doing what Tuesday, Wednesday, Thursday. But in the meantime, reach out with any questions and have a wonderful week. Lots going on. As always, thanks for listening. Thanks for watching. Thank you for reading the dividend campaign. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered Thank you. 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 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 no expressed

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