The Dividend Cafe - The Dividend Cafe Tuesday - August 27, 2024

Episode Date: August 27, 2024

Market Update and Debt Concerns - August 27 In this episode of Dividend Cafe, Brian Szytel discusses the current state of the markets on a particularly quiet day. He covers key economic events to watch for, such as the upcoming PCE and nonfarm payrolls reports. The episode details the performance of major indexes, the state of the bond market, and the inversion of the yield curve. Brian also addresses concerns related to U.S. debt, the strong demand for two-year treasury notes, and the interconnected nature of global debt markets. Additionally, he explains the differences between securities-based loans and margin loans, highlighting their respective advantages and risks. Listeners are encouraged to reach out with questions and look forward to more insights in the next episode. 00:00 Introduction and Market Overview 00:59 Economic Indicators and Treasury Demand 01:19 Debt Concerns and Market Dynamics 02:43 Securities-Based Loans vs. Margin Loans 04:32 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. Welcome to Dividend Cafe. This is Tuesday, August the 27th, and Brian Seitel with you here today in really a very quiet market day, frankly, across the board. Not a lot of economic news. We've got PCE and the non-farm payrolls on Friday. And in the meantime, there's a couple of smaller things, and I'll go through those. But the Dow ended up closing up almost 10 points. The S&P and the NASDAQ were up 16 basis points, and the 10-year yield dropped one basis point to 383. The VIX or the volatility index is back in the 15s, meaning there's not a lot of volatility. Things are quiet. That's not necessarily a bad thing for most market participants, but that's your Tuesday. The bond market to the 210 curve, which we talk about all the time, has been inverted now for two

years. It is now just seven basis points inverted. So we're getting almost back to a flat and non-inverted curve, but not quite there yet. I had a comment in the written version about just debt, at least in the US, on the treasury side. And there was a fairly large auction today, 69 billion of two-year notes that went off really quite well. So the demand for treasuries is still very strong. But with $9 trillion, that's nine with a T, trillion, maturing in the next 12 months, and with the U.S. running trillion-dollar annual deficits for the foreseeable future, regardless of whichever candidate gets into the office in November, is it a cause for concern? Look, it's always a cause for concern. We don't want our national GDP going from 100% to 200% debt to GDP ratio. That said, we already have a slowing China. That's already priced in. We had a $1.2 trillion balance sheet of treasuries in China.

Now it is now $800 billion because their real estate market is contracting significantly, and they just have slower growth rates there. So there's less yuan to recycle back into U.S. treasuries. So all those things would be normally intuitively bad for demand for treasuries. And then now there is 225 basis points of interest rates cuts priced into markets. So wouldn't it make sense then for lower interest rates, higher supply, meaning that those $9 trillion of bonds are maturing and all these things to mean that the demand would be lower. Intuitively, it would. The reality, though, is that sovereign debt markets just don't operate in a vacuum. You have to understand that they're all relative and they're all interconnected. And so until there's a better store of value,

until there is a better way to fund long-term obligations like pensions and things with something without credit risk that has ample liquidity, that has safety, all those things. The U.S. treasury market is just, frankly, by far the best market to do that. And so I'm not worried about demand, rather, aside from what you may hear in media and things. So that aside, there was also a question, again, about lending and about debt, coincidentally, about the difference between a securities-based loan or a non-purpose loan from a brokerage firm like a UBS or Merrill Lynch or something, or a Schwab, versus a margin loan from somewhere like Fidelity, a custodian. institutions are banks and they're levered institutions and they're using bank capital on their balance sheet to provide liquidity to clients and they're taking in the securities as collateral to do that. So there's a difference between the two and from a regulatory standpoint.

From an interest rate standpoint, those loans tend to have a little higher interest rates, but they by and large tend to have a little higher interest rate just because the capital from the bank is more expensive and so they need to charge more for it. The funds can be used for anything other than just purchasing other securities. There's some other regulatory differences between the two, but I'll save that to save your attention. The margin loan from somewhere like Fidelity is the custodian allowing securities to be lent out, which provides the liquidity to other customers at the custodian. So it's a little different. It's non-levered. It doesn't use Bain Capital to do it. And so it's

less expensive for the custodian. And the interest rate tends to be a little lower, at least at TBG it is. The spread tends to be a little lower. And the deductibility is far clearer in our tax code on a margin loan as far as it being deductible interest versus against the portfolio income. So pros and cons with them, obviously as you can tell how I wrote the answer, there's more pros using a margin loan than a securities-based loan at a bank. But all that to say, all leverage comes with risks and all of it needs to be, of course, used in moderation. Those loan-to-value ratios need to be kept in check and on the lower end, always. So with all that, I'm going to be kept in check and on the lower end always.

So with all that, I'm going to let you go for the evening. I'll be back with you on Wednesday, and we'll have more to chew through. With that, I wish you a lovely evening. Ridge out with your questions. Thank you. 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 Thank you. 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 express or implied representations or warranties as to the accuracy or completeness of the data and other information,

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