The Dividend Cafe

Today's Post - https://bahnsen.co/3E5y8nq

10-year yields rose to 4.29% today on the way towards the October highs of last year at 4.34%, and the yield curve steepened with 2/10’s now at 65 bps. Today we saw jobless claims come in slightly better than expected and an upside surprise in the Philadelphia Manufacturing Survey data, both supporting higher growth expectations which is what moved rates on the long end for the day. Even though stocks and bonds sold off today, I am sticking with good economic news and still being good myself.

For all the back and forth on where rates will go, what the Fed will do, and will those things need to get restrictive enough to break something in the economy, so far, it has yet to materialize meaningfully. Keep in mind also that 10 YR rates floating around the mid 4’s, are hardly anything new. The 1960s, 1990s and 2000s all averaged as much, with plenty of positive real growth in GDP. The difference now is we have a vastly expanded global indebtedness paradigm, so the sustainability of how long growth can last along with higher rates comes more into question, and I suspect both will come in as time goes on.

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Today's Post - https://bahnsen.co/3EicX1X

Following yesterday’s dismal economic data out in China and the largest rate cut there in 3 years (mind you, we are only talking about 15 bps), there was some add-on stress revealed in the real estate and financial markets today. One of China’s larger wealth management and shadow banking firms, with over $138B in assets, missed some repayments on some of its investments and is under review.

It is too early to tell if more financial contagion will occur definitively, and of course, you have a government there that can act if needed, but having managed client capital through the GFC in the US myself, a declining real estate market followed by several cracks like this in the financial system are eerily familiar warning signs and worth following. I do suspect the likely path is continued easing in monetary policy and, eventually, some form of stimulus to revive the Chinese economy, but since I know David will have more insight in this Friday’s Dividend Cafe on the subject, I will leave it there for now.

Interestingly in Asia, however, is Japan’s economic resurgence. Japan’s GDP last quarter was up a shocking 6% q/q on exports (recall how weak the Yen has been), which was the best organic reading since 2015. Going around the horn to the US, we had Fed minutes released from July’s meeting, leaving further potential rate increases on the table and some better-than-expected housing and industrial production numbers out. So what do you get with such a divergent economic paradigm amongst the first, second, and third largest economies of the world?

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Today's Post - https://bahnsen.co/44d1yL0

One of the things I used to get most frustrated by in the 2000-2007 period of artificially low interest rates, or 2010-2016, or 2020-2022, is how people assumed a central bank reducing rates was a good thing, when the only reason the Fed was doing it was because they believed things were bad. In other words, yes, a rate cut or low rates may (in many cases but not all) boost asset prices, but if the rate cut is coming because of fears of economic weakness (or actual economic weakness) there is ample reason to believe the celebration should be delayed. Now, I believe the Fed has rates way too tight right now and I further believe it is for all the wrong reasons. Yet if the Fed were cutting, not because they realize they over-did it, but rather because we were seeing screaming, severe recessionary conditions, does anyone believe that would be a positive thing?

The People’s Bank of China unexpectedly cut rates last night because things there are terrible. The Shanghai Composite Index was down -0.49% and the CSI 300 was down -0.31%. U.S. futures dropped -250 points and as I type the market is down -300 points (the final closing numbers are below). The reason risk assets responded negatively to what people intuitively (and naively) think is a good thing (i.e. unexpected rate cuts)? Because the rate cuts are due to things being, ummmm, bad. China’s situation now is case in point. This was the PBOC’s second rate cut this summer. Consumer spending, industrial production, and business investment were all less than expected. And everything happening there is teeing up this Friday’s Dividend Cafe on what I see as pending Chinafication – not the economic softening itself, but the response to the softening and what that creates.

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Today's Post -

Economic Front

Producer Prices were up +0.8% year-over-year in July (yes, less than 1%). Prices for intermediate processed goods are down -7.8% versus a year ago.

The University of Michigan Consumer Confidence Index came in at 71.2 on the month, down a whisker from last month’s 71.6 but up a good deal from the June print of 64.4

I did get a fair amount of inquiry about the news that total U.S. Credit card debt had exceeded $1 trillion last week. That the total number goes up and down year by year is actually the new news, since from 1958 to 1990 it only went up every single year without exception. But people do not realize – throughout the pandemic $150 billion was paid off the balances of U.S. credit card holders (I am sure some of this was use of stimulus money, and some was re-financing mortgage debt at historically low rates). Income and assets have grown more than credit card debt for those who hold the bulk of U.S. credit card debt. And most importantly, debt service payments as a percentage of household income sits below 10% right now. it had been over 13% prior to the financial crisis.

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Today's Post - https://bahnsen.co/3DPZwWA

Four weeks ago, I devoted a Dividend Cafe to the subject of a “dividend growth mentality.” It was intended to, amongst other things, reiterate much of the underlying value proposition for investors in buying companies that return capital to shareholders via dividends and who increase those dividend payments year-over-year. The people who read Dividend Cafe are mostly investors, and all clients of our firm are investors. My interest in dividend growth is investor-centric – that is, how dividend growth accrues to the benefit of our clients.

And yet, as became clear to me from a couple of letter-writers in the aftermath of that Dividend Cafe, there is a sense which it begs the question to ask why it is good for investors to receive dividends. Don’t we first need to understand why companies, themselves, pay dividends? Would the benefit to us as investors matter if there were no benefits to the companies? Or is this whole thinking sort of confused?

Well, one thing I can promise you – you won’t be confused on any of this after you jump into this week’s Dividend Cafe, where we will seek to unpack this whole subject of companies paying dividends – why they do it, should they do it, and what does it all mean (economically and even philosophically).

Let’s be honest, and this is about as fun as it gets. So join me in the Dividend Cafe.

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Today's Post - https://bahnsen.co/454dv7h

A tad to my surprise CPI came in even lower than expected (+3.2% vs. consensus estimates of +3.3%). The core rate was +4.7% as anticipated. On the month, prices ex-food, ex-energy and ex-the B.S. shelter figure were down -0.1%. Within that +3.2% the shelter component was up +7.8%, as the model shows OER (owner’s equivalent rent) up +7.7% on the year and Rentals of primary residence up +8%. Uh huh.

Core goods prices are up +0.8% on the year. +0.8%. The annualized total CPI from the last three months even with the bad shelter data is +1.9%.

Shelter is overstating headline inflation by 30% and core inflation by 40% (and I actually think it is mor than that). Month-to-month data is moved by base effects of the year prior and energy prices. As for energy prices, it looks like much of the oil and gas surge was late July and not as captured in this month’s data as I would have expected.

Two years ago this exact week the S&P was at 4,450 or so. Fast forward to today, the S&P is at 4,450 or so. But the 10-year yield was 1.32% and is now 4.02%. Would anyone guess that a near tripling of the bond yield would leave the market flat? Now, the Nasdaq is down -8.3% over the last two years, but still, you get the idea. Sometimes facts make no sense unless you have the gift of hindsight. Be careful about applying an investment conclusion to your forward-looking premises. As I always say, it will be hard enough for your premises to come true. It will be even harder for the conclusions that come from your premises to prove accurate.

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Today's Post - https://bahnsen.co/3YukmEv

I think the biggest news of the day was China’s -0.3% consumer price index for the month of July, and it’s -4.4% producer price index. This was the tenth month in a row of wholesale price deflation, but it was the first month in over two years of consumer price deflation. I am dedicating next week’s Dividend Cafe to the subject of Chinafication.

In keeping with the message of the last two Dividend Cafes, our “credit watch” has a couple interesting things to note. Earnings were covering interest expense on investment grade loans 9.2x over right before the Fed began hiking rates. They are now covering them 8.2x. This is called the Interest Coverage Ratio and a high one is good (more coverage of the interest expense by the earnings of the company). Now, that number will get all the way down to 6x in recessions (2020, 2008, 2002), so this move down is not dramatic, but it is a deterioration that is worth watching. With High Yield it has moved from about 5x to just over 4x. Across the levered loan world total leverage is up a tad (debt divided by earnings), and coverage of the interest expense by either earnings or free cash flow is down a bit. None of these metrics yet indicate anything broken, yet all of them are modestly worse off than they were 12-18 months ago.

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Today's Post - https://bahnsen.co/3OoSkpj

From what I had initially thought would be a relatively quiet day in markets given the economic calendar, we ended up with a good amount of news to chew through in choppy markets with stocks selling off, a bid in bonds and volatility continuing its week-long climb. China reported softer than expected trade activity in exports and imports, reflecting its continued anemic recovery post-pandemic and further softness in its attempt to shift more towards a consumption-based economy.

Following Fitch's downgrade on US debt last week, Moody's joined the downgrade party lowering the credit rating on ten small and mid-sized US banks today, issuing a negative outlook on over a dozen larger banks. Higher rates, an inverted yield curve, and concern in commercial real estate, not to mention the stress earlier in the year with SVB/FRB, all seem well-known at this point, so this felt a bit behind the curve. Stocks traded lower on the news down over 450 points by mid morning before regaining through the rest of the day closing down only modestly. All fully unpacked in the podcast video link below.

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Today's Post - https://bahnsen.co/3Yoorda

Greetings from New York City (again). Lots of fun stuff today in my favorite DC Today of the week – the Monday edition (I love Mondays for so many reasons).

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Today's Post - https://bahnsen.co/3rVTWPV

I hope that you found last week’s Dividend Cafe on Credit to be informative and interesting. It’s summertime, and some people are more focused on the beach and the sun than syndicated loans, but not me. The cool factor has never quite been something people associated with me, and if I have to enter the month of August with a double issue of Dividend Cafe on Credit markets, I am going to do it.

But it isn’t just for the least cool of us like me – as I mentioned last week, Credit is a sine qua non in our economy. It is not an end for economic activity, but it is a vital part of the means. Oil and gasoline are not the points of driving, but good luck driving without them (okay, fine, or without electricity – the point is the same). The point of last week’s Dividend Cafe was that Credit is both a signifier or messenger about economic reality and, at the same time, a catalyst or influencer on economic activity.

I wrote last week’s Dividend Cafe in sub-optimal conditions (I will leave it there) and knew as I was wrapping it up that there was more to say, so I committed to a second part. So consider today some “extra credit” (see what I did there) – and jump on into the Dividend Cafe!

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