The Dividend Cafe

Today's Post - https://bahnsen.co/3mP5Ad0

The talk is warming up for the debt ceiling debate to become a major market story for a time. As I was writing months ago, there is no leverage for the Republican House if they don’t first pass their own debt ceiling bill (essentially, a bill they actually pass with 218 or more votes that does raise the debt ceiling but gives House Republicans what they want by way of spending cuts). It is what John Boehner first did in 2011 that then forced the Obama administration to have to take a stance against it, and then ultimately pushed that stand-off to the point of the “sequester” where hundreds of billions of dollars came out of the deficit. In this case, I (a) Do not know if Speaker McCarthy will get his 218 votes, (b) Do know that the Biden administration will oppose whatever that is, and (c) Do not know what the twists and turns will be when they find themselves at their version of a “Boehner-Obama” stand-off. I only know this: Without “A” – there is no “B” or “C.” So we shall see if the House GOP can pass a bill and then take it from there. A debt ceiling lift that comes with the spending cuts they want does force the White House into a tougher political play (they can’t see the Republicans are forcing the government to default if the House has actually passed a bill to not do so). But these things have a way of moving and shaking quite a bit before we get to the end, and I can promise you media coverage of it all is going to be … unhelpful.

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Today's Post -

Day-to-day bond volatility continues to be quite elevated, and very few are really talking about it. I believe as QT inevitably moves to QE (or at least non-QT), you will see bond volatility come down. Equity volatility already has. 80% of days in January were up or down > 1%, 74% in February, 65% in March, and just 36% so far in April. Hmmmm …

I have spoken a lot lately about the American consumer slowing down only when they lose access to credit. Until then, spend spend spend (in fact, the predominant economic philosophy of American policy for the last 75 years has actually sought to intellectually codify this behavior as our patriotic duty). Revolving credit right now is 6.2% of disposable income, not even up to the 6.6% average it was for the last ten years, let alone near the 9% level it averaged in the decade up to the financial crisis. All that to say – debt levels for consumers seem high; debt levels as a percentage of income are not. So my expectation is … spend, spend, spend.

Beware of people who tell you, “The consumer is about to crash and burn,” when they have been saying that over and over and over and over again for years. There is an incorrigibility to perma-bears that can only be called dishonest if we don’t see it all for what it is.

Also, who cares if people spend a little less and save a little more? Do you really, actually, seriously think that would be a bad thing? Come on.

Anyways, another pretty boring day in markets and all the recap is below, along with a great question on commercial real estate and the banking sector.

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Today's Post - https://bahnsen.co/40eo9VP

I would say, at this point, the market is definitely pricing in yet another rate hike at the next FOMC meeting two weeks from today (futures are up to 87% implied odds). Markets obviously haven’t cared much. Bond yields today didn’t move a lot. Sometimes you have to report what is and not what ought to be, and sometimes what is or what will be is different than what is or what appeared to be just two weeks sooner. Nevertheless, I take it not merely as the Fed likely hiking one more quarter-point in May but the Fed likely cutting more aggressively when they swing the pendulum back the other way. I don’t like any of it, to be honest.

The spread between BBB’s and BB’s (low-end investment grade and high-end junk bonds) is a mere 150 basis points – well below the 200 basis points, we have seen a few times in recent months when it looks like credit is about to weaken. Corporate credit has hung in there remarkably well throughout this cycle, for now, despite all the recession talks and doom and gloom of Fed tightening. It almost feels like the Fed can’t be satisfied until they break corporate credit, only, when they do (if they do?), they then will feel like they have to immediately put it back together again, but they can’t put it back together again if they don’t break it first, and I have the distinct impression that is frustrating them.

As for what to like within markets, we like dividend growth stocks, always and forever (surprise). But it does seem to me the clear trend for extracting liquidity from the system favors value over growth and less shiny assets than those that have been shining. We shall see.

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Today's Post - https://bahnsen.co/40b95Ih

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Today's Post - https://bahnsen.co/4018FUN

This is a unique Dividend Cafe but one that I think will have something for everybody. It speaks to a mentality and a framework that has more than just economic ramifications. It was inspired by a conversation I had with my wife on Wednesday night about some other things, and as our conversations often do, led to another track that led to another track that led to this inspiration for Dividend Cafe.

At the end of the day, investor behavior will always be the primary determinant of investor outcomes. And investor behavior is deeply tied to how one views the “last dollar on the table.” In fact, even outside of one’s investing life, their view of the “last dollar on the table” is likely to be highly relevant to the outcomes and experiences one will have.

One might even argue the “last dollar on the table” is the most expensive dollar one could ever pursue – financially and otherwise.

Let’s jump into the Dividend Cafe.

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Today's Post - https://bahnsen.co/43GLAdk

The markets went into big-time rally mode today and, of course, had already rallied a lot from mid-March levels. The CPI number was quite disinflationary yesterday, as Trevor walked you through in the DC Today, and we saw the disinflationary report in CPI yesterday and now further disinflation in PPI today (producer prices). Headline PPI was down -0.5% on the month when no change was estimated. The core PPI number year-over-year is now +3.4%, down more than 50% from its peak level a year ago. It had been +4.8% YOY just one month ago. But the Headline PPI is now up just +2.7% from a year ago, a massive drop and substantial wholesale disinflation that screams for …

A rate hike??? Dear Lord.

March 2022 headline PPI: +11.7%

March 2023 headline PPI: +2.7%

Okay. Don’t get me started. But did the market rally today because it is now even more obvious that the Fed should not be hiking anymore? Well, if so, the Fed Funds Futures aren’t showing it (still 66% implied odds of a quarter-point rate hike). Do markets rally because of what the Fed ought to do or only what the market believes it will do? The former is unlikely last time I checked. Yet markets today clearly said some form of “risk on,” and the reality is that the Fed either gets it or they don’t. The end is near. At least for this rate hike cycle. Credit is contracting. And both stocks and bonds seem to be seeing some form of easier path ahead.

Listen or watch today’s comments and check out the Ask David below for the pivotal question about the dollar everyone is asking.

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

Today was a highly anticipated day, as we were set to get the latest look at inflation data. This data came in lower than expected, which appeased markets at first glance but lost its luster throughout the trading day. Some pointed to the FOMC minutes and the glooming use of the word recession that took the wind out of the market’s sails, yet this was not “new” news (more in the post).

Perhaps now, everyone will shift their focus and attention to Friday as we start to gather another season of earnings reports.

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Today's Post - https://bahnsen.co/3moAxo7

Days like today tend to be pretty boring because stock and bond markets are limited in what they are likely to do a day ahead of a news announcement like tomorrow’s CPI reading. The fed funds futures have a 70% chance right now for a quarter-point rate hike next month, and we will see how markets respond to the CPI tomorrow. In the meantime, I tried to make some stuff up today to keep you interested. =)

I’ll put it here instead of down below, but the NFIB Small Business Optimism Index has stayed at a low level in March, February, and January. Now, it hasn’t gone much lower from each of those months, but it has stayed level at a spot that is pretty near where it was ten years ago. Their access to capital (particularly from banks) has dropped substantially, and the confidence one would deduce from hiring plans and capex plans is just not there. It isn’t collapsing, but it isn’t good. The number one issue cited: uncertainty over the economy.

It will be interesting to see if the Fed wants to resolve their uncertainty the hard way.

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Today's Post - https://bahnsen.co/3GAu2FF

I hope everyone had a wonderful Easter weekend and are feeling excited for the week ahead. Markets should be pretty weird this week, but now I just say that every week because I have such a high chance of being right when I use the word “weird.” Today didn’t do anything to embarrass me in this prediction (more below).

Dividend Cafe last week was my earnest effort to unpack the current state of oil markets and all their economic, geopolitical, and monetary implications

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Today's Post - https://bahnsen.co/3Ui1J4z

Last weekend’s news was not a Lehman bankruptcy, a Silicon Valley depositor backstop, or a Credit Suisse acquisition.  It was not even driven by U.S. forces, let alone the usual cast of characters in the Fed, Treasury, or FDIC.  Rather, it was OPEC+ making an announcement of production cuts in oil.  It didn’t crash markets – in fact, it caused a big rally in the energy sector.  But it is a big deal, and it warrants its own special Dividend Cafe.

I would never dare spend a Dividend Cafe pontificating on where the price of oil is going.  I do not know, and neither does anyone who trades or tracks oil for a living.  Commodity prices are inherently unknowable, and oil is at the top of that list.  Getting premises right is no surefire way to the right conclusion, and that applies to oil prices in spades.

But what I will spend this Dividend Cafe doing is pleading with you to see the non-oil ramifications of this oil move.  And by “this oil move,” I really mean a lot more than “this” oil move – I mean an entire set of events and conditions that, taken together, represent a significant change in global geopolitics and, with that, investment implications.

So let’s jump into the Dividend Cafe and digest all that is happening.

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