Dear Valued Clients and Friends,
In a week that has not really seen as much political drama in quite some time, the markets (as of press time) have been the polar opposite – no drama! I delve into the impact to markets from all of the Trump campaign/administration legal issues this week. While this week’s events are all exciting television (depending on your point of view), the Dividend Café this week goes into the “stuff” that actually is driving markets right now (the fed funds rate, behavioral finance, and much more).
Dividend Café Video
Dividend Café Podcast
Vacationing with central bankers
The annual Jackson Hole, Wyoming symposium begins this week wherein central bankers from around the globe, and various pundits, economists, and assorted illuminaries all assemble to talk policy, perspective, and economic framework. You will note other comments about the Fed and political pressures on the Fed throughout this week’s commentary, but I will reiterate a central question that those of us obsessed with central banks have to get answered:
Will late 2018 prove to be like 2015 when a rising dollar and struggling international environment did some quasi-tightening for the Fed, OR will 2018/2019 be the time that they finally normalize, despite impact to emerging markets and global divergence in policy. How many more rate hikes are coming, and what will the continued efforts to reduce the Fed’s balance sheet look like, when all factors are considered?
It is a big story with big questions and no clear answers. Our view is that they will continue to telegraph actions so as to limit disruptions of surprise in the market and that they genuinely do fear have inadequate bullets in their gun next time we face recessionary pressures.
Fed Funds Futures Finding Fun Forecasts
I just started typing and that alliterative magic came out). But in all seriousness, the fed funds futures market are currently placing a 93.6% chance of the Fed raising rates another quarter of a point next month. The same futures market is calling for a 60.9% chance of a December meeting hike. As you will see in the Politics and Money section below, the odds of a rate hike priced into the market tell you a lot more than what the President may be saying in interviews that he wishes would or would not happen. I will spare you all my diatribe on Fed independence, but I will say that the futures market does indicate the December hike is not a foregone conclusion. I believe Chairman Powell wants to hike, but I do not believe it is settled. The dollar rally, the impact in emerging markets, and the flat yield curve could all cause the chairman to think differently about such. If so, look out below, king dollar.
I want to make a little cents for you about the U.S. dollar. It weakened significantly last year when everyone believed it was due to strengthen (that actually began in late 2016). And it has rallied since February this year when a weakening was expected. Currency and foreign exchange rates are, like all assets, about expectations, not absolute events. As the countries of dollar competitors have experienced weaker than expected data, and the U.S. the opposite, it is the data relative to expectations that have provoked movement. Combine this with international liquidity around dollars tightening (due to Fed policy), and there also has been created a significant short covering. All factors that have, thus far, driven the dollar higher, are, by definition, transitory/temporal, and subject to reversal (sometimes quickly).
Planning on the right portfolio
I often forget the wisdom of what my mentor, Nick Murray taught me – that people begin believing the whole purpose of their portfolio is to beat someone else’s portfolio when that portfolio was allowed to exist without a plan. A portfolio must have a plan and purpose behind it, or it is a random gob of assorted line-items, each incoherently placed next to each other, leaving an investor inevitably predisposed to wondering the wrong things, asking the wrong questions, seeking the wrong results. If I talk about the economy, the merits of dividend growth, the impact the Fed is having on the market, the state of interest rates, and global financial conditions, yet do not tie all of these things back to how it matters to the actual plans, needs, and goals of my clients, I am talking only academically. The impact of the economy on the markets, and the right way to position a portfolio exposed to said markets are only relevant to the extent they drive successful outcomes for clients (i.e the fulfillment of a plan).
As we talk week by week by week about the market, your portfolio, and all these related Dividend Cafe topics, please never lose sight of the partner to your portfolio: The plan which must be the guiding purpose of the portfolio itself! And if God forbid, such a plan is not in place – a written, intentional, organized design and road-map – then get one – without delay. To that end, we work.
Municipal market strength
One of the big benefits for the muni bond sector this year relative to taxable counterparts (like Treasuries) has been supplying. Limited supply in the muni market vs. monumental supply in the treasury space has created a big relative advantage for municipals. That thesis was tested recently as $12 billion of new issuance in the muni bond sector came to market last week alone, double the weekly average we have seen all year. Deals were over-subscribed, though – showing no signs of a fade in the strength of the market. Appetite for stable and tax-free income is high, though that demand factor is mostly seen in the lower side of the credit quality spectrum (for the obvious reason that that is where appealing yields lie).
Clarification on debt
I had a chart in the Dividend Café a couple weeks back that pointed to the U.S. household leverage levels (being at a 40-year low). I contrasted it to the government’s debt levels (as % of GDP). Where does the corporate sector stand? Personal leverage is down. Sovereign and municipal leverage is up. And in the corporate sector, there had been a meaningful de-levering coming out of the recession, and an opportunistic reflating in the years since … Is corporate America now in need of leveling out if not reducing its debt ratios? In this case, debt reduction is generally the consequence of a recession, not the cause of one.
Politics & Money: Beltway Bulls and Bears
- The President decided to chime in more explicitly this week about his thoughts on the Federal Reserve and the trajectory of interest rates. I have never believed the Fed is free of politicization though I think many have done their best to pretend. In this case, the problem with the President’s intervention is it may very well work against him (i.e. cause the Fed to fear not raising rates out of worry that they will be blamed for capitulating to the President). I commented on the whole thing on Neil Cavuto’s Fox Business show on Monday
- One interesting thing taking hold in the ongoing trade/tariff saga is that it is no longer just visible as a “fear of escalation” story. Actual, real-life impact is taking place for soybean farmers that is becoming systemic. Billions of dollars of value deterioration in our soybean industry cannot happen in a vacuum – it comes with a trickle-down effect. Automotive production is suffering from the steel and aluminum tariffs. The scrap metal industry faces the need for adjustment. And this is all in the early stages of the real-life tariffs … My view continues to be that some agreement gets reached, and that along the way uncertainty clouds market valuations. But also along the way, real industries, and real companies, are being really impacted. And that matters to the real economy.
- It was a politically loud week with the conviction of Paul Manafort on eight of the charges brought against him, and the plea bargain of former attorney to President Trump, Michael Cohen. The markets didn’t seem to care one bit, and that is because there was nothing to care about in the news (from Mr. Market’s perspective). The market is not and will not be materially impacted by these kinds of things. Should actual uncertainty enter the fray out of the White House / Mueller soap opera, volatility would surely increase (though even then, it’s doubtful any fundamental, let alone secular, re-pricing would take place. The comments herein are as non-partisan and Trump-agnostic as they come – they are descriptive facts, not prescriptive wishes. I am merely referring to market shrugs – not any other category of societal response.
- Do the events this week add to the chances of the Democrats taking back the House? Probably. Were the odds high already of such? Sure. But what does it really mean for markets? Legislative gridlock is as old as our country itself, and I find no precedent whatsoever of markets ever being concerned with a Congress that can’t get anything done.
Chart of the Week
Why have the benefits of tax reform thus far mostly trumped the headwinds caused by a threatened trade war and tariff imposition? Simply put, as hurtful and contractionary and ill-advised as the tariff measures are, the pure relative size in fiscal policy and stimulative impact of the tax reform bill trumps trade/tariff considerations. For now.
Quote of the Week
“It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”
~ Mark Twain
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I am going to do something Friday through Sunday I do not do very often – I am going to go out of town with my wife and three children, and not bring my phone, computer, iPad, or any other such work-related communication. I am looking forward to the family time, and anxious about the unplugging (I am in no denial about my workaholism). But I am very blessed with my family, and hopeful for a final summer bonding time … I hope your weekends deliver the same. Not only does the office await me on Monday morning, but college football is now just a week away!
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
The Bahnsen Group is registered with HighTower Securities, LLC, member FINRA and SIPC, and 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, and there is no guarantee that the investment process or the 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 reference 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, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations 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 team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.
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