00:02
Good morning. Good morning. This is another episode of Two Grey Beards. Nick, what happened this week? Well, it was one of the most boring weeks I’ve had the misfortune to sit through. Although we potentially had some market moving events like CPI and PPI, but they were very much as expected, even slightly better than expected. A lot of people got excited.
00:32
when the CPI missed by a whole 0.1, but at the end of the day, the bond market didn’t want to know about it. I think the bond market is correct. I think it really doesn’t matter whether PPI or CPI are 0.1 stronger or 0.1 weaker. What we have is a very definitive direction that the Fed wants to see those progress towards.
01:00
and we are still far too high, although going in the right direction. But everything that the Fed is basing their assumptions on already has those numbers trending lower over time. And therefore it’s the speed of the trend that is going to influence the Fed rather than the mere direction of that trend down. So if we should have a faster…
01:29
trend decline or significantly faster, that would make the Fed change its mind. But since we’re not getting that, I really don’t see that, you know, sort of this slight deviation is really material for markets. And that is what actually was proven right by the end of the week. The, you know, bonds, what do they do? They are four, five, six basis points higher than they started the week.
01:58
And the stock market is absolutely unchanged. A whole load of 12 ticks realize volatility from close last week to the close of this week. Literally one of the most boring weeks I have had the mispleasure of sitting through. Right, and so we’ll keep it short and sweet this time. Data was in line, the auctions were well received, though some…
02:27
less than others and really nothing to take from that. There was no bank failure. There was limited. I mean, yeah, we’re going to talk about there wasn’t the bank failure this week. And it is true that the banks in general weakened and continue to face the same headwind that we’ve been talking about since we…
02:53
since the banking crisis started. And there was a little bit more take up data on the Fed programs, but not something that would suggest there’s a meaningful bank run. So, you know, again, I look at the banking situation as a headwind, um, that there may or may not be more trouble with an individual bank, but that the overall banking system is both well-capitalized, strong.
03:22
and has a business headwind that makes it hard to invest in any of those things. Yeah, no, still the same thing that we said weeks ago at the beginning of March applies. ETFs like KRE are for trading, they’re not for investing for the time being. There is nothing to look forward to in the banking sector in terms of, especially in the regional banks, in terms of future profitability.
03:53
and therefore it’s an avoid kind of sector. The rest of the banks are going to be, you know, hostages to the economic situation and the future economic situation. And none of them really see the economy accelerating. Certainly their lending standards are tightening somewhat. And therefore I think the banks are stuck.
04:17
I don’t think I don’t I think they’ve given up quite a bit of ground, but I just don’t see any impulse to buy them or any reason why we should add them to output failure. Yeah, I was looking at tech stocks and the big cap biggest of big cap tech stocks. They continue to outperform. It seems to me that that’s, that’s sensible at some level. They tend to outperform when economic uncertainty is high. But I don’t
04:46
feel that that is an obvious reason to position our portfolio in some way that would either underweight or overweight those things in particular as well. But you know I did notice that NASDAQ is continuing to outperform Russell which is at or near its year lows. So it’s an interesting dynamic where you have the companies that are best that best reflect the
05:16
local US economy underperforming while the other sector differences for sure, while the big caps continue to perform well. Yeah, I think it’s it’s regrettable that I didn’t really think about this many months ago. But in a period where interest rates are stable, and let’s call them stable here, they you know,
05:42
yields could back up and go back higher, but even if they do, I think you’ll probably agree that they are unlikely to go back to the highs or through the highs that we saw. Certainly for the foreseeable future, in that kind of environment, owning Apple, owning Microsoft, is probably not a bad play simply because they have a very large moat.
06:10
And in terms of creditworthiness, they’re more probably more creditworthy than the US government So it’s not really a bad time to own them. It’s just that I think that’s so expensive right in terms of In terms of multiple that it makes it very unattractive to step in and buy them at this point Right. So we you know, then basically what we’re saying is that for the last
06:38
six or seven weeks, the range in the S&P is less than 2% from high to low. And that is because there are these many headwinds underlying the market. There’s the Russell versus big cap across the bond market. There’s inflation, recession, fed policy looking to go flat. Negative yield curve. Yep. Let all those sort of things are.
07:07
multiple crosswinds, some working in favor of an asset or assets and some working against it. And so that is an environment in which cash is earning 5% is very attractive. So what happens next week? Not much, as far as I can tell. Very little. We have retail sales, which will give us an idea as to how the real economy is working. But so far,
07:37
There is no data that shows any significant weakening and I don’t expect retail sales to be the first. Yep, there’s a off quarterly options expiration which sometimes generates some short-term volatility but I would expect in this case won’t because it’s off quarter. Otherwise the news is very light. So I assume given that
08:06
our portfolio is going to remain the way it is. Yeah, we didn’t do anything last week. We still have our bids in for LEMB and VWOB because we think the levels are very attractive and we didn’t get filled. We will continue with our bids. I just don’t see any reason to change anything. I agree. Now.
08:29
There’s this thing hanging over the market that is getting not only market participants focused, but also the mainstream media is, you know, televising the circus real time. And that circus is the debt ceiling and the potential for the government to shut down. We have a variety of thoughts on the potential outcome of, well, not the potential outcome, the path to an outcome.
08:58
of a of this situation but I think it’s important to time that information well because at this point no one knows there is no forcing mechanism in may that’ll bring these these parties to the tables to reach some sort of agreement or kick the can down the road which is probably more likely than an agreement
09:25
but there’s no forcing mechanism until June. And there may not be in June either, but that’s a subtlety that’s not important right now. Given that, I think it’s probably in our interest to tell the listeners and viewers that what our thoughts are, but our high level thought at this state is it’s unlikely to be a disaster. And…
09:51
You don’t really need to know the details of how this path can happen until we reach a point where the forcing mechanism can actually make things happen. Yes, a lot of people talk a lot of rubbish about the dead ceiling. I think the the likelihood that it’s a complete disaster is less than 1%. It’s never happened for a reason, because it doesn’t need to happen. There are so many ways out of this that
10:20
really expecting the worst is not good odds. What we can do is, and I think we’ll do that for next week, Andy, is we can prepare a table with a set of probable outcomes and how that will affect the market. Because the, let’s face it, the biggest effect is going to be that we’re going to have a lot more issuance.
10:48
after the debt ceiling is passed and a lot more duration is going to hit the market. So there will be an initial reaction and there will be a continuing effect on markets. So let’s not confuse the one with the other because the initial reaction is probably going to be the wrong one. Yeah, yeah so we’ll outline those how the path
11:18
evolves, what steps the two parties involved could take, and what the consequences would be short term, while putting in context that the ultimate solution will be a resolution that allows the government to pay all its bills and meet all of its spending.
11:47
legislation that’s happened and those two things will be tweaked a bit, likely less issuance, modestly, and less spending as the Republicans extract some leverage out of the Biden administration. How much is anybody’s guess, but some, and that’ll have a, you’ll have an issuance
12:17
very large and a spending that’ll be modestly less and then the and that’s the big high level thing to take away that issuance will be very large the spending will be less and that could in combination be a negative growth surprise for the economy which is good for bonds and bad for stocks.
12:46
and the supply generating a negative outcome for assets is besides cash but we’ll lay that out for you next week yeah there’s no need to concern yourself about what you know the negotiations the back and forth results next week because really nothing is going to happen during the month of may
13:11
this is a June issue and therefore we can safely leave it till next week. Sounds good. And I guess the point is that to the extent that there’s drama recognized next week, which you never know, there’s going to be statements made by both parties that could be closer to an agreement, farther from an agreement. There’s no forcing mechanism next week. So to the extent that there’s drama, it’s probably good to ignore that drama in your investing.
13:41
Absolutely. Thanks again. Thank you and I’ll do my bit about what we have in the portfolio and our bids. As we said earlier, the allocations this week are very simple. We’ve bought nothing, added nothing and we’re not changing the orders. The only orders we’re working are LEMB and VW.
14:09
OB to purchase 200 shares each at these prices limit price and Nothing has changed the broker statements are in here very little change over the course of the week and Absolutely, nothing more to add. Thank you very much indeed. See you next week. Sounds good
