DC Today is a daily missive from the Dividend Cafe of The Bahnsen Group. While the Dividend Cafe’s weekly market commentary is meant to be long-form, macroeconomic, and principle-driven, the DC Today’s purpose is to provide a daily synopsis of markets, politics, and current events. It will be short, sweet, and hopefully, informative. Our goal is to bring you the latest and most relevant market information and insights, written only by us. Please feel free to share The DC Today with your friends and family. And of course, we always welcome your feedback as to how we can make it more relevant and practical for you!

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Dear Valued Clients and Friends –

December has launched, and I have some things to tell you …

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Market Action

*CNBC, DJIA, Dec. 1, 2022

  • Dow: Down -195 points (-0.56%)
  • S&P: -0.09%
  • Nasdaq: +0.13%
  • 10-Year Treasury Yield: 3.50% (- 19 basis points); down 72bps from the 4.22% high of just five weeks ago!
  • Top-performing sector: Communication Services (+0.29%) & Health Care (+0.24%)
  • Bottom-performing sector: Financials (-0.71%)
  • WTI Crude Oil: $81.28/barrel (+0.91%)

Key Economic Points of the Day:

  • The Fed’s favorite inflation measurement (PCE) came in up just +0.2% on the month, less than the +0.3% expected, and known to be tainted by the misleading contribution of housing’s lag effect (which I have written about extensively).  The September gain had been +0.5%, so the stock and bond market responded favorably to the disinflationary trend.
  • Initial jobless claims came in at 225,000, actually lower than expected.
  • ISM Manufacturing was in decline (at 49) – with 12 of 18 sectors in contraction.

Ask David

“I have heard you talk about the damage government intervention does to markets when it supports companies that should otherwise fail – creating a sort of “zombie” company.  In those cases, resources are prevented from being invested in the most productive areas.  Could the same be said for a lender of last resorts?  Would that create a scenario of “zombie” banks?”

~ Brian E.

I love this question.

In fact, I believe there was a “zombification” of Japan’s banking system in the 1990s, which far worsened their deflationary spiral, and it was essentially a classic case of banks not being allowed to fail (due to fear of collateral damage), but being allowed to live under-capitalized and unable to contribute to the economy via productive lending and investment.

But, the “lender of last resort” model in and of itself certainly does NOT require this to be true.  I go back to the late, great 19th-century icon Walter Bagehot, who gave us the dictum by which central banking was born: “In times of financial crisis, central banks should lend freely to solvent depository institutions, yet only against sound collateral and at interest rates high enough to dissuade those borrowers that are not genuinely in need.”

I added the bold for emphasis.  The concept of a lender of last resort is not to take from taxpayers but rather for the Fed, with its actual capital to lend where banks are actually solvent but facing liquidity crises.  The testimony of history is clear – liquidity crises can turn into solvency crises really quickly, and that is what the Fed is supposed to prevent.  When the Fed is trying to treat a solvency crisis, though, as if it were a liquidity crisis, THAT is where you get zombie-like results.

On Deck:

  • November BLS Jobs data tomorrow
  • Dividend Cafe on the Fed tomorrow

Check out:

Send questions any time, and have a great night!

With regards,

David L. Bahnsen
Chief Investment Officer, Managing Partner
dbahnsen@thebahnsengroup.com

The Bahnsen Group
www.thebahnsengroup.com

The DC Today features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.

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About the Author

DAVID L. BAHNSEN

Founder, Managing Partner,
and Chief Investment Officer

David is a frequent guest on CNBC, Bloomberg, and Fox Business and is a regular contributor to National Review and Forbes. David serves on the Board of Directors for the National Review Institute and is a founding Trustee for Pacifica Christian High School of Orange County.

He is the author of the books, Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It (Post Hill Press), The Case for Dividend Growth: Investing in a Post-Crisis World (Post Hill Press) and his latest, Elizabeth Warren: How Her Presidency Would Destroy the Middle Class and the American Dream (2020).