Dear Valued Clients and Friends –
The drama in Washington is supposed to be all the rage, and I am torn because I do know it is the primary mover in minute-by-minute market fluctuations, and I also know it may be what readers most want to know about (adding to the burden to write about it here, which is the purpose of DC Today), and yet the whole thing annoys me so much I wish I had the option of a protest abstention. But I don’t.
As of press time today, the basic update is that talks are dragging on, and this is somehow news. Both sides continue to say, “Default is off the table.” The press is acting more recklessly than I expected them to, and I expected full-blown beclowning. It is really hard for them to perform worse than I thought, and they are.
Last but not least, the “shiny object” debacle of 2020-2022 in one chart – for those who want to visualize the lesson for future application:
*CNBC, DJIA, May 23, 2023
Dow: -231 points (-0.69%)
10-Year Treasury Yield: 3.69% (-2 basis points)
Top-performing sector: Energy (+1.04%)
Bottom-performing sector: Materials (-1.54%), Tech (-1.50%), Communication Services (-1.48%)
WTI Crude Oil: $73.48/barrel (+2.01%)
Key Economic Points of the Day
- New home sales increased +4.1% in April, rising in the south and midwest but still down in the west and the northeast. Median prices are down -8.2% from a year ago, getting close to the 10-20% range I believed was inevitable.
- Combined ISM was up on the month, with manufacturing down a bit, but services were up more than goods manufacturing was down.
|“My question is about money market funds. Generally, when the investing herd goes hard in one direction, calamity seems to follow. Do you see any risks in money market funds or potential gating issues? I remember when the Reserve fund broke the buck back in the financial crisis. I know there have been newer rules and regulations since then, but what if investors started liquidating in a run-like fashion similar to the banks? Could a safe and liquid asset prove to be the opposite?”
~ Matt S.
|The herd and calamity concept needs to be better understood here. When we talk about people running into something and then it not ending well, we are pretty much always talking about something with leverage. Borrowed money makes things not end well. Money markets don’t fit in that category. But essentially, the underlying ingredients of a money market are the most liquid assets in the world – treasury bills, CDs, and commercial paper – and I do not think there is a gating concern.
But note that you switched from a LIQUIDITY concern (gating) to a SOLVENCY concern (Reserve fund breaking the buck for two days in September 2008). That was for no other reason than the Lehman commercial paper in that money market fund the day after their bankruptcy. There were (it turns out, misguided) concerns about AIG and Lehman paper within these funds, and the Fed had to step up as a buyer with their commercial paper liquidity facility (a facility they would no doubt use again), but even then no one ever lost a dollar on a money market fund and that “reserve fund breaking a buck” incident lasted for about the length of a TV commercial break.
I am anti-crowd, always. But money market funds are baskets of liquid assets, bought unlevered and managed with no underlying leverage. Leverage feeds panic selling, and credit impairments feed insolvency. Always and forever.
- Clients will receive their weekly portfolio holdings report tomorrow morning.
- Gov. DeSantis will announce his official campaign entry to the Presidential race tomorrow.
Send questions any time, and have a great night!
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
The DC Today features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.