Moneybeat: Japan’s economy falls to fourth place

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

DAVID BAHNSEN: Well, good morning Nick, good to be with you.

EICHER: All right. Well, let’s talk about the latest data point on consumer inflation. David, the January CPI, the Consumer Price Index, it came in at 3.3%, higher year on year. And that's a good bit more than the 2% target the Fed considers desirable. The day that the report came out, David, we talked about this and you think that it’s relying on old data, and that the inflation picture is better than advertised? Talk about the January CPI.

BAHNSEN: BAHNSEN: Well, I think that there were two issues that came out of that report, that one was they thought it was going to drop more. And one is “Oh, look, it's still showing something above 3%.” You know, the Fed has not totally got this thing under control. And this has been a story that I think has gone on now for at least six months, probably closer to a year, where inflation has been dropping, but that headline inflation number is showing in the ‘Shelter’ component, which is 34% of the weighting of CPI.

Shelter is attempting to capture what people pay for their monthly shelter, whether it's a house payment, or a rent payment. And when it's such a large portion of CPI - 34% - it's a big deal. And they're showing CIT over 6% year over year growth still, because they're measuring leases that were in many cases signed a year ago. Well, how do I know they've started dropping?

There are about half a dozen indicators that I look at every single month. There are over a dozen out there, but I've decided there's about half a dozen that are really credible, really accurate. In some cases, they're showing out and out deflation, you know, price contraction. In most cases, it's about flat, but it isn't 6%. And the other thing that I want to objectively point out is a lot of leases renew, they're not new leases. And they may be renewing with a two to 3% inflation kicker. So I'm willing to pretend it isn't 0%, because there is an increase for a lot of people, but it isn't 6%.

So the Fed knows that this lag effect is there, and if you tell the model it's 3% in shelter instead of 6%, well, then lo and behold, you take a full percentage point out. Then your 3.3% goes to 2.3%. And so that's kind of the way I'm viewing it. And I think that's the way the Fed is viewing it too. But Nick, they have a sort of optics here that enables them to not cut at the March meeting, and kind of keep this thing going a little more. They're not fearful that unemployment is about to go up. They do want to start pulling down and I believe they will at the May 1st meeting. But this bought them a little more time. And yet at the same time, it isn't indicating to me that there is a substantial persistence of additional inflation. 

EICHER: I’ve got a little bit of economic memory lane here. I was in college and studied the Japanese economic miracle in econ class. So go ahead and remind me just how long ago that was. But I do think it's noteworthy that last week, Japan got bumped from its perch as the world’s number three economy. It’s now number four behind Germany. Talk a little bit about Japan falling out of the number three spot.

BAHNSEN: Nick, let's be clear, when you heard stories about Japan being the ascendant economy, this was a long time ago when Japan was in that ascendant case. And I frequently talk about how the old movie Die Hard that became such a classic centered around Japan, you know, having this huge economic value and presence and activity, and it would be totally crazy for people to make a movie now about Japan being a threat to U.S. economic positioning.

President Trump famously wrote an op-ed that was published, I can't remember if it was the New York Times or the Wall Street Journal in 1987, talking about how Japan was eating Americans lunch. And so it was 89, in which Japan kind of peaked and they began a 30 year period of deflationary spiral on a relative basis. It's true you get a ranking and Japan now fell behind Germany. But what's interesting is that this comes with their nominal GDP growing 5.7% last year, and it's only because Germany's grew 6.3 But Japan's nominal GDP grew more than China, more than America last year, more than number one and number two, but their total size of economy has shrunk so much.

Now, keep in mind, their stock market was up 28% last year. Their stock market is up the most this year. There are other things that are playing out that are more positive, but they're not in any position to be a world leader with low, slow and no growth as a byproduct of 250% debt to GDP. I mean, they still have as basically a 0% interest rate to facilitate the monetization of their debt at a central bank level.

It's a total disaster. They have an aging senior population, and they had no kids for decades. You can't get economic growth without population growth. That's how production works. You need more productivity for more people, and Japan doesn't have it.

EICHER: Well, quickly before we get into “defining terms” for this week, David, I do want to get your reaction as a New York businessman to the judgment last week against former President Trump - the eye popping $355 million judgment, and then you have to add interest in so we’re looking at another roughly 100 million dollars. What do you say about that?

BAHNSEN: Nick, that issue of President Trump and the Friday ruling, I first of all, just want to point out that I have been extremely objective for years and years here when he does things I like, I say so; when he does things I don't like, I say so. Nobody could accuse me of being either a cheerleader or an irrational critic of President Trump. But this ruling is one of the dumbest things I have ever seen. It has no chance of holding up on appeal. And I don't say that lawyerly, I'd say that just with basic common sense.

Everybody is laughing about this, who has ever done any real estate in New York or anywhere else. Nobody lost any money. All the lenders were paid. The lenders did their own due diligence and approved loans based on the valuations. Did he submit in loan apps valuations of his other properties that were exaggerated and higher than would have played out? Of course, everybody is trying to show the highest net worth possible to get a loan, and then relying on the banks to decide what they think things are worth. But if you default on a loan, because you gave fake data and you were not qualified, then there's a fraud and wrong that was done.

Nobody defaulted on these loans. He just simply submitted documents of high values that are totally subjective, that were accepted by the banks that then went on and did their own due diligence. And now assessing a $350 million fine with no damages. Nobody in their right mind can take this seriously. That's what I have to say about it.

EICHER: Well, David, last item here: defining terms. I want to circle back to Japan. This is not necessarily a conventional textbook economic term, I’d say it’s a “Bahnsenism.” You've used it here quite a bit to describe the phenomenon that affects highly indebted, slow growing national economies. And the term is “Japanification.”

BAHNSEN: I do use the word Japanification a lot. I want to define that for WORLD listeners this week. Japanification is a term that I made up. And I frequently say, I think I stole it from someone else. But I don’t remember, and it isn’t a formal term. So we’ll just allow for it, in our purposes.

When I talk about Japanification, I’m referring to downward pressure on a country's economic growth, the downward pressure that is caused by and reinforced by the things they’re doing to create growth. So it’s a negative feedback loop that comes when you use fiscal policy, more government spending, and monetary policy, easy central bank rules to try to stimulate economic growth, but it ends up having a diminishing return. And then that creates a negative feedback cycle. That’s what we mean by Japanification. And it was essentially what took place over decades in Japan, and a form of it is now playing out in the United States and in Europe.

EICHER: Okay. David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. His personal website is Bahnsen.com. His weekly Dividend Cafe is found at dividendcafe.com.

David, thanks, have a great week!

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