Moneybeat: An audacious crime

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

NICK EICHER, HOST: Time now to talk business markets and the economy with financial analyst and advisor, David Bahnsen. David is head of the wealth management firm, the Bahnsen Group and he is here now. David, good morning.

DAVID BAHNSEN: Good morning, Nick. Good to be with you.

EICHER: Well, David, let's talk about the sentencing last week of the crypto billionaire Sam Bankman-Fried. He swindled billions of dollars from his crypto clients. The judge wound up giving him a sentence of 25 years, reasoning that he really was a danger to defraud again. How would you describe in short, the crime he committed? And do you think the sentence was fair?

BAHNSEN: Yeah, actually a lot of white collar crimes that are often complex, this one's really pretty simple. Customers had money in their account, and he took it and moved it to his own use, and his own use included wild amounts of spending, giving away money to big huge political and charitable causes as a means of trying to whitewash his crimes.

But the audacity was the sheer size of what he was just simply taking was $8 billion. Most people that have been convicted over the years of taking money out of somebody else's account, were not so audacious as to do it at the level of $8 billion. He believed he'd get away with it because he believed he would use it temporarily to prop up various leveraged crypto buys in his own hedge fund, Alameda. And of course, when the trading and the leverage and all the shenanigans of this big scam and fraud got away from them, the money wasn't there to return.

Twenty-five years, I don't have a strong opinion, because there's sentencing guidelines that apply. But I was appalled, Nick, I mean, appalled at the letter his mother, who is a now retired law professor at Stanford, wrote the judge about the sentencing, saying that he had no risk of doing it again, and that it was wrong for someone like him to go to prison, because the prison is where people go to have their humanity taken and that he deserved a better life than that. And essentially, I think this speaks to the bankruptcy of morality that is not rooted to a biblical worldview.

This entire upbringing of this young man taught him that there was no real ethic, there was no real foundation for morality, that because he was so smart and had good intentions, allegedly good intentions, that anything goes. And this is the kind of moral relativism and I think, incoherent worldview we get, when we are divorced from biblical law. There's been a lot of criminality and corporate fraud lately rooted to some humanistic idea of humanity. And it would be nice if some of these people that supposedly care about humanity started by caring about a human being.

EICHER: So this wasn't fundamentally about crypto, then?

BAHNSEN: Well, I actually think it was, in this sense, that so much of what was happening in crypto pricing in 2022 was because there were so many leveraged players. You had a ton of people buying it with money that didn't exist. And so that was partially what was required to keep this Ponzi thing going. And a lot of the value was related to a token, this digital token that obviously has no real value, but it was connected to what the value of FTX is, his company. But the FTX was related to what the value of the token was. So it spoke to kind of the circularity of this businesWell, David, let's talk about inflation data we received last week. Last Friday, we got the February numbers for the personal consumption expenditures. And this PCE is said to be the preferred inflation indicator for the Federal Reserve. So a rather important gauge. How did you see the report?s model, which in a criminal context we refer to as a pyramid scheme, but in this world continues to have some degree of cultural currencies. So we'll let all that play out, but I think you're right, it wasn't directly and only about crypto, but it was certainly an adjacent part of this story.

EICHER: Well, David, let's talk about inflation data we received last week. Last Friday, we got the February numbers for the personal consumption expenditures. And this PCE is said to be the preferred inflation indicator for the Federal Reserve. So a rather important gauge. How did you see the report?

BAHNSEN: Well, it's interesting that came out on a Friday in which banks and the bond market and the stock market were all closed. And so you didn't get chance to see any kind of market pricing. But the news itself was really pretty much in line. That itself has become news because there's people looking to see if the inflation data is worse than expected, and when it comes in in line that could become priced into bond market expectations in a positive way. It was actually slightly better month over month. They were expecting 0.4% and it ended up being 0.3%. But year over year, the core rate came in at 2.5%, which is getting very close to the Feds target. It's worth noting that the PCE has a lower weighting of shelter than the CPI, the consumer price index does. So we'll see what the CPI for the month of March indicates when that comes out in another week or two. But all things being equal, I think the Fed has to be reasonably happy with what the report was on Friday.

EICHER: All right, well, let's make this our defining terms for the week, David, this kind of alphabet soup of competing government inflation reports. We have the PCE, we have the CPI. What do they measure? And what's the difference? And why does it matter?

Yeah, well, let's start with just who releases each index, okay? The consumer price index, the CPI, which is probably better known in the minds of consumers and voters, is released by the Bureau of Labor Statistics. So the BLS that puts out jobs reports is putting out the CPI, which is basically meant to reflect spending and what prices are doing. The personal consumption expenditures is put out by the Bureau of Economic Analysis, the BEA, and so they're just two different government bureaus. But functionally, the difference is the way in which they're measuring prices.

So for me to answer the question honestly, for world leaders, I have to first start with one of the most important economic beliefs I have: there is no such thing as an aggregate price level. Both are trying to measure something that doesn't exist, or if it did exist is worthless, what it because it changes second by second, what the total price level is throughout an entire economy, with trillions upon trillions of transactions going on, many of which are going on in microseconds all the time, is impossible.

So it's an attempt to favorably judge a fallible indicator of what prices are doing. And they each make their own effort, Nick, to do this based on weighting what they think people spend money on. So if people spend 10% of their money on food, they want food to be 10% of the index, things like that. And so the CPI has 34%, it's at now actually, up to 35% of its weighting on what they believe people are spending for rent or a monthly house payment. The PCE has that down closer to 23 or 24%.

So there's differences in the methodology. The Federal Reserve has long believed the PCE to be a better measurement than CPI. Both have different times in which they seem to be closer to reality, and both do a core and the headline version. The headline version in both includes food and energy, and the core excludes food and energy under the accurate belief that those prices tend to be more volatile and move around based on other circumstances that are supply oriented—in oil's case, especially, geopolitical food can be very impacted by weather, shipping, things like that.

Of course, all prices can be affected by extrinsic things like that, but a core and a headline just gives us an extra data point. Those are the basic definitions of the major price measurement systems. We have PCE and CPI.

EICHER: All right, David Bahnsen is founder, managing partner, and chief investment officer of the Bahnsen Group. David's latest book is Full Time: Work and the Meaning of Life, and you can find out more about it at fulltimebook.com. Well, David, I trust your Easter Sunday was a meaningful one. Our savior is risen!

BAHNSEN: Amen, he is risen.

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