Moneybeat: Analyzing the strike made in Washington

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: Alright David, let’s begin with the labor strike, the UAW. It’s the biggest in the history of the union. They’re going after three companies at once.

Now these things can move very fast, and I’d like to get your sense of why it broke out in the first place.

Let’s listen to the president of the UAW, Shawn Fain has to say.

SHAWN FAIN: We will show our strength and unity on the first day of this historic action. This is our generation's defining moment. The money is there. The cause is righteous. The world is watching. And the UAW is ready to stand up. This is our defining moment.

Now, David, The Wall Street Journal on Friday called this a made in Washington labor strike. And I'd like to read a few lines from the Journal editorial on Friday when the strike started. Says,

"The UAW knows that EVs require fewer workers to make and will jeopardize union jobs making gas-powered cars. But the companies already lose money on EVs and worry about making too many concessions to the UAW that will cause them to lose even more as they are forced to build more EVs.

It’s hard to overstate the costs of this coerced EV transition.”

How do you see it?

BAHNSEN: That is a major factor here, and it isn't the only one. I think any analysis that seeks to only focus on one cause will be short sighted. There's no question that some attempted Washington interference at accelerating a migration to EV has the UAW concerned about being less needed for their labor force in the future, but it also has the automakers in accelerated anxiety about margins and about the economic reality of the current state of affairs.

If we were talking about a natural migration within the economy—within consumer habits, within business conditions—the notion that companies are supposed to accommodate labor unions when something is just organically changing would have made for a very strange accommodation for horse and buggy labor unions 115 years ago. But see, that isn't what is happening here. We're talking about EV interference rooted in government mandates, government subsidies, and general government interference. It is by no means a good rationale for the UAW to turn down 20% pay increases to demand a four day work week and what amounts to $300,000 annual salary expense in many situations.

However, the general lay of the land between automotive industry interests and union interest is absolutely accelerated by the government putting their thumb on the scale of what ought to be a negotiation. When it comes to EV versus combustion engine, it ought to be a matter of consumer choice. And when it comes to compensation and terms? That ought to be a matter of management and workers figuring it out on their own.

EICHER: Does this have any genesis at all in the bailouts during the Obama administration? Or is that unrelated to this?

BAHNSEN: No. The bailouts of the Obama administration… I don't know who was bailed out. I mean, the bondholders are wiped out. The stockholders were wiped out. The people who were bailed out were the pensioners. And the entire reason there was ever a need for that bailout or a need for the bankruptcies was because those companies were insolvent; why those companies were insolvent resulted from what the labor unions had negotiated for in the 1950s, 60s, 70s, 80s, onward for 40 - 50 years. They negotiated an untenable position.

My friend Amity Shlaes pointed out that—and I believe Amity to be one of the preeminent economic historians of our day—this was out of a byproduct of post-World War II era conditions, when the U.S. automakers did not have foreign competition. There was no Toyota. There were no automobiles being imported from Germany. When the imports were able to represent competition to the big three, they provided local consumers with far more choice and better quality at competitive prices. At that point, the union demanded forced concessions and forced increases that were untenable and that helped to put the automakers into bankruptcy in 2008.

At that moment, what happened was the bankruptcies. I'm always hesitant to call them bailouts when they were bankrupt, right? I mean, the bondholders were wiped and the stockholders are wiped. The issue was that now here we are, again, with auto worker unions demanding things that, much like the airlines over the years, you can demand it all you want: All it does is put these companies that already work off of very cyclical business realities and very thin margins back on a path towards insolvency.

EICHER: So David, I want to turn to kind of macroeconomics and we got a an inflation report, the consumer price index, we found out that in August, prices overall were 3.7% higher August versus August. That's up from the year over year in July, 3.2%. Core inflation was down. I don't know, how do you read the CPI this time around?

BAHNSEN: Almost exactly in line with expectations. Food price inflation has come way down. It was basically flat on the year, (so the headline number, which of course includes energy and food; the core number excludes energy and food.) And then we saw this ridiculous number for shelter—that which includes rents and owner equivalent rent, which is about a third of CPI—and it's been supposedly up about 8% for the last several months, when in real life, it might be up 2%.

But the big problem is in the way that rent increases are being reported. The truth is that that is starting to come down a little bit, it's still reporting in the mid 7s. So that put downward pressure on core inflation. But, as we know, energy prices moved a lot higher over the last six weeks, so there's kind of a tug of war there.

What I find really interesting is—for about the first time in several years—food and energy themselves are in a tug of war; where food prices have been coming down, energy prices have been going up. There was absolutely nothing about the report that changes what the Fed is on track to do. The Fed Funds Futures market went up to 97% implied probability that there will be no rate change at the September meeting, and it's up to 65% or so of no rate change as of the November meeting. And so more and more I think the markets are pricing in the reality that the Fed may be completely done hiking rates. I'm on record as believing that that time should have come quite some time ago, that the Fed has far overdone this and that whatever inflationary issues persist around energy have absolutely nothing to do with the Fed at this point, and are unrelated to monetary conditions or trying to get a weaker economy: Trying to get more people unemployed as a means of combating inflation. At this point, we're really dealing with totally different circumstances.

EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. You can keep up with David at his personal website, Bahnsen.com. His weekly Dividend Cafe is at dividendcafe.com.

Thank you, David!

BAHNSEN: Thanks so much, Nick.

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