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: Well, that is a major factor here. And it isn't the only one. And I think any analysis that seeks to only focus on one cause will be short sighted. But there's no question that some attempted Washington interference at accelerating a migration to EV is a part of what has not only the UAW concerned about being in less need for their labor force in the future, but it has the automakers in accelerated anxiety about margins and about the economic reality of the state of affairs. The thing I would say is that 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. We're talking about EV interference out of government mandates, out of government subsidies, out of government interference, and 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 interest and Auto Union auto worker 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 Eevee 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: Well, no. The bailouts of the Obama administration, which I don't know who was bailed out, right? 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 why those companies were insolvent was what the labor unions had negotiated in the 1950s, 60s, 70s, 80s, onward for 40 - 50 years, They negotiated an untenable position. And my friend Amity Shlaes pointed out that, as I believe Amity to be one of the preeminent economic historians of our day, that this was out of a byproduct post World War II, when the U.S. automakers did not have foreign competition. There was no Toyota. There were no automobiles being imported from Germany. And when the imports were able to represent competition to the big three, providing consumers with far more choice and a lot of cases better quality, certainly price competition. At that point, the union demanded forced concessions, forced increases that were untenable and that helped to put the automakers into bankruptcy in 2008. And then out of that moment, what happened was the bankruptcies. And so 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 a very cyclical business realities, and very thin margins. All it does is put them 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: Yeah, basically, almost exactly in line with expectations, I mean, food price inflation has come way down. It was basically flat on the year. And so the headline number, which of course includes energy and food, and the core number excludes energy and food. And what you saw was that this ridiculous number of 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 this big lagging problem in the way that that is reported about rent increases. And 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. And so there's kind of a tug of war there. But what I find really interesting is it's 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 at 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 well on record of 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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