Moneybeat: Coming in late for a soft landing

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

NICK EICHER, HOST: Alright, 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. He is here now, David, good morning to you.

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

EICHER: Alright, well, really strong economic growth report last week, David Q2 GDP gross domestic product of 2.4% for the quarter. We're talking about April, May and June. That number coming from the Commerce Department last week. It beat expectations, it built upon that 2% figure for the first quarter. But is there anything in the GDP report from last week, David, that gives you any pause? I mean, does anything in it make you doubt the Wall Street Journal headline I saw over the weekend saying that the US economy is sticking the soft landing?

BAHNSEN: Well, I mean, obviously, it's still too early to know that we will stick the soft landing because some of these things can move. But the case for a soft landing, the case for avoiding recession has been picking up and we've talked about this quite a bit. I think that at this point, there is probably a greater chance of sticking a soft landing, avoiding a recession, than not. And I wouldn't have necessarily said that a few months ago. Of course, there is still the risk of this Fed tightening, which has gone on too long, too fast and too far, and may not even be over yet. There is a risk of it into 2024 breaking something. But for various political reasons, I'd be skeptical that they will let that happen. So I do believe that just in terms of how economic growth is measured, we should remember, of course, that saying a quarterly read of 2.4% is annualizing that quarterly read. So it's easy to get confused thinking, Well, gosh, if we're growing 2.4 per quarter, that means we're growing almost 10% a year. But no, it's it's a quarterly read that is doing the annualization in the math. But nevertheless, if all of that growth, Nick, had come from things that I think are more temporal, a big sugar high of government spending or inventory buildup, I'd be a little less sanguine about it. But there was a meaningful pickup in non-residential fixed investment, which is business investment. Granted, much of that was from some of the Biden administration spending of last year in the infrastructure bill and some of the Clean Energy spending and some things like that. And we could disagree with some of it and believe it to be ill advised. But nevertheless, it is still having an impact into the economic growth right now.

EICHER: Well, yeah, I'd like you to dig into that business investment component of the GDP measure this go round, David, because as I look at the various buckets that make up GDP, business investment was the biggest factor. It was higher even than consumer spending. And I know you really look to that, you look to business investment as a sign of healthy economic growth. So dig into that a bit.

BAHNSEN: Well, it's really important to remember that the reason I believe business investment is more important than consumer spending is not merely because any number of things can cause consumer spending. It's because there is absolutely nothing for a consumer to ever spend money on if a business hasn't first invested. This is just a simple law of economics that dictates much of how I approach the field. And it comes from a creational theology that recognizes that production has to precede consumption, and that God made us to work before he made us to rest and enjoy and that one man's or woman's production must precede another man or woman's consumption. And this is a tautology, it is just self-attestingly true. So there's a real economic point here behind that. But even beyond that, I would say that consumption is something that I take for granted in the American ethos, that we are a society of people that really lack very little incentive to consume. There's a real natural predisposition to enjoy food, and beverage, and travel, and convenience, and amenities, and apparel, and so forth. So consumption doesn't seem to take a lot of arm twisting, you may have noticed. Production is the area in which we've been more, I think, stunted for quite some time. And there are healthier ways to incentivize production and there are less healthy ways. But just in terms of the raw data, there's no question that the business investment last quarter picked up, and I will be hopeful that can be a good offset to some of the other economic challenges that we'll have in the quarters ahead.

EICHER: But on the issue of consumption, David the PCE did come out last week personal consumption expenditures, the inflation gauge that the Fed prefers to use to try to steer toward 2% consumer price inflation, that number hit 3%. That's down from the previous month, down from the month before that, and the month before that. Can't the Fed now kick back and say, "Hey, job well done, we're finished"?

BAHNSEN: Well, I don't understand the presumption in the question that they can steer this, that they are the ones controlling inflation. And so that, you know, the question is rooted in the way that much are in the media, and certainly the Fed themselves are talking about it, as if the Fed controls inflation. But see, I do not believe that we're thinking about this correctly to believe that the need to get inflation down comes from destroying jobs. And that's what the Fed is saying as well. There's just too many people employed. And there's too much what they call labor slack. And wages have grown. And so we got to kind of go out and, and hurt some people in order to get inflation down. And I think it is a very unfortunate understanding of the way economics works. Ultimately, if the interest rate is set at an artificial way, too low, too high, then you're going to get if it's too low malinvestment in excess of activity, it shouldn't happen. And if it's set too tight, you're going to contract activity. But none of those things have to do with inflation, inflation is too much money chasing too few goods, right. And so this is the problem I think we face right now is that the Fed has taken on a task that is outside of their purview, and using tools that are outside of what are needed in the moment. And even within the period where clearly they had interest rates way too low for way too long. Now to counter that by going way too high, for way too long, just simply exacerbates a reckless boom and bust cycle with a Fed that is constantly either over cooling or overheating economic conditions. And I think that it is totally unnecessary. And that the way to get inflation down is to have a level of production of goods and services that meets the needs in the society and that those things are self clearing over time. And that's how markets work. And I do not believe that there is any question inflation is headed lower, when you see the rapid disinflation that we have had. And when you see the fact that even at a 3% reading, it is assuming that shelter or housing has inflated over 8%, which it has not, there's a significant lag effect that is embedded in that data. And so I believe that the Fed is well aware that when you X out that lag effect, they're annualizing at their 2% target now anyways. And here's the thing there. They have trillions of dollars of real people's money in real financial markets, telling them that as five year inflation expectations priced into what they call the tip of market, the treasury inflation protected securities, are showing inflation expectations of 2%. That's the real number, that trillions of dollars is priced in. So I think the Fed is way behind the curve here. And I'm hopeful that they will get out before too much damage is done.

EICHER: Well, David, so it's interesting. I cannot remember hearing this particular word from the Chairman of the Federal Reserve in some time, and I'll play some tape here in just a moment. Jay Powell gave a press conference after the central bank decreased interest rates again last week, he uses that term that you used, disinflation, listen:

JEROME POWELL: The overall resilience of the economy, the fact that that we've been able to achieve disinflation so far, without any meaningful, negative impact on the labor market, the strength of the economy overall. That's a good thing. It's good to see that, of course, it's also you see consumer to consumer confidence coming up and things like that, that will support your activity going forward.

EICHER: All right. So the Fed for the 11th time since last March, raised the fed funds target interest rate to between five and a quarter and five and a half percent. These rates are now at 22. year highs. But, David, what do you make of the Powell statement?

BAHNSEN: Well, look, the year over year inflation number a year ago was 9%. And the year over year inflation number a year later is 3%. And along the way, it's gone down every single meeting. And so whether or not you use the term disinflation, the math doesn't lie, right. We've obviously had disinflation. And if you're looking at goods, we've had deflation. If you're looking at producer prices, we've had deflation. So the issue has never really been what the data shows. I think the data is rather empirically obvious. The question is what the Fed wants to do with the data. And I do continue to have a somewhat political, skeptical, cynical view, that I just simply don't believe that they will go into an election year still maintaining this hawkish high and mighty perspective, I can't believe that they will want to overpress. And so when he says we've gotten disinflation and not destroyed jobs, it sounds to me like he's projecting, getting to a soft landing narrative where they can do a victory lap, but I thought they were gonna do that six months ago, and I thought that should have done it six months ago. So if I'm wrong here, then I guess I'll have to be a lot less cynical in the future politically, because it's a very poor idea for the Biden administration to adopt the phrase Bidenomics. And I'll point out that the Treasury Secretary, this administration was herself a former Fed Chair: Janet Yellen. If in fact, the Fed intends to continue raising rates going into the election year. I just don't believe it's going to happen.

EICHER: Alright, David Bahnsen, founder managing partner and Chief Investment Officer at the Bahnsen Group. His personal website is bahnsen.com, his weekly dividend cafe, where you can find that at dividendcafe.com. David, thank you so much, and I hope you have a terrific week.

BAHNSEN: Thanks so much, Nick.

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