Moneybeat: Corrosive economics

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 Bunsen group. He is here now, David, good morning.

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

EICHER: Alright, let's begin with a stellar jobs report from September: 336,000 jobs, an upward revision of the August jobs figure, the strongest gains since January unemployment rate holding steady again below 4% 3.8 give or take. But no matter where you read the story, David, Wall Street Journal, New York Times, doesn't really matter, the theme is pretty uniform: “This is a really nice jobs report but I wonder what the Fed is going to think.” It's just an odd situation, is it not? It would seem this report is an unalloyed good thing, or is there something I'm missing?

BAHNSEN: Well, but that's the point is that there is this thinking that good news is bad for the Fed purposes, because the Fed is trying to, quote unquote, slow down the economy because of the incredibly errant belief that growth and inflation are one and the same, and therefore people having jobs becomes inflationary. And it is patently false. It's been wrong for 50 years when this Phillips Curve ideology was first developed, the notion that there was a trade-off between employment and inflation that had to be managed, and that lower unemployment could create higher inflation, and higher unemployment could create lower inflation. It's a silly concept. 

Now, economically, I can explain why I believe it's silly out of my understanding of what inflation is, which is too much money chasing too few goods and services. And I believe that more workers creates more goods and services. And so it's a supply side argument. But nevertheless, that's not the framework that the Fed talks about. And so the media is running with the idea that oh, a hot jobs report may make the Fed more inclined to keep rates going higher. 

You noticed on Friday that the stock market had dropped a couple 100 points right when the report came out, and then it closed up over 300 points. So you had a 550 point swing up in the market. That is not because the media was wrong to wonder how the Fed feels about the unemployment number, all things being equal, the Fed is very clear, they wish more people were losing their job. And they say so explicitly, that we need to keep rates higher until we can see some of these economic data points get worse. 

The reason, though, that I believe the market shrugged it off is something called the proxy funds rate. It's actually put out by the Fed, I didn't make this up and I didn't get 10 of my economic friends together to make it up. It's created by the San Francisco Federal Reserve. And it's uses 12 different metrics to kind of get an idea like, okay, the Fed sets what's called the Fed funds rate. That's the policy rate. That's what we all refer to about what the Feds doing with rates. And they have it set right now between five and a quarter and five and a half percent. And most interest rates are somehow referenced off of that rate, okay? The proxy rate is what the Feds looking at from 12 different metrics of real Treasury rates, mortgage rates, credit spreads different data points that tell them what effectively, the rate really is. And that's it 7%. So more or less, all that means is there's an extra one and a half percent in reality of tightening going on, above and beyond the Fed. So that's why I think that it's already been priced in the tightening has already been done for the fed by financial markets. And this is creating a real pickle for the Fed.

EICHER: Alright, David. Well, we've had so much hot news to cover over the past several months, we've gotten away from listener questions, but a few things have come in unsolicited that I think touch on newsy or themes that I'd like to drop a couple of questions in that I think are broadly interesting. So here's the first one. It comes from Timothy Deal of Auburn, Indiana. His question has to do with our discussion last week of the United Auto Workers strike and that fiery UAW rhetoric. He says he agrees with your analysis, but he's also having a hard time seeing corporate management as the good guys here. Listen:

TIMOTHY DEAL: I don't really have a good answer to the popular narrative that CEOs and management are really just worried about investors, that CEOs can make mistakes, and they don't get a pay cut or anything. And so it's always the labor people who have to suffer under low wages and have to go on strike, which we see in multiple industries these days. So I guess my question is, if I was in a conversation with some of my peers who also hear this kind of narrative, how would you express the purpose of management investors and can you give us some good examples of wise stewardship in any companies today that would be a good example of how upper management, how working for your investors is supposed to work?

BAHNSEN: Yeah, I mean, I think that when we think about the divide between labor and capital, that we can do two things at once. we can hold our ground about truth and proper ideology, that there need not be class warfare between the two, and at the same time, obviously, use rhetoric that will be effective to the audience that we're speaking to. And the notion that CEOs don't care about workers, I think comes from a bad understanding of self-interest, that somehow it would be good for capital or good for management, to have workers disgruntled. There are all at once to incentives that, you know, I own a business, and I all at once need to pay people an amount that doesn't bankrupt my company, and at the same time incentivizes their maximum productivity and retention. If they're good workers, I want to keep them and I can't keep them if I underpaid them, or treat them poorly. So these interests have to be understood. And this is why I did that economics course. And I care so much for people to really get the basics of how the world works. 

EICHER: Okay. And a second question, David Pete Daikeler, who's a listener in North Carolina, he calls attention to what he sees as a silent depression in our economy specifically. And for example, during the Great Depression, he says, houses were about three times the average salary; today, it's eight times he says, reading from his email, "My wife and I did very well coming out of the late 1960s, early 70s. And we just tried to tackle each challenge as it came. Now we have two 20 year olds who are so smart, but all their knowledge causes them to become overwhelmed by the economy and global affairs. Is there a silent depression that the rich can't see because we don't experience it?" And, David, please take your time and answer this one thoroughly. I know it's a long answer for you, so go ahead and have at it.

BAHNSEN: Well, there's kind of a few different topics that are sort of blended together in the question, and I think it's better when they get unpacked a little because I think the silent depression, so to speak, referring to the kind of alienation that I think exists throughout society right now is undeniable. It's very concerning, and I've done significant research on it and am convinced that it is almost always related to a decline in faith, family, friends and work, and particularly work. And so not so much at age 20, but more age 24 to people in the young 30s, there is significantly happier conditions for people who are in jobs and careers they like versus, and this is especially true, much more true with males, those that are not working, and don't feel that same purpose. And so that's kind of a spiritual and sociological dynamic. It's actually a big subject in the new book I have coming out early next year. But what he's really getting at I think the heart of the question is, do young people just simply feel overwhelmed with anxiety by the fact that entry into a new house is so much more expensive, that student debt, I don't think he mentioned, but that's a big part of it. So it's important to point out that A, he's 100%, right. For the number one expense people have, which is shelter, the percentage of income that the people have to spend on things like rent, or a first mortgage is much higher than it's ever been and it should be. 

Now, here's the problem. It's their fault. And I don't mean this mom and dad. But I mean, all the other moms and dads, that all believe that a permanently escalating home price is supposed to be this wonderful thing. And we have this cult of home price appreciation that's totally bipartisan. I think it's economically absurd. And it's created this unaffordability. We have totally inadequate supply, we can't get new homes built because of all the zoning and environmental regulations. And then now mortgage rates have moved way higher. But when mortgage rates were so so low for 12 years, all that did is push prices higher, artificially, and made home prices less affordable for young people. And so my belief is that I don't know that it's created a depression, the problem is it's created a delta between the top 20-30% And the bottom 50% that is really significant. 

Look, the top 20% of performers, where there's the most talent, skill, knowledge, they're not letting that slow them down, they're still out getting great jobs, working so hard. But not everyone's able to be the top 20% because of math. And it has definitely created a sociological, and yes, an emotional divide. So I'm very, very sensitive to it. But I think a huge part of the problem is parents that continue to support the scam of higher education. And then a kid gets left for $250,000 in debt and did not get an education that justifies it. And then the prices of homes being far too high, relative to what a good earner with a decent job in their mid-20s, late-20s can be expected to afford. So those are the two major contributions to that aspect of the economic anxiety. But even then, I really do believe that's separate when you use the word depression, I think that's separate from the spiritual and existential alienation that I think is taking place, which I'm convinced is coming from inadequate purpose. And of course, as a Christian, I'm quite convinced that comes from people not having their telos identified in Christ.

EICHER: Alright, David Bahnsen is founder managing partner and chief investment officer of the Bahnson group. You can keep up with David at his personal website, which is bahnsen.com his weekly Dividend Cafe newsletter, you can find that dividendcafe.com David, thanks so much. We will see you next week.

BAHNSEN: Thanks so much, Nick.

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