Moneybeat: Credit worthiness in question

REICHARD: Next up on The World and Everything in It … the Monday Moneybeat.

BROWN: 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, GUEST: Well, good morning. Great to be with you.

BAHNSEN: David, economics is not my area, but I know a big story when I see one: namely, that the U.S. government’s credit rating has been downgraded.

The story is that Fitch Ratings has become the second of three credit-ratings agencies to knock down the U.S. government’s rating. Standard & Poor’s was the other, more than a decade ago. So the federal government credit rating goes from triple-A to double-A-plus … and most of the stories pinned the blame on the recent debate over raising the debt ceiling.

But left out of most of the stories was the fact that Fitch also cited rising deficits and the ratio of debt to gross domestic product. Additionally, Fitch criticized the government for not tackling entitlement spending.

Treasury Secretary Janet Yellen countered that the Fitch downgrade was “arbitrary” and “based on outdated data.”

So who’s right: the treasury secretary or the ratings agency?

And … I know you’re not a fan of the financial press … but how do you rate the media coverage of this downgrade?

BAHNSEN: Well, that last part I'll do first. The media coverage was just outrageous and and, but not at all unexpected. It's their job to create clicks and ratings and to say things that are totally untrue or disconnected from reality to do so seems to be a pretty common deal. I do not believe that Fitch should be considered a story at all. I believe this idea that 12 years after Standard and Poor's went from the highest credit rating on the planet to the second highest credit rating on the planet, that now Fitch has joined that while Moody's, by the way still keeps that a triple A is hysterical. And you, it should be pointed out to that Fitch is the third most significant of the credit rating agencies. Many issuers don't go to Fitch for rating at all. S&P and Moody's are sort of the the duopoly here. But see, the problem is that in me saying that I'm not saying anything close to this idea that the debt doesn't matter. I'm saying that the credit rating on the debt doesn't matter.

Credit rating refers to someone's assessment of their ability to pay principal and interest. And I am as big of a critic as American governmental excessive indebtedness, as anybody could be. However, I am a critic of it based on what it does to our economic growth and what it does to future generations. I'm not a critic of it, based on our ability to pay it to now I don't want them to print money to pay it, I don't want them to raise taxes to pay it. I don't want them to do all sorts of the things that they will have to do to pay it. But the ability to make the payments is what Fitch is supposed to be assessing. And there's no difference and their ability to make a payment today versus a month ago versus four months ago versus four years ago.

So I kind of am on Secretary Yellen's side that Fitch is operating off our data data, the 32 trillion of debt today made us go to double A plus but a year ago it didn't. It just is very arbitrary and very weird. But I'm not on Janet Yellen's side that this national debt should be considered in a sanguine manner. I think it is horrific. I think it is the fundamental economic issue of our day, that we are resigning ourself to lower levels of growth, crowding out private sector, allocating resources to unproductive uses, and leaving our children and grandchildren with a burden that they didn't create. And I don't believe that we should take that lightly. I just don't think that has anything to do with a credit rating.

BROWN: Another story I’d like to ask you about, David, is the employment report. The government said that in July, U.S. employers added a fewer-than-expected number of jobs: 187-thousand. That comes on top of adjustments to the jobs numbers for June and May by a total of 50-thousand jobs. Remember that June was originally reported to be more than 200-thousand, but that’s been cut back to 185-thousand.

You look at these figures much more deeply, so what did you see in this latest report?

BAHNSEN: Yeah, it was another pretty good report, but it was not another incredibly good report. Those job revisions are pretty minor. But nevertheless, they're downward instead of upward. There isn't anybody that could try to paint the jobs picture right now in a negative way. If they're referring to judging how many people who want a job that have one, that data is just simply overwhelmingly positive. The negative jobs data is the area that most people do not look to, which is what I'm obsessed with. Which is why there's so many people who aren't looking for a job, that declining labor participation force, which has definitely improved post COVID, but has not gotten back to where it was at a pre-COVID level, and is nowhere near back to where it was pre financial crisis 15 years ago. So that's a very different metric.

In terms of this week's data, the ADP private sector report that came on Wednesday was really strong. The initial jobless claims on Thursday, the four week average is now the lowest it's been since March. So that was starting to look a little hairy about two months ago. And that's improved. And then the government data that came out Friday with what's called BLS, the Bureau of Labor Statistics wasn't great, it was a little bit less than expected. But I mean, very, very small. So the jobs picture shouldn't be something that is controversial. It just simply isn't continuing to explode higher. But it isn't showing weakness. It's a stronger part of the economy in an economy that has plenty of other weaker parts if we wanted to focus on such.

BROWN: David, Nick tells me that you said to him last week off the air that you were feeling pretty good about the current earnings season, where the big companies give earnings reports. And you said last week that you thought by now we’d have a clearer picture on where things stand. So tell me how you evaluate the current earnings season and what it says about the strength of the U.S. economy.

BAHNSEN: Yeah, I think that we are now you know, through the heart of earnings season, these last two weeks, you had about 65% of the S&P report. Before that, you have already heard about 2015 to 20. So we're near, you know, roughly 80% through earnings season. And it looks to me like year over a year profits will be down about 6%. And so you consider that a year ago, the Fed funds rate was basically right around 1%. And now it's up over 5%. I don't think anybody could have predicted with the way the last 12 months have gone, the profits would be down a whopping 6%. Many were predicting 20 or 25% decline in corporate profits.

So the profit picture seems to have bottomed for now. And revenue year over year is about flat, it hasn't really come down. Some of that is inflationary. But overall, it's been a really positive earning season. And the guidance forward has been good, it has not been universally good. There have been pockets of weakness and concern. But the environment does not feel as negative as many would have expected. And the year over year, profits growth is definitely better than than many would have expected. So that's, again, very similar to the employment number. No one's talking about this stuff all being great. It just isn't as bad as some thought. And that's kind of where this economy lies right now.

BROWN: 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-dot-com. His weekly Dividend Cafe is at dividend-cafe-dot-com.

Thank you, David!

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