Moneybeat - Debt ceiling drama

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

NICK EICHER, HOST: Time now to talk with financial analyst and adviser David Bahnsen—it’s going to be a sprint—three things to hit quickly, David, and I’d like to begin, as markets open this morning, with a review of what drove the odd volatility in the markets last week. Big drops, big recoveries: What was up with that?

DAVID BAHNSEN, GUEST: Yeah, I mean, for quite some time, there's been two things that have been happening in the market pretty consistently, which is that it's been going up, and that there hasn't been much volatility. And I think that's more or less still the case.

But this week did something that was almost identical from start to finish through the week to what happened in I believe, is the third week of July. You had a Monday where the market was down a lot. And both of the July Monday and this one day, I'm talking about this last week, I mean, down over 900 points in the middle of the day. And in both cases, it came back 300 by the end of the day. And then the Tuesday, Wednesday, Thursday, the market was up huge. And all of a sudden you're up on the week. And that's what took place this last week as well.

We were down 970 points Monday on all of these ideas that this Chinese real estate company that is facing its financial challenges could be a “Lehman moment” and a contagion effect in the financial markets. And so you go from Monday, 1,200 news reports to the next “Lehman Brothers moment” to Friday, we were up on the week.

So what do I think that matters to WORLD listeners? Well, here's the thing that I am very, kind of animated about here. We can believe the market is a little expensive right now. And I do believe that, especially certain parts, we ought to still maintain the position that we don't know what the next day or week or month will bring. We know for some time markets have shrugged off COVID all the way since the point at which we found out it wasn't going to make our society go extinct.

So you look at the overall set of circumstances. And companies are growing profits at record levels, profits are higher than they've been, profit margins are higher than they’ve been. The concern is the ability to sustain it with economic growth into the future. But constantly wringing our hands about the next “Lehman Brothers moment,” besides the melodrama of it, and I think, irresponsible sensationalism, from an investor's standpoint, it's really quite dangerous. And that's the nature of being in the market. It's a nature describing an economy. And so I believe it's just really important for people to have kind of a more prudent and sober perspective.

EICHER: David, the Federal Reserve held its long-anticipated, two-day rate-setting committee meeting. How did you read the chairman’s message on quantitative easing?

BAHNSEN: The Fed this week, there had been all this hubbub earlier in the summer: Are they gonna start tapering quantitative easing in September, meaning starting to tighten monetary policy? It's been my position all along that it was laughable that they would do that. They most certainly didn't. And then what Chairman Powell said is, “oh, we're looking at either November or December to kind of start getting going and will probably continue doing quantitative easing, but slowing it down until at least the middle of next year.”

Now between now and then, I can see plenty of scenarios in which they actually decide to delay further, but I wouldn't predict that. I think that, again, short of a really disappointing unemployment number, or some other headline event that gives them an excuse—a winter surge in COVID cases—that they use as an excuse. I think they intend to actually go forward with the tapering. And by tapering I mean, slight slowing down, but not raising interest rates.

And so the Fed did this week exactly to the “T,” what we've been writing for four or five months what we expected them to do.

EICHER: And as we go out—big week coming up in Washington with budget votes and we’re just going to have to wait to next time, certainly, to have anything to say about that—after we see what the Democrats do—because this is all about them. But there is this debt ceiling drama added into the mix—little extra, intriguing storyline there that we can talk about now.

BAHNSEN: Well, the debt ceiling thing has been building up for a few months, but it wasn't a story a few months ago. It's gonna be a story if you mean, everyone's gonna be talking about it. But also there's no ambiguity about how it's going to end.

My problem with this story, Nick, is that this is at least the eighth time since 2011. We have an obscure statute that legislatively limits the amount of debt the country can take, and then they move that number higher every time they need to. So I of course on record. And this is something I'm pretty committed to, as a cause in my life, to resisting the growth of government, which implicitly means the growth of the debt the government takes on. And my reasons for that are entirely theological and anthropological: that I believe it necessarily means less self-government, and less individual responsibility, the larger the size of government.

So mine is not so much about “Oh, we can't pay back the debt.” The difference, quite candidly, between 29 trillion of debt and 28 and a half trillion a debt is it's reasonable to say those are basically the same thing economically. But my point is, the trajectory of which we continue to accept a larger percentage of our society being represented by government, I think is very problematic.

So I think the statute is silly, and therefore I'd like to see it go away. But that's not because I want the debt to go higher. It's because there's absolutely no point in tokenism in our legal code. And both parties—this is not a Democrat thing—both parties waive the debt ceiling whenever they want.

And so then you get to a point where, well, are we actually going to say that we're going to default on the debt, that we're that we're not going to raise it, and we really will won't pay a bill, we won't pay off remaining debt? Remember, most a lot of our Treasury debt just gets paid off with new Treasury debt? I mean, of course, we're not going to do that. So why are we pretending? Well, we're pretending for the sake of setting up dramatic moments in the Beltway, where either a Democrat with leverage or a Republican with leverage gets to stare each other down.

So this particular debt ceiling thing is especially perverse, because the Democrats have 50 senate votes, so they can just do it tomorrow. They don't need one republican vote. But because they were trying to explore if they can get a political moment out of making the Republicans not vote for it. They don't want to put it in a reconciliation bill. And they're trying to catch the Republicans in a gotcha moment.

The whole thing's a charade. It's unbecoming of adults. It's unbecoming of the leadership of our country. And so my somewhat contrarian view is I obviously just wish they would quit growing the debt? But to the extent that we know, know, know, they're going to grow it anyways, I would rather get rid of the token measure altogether. That is only used as a political instrument.

EICHER: David Bahnsen—financial analyst and adviser. He writes at dividendcafe.com. David, eager to talk to you next week after we see how the spending votes shake out—a lot more then.

BAHNSEN: Yes, we'll definitely know a lot more by this time next week. Nick.

EICHER: All right, thank you.

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