Moneybeat: Economic calculations

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

NICK EICHER: 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 and David, good morning.

David, good morning!

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

EICHER: Alright, David, major economic policy address by the head of the U.S. Federal Reserve, that would be chairman, Jay Powell. He spoke at the big annual economic conference in Jackson Hole, Wyoming. And this year, he made some news.

POWELL: The time has come for policy to adjust. The timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. … With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2% inflation, while maintaining a strong labor market.

All right, so all that to say, interest rate cuts are coming soon. So David, what stands out here on this highly anticipated Powell speech, any surprises?

BAHNSEN: Well, it was pretty much what was expected, and that actually surprised me, that the markets responded as they did, because there wasn't really anything in the speech that should have been a surprise. I think it's possible that just the validation of where he stands. There is some language in the speech that I highlighted that I think does speak to exactly where he is. And essentially it just comes down to, Nick, him focusing on the Fed's looking at labor markets, and then price stability is they're more confident is under control, and labor markets they're less confident is under control.

And the speech a year ago and the speech two years ago would have been identical, but in reverse, that they were confident labor markets were under control, but very concerned about price stability. And so that becomes the two subjects that they use to make synonymous with one being for tighter policy higher rates, and the other being for looser policy and lower rates. And essentially, they're setting the table for a paradigm, a phase of price stability is set, labor markets are vulnerable, ergo, expect us to be cutting rates for a little while.

Now, the 10 year dropped below 3.8%. More importantly, the short end of the curve, the lower term rates, all dropped substantially, about 10 basis points. So Nick, we have very little part of the yield curve left that's still inverted. Now the very short part of the curve obviously still is until they cut interest rates, but the two year is at 3.9% now, and the 10 year is at 3.8. So that was inverted by over 1%. Now it's .1%, so they're very close to going forward in September, they will 100% be cutting rates and getting a bond yield curve back to normal. We're in for an era of rate cuts going forward.

EICHER: Hey, David, how about instead of waiting for the end to do defining terms that we just do it now? Because I could just imagine the listener needing a refresher on the yield curve and what that means, and and why it's important in this conversation on interest rates in the Federal Reserve.

BAHNSEN: Yeah, when I talk about the yield curve, it's a term we use to describe, you know, all the different maturities of interest rates.

And so somebody could be borrowing money for three months, whether it's the federal government or, you know, people going to their bank or whatnot, and that interest rate is a certain amount, and generally, it's going to cost you a lot more money to borrow money for 30 years than it is for 30 days. And it's going to cost more money to borrow for 10 years than two years, because there's more risk over more time, the lender is away from their money for a longer period of time.

So when it costs more to borrow money short term than long term, that's backwards. It's somewhat illogical. And we call that an inverted yield curve. It's not how it's supposed to be. Well, why would that ever happen? Why has it happened for the last two years? Because the Fed raised interest rates a lot on the short end, meaning, you know, the Fed can't control long term rates. They control short term rates. Those rates went way up, but the longer end didn't for the very reason that the long end of the curve doesn't believe rates would stay up.

Growth, inflation down the line are not high enough to justify higher rates long term. And so it can speak to what they call a policy mistake, meaning the market saying, “Hey, if you have rates that are higher for three months than they are for 10 years, then we believe you've made a mistake in raising rates so much.” But you know, the Fed views that as something they have to do from time to time.

I don't agree that the solution to high prices is to make people lose their jobs, but the Fed believes, well, we gotta tightened policy, and that's going to slow down economic growth. And so we will do this yield curve inversion, this policy mistake. We'll do it on purpose for a little bit to kind of get things back in line. And rather than spend a whole lot of time explaining why I disagree with it, I'll just try to explain that that's what their thinking is and how it plays out in the bond market.

EICHER: David, big story that got a lot of attention last week. This one broke out of the business wire and onto the news pages, the regular news pages. It was the story of the government overcounting new jobs added over the last year and overcounting to the tune of 800,000 jobs. That is way off. 28% off. How does that happen?

BAHNSEN: Yeah, there's a lot of different reasons. In 2019 when President Trump was in office at the same time, they revised by about 600,000. The largest ever had been in 2009, and there's a couple things to be said.

Let's just start with what the most obvious is, people wondering if it's some sort of conspiracy to have made the jobs figure look better than it was. You know, the problem, I think, obviously, with that theory is, why reveal it now 10 weeks before the election? It would be probably a little bit smarter to carry this through till after the election, if that's what you're going through. But it doesn't give a lot of confidence in the way data is collected, but paradoxically, it sort of should.

And this is what I mean: the way the household survey is conducted month by month that we get our Bureau of Labor Statistics Data is just that. It's a household survey. And so you're getting data month by month via survey, but you get a chance sometimes to validate it, because you can compare it up against state reported data. And so when you are, then, contrasting up against state data, you get to see if some of the inputs in your model. They have something called a birth-death model, led to some disparity. Sometimes it can be revised upwards, sometimes downwards.

In this particular case, the best theory I have seen, Torsten Slok is the Chief Economist at Apollo, and I read a lengthy report he put out explaining, Nick, that during the COVID moment, we had an unprecedented amount of new business applications. People starting new businesses, largely, you would assume, from lockdowns and everything, these were stay-at-home businesses, somebody starting a one man or one woman shop. Well, a lot of those businesses have stayed. They're still going, but they weren't the type of businesses that were going to go out and hire people. And in the BLS model, the presumption would be with that many new businesses, that there would have been new hires going, and there just weren't.

And so the ratios in the model, I think, were distorted by the very high amount of new single person businesses that started and stayed. And so no matter what, it does not give a lot of confidence to people now in the ongoing data. Again, it did happen very close to a similar number in 2019. The biggest ever was in 2009, but you know what else was going on in 2009 when it happened? 650,000 a week, weekly jobless claims. Okay, right now we have 230,000; it's been about 200,000 during this period that just got revised. So there is now going to be another revision coming upwards. Goldman Sachs thinks that the downward revision of 800,000 is going to be upward revised 500,000.

I can't make anyone like this, but it is really tricky to try to calculate a national unemployment number with 330 million people in the country. And unfortunately, this is, in our business, what we refer to as tracking error. It's a weird statistical thing, and I'd rather they adjust it to be accurate than not adjust it.

But unfortunately, along the way, there's going to be some hair on some of these numbers, and this is one of them. And as much as I know some people want me to buy into a conspiracy theory on it, I can't do it because the conspiracy would be too dumb to have let it out 10 weeks before the election.

EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. Check out David’s latest book Full Time: Work and the Meaning of Life at fulltimebook.com.

David, thanks so much. Hope you have a great week.

BAHNSEN: Thanks so much, Nick.

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