Moneybeat: Executing fiscal change in Argentina

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 and he is here now. David, good morning.

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

EICHER: So, David, let's begin today with the election of Javier Milei in Argentina. He campaigned with a chainsaw to emphasize his commitment to cutting government excess. He spoke of tethering Argentina's economy to the dollar. Probably the most recognizable politician, at least I think I've seen in a while. I did enjoy his flourish that he styles his hair, I don't know if you heard this one, David, with the invisible hand of Adam Smith. And when you look at that mop of hair, you think an economist would have a little more respect for Smith. But, of course, he brings the inevitable comparisons to Donald Trump, because of the media's collective one track mind, but Milei is to be sworn in in December, and we may be in for what I think it would be an interesting ride. What do you think are the positives and negatives of Milei's rise? And what could we learn from watching an economist rise to power in one of the true economic basket case countries of the world?

BAHNSEN: Well, there's definitely a risk and a reward here. I think it would be incredible news to Donald Trump that he'd be compared to a libertarian, and one who is even in the past identified as an anarcho capitalist is not exactly the governmental philosophy I think most people had of the Trump administration. And yet this gentleman in Argentina, I think the opportunity is to lead by example with a philosophy of limited government and fiscal prudence that can permeate what has been an incredibly distressed region economically for many years. But the risk—and this is something I probably care about as much as anything I could get into with WORLD listeners—is in execution. I don't think having a philosophy of limited government is enough. And when you have an issue, like what Argentina has with excessive indebtedness, with hyperinflation, with decades of governmental malfeasance, you can't just come in with a baseball bat and clean house and have everything get better immediately. There has to be a wisdom, a poise, a thoughtfulness and intentionality. And in the implementation, and I'm very fond of the line for Christians and all spectrums of life, that piety is no substitute for technique. Ultimately, if you come in cheerleading for a philosophy of limited government and execute poorly without the appropriate gradualism, then the people will rebel against the limited government and ask for more statism. And this is the testimony of history. And so I think he wants to do a lot of the right things, but I hope he will do them in the right way and in the right timeline, so that you don't get the pendulum reversing the other way.

EICHER: I did see some stories about how he's moderating some of his rhetoric. There have been a couple of stories about that. But can you address yourself to the topic and I know that this has been walked back just a bit, too. But one of the central features, at least of his political campaign, was the notion of tying Argentina to the dollar or dollarizing and moving away from the peso. Can in two or three minutes, can you explain how that would work?

BAHNSEN: While many, many countries do it. I mean, dollarization is essentially a way for emerging market countries to try to hedge their risk of getting to a point where their currency weakens a great deal against the dollar. A lot of these countries have denominated their debt in dollars, and certainly as major portion, not all but a very heavy portion, of their global trade is denominated in dollars. And so a way to help hedge the risk of your currency being whipsawed around compared to a currency in which you need to transact a lot is to link your currency to the dollar, so that you're going to go up or down with that currency. And China has done it at different points of time. And then other points of time they will de-dollarize when it is in their interest to do so. But dollarization is a common strategy for emerging markets who are seeking to avoid the risks of being on an island with their own currency that won't have the same stability and obviously can't have the same capital flows. The mechanics of how a country does it, by the way, a very technical and I think pretty boring, but it's not very hard to do. I mean, you essentially, first make the commitment to do so, and then you go about perpetrating open market transactions that will keep you in a flat ratio to the dollar.

EICHER: Well, it'd be worth watching for sure. And another thing I think worth watching is just sort of this interesting chain of events with the OpenAI CEO, Sam Altman. Of course, you know the story a couple of weeks ago, the board fired him, evidently without warning, and reasoning that didn't make a ton of sense, publicly. Employees tried to pull off a counter coup to try to get him back. Open AI's biggest investor Microsoft hired him. I think this lasted a couple of days. Employees threatened to quit from OpenAI unless Sam Altman were to come back. And then by Wednesday morning of last week, he is back. The old board is out, the new board is in. Is this just the wild west of tech, or do you see any kind of deeper meaning here?

BAHNSEN: No, this is completely idiosyncratic to the fact that OpenAI was run by an 501(c)(3) nonprofit that claimed its objective in the world was some sort of world peace and harmony and, and all these types of things. They didn't actually use the same nomenclature as Effective Altruism, that FTX and Sam Bateman-Freid and the the kind of crypto do-gooders that are now all in prison used. But it spoke to this structure that said capitalism or a free enterprise system can't be relied upon to do good with something as dangerous as AI. So we will set up as a 501(c)(3), a nonprofit that has a board and its agenda will be to do good for the world. Okay, that sounds lovely. But then this nonprofit owned a little for-profit entity called OpenAI that had chat GPT, that did an $86 billion valuation. Well, that sounds like a not-for-profit to me, taking tens of billions from Microsoft and having an $86 billion valuation. It all comes from a total ignorance about the nature of markets. That somehow profit pursuit is evil, but if you can pharisaically attach this notion of do-gooder-ism to it, that kind of virtue signaling somehow put you in a moral superiority. And that's where this conflict came from. Is guess what? You have Microsoft as an investor, you have hundreds of programmers and employees, that it's news to them they're not supposed to be trying to get more enterprise value, more stock options, more, you know, aspiration. And the CEO and the board have this conflict and it put everybody through this three or four days soap opera, that resulted in of course, as it always will, with the people with the checkbooks winning. It stems from the fallacy to begin with that somehow markets are an inadequate arbiter of where this ought to go. AI has a lot of complexity around it. There's a lot of moral ramifications as there are with any market activity. But this was a classic failure of a structure that was rooted in rank Phariseeism.

EICHER: Well, David, we ran out of time to talk about this last week, and admittedly so it's kind of old news. But I think important to this whole question of inflation and the Fed and interest rates, the consumer price index for October came out. And I especially wanted to talk about this, because it is seen as a sign that the Fed is now going to feel less pressure on interest rates, at least to raise them. Because now at 3.2% Consumer Price Index year on year the October numbers represented the coolest consumer inflation numbers since July. Specifically, New York Times writer Jeanna Smialek noted that a closely watched measure of housing costs moderated after unexpectedly ticking up in September. So the question is, is this—that CPI number for October—is this the long-awaited adjustment in shelter prices that will finally satisfy the Feds desired 2% inflation target? What did you make of those figures?

BAHNSEN: Well, I think they're basically already there, because I think that the year-over-year inflation and rents and housing, the way they measure it is with two things: one around new rents, and one around something called owners equivalent rent. And it makes up 34% of CPI. And yes, it has come down from eight to seven. But it isn't anywhere near seven in the real world. And all that's because of the lag effect of leases that were signed a year ago. And so, if you assume it's 3%— which I think is generous, but I'm happy to do at 3%—of 34%, it takes away a full percentage point, 1.15% from the current inflation rate, which brings it down to a to handle of inflation. And so the lag effect of shelter is a big issue. But this doesn't finally satisfy the Fed. The Fed knows perfectly well about this. The Fed isn't driven by the fact that they wanted to stay tight as long as they could. Because if nothing was breaking, they figure they can get more access out of the economy. And they felt that it was concerning that more people weren't losing their job, when if you're trying to put downward pressure on inflation, you're supposed to see an increase in unemployment. It stems from the view of the world they have that is rooted in what's called the Phillips Curve. And it's one of my biggest disagreements with Fed models, right now about this whole subject. But I do believe that there's a 0% chance the Fed is going to raise rates again. And the entire debate in the last two weeks has shifted to when they will begin cutting. Whether that will be, there's about a 35% chance right now in the futures market, that they'll start cutting in March. And it's over, well over 60% chance they'll start cutting by the summertime of 2024. The thing people have to realize is everyone's sitting around saying, “Oh great, the Fed's about to cut. This is good” is it's gonna depend on why. If they start cutting severely and drastically, it will be because this soft landing that they believed they could perfectly orchestrate eluded them. And that in fact, the unemployment numbers do start going higher, and the corporate defaults do start increasing. And so there's still a lot of risk out there, as there always will be when you ask a central body to do the impossible. And that's really where we continue to be with the Fed. But the good news is that you really have very, very low inflation with core goods, with intermediate goods, processed goods. And even on that shelter a number that is so grossly distorted from reality, it's definitely coming down.

EICHER: So David, short market week with the holiday but anything else going on in the markets or in the economy generally, we should know about before we go?

BAHNSEN: Yeah, last week was a short week. And those types of weeks can be very distorted. But really I stand by what I've been saying for several weeks now. Probably several months, Nick, the 10 year bond yield was down to 4.47% going here into the Monday of this new full week, and it had been up at 5%. So it's come down over half of a percentage point over the last several weeks. And that's pushed a big rally in the stock market in the last month or so. So as bond yields go, so go stocks until next year. Then you get another look at corporate profits. You get another look at what the Fed will do. But right now it's pretty much all about bond yields.

EICHER: Alright, David Bahnsen, founder Managing Partner Chief Investment Officer at the Bahnsen Group. You can keep up with David by visiting his personal website which is bahnsen.com. You can read his weekly dividend cafe, and you should, at dividendcafe.com. David, thanks so much.

BAHNSEN: Thanks so much, Nick.

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