Moneybeat: How does debt and inflation affect poorer countries?

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

NICK EICHER, HOST: It's time now for our weekly conversation on 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, GUEST: Well, good morning, Nick, good to be with you.

EICHER: David, I'd like to reserve as much time as possible for listener questions. So I will just ask up top here for your top story of the week.

BAHNSEN: Sure. I think just briefly, there was a producer price index number that came out on Friday, that's the wholesale prices, it was a little higher than expected. On the week, it was a down week for the market after, you know, having been in quite a long roll up weeks for the equity market, the stock market, and bonds continued to do quite well, meaning the yields were dropping. So you have interest rates going lower, and bond prices going up. All of it kind of coming together to still predict the idea that the Fed is not about to start cutting rates anytime soon, but they're about to start easing up a little in how much they've been tightening. And there's greater optimism for some form of a soft landing. I don't think anybody can predict that. But it does seem that markets, at least are open to the possibility that if we have a recession, it may end up being a real mild one. So that's going to kind of stay the economic story here for a bit. The Fed will be announcing their next rate move this week, everyone basically already knows they'll be raising rates half a point, less than the three quarters of a point they've been doing. But the question will be what the Fed does this week in terms of their comments about the future. So I expect a little bit of volatility around that. And we'll go from there.

EICHER: All right, David. First question comes from Abigail Chisholm, she noticed a piece in The Wall Street Journal on the effects of national debt and high inflation on developing nations. And she'd like to know what you think the long and short term ramifications are?

BAHNSEN: Yeah, I think that as a general rule, the effects of excessive indebtedness on any nation are the same in that universally excessive debt in the present is a drain on future growth. And that applies to a big country like the United States, and small countries, whether they be in South America or Africa or Southeast Asia. However, there is definitely a big difference when a nation like the United States has excessive amounts of debt, and is the world's reserve currency. They have the ability to manipulate it a lot more, and they have a lot of leverage. Many, oftentimes their creditors are foreign countries that are having to be paid back in US dollars. And so we have the ability to do things that developing nations do not. Developing nations can end up, if they get out of control with their debt, really hurting their own currency. And I would point out a lot of times these nations have debt that is denominated in US dollars. So they become somewhat, you know, dependent upon what's going on in our currency. So, in all cases, universally, I think excessive indebtedness is dangerous. And in all cases, the biggest impact is how it weighs on future growth.

EICHER: David, our next question is from listener Garrett Brandt.

BRANDT: Good morning, David and Nick, as a real estate attorney working as in house counsel at a real estate brokerage, I have been following with interest and concern these large institutional investors that have been buying up residential properties to turn them into rental units. They are buying up literally hundreds of thousands of units across America, sometimes including entire brand new construction communities. This exacerbates our inventory shortages, drives up prices for individuals and increases rents. So I have a policy question for you. I know that in the summer, Congress started holding hearings on this. So what policy would be advisable or at least practical, that might limit this behavior, while at the same time not harming a small investor who wants to build wealth through real estate investing? Thank you for your wisdom on these matters.

BAHNSEN: Well, thank you for the kind words, and I hope that my answer will be useful and also non offensive because I truly feel strongly about this. And yet, it's very possible that my answer may not be popular with everybody.

I believe strongly in freedom. I believe strongly in liberty in market transactions. I believe strongly in the rule of law. And I believe that if there is a problem of big institutional investors buying properties, those problems get solved in market forces rather than at the benevolent hand of the state, telling people they can or can't buy properties, telling people that there's going to be a regulatory punishment or disincentive for them to do something in what would otherwise be a free society. The fact of the matter is, we need to remember that no institutional investor is buying a property, apart from the desire to have a regular person occupy the property. So there is not a question of helping a big guy is hurting a little guy, it's helping a big guy, and then picking which little guy is going to be helped. Because providing more rental, that inventory is just as much a market need as providing more purchase inventory.

And yet what has already slowed this process, the thing you were concerned about that Congress was doing little fox hearings on last summer, has already cut dramatically slow down, other than in certain key markets, especially Sunbelt areas where there's still people wanting to buy homes, there's higher demand in certain Sunbelt markets. But what has dramatically tamed it is market forces - interest rates are higher, prices have gone up, excuse me down, and there's less security about where home prices are going. And I just believe that no matter how strongly we feel that this is bidding prices up, this is an example of prices going up by market forces. And I would not want to do anything to distort that. What I dramatically want to fight if we're worried about being able to help the little guy go buy a home. It's not by telling other people they can't buy homes. It's by getting the Fed out of zero interest rate policy; it’s by allowing state and local governments to stop all the silly regulations that keep more product from being built and mismanaging inventory. I just strongly feel that the boogeyman of institutional investors buying rental property to meet a market need is not our problem here as much as manipulation of interest rates and a high regulatory environment that disincentivizes more building. But market forces will play this out far better than the benevolent hand of a disinterested third party like the state.

EICHER: David, we've got room here for a third and final question. And this one is listener Michael Cox of Cincinnati, Ohio.

COX: David, I really appreciate your weekly market insights and your economics course. I was hoping you could clarify some of your thoughts regarding Elon Musk's Twitter acquisition. On April 18th you mentioned this initial offer is way too low to really think that the board would either meet it or would be pressured to meet it legally. On October 10, you mentioned why did he want to get out of the deal? Because he's dramatically overpaying. I'm curious to know what changed in your thinking during that time? And why? Thank you.

BAHNSEN: Yes, yes. Well, it's a great question, because obviously, what changed was the market itself. You had a massive decompression of yields in that time period, excuse me, of multiples of price earnings ratios, and ongoing quarterly results showing - especially in Twitter itself, which is all that matters here. But even in Facebook and Snap and other social media companies that are publicly held, a substantial decrease in valuation and company fundamentals. I don't recall if at the time, the offer that I was saying was too low was the final one they ended up settling or not. But regardless, it is no question that the facts changed - and that they changed for Elon Musk obviously, because he went in and wanted to do the deal. And then he spent months trying to get out of the deal until his lawyer said you're not getting out of this deal. And now the one thing he can do to salvage the value is somehow negotiate a deal with his lenders to buy that debt back at a huge discount. The companies that issued the debt - it was about $13 billion that I think would be down 50% if they were to trade it or syndicate it into the marketplace - they haven't syndicated $1 of it. So they're not willing to take that write down right now. And so I think Musk has an opportunity, he's going to be paying a billion dollars a year of cash flow in interest on the debt he took. And the company doesn't make a billion dollars a year. And so my guess is that he will try to negotiate a deal to buy that debt back at 75 cents on the dollar. It would trade right now in the market at about 50 cents on the dollar. But yes, the price that he paid is sort of irrelevant, like in terms of if they came to me with the deal, I would not have participated. I would not encourage you to participate. I would not have put client money in the deal. The people who did participate don't necessarily think it was a good deal either. They just simply were not economic buyers, Elon was buying as part of a project, a hobby, a, an endeavor. And you could argue it was for a certain social good, free speech, you know, a lot of the things he's kind of been working on doing all of what, you know, have some real nobility to him. It could also just be that sometimes people with $300 billion do funny things that they can afford to do. But no, I stand by what I said that, at the time that the discussions first began, I don't remember what those prices were, it wasn't going to be enough to get Twitter on board. When they came into the 50s, that got the deal done. And there's no question that almost immediately in this time period, starting in March, going into April, which is what you bring up, and then by May, the market had dramatically changed. And we know in June and again in August, September, that we were dealing with new lows down in the market and the Nasdaq in social media and tech companies. So a lot of things are moving very quickly throughout this year as people who've been watching markets well now.

EICHER: Okay, many thanks to Abigail Chisholm, Garrett Brandt and Michael Cox for supplying questions. And you have a question too. So if you do, send it in—email is feedback@worldandeverything.com. You can type your question out, I'll read it for you. Or you can read it yourself in your own Voice Memo app, and then send that file along again, the email address feedback@worldandeverything.com.

David Bahnsen is founder managing partner and chief investment officer of the Bahnsen group. His personal website is Bahnsen.com. David, thank you so much. We'll see you next week.

BAHNSEN: Thanks so much, Nick.

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