Moneybeat - Inflation peaks

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

NICK EICHER, HOST: Time now for our regular conversation on business, markets, and the economy. Financial analyst and adviser David Bahnsen is on the line. Good morning.

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

EICHER: Alright well now six consecutive weeks with the markets in decline.

This time all three of the major indexes finished with losses of at least 2 percent: the S&P 500 off 2.4 percent, the Nasdaq down 2.8, the Dow dropped 2.1.

The Wall Street Journal called last week in the markets “brutal.”

BAHNSEN: Yeah, I mean, the markets were up really big on Friday. And they had been down quite a bit on some other days in the week. It was, though, definitely once again weak—focused on hitting crypto and hitting technology and hitting small cap and NASDAQ. And so you really kind of have a very punishing market right now for the more excessively risky and volatile areas of the market.

The most interesting thing in the markets this week was not ongoing equity volatility. I think that's kind of a broken record, in that we realize markets are adjusting around kind of a normalization of monetary policy. But bond yields came down this week, and they came down quite a bit.

The 10-year at one point had gotten to 3.3%, which, by the way, is where it peaked in 2018, when the Fed was raising rates. I don't know if that ‘mid threes’ will prove to be the high or not. I'd very strongly suspect it could be. But if the 10-year ends up settling in this 2.5 to 3% range, through the Fed activity, then I really believe you have to conclude that once again, the bond market is saying they just don't believe it, and that the larger threat we face is weak economic growth and debt deflation a-la Japan, not 10 years of inflation. And I think as listeners know, that's very much the camp I'm in as well.

EICHER: Right, but let’s stay on inflation, then. Because we did receive a new inflation number last week—speaking of broken records—the Consumer Price Index for April shows prices up 8.3 percent versus last April.

And maybe it’s a stretch to call it good news—the 8.3 number is less than the March number at 8.5—but I’ll ask anyway: Do you think inflation has peaked?

BAHNSEN: Yeah, I believe that that's the case. But let's be clear what that means. It doesn't mean that then all of a sudden, you don't have inflation; it means that the rate of growth of inflation begins to come down. And so I think that with goods inflation, as we unpack the numbers in both the CPI, the consumer price index, and the PPI, the Producer Price Index, I think that it's very likely that that is the case, that the rate of growth of inflation will begin to drop.

But to get to a point where it begins to feel less significant, I think it has to drop a lot. And I used to hold out hope that would be by early to mid summer. And I think it's going to be more later into the year. The China shutdown in Shanghai and Beijing on this silly COVID stuff has really actually hurt the cause of ongoing supply chain relief. Potential union negotiations of the ports in the West Coast, it's 29 ports that could have as many as 20 something thousand employees not going back to work or having reduced hours. On the margin, all of those things continue to exacerbate the issues that are most causing problems with prices.

EICHER: Before we go, one last thing: I’ve been so intrigued watching the Elon Musk drama with respect to Twitter and last week we saw Musk pumping the brakes on his acquisition. Evidently he’s wanting to know more about how widespread on Twitter fake accounts are—just how many artificial-intelligence bots are there—versus the 5 percent that we hear about. Musk tweeted over the weekend: “The bots are angry at being counted” and added a laughing emoji. This guy is very entertaining.

How do you read this? Is the deal off?

BAHNSEN: Yeah, the Elon Musk/Twitter thing is fascinating because there's a lot of speculation as to whether or not he really wants to close the deal. And when you see a deal that is allegedly being done at $54 a share and a stock trading way below 54, that only means one thing, Nick: It’s somebody not believing the deal is going to happen. It's the market pricing in the possibility of it not happening.

Musk tweeted Friday morning the deal being on hold and the stock, at one point, pre market, was down 25% - back down into the 30s. He then subsequently tweeted, ‘I'm still committed to the deal’ and the stock came back up, but it's still trading well below the supposed price that he’s going to be buying the company.

So I've thought all along that it's a great thing to bring Twitter private, to have someone who wants to reform the things that are wrong with it reformed. I do fear that sometimes the right is a little too quick to try to make heroes out of people that are not really necessarily on their side. But I understand in this case, you know, the enemy of your enemy sometimes feels like your friend. And Musk is a pioneer, a really fascinating guy in a lot of ways. But um, you know, he can't just get out of this deal so simply. Twitter disclosed their study had been that less than 5% of users were fake, were bots, were spam accounts. And he said he wanted to see that data. I kind of have a hard time believing he hasn't seen it yet. But whatever the case, they're doing more process there.

But for any reason at all, if he gets out of the deal, he does have to pay a billion dollars. But that billion dollars does not just mean he can get out of the deal. He has to give a billion dollars and have a legally compelling reason that the contract was violated, that there was fraud or issues, you know, that were wrongly disclosed. This is a binding deal. And so it's both a billion dollars and being able to say, ‘look, there were material facts that changed’ that could get him out. So I think he's pretty well stuck into this, but obviously him hemming and hawing Friday has market people concerned. Ultimately, I don't know exactly what his end run is. Let’s just say that if I had Musk's balance sheet, which I do not, I would not be buying Twitter with it.

EICHER: Right, not many of us do. And let the record show there’s zero need for me to clarify that point!

David Bahnsen, financial analyst and advisor, head of the financial planning firm The Bahnsen Group. He writes at DividendCafe.com. David, thanks.

BAHNSEN: Thanks so much, Nick.

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