Moneybeat: Losing sight of the long tail

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

NICK EICHER, HOST: All right time now to talk business markets and the economy with financial analyst and advisor David Bahnson. David is head of the wealth management firm, the Bahnson group. He is here now, David. Good morning.

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

AUDIO: No deals, no wheels. No justice, no jeeps.

EICHER: Well, that certainly escalated quickly. The union expanding the auto workers strike last week, David, that still seems to be quite a top economic story this week.

BAHNSEN: What is happening in Detroit is likely to continue escalating for a while. As of right now the White House is claiming that on Tuesday of this week President Biden is planning on going to actually march in the picket line with the workers, which strikes me as a kind of bizarre idea. Maybe not the good look they think it will be. I don’t know politically what to make of that.

In terms of where they are in the negotiations, it’s difficult because there really aren’t any talks going on right now. They’ve escalated it from where it was last week—a little bit, not to the extent I thought they would. They didn’t include Ford in the latest level of new plants that are in strike, but they did involve the other two. And so they’ve expanded it.

I think most of the public is aware of the high level circumstances, in that they’re viewing it as an opportunity to get raises. The automakers offered roughly 20%; the unions are asking for 40%. The most interesting thing to me is an end to tiering, which means essentially that people would not be paid more for more experience. Whether you’ve been doing the same job for three weeks or the same job for three decades, you would be getting paid the same. And I’m not sure that there’s a lot of room for the automakers to move on some of these points.

EICHER: All right, a lot of stories we need to touch on David. Let’s go to the Fed, which chose last week to leave interest rates where they were, which was more or less in line with expectations. But did anything strike you about Chairman Jay Powell statement afterwards?

BAHNSEN: I think that the whole entire story is in the markets right now. The financial aspects of the economy are evidenced in the bond market where you see the long end of the curve, let’s call it the “10 year Treasury yield” has gone up about 38 basis points—0.38%—just in the last month. It’s up well over 1% in just about the last six months—a little less than six months, really. It had gotten all the way down. It wasn’t there for a long time, but it touched 3.3% back in April. It came all the way up to around the 4.5% range this week.

I hate to get into more technical sides of financial markets, but I think a lot of this is because while everybody has been focused obsessively on the Fed with the interest rates for the last year and a half. The Fed had also, simultaneously, been doing this thing called quantitative tightening, which is the opposite of quantitative easing that they had been doing to the tune of trillions of dollars before that. And what quantitative easing was, is when they were buying bonds from Treasury with money that didn’t exist, then putting it on their own balance sheet, in effect reducing the bonds that are on their balance sheet. So it’s a way of removing liquidity from the banking system.

And when there aren’t buyers on some of the longer end, or when those buyers who are buying 10 year treasuries are people like you and me or local banks who care about the interest rate, those yields go higher. When the Fed is buying them, they don’t care about the interest rate. They’re what we call a “non-economic buyer”. So you more or less have—and I wrote about this and put a chart to this effect in dividend cafe.com a couple of days ago—half a trillion dollars that is off of the Fed’s balance sheet of treasuries in the last year or so, and a little over a trillion dollars that has come onto households’ balance sheets.

And you know, why wouldn’t they? They like 4% or 5% yields more than they like 0% or 1% or 2% yields. The difference is that it isn’t just an apples to apples switch. The Fed didn’t care about the yields, but the new buyers do, and that’s caused the long end of the curve to come up. People start to wonder: Is the Fed really going to stay higher for longer? I think that’s the pickle the Fed is in—that they can definitely lower the short end of the curve (and in fact will end up starting to do so next year, in my opinion), but what do we believe about the long end? There’s a lot of confusion in there and the Fed is not giving great signals about this.

EICHER: I saw that a chart that you posted on the Dividend Cafe, David. Do you mind if we grab that chart and place it in today’s program transcript, I found it a useful chart to visualize that dramatic move and the correlation to the Fed rate rise. Do you mind? Can we do that with your permission, of course?

BAHNSEN: Oh, of course. I think it’s a great idea. It’s very effective, just to be able to see what exactly has happened. And I think the point I’m trying to make is it does have an economic impact.

EICHER: Yeah, thank you. So let’s move on to a couple more items. I was thinking about the looming government shutdown, get your comment on that. We’re down now to days. It is not looking as though the Republicans are coming together. They appear headed for a collision. What do you make of the drama in Washington? We did talk a couple of months ago about the debt ceiling deal, but we’ve not talked about government shutdowns. Does it matter much, do you think, beyond politics?

BAHNSEN: Well here’s a little history: There’s been 20 shutdowns in my lifetime, and I’m not quite 50 years old. The average duration of those 20 shutdowns was eight days. The fact of the matter is that, from a market standpoint, looking at all the shutdowns in the 80’s 90’s, and 2000’s, 11 out of 14 times the market was up during it. And the three times it wasn’t, it was just barely down: Literally 1% or so. And so it isn’t a generally a big market event.

It isn’t usually an economic event. The only caveat I want to give is: You don’t often have a government shutdown happening when the Fed is in the middle of tightening monetary policy, when the United Auto Workers are on strike, and when China’s growth is slowing and having an impact throughout the global economy all at once. So it may not be a big event, but I think it’s an entirely absurd event.

Just in terms of how it adds to overall economic sentiment and reality, it may end up being a bigger factor. But what we know historically is that these don’t usually last a super long time. They usually end with the party that started it very embarrassed. And they don’t usually accomplish a whole lot.

EICHER: Well, there was one other factor, and I want to raise that again before we go. I know the listener is seeing prices at the pump headed north. But I looked at the three month view on Brent Crude oil. David, we were in the $70 range at the end of June around the end of June. Now here toward the end of September, we are up over $90 a barrel, and it feels like 100 is not far away. Are you concerned about that?

BAHNSEN: I think that is a story in this sense. Nobody is going to say with a straight face that the Fed is causing oil prices to go up. What I think oil prices going up does is make the Feds job a lot harder, because you really did have quite a bit of disinflation going on in almost all aspects and, in some cases, outright deflation. In oil’s case, it’s obviously responding to the mismatch of supply and demand. That is, demand is higher than supply.

Saudi Arabia has no interest at all in helping the United States here. And the Biden administration has lost the ability to use the tool they used last year, which was pulling from the Strategic Petroleum Reserve to the tune of hundreds of millions of barrels. If oil prices don’t stabilize here, does the Fed have to treat it as if it’s part of their inflationary circumstance they’re dealing with? Or do they carve it out. It puts them, again, in another very difficult position. So oil prices absolutely matter. 90-ish is around the limit as to where I think they can go without really starting to erode demand. If you get up near 100, or above 100, it definitely becomes very problematic for the economy.

EICHER: All right, David Bahnson, founder managing partner and Chief Investment Officer at the Bahnson group. You can keep up with David at Bahnsen.com. That’s his personal website, B-A-H-N-S-E-N, bahnsen.com weekly dividend cafe, you can find that at dividendcafe.com. David, thank you and I hope you have a terrific week. We’ll talk to you next time.

BAHNSEN: Thanks so much, Nick.

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