Moneybeat: Misreading the signs

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

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm, the Bahnsen Group, and he is here now. Good morning, David.

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

EICHER: All right. Let’s begin with the September jobs report. Employers adding less than 30,000 jobs in September. Unemployment holding firm at 4.2%, and the household survey looked considerably stronger.

Now, the CME FedWatch numbers show an interesting market reaction. The odds now of an October rate hike by the Fed have fallen sharply, but markets still are putting about an 85% chance on at least one rate hike by December—not this month, but by December. First, David, how weak was this jobs report, and did it really change the Fed outlook, or mostly just push the expected timing back?

BAHNSEN: It was a fairly mixed report. Obviously, the headline number was the worst part, and that’s probably what matters most. That the new jobs created net were only 29,000, way below the 80,000 projected. I want to remind people, even at 80,000 as a projection, if it had been hit, that’s a very low number compared to what we need to be seeing month by month, and to underperform a low number is disappointing.

But then, when you look under the hood, sometimes a good number has some worse things under the hood. Sometimes a bad number has some better things under the hood. The household survey was better. All in, there’s some good, there’s some bad, but what some chose to focus on was, “Oh, maybe this somewhat negative jobs report will make the Fed less likely to hike rates, and that’s a good thing.” And that’s one of my biggest pet peeves, when you get into this little cycle that bad news is supposed to be good news, and good news is supposed to be bad news. I disagree.

What’s interesting is that the Fed funds futures response was not that the Fed is any less likely to hike rates this year. It moved the odds a little bit from October to December, but we’re still somewhere around an 87%, 88% implied probability of a rate hike this year, more likely in early December.

EICHER: Now, David, I keep seeing this same explanation in the financial press: long-term Treasury yields rising because of all the government debt. The Wall Street Journal trying to make that case again, but of course, when we talked about this in some detail a couple of months ago, you said that explanation was entirely too simplistic. That the debt path was not exactly a surprise.

It’s not a surprise really to anybody that we’re deeply in debt. How much less is it a surprise to bond investors? Is there something actually new here? Why do these stories keep showing up, or do you think the press is just reaching for an easy explanation for a more complicated move?

BAHNSEN: Well, the reason that the journalistic space has decided to jump onto the “oh, all the debt is causing bond yields to go up” narrative, when it is obviously incoherent, is because it’s a simple narrative. It’s readable. It’s translatable. It fits into a headline. It’s easy.

It isn’t just that we went from 39 to 40, and why didn’t we take it seriously at 39? We went from 39.9 to 40. All of this has been like clockwork, month by month, going up a couple hundred billion dollars a month for years and years and years, and all the projections that every single person who’s ever bought a bond and ever owned a bond—sovereign wealth funds, central banks, pensions, insurance companies—has always known is that not only is the debt yea big, but it is growing by yea bigger. None of it is new. None of it is news. This is just not true.

That bond yields are all of a sudden moving higher on the long end—and by the way, they’re moving higher to a point where they were 18 years ago, when the debt was 30% of what it is now. What is going on is multi-causal, and that is hard for journalists.

But I would say that the largest reason for why it’s moved this last few months is that all of a sudden we’ve had unprecedented competition for buyers picking what they want to buy in long-term, high-grade debt. The Googles and Amazons—these are basically government-level debt. AA-plus, AAA credit ratings. You have billions of dollars being issued, and now what you have is the same level of demand, which is good, but more supply. That pushes prices down, which pushes yields up. That’s the number one explanation.

Are there other factors, such as monetary policy, that for a bit the market wasn’t sure Chairman Walsh was going to take some of this seriously, and there was a credibility thing that could have contributed? But again, I have to ask people, if it’s government-level debt, if it’s worried about the Fed’s credibility with inflation, then why have TIPS spreads, which is the measurement of inflation expectations, only moved up about 17 basis points when the total bond yield has moved up 50, 60, or 70 basis points? The bulk of this is simply in real growth expectations, and that speaks to supply-demand factors.

EICHER: David, there is one other journalistic article I’d like you to interact with. Actually, this was an article given to me in hopes that it would flow to you and you would have something to say about it. Let me set it up this way: The Wall Street Journal reporting that the wealth of the richest one-tenth of 1%—this is the tippy top, as we’ve heard, the richest one-tenth of 1%—their wealth has more than doubled since the end of 2019.

And then the story, of course, makes the political connection. Growing wealth at the very top, it says, has become a political flashpoint, helping to fuel the rise of democratic socialists such as New York City Mayor Zohran Mamdani.

Okay, suppose every one of these numbers in the story is right, and there’s a good reason to suppose that the numbers are right. They come from the Federal Reserve. No reason to disbelieve that. But what follows? What would we still have to know before concluding that the widening gap itself is a problem?

BAHNSEN: It doesn’t tell us much. The media response to it, the public response to it, societal angst speaks to how well we’re doing with our Tenth Commandment obligations, which is not very well. But what it doesn’t tell us is how real wages and quality of life and real disposable income are going for everybody else.

If real wages are growing while household net worth is becoming more disproportionately owned in the top 1%, I do not believe that lower-wage earners or middle-wage earners care, and they haven’t throughout history. They end up caring a great deal when their quality of life is not going up, but more and more wealth is concentrated in the top.

As a fundamental rule, I believe that our focus needs to be on that which we can control as a society, which is producing more wealth. I do not believe it should be on what we can’t control, which is on how we distribute that wealth. What we have to focus on is that which raises the level for all people, which is wealth creation, not wealth distribution.

How do you foster the conditions for wealth creation that then are going to be there across society? It’s with freedom. It’s with incentive to produce. It’s with removing impediments to produce. This is the most important economic conversation of our day. What built America versus Europe is that we repudiated economics of envy and covetousness. We are not supposed to be looking at very successful people and saying, “I hate that guy,” or, “I hate that gal.” What we are supposed to do is celebrate a pioneering spirit.

Now, I’ll be very clear. I recognize some people have gotten wealthy with fraud, with cronyism, with shenanigans, with crypto scams, whatever you want to point to, and I’m against all of that. But to the extent we have rule of law and freedom, then we should celebrate people getting wealthier regardless of distribution and proportion. And I think that’s a very biblical point of view.

EICHER: All right. David Bahnsen is founder, managing partner, and chief investment officer of the Bahnsen Group. David writes weekly at dividendcafe.com and occasionally for WORLD Opinions. David, thank you. We’ll talk next time.

BAHNSEN: Looking forward to it, Nick.

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