Moneybeat: Money, markets, mistakes

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JENNY ROUGH, 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. He is here now. Good morning to you, David.

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

EICHER: Well David, let's begin with the big picture. We just got fresh consumer price index and producer price index numbers, so set the table for us. What are these reports and the other data you're watching tell you about the current state of inflation and the overall economy?

BAHNSEN: Well, one of the things I've decided I really want to do on Moneybeat is not hold back in trying to give a more thorough explanation about inflation because sometimes I can't do it on television, you have a limited amount of time and they're going for kind of a quick thing. Are prices higher or prices lower? And it's a political thing, right? Is this gonna be bad for President Trump or was it bad for President Biden about prices? Inflation economically, Nick,—and I really hope listeners can understand all this 'cause it's important—“inflation is always and forever a monetary phenomena.” That's a quote from the great Milton Friedman. Too much money chasing too few goods and services. He didn't say and services, but the point being an economy made up of the goods and services. If there's too much money chasing those goods and services, then that's what's called inflation. And so, you want a responsible level of money supply level relative to the size of the economy. And when we talk right now about inflation, this last week as the consumer price index number came out, the producer price index number came out. And everyone's wondering if Jay Powell at the Fed is thinking there's inflation that will affect what he does with interest rates. Nobody's talking about that inflation. They're talking about whether or not prices come up from tariffs. And I believe that it is a bizarre conversation that anybody would wonder if prices would go higher because of their costs going higher. Of course they would.

And President Trump had sent a really, I think, troublesome tweet or social media post out on Friday threatening Walmart saying you already make enough money, you already made billions of profits, don't raise your prices because of tariffs. And that is most certainly, you know, not something I want to see from the president talking to the private sector about what amount of profit they're allowed to make and what they ought to be doing with their cost. I don't believe government should be involved with that stuff. But the issue with like, for example, the producer price index, you saw energy inputs come down as oil prices were lower and you saw consumer electronics wholesale prices go up quite a bit. But see, that's not inflation, that's a particular impact from one and a different impact on another.

Politically, I totally accept that people go to the grocery store and see prices higher because of tariffs. That's what I call political inflation. It's going to be problematic, but the overall price level going up is a monetary phenomena. And so, I understand that it may be semantics to some people, did prices go up or not? That's all I think inflation is tariffs are if tariffs are implemented.

That's the other piece is people are wondering where inflation is from tariffs that haven't happened. But if tariffs increase prices of some things that will be talked about it will be problematic. I don't think it has anything to with the Fed. I don't think it has anything to do with interest rates. And it is only inflation as a monetary phenomena, if it leads to production of less goods and services. Because then you might have the same money supply, but less goods and services because of less trade, that can become inflationary. So there's a lot of nuance in this, but it's important nuance. And unfortunately, it doesn't lend to a quick, did this hurt a politician or not hurt a politician. That's what people are going for. That's most often what the media is going for. But it's a little bit more complicated of a subject than that.

EICHER: Well, David, you have long noted it's a tight regulatory environment that chokes housing supply off. Now Barack Obama is telling Democrats much the same thing. Last week he said you all had better get behind an abundance agenda or keep losing elections.

Do you think the former president is genuinely pro-growth here or is this just a different brand of pro-growth rhetoric?

BAHNSEN: Yes and no. It's an important distinction you've helped tee-up, because there are plenty of people in the Yimbyism movement that yes in my backyard, which I'm a part of, as opposed to the Nimbyism movement that’s not in my backyard, which is what he's criticizing. There are plenty of people that make strange bedfellows, okay. In other words they may be in agreement on a certain conclusion but coming at it from a different reason there are plenty of people that are driven by something very different than I am.

I want the production of more housing stock to let the market satisfy matters of supply and demand and prices level accordingly and I believe that Nimbyism is that artificial distortion to market forces caused by a whole number of things: environmental interventions, and often just cultural interventions. Which is usually what people on the right are guilty of, that in affluent neighborhoods.

But right-wing people just say, I don't want new growth anymore. I like my life how it is. I don't need a building, you know, down the street. I don't need new traffic or parking or whatnot. And so they want to use zoning laws to kind of impact because they don't want the noise or the construction or the interruption. President Obama is likely, as a lot of the center left, abundance people.

Ezra Klein has a new book along these lines that I generally liked. But again, they're not necessarily coming at it because they're desiring market forces to drive it. But they are after a similar outcome, which is removing impediments to get more housing stock built. And in the end, do I think that Yimbyism, the center left Yimbyism would actually want to see governmental subsidies to drive more low income housing? I think it would. And that's not what I mean by the term.

So I guess that I'm giving him a mixed report card. He's probably saying something I agree with, but for a little different reason, and more than likely would end up proposing somewhat different solutions. That's been my experience with left wing or more progressive Yimbyists.

EICHER: Well, David, this month marks 25 years since the blockbuster AOL Time Warner corporate merger. It's still the textbook example of how to destroy shareholder value.

You've called this the largest wipe out in corporate history, would you walk us through what went wrong and the key lessons we would be wise to keep front of mind today?

BAHNSEN: Well, there's the obvious sense that a lot of mergers and acquisitions in corporate America are vanity driven and should be avoided for that reason. But what I would say is more stark here is that you had a logic and intuition that said why is this company that has far inferior revenues, inferior earnings and a much less dependable, reliable, proven business plan, how are they swallowing up a company that has Time Magazine, Life Magazine, HBO, Turner broadcasting, CNN, sports illustrated, Warner Brothers, Warner Music, this Time Warner group that AOL swallowed up was iconic and real and using this preposterous stock price of AOL based on smoke and mirrors.

So the takeaways are first of all, accounting matters when you're looking at something that is what's called heavy on goodwill and trying to justify it as opposed to more traditional accounting metrics that are a little more reliable. It doesn't mean that all of it is always going to go astray but at least have more scrutiny, more validation.

And then ultimately I make the argument, too, that when they say we're going to grow the numbers this way and even then if they had it was basically leading to a place that wasn't really all that attractive. They were never going to grow with the way they said. But even if they had, it didn't justify what the deal was.

You were just dealing with something that looked like a bubble, felt like a bubble, quacked like a bubble, and people refused to call it a bubble. And a couple hundred billion dollars later, at one point combined market cap of this deal is over three hundred billion dollars and they were projecting to get to five hundred eighty four billion. Well in two thousand eighteen AOL sold from Verizon to Apollo with Yahoo for four billion. Okay. So hundreds of billions of dollars set on fire and a lot of lives ruined, a lot of careers ruined, but a very valuable and learned. Whether you're adjusting for inflation or not, this was the worst deal in American history. And maybe what we can just say out of an ending is let's keep it that way. Let's never ever do another deal this bad again.

EICHER: Alright, David Bahnsen is founder, managing partner and chief investment officer at the Bahnsen Group. He writes regularly for WORLD Opinions and at Dividendcafe.com.

David, thank you so much. We'll see you next week.

BAHNSEN: Thanks so much, Nick.

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