Moneybeat: Mortgaged between a rock and a hard place

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

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

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

EICHER: No big macro-economic stories this week, so I imagine it’s all about looking into corporate profits, or losses, I suppose.

BAHNSEN: Yeah. I mean, for us right now, particularly being in the world of money management, there's no question that it's earnings season. And when you have a few weeks, every quarter, where all the major companies in the public stock market are releasing their results. That's really where you're seeing kind of what's happening under the hood in terms of revenue, growth, profit, growth, profit, margins, all of these kinds of things that really, ultimately do dictate where financial markets go. But then in all those other weeks, there can be a tendency to be focusing more on macro and the Fed and, and the jobs data and things like that. Ultimately, I think that macro plays less of a role in where company specifics matter, and that the underlying attributes of company's specific stuff is what drives stock prices, for example, over time, and so weeks, like this week, are always really refreshing for a money manager like me, because you're just sort of back to basics, you know, really seeing what's happening under the hood of American companies. And I think by and large, a lot of companies are doing very well, a lot of margins have stabilized, you don't see rapid profit deceleration. Now you're not seeing big profit growth either other than certain sectors. But that narrative of a soft landing gets really reinforced by weeks like this, where the profit story from some of our great industrial companies or banks, and whatnot, they seem reasonably stable.

EICHER: David, this week, several tech execs were at the White House, signing some voluntary guidelines on artificial intelligence. What’s your take on AI? And I mean financially. Is this all shiny-object to your way of thinking, or is there some financial substance to it?

BAHNSEN: Yeah, there's a sense in which I want to apply the term shiny object because there will be a bubble like characteristic that can take hold, and there will be a lot of people that lose a lot of money, just chasing AI investment indiscriminately. So that's a shiny object type thing. But I don't want to paint with the same brush of shiny object that I would like Bitcoin or crypto where there's no intrinsic value. People don't really know why they're owning it, and they just hope it goes higher. Ai obviously has real utility. And in that sense, it could end up being more like the internet, where early on, there were a lot of companies throwing on a.com label, and they were getting a valuation boost by doing that, but they weren't tying it in anything real, anything substantive. A lot of companies are doing that right now with AI. They're, they're using terms and vocabulary to capture kind of a mystique of artificial intelligence, but they're not connecting it to any real revenue model or any real business model. And so ultimately, I think there will be utility there will be usefulness, but I think it's going to be a tiny, tiny fraction of the amount of companies that go there and separating that wheat from the chaff will take a long time.

EICHER: I was reading a feature in The Wall Street Journal on housing prices and the double-whammy home-buyers are experiencing.

You’ve got a relative scarcity of real-estate with people in the market for homes making offers above the list and bidding prices up. But then in the rising interest-rate environment, mortgages are in the sevens. Do you see that coming down anytime soon, or are we stuck for awhile?

BAHNSEN: Well, you're really stuck right now between a rock and a hard place because the prices are down 1% year over year in terms of median home prices, and they really need to be down 15% to start to level out the market. However, people cannot buy a new home at a 7% interest rate when they already are in a mortgage at 3%. And that's the number one thing holding people in place is people that are ready to move people that are ready to upgrade buy a bigger home a nicer home, and they can't do it not because of the size or cost of the home but because of the ease interest rate, they have a deal that's too good to be true in their current home. And I ran a study on this at the DC today.com, a couple of weeks ago, it's 92% of people with a mortgage right now that have a rate below 6%. And the market rate is around 7%. But of that 92%, it's 66% that have a rate below 4%. And I believe it was 28% that have a below three. So people are not going to see their rate double or in some cases almost triple. It's just not going to happen. And so that really limits the pool of buyers. And then most sellers are well aware that if they wait rates are going to be coming down and then possibly going to be in a healthier environment. But one thing that's interesting, past softening cycles, when you shift from a buyer's, excuse me a seller's market, to a buyers market, it's usually violent. Right now, a third of all deals that closed last month with closed above asking price. And you're still seeing two or three offers on most deals that actually do go to market. But you only are seeing 20% of the deals that you saw a year ago. So volume is down 80%. And that's really the reason why is that buyers and sellers are at a stalemate, buyers aren't going to do a 7% mortgage and sellers aren't going to lower their price.

EICHER: Good Dividend Cafe this past weekend, David, on supply chains and our vulnerability there with respect to China. Let me throw a challenge at you: can you squeeze that down here in our time remaining? It’s worth thinking about after the Covid moment exposed the vulnerability of the supply chain and how we ought to think about on-shoring more of that and not being so reliant on China.

BAHNSEN: Yes, it's always a hard challenge, Nick, for I have like two hours of stuff to say, and I have to get it into 20 minutes in dividend Cafe, and then take 20 minutes a dividend Cafe into two minutes for world is tough. But you know, in a nutshell, it's a fair question. I'm basically saying that for different reasons than people imagined six or seven years ago, we are seeing a slow conversion out of a lot of the offshoring to China for manufacturing, and either into onshoring or nearshoring, meaning moving into a country, not China, but not necessarily the United States could be Mexico could be Canada, etc. And then it isn't happening at a lightspeed pace, but it has picked up and it's picked up for reasons more national security driven, juxtaposed with cultural concerns, but not the protectionist or economic nationalist reasons that we're in the political sphere seven years ago, I think that there is 0% chance that this happens without disruption, that there will be some negative disruption around it, and there will be positive opportunity around it as well. But my concern would be the government messing it up. This is not the time to be offering subsidies and credits and corporate welfare to people, but allowing this normal market process and seeing some of the competitive disadvantages that have taken hold in utilizing China as a vital part of supply chain, I think that we're gonna see a huge increase of productivity United States, if the government doesn't get in the way, but too many people are begging the government to get involved in this. And I vehemently disagree. And a lot of people on the right are asking the government to do that. And I vehemently disagree. I think that ultimately, the country learned out of the COVID moment that we do have a little too much of our supply chain for national security reasons dependent on China. And it isn't always just that the entire thing is manufactured there. We could be manufacturing something in Korea, or something in the US, but it goes through China at some point along the way. And that there is a benefit to us taking more control of our supply chain. And we have the 77% increase in factory construction in America in the last year. That's a great number, but people got to understand that's off of a very, very low number. So even plus 77% is not as high as it may sound. The next step when you build factories is you need machinery in the factories. And the next step when you put machinery in factories is you need people to work there. My question is not about China. It says the US going to have the labor participation, particularly from able bodied men, I have to say, because all of the whining about China's supply chain is all for naught if we can't get people to go got to work at new factories.

EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. His personal website is Bahnsen.com. His weekly Dividend Cafe is found at dividendcafe.com.

David, thanks, have a great week!

BAHNSEN: Thanks so much, Nick.

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