Moneybeat: On the margin

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 Bahnsen. David is head of the wealth management firm, The Bahnsen Group. And he is here now. David, good morning.

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

EICHER: All right, David, we had a couple of economic data points that broke into the news last week, both of them measuring inflation, or trying to, but coming at it from different angles. Talking, of course, about the consumer price index, and the producer price index. And of course, we look at those data points in light of trying to predict when the Federal Reserve might back off of these high interest rates. Should we talk about these data points together? Or separately? Or how do you want to go?

BAHNSEN: Well, I think that there, it's kind of both. I mean, you want to look at the separate indicators from each and then what the aggregate lesson may be. And it's one of those weeks where, you know, the consumer price index came in 0.1% higher than expected, and the producer price index came in 0.1% lower than expected. And so when you take it together, the sort of a mixed bag, the lesson is actually the same from both, which is that in trying to measure something called an aggregate price level, you're gonna get outliers that skew the data. 

Right now, my concern for upside inflation is the one thing that I think really matters most to people and has nothing to do with the Fed, and that's oil. We were in the mid 70s, for a long time, and it's come now to the mid 80s. And as that sits there around the kind of higher 80s range, you have to wonder is it going to move into the 90s and even 100? At that point, the core inflation rate may not move at all, but the headline inflation rate will, and there wouldn't be anything the Fed could do about oil prices. That's why we created a separation of core and headline because they acknowledged that oil is particularly volatile, and particularly subject to geopolitical and, and commodity, you know, price movements that are outside of normal functions in the monetary and economic system. So it's a complicated bag, and it does provide people a lot of talking points to help fit their pre-existing narratives on things. But I'm trying to just be as objective and thorough as I can here.

EICHER: David, I'm assuming that the oil price issue is a supply side issue more than it is a demand side?

BAHNSEN: Well, yeah, I mean, it's obviously everything is always a little bit of both, but in this one more than the other. And in this case, OPEC+ has continued to not restore their normal production levels, even as prices have come back into the 80s, and announced further, they're going to stay at the lower production level, at least through June at this point. Now, why would OPEC+ do that? Why would they cut themselves off from a level of volume-driven profits even at higher price levels? And the answer is that they remain utterly furious at the United States for the Strategic Petroleum Reserve antics of 2022, whereby the United States flooded with additional oil from their emergency reserves, and then in 2023 did not refill it at the level that OPEC+ had expected. 

It's kind of a case where someone who exists to manipulate a price is mad at someone else who's manipulating the price. And so they're going to go and manipulate a price, and then the other party is going to respond themselves by manipulating the price, all the while both sides are calling themselves price manipulators. So neither the United States nor OPEC+ should be, or has any obligation to be, producing more oil than the market needs. But when both of them use the production of oil supply below demand levels as a means of competing with one another or manipulating the price, then you get all kinds of gamesmanship. And of course, you have to remember the United States also has the advantage of oil being denominated in their currency. So I'm an American and not an advocate for OPEC+, who are mostly very bad and evil actors. But there's a lot of truth to the accusations that both sides use oil and currency in a manipulative fashion.

EICHER: Sure. Well, David moving along here, President Biden issued another tranche of student loan debt cancellation last week. He's kind of been nickel and diming what he wanted to do originally, which was offered blanket relief. But the Supreme Court slapped him on the wrist a couple of years ago, said he had no authority to do that. So instead have something close to a trillion dollars with the tranche from last week, he's now up to $153 billion. I wonder at what point does this get noticed in the macro economic world?

BAHNSEN: Well, I think there's two questions in there, Nick. The answer to the second is on the macro economic level. Obviously, not. It is too small of a number. It's gone in piece by piece. A lot of it had been priced in and known about already, you know, certainly something like 7 billion, which was I think the number this week across a 5.9 trillion, doesn't have a particular economic impact, all of a sudden, would say a whole bunch of people that it's not that many, but a certain amount with a $200 monthly payment no longer have to make it. And they weren't making it anyways, that's the other thing is that he's forgiving the debt of a lot of people who already weren't paying it back. That was especially true early on, because they would come out of that whole COVID for, you know, pause where they weren't requiring payments. 

So, I do think it's an outrageous story, just utterly outrageous. And if there is a macro economic impact, it's when it gets to a point of a moral hazard by which, you know, if he had gotten away with that blanket debt for cancellation, he had planned that the Supreme Court said no, the moral hazard that would come about where people started expecting more of it. And also, eventually believing that credit card debt would start to be forgiven or other forms of consumer debt that have put a burden on people. And, you know, I think it's a mixed bag enough that there's too much confusion to allow a detectable macro trend. But all economics is marginal. And that's one of the things that we learned early on as a student of economics is that this stuff takes place on the margin. And on the margin, this outrageous activity has a marginal impact.

EICHER: Well, I think that's Defining Terms for us this week, David, the phrase that you just used, I know it's an important economic concept that all economics is on the margin. But can you break that down a little more simply, for us? What do you mean when you talk about that?

BAHNSEN: Yeah, the notion of marginal economics is really a fruit of the classical economic movement in the 18th and into the 19th centuries, where we understood that we don't just think about the sum total of something, but what happens at the next increment of it. And an example I would use with economic students I teach, you know, you get a lot of satisfaction as a consumer out of a cheeseburger. And you know, if you're really hungry, you're a big guy, you might really like a second one, too. But most people know that the 10th one is not really good, and has a diminishing return for you. And so there's a certain dollar amount we would pay for a cheeseburger, and we would not pay anything for a 10th cheeseburger. Or maybe we'd only just pay, you know, a very small amount. The value starts to go down on the margin. But you could say, “Well, what's the difference? A cheeseburger's a cheeseburger.” But see, it isn't, because the first one provides enhanced value relative to what the 10th one does. And that's an extreme and almost kind of humorous example, but I think it makes the point of the way all economics works, is, you know, when I look at monetary policy, your first rate cut has a certain stimulative impact. But the last rate cut is on the margin producing less behavioral response. And so whether it's monetary fiscal spending, we have to always think about what the next increment will do to an expenditure, to in addition, to a subtraction. That's what we mean by marginal economics. Not merely what is happening in sum total, but what is happening at the next increment.

EICHER: All right, David Bahnsen, founder, managing partner and chief investment officer of The Bahnsen Group. David's latest book is titled Full-Time: Work and the Meaning of Life, and you can find out more by visiting fulltimebook.com. David, I hope you have a great week.

BAHNSEN: Thanks so much, Nick. Good to be with you.

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