Moneybeat: Overton window economics

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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.

David, good morning to you.

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

EICHER: Well David, let’s begin with the EPA’s move to rescind the Obama-era endangerment finding—the legal foundation for federal climate regulation. And some analysts are saying that consumers won’t feel much impact there because many of the major rules never fully took effect.

But whether it’s true or not at the consumer level, do you think that it changes the investment climate for the energy industry—particularly when it comes to capital expenditures?

BAHNSEN: Yeah, I think that we have to understand that these things have a sort of chain reaction to them, and particularly this endangerment finding that was used pre-textually to rationalize a lot of EPA intervention and a lot of cost in particular.

Your point about CapEx is a good one—that there is some loosening of the concerns about capital expenditures into the energy industry when this, amongst other things, looms over people. The general finding that was used to sort of haunt people from doing investment in essentially carbon and the fossil fuel industry, has taken a blow.

I think that there are other issues that still linger. That broader cultural context still matters, and that has been more favorable over the years anyways, but not because there has been a movement away from, for example, this endangerment finding as much as there’s been a movement away from the alternatives—that people have not found the intermittent sources of energy from so-called clean or green energy solutions to be reliable.

What this does to me—the reason I like the fact that President Trump did this—goes beyond though just the fact that some energy company might wake up the next day and now decide to go forward with a particular project. I don’t think it’s quite that linear.

What it does, though, is set a broader cultural context in which there is a movement for the energy industry to recognize the need for ongoing investment in oil and gas. And by the way, then that incentivizes people to find cleaner ways to do that. 

That’s where we’ve moved the needle the most. And the best example of that has been greater use of natural gas versus crude oil and particularly coal. 

So ironically, I think what the Obama-era stipulation did was disincentivize natural gas, which would have been by far a cleaner solution than where many had gone anyways, particularly in China.

EICHER: Well so David, say that you’re an energy executive or investor, how much weight do you put on something like this—and how permanent does it feel?

BAHSNEN: I don’t think it’s as simple as just this. I mean, it is true that anything an executive branch can do can be done away by another executive branch. 

So I don’t think it’s a matter of them setting policy around what was done before or what has been undone now. It’s more reading the tea leaves of the broader cultural context. 

That’s why I keep using that phrase, Nick. Very little of our environmental or energy policies have been legislated.

So energy companies 15 years ago, 20 years ago, only had the whims of an executive branch decision to go off of, and that’s all they have now as well. So I do think that it is a factor in their calculus, but the broader issue is where the overall cultural context is, and this moves the Overton window in that regard.

EICHER: Alright David, well we got some fresh economic data this past week. Inflation cooled to 2.4% year on year, that was helped out by lower prices at the gasoline pump. And the jobs report showed some modest gains, but—and it seems there’s always a but with these reports—this one included downward revisions to prior months.

So let's take the two of those together, the inflation and the labor data. What do these numbers say about where the economy stands?

BAHNSEN: They say the same thing that we’ve been talking about for quite some time, which is this push-pull, you know, mixed bag.

The biggest issue, though, is with shelter—that it is still showing annual increases of 3%, but that is much lower than what had been four or five, and this is the thing I’ve been talking about for a long time—and why the inflation numbers were always inevitably going to be coming lower. 

I happen to think they’re even lower than three in real-time market indicators. But the way it’s measured in the CPI, it’s still come down to three, which is much lower than the over 4% it was before.

The issue with jobs is much more complicated, because you did have a higher-than-expected number, it’s still much lower than what our trend line growth had been, but then one side of the pool filled up a bit, the other side of the pool cleaned out a bit because of the revisions that you talk about.

So as long as we’re still getting these heavy revisions later, it’s hard for us to have confidence in the real-time numbers.

The private sector data does not speak to a robust jobs environment. But none of the data speaks to a ton of firings, it just doesn’t speak to a ton of hirings. And so if you have a sort of run-in-place jobs environment, that’s not the worst thing; it’s not recessionary, but you do want to see more jobs being created.

EICHER: Well David, market story this past week: A new AI tool from Anthropic that automates legal and compliance work. It triggered a selloff in software stocks—investors realizing AI may disrupt some of the very companies that were expected to benefit from it.

So what do you think: Are we seeing a classic example of creative destruction—or maybe just a balancing of stock prices that were too expensive?

BAHNSEN: Well, we’re not seeing it yet, but we’re certainly aware that it’s coming. And it should be something that people are excited about in the sense that if there was a tool on the horizon that is going to make something be done better or be done more efficiently, that sounds like a very good thing.

I think from an investment standpoint, the issue is not so much, “Oh, we didn’t know a tool was coming that would be disruptive,” as much as some of these software companies are so overpriced that their prices don’t reflect some of these things.

And then you need a catalyst to reprice. And a catalyst in the form of successful unleashing of a new product from Anthropic, for example, is the type of thing that sometimes results in what we refer to as a repricing.

This is very much a story of the software industry had been trading at 28 times earnings and it re-rated to 23 times earnings.

Twenty-three is still not cheap. Twenty-three is not saying, “Oh, creative destruction is coming. AI is putting us out of business.” That would be about 15 times or 12 times, earnings.

It’s just repriced because the 28 was too expensive and was not accounting from an excessive valuation, was not accounting for some of the disruptions and so forth.

I continue to not be even remotely in the AI doomsday-ish camp that suggests that AI is just going to make it that no one has a job anymore. I think that represents a profound misunderstanding of how humanity works.

But I do believe that overpriced stocks are vulnerable to any form of catalyst that disrupts their margins, their model, their utility. And we got a bit of a sign for that. And that’s what you’ve seen—not just last week, but even over the last several months—that there’s been a bit of a rotation in the stock market around some of these realities.

EICHER: Right, and in Dividend Cafe, you make the point that efficiency gains from AI are not the same thing as real economic growth. What do you think would have to happen for AI to translate into measurable output—not just cutting costs, positive as that is for profit margins?

BAHNSEN: Yeah, it was, it’s a major theme in the discussion many macroeconomists are having about AI.

I think that the possibility is there—I’ll recap for WORLD listeners what you’re talking about that may not read dividendcafe.com: Arguing that AI makes something done quicker or makes it done more efficiently is not the same as arguing that you’re getting more things made.

And the argument to rebut that is, if you can get things done quicker, then you can get more things done, period, and it would increase output.

The problem with that argument, Nick, is that the story of digital technology and the internet was not a story of getting more done. It was getting things done in a better way and then being content with that.

The productivity did not rise in concert with the enhanced efficiency.

So we are at risk of making a mistake of confusing activity with output. And I don’t know very many people that have played around with AI a bit who don’t know that it’s going to benefit activity and efficiency. 

But seeing it lead to greater production of goods and services, higher output, that then creates tangible value—that’s the big question. 

And I’m bullish that AI will be transformative, but I am not bullish that that is all going to be imminent and clean and go as expected. I believe there will be some bumpy rides along the way.

EICHER: All right. David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. He writes at DividendCafe.com and at WORLD Opinions. David, I hope you have a great week, we'll talk to you next time!

BAHNSEN: Thanks so much, Nick.

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