Moneybeat - Quantitative impact

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

NICK EICHER, HOST: Time now for our weekly conversation and commentary on business, markets, and the economy. Financial analyst and adviser David Bahnsen joins us. David, good morning.

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

EICHER: How about we begin with the November jobs report—just out from the Labor Department on Friday, a little bit over 200,000 jobs added back into the economy, but the number was not in line with expectations and a far cry from the averages this year. How do you read it?

BAHNSEN: Yeah, I was actually encouraged by one part, which is the part I probably care most about, which was to see the labor participation force grow. And yet, you know, the discouraging part besides the headline number of expecting 550,000 and getting less than half of that in terms of new jobs created. You know, obviously, that's the focus is that there were a lot less jobs created last month. But I think that seeing, you know, several 100,000 people come back into the workforce is encouraging. So it was more of a mixed result than the headline may appear. There was some good news, but there was certainly some bad news. And I think objectively, we have to take both together. But that mismatch of people coming back into the workforce, yet not finding new work, that really just has to be attributed to that skills mismatch that continues to exist. The jobs that were having the hardest time filling, are because we simply don't have the labor force with the requisite skills to fill them.

EICHER: Could you help, David, I think it’s important to define terms. We’ve been hearing a lot about the Federal Reserve and its policy of “tapering” and the speculation whether the Fed will taper more quickly or more slowly. Help us understand what’s meant by “tapering.”

BAHNSEN: Okay, so you can't define ‘taper’, a verb, unless you define what the verb is referring to. And that is quantitative easing. And so quantitative easing is the process of the Federal Reserve buying bonds from banks with money that doesn't exist. So they're crediting the bank the cash for the bonds they buy, and they're taking the bonds onto their balance sheet. And it is a way of producing liquidity into the system, building up excess reserves at the banks, and it does have the effect, when they're buying, of theoretically putting downward pressure on bond yields. Now, the tapering just simply refers to slowing down the pace of those, but the end of the tapering, it means they've stopped doing it. And that's where we're headed at some point, I suspect in the spring of next year that they will stop altogether. So they began tapering the bond purchases of quantitative easing round three, which was the real big one post financial crisis, the end of 2013, and they stopped by 2014. And then they didn't do any quantitative easing from the end of 2014 all the way to COVID - that was over five years. And then at some point in the middle there, they were doing quantitative tightening - they were letting bonds mature, and not reinvesting them. And that's when President Trump got very irritated with Jay Powell because they were actually reducing the liquidity of the balance sheet. And it went really well for a couple years. And then you may recall in late 2018, the credit markets kind of responded negatively. And all of a sudden in 2019, Chairman Powell stopped and they started cutting rates again, and all those things. So all we're talking about right now, is this emergency quantitative easing that they began doing during COVID, that they're tapering off of that. They're not going to be doing quantitative tightening, meaning they're not going to be reducing the size of the balance sheet. But as long as they're tapering, they're still adding more liquidity in the system, just at a slower pace.

EICHER: And then, understanding that, I read lots of these stories, and suspect the WORLD listener may see these stories, too—how the financial press interprets economic data points like the jobs number we talked about at the top and its connection to the Fed’s tapering of bond purchases.

I want to read a few headlines and get your thoughts:

Declining Jobless Rate Keeps Fed on Track to Accelerate Taper

… Weak Jobs Data May Slow Fed Taper

… Fed [Governor] Not Fazed By Disappointing Job Headline, Still Wants Faster Taper

I could point to story after story. What do you make of it?

BAHNSEN: It makes me feel really bad for people that are dependent on getting their news from the mainstream press. Now, if all they were trying to say is that perhaps jobs numbers good or bad, give Chairman Powell an excuse or a spin for something he may do or not do, there can be some prima facie acceptability to that. But the notion that tapering has anything to do with the jobs picture, and that by accelerating quantitive easing we help the jobs market and by slowing it, we hurt the jobs market, it is just completely absurd. There is no economic benefit at all right now to quantitative easing. In the course of a financial freeze up that we were experiencing financial crisis, we were experiencing in the initial part of the COVID moment, people can debate it, but I obviously understand what their reasoning is to provide a lot of extra liquidity in the financial system when there was the freeze up of our entire credit markets, banking system, etc. The notion that jobs are connected right now to tapering is totally fallacious. And I think most of the media commentators now are focusing on whether or not Chairman Powell will begin raising interest rates next year, because even they know that the tapering issue is a foregone conclusion. Quantitative easing is done. Will they end it in June versus April? I don't know. I don't care if they end it tomorrow, it would have no impact on anything economic or even financial markets, in my opinion. But the Fed doesn't like to surprise markets, and they've told the market they're going to be doing it next spring or so. And so I think that they will. But the interest rate is the more important variable. And I don't believe that the Fed is really heavily leaning towards aggressively raising rates anytime soon. So I think that there's a couple different conversations that the media tends to kind of contaminate together that don't necessarily belong. But when we hear the news and listeners to WORLD hear this, it's very important to understand that there are things happening from the Fed that are not pertinent to the real economy. And in my opinion tapering is at the top of that list.

EICHER: All right! David Bahnsen, financial analyst and adviser. He writes at dividendcafe.com. Sign up there for his daily email newsletter. Thank you David.

BAHNSEN: Nick, before we go, I know that the fundraising campaign is underway, and I just want to say I think it's fantastic. I hope people will really support this endeavor. It is just so important, and I love what WORLD’s doing. I know so many listeners do and I hope they'll get really behind this endeavor.

EICHER: Well, thanks for saying that, and again, appreciate your analysis each week here. See you next time!

BAHNSEN: Thanks for having me, Nick.

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