Moneybeat: Still the best house

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

NICK EICHER, HOST: It’s 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. Good morning to you.

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

EICHER: Let’s begin with the August jobs report. The economy added just 22,000 jobs last month—and revisions to prior months tell us things were even weaker than we thought. June’s number was revised down into negative territory—now showing a loss of 13,000 jobs. July was revised up slightly, but altogether, we’ve had just over 100,000 net new jobs added in the past four months … really weak. And most of the gains we did see coming from healthcare and social assistance. But manufacturing jobs are down, construction is stalling, and the unemployment rate is holding at 4.3 percent. So David, how do you read the trend?

BAHNSEN: Well, what we see right now is a really clear trend where there are not a lot of firings going on. There are not a lot of people being laid off. There’s more than there has been, but that number is still reasonably low.

However, there’s not a lot of hirings—so you have low firings and low hirings. That is obviously not an environment for job growth, and it often is an environment that precedes negative job creation. We haven’t gotten there yet, but it’s certainly not trending in a good direction.

EICHER: Well, media reports citing fed funds futures show markets have fully priced in a 25-basis-point rate cut in September—a quarter point—so that’s almost certain to happen.

But there’s now talk not just of this month, but three straight cuts by year-end.

So David, is this change in expectations really a reflection of deeper economic weakness? How do you read it?

BAHNSEN: Well, you read it for what it is. There’s a 100% chance that there’s at least a quarter-point rate cut coming next week.

Now, what has changed is that there’s now actually an 11% chance, which isn’t very high, but it’s higher than zero, that there will be a half-a-point rate cut at the September meeting. So it’s, in all likelihood, a quarter point. There’s a small chance it’s a half point.

But now, if you go out to the December futures, what you’re seeing is that there is now a 65% chance of 75 basis points—three rate cuts—by the end of the year. But it’s actually another 8% that there’s a whole 1%, so basically there’s 73% chance that we’re getting between three rate cuts and as high as four, although the four is certainly an outlier.

My point being that the entire narrative has changed.

It’s interesting, to be honest, that the administration might celebrate this, because obviously the President has wanted rate cuts and asked for them for some time. And the President, as I’ve been saying all year, is most certainly going to get his rate cuts. But that they’re getting them for the reasons that they’re getting them is not really going to be a positive, which is that I think the Fed is very concerned at this point that the job picture is deteriorating.

So economic weakness as a reason to cut rates is not exactly what you want—versus cutting rates because you had gotten overly tight, and you’re trying to avoid credit conditions and financial markets tightening up.

You notice every time there’s talk of rate cuts, markets have rallied. Yet, on Friday, markets sold off.

Why did markets sell off when the certainty of rate cuts increased?

Well, first of all, I think markets were already quite confident rate cuts were coming, Nick. But beyond that, the reason now matters. The reason being a weaker economy that could potentially get entrenched—that’s a concern.

We’re not falling into recession off of this, but there’s no question that we are beginning to see some cracks in the armor.

EICHER: But despite that ,you wrote in this week’s Dividend Café that America remains “incredibly investable”—largely for this reason: because we’ve built an economic framework that rewards risk.

I was really interested in the contrast you drew between the United States and Europe: specifically that over the past fifty years, the U.S. has created more than 250 companies worth $10 billion or more. Europe? Just 14. So let’s put it all together: What makes the U.S. such fertile ground for investment? And where do you see the most serious drift from what built that edge?

BAHNSEN: Look, the United States was basically formed as a country under free market principles, out of a DNA that I believe was also intersected with a national character of pioneering, spirit of entrepreneurialism.

There was essentially, from the get-go, a DNA that was pro-growth, and there was a rule of law and respect for private property and implementation of various market principles that were laissez-faire, that believed in the dignity of the individual, that drove economic growth and did so profoundly.

You know, now the whole world has grown in the last 250 years. There has been an industrial revolution and a digital revolution that created a higher standard of living for the whole world.

But the United States grew more than that. And when you look at our investment markets, there’s just no question that we’ve attracted capital, and that that capital has generated big returns. And it’s done so specifically because of the things I’m talking about.

Where freedom has reigned, there has been better economic and investment returns all over the world. The United States has been the gold standard for that.

Where there has not been any freedom—totalitarian societies—there has not been attractive returns.

Then what you see is an awful lot of fuzzy middle. A place like Europe is a great example, because it is not totalitarian. It is a democratic society. They have elections that are free elections. But they have a heavy intervention into their markets, into their economy—a heavy desire to mute the effect of risk.

That deadens entrepreneurial activity. It deadens the investment opportunity and the return on capital that can be generated.

This is a historical fact that has played out. It is something that Americans ought to have a lot of gratitude for. But I also believe it’s something Americans need to be cautious of.

Are we trying to muddle in the economy in a way that could undermine what has been our biggest strength?

Well, we’ve obviously done that a great deal already. I think it has hampered growth. It’s kept us in a bad neighborhood. But we’ve still been the best house in that bad neighborhood.

I’m not sure right now that there’s a whole lot we can do about the neighborhood. But I do believe there’s something we can do about our house—making sure that we at least maintain a level of freedom, a level of entrepreneurial celebration, a level of economic aspiration that is at least the best in the world, even if it isn’t going to be the best we’re capable of.

EICHER: All right, David I should mention that we are now one week away from our event in Houston, The WORLD Stage. Really looking forward to that. We are nearly full, so please don’t put it off. Head over to wng.org/theworldstage and reserve your spot right now. There’s no charge, but space is limited. We’re meeting in downtown Houston September 15th, next Monday night. Meet David and the WORLD team. David will be speaking on themes from his book Full Time: Work and the Meaning of Life. He and I will sit down for an interview after that, we’ll take audience questions, and then hang out for pictures and signed copies of David’s book. It’s going to be a great evening.

Details and sign ups at wng.org/theworldstage, the link’s in the transcript.

David Bahnsen, founder, managing partner and Chief Investment Officer at The Bahnsen Group. He writes regularly for WORLD Opinions, and at dividend-cafe.com. David, thanks. See you next week, literally, in Houston.

BAHNSEN: Thanks so much, good to be with you.

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