Moneybeat: The Fed is close to done with rate hikes

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, of course, is Head of the wealth management firm, the Bahnsen Group. He is here now. And good morning to you, David.

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

EICHER: All right, David. The Fed met last week and did exactly as you and just about everyone expected. And that is, it hit a pause on interest rate increases. We’ll have to see what happens at the next meeting at the end of July. But let’s talk about what Chairman Jay Powell said in his press conference, his statement. What’d you take away from that?

BAHNSEN: I basically took away from it—I think everyone did—that it wasn’t really a statement. It was multiple statements that were either accidentally or purposely incoherent as well as very contradictory from one another.

On one hand, he talked about why they paused in hiking rates. On the other hand, you had two Fed governors predicting that there would still be two more rate hikes by the end of the year. On yet another hand, he talked about economic growth coming back. So there was sort of a little bit of everything in it; something for anyone who wants to interpret anything.

The market definitely responded favorably. I am more of the opinion, once again, that even though the futures are showing about a 65% chance of hiking at the end of July, which is four to six weeks away. There’s a lot of data that will come in, but both the CPI and PPI numbers this week, along with the inflation numbers and indexes for consumer and producer prices, give me overwhelming reason to believe that the Fed is about to be done. And then claiming all this as being a war on inflation is not making any sense anymore at all.

EICHER: OK, one last news item before we get to listener questions, David. President Biden hosted some executives at the White House last week and the issue was hidden fees on things like AirBNB rentals and tickets to concerts and sporting events, so-called “junk fees.” The president wants companies to get rid of those voluntarily and reflect an all-in price, instead of little tack-ons at the end of the transaction. And he’s talked about legislation to enforce this if companies don’t comply voluntarily.

So give us a “no free lunch” analysis of proposals like the no junk-fees initiative.

BAHNSEN: The issue of so-called junk fees—whether we’re talking about a particular White House proposal or not—this idea of various peripheral costs that come with the transaction: I think as consumers, a lot of us may wish that there was more all-in pricing, a little more simplicity, transparency.

Of course, what the White House is talking about is economically absurd. Whether you’re paying $100 for a product, and then $2 for this and $1 for that, or the company instead just charges you $103, you’re not paying any less money in Option A or Option B. What the White House is saying is that it’s easier for the consumer to understand with Option B of just having one particular fee. The “no free lunch” aspect here about trade-offs is rooted firstly on the premise that there is no possible way that whatever happens will not be paid by the consumer—no possible way. So all we’re talking about is how the consumer ends up paying it.

And my argument is that it ought to be a transaction between the service provider and the consumer and that the President of the United States should have no say in the matter whatsoever, that they are a disinterested third party and that as a matter of market activity, there is always the option for consumers to vote with the way they transact, to say, “we don’t like these different add on fees,” or, “please bill us differently, or have a competitor do it differently in a way that’s more friendly.” But this is not a matter of the federal government, and for the federal government to say it’s adding cost is incredibly ignorant economically, because, of course, the alternative is bundled pricing that just simply equals the same amount. And I just think this is basic economics that would almost take a politician to not understand.

EICHER: Okay, Morgan Buchek of Fairview, TX, writes,

“Hi David, I recently read on your blog that you are a student of American economic history, so I’m hoping you can bring clarity on one point.

I was taught in school that FDR’s New Deal government programs brought America out of the Great Depression. I recently read a book, however, called “FDR’s Folly”, that argued to the contrary: that FDR’s economic policies actually kept us in the Great Depression much longer than necessary. From your research, can you help us understand how to think accurately about this time in history?

Thanks!”

So David, what do you say?

BAHNSEN: Well, that’s a wonderful question. And it’s a very important question for setting future economic policy, because economic history has a lot to do with how people think about policymaking in the future. There is absolutely no ambiguity here that those who believe the New Deal and large government programs in the mid-1930s brought us out of the Depression are wrong, and they are decidedly wrong. 1938 is the great example; we essentially doubled the Depression in 1938 after the New Deal implementation. Even hyper liberal left-wing economist Paul Krugman has acknowledged that it was not the New Deal that brought us out of the Depression, but instead America going into the World War Two and the large ramp up of industrial activities to prepare for the war which caused us to exit the Depression.

I don’t happen to agree with that explanation much either. But unfortunately, the victors get to write the history books, and the left-wing, Keynesian side of economics won that period in time, and they have spent the last 80 years saying that the Depression ended because of the New Deal. But I very much disagree.

And I would recommend to you Amity Shlaes’ remarkable book “The Forgotten Man.” I certainly believe that some of the New Deal programs were better than others; some were perhaps more justifiable than others. But the general idea that the government spending money it didn’t have to launch various expansions of federal government projects was the source of increased aggregate demand has been refuted in my mind by very economically cogent people, not just Amity Shlaes. Historically, I think a better understanding of what was happening in monetary policy came from Milton Friedman and Anna Schwartz in the 1960s. But no, it is imperative we understand that market solutions that come from prices resetting—and there’s a whole kind of complex explanation that does not require magic of spending government money that doesn’t exist—that is a far more sensible way to end economic contractions.

EICHER: All right, well, let's go to our final question. Timothy McCandliss of Fort Walton Beach, Florida, he writes,

“Media reports surrounding boycotts of Target and other companies over LGBT issues often use lost market value to measure the boycott's impact.

For context, it seems market value (or market cap), is just a reflection of market sentiment and can balloon or reappear as quickly as it can evaporate. As such, the media coverage seems to be sensational but not relevant. Lost revenue seems like the most obvious metric to use.”

So David, what is the best way to measure?

BAHNSEN: I’ve talked about this with you before on the podcast. Sometimes when a stock price drops, that’s a reference to the market cap. It could very well be both-and to what he’s talking about: The market cap of the company is dropping because of the expectation that revenues or earnings will be dropping. And yet, there’s also other explanations that could be causing the stock price to drop. And I’ve tried to point that out with Target. In this particular quarter where Target stock price dropped a lot, it did definitely correlate with the controversy around some of their activities that people were boycotting against.

But other competitors of Target were seeing their stock price drop too that were not caught up in the culture war issue. So it gets difficult to kind of assess and exact causation.

And I agree that a revenue drop from a company that is not also accompanied by a revenue drop in their competitors gives you more clear evidence whether there is a boycott impacting things. I don’t think it’s ultimately a clear black-and-white issue with Anheuser Busch. The stock price was dropping, but it was dropping because there was clear forward-looking evidence that even though formal revenues had not been disclosed in a quarterly report, suppliers of Anheuser Busch were saying, “We’ve seen our orders drop by 20% 30%, etc.”

So there’s two different battles being waged here. There’s what shareholders may be doing to try to seek engagement with companies. And then of course, there’s what customers may be doing. Some—and in fact, over history, most—customer boycotts have been really big failures. But organized well enough, and with enough size, scale, and motivation, some customer boycotts and change in consumer activity has been very effective. So I just don’t think this leads to an answer that could ever be not nuanced.

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, I hope you have a great week!

BAHNSEN: Thanks so much, Nick.

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