Moneybeat: The Hormuz effect

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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. 

Good morning, David.

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

EICHER: Well David, the jobs report for February came in as a really unhappy surprise. The U.S. economy losing a net of more than 90,000 jobs, the gains that we saw in December and January got revised down as well—so all taken together, that's a 150-160 thousand jobs that we thought we may have had that we did not have. So the labor market is looking all of a sudden quite a bit weaker than economists thought just a month ago.

So when you step back, do you see this as a real signal of weakness in the labor market, or it just another reminder of how noisy these reports each month can be?

BAHNSEN: Unfortunately, it’s a lot more of the former. Look, I’ll give some qualifiers—there’s a little bit of noise maybe that might allow for some bounce-back in the March report. 

But let’s just be real clear on a few things: The revisions are almost the worst part, because they take away some of the story that maybe things were starting to look better in the last couple months. It was another 60,000 on top of the 90,000. You ended up with 161,000 net job decline from this report.

One of the talking points has been "well, the total jobs number worsened, but it’s mostly government jobs we’re losing and the productive part of the private sector is still doing fine." But this was 86,000, it might have been 84,000, I mean it was almost entirely the 90,000 this month, private-sector. And I think it was 6,000 jobs lost in the governmental sector.

So on almost every point—by the way, the manufacturing jobs, Nick, were down by 12,000. So the notion that tariffs are working to bring back manufacturing employment is most certainly not happening. I believe manufacturing jobs have been down every month for the last year.

The total jobs picture was really bad. The unemployment rate ticked up. The labor-force participation force ticked down.

But then I mentioned, you know, you can try to find a little bit noise. There was a nursing strike that I think ended, and if that was factored in, that might allow for about 20,000 jobs coming back.

So there were certainly seasonal issues with retail because of weather, and even though they tried to factor that in to the seasonal adjustments, they might not have gotten those fully right. So we’ll see if some of the restaurant and bar jobs that were down might come back with weather improvement.

But my point being: we have a precarious labor environment, and we haven’t had robust hiring for a long time. And the upside, the glass is half-full has been that firings haven’t been big. But now you’re starting to see negative job growth, and that becomes much more concerning.

EICHER: I do want to ask about the Federal Reserve, David. The Fed is still holding interest rates in what it calls a restrictive stance. Is the central bank a bit late to the party here in bringing rates down toward neutral?

BAHNSEN: I would like to say no, I don’t blame the Fed, because it’s uncomfortable for me to think that I want the interest-rate setting policy to be the factor driving job growth. 

But it would also probably be economically ignorant to say that it isn’t any factor at all. That any degree of tightening above a neutral rate, certainly on the margin, would be a factor in financial services and real estate. The construction aspect is a big deal because the housing freeze has impacted employment opportunities there. So it’s harder a measure—that’s why I hesitate. 

But no, I’m comfortable trying to be honest and objective that there are some Fed fingerprints here. But based on what I see in the small and mid-sized business and the manufacturing side, I suspect that tariffs are a factor in this as well.

EICHER: David, I'd like to turn to the war in Iran. Obviously we have more information than we had last week when we talked. 

Oil prices have now moved above $90 a barrel, the Strait of Hormuz effectively is shut down for shipping. So beginning with the oil market—is this about what you expected, or has the spike been a bit more severe?

BAHNSEN: Well, the difference is the timing of it. The fact that oil was only up about five and a half percent the day we last spoke last Monday was significantly less than most people would have expected. It was almost like no impact at all. And that each day it just sort of ticked higher and higher, this kind of incremental issue. 

I gave a speech in Nashville, Tenn., on Thursday night and said, "Hey, oil is up 17 percent on the week. That’s not as bad as it could have been, but it’s not nothing, but you know we're not looking at a 17% week over week increase and that becomes a factor"

And then by Friday it was up another nine and a half, and it got to about 31 percent for the week. And now that's, that's a real move.

Yeah, I think that the other issue—and I highlighted this in my DividendCafe.com over the weekend—there is something called backwardation, and it's the opposite of what's called contango, where you know, people are buying contracts to secure certain prices at different points out. And when you're paying less for something in a month and more in the future, or the opposite, more in a month but less in the future, that’s what backwardation is. 

Right now, oil futures going out nine months, twelve months, are in the $60s, and in the next thirty days, they're in the $90s.

So there is a significant, dramatic backwardation, which is a way of saying people believing that these are temporal supply shocks, largely driven by Strait of Hormuz problems.

And I wonder if there's a part of this, Nick, that is on the back end, that further outpoint, predicting not only that all these short term things get better—which they certainly will, by the way—but maybe, much better. Meaning maybe—this is by no means a prediction—but you start to wonder if some of this is evident in oil future oil prices. 

That Iran might end up with a leadership that the U.S. can work with, that they can pull sanctions from, that there can be international sanctions relief. Because if Iran became a global exporter of oil, remember, they've been very very handcuffed for some time by sanctions—their contribution to global oil supply has been really constrained relative to their capacity—that could push oil supply down quite a bit in the future.

So we have to talk about this right now as a spike in oil prices that is going to impact prices, and yet we might be talking about it very differently on the other side of this depending on how the Iranian leadership aspect of this shakes out.

EICHER: Right. Well David, there is one thing I’ve really been wondering about, and that's the broader shipping picture.

And I'm not talking just about the Strait of Hormuz—although I am talking about that—but also the possibility of Houthis in Yemen launching attacks that would affect Red Sea shipping. So potentially, we might have two global choke points at the same time.

But here’s what I'm not fully understanding: If Iran is taking the brunt of the military strikes right now—and clearly Iran is taking the brunt of the military strikes—how is it that Iran is able effectively to shut down traffic through the Strait of Hormuz? 

Now maybe this is more of a military question than an economic question, but why is it that the U.S. simply hasn't been able to clear that lane and restore that shipping?

BAHNSEN: Yeah, but this isn’t a military issue—this is an economic issue.

Iran has not closed the Strait of Hormuz. There's 147 cargo ships that have dropped anchor, that have essentially said, "We're not moving." Because the drone attacks, which is the one capability that Iran appears to have, they essentially, the fear of something going on, that their safety cannot be secured at this time. 

So from an insurance standpoint, the operators are not comfortable going. The big Danish shipping company Maersk closed a couple of routes from Middle East to both Asia and Europe over the weekend.

Now by the way, this is not just an energy story or oil story, because that cargo shipping, the containers, this ends up impacting a lot more than just energy—it's the shipment of goods.

And you see, now look, container prices and shipping prices went up this week, but they had been very low, so they came up off of a low price. 

But I don't think it's that Iran has militarily blocked Strait of Hormuz. It's that there's enough fear and trepidation that the companies that operate in the Strait of Hormuz do not want to operate right now. 

And that's what the U.S. is looking to secure, that they'll ensure the safety of some of these things moving. 

You might see this move pretty quickly. The U.S. has the capacity to get something done, and I happen to believe that there's been a lot of conversations about how that could be facilitated, even outside the merely military aspect, which obviously we have a lot to say about as well. 

EICHER: David Bahnsen is founder, managing partner, and chief investment officer of the Bahnsen Group. David writes regularly at DividendCafe.com and at WORLD Opinions.

David, hope you have a great week this week. Just want to thank you again for the work that you did with our staff this past week at our retreat. Very much appreciated. So thank you for that, and thank you for this!

We’ll see you next week.

BAHNSEN: Well, thank you. It was an absolute blessing to be there. Thanks so much, Nick. 

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