Moneybeat: The latest economic news

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's head of the wealth management firm the Bahnsen Group. hJe is here now and David, good morning.

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

EICHER: All right, so a flurry of activity last week, David. We had the inflation report, the CPI Consumer Price Index, and then the Fed had its latest policy meeting. So lots of data stories. What's the bigger of the stories do you think?

BAHNSEN: Yeah, I think it was exactly that. Two different inflation reports that came out, the CPI on Wednesday and then the PPI that came out on Thursday, both indicating downward pressure on inflation month over month. The producer prices, in particular, went negative, and they were expected to be up about 0.1% and they were -0.2% on core and .3 on headline. And so you had a good move for what you know the Fed is looking for in terms of cover to get to that point of rate cuts. Was it just superficial and not sustainable and not really all that noteworthy? Well, that would be news to the bond market. Nick, we were talking in late April, and the 10-year was at 4.7%, and we were talking about whether or not it would hit 5% again, as it had last year. As I'm sitting here talking, it is at 4.22%. You're talking about the 10 year down, 50 basis points, half of a percentage point in six weeks. So really strong indication in market pricing of downward pressure on inflation and inflation expectations.

EICHER: Yeah, and then that Fed meeting, David. I wonder what you thought of Chairman Powell’s statement afterward? And you know, from what I can discern, it appears the central bank has penciled in one rate cut later this year. Wasn't too long ago, we were talking about two.

BAHNSEN: Yeah, but they didn't pencil anything in. I think there's a little misnomer there. But let me clarify: The Fed in November of last year, basically indicated that they were not going to be raising rates again, and they put out what's called a dot plot, where their own governors were predicting what they think rates will be. It's not the same as stating what they're going to do. If you think about it, the Fed can't do that, because their whole point is, "We're data dependent, we're objective." Meeting by meeting, if the Fed knew in November of '23 what they were going to be doing in December of '24, it would kill data dependency. It would just mean we've already determined a path. So the dot plots are meant to be the Fed's own predictions. And as I've said most of my adult life, not entirely, the dot plots have changed to mirror what the market is saying. The market has not changed to mirror what the dot plots are saying, but the Fed's own predictions are. Well, it's true that the Fed came out with dot plots, half of the governors predicting one rate cut this year, half predicting two. I think it will end up being two, but I don't think they'll start in September. I think they'll end up starting in November and do another one in December. But it really is at this point, when you're talking about the very end of the year, somewhat token, and then the next rate cut in January. Either way that at least is what the market and the Fed are predicting is some modest rate cuts at the very end of the year, and even those are subject to change, as we've seen this year, the Fed's own predictions and the market's own predictions have been kicked out several months, a couple times.

EICHER: Well, bad political luck for President Biden. I mean, I say that advisedly, but six, nine months ago, the smart money was on Biden benefiting from earlier rate cuts in the thick of the campaign season, but now he's not going to get it.

BAHNSEN: Well, I don't happen to agree with that. I think that if you want good luck as a president, you want easy monetary policy in the third year of a term. The fourth year of a term, it's generally going to be too late. But I'm not sure that this would matter a whole lot either way. And the sense that I---and now I'm more politicking than I am economizing, but I think this election comes down to as far as issues go, with President Biden immigration and inflation, and I think that most of his narrative around those two issues is pretty well baked in, and in both of those two issues, it's not very good for him. Now, of course, this election may not be determined by issues. It may be determined, in the end, by just which of the two candidates independent voters find more tolerable. I mean, we know it's going to be a close election, but I think as far as the idea of rate cuts coming, let's say in July or September. I don't think it would have mattered at all. It isn't like unemployment is really high and rate cuts will come in and boost jobs. Unemployment is already low. It's not going to move higher or lower based on a quarter point move between now and then. So where Biden is lucky versus unlucky is that in the Fed raising rates from May of 2022 where it was 0% to July of 2023 when it went to 5.5% and we didn't go into recession, the recession probably would have been a total presidency killer, as it has been throughout history, and we didn't get a recession. And so you could argue he's kind of lucky in that regard.

EICHER: Yeah, so David, could we talk about super CEO Elon Musk for a moment? He was all over the news last week, working to get his pay package restored, an eye popping $48 billion stock compensation that when we first started hearing about this, it was over 50 billion, but owing to the decline in Tesla shares, it fell back a bit, but still a staggering number. What is your takeaway on that shareholder meeting last week, and also the notion that a judge can set his pay?

BAHNSEN: Well, this comes down to a board-approved comp package that was passed sometime back that was going to pay him 10% of the value created, and the market capitalization of the company went up $600 billion as he very successfully at that time, executed a number of major initiatives, and he was to receive something in the range of $60 billion and then a judge In Delaware threw it out, which was, in my mind, absolutely outrageous. Board approved shareholder approved private transaction between free parties, wherein the people that have skin in the game made $600 billion and a judge in Delaware determined it was unfair. Now, look, any one of us can feel, I don't want the CEO getting paid that much. No problem. Don't own the company. Sell the stock. You have no requirement to hold a stock in a company where you feel the CEO is being overpaid and your interests are being damaged, but in this case, the shareholders are only paying Elon Musk that much money, because they benefited, and this was a transaction between private parties. So I feel very strongly about the rule of law. So the people with skin in the game voted, and now this week, there was a new vote, and it was upheld, and I think it was appropriate as a matter of rule of law, and then going forward, it will either prove to be a good investment or a bad investment. But the people who should determine if it's a good investment are people who have a chance to make money if it goes well, and people have a chance to lose money if it goes poorly. And on that hinge is one of the most important cornerstones of all classical economics, the principle of skin in the game.

EICHER: Skin in the game. All right, David, I want to go back to the beginning, where you talked about the importance of signals out of the bond market and what they say about inflation expectations. So let's do a defining terms here before we go on the bond market itself, and why it gives such important information on the direction of the economy.

BAHNSEN: The term today is the bond market, and let's be clear what we're talking about. When we say the term bond market in financial markets, we're referring to the United States Treasury bond market. But when you talk about the bond market in the United States, United States of America, you're really referring to interest rates. There's no credit risk. we're just simply talking about the up and down movement of interest rates. And therefore you get a really good, clean, isolated look at how people are feeling about yields, about what they are willing to charge to be separated from their money. With a treasury bond you're taking for granted that you're getting paid back by the full faith and credit of the United States government. Same way people feel so good about FDIC insurance, a CD, things like that. This is literally a treasury bond backed by the government. James Carville, Bill Clinton's campaign manager in 1992 famously said, "If reincarnation was real, I want to come back someday as the bond market," because bond markets have an ability to have tremendous influence and indications over financial markets, over the economy, over so much of the world.

And when I refer the bond market, I'm referring to trillions of dollars, we happen to know there's $34 trillion in national debt. So at any given time we know how many treasury bonds are out there. It's equal to the amount of the national debt. And then there's bonds they're paying back, every month, and bonds that they're reissuing to issue new debt. And so you're constantly dealing with a new supply and demand. And it gives you an indication of what the appetite is out there, what investors are wanting, and what they require, and so forth. It's heavily liquid, heavily transparent. That's what we mean by the bond market.

It gives us a lot of indication of other financial conditions. And when I talk about the 10 year, it's a longer bond. So it's actually really telling us kind of what investors think about growth. Then you say, okay, look, if the economy is going to grow by 3% a year, I'm going to want 3% or more, because you would think I could get that amount of money somewhere else by having my money, you know, invested in a different place. So the interest rate of the 10 year bond gives us a lot of indication of what people's structural implications are but of course, growth, nominal growth, includes inflation plus real growth. And so if you think there's going to be 3% real growth and 1% inflation, that's four, but if you think there's going to be 3% inflation and 1% real growth, that's also four, but it's a very different four.

So the bond market gives us a look at inflation and growth expectations, and that's why I consider it such an important financial instrument.

EICHER: All right. David Bahnsen, Founder, Managing Partner and Chief Investment Officer of the Bahnsen Group. You can check out David's latest book, it's titled, Full-Time: Work and The Meaning of Life, and you can check it out at fulltimebook.com. David, I hope you had a great Father's Day weekend. So belated happy Father's Day to you, and I hope you have a great week ahead.

BAHNSEN: Well, happy day after Father's Day to you as well. Both, both you and I have lost dads who meant a great deal to us, and it's a special day for so many, so happy belated Father's Day, my friend.

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