Moneybeat: The resilience test

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JENNY ROUGH, 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: David, the two economic reports driving headlines this week were the jobs report and the consumer inflation numbers. According to the one: Inflation cooled a bit, that’s the Consumer Price Index reading, CPI. And according to the other: Unemployment rose to its highest level in several years.

Both reports, of course, were affected by delays and distortions tied to the government shutdown.

So as you look at those numbers—together or separately, however you want to approach it—what stands out to you about what they do, and do not, tell us about the economy right now?

BAHNSEN: Well, let’s start with the unemployment report, because it’s one of the rare times that I get to say that a move higher—in this case to 4.6% unemployment—was for exactly the right reason, which was that the number of people entering the labor force had gone up.

So now you have new people coming into the labor force, adding to that denominator. You have to see them get jobs, but it is a good thing for more people to be coming into the labor force. We’ve seen so little of that for so long that I’ll take that as an encouraging sign, although there weren’t a lot of new jobs created on a net basis.

When the administration is talking about some of the new jobs created this year in the private sector, that’s a gross number. It isn’t looking at the net, given that we’ve had a pickup in layoffs this year. So there’s still a lot of work to be done on the jobs front, Nick.

But a 4.6% unemployment rate from 4.5%, because more people entered the labor force, that’s a better outcome.

Now, the CPI number—I hesitate to even talk about it, because I cannot believe for the life of me that they even released it. There was essentially no data from October, a totally made-up number on the shelter side because they had no data, so they plugged in a 0% number for it. There were only 14 days of data from November, and the full month they had was from September, which by December is obviously totally obsolete.

So it was just a very odd number. It didn’t include any insurance figures. Auto insurance is a pretty big component of people’s spending and monthly expenses, so I didn’t really put much weight on it.

Whether people want to assume the current inflation rate is somewhere between two-and-a-half or three percent is immaterial to me. It is somewhere in there. By the way, I’ve long believed that the contribution to CPI from shelter is overstated, but I think the administration putting in a 0% number is a little disingenuous.

So we have a little room to go here in terms of the shutdown being resolved before we get data that I think is going to be reliable.

EICHER: So, between zero and more than that, a lot of guesswork going on here.

BAHNSEN: Well, look, zero could be right. It could be negative. I don’t think it’s negative, but the point is they don’t know either. They put it in as an input, and the footnotes are pretty clear.

You had 14 days of data in November. You had no data in October. You were missing whole product categories. So it’s hard to believe that the news outlets spent as much time as they did covering it at all.

EICHER: Given all that, do you think it would have been better for the government simply to say, “We don’t know enough right now,” instead of publishing numbers the Fed itself is looking at skeptically. So just skip it and regroup in January?

BAHNSEN: I suppose not. I suppose that would have looked a little funky. To be honest with you, they did disclose the holes in this report. The administration said this is missing, this is missing that.

I think the flaw here was the way the financial media reported on it. They didn’t adequately footnote it. But the report itself did have all the right caveats.

EICHER: Okay, so that brings us to your Dividend Cafe this week. You step back from the month-to-month noise and take a 25-year view, and what emerges is a pattern of repeated instability—economic instability, political, cultural instability—stretching across a quarter century. Why was it important to you to zoom out like that?

BAHNSEN: Well, I would argue that I could zoom out even further and we’re not going to see anything different. You could take any 25-year period, and that’s because you and I know we live in a fallen world. On this side of glory, one of the hallmarks of original sin is that you end up, on a systemic basis, with geopolitical original sin, with economic instabilities, and so forth.

There’s no 25-year period that isn’t going to have that.

But I wanted to focus on these 25 years because we’re now at the end of the first quarter century of this new century. It’s unbelievable. If people were to look at it and say, “What’s happened so far in 25 years?”—you have 9/11, you have the tech implosion, you have the global financial crisis that brought the world’s financial system to its knees. You have the ascendancy of China. You have the COVID pandemic.

There are all sorts of major events.

Do we want to argue that these 25 years were more unstable than any other 25-year period—than the Cold War, than World War II, than Vietnam? You get these things in the news cycle all the time.

I think it’s a really interesting trip down memory lane to think about the last 25 years. But for investors, and for those looking at this in the context of economics, to look at it and then say: all of those major instabilities, and investors are up seven-and-a-half times over the last 25 years.

That ought to give us perspective on how markets absorb instability. I have to say, I think markets absorb instability a lot better than governments do.

EICHER: And that gets to one of the big takeaways for me—that government economic policy may not matter as much as we often think, because there’s something about the resilience of a free-market economy, and the ability of businesses and business leaders to adapt.

BAHNSEN: That’s where you have to combine your two sentences there, because it doesn’t matter about the policy as long as you have a free-market economy. If the policy is to confiscate all corporate profits, well, that would change things.

But to the extent that we have a generally free-market system, you’re exactly right.

This is also part of my theological framework. As much as original sin means I expect ongoing instability, I also believe in the human person created by God, with faculties for overcoming problems, with the ability to create solutions, with an innovative and productive engine behind him or her that is part of our created person.

That’s where profit realities come from—how God made the human person. You put that at scale, you put it in the context of an interconnected, global, very substantially resourced economy, and that’s how you get the kind of profit growth and innovation we’ve had, which have led to really tremendous returns for investors.

EICHER: All right. David Bahnsen—founder, managing partner, and chief investment officer of The Bahnsen Group. He writes at DividendCafe.com and at WORLD Opinions. David, thanks and Merry Christmas. We’ll see you after the holiday.

BAHNSEN: Merry Christmas, Nick.

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