Moneybeat: The wisdom of markets

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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: Well, David, I’d like to start with something that showed up on the front pages of both The New York Times and The Wall Street Journal over the weekend: this question of affordability. And I know it’s primarily political, but there’s an economic piece here.

The Times is fact checking whether President Trump is right when he talks about affordability pressures. And the Journal took the story in a completely different direction. It had a blunt headline on its econ page. The headline was this: “Everyone is talking about the affordability crisis. It can’t be solved.”

So there’s quite a lot wrapped up here. David, what do you make of the broader affordability issue? It feels like this is going to dominate politics in the midterm elections. But do you think we are anywhere close to having an honest conversation about it?

BAHNSEN: Well, we’re definitely not getting close to having an honest conversation about affordability. But part of that is because I don’t think people know even what questions to be asking that could help lead to an honest conversation.

You know, it’s funny, you had said it’s sort of a political thing, but it has an economic connotation too, and I think we’ll be in a better position when we sort of reverse that: where we think, I guess this has a political connotation, but it’s primarily an economic question.

That’s really the truth — that this is an economic issue that is related to the supply and demand equilibrium, the production of goods and services, the demand that goes therewith, the supply of money that exists in the economy, how they juxtapose with one another, affecting prices. That’s the story of how prices are set. That’s all a bunch of economic variables, but it becomes highly politicized, and that is pretty much irreversible.

Both parties have done it to the other party when they’re in charge, to the point where we’ve now decided that what eggs cost at the grocery store must be either the fault or credit of the President. It’s rather insane, if you think about it, but the problem is it’s just true enough that people can run with it.

Where there are presidential actions, there are political actions that impact prices, but there’s never been anything a politician can do to impact prices more than to get out of the way of prices and allow production to come meet demand. In other words, what Ronald Reagan became very famous for in his economic portfolio was something in the late 70s and early 80s we referred to as supply side economics. It pushed prices lower, it pushed real wages higher. And by real wages I mean net of inflation, actual incomes. And it does so by producing more goods and services. It closes the output gap. There’s more things being produced, and therefore there’s an increase in both jobs, but the wages that go with it.

I don’t think right now that we can have an honest conversation, Nick, because no one’s going to talk about what the primary driver of higher prices is — as felt by people — which is housing. And since housing is what people spend most of their incomes on, whether they’re renters or owners of a home, that’s the biggest issue. And we will feel better about prices when housing is more affordable.

EICHER: Well, David, let’s pivot to the Fed. Here we are in December, and the possibility of a rate cut is starting to look less possibility and more likelihood.

I went over to the CME FedWatch tool to check the probabilities. The market now is putting an 86% chance on a quarter point cut. It was 67% a month ago, 71% last week. So you see how it’s been climbing steadily and very much so over the past week.

How do you read this? And more to the point, how does the Fed rationalize a cut when the composite inflation number still hasn’t come back to that 2% target that they’re always talking about?

BAHNSEN: Well, I think that the issue, first of all, as to why the futures have now gotten up to 86% probability — it’s from John Williams’s comments. So for listeners who don’t know, there’s a group of voting members that are all presidents of the regional Federal Reserve Bank that make up the Federal Open Market Committee — the FOMC — and they vote.

And the Chairman of this, which is Jay Powell, generally the Chairman has an awful lot of clout with the way things vote. But the New York Fed is a permanent member of the FOMC. The other places kind of rotate. And we know that New York is obviously a kind of epicenter of our banking and financial system.

And for John Williams, the president of the New York Federal Reserve, to come out and say, I think we need to cut in December — many people, and I think they’re right about this, took that to mean Jay Powell was saying it.

Your question, though, Nick, as to how they could rationalize it when the headline inflation number is not yet at 2% is that the Fed lives with the tension of what they want the price level to be with their full employment mandate. And as long as you have two dual objectives that are constantly in tension, if not outright contradiction, with one another, then you have a permanent permission structure to pick one over the other.

And they talk about the kind of weight of priority in which one is a bigger risk. And Powell has done a reasonable job at laying this out. Sometimes they’re pretty duplicitous, I think, in the way they talk about stuff, but Powell has come right out and said we might have to pick one of our objectives over another — that right now we think the body of evidence for weakening employment and weakening economic conditions is a larger concern than where the price level is now.

To the extent that there’s people like me who are big advocates of sound money and do not want to see inflation, what I would say is: if you were trying to get to 2% inflation, and you believe that tariffs are adding half a point or three quarters of a point — and tariffs have nothing to do with monetary policy — then I think the Fed is perfectly right to say we need to go focus on what we can control, which is tightening credit conditions that are going to hurt wages and employment versus the inflation level that, if they are really being driven by tariffs, are outside of the Fed’s inputs anyways.

EICHER: Well, David, I’d like to touch on something I found really interesting. There is this proposal in New York that would restrict retailers from using AI and personal data to tailor prices to individual consumers — basically banning what they call algorithmic price gouging.

And I think, I think I know how you’re going to answer this, but I’ll ask it this way anyway. Do you see this as genuine consumer protection, or do you see this as old-fashioned price control thinking updated for the AI age?

BAHNSEN: Well, you are right. You do know how I’m going to answer, and it’s outrageous. And this did not start in New York. It started in California. The notion that we — you know, they tried to pass a law in California that some of these online real estate websites couldn’t use AI and other data to try to set what different rent levels were. And it isn’t even price fixing, it’s price reporting. It was just an aggregation of data, and certain parts of California regulatory apparatus wanted to ban and regulate, restrict that — any attempt to use technology or to outlaw the use of technology in how prices are found.

You know, this is an economic principle that I teach high-school kids. It’s an unbelievably important faith-based principle, so I don’t mind sharing it here for World listeners. Prices are not imposed; they are discovered. This is one of the most important pieces of all of economics.

So when you think, Oh, the state is coming in and helping to impose a price, to set a price, to tell you how a price can and cannot be set — that’s not what prices are at that point. They’re distorting prices. Prices are organically set between buyers and sellers, and they reflect sometimes trillions of pieces of input and data and interpretation of data going on very quickly, and we all make different decisions on subjective taste and preferences and information and all that kind of stuff.

It’s what we call price discovery, and it’s how economic calculation is done, and it’s how our standard of living gets better — because we respond to prices.

So as a permanent principle, whether you’re talking about AI or whether you’re talking about something from the 18th century, any attempt for the state to impose prices impedes natural, organic price discovery. It not only is an imposition upon freedom; it’s an imposition upon prosperity.

EICHER: Well, David, your Dividend Café this week was very personal, very much in keeping with the Thanksgiving weekend we just came through. You write in it about gratitude. You write about the team that you have around you. You reflect on a very big milestone, big number — 30 years since your father passed away. This was the man you credit with shaping your first-principles approach to work and investing.

And David, as your firm, The Bahnsen Group, has grown — that’s become a much bigger enterprise with a lot more people involved. How do you keep those first principles in the DNA of your organization? And I ask that because I think anyone building or leading anything — whether you’re starting a business or you’re running a school or a ministry — I think there’s benefit from hearing how you think about that.

BAHNSEN: Well, I love the way you asked the question, Nick, because DNA doesn’t change. And that’s the important part — is that you have to have it in your DNA, where if you’re constantly having to try to bring it back in, you’re subject to losing it, to forfeiting it.

But by having a DNA — right? You’re just underlying programming. And this real foundational thing, the Bible talks about a lot in terms of the kind of solid-ground foundation from which decisions are made and the way you think about critical things.

It’s very important to me that our business have an actual DNA — that everything that flows out of what we do… we can make mistakes, we can kind of violate some of our own principles, but no, the principles have to be there foundationally.

And I believe this for any entrepreneurial endeavor. And as you point out, I only have the blessing of believing it because it was so thoroughly taught to me by my late father.

So whether people are in education, whether they’re in an entrepreneurial endeavor, whether they’re in a pastoral ministry, whether in government or organizations — you know, there needs to be a belief system and a set of principles by which people make decisions. And there is one no matter what. The question is whether or not that belief system is faithful and rooted to timeless, eternal principles and to transcendent truths.

That’s what is important in my company. It’s important in the way I was brought up. And I would hope for all of us it would be important in the way we conduct ourselves in our various vocational endeavors.

EICHER: Well, we are thankful for you, David. And I know these anniversaries of losing a father—they hit hard. Thirty years, long time, but probably feels like just yesterday, right?

BAHNSEN: Yeah.

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, hope you have a great week.

BAHNSEN: Thanks so much, Nick. Good to be with you.

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