Moneybeat: Understanding economics

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now for our weekly conversation on business, markets, and the economy with financial analyst and adviser David Bahnsen, head of the wealth management firm The Bahnsen Group. Good morning!

DAVID BAHNSEN, GUEST: Good to be with you, Nick.

EICHER: Well, here we are on Labor Day, new month of September, so why don’t we—speaking of labor—have a look back at the jobs report for August? Any conclusions you can draw?

BAHNSEN: Well, I do think that the August jobs number, the BLS, which stands for the Bureau of Labor Statistics, their monthly jobs data that came out on Friday was interesting. You know, the number was 315,000 jobs created in August, and the expectation was for 298. So you say, Okay, well, it looks like it was a little bit better than expected. But there were 100,000 jobs revised downwards from the summer months. So it ended up kind of being one of those like, okay, there's some good things and some bad things, but kind of right down the middle, so to speak. The unemployment rate went up from 3.5% to 3.7%. But it did it for the best possible reason, not because of lost jobs. But because the labor participation force did go up a little bit, which makes the denominator higher, so the percentage moved. I don't think that there was anything that would say, “Okay, wow, this economy is really screeching to a halt.” And there was certainly nothing that says it's rapidly advancing, and everybody is crazy to be thinking about slowdown, it was just sort of right there in the middle, which is a perfect complement to the state of so much data right now, which is ambiguity, the ambiguity of where things are, there's not a compelling case that says things are really slowing down. And there's not a compelling case that says, things are just fine. There's a variety of data points that produce an ambiguous economic narrative.

EICHER: David, lots of listener questions came in last week, so I’d like to use the slower holiday time to clear out a bit of the backlog, so if we can move quickly through these, I think we can fit in four, so let’s try that.

First one from Dr. Ronald Godat. He’s a dentist in Fletcher, North Carolina and he wants to know the relationship between price inflation figures and goods-and-services sales figures. So he asks this:

If we say inflation is up 8-1/2 percent and, for example, retail sales are up 8-1/2 percent, does that mean that no more goods were sold during that period of time? In other words: Does it mean the same amount of goods were sold since it took 8-1/2 percent more dollars to purchase them?

BAHNSEN: Yeah, I understand exactly where he's coming from in the question, but it is a bit simpler than the question may suggest, because it does not speak to the quantity of goods. The price level is only a reflection of prices. So if I tell you, let's just always make this simple. So let's do this with just one orange. If I say one orange, sold for $100. And if now we say the price of the orange is 108. I haven't said if two oranges sold, or if 1000 Oranges sold, or if still only one orange sold. All I said was that the price of the orange was 108. And when we talk about the price level, we're not referring to the volume of goods and services. And so the way we measure GDP, which looks into both consumption and production and inventories, you're gonna then get a measurement of goods and services. But the price level is isolated to what the price of a given transaction would be. Now, the complexity is allegedly with something like CPI, Consumer Price Index, they're trying to measure all prices aggregated together, which I think is pretty silly. But with just one orange to the question, you wouldn't have an indication of more goods and services sold or less. It doesn't speak to that - it's only isolated to the price that a particular good or service is being sold at.

EICHER: Next question is from Jered Gebel. He listens in southeast Alaska, where he says he flies float planes for a small airline up there.

GEBEL: My question is about the stock market. I understand owning a stock and a company is only a piece of it. And I combined sell that stock for whatever it's worth. But the question is for one particular stock, who or what for example, says today, the stock price for company X is $5.85.

BAHNSEN: Well, perhaps I unintentionally but what the question does is allow us to answer one of the single most important thing in all of economics because there is nobody determining what the stock is. The entire point of free market economics centers around prices, and prices are signals, prices are baskets of information. Who literally and functionally determines the price of a stock? Buyers and sellers. So the second the market opens, I come out and say, I will pay 10. And someone else says, I will sell to you for 10. And then the next second, someone says $10.05, and someone else says, “Okay.” It's that movement up and down, have a buyer and seller cooperatively agreeing. There's no centralized force saying what the price will be, there's no one at the company, the company can say we now want the stock to be 20. But if no buyers come and pay it, then the company is really kind of wasting their oxygen. Prices are set by the voluntary agreement, the mutual cooperation of buyers and sellers. That is true of stock prices and that is true of banana prices. Price does not exist until a buyer and seller reach an agreement. And that is how it works in the stock market.

Now perhaps a different question is, “What is the value of a stock?” But even then the value of a stock, it could be disconnected from the price. Buyers and sellers agree to what the price may be, but someone may be selling at a price beneath its long-term value because they're desperate to raise cash, whatever the case may be. People overpay as well, meaning the buyer and seller agree on a price, but it may in hindsight prove to be silly because the company doesn't really do all the things people hoped it would do - things like that. But it's a great question to really kind of indicate how prices work, using stocks as an example.

EICHER: Listener Todd Vician wrote and said his son noticed that the U.S. Dollar is stronger than ever compared to the Euro. And he wants to know, is it significant that that’s the case for what may be the first time in a long time—even while we are still struggling with inflation, sagging stocks, etc?

What do you say about that, David?

BAHNSEN: Yeah, the dollar was stronger than the Euro back when the Euro first came out in the late 90s. And very, very early 2000s. And then it was around parity, where they were both basically dollar for dollar with each other for a short while at the beginning of the George W. Bush administration. And then we went on a 20 year period where the Euro was valued higher than the dollar. And at one point, I believe, getting as high as about $1.60 to Euro, I mean, like a 60% increase in the Euro relative to dollar. And so the question is accurate, that it's now basically come down to about parity.

Over the last week or so I think the Euro moved a little bit - two to 3% higher than the dollar. But they're very close to one another now when the Euro had been in a stronger position. And it is significant. And I'll explain really quickly why the Fed is tightening monetary policy more than the European Central Bank is. Interest rates are stronger, and they're attempting to try to beef up that dollar while Japan is not. So the Yen is really weakened. And while the Euro is not.The European authorities are doing more than Japan, but much less than the Fed. The problem is that puts a really tough position on the European Central Bank because they now basically have their currency controlled by the Fed. If they were to tighten monetary policy more, then that really hurts different aspects of what they're trying to control. They're become a very interventionist and manipulative central bank. And that I don't mean that as a compliment. But what happens is the manipulation gets done for them because if our Fed tightens, it strengthens dollar, weakens Euro, and that represents a whole policy ramification. And so all they can really do is sort of hope that the Fed lightens up, which means the Euro can strengthen relative to the dollar; but in the meantime, it's really taking its P's and Q's from what the Fed is doing. So that's sort of the story as to how the dollar and the Euro interact with one another.

EICHER: Alright. And finally listener Rachel Gage from Durham, North Carolina.

GAGE: Hi, Mr. Bahnsen. On your August 29th segment, you said you had a contrarian view about the loan repayment scheme. And you said you didn't think it was going to work. So I'd love to hear your insight into why that might be. Thanks.

BAHNSEN: Yeah, the contrarian part of my view is that I don't believe it's politically advantageous to the White House because I think the people who were prone to really like it are people who are prone to already vote in line with this administration anyways. And yet there is right now a real political reality that independents and centrist and moderates really sway the elections. We are so dialed in with passion and enthusiasm for a certain part of the right and a certain part of the left. But there is an independent voter that I think largely does not like the student loan repayment program - or forgiveness program, I should say. And I think that politically my contrarian view is that this is a net negative for the White House.

EICHER: You can submit your question for the Moneybeat Mailbag and again, we do prefer that you use your phone to make a voice memo, try to keep it short, and send me a file at feedback@worldandeverything.com and we will consider your question for air. We can’t do them all, but we’ll do as many as we can fit.

David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. His personal website is Bahnsen.com.

David, hope you enjoy the Monday market close here on Labor Day. Talk to you next week, Lord willing. Thanks!

BAHNSEN: Thanks so much, Nick.

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