Moneybeat: Uneasy calm

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

NICK EICHER, HOST: All right time now to talk business markets and the economy with financial analyst and advisor David Bahnson. David is head of the wealth management firm, the Bahnson group. And he is here now, David. Good morning.

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

EICHER: All right, David, what is your sense of the top story of the week?

BAHNSEN: Well, I mean, I think obviously, the top story globally is the ongoing issues in Israel and surrounding Israel. Now people can say, is it really the biggest market story? But you know, I attended a luncheon with Federal Reserve Chair Jay Powell last week. And it's clear that the Fed believes that there is the potential for this to become an economic story in the United States. It hasn't been a big market story yet. In other words, the market was down about 500 points last week. But it was actually up three or 400 points at the beginning of the week. And then sold off later in the week. And so it's kind of hard to make the argument that U.S. stock market action has been about the Israel conflict, because why would it have had periods when it's gone up a lot. The first week after Hamas attacked Israel, the market was up hundreds of points. And so I think that we've just had a lot of up and down volatility, which you could argue would have nothing to do with Israel/Hamas. However, if there's going to be an extended supply shock, this is the thing that the Fed knows they can't do anything about. They believe—I don't happen to think they're very good at controlling demand shocks either—but they believe that they're there to try to either weaken demand, which is what they're trying to do right now with high interest rates, or to create demand, which is what they do when they're trying to ease monetary conditions. Supply is a different story. And foreign policy and issues with oil that's on the supply side of the economy. And so this could very well create issues that the Fed doesn't even pretend they can control, let alone actually have the ability to. And I am becoming more convinced that there's some volatility premium in markets right now around this uncertainty with the house. I don't think it's the primary story. I do think, though, that markets are becoming increasingly convinced that the lack of governance being evidenced by the Republicans who have the majority of the House and cannot elect the speaker at a time of great global tumult. This is not good. And I don't think markets like it. And I think as time goes on, it becomes an increasing source of economic vulnerability.

EICHER: Well, I want to hear about the Powell meeting, David. I did see that he appeared to come down in favor of staying the course on interest rates. Not cutting interest rates, but at least not raising them either. What did you take away from your time with the Fed Chair?

BAHNSEN: Yeah, there were a couple of things. And I'm working on kind of a write up of some of the things that he did say that will be part of my dividend Cafe this coming week. Because, you know, he actually said, Nick, that he did not believe that a lot of what created the inflation in the last couple of years, was on the demand side. That he believed there were really big supply shocks out of shutting down the economy from COVID. And then reopening and not having adequate supply, which, of course, has been my belief for several years, now. I think it's absolutely indisputably true. And yet you have a Fed chair who has seemingly been running monetary policy under the belief that they can kind of control this thing that really, I think, was much more supply oriented. And there's this thing that I've talked to you about on the show before called the Phillips curve that has really governed monetary policy for a long time, going back to the 1970s. Where they believe that high employment is inflationary, and higher unemployment is anti inflationary, and that these two things are in sort of a, a tension with one another. And I, of course, don't agree with it at all. But to hear the Federal Reserve Chair in person talk about how well sometimes the Phillips Curve is true, and sometimes it isn't, is an incredibly weird belief about a mathematical model. How are mathematical models sometimes true, and sometimes not. And this is something that was very explicitly said in this lunch I attended. And so if one believes that sometimes things correlate mathematically and other times they don't well, that's obviously true. It just isn't very helpful, because then we have to figure out why something happens one time and doesn't another. But to actually suggest that the model works at times and doesn't work at other times, is essentially conceding that the Fed will runs off the seat of their pants. So they just they have to put a finger in the air to try to govern economic affairs. And so I found that to be a very profound admission on his part. I wish it would become a more humble application for them to concede that a lot of the things they're trying to do, they're not able to do. They're not going to raise rates again. He didn't flat out say it, but I'm quite confident that the tone and the market action suggests so. But what people are afraid of is not that they're gonna raise again, it's that they're gonna stay too high, too long. And I for one, I do not say a lot to defend the Fed because I'm very critical of auto policy decisions. I'm thoroughly convinced that his motive in the policy mistake I think they're making and appear to be set to continue to make, I'm convinced that their motive is that they believe it's the right thing to keep inflation from becoming entrenched. I just happen to think they're completely wrong.

EICHER: And there was news about a disturbance at chair pals talk. Given the global tensions, David, were you a little nervous?

BAHNSEN: Well, because they were immediately chanting something to the extent of stop financing fossil fuel, it was clear that it was an environmental sort of extremism, as opposed to something potentially Hamas or jihadist or something, you know. There's been protests in New York on that front, too. And obviously, we know the tensions around the world. And so, to be honest, it was a little odd to me that there wasn't better security. Powell had to be, you know, hurriedly rushed off stage by security. And we were sitting here not too far from it all. And you had this group of people screaming for the Fed to quit funding fossil fuels. And so I'm glad to know that some of our radicalist in our country not only don't understand environmentalism, but don't understand monetary policy either. But nevertheless, they were eventually removed and Chairman Powell got to speak. And I also was happy that they weren't so against fossil fuel that they did want the lights to be on on them as they were doing their thing. And, of course, these lights were powered by electricity powered by natural gas. So they at least were able to get enough fossil fuel to bring some attention to their effort.

EICHER: All right, David Bahnsen is founder, managing partner, and Chief Investment Officer at the Bahnsen group. You can keep up with David by checking out his personal website bahnsen.com. His weekly dividend cafe, you can find that dividend cafe.com. David, thanks so much. We'll see you next time.

BAHNSEN: Thanks so much, Nick.

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