Moneybeat: Working the refs

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 adviser David Bahnsen. David heads up the wealth management firm The Bahnsen Group. He is here now. Good morning to you, David, and glad you’re here.

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

EICHER: Well, good to be with you, too, David. So we’ve talked an awful lot over the past several weeks about tariffs—and finally I’ve got a story that’s not tariff-driven, but it is President Trump driven with a touch of tariff policy. And that is the spat between the president and the chairman of the Federal Reserve Jay Powell. I’ll note; the Jay Powell President Trump nominated in his first White House term in 2018... now he’s fallen out of favor. What’s going on there?

BAHNSEN: Well, I want to give all sides of it here. It’s a tricky thing for me—like so much with markets and the economy that require nuance—because it doesn’t lend itself to a this-side versus that-side.

There’s a few different things to say. I’m critical from time to time of this Fed chair, Jay Powell. I’m often more critical of the role that we have asked the Fed to play. I don’t really blame a particular Fed chair for doing the job they were given to do that I don’t think they should have been given to do. I have to separate where I’m critical of the way a Fed chair is doing their job versus the job itself that I may not agree with. There’s a little bit of both sometimes of Chairman Powell.

I do know him to be a very earnest and sincere man, and I have differences with him about certain elements of monetary policy. The president right now is upset with Powell because he did not cut rates at the last meeting, and last week gave a speech at the Economic Club of Chicago. In that speech, he stated that the Fed has concerns about the tariffs pushing prices higher and impacting some of their plans of monetary policy, and yet perhaps putting downward pressure on growth.

It could lend itself to a “stagflationary” environment, which is very difficult for a central bank to deal with. I don’t know if President Trump’s upset that he said it and believes the Federal Reserve chair should not be criticizing or commenting on potential policy—or if he’s upset about not cutting rates.

The president’s always wanted lower interest rates. He wanted them when he was a very leveraged real estate investor. Every president we’ve ever had or ever will have, if they could control the central bank, would like lower rates, not higher rates. I interpret it as the president working the referees a little bit.

The irony of this whole thing, Nick, is that Jay Powell is going to be doing exactly what President Trump wants, anyway. The Fed Funds Futures market have said all throughout that there’s probably four rate cuts coming this year, potentially five.

So, whether President Trump was complaining about this, I think Powell would be doing it. But he doesn’t want it to appear that he’s responding to the president’s prodding. And We’re going to have to watch this play out a little.

I suspect my theory is right that the president’s just working the refs a little bit.

EICHER: Yes, so you mentioned Fed optics: Powell doesn’t want to be seen as reacting to presidential prodding; he needs to be seen as independent, and there’s something unseemly about a president jawboning a Fed chair. But I must say, and I’ll put up a link to Powell’s Chicago speech, Powell doesn’t seem to mind complaining about White House policy.

BAHNSEN: Well, there’s a lot of different elements involved in the optics of what’s going on. On one hand, it’s so funny how many on the right have said, “Oh, inflation’s so high and it’s not going lower and why would the Fed cut?” Now President Trump’s in and they’re saying, “Hey, inflation’s come back down. He should be cutting rates.”

You know, everybody’s view on inflation tends to be highly levered to their own political outlook. There’s no question that inflation has moved a lot towards the Fed’s target on a headline basis that isn’t showing there yet. But as I’ve been pointing out on this podcast for over a year, I believe that’s because of a misreading of the data around shelter and rents.

So, I don’t have any problem at all with the Fed cutting rates. I do think they’re too tight and I do think the economy is slowing down substantially, and I think a lot of that is because of the uncertainty around tariff threats. But it’s peculiar for the president to say that the economy’s doing great and tariffs aren’t going to hurt the economy—and the Fed should be quickly cutting rates because of a slowing economy.

Now, by the way, there’s a legitimate criticism I’ll bring up. I was on the Kudlow show on Fox over the weekend. An economist from Heritage said it wasn’t fair that Jay Powell never criticized Joe Biden for all his spending—but then is criticizing the tariff policies.

I think that, prima facie, that’s a legitimate issue. But then my question is, what is it we’re asking for?

We’re asking that he not criticize the tariff policy or we’re saying he should have criticized the Biden policy. You know, there’s a sauce-for-goose, sauce-for-gander thing going on here too, right?

EICHER: Right, yeah. Works both ways. So before we have to go, David, we continue to hear warnings of recession, and I’d love to get a read on where you think the economy stands right now—the health of the economy from what you can see, the indicators you pay attention to.

BAHNSEN: Well, the signals we look at are backward looking, and the things I most care about are forward looking. When I look forward, I see a significant decline this quarter in capital goods, investment. Anecdotally, I’m having conversations with well over 100 business owners (and if they’re a bad representative sample, then that’s what it is, but I have a very hard time believing that they all that different from a lot of others out there). The uncertainty theme is pretty much unanimous. There are degrees of severity, some saying they worry for the sustainability of their business’s very existence and others saying they may face cutbacks later in the year.

But nobody’s going out doing big orders. No one’s doing big investments, whether it’s R&D (research and development) or hard Capex (capital expenditures) into big inventory, big factories, big manufacturing, capital goods. So, you have all that up against the uncertainty.

Then there’s the upside uncertainty of the tax bill (that the tariff thing, while it would not necessarily be completely wiped away or whitewashed, could have good degree of offset). If they could get this tax bill done above and beyond just extending the Trump tax cuts, with things like 100% business expensing or any other additional reduction of the corporate tax rate—which would be hard to do.

So, that’s the stuff I’m looking for, forward-looking, Nick.

I don’t care about retail sales last month. I don’t care about consumer confidence last month. All I have to do is look at Fifth Avenue and I know people in America still love to shop. So, I’m not worried about any of that.

But business is not investing. That will catch up with us this summer in the economy.

We already know even though we’re not talking a whole lot about tariffs today, that stuff is still lingering in terms of China and other trade deals.

EICHER: David Bahnsen, founder, managing partner, and chief investment officer of The Bahnsen Group. David writes at WORLD Opinions and at dividendcafe.com. Thanks, we’ll see you next week!

BAHNSEN: Thanks so much, Nick.

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