Purgatory economics

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JENNY ROUGH, 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 advisor David Bahnsen. David heads up the wealth management firm The Bahnsen Group, and he is here now. 

Good morning, David.

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

EICHER: All right David, well let me start with the way last week was kind of being framed in the major media. The New York Times says investors are, "losing patience" with the Iran war. Another piece in The Times asks whether we may be looking at a 1970s-style oil shock. Over at The Wall Street Journal, you read stories about growing alarm on Wall Street about the Iran war.

When you see headlines like that, and markets then nearing correction territory, are we looking at real deterioration, or is it more of a temporary sentiment shift? What do you think?

BAHNSEN: Well, there’s a couple different things. The language itself, I expect, whether or not it is true, the language doesn’t create the environment. And then it sometimes might be accurately describing and other times might not be, but that media language is pretty much assured to be hyperbolic, and then it can sometimes be accidentally or coincidentally correct.

And I guess that’s indicting of the media, but it is also my opinion of the sensationalism by which financial media’s business model operates.

In this particular case, it is rather descriptive that if oil prices stay above 90, around 100, for a period of time, that it becomes very contractionary to the economy. And in terms of what we see at market prices, saying that market indices are down 10%, and that’s what we call a correction, is just descriptive.

I think that the problem I have, though, is predicting where it goes from here in the economy, in the market, in commodity prices, when it is based on a particular military or geopolitical outlook. 

That, I think, is much harder to do. There isn’t anyone writing in the media that knows exactly where things are going. 

So if all the language was, Nick, was "hey, there is going to be a problem in the economy if oil prices stay this high for too much longer," that’s a pretty fair thing to say. Beyond that, some of the more doomsday-ish predictions I think are a little lacking in foundation.

EICHER: Alright, well David, take us a level deeper, because when you look at the main drivers that you tend to focus on—the labor market, the condition of the financial markets, and corporate profits—what are those things telling you right now?

BAHNSEN: Well, I think that there is a very mixed bag in all three. I think that for whatever reason, we have a very bizarre time right now with data that I referred to in Dividend Cafe as "data purgatory." There’s stuff that just looks really concerning, and other stuff that is, frankly, stubbornly not confirming it.

And so the weekly jobless claims is a data point you and I have talked about a lot over the years. It’s really quite benign. It’s coming in about 210,000 or so per week. And yet, the ADP number, the BLS number, the quits rate, the job openings—there’s all sorts of other data points that are either problematic or indicative of something problematic coming.

So the labor markets are probably what I’m watching most intently, because it is so confusing. And I would add to that, the financial conditions, in terms of just how loose and available accessible money, and the flow of money, and particularly lending, is in the economy.

You know, tightening financial conditions is a term we use in finance to refer to banks that are wanting to hoard money instead of lend money, cause they’re getting more risk constrained, there’s less liquidity in the financial system and less appetite to lend it out either because people are concerned about credit worthiness and concerned about the economy, or just because there’s less credit-worthy borrowers and credit-worthy projects to lend to.

And again, the data is quite mixed. There’s some indications of financial conditions that are fine, but they are certainly less fine than they were.

The credit spreads, which is kind of the rate above the risk-free rate that certain riskier things cost to borrow money, whether it be structured credit, corporate credit, et cetera, these spreads have widened in the last couple months, but they are not as wide as they would be in a period of extreme distress.

So that purgatory word—just kind of caught between both levels and waiting to see what happens next. And that, to me, is the honest answer right now in an economic assessment.

And if one has a strong opinion that it’s going to break this way or break the other way, somebody can end up being right about that, but that is a prediction of what will come, it is not a description of what is.

EICHER: So David, if the fundamentals are mixed, what is it that’s actually moving markets day to day right now?

BAHNSEN: The volatility right now is up because of Iran. I mean, and oil prices. There’s no question.

This enhanced intraday volatility escalated—and though the right description is what you said—that things will be down more in the middle of a day and maybe not close as much down, or it could be vice versa, you know, you’re having some bigger up days too.

So the average intraday movement from whatever the peak of the day is to whatever the trough of the day is has about tripled since the Iran war started.

And yet, the total market movement of daily prices is thousands upon thousands of points. And yet the net net movement from where we were to where we are is down a little less than 5,000 points, right at about 10%.

So it had been only 5%, and it worsened in the week that just was.

Look, I think that enhanced volatility is because there’s some investors that are nervous and skittish, and that usually is going to lead to a lower place, but not as low as the volatility itself.

There are some people trying to time their way in and out of this, and it’s not going very well for them.

EICHER: So if we step back from the day-to-day volatility we see, what would you say, David, is at the root of the uncertainty in the economy?

BAHNSEN: Well, I’m concerned where the economy is headed in the sense that I’ve been concerned for some time.

Uncertainty means, by definition, that it is not a certain outcome, good or bad. And I don’t think that, generally speaking, the U.S. economy, rooted to a market orientation, should ever have to be uncertain, right? 

I mean, at a high level, often uncertainty is a choice, and I really believe that the uncertainty of the economy, apart from the Iran issues that are in the last four weeks, have been there for about a year because of Liberation Day and the tariff-oriented policies.

You could get certainty, okay, around corporate tax advantages in the new tax bill—that’s a positive certainty there. You could get certainty about a more favorable U.S. energy policy or deregulation. There’s things in the policy framework that could create more certainty.

But what happened with tariffs is there is just this really big ambiguity about what companies are willing to do with hiring and with capital spending, and that’s been going on for some time, but that doesn’t mean that it bled through into a really bad outcome, but it certainly bled through into an uncertain one. And that’s where I’ve had the uncertainty for some time, and right now most of the data points I look at indicate that I’ve been right.

Now, keep in mind, Nick—and it’s important for listeners to hear this—when you hear about certain positive things, there is a very big positive in data center spending. 

The total aggregate economic metrics across the country include what’s happening with AI, and we are a few companies are spending hundreds of billions of dollars on their investment into the power, the computing power necessary for artificial intelligence. 

So maybe that ends up being the great savior here. But it is incredibly rare that one industry can lift the entire economy, and it can offset when a lot of other things are dropping.

I’ve said this on the podcast before, I’ve written about it, I want to elaborate on it more. But the best analogy I have is what took place with the hydraulic fracturing moment—what we referred to as fracking—in the early 2010s. And that is that we had a significant lift in activity in that one sector, but then almost no activity in any other sector out in the recession that was the financial crisis.

And I feel like that’s happening in a lot of ways right now.

EICHER: All right. David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. He writes each week at DividendCafe.com, and regularly for us at WORLD Opinions. 

David, have a great week.

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

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