The apocalypse premium

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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 Bahnsen. David heads up the wealth management firm The Bahnsen Group, and he joins us now.

Good morning, David.

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

EICHER: Well, David, we talked about this on The World and Everything in It last Friday, but there is an economic side to the story, too, that I wanted to get with you on.

Climate scientists, I’m sure you read last week, have formally dropped one of the most widely used worst-case warming scenarios, and even some news organizations were acknowledging they treated it much more realistically than it ever really was.

I read Holman Jenkins in The Wall Street Journal arguing that the bigger issue is not climate science or culture, but capital allocation—that governments, businesses, and investors directed trillions of dollars based on assumptions that turned out to be, well let's just say far less plausible than advertised.

What do you say about that?

BAHNSEN: Well, I think that that is very true, but it was true before this report came out.

And the economic story of this is more than money spent on the wrong thing. It is the money that wasn’t spent on the right thing.

And this is one of the great lessons of capital allocation. And when we refer to this thing called malinvestment, when resources are directed in the wrong way, there is a healthy part of loss where risk-taking teaches entrepreneurs lessons and they move into something different that is better responded to in the marketplace.

And that trial and error is celebrated in America, and risk-taking is largely frowned upon in Europe.

This is in a different category because it is so ideological and so wrong-headed, as this report shows. But the numbers can never capture what was the opportunity cost of not investing in nuclear, of not investing in cleaner ability to emit carbon, quicker access to energy that is more potent and productive, from coal to the cleaner forms of fossil, and their inability to even import what they need of natural gas.

Now, I happened to spend a little bit of time on Friday with Ambassador Andy Puzder. He’s the ambassador to the European Union, and he was walking me through a lot of the issues that they deal with with some of the different countries there and some of this environmental stuff.

And one thing that is just really shocking to Americans, in particular American investors like myself, where all of our efforts in this anti-fossil notion in America is mostly virtue signaling and just dealing with a lot of pharisaical silliness that is largely laughed about now—there’s real true believers in Europe. I mean, some of the authorities are very self-consciously willing to undermine their economic growth and their environmental progress because of their belief.

So tearing down these misnomers is a good thing, and they are behind for a reason.

EICHER: David, let’s turn to Dividend Cafe this week. You had a deep dive on Kevin Warsh, the new Fed chair.

One of the loudest concerns we’ve been hearing all along is whether Warsh at the Fed will be independent of President Trump. And your argument is that we’re kind of using that phrase loosely.

What do people mean when they say Fed independence, and what do you think we’re getting wrong about that?

BAHNSEN: Well, I think that one of the points I try to make in the article is that many are using it selectively.

That through bona fide, obvious, and indisputable—and even, I would say, non-controversial—examples of there being violation of Fed independence, we’ve never really heard the term before.

And we use it now either because of people that just want to criticize anything President Trump does, which I do not think is a legitimate reason, or because of the way in which President Trump did it, which I think is a perfectly legitimate reason.

I’m by no means condoning all of his behavior. But what happens is, like so many things these days, Nick, it obfuscates our ability to have clarity.

So if we say, “I don’t think that President Trump should have pretextually had a DOJ investigation about Jerome Powell because he was mad at him about interest rates,” that’s a pretty non-controversial thing to say.

But if we say, “And I think the Fed should at all times be perfectly independent, and we should walk around saying that all the time,” I then say, “Wait a second. What does that mean? Where are we getting it from?”

Because we’re most certainly not getting it from the Constitution.

So, because so many critics of the president have decided—some for legitimate reasons, some for illegitimate ones—to harp on the issue of Fed independence, I think this seems like a great time to say maybe we ought to clarify the statute.

Maybe Congress ought to do its job and tell us what exactly the Federal Reserve is. If it is sort of under the executive branch, but not really; if it’s obviously under the legislative branch because it was created by Congress, and the Fed chair has to come talk to Congress a couple times a year, and the Senate has to confirm all the Fed governor appointments. But it’s also sort of under the president, the executive branch, because the president has to nominate the various folks.

We don’t have any other agency or entity in government that functions this way. It’s not an agency. It’s not a cabinet department. And I think there ought to be structural clarity.

So regardless of a president’s misbehavior or bullying or whatnot, let’s have the lines legally and structurally so that we can eliminate a lot of this controversy.

And then, as far as the actual administration of monetary policy, rather than worrying about whether or not Al Gore is mad at Alan Greenspan, or Richard Nixon’s mad at Arthur Burns, or Donald Trump is misbehaving in the way he’s mad at Jerome Powell, all those things could be legitimate. But let’s have a conversation about what the Fed should and shouldn’t be doing.

I think that the president has a right to share his opinion, his or her opinion. I don’t think the president should be bullying the Federal Reserve chair. 

But nor do I believe the Federal Reserve should or does exist outside of the oversight of Congress.

And therefore it is the legitimate duty of Congress to clarify the structure and to provide the oversight that it is required to provide by statute and by Article One, Section Eight of the United States Constitution.

EICHER: Kind of a novel idea. 

David, there was a line that made me laugh out loud from your Dividend Cafe, so I wanted to follow up on this kind of provocative idea:

As you put it, your concern is less about whether the Fed is independent of a president than whether it is independent of bad economic assumptions.

David, talk a bit about that. I really love that one.

BAHNSEN: Well, hopefully it isn’t that provocative, because I mean it quite seriously.

I think that the Federal Reserve has been married to something called the Phillips Curve as a model of monetary policy for a long time whereby they believe there’s a negative feedback loop between economic growth—that is that which will be evidenced in high jobs, low unemployment, and good wages—and then inflationary pressures.

And this is a way I can reduce that position, I think, still avoiding a straw man, but nevertheless intending as an internal critique by saying they believe growth is inflationary, and it is not.

And there is productive and non-inflationary growth, but how do you solve for this?

Well, why is the Fed concerned about Phillips Curve modeling? Because they believe that they need to use monetary policy, which is to say the cost of capital, to either accelerate or decelerate economic growth.

And I do not believe they should. 

I do not believe it is the Fed’s job to use their discretion and their intervening forces to accelerate or decelerate market growth.

I believe that is the job of economic actors who will set the price of money themselves and who will go about their business. And economic growth will go up or down without the interventions of the Fed and the Fed will be there as a lender of last resort, which was its intent to begin with.

EICHER: Alright. David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. He writes at DividendCafe.com and at WORLD Opinions.

David, I hope you have a terrific week. Thanks!

BAHNSEN: Thanks so much, Nick.

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