The wrong fight

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

Good morning, David!

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

EICHER: Well, let’s begin into the development that broke late last week, the Justice Department dropping its probe into Chairman Jay Powell. That clears the path now for Kevin Warsh to replace him when Powell’s term ends next month. 

We know that a lone Republican, the senator from North Carolina, Thom Tillis, had been using his power to hold up the Warsh nomination in the banking committee. He said during the confirmation hearing with Warsh that he didn’t want to, but clearly it was his only leverage to end a possible prosecution of Powell. 

So how important is it now, David, would you say that we’ve evidently avoided this drama at the Fed? And then in the same vein, just talk about what Kevin Warsh would be bringing to the Fed, assuming there aren’t any other roadblocks ahead.

BAHNSEN: Well, that is my assumption, that there won’t be any other roadblocks. And then now I think your question is the pertinent one, which is, what will a Chairman Warsh represent?

I do think that he’s going to bring a reform mindset that has a general posture of not believing the Fed’s footprint on the economy should be as large as it has been since the financial crisis. And this will take on a couple of different ways in which they go about doing that.

One is the balance sheet. You know,  the Fed owns a little less than $7 trillion of the United States debt. That’s something in the range of 15 to 20 percent of our bond market. That’s vastly higher than it’s ever been, other than you know, right after COVID, when it hit up to $9 trillion. But for years and years, the central bank was not using their balance sheet as a liquidity tool. They’ve turned it into this huge, multifaceted tool of policy, and I think that Warsh will incrementally bring that down and he was critical of it when they were beginning to do it, when Warsh was a financial governor after the financial crisis. 

The second piece is the general idea of the Fed coming in to save everything, the alphabet soup of facilities that they create when we had the financial crisis, and then in a major way during COVID, where they're using Federal liquidity facilities to backstop commercial paper, municipal bonds, commercial real estate, all sorts of credit vehicles that just gave the Fed much more muscle in the economy than I think is their rightful intent.

Finally, Nick, the third thing I’d focus on is returning power to markets, returning innovation to financial institutions to innovate with credit. Now, they need to be regulated, there has to be constraints and controls, but the Fed has taken on a lot of the work that we want our banking system doing and then used excessively tight capital constraints to control that.

People say, "okay, David, what are you talking about?" The Fed sets the limits on what banks are allowed to do with their balance sheet, and they can turn the knobs up and down very easily with the capital requirements that banks have to hold, including against hyper-safe vehicles like Treasury bonds. 

So they’ve become more of a regulatory burden, and that has started to come off a bit, and even some of the appointees that the Trump administration has made to replace some of the Biden appointees are a step in the right direction. 

But with Warsh, it’s philosophical. It’s not just political, it’s not just transactional, he philosophically believes that we need a deregulatory approach in the way the Fed oversees the banking system, still, of course, in a confine of responsibility, but nevertheless less power to central planners and more power to private actors.

I think that these are the general categories, and all of them are significant, that we will see a Chairman Warsh move the Fed in the right direction.

EICHER: Well I'd like to move to New York City, David, and the new mayor, Zohran Mamdani. Mamdani put out a video a couple of weeks ago now, April 15, appropriately, standing in front of a high-end apartment building in the city where a hedge fund CEO has a posh apartment unit.

That CEO: Ken Griffin. Mamdani was almost mocking him in the video, seeming to be champing at the bit to slap a new tax on Griffin and people like him.

Well, now Griffin is pushing back, and the Wall Street Journal carried a story last week saying that Griffin is hinting at rethinking a major project he was going to be investing in in the city, but now maybe not. 

Did Mamdani pick the wrong fight with the wrong guy, do you think, David? 

BAHNSEN: Oh, he certainly did. By the way, Ken Griffin is much more than the CEO of a hedge fund. I mean, Citadel is one of the largest market makers in the entire financial services industry. They have a major hedge fund that is a multi-strategy capital allocator that facilitates the trading of a massive amount of stocks and bonds that move on the street.

He’s one of the most intelligent people in the history of Wall Street. He is a center-right guy, a donor to various causes that I believe in, and he is an incredibly charitable person. And I don’t mean here just conservative groups, right-wing groups, sometimes even faith-adjacent groups. What he is, as one of the wealthiest men in America, is extremely humanitarian—education, medical.

This is just the wrong person to try to make a villain. And for him to go buy real estate in New York and employ people and renovate and participate in the marketplace and be a massive taxpayer, even as a nonresident, through all the business interests and real estate transactions, it’s not just a pragmatically dumb idea on the merits.

Socialists should be saying thank you to people like Ken Griffin that pay vastly more taxes and vastly more into the system that they hold dear, of big government spending, than anybody else. He’s the wrong villain. 

And I will say, Mamdani seems to have backed off from it a bit, because he thought he was doing something really hip and cool on April 15, and he’s gotten really kind of smacked around for it. And I say for good reason. 

It was the wrong move, not just politically, but on principle.

EICHER: Well David, I want to talk about another really smart, really capable business man: Tim Cook. We see that he is coming to the end of his tenure as CEO of Apple, and I think that’s going to be a considerable transition. 

I mean, this is the guy who followed founder Steve Jobs—legendary figure, just seems like an impossible task to follow him—but Cook did it, and he did it well, he did it in a record-breaking way. What, at one point the valuation of Apple at $4 trillion and the first company ever to do that?

How do you, David, apraise the Tim Cook era at Apple?

BAHNSEN: Well, look, I mean, it was an incredibly successful era, as you’ve pointed out, and he has his fair share of detractors.

You know what Tim Cook was, though, was a very apolitical actor as far as how he befriended the administration that was in charge because they were in charge. And people that would expect him to go pick a fight with President Biden do not understand his fiduciary duty to his company, and the same is true with President Trump.

But his ability to monetize things outside of the iPhone and build an ecosystem around apps and recurring revenue with the applications and subscription services of Apple is an unprecedented American business success story.

The pricing power they ended up having, all of this is after Steve Jobs’ passing. And if when the iPhone first came out you had said to Steve Jobs, one day you’re going to be selling this for $1,600 and not have sales go down, nobody would have believed it, and it’s just the most profitable and successful consumer product in human history.

Tim Cook didn’t create it, but he levered it more than anybody would have thought possible, and we’ll see what lies in store for Apple next.

EICHER: Well David, before we go, I did want to ask you about something you've been talking about for some time, warning about for a long time, and that is the use, in corporate America, of groups like the SPLC—the Southern Poverty Law Center—used inside of corporate decision making. 

And we are now learning about companies and the extent to which they were using screens for things like charitable giving and decisions about vendors. And you know, some of them backed away from the use of the SPLC, I think some of them are probably going to be running away now with these disclosures that are coming out. 

But does not the indictment of the SPLC represent a real opportunity now, David, for companies to rethink how they have been making some of their decisions in the past?

BAHNSEN: Well, you know, Nick, it certainly does, and it's going to. There are companies that we’re talking to, my consultants with Bowyer Research, that were on the bubble about changing some of their use of SPLC in these processes, and I think this will tip them.

But I want to say, there had already been a really successful move away from them. We’d seen a lot of companies that are in the portfolio that I manage, that we have engaged with, that were willing to back away from using Southern Poverty Law Center as their filter for who was an appropriate charitable target and who wasn’t in the name of pursuing something more politically neutral and recognizing that Southern Poverty Law Center was anything but in the way that they were very frequently including our friends at ADF and Turning Point. 

Referring to reasonably mainstream groups, they certainly can have political opinions that many, many people won’t agree with, but that’s not hate speech. And believing in certain traditional views of life and marriage is not hate speech, even if folks disagree with it there.

And by the way, the way that they targeted me personally, my consultants, Jerry Bowyer, my late father, and many people affiliated with WORLD, I mean, the SPLC is just a completely non-credible organization for this.

And so the indictment last week, I don’t know what’s going to come of it legally, but I do think you’re right that pragmatically it’ll tip companies away from something they never should have been doing to begin with, which is having a player on one of the teams serve as the referee.

EICHER: David Bahnsen is founder, managing partner, and chief investment officer of the Bahnsen Group. He writes at dividendcafe.com, he writes also for WORLD Opinions. 

David, I hope you have a great week, we’ll catch you next time.

BAHNSEN: Thanks so much, Nick.

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