MARY REICHARD, PRESENTER: Next on The World and Everything in It: the Monday Moneybeat.
NICK EICHER, HOST: Now it’s time for our weekly business, markets and economics talk with financial analyst and consultant David Bahnsen, head of wealth management firm The Bahnsen Group. Good morning!
DAVID BAHNSEN, GUEST: Good morning, Nick. good to be with you
EICHER: Well, today we’re going to start answering audience questions, David. We have lots of them. As it turned out we had a glitch in our system where not all of our emails got through, but our team was able to fix it and we believe they have all been recovered. I have – I hope – read through all the emails that have accumulated over several weeks and let me say that you may not be hearing yours right away. I had to categorize them, and one of those categories I call “evergreen” – appropriate for any time – and David, let’s get right to that. The first question relates to your comments from the last week.
This is from Jacques Pye and he writes the following:
I do understand and agree with your comments that the notion that the good jobs are reporting [in September] would cause the Fed to raise interest rates to cool the economy (which produces so many jobs)… [that it] While NOT the cause of the sharp drop in the Dow Jones Industrial Average the previous Friday, I’d like to hear your thoughts on what caused the Dow to drop more than 600 points [day].
So David, maybe recontextualize your comments and then get back to our listener on what caused the Dow decline about a week ago.
BAHNSEN: It’s referring to the day the payrolls come out and look pretty good, which means the Fed is unlikely to slow tightening. And they are unlikely to curb rising rates, causing the Dow to fall. This is the basic idea in the narrative of the media.
He mentioned that the Fed is therefore more likely to control the Federal Funds Rate, but the Fed does not control the Federal Funds Rate, it controls the Federal Funds Rate. And these technical details make the difference. While the policy rate will ultimately be largely fed by the Fed rate, I want to make that clear.
But first of all, what drives the market on any given day is really dangerous to answer because you won’t know. And by looking for an awareness of what could potentially move markets, you can embed an arrogance or confidence that becomes actionable. That would go against the humility approach, which says that the market can go up or down for any reason any day without telling you why. For example, last Friday you could say that the market absolutely knew that the Fed would hike rates at the next meeting. And then the work report comes out pretty good. But the market fell anyway. Maybe the market didn’t know.
But what I would say is that maybe a lot of people were positioned in the trade, short-term traders, hedge funds, high-frequency algorithmic players, positioned for the other path. It did not happen. So they had to cover their trades very quickly. It doesn’t have to be fully recognizable or transparent, and it isn’t. I do not declare it with incredible certainty. But I do want to point out that these things are driving a lot of short-term market activity. And these things are incredibly irrelevant to investors.
EICHER: Next question from Matthew JS Jackson. He listens to us, he says, almost every day in Northern Ireland:
JACKSON: Hi David. My name is Matthew. I’m from Northern Ireland. I have a question about the UK market. The UK market has changed a lot in the last week. And I guess I just wanted to understand your reasoning behind it. Whether you think it’s the mini-budget or the Bank of England, and whether you think the mini-budget will actually help inflation rise in the UK, or whether it will only exacerbate it by damming up more demand than it does curb demand and bring supply back to normal levels. So your opinion would be very welcome. Many Thanks.
BAHNSEN: All right. In a way, the question is a broader question of economic philosophy: does higher production, or an incentive to higher production, lead to more or less inflation? He happens to contextualize it precisely in the context of Britain. Your new Prime Minister, Liz Truss, is not having much political success pushing this agenda. Incidentally, I’ve been in touch with their economics department on a series of conference calls now to try and push the agenda that supply stimulus is the solution to inflation, not the problem of inflation.
Back to the question: does it stimulate more demand, which exacerbates the problem? And that, again, is the philosophy of demand-side versus supply-side economics. The problem we have with inflation in Britain and the United States is insufficient levels of production of goods and services relative to demand and the money supply behind demand. And there’s no way that incentives to produce more goods and services are counterproductive to inflation.
The biggest argument we have in history for this has been the massive and structural disinflation that supply-side activity has created in the United States [during the 1980’s], where after Reagan’s tax cuts and his cabinet deregulation process, manufacturing exploded and you had a significant cut and moderation of inflation. I firmly believe that the UK would be well served to stimulate or encourage greater production. However, I am quite skeptical that they will make it politically based on the uphill battle they are fighting.
EICHER: Let’s stay with the subject of Europe, David. A question from Matt Himsey:
We’ve been hearing about fluctuations in the value of the currency lately and how the euro has been historically low. How is the value of the currency determined? Why is the euro losing value and not the [United States] Dollar Appreciating?
BAHNSEN: By definition, both happen at the same time; I happen to think that one drives the other. You have one acting relative to another. That’s how currencies always are, because the value of one currency is the amount of the other currency that you can get for it. So if one goes lower, it means the other goes higher. This is textbook zero-sum game. And the dollar has risen significantly this year against the euro, but also against the yen and also against the pound sterling. And the question is why are these other currencies falling and the answer is very simple that the demand for dollars is driving up dollar prices. And the reason the dollar is in demand relative to these other developed currencies is that the Fed is ahead of other central banks in tightening monetary policy.
If you look at government bonds, our currency’s government debt, and the fact that we’re denominated in dollars for so much of the world’s trade, and especially when you use our currency to control the world’s oil markets, the dollar has this leverage. In times of economic hardship, both domestically and globally, people fled in dollars, not dollars. And so it’s a great argument to think of economics in terms of the cleanest shirt in the dirty laundry, or the best house in a bad neighborhood. We can voice all kinds of criticism of the dollar and of US monetary policy, which weakens the stability of its own currency. But as long as other countries are more guilty than we are in the relative and zero-sum game that is forex trading, other currencies will be worse off. And there is no question that the euro’s instability has been more severe than that of the US dollar.
RICE: Hi David, Jeb Rice here. I love your spot on The World and Everything in It podcast. I appreciate what you do. My question relates to inflation. The causes of inflation are therefore multifactorial. If these causes were successfully addressed, would you expect prices to stay around where they are? Have we hit a new set point for what we are paying for things like food, energy, etc., or are you expecting a deflationary bout where prices fall again and get back close to where they were before this inflationary bout? ? Thank you for your time David. Really appreciate it. Watch after.
BAHNSEN: Yes, that’s a great question. And there is also a third option, in which the growth rate of prices decreases significantly – what we call disinflation – but in which prices themselves do not deflate and fall below their current levels.
I would answer your question by saying that I expect different things for different goods and services. I believe housing will deflate and I believe rents will deflate due to the imbalance between supply and demand. I think food prices will go up and maybe go back to almost pre-COVID levels. But there is much to do with food inflation, and energy is also a more difficult story to determine as supply policies in the United States become aligned. There is a lot of electoral and political significance there going forward. But if you take this kind of fictional idea of the price level – an aggregated summary of all prices – as a general price level, then I think we’re going to face debt and severe disinflation in the near future. And at some point we would face deflation, for which I don’t want to give a time frame.
We’ve been very fortunate in the United States because, other than the Great Financial Crisis and of course the Depression before that, we’ve had very little deflation over the years. The kind of purgatory we’re seeing here isn’t really great where the economy is slow and without growth, but it’s better than deflation. And even discounting the negative contraction in the price level, deflation feels a lot like deflation, “slow with no growth”. It exacerbates the social divide. It’s taking away jobs and productive growth opportunities, and the excessive debt that’s responsible for it remains, and that would be my prognosis for the future.
EICHER: Well, as I said, we have many more questions than we have time for. But don’t let that discourage you or stop you from submitting a question because David is sort of willing to stay after class. And we’re considering recording a special podcast where we go much longer and go through them all. So we’re considering a special one-off or two-off, whatever we need to take care of all the questions because I know David likes to do that. So if you have any question, email us at [email protected]. Whatever is on your heart when it comes to business, economics and finance: [email protected]. Send me a recording if you can, ask the question and we can hear your voice.
David Bahnson is the founder, managing partner and chief investment officer of the Bahnson Group. His personal website is Bahnsen.com. David, we’ll talk to you next time. Thanks again!
BAHNSEN: Appreciate it. Thank you Nick
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