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Moneybeat: the latest economic news
MARY REICHARD, host: Next up, The World and Everything in It: the Monday Moneybeat.
NICK EICHER, HOST: Now it’s time to talk business, markets and the economy with financial analyst and consultant David Bahnsen. David’s boss of the Bahnsen Group wealth management company. He’s here now and David, good morning.
DAVID BAHNSEN: Well, good morning. Nick, great to be with you.
EICHER: All right, lots of activity last week, David. We had the inflation report, the CPI Consumer Price Index and then the Fed had its last policy meeting. Lots of data stories. What do you think is the greatest story?
BAHNSEN: Yes, I think that was exactly it. Two different inflation reports were released, the CPI on Wednesday and then the PPI released on Thursday, both indicating downward pressure on inflation month over month. Producer prices, in particular, were negative and were expected to rise by around 0.1% and be -0.2% in the core and 0.3 in the overall price. And so you made a good move in terms of what you know the Fed is looking for in terms of coverage to get to that point of rate cuts. Was it just superficial and not sustainable and not that noteworthy? Well, that would be news for the bond market. Nick, we were talking at the end of April, and the 10-year bond was at 4.7%, and we were talking about whether or not it would get to 5% again, like it did last year. As I’m here talking, it’s at 4.22%. We’re talking about a 10-year, 50 basis point, half percentage point drop in six weeks. So a really strong indication in market prices of downward pressure on inflation and inflation expectations.
EICHER: Yes, and then that Fed meeting, David. I wonder what you thought of Chairman Powell’s statement afterwards? And you know, from what I can gather, it looks like the central bank has planned a rate cut later this year. Not long ago we were talking about two.
BAHNSEN: Yes, but they didn’t write anything. I think there is a small mistake there. But let me be clear: in November of last year, the Fed basically indicated that it was not going to raise rates again and published a so-called dot plot where its own governors predicted what they thought rates would be. It’s not the same as declaring what you’re going to do. If you think about it, the Fed can’t do that, because their goal is, “We’re data dependent, we’re objective.” Meeting after meeting, if the Fed knew in November 2023 what it was going to do in December 2024, it would end data dependency. It would just mean that we have already determined a path. So the dot plots are intended to be the Fed’s own forecasts. And as I’ve said for most of my adult life, not entirely, the dot plots have changed to reflect what the market is saying. The market hasn’t changed to reflect what the dot plots say, but the Fed’s own forecasts have. Well, it’s true that the Fed presented dot plots, half of the governors predicting one rate cut this year, half predicting two. I think there will end up being two, but I don’t think they will start in September. I think they will start in November and do another one in December. But it’s really at this point, when you’re talking about the end of the year, somewhat symbolic, and then the next rate cut in January. In any case, at least what the market and the Fed are predicting are some modest rate cuts very late in the year, and even those are subject to change, as we have seen this year, both the Fed’s own forecasts and the market’s forecasts. Forecasts themselves were discarded several months, sometimes.
EICHER: Well, political bad luck for President Biden. I mean, I say this deliberately, but six, nine months ago, the smart money was on Biden, benefiting from previous rate cuts at the height of the campaign season, but now he’s not going to make it.
BAHNSEN: Well, I don’t agree with that. I think if we want good luck as president, we want an easy monetary policy in the third year of his term. By the fourth year of a term, it will usually be too late. But I’m not sure it would matter much anyway. And the feeling that I—and now I’m more politicizing than I’m economizing, but I think this election comes down to issues, with President Biden’s immigration and inflation, and I think most of his narrative around these two issues are very well consolidated and, on both issues, it’s not very good for him. Now, of course, this election may not be determined by issues. It may ultimately be determined by which of the two candidates independent voters find more tolerable. I mean, we know it’s going to be a close election, but I think as far as the idea of rate cuts, let’s say in July or September. I don’t think it would matter at all. It’s not like unemployment is actually high and rate cuts are going to occur and increase jobs. Unemployment is already low. It won’t go up or down based on a quarter-point move between now and then. So where Biden is lucky versus unlucky is that in the Fed raising rates from May 2022, where they were 0%, to July 2023, when it went to 5.5% and we didn’t go into recession, the recession would likely have been total . killer of the presidency, as it has been throughout history, and we haven’t had a recession. And so you could argue that he’s lucky in that regard.
EICHER: Yeah, so David, can we talk about super CEO Elon Musk for a moment? He was all over the news last week, working to restore his salary package, with an eye-popping $48 billion in stock compensation that when we first started hearing about it, was over 50 billion, but due to the decline in stocks Tesla’s fell a little behind, but it’s still an impressive number. What is his conclusion about that shareholder meeting last week and also about the notion that a judge can set your salary?
BAHNSEN: Well, it comes down to a board-approved compensation package that was passed along a while ago that was going to pay him 10% of the value created, and the company’s market capitalization went up by $600 billion, as he had very successful at that time. , executed a series of important initiatives and was going to receive something in the order of 60 billion dollars and then a judge in Delaware rejected it, which was, in my opinion, absolutely outrageous. The board approved the shareholder-approved private transaction between free parties in which the people in the game won $600 billion and a judge in Delaware ruled it was unfair. Now, look, any of us can feel: I don’t want the CEO to get that much money. No problem. Don’t own the company. Sell the stock. You have no obligation to hold shares in a company where you feel the CEO is being overpaid and his interests are being harmed, but in this case the shareholders are only paying that amount to Elon Musk because they benefited, and this was a transaction between private parties. Therefore, I feel strongly about the rule of law. So the people who are in the game voted, and now, this week, there was a new vote, and it was upheld, and I think it was appropriate as a matter of the rule of law, and so going forward, either it will prove to be be a good investment or a bad investment. But the people who must determine whether it is a good investment are those who have the opportunity to make money if the investment goes well and the people who have the opportunity to lose money if the investment goes wrong. And in this articulation lies one of the most important pillars of all classical economics, the principle of skin in the game.
EICHER: Skin in the game. All right, David, I want to go back to the beginning where you talked about the importance of bond market signals and what they say about inflation expectations. So let’s define the terms here before we address the bond market itself and why it provides such important information about the direction of the economy.
BAHNSEN: The term today is bond market, and let’s be clear what we’re talking about. When we say the term bond market in financial markets, we are referring to the United States Treasury bond market. But when you talk about the bond market in the United States, in the United States of America, you’re really referring to interest rates. There is no credit risk. we are simply talking about the movement of interest rates up and down. And so you have a really good, clear, isolated view of how people are feeling about income, about what they’re willing to charge to be separated from their money. With a Treasury bond, you assume you will be repaid with the full faith and credit of the United States government. The same way people feel so good about FDIC insurance, a CD, things like that. This is literally a government-guaranteed treasury bond. James Carville, Bill Clinton’s 1992 campaign manager, famously said, “If reincarnation were real, I would like to come back someday like the bond market,” because bond markets have the ability to have tremendous influence and influence. on financial markets, on the economy, in much of the world.
And when I refer to the bond market, I’m referring to billions of dollars, we know that there are 34 billion dollars in national debt. Therefore, at any given time we know how many treasury bonds there are. It is equal to the amount of national debt. And there are bonds that they are paying off, every month, and bonds that they are reissuing to issue new debt. And so you’re constantly dealing with new supply and demand. And it gives you an indication of what appetite there is, what investors want and what they need, and so on. It is strongly liquid, strongly transparent. This is what we mean by the bond market.
This gives us many indications of other financial conditions. And when I talk about 10 years, it’s a longer bond. In fact, this is really telling us what investors think about growth. Then you say, okay, look, if the economy is going to grow 3% a year, I’m going to want 3% or more, because you would think I could get that amount of money somewhere else, having my money, you know, invested in a different place. So the interest rate on the 10-year bond gives us a lot of indication about what the structural implications are for people, but of course growth, nominal growth, includes inflation plus real growth. And so if you think there will be 3% real growth and 1% inflation, that’s four, but if you think there will be 3% inflation and 1% real growth, that’s also in favor, but it’s very different for .
Thus, the bond market gives us a view of inflation and growth expectations, which is why I consider it such an important financial instrument.
EICHER: Okay. David Bahnsen, founder, managing partner and chief investment officer of the Bahnsen Group. You can check out David’s latest book, titled Full-Time: Work and The Meaning of Life, and you can check it out at fulltimebook. with. David, I hope you had a great Father’s Day weekend. Happy belated Father’s Day to you and I hope you have a great week ahead.
BAHNSEN: Well, happy day after Father’s Day to you too. You and I have lost fathers who meant so much to us, and it’s a special day for so many, so happy belated Father’s Day, my friend.
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