Moneybeat: Understanding the economy | WORLD


MARY REICHARD, HOST: Next, The world and everything in it: Monday Moneybeat.

NICK EICHER, HOST: Now it’s time for our weekly conversation on business, markets and economics with financial analyst and advisor David Bahnsen, director of wealth management firm The Bahnsen Group. Good morning!

DAVID BAHNSEN, GUEST: Glad to be with you, Nick.

EICHER: Well, here we are on Labor Day, the new month of September, so why not, speaking of the workforce, take a look at the August employment report ? Can you draw conclusions from this?

BAHNSEN: Well, I think the August employment numbers, the BLS, which stands for Bureau of Labor Statistics, their monthly employment data released on Friday was interesting. You know, the number was 315,000 jobs created in August, and the expectation was 298. So you say, okay, well, it looks like it was a little better than expected. But there were 100,000 jobs revised down from the summer months. So it ended up being one of those genres, okay, there’s good and bad things, but kind of in the middle, so to speak. The unemployment rate fell from 3.5% to 3.7%. But he did it for the best possible reason, not because of the loss of jobs. But because the working population has increased a bit, which makes the denominator higher, so the percentage has moved. I don’t think there’s been anything to say, “Okay, wow, this economy is really shutting down.” And there was definitely nothing that said it’s progressing fast, and everyone’s crazy to think about the slowdown, it was just kind of right in the middle, which is a perfect complement to the state of so many of data right now, which is the ambiguity, the ambiguity of where things are, there’s no compelling case that indicates things are really slowing down. And there’s no compelling case that says it’s okay. There are a variety of data points that produce an ambiguous economic narrative.

EICHER: David, a lot of questions from listeners came in last week, so I’d like to take advantage of the slower holiday weather to sort out a bit of the backlog, so if we can get through them quickly, I think we can in integrate four, so let’s try that.

The first of Dr. Ronald Godat. He’s a dentist in Fletcher, NC, and he wants to know the relationship between the price inflation numbers and the sales numbers for goods and services. So he asks this:

If we say that inflation increased by 8-1/2% and, for example, retail sales increased by 8-1/2%, does that mean that no goods were sold during this period? In other words: does this mean that the same amount of goods were sold since it took 8.5% more dollars to buy them?

BAHNSEN: Yeah, I understand exactly where it’s coming from in the question, but it’s a little simpler than the question suggests, because it’s not talking about the amount of goods. The price level is only a reflection of the prices. So if I tell you, let’s keep it simple. So let’s do this with a single orange. If I say an orange, sold for $100. And if now we say that the price of the orange is 108. I did not say if two oranges were sold, or if 1000 oranges were sold, or if only one orange was sold. All I said was that the price of orange was 108. And when we talk about the price level, we are not talking about the volume of goods and services. And so the way we measure GDP, which looks at both consumption and production and inventory, then you’ll get a measure of goods and services. But the price level is isolated from what the price of a given transaction would be. Now the complexity is allegedly with something like the CPI, the consumer price index, they’re trying to measure all the aggregate prices, which I think is pretty silly. But with a single orange in the question, you wouldn’t have an indication of more or less goods and services sold. It’s not about that – it’s only isolated to the price at which a particular good or service is sold.

EICHER: The next question is from Jered Gebel. He listens in southeast Alaska, where he says he flies seaplanes for a small airline there.

GEBEL: My question is about the stock market. I understand that owning a stock and a business is only part of it. And I combined sell this stock for what it’s worth. But the question is for a particular stock, who or what, for example, says today that the stock price of company X is $5.85.

BAHNSEN: Well, maybe I have it unintentionally, but what the question does is allow us to answer one of the most important things in all of economics, because no one determines what is the stock. The whole point of free market economics is about prices, and prices are signals, prices are baskets of information. Who literally and functionally determines the price of a stock? Buyers and Sellers. So the second the market opens, I go out and say, I’m going to pay 10. And someone else says, I’m going to sell you for 10. And then the next second, someone says 10, $05, and someone else says, “Okay.” It’s that up and down movement, having a cooperatively agreed buyer and seller. There is no centralized force that says what the price will be, there is no one in the business, the business can say we now want the stock to be 20. But if no buyer comes the pay, then the business is really wasting its oxygen. Prices are set by voluntary agreement, mutual cooperation of buyers and sellers. This is true of stock prices and it is true of banana prices. Price does not exist until a buyer and seller come to an agreement. And that’s how it works in the stock market.

Now maybe a different question is, “How much is a stock worth?” But even then the value of a stock, it could be disconnected from the price. Buyers and sellers agree on the price, but someone may sell for less than their long-term value because they are desperate to raise cash no matter what. People also overpay, which means the buyer and seller agree on a price, but in hindsight, that might turn out to be silly because the company isn’t really doing everything people hoped it would. she would do – things like that. But it’s a great question to really show how prices work, using stocks as an example.

EICHER: Auditor Todd Vician wrote and said his son noticed the US dollar was stronger than ever against the euro. And he wants to know if it’s significant that this is the case for what could be the first time in a long time, even though we’re still grappling with inflation, stock slumps, and the like.

What do you say, David?

BAHNSEN: Yes, the dollar was stronger than the euro when the euro first came out in the late 90s. And in the very early 2000s. And then it was around parity, where they were both basically dollar for dollar with each other for a short while early in the George W. Bush administration. And then we went over a period of 20 years where the euro was valued higher than the dollar. And at some point, I believe, hitting around $1.60 for a euro, I mean, like a 60% increase in the euro against the dollar. And so the question is correct, that it is now essentially about parity.

Over the past week, I think the Euro has moved slightly – 2-3% more than the Dollar. But they are very close to each other now that the euro was in a stronger position. And it is significant. And I will explain very quickly why the Fed is tightening its monetary policy more than the European Central Bank. Interest rates are higher, and they are trying to strengthen that dollar while Japan is not. So the yen is really weak. And while the Euro is not. European authorities are doing more than Japan, but much less than the Fed. The problem is that this puts a very tough stance on the European Central Bank because they now essentially have their currency controlled by the Fed. If they tightened their monetary policy further, it would really hurt different aspects of what they are trying to control. They have become a very interventionist and manipulative central bank. And I’m not saying that as a compliment. But what happens is that the manipulation is for them because if our Fed tightens, it strengthens the dollar, weakens the euro, and that has a whole political ramification. And so all they can really do is kind of hope the Fed clears up, which means the euro can strengthen against the dollar; but in the meantime, he’s really taking his P’s and Q’s from what the Fed is doing. So that’s sort of the story of how the dollar and the euro interact with each other.

EICHER: Okay. And finally listener Rachel Gage from Durham, North Carolina.

GAGE: Hello, Mr. Bahnsen. In your August 29 segment, you said you had a contrary view of the loan repayment regime. And you said you didn’t think it would work. So I’d love to hear your perspective on why that might be. Thanks.

BAHNSEN: Yeah, the opposite part of my perspective is that I don’t think it’s politically advantageous for the White House because I think people who were inclined to really like him are people who are inclined to already vote in line with this administration anyway . And yet, there is currently a real political reality that independents, centrists and moderates do influence elections. We are so passionate and enthusiastic about a certain part of the right and a certain part of the left. But there is one independent voter who I think largely dislikes the student loan repayment program – or the forgiveness program, I should say. And I think politically, my contrary view is that it’s a net negative for the White House.

EICHER: You can submit your question for the Moneybeat Mailbag and again we prefer that you use your phone to make a voice memo, try to be brief and send me a file at [email protected] and we’ll consider your question for air. We can’t do them all, but we will do as many as possible.

David Bahnsen is Founder, Managing Partner and Chief Investment Officer of Bahnsen Group. His personal website is

David, I hope you enjoy the Monday market closing here on Labor Day. I’ll talk to you next week, God willing. Thanks!

BAHNSEN: Thank you very much, Nick.

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