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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 adviser David Bahnsen. David heads up the wealth management company the Bahnsen Group, and he joins me now. David good morning on this first day of 20-24.
DAVID BAHNSEN, GUEST: Well, good morning, Nick, good to be with you.
EICHER: Well, the year’s gone by, and time to take stock, I guess. Let’s run though it in that order, business, markets, and the economy. How you appraise the year that was in those three categories? And let’s start in business, David, what do you think was the big story in global or US business?
BAHNSEN: Well, I think it’s a good distinction between business, markets, and the economy. And when you talk specifically about the world of business, it was the resilience of companies, their capacity for profit making activity in the face of muted economic growth, in the face of a lot of uncertainty in the jobs market as to what the overall economy would do, and also in the face of higher interest rates, higher borrowing cost, the fact that the business environment and the country held up so well, I think is a testimony to the nature of a free enterprise system, and how business owners and business conglomerates are able to respond to changing conditions, the alignment of incentives that exist in a market economy, the knowledge that is, I think, far superior in the hands of business men and women, then it is in the hands of central planners and politicians, I think that the business environment held up well. If I had started off the year saying that China was going to essentially have a negative growth type year, when expectations were that they were going to have such a positive growth year in the aftermath of reopening and their delayed COVID moment, I would have expected a lot of global businesses to suffer quite a bit. And if I would have known that we would persist in a high rate environment, have a total freezing of bank lending, and deal with the high cost of borrowing embedded in capital markets, I would have been very hard pressed, it would have been a tough call to come up with the profit gains, and the overall dynamism that we’ve seen in our corporate economy in 2023. I credit it as a testimony to free markets.
EICHER: This is probably not a contrary example, but I do remember the morning the story broke in the spring, in March, that SVB, Silicon Valley Bank failed. Was that a market story or a business story, to your mind?
BAHNSEN: Oh, it’s very definitely a story of markets. Because what it was, is a direct byproduct of what had happened in the bond market, putting their net worth upside down. They had a bond portfolio that had gone so far with long dated bonds, that then because of the rapidly increasing interest rates caused the market value of those bonds to drop, that once they had any deposit withdrawals, it cycled in a way that accelerated their demise and left them without the necessary capital, because the marked market value of their bond portfolio had gone down so much. And so that was really connected to financial markets. But then in the aftermath of that, Nick, which I think is more of a market story, you get a very positive business story. And that is how quickly other banks were able to take on those customers, take on those depositors, redeploy some of those investments that the Silicon Valley Bank and subsequent First Republic Bank failure did not become more contagious is really one of the more interesting stories of 2023.
EICHER: And that was a story of business resilience and not necessarily government policy, or would you make a distinction there?
BAHNSEN: No, I would, because I think there are people that believe the FDIC is the same thing as government because it’s a government backing that comes in, but in the case of First Republic, it was a private bank, JPMorgan. I happen to be looking out my window here at my New York office on Park Avenue at their building, and they have the balance sheet and the size to be able to take on those obligations. But even the FDIC itself, I do view a little bit differently than other government bureaus because the FDIC is entirely funded by bank payments, the private sector funds the FDIC with what is essentially a cost of insurance. The banks pay the FDIC and then those monies are used to absorb losses when the FDIC takes losses like they certainly are with Silicon Valley Bank. And so there are some who don’t like that system. That’s not so much my point here. It’s just very nice when the FDIC doesn’t have to become an unlimited backstop to other bank failures, because there are private sector solutions, like the one JP Morgan provided in the case of First Republic.
EICHER: Staying with the umbrella theme of markets, I’d like for you to drill into the equity markets, where you live so much of your professional life, the New York Stock Exchange and others, they ended on a very positive note. What’s your sense of the year?
BAHNSEN: I gotta say, getting profit growth on the year was not expected. And certainly getting an increase in the valuation on those profits to the degree we’ve had, was not expected. And so it was a year in which it was very difficult to lose money investing, whether it was cash, or emerging stocks, or US stocks, or any kind of bonds, at the end of the day, it appears that virtually every asset class under the sun is going to declare a positive return.
EICHER: Then, just the economy writ-large. There was a lot of talk of high prices, a too-high consumer price index, popular talk of inflation, and the federal reserve response to that, with increases in the price of borrowing, raising interest rates in pursuit of a soft landing, avoiding recession. Looks like mission accomplished. What do you say?
BAHNSEN: Well, I think that the economy obviously requires just a real obstinance, or a partisan lack of objectivity to not acknowledge that the economy performed better than people would have expected this year. Now, that doesn’t mean it performed great. It doesn’t mean it performed great in all categories, or even good in all categories. I think there are certain elements of the economy that are woefully underperforming. But relative to expectations, which were nearly universal a year or a year plus change ago, for a recession, to have had economic expansion, and each quarter of the year for that expansion to have outperformed expectations is really quite rare. And frankly, I think that the employment is the ground zero of this: we have jobs. What I fear is that we won’t have workers. And so that’s a very different problem than having a lot of workers looking for jobs is when you have jobs looking for workers. And so there’s skill mismatch issues that we have to deal with in the future. There is a web of tax and regulation burdens that we have to deal with in the future. But right now, the economy is offering a lot of job opportunities. There’s been wage growth, and that’s the bright side that I think it behooves us to look at. Manufacturing has declined, even as factory construction has increased. There is a mixed bag in some of that data. Industrial production is not robust. It’s declined over the last few months. The total trade globally when you put imports and exports together, has decreased, largely because imports have come down. China’s exporting less. And there’s going to be ramifications to a lot of these things. But for 2023 coming with what would be a full year GDP number with a three in front of it and unemployment number with a three in front of it. That’s a pretty good year Nick.
EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group … his personal website is Bahnsen-dot-com … his weekly Dividend Cafe is found at dividend-cafe-dot-com.
David, thanks, have a great week!
BAHNSEN: Thanks so much, Nick.
WORLD Radio transcripts are created on a rush deadline. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of WORLD Radio programming is the audio record.
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