In light of the economic tumult as a result of the Coronavirus and the political responses to it, we asked David L. Bahnsen, Founder, Managing Partner, and Chief Investment Officer of The Bahnsen Group, a bi-coastal private wealth management firm managing over $2.1 billion in client assets, if he’d share with the Center for Cultural Leadership his ideas on the economic side of the crisis. He regularly offers his financial opinion on major news media, and from the beginning of this crisis has addressed it on national outlets. (This interview is the second in a series. The first was COVID-19 and Legality: An Interview with Jeffery J. Ventrella.) David kindly agreed, and the interview is below:
PAS: David, thanks for taking time out of your hectic schedule to answer some questions. Can you start by summarizing the leading lines of the economic fallout from the Coronavirus crisis, whether from the virus itself or the political response to it? Simply put: what’s happening, and why?
DLB: Economically, what is happening is that the government (federal and most states) have essentially shut down the economy, or a large portion of the output from it, as a part of their treatment for the coronavirus pandemic. On the supply side, productivity going into Q2 will be suppressed across most sectors, and on the demand side, consumption (which drives 70% of American economic activity) will be horrifically compressed.
PAS: This is the second time in your career you’ve been caught in the middle of a global financial meltdown, the first, of course, being the 2007-2008 home mortgage crisis, about which you wrote Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It. This latest one seems to have a different — and more severe — feel. Beyond the fact that the sources of the two crises are so obviously divergent, how does this crisis differ from the last one?
DLB: It is actually the third, as I also count the 9/11 experience (and subsequent recession, all in the same period of time as a post-tech bubble burst) as a significant one as well (at the beginning of my investment career). In all three cases there are various similarities and various divergences.
Clearly, the rapidity of this is historically noteworthy. The stock market’s drop was the fastest on record (in terms of number of days). The 2008-9 crisis was more structural and less transitory – there was (then) a very genuine question of the solvency of the nation’s financial system (and the world’s!). Here, there is virtually an overnight removal of global demand, which most believe will come back (in either an L-shape, U-shape, or V-shape) when circumstances allow. The banks are solvent. The financial system is heavily liquefied. The bones of the economy are solvent, and the state of the economy coming into this mess was really quite strong.
PAS: The latest Coronavirus stimulus package is by far the largest in US history. You’ve read the entire document, and you’ve helpfully laid out its four main provisions. Stepping back, what are the broad aspects of this stimulus that people need to understand? What is the Fed doing, and how will this change our economy?
DLB: Well, the stimulus and the Fed interventions are technically separate things, but a large part of the stimulus is crucially inter-connected to the Fed. That piece is the $400 billion of equity capital the Treasury will put up for business lending, which allows the Fed to lever up to 10x in their liquidity conventions (so essentially a $4 trillion pile of liquidity to back business and consumer assets). But the broader parts of the CARES ACT itself that most will comprehend easier are (a) Direct payments to taxpayers, and (b) Support to businesses via “forgivable loans.” At $350 billion, that second piece is what Treasury is most counting on to keep payrolls going through this distressed time.
The short-term benefits are likely to be profound, but there are a lot of questions around implementation and execution. The long-term implications (more on the Fed side than anything), would take a book. In fact, that’s not a bad idea.
PAS: I’ve noticed in your interviews that unlike other economists you’ve been reluctant to make too many forecasts. I was reminded of a sobering quote from a book you and I both love, Daniel Kahneman’s Thinking, Fast and Slow: “An unbiased appreciation of uncertainty is a cornerstone of rationality.” Is there a danger in a crisis like this of wanting certainty so badly that we make bad economic (and other) decisions?
DLB: Sure, particularly for investors. But the same is true for everyone in some capacity. The coronavirus did not create the uncertainty of life in this fallen world; it revealed it (or re-revealed it). The threat of health pandemics (like all “tail risk,” for those who understand probability distributions and bell-shaped curves) – the threat of terrorists hijacking planes – the threat of major financial institution failures – these threats exist every day on this side of Eden and this side of Glory. How one deals with the reality of these uncertainties, and calculates various risk/reward propositions, is the essence of “human action” (i.e. – economics).
PAS: In your estimation, what decisions, both political and personal, would draw this economic crisis to its swiftest close?
DLB: A firm determination at the right time that the health aspects were in a position to let the economic aspects normalize. It’s really that simple.
PAS: Finally, David, your advice to your clients has basically been, “Don’t panic. Stay clam. Stay the course.” What general life, as well as basic economic, advice would give the Average Joe and Jane during this crisis?
DLB: My advice has been much more nuanced to clients, and more in depth on a case by case basis. But you are certainly right, the details of the advice follow the foundation of staying calm and avoiding panic. I would give that advice any day, anytime, as I don’t believe people make the best decisions in life when they are in a state of panic.
As life advice, I recommend proceeding through every step of this trauma with gratitude. We all have things that ought to evoke a holistic sense of gratitude.
Economically, experiences like this reinforce the need for healthy balance sheets, defensive income statements, diversification, and more. In this case, that applies to our personal finances and decision-making AND one’s investment portfolio.