David L. Bahnsen is Founder, Managing Partner, and Chief Investment Officer of The Bahnsen Group, overseeing the management of over $3.5 billion in client assets.
Prior to launching The Bahnsen Group, he spent eight years as a Managing Director at Morgan Stanley and six years as a Vice President at UBS. He is consistently named as one of the top financial advisors in America by Barron’s, Forbes, and the Financial Times (2016-2021). He has been a CCL fellow from its inception and is one of the most respected economic and wealth analysts in the country.
PAS. The latest inflation numbers have appeared, and they’re quite high. All along you have disagreed with a lot of the prevailing wisdom about inflation. What’s going on, and what are likely to be the short- and long-term effects of inflation?
There are really two different conversations going on around inflation but for a variety of reasons they are easy to conflate. The bond market and the U.S. dollar has continued to take my side on the inflation discussion (okay, the better way to put it is that I continue to take the bond market’s side of the discussion), which is to say that long-term growth expectations are low, because long-term excessive indebtedness has put downward pressure on both nominal and real growth.
But the current price escalations are real, and the bond market’s sanguine response does not change the fact that fuel prices are higher, food prices are higher, car prices are higher, etc. I have long felt that most people do not care what is causing price escalations; if prices are going higher it stings people regardless. However, based on my day-to-day responsibilities in allocating capital, I don’t have the luxury of not understanding why prices are going higher. And nor do I think it is helpful (whether myself from a capital allocation standpoint or a layman just making heads and tails of the daily economic news) to paint the entire story with one brush. The fact of the matter is that there are different circumstances happening with energy vs. housing vs. automobiles, no matter how inconvenient or “complex” that makes things.
The narrative that the inflation was caused by recent bouts of government spending does not stand up to the basic scrutiny of the last 30-40 years of history. The first $25 trillion of national debt was deflationary but the last $3 trillion was inflationary? The first $5 trillion of quantitative easing couldn’t even create 2% inflation but the last $3 trillion of it created 7% inflation? It is admittedly a potentially powerful political argument from a partisan standpoint, but I am only staying in an economic lane here.
Housing prices have escalated because of inadequate new supply, demographic shifts (late age household formation), a preposterous distortion in the cost of capital (low rates), and the increase of rent costs that have made home purchases more relatively attractive. This is unhealthy and policy-driven inflation, and I believe it has been the law of the land for three decades, and created an affordability crisis in our country.
Energy prices have escalated because of an abandonment of U.S. production capacity (some policy driven, and some decision-making during COVID to excessively turn off rigs and wells), combined with a surge in demand that seems to have surprisingly surprised some people. This is also unhealthy and policy-drive inflation.
The bulk of the non-housing and non-energy price inflation we see is a surge in demand for goods post-pandemic that has been met with an inadequate surge in supply. In fact, that shortage in supply has been created by a perfect storm of supply chain disruptions, a grotesque inadequacy in semiconductor manufacturing, a lack of port capacity for imports, a lack of truckdrivers for distribution, and an overall lack of laborers at various stages of the supply chain. Here, you see used and new car prices up 20-30% since 2019, and other goods and services up 3-6%. So in both cases you see > trendline inflation, but an obvious inequity in the distribution of that inflation. This screams for an idiosyncratic explanation, and the occam’s razor of it is that semiconductor manufacturing is the BIG problem, while supply/demand imbalances in food, consumer goods, etc. are the SMALLER problem. But yes, both are problems.
Inflation is a presidency-killer and I believe that this will hang on President Biden in 2022. My narrative change versus “Fox News talking points” is not because I have a different political point of view – I don’t, and I get it. But I believe those arguing for the simplistic notion that excessive government spending out of COVID and excessive Fed QE out of COVID are missing something from the past and the future. The real tragedy of excess government indebtedness is how it suffocates and stagnates future growth. The narrative that “it has created a red hot economy” is catnip for the current inflation blame-casting, but it is causing us to miss the forest for the trees.
PAS: What’s causing the supply-chain issues, and how long are they likely to last? What will solve them?
It is not one single thing – it is a perfect storm that involves labor shortages and semiconductor manufacturing inadequacy (two of the lowest hanging fruit out of as many as five different factors). Marginally, it will begin improving Q2 and take into Q4 to be truly felt.
PAS: What do you predict the Fed will do to address the current economic situation?
The Fed will use the inflation headline narrative to drive some monetary policy tightening (that is, the tightening of policy that has been far, far, far too accommodative) – and will do so until credit markets force them to stop, which I believe will be sooner than people think.
PAS: Any specific economic advice for Americans in the present situation?
Ignore the media. Save, invest, work, and grow.