Buck: Welcome back to the show, everyone. Today, my guest on Wealth Formula Podcast is David Bahnsen. David is a founder, managing partner, and Chief Investment Officer of The Bahnsen Group. And he’s also the author of a newly released book called There’s No Free Lunch: 250 Economic Truths. David, welcome to Wealth Formula Podcast.
David: Thank you so much for having me.
Buck: So it’s interesting that the title of the book obviously some little bit of a nod to Milton Friedman there. Let’s talk a little bit about some of the things that you talk about in the book, which is let’s start with how does economics boil down to human behavior around scarce resources?
David: Yeah. So my definition of economics, obviously largely borrowing from the Austrian school of economics that defines human action, is the core of economics, is very important in this sense. When one acknowledges the human person as the center of economics and the actions that humans take as the effectively the activity of economics. It invites us to understand the human person in a way we may not otherwise understand the human person and therefore understand economics more profoundly. What do I mean by this? What are humans created to do? What do we know about the character and nature of humanity, their rationality, their incentives, their motivations? There is a certain lesson from history in the formation of civilization that comes down to the human person. I call this the anthropology of economics. The more we understand about the human person and what the human was made for, the more we can understand what is the important part of economics if one disagrees with this, if one believes that economics is more a scientific or analytical study of trends and patterns and numerical realities, then it plays into the belief that economics can be centrally planned by mere mastery of data. My belief is that the human person is complex, is rational, is reasonable, is a moral creation. Either they do things for good or for bad. But there is a moral connotation to human activity and that therefore economics cannot be reduced to something merely numerical. That undermines the great argument of the central planner that economics can be optimized through wise academic planning. And it facilitates the argument of the freedom lover who believes that ultimately only in the context of a free society can we have optimal economic activity.
Buck: So human flourishing is a big part of what you believe drives economics. And with that being the case, why is it that you think that in certain countries or now, as you’re seeing in the US a little bit more that we’re getting some more popularity when it comes to socialist thinking as opposed to maybe some years ago when even the younger audiences were looking at a more libertarian thought? Perhaps. So maybe you can talk a little bit about the way thinking might be in any given country at any given time and how that seems to reflect your theories.
David: Yeah, it’s really a very important question. I believe human flourishing is the aim of economics. And so what I mean by that is whatever framework we want to have. So let’s say there are some who desire to see a socialistic framework about economics and others like myself who advocate for a free enterprise system. I think that the fundamental driver should be that which will most facilitate the flourishing of humanity. And I define flourishing in sort of two different contexts because I believe the human person has two different contexts and that is the physical or material realm and then the spiritual realm. No one can really deny that humanity has physical properties and non physical properties. And so our peace, our harmony, our fulfillment, our joy, these are things that do not fit into how well our physicality is going. And yet it’s very, very important. We want people to be happy, we want people to be fulfilled. We want people to have lives of meaning and dignity. But then we don’t turn off the physical analysis either, because mankind is material and so their well being avoiding impoverishment, avoiding starvation, famine, drought. We want physical conditions that facilitate this flourishing. And so what system, when it comes to economics, will best bring about the flourishing human in a flourishing society? I think testimony of history is clear that it is free enterprise, not socialism. But I am okay if the socialist starts the belief that no human foresting will be better facilitated through collective, centralized, top down planning, it would then be my job to try to persuade the person that that is not the case. So you ask why is there a greater popularity right now around the idea of socialism to bring about greater foresting? And my answer is I don’t think there is. I think there is a greater distrust that capitalism can and socialism becomes the default position. But I believe that fundamentally what we have is a distrust in markets. Because markets are not understood, they’re not properly taught. Even defenders of markets do not necessarily often have a foundational appreciation for the philosophical tenants of the enterprise, namely the one I just talked about a moment ago, that the human person needs to lie at the center of our economic worldview. And there is a great understandable frustration in the current economic predicament. 30 year old today, their adult life has been bookended by the financial crisis and covet. And so they see this great frustration collapse of the global credit economy 13 years ago and now totally unaffordable housing 13 years later. Student loans, College education was supposed to provide them a very robust, fulfilling career under delivered in that, and yet they have a significant amount of student debt to pay. I would argue all the things that are given them angst are actually caused by the central planner and the failure of a big government view of economics. But I don’t take away their frustration. I have empathy for the fact that there is frustration. I would just say that we have to do a better job making the case that what they believe is the solution is actually the cause.
Buck: When I hear you talk about that, especially given the current inflationary environment, that reminds us perhaps of the 1980s, the reaction seems somewhat different. And I was a little kid in the 1980s, but when I think back to the 80s, I don’t think of it as being as a time when economic achievement was necessarily looked down upon the way it is now. But then they were dealing with double digit inflation, they were dealing with multiple recessions. How do you look at that and say, what’s the difference?
David: Yeah, I do think that envy and the politics of envy and class struggle existed in the 80s, late 70s and early 80s is probably the area you’re more talking about with high inflation and recessions. But I think that it has definitely accelerated. And right now there is this desire to frame all of society through the lens of an oppressed and an oppressor along the lines of not only class but race and gender and a whole lot of other things. And so I think that this sort of ideology of covetousness, that we are to be angry at people who have things is a byproduct of two things that have really gotten away from us. The first is I think the overall spiritual and cultural and moral capital is being undermined. I do not think that we are prepared to defend for private property, for a culture of responsibility. There is a certain merit in a free enterprise system that is being morally forgotten. But then Secondly, I think that when you have subpar economic growth, it exacerbates frustration with wealth inequality. So the rich were a lot richer than the poor were in the early 1980s, but the poor got a lot less poor in the 1980s and in the 80s and 90s, you had really spectacular economic growth where even if the divide between rich and poor was not compressing, the rich are getting richer and the poor were getting richer. And that really is the fundamental issue at hand. Wealth inequality or income inequality become big issues and hot potato topics when there is inadequate economic growth to bring the quality of living up for everybody. And that is what we’ve been living in since 2008. We’ve had 50% of annualized real GDP growth averages. Economic growth has been half of its 70 year history. It’s average since World War II. That to me is what’s creating this angst.
Buck: So going back to some of your thoughts here, why should we look at what motivates economics scholars? I think you’ve talked a little bit about the economic realities, but I think you’ve pointed out that economic scholars suddenly seem to be abandoning and ignoring economic realities.
David: What do I think is motivating it? Well, I think that there’s two things that across the kind of populace, I think people these days get their economics from their politics instead of getting their politics from their economics. But then in terms of why so many have gone into essential planning advocacy, those in the kind of academic profession economically are fans of a central planning system because their fundamental tenants, their presuppositions, their premises that they formulate their own economic worldview around all favor this idea of the central planner as being the capable actor who can mitigate the challenges of a real business cycle. I believe in a free enterprise system of risk and reward. And I said two things. I said reward and I also said risk. I said success and I also said failure. I said there will be home runs and there will be strikeouts. But there is a sort of hubris in the economic profession, what the late economist Frieda Hyatt called the fatal conceit that they believe they can so wisely administer the affairs of mankind. It’s rooted in a utopianism. It’s fundamentally rooted in the same ideological flaw of Marxism. That’s not to say that all central planners are Marxist, but all Marxist are central planners. And ultimately central planning comes down to an arrogance that human activity is inadequate. The spontaneous order that exists within society is dangerous, that it needs the omniscient and benevolent hand of the state to interfere as a disinterested third party in matters, in transactions, in the economy and the relationship between production and consumption. Relationships of exchange do not need a disinterested third party. So this is the great fight of our day. It’s a fight over freedom.
Buck: So when we look at today’s new, I guess problems, we are in sort of very unusual times, maybe some that are we’ve not seen before. Can we look at old economic truths to try to address those?
David: Not only can we I think we must because I think most of the great wisdom that is useful for the current struggles is wisdom of old, and it requires modern application. It requires applying some of the principles to the challenges of today. One of the great mistakes a lot of people on the political right make, and I’m in this camp, I am a Reaganite and a movement conservative politically, but I don’t believe that everything that we were struggling with in the 80s is the same as what we’re struggling with now. And so the principles I believe in need to be modernized in their application contextualized to the challenges of the day. But I do not believe that the challenges of the day require entirely new principles. So when we read the great classical economist Adam Smith, David Ricardo, Jeanbautise, as a supply Sider who believes that production must drive economic growth, Contra the Keynesian view of consumption driving economic growth. I not only have an anthropological argument to make about the human person, that the human person was created to be a producer, and that there is existential fulfillment that comes from production, not consumption, and not only have that argument to make, but when I go to supply side economics saying how do we drive the production of goods and services that make for a higher quality of living? I can go to the classical economist John Papi say, and then, of course, there’s application with Art Laffer and the great supply side movement of 40, 50 years ago. But to me, there is a philosophical history that’s rich in economics. And whether we’re looking at the 18th century Giants or on through the 19th, and you get into the 20th and you’re looking at Hyatt and Milton Friedman and Ludic Von Meese, and then even in the last 30, 40, 50 years, the contributions of Thomas Soul and Walter Williams, I believe that we just have a richness of history. And rather than try to reinvent the wheel, I want to stand on the shoulder of these giants.
Buck: So let’s talk a little bit about that, because right now we are experiencing some in an inflationary environment like we haven’t since the late 70s, early 80s. And with that in mind, obviously Paul Volcker came in and he raised rates significantly. Is that in your mind what happens? I guess let’s start with the forecast for inflation. Do you think that sort of tails itself down because of an increase in the supply side? With all the supply chains starting to ease, maybe the war goes away in Ukraine at some point life gets back to normal. How do you deal with that problem? Do you go at it like Paul Volcker aggressively and increase rates? Do you think that’s what’s going to happen should happen?
David: Well, I don’t know the listeners of your podcast well enough to know if I’m okay to really give them what they deserve here, which is a bit of nuance. It’s a complicated question that doesn’t allow for a binary answer. So I hope everyone can bear with me, but I really believe listeners deserve the answer I’m about to give. I do not believe that if interest rates were at 5% tomorrow on the Fed funds rate that it would bring any workers back to the ports of Long Beach, that they would bring truck drivers back who are having a hard time getting goods moved throughout the country. The inflation we under the late 70s existed in a period of very stable velocity of money. And so an increase in the money supply, combined with terrible supply side incentives, high marginal tax rates, high regulatory environment was making for a perfect inflationary storm. And the debt to GDP at the time was something in the range of 25 or 30%. Now, I believe that bad policies and bad economics has created a terrible environment, but it is far more deflationary in the sense that we have suffocated real economic growth by excessive indebtedness in the current moment. They did a lot to increase money supply, and there’s been a terrible assault on the supply side of the economy, but it has been from labor shortages and supply chain disruptions more than even tax rates and regulation. Therefore, I think there will be more of a self correcting mechanism in the supply side. And interest rates will not need to go to Volker levels to solve the monetary side. But fundamentally, they can’t go to that level because they have levered up the economy in both the government sector and the corporate sector so much that they couldn’t if they wanted to. The government could not afford to service its debt at that level of interest rate. But in this case, the inflation, in my opinion, is less monetary than it was in the 1970s and is more supply driven. And so I think it will require a different set of solutions. And then you say, well, that leave us back to a better environment. The problem is, I still believe we suffer from price inflation and housing and College tuition and health care because of government subsidies. So we have problems in policy creating inflation, but they’re different problems than we had 40, 50 years ago, therefore required different solutions. So it’s a bit nuanced of an answer, but I think it’s the accurate one.
Buck: I guess you talk about some different tools that might be needed. What kinds of tools would those be?
David: Well, fundamentally, where the buying administration aired in this current inflation more than anything else, take away energy. Okay, that’s a separate subject altogether that obviously has significant supply side problems. We are way below our productive capacity. We’re not producing the same oil and gas at $100 oil that we were at $50 oil. It doesn’t make any sense. And there’s a whole host of reasons for why that is on the energy front. But when people talk about the Covet bill, putting a lot of money sloshing around and consumers got their extra couple of grand and they went out and spent it. And whatnot I think velocity is so low, it has been suffocated so much from all the excessive government debtedness that I don’t think that becomes a perpetual inflationary catalyst. Rather, I think it depresses economic growth. And I think that monetary policy like the Fed is engaged in leaves zombie companies to survive that shouldn’t otherwise survive, and therefore it misallocate resources away from the most optimal use. How do we go about fixing this? Well, first of all, the labor shortages that we incentivized by paying people not to work, there’s a scar in the culture now that a lot of people are resistant to going back to work, and I think that has to be solved for. So I would rather see policies that are driving people back to work. I do not think we need higher minimum wage laws, greater unionization, and there’s all these different topics to play in. But fundamentally, there’s nothing that would be more disinflationary than getting another one and a half million people back in the labor force.
Buck: So rates are going up a little bit. Do you anticipate some level of recessionary activity? And if so, what are you telling your clients?
David: Yeah. So that question is a very good one. That’s coming up a lot right now. And the answer when someone says do you anticipate some future recession activity? My answer is always yes. The question is in three months, three years, five years, six months, timing of recession is a surefire way to make one a false profit in our business. I do not believe that it is usually a very good idea to forecast an inflation. Excuse me, a recession when you have 3.8% unemployment, when you have credit spread still at only about 400 basis points between high yield and Treasuries, those things can change. But at this time I am less worried about a recession that goes into negative economic contraction than I am a persistence of subpar economic growth. I don’t want a recession, but oftentimes a recession purges out now investment in the economy and enables a little cleaner path forward for economic growth. But what doesn’t purge the things that need to be purged for economic growth is persistent low, slow or no growth. And so that’s where I fear we are right now. Can I see conditions changing? Can the Fed tighten so much that it does indeed tip the economy into recession and say late 23 or early 24? I think it’s possible, but those things are totally unpredictable and it’s one of the hallmarks of a good financial analyst to maintain such humility because recession predictions are a Fool’s errand.
Buck: The idea for your clients is just keep doing the same and just continue to, I guess, just plan for the long term, right?
David: Yeah, but it depends what the same is. And so if the same is, I want to keep throwing more and more money at very high valuation technology stocks, then I do not want to do that. But that is not because it is the wrong thing to do now. It was the wrong thing to do before as well. We want less speculation and more investment discipline in a portfolio. And for us, investment discipline comes down to the buying today at attractive prices, what will be attractive cash flows in the future. So we are dividend growth investors, and we do not believe that a recession or non recession call would indict the practice of dividend growth investing. In fact, we think it would reinforce it on either side. And so, yes, to the extent that we feel we’re buying sensible companies that are well run, good management, we are talking our book a little bit here. I recognize that. But we’re active managers for a reason. And there are a lot of periods of time where one doesn’t need active management. Indexing just produces wonderful returns, especially when multiples are expanding. If one believes that multiples are going to keep driving over half of market returns when the multiple is already at 2021, 22 times earnings, they believe something different than I do.
Buck: Again, the book is There’s No Free Lunch: 250 Economic Truths, David Bahnsen, and it’s thebahnsengroup.com we can learn more about what he’s doing there. The Bahnsen is BahnsenGroup.com. David, thanks so much for joining us on Wealth Formula Podcast.
David: Yeah. Thank you so much for your very thoughtful questions. I enjoyed the time.
Buck: We’ll be right back.