Moneybeat – Historic red ink

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Well, a down week on Wall Street, but only slightly. Those wild swings up and down were still present, but—and this analysis is a sign of the times, too—but the swings were in the hundreds of points instead of in the thousands of points. So in that sense, a little bit of stability in the capital markets.

It’s time now to turn, as we do during this economic crisis, to financial analyst and adviser David Bahnsen. He’s on the line now for our weekly conversation.

David, good morning.

DAVID BAHNSEN, GUEST: Good morning. Good to be with you.

EICHER: Well, let’s talk from the top, let’s begin with jobless claims. We’ve been talking about that week by week. The number is—I never thought I would hear myself say this—the number is down to 4.4 million this week. Terrible number, but it’s going the right direction. What do you say?

BAHNSEN: Well, and that’s expected. I mean, you assume in a kind of multi-week shutdown that the worst week will be that at the very beginning because this is measuring initial jobless claims. And so we have gone down by a little over a million per week for the last several weeks. 

But the aggregate number, which, again, you have to remember–it’s at least this many. Let’s call it 26 million now in aggregate. But in reality that’s probably understating the total number of unemployed because of those who either haven’t made a claim or couldn’t make a claim for whatever reason. Or states that maybe are behind in their processing. 

So the number is really bad and yeah, certainly on an initial-claims basis, declining and will continue to decline now as we get ready for more re-openings.

EICHER: Let’s talk about that kerfuffle in the oil market where the price of West Texas crude for, what, the end of May, delivery the end of May dropped to a negative level at one point this week? Can you explain all of that?

BAHNSEN: Yeah, it’s the West Texas Intermediate, not the Brent Crude. But the key distinction there is this is the oil that is primarily being stored in Cushing, Oklahoma. It’s largely the oil that is being produced in Texas and Oklahoma. And it is, I guess, very complicated. It sure could have been a lot simpler if they could have just simply presented it as storage costs were going higher, not oil prices were going lower. 

Because by talking about negative oil, they actually pretend as if there was someone out there who was buying oil at minus $40, where all we’re referring to is the cost that those who in the physical oil market, who had no ability to store it, were paying to go find storage. 

The hard part is that unlike the past years, past decades, we have a significant amount of financialization in commodity markets. It’s a stock that is supposed to reflect the price of oil. But it isn’t doing anything of the sort. And obviously all these mom and pop investors buying this little stock have no intention of taking oil delivery in their house. So the whole thing is a mess and it kind of skewed, I think, the more important conversation, which is that our energy sector is in real trouble and we’re sitting here talking about whether or not we have -$40 oil or not around the complexity of futures delivery. It was just a silly couple of days.

EICHER: And, of course, the real story there, I guess, beyond the issue of storage is the fact that there’s just so little demand right now for oil, right? It has to do purely with economic activity, does it not?

BAHNSEN: Well, that’s certainly the reason why you have such a glut of supply is that in the month of March we had a significant increase of supply at the same time you had a total erosion of demand. But, ultimately, there is nobody who sensibly believes that demand is not coming back. We don’t know to what level and at what speed, but obviously the world cannot function without oil. And so the demand part will resume as normal economic activity resumes.

EICHER: Let me move on now, David, to the CBO report—the Congressional Budget Office. There were some economic projections that were interesting. I’d like to get your comment on those. Basically what the CBO economists predicted is a 12 percent contraction in the second quarter of economic output. So, minus 12 in quarter two, they believe. They project a jobless rate about 14 percent. 

Those numbers are just huge. Deficit spending, $3.7 trillion. That almost quadruples where it was at the end of March. Deficit 18 percent of Gross Domestic Product. So, of the overall production of the economy, the deficit is equal to 18 percent of it. Versus in 2019, 4.6 percent, just to give a sense of context. The highest deficit spending since World War II. Take your pick.

BAHNSEN: Well, it’s interesting. I think in some cases, the numbers are overly optimistic. 

The federal debt, they’re predicting, will equal 101 percent of GDP by the end of this fiscal year and I think that that is entirely possible. It could be worse than that. 

That 106 percent level around World War II, you know, we’ve seen it before and that’s sort of the analogy that lawmakers are making is considering COVID a kind of wartime pandemic and then when things normalize naturally those ratios will get much better. 

It’s important for people to understand when they start using analogies to Europe or Japan that Japan is run at about 260 percent debt-to-GDP. Many western European countries are running 150 to 220 percent debt-to-GDP. So it’s brutal levels of indebtedness, but it isn’t abnormal right now, sad to say, in the developed world. 

I’ve talked on your show already—and I’m going to be talking about it as long as I have to, even post-COVID— that this story is a set-up of the story that I think is going to be most important to people in the years ahead. This is the story that paves the way to the central bank’s command and control of the economy and the desperate need for a central bank that will sort of use monetary policy to monetize the debt of our country.

When you have that degree of government spending as a percentage of your economy, you have what’s called a crowded-out effect. The private sector, where more productive activity takes place, is diminished by the role of the excessive government spending and it contracts from productive economic growth. And so they’re not flourishing. That’s the goal of economics, certainly, for myself as a Christian economist.

EICHER: David Bahnsen, financial analyst and advisor. He’s the Chief Investment Officer at the Bahnsen Group. David, thank you. We’ll talk to you next week. 

BAHNSEN: Thanks so much.

(AP Photo/Mark Lennihan, File) In this March 18, 2020, file photo a few people walk on Wall Street in front of the New York Stock Exchange in New York. 

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