Bahnsen: Humility means admitting we don’t know where the economy is going

Key Concepts

• Macroeconomic Uncertainty: The inherent and persistent uncertainty surrounding economic conditions.
• Earnings Growth: The increase in company profits over a period of time, currently experiencing double-digit growth.
• Humility in Investing: The importance of acknowledging uncertainty and avoiding strong assumptions about the economy's future.
• Asset Allocation & Rebalancing: Strategies for diversifying investments and adjusting portfolio weights to manage risk.
• Blackstone: A leading asset management firm specializing in private equity, credit, real estate, and infrastructure.
• Federal Reserve Chairmanship: The potential appointment of a new Fed Chair and the implications for market confidence.
• Market Independence: The perception of a Fed Chair’s ability to make decisions free from political influence.
• Fee-Based Business: A business model where revenue is generated through fees for services rather than direct product sales.

December CPI and Earnings Season Kickoff – A Discussion with David Johnson

I. Market Performance Amidst Uncertainty

The discussion began with the observation that the Dow and S&P 500 are reaching new record highs despite significant domestic and global macroeconomic uncertainties. David Johnson posits that macroeconomic uncertainty is a constant in investing, and market highs have historically occurred during periods of uncertainty. He acknowledges a potentially heightened level of uncertainty currently, encompassing geopolitical, monetary, and fiscal factors, but emphasizes that markets ultimately respond to corporate profits and profit growth, even amidst these challenges.

II. The Importance of Investment Humility

Johnson stresses the need for investors to adopt a “humble” approach, despite current expectations of continued double-digit earnings growth (three consecutive years are anticipated). This humility isn’t a critique of current earnings performance, but rather a caution against overconfidence in predicting the economy’s trajectory. He argues that compelling arguments can be made for both economic headwinds and tailwinds, and a humble investment posture – incorporating asset allocation and rebalancing – is crucial for a sensible portfolio. As Johnson stated, “Humility in our investment posture allows us to have a more sensible portfolio. That’s where things like asset allocation come from. That’s where things like rebalancing come from. They come from being humble.”

III. Investment Pick: Blackstone (BX)

Johnson’s current investment recommendation is Blackstone, citing its leadership position in asset management. He describes Blackstone as a “fee behemoth” and an “asset gathering machine,” benefiting from its diversified portfolio across private equity, private credit, real estate, and infrastructure. He highlights the attractiveness of its fee-based business model and believes the current price represents a good entry point for investors. The firm’s strength lies in its ability to capitalize on themes within private markets.

IV. The Federal Reserve Chair Debate: Hasset vs. Warsh

A significant portion of the conversation focused on the potential replacement for Federal Reserve Chair Jay Powell. Johnson, a long-time friend and colleague of Kevin Hassett, surprisingly stated he “is actually praying that he’s not the Fed chair.” Despite their professional relationship and mutual respect, Johnson expresses concern that Hassett’s recent defense of tariffs represents a departure from his historical commitment to market principles and independent thinking.

Johnson fears that markets would struggle to perceive Hassett as an independent voice, potentially undermining confidence in the Federal Reserve. He contrasts this with Kevin Warsh, whom he believes would be better received by the markets due to a stronger perception of independence. Johnson clarified that both candidates would be Trump appointees, but argues Warsh would maintain greater credibility with investors. He stated, “I think somebody like Kevin Warsh is going to be better taken in markets, and I say that with the utmost respect for my friend Kevin Hassett.”

V. Rationale for Warsh’s Perceived Independence

While acknowledging both Hassett and Warsh would be Trump picks, Johnson believes Warsh would be viewed as more independent. The specific reasoning behind this assessment wasn’t fully elaborated, but the core argument centers on the perception of consistent adherence to market principles.

Conclusion

The discussion highlights a cautious optimism regarding market performance, driven by strong earnings growth but tempered by significant global and domestic uncertainties. The key takeaway is the importance of humility in investment strategy, emphasizing asset allocation and rebalancing to navigate an unpredictable economic landscape. Blackstone is presented as a compelling investment opportunity due to its leadership in asset management and attractive business model. Finally, the debate surrounding the next Federal Reserve Chair underscores the critical role of perceived independence in maintaining market confidence, with Johnson advocating for Kevin Warsh over his friend, Kevin Hassett, based on this criterion.