Moneybeat: Off-ramp or mirage

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

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. David heads up the wealth management firm The Bahnsen Group. He is here now. Good morning to you, David.

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

EICHER: Well, David, President Trump, last week, unveiled a bilateral economic agreement with the U.K. Steel and auto tariffs rolled back in exchange for ethanol sales, for Boeing orders, and for access to the beef market in Britain.

Now, we have talked over the last several weeks about a potential off-ramp from the tariff and trade war. Do you see the U.K. deal as the model?

BAHNSEN: There’s a few things it does that fulfill some of what I’ve been talking about. I am a little concerned, though, to refer to it as a normative for other situations. Remember, we run a trade surplus with the U.K. So if the whole theory of the case is that we are getting ripped off when we’re in a trade deficit, I have to assume that means that we’re ripping the UK off by selling them more than they sell us. Now I say it somewhat tongue in cheek. But it is the logical conclusion of that theory.

You can’t necessarily assume that the deals are going to get worked out with the countries that we have a trade deficit with the same way that a country like U.K., which really should be a layup. We had a 25% tariff imposed on them for steel and aluminum. Reportedly, that’s going away entirely. We had a 25% tariff on autos. Apparently, that’s going down to 10,000 they’ve agreed to buy some equipment from Boeing. We’ve agreed to buy some automobiles from Rolls Royce.

Other than that, I really do want to see the fine print. I want to see the actual deal. All we have so far is kind of a speaker phone conversation and a framework.

But yes, I think that getting to a point of announcing a big deal is what the president wants. So far, we have that with UK. Then we’ll see where things go from here with India, Vietnam, Japan, and obviously the big one is China, and we’ll know more here in the aftermath of the Secretary’s meetings in Switzerland this last weekend, very soon.

EICHER: I’d like to dive into the U.S.-China trade talks in just a minute. But you were listing out potential trade partners, and at the top of the list was India. But we have India and Pakistan edging toward conflict, and we’re talking about two nuclear-armed neighbors.

Do you think that these rising tensions could potentially spill over and derail or at least complicate trade negotiations with India?

BAHNSEN: It has the potential to. It doesn’t appear to have rattled markets a lot this week, whether it be in commodity prices, currency, let alone interest rates and equity markets.

There wasn’t a big aftermath, but I do believe if that were to escalate, it could enhance volatility, and it would very likely provoke us involvement on the India side. I mean, India is the ally there, relative to Pakistan, and so that has the potential to be a factor in the way that deal goes.

It’s a little premature to say, but nevertheless, it’s just another new event in what is a very complicated world these days.

EICHER: All right, well, to China now, David: Over the weekend, we had the Treasury Secretary Scott Bessent meeting with the Vice Premier of China in Switzerland. It was set up as a de-escalation summit. So beyond any of that, what concrete steps do you think we should be looking for in the days ahead?

BAHNSEN: You know, Nick, we’re really waiting on more detail—in terms not only of the meetings that took place with Secretary Bessent this weekend and the Chinese Vice Premier (who has been sort of tasked in his portfolio with handling trade). But really in the week to come is where you’re going to see what exact de-escalations do take place.

They’ve talked in the immediate aftermath about lowering the tariffs, but still leaving them high, just to give everyone a little breathing room. Then I think you’ll start to see more specifics.

So, the sequence of events I’m expecting is a little bit of de-escalation, but still with very high tariffs, just to allow some trade to continue. Then from there, start working on an agreement that is going to call for, in my opinion, purchase agreement from China for certain products, opening of new markets, Chinese rhetoric and commitments around fentanyl.

Then, of course, some reciprocity in the economic terms. I think the headlines are going to be bigger on those first two points around China—purchase agreements, fentanyl—then last will be what the tariff percentages end up being. But it’s just too early out of the Switzerland meeting to know more.

EICHER: Okay, David, the Fed left interest rates steady once again last week, emphasizing data dependency, while markets have still more or less priced in three or four rate cuts by the end of the year.

Do you think the Fed is genuinely in a wait-and-see mode, or is this patently an exercise in maintaining its own credibility while the trade war and the effect of tariffs remains unresolved?

BAHNSEN: Well, I don’t believe so. But I think that is definitely the posture that for over 30 years the Fed has had to take is in order to maintain central bank credibility. They always have to say that they’re looking at the data wherever it takes them.

So, if you come in and say, “Here’s what we’re going to do in four months,” you’ve undermined the credibility. You’re basically saying, “We’re not looking at the data over the next four months, we’ve already made up our mind.” But 98% of the time, the futures market four months out, six months out, has priced in what they’re going to do, and it is what they’re going to do.

There’s a debate in economics as to whether the markets are trying to follow the Fed—or the Fed’s following the markets. I’ve always believed the latter, and I always will.

The range of expected rate cuts has changed a little bit. It was from maybe as low as three to as high as five cuts by the end of the year a month or so ago. Now has come down to three to four. There’s still almost certain probability of three rate cuts, 75 basis points, getting down to three and a half percent by end of the year. There’s also a significant possibility of that being at four, you know, a full 1%. But 1-1/4% seems to be off the table now. The difference is that if you do get significant economic deterioration this summer, I think that additional rate cuts will be right back on the table.

But the Fed’s doing exactly what we thought they would do. They’re referring to the data as it is now, leaving open the fact that the data may change both on the inflation side and economic health and growth side, and then ultimately, will respond at the right time. What they don’t want to do is respond ahead of it and be accused of giving in to political pressure.

EICHER: All right, David, before we go, you did mention last week that we should be paying attention to the weekly unemployment filings as kind of a real-time barometer of where we are on the jobs market. The claims last week came in dipping modestly below expectations. Again, I know it’s a small sample, but what do you take from that report?

BAHNSEN: Well, you know, if you’re looking at the three-week averages—as I am—every week matters because you’re every week getting a new three-week average. The three-week average has not moved, but you’re right: in the weeds, the three-week average has not moved because one week was way above expected and one week was below expected, when all was said and done.

No, the three-week average is not showing yet that there is pressure on unemployment.

The issue I would point to, and it was in my Dividend Café chart of the week this weekend is 77% of job openings are with businesses with under 250 employees. Small businesses is where I think the big vulnerability is, and that’s where I believe the vulnerability is with this trade war. If the tariffs end up disproportionately hurting small businesses that don’t have the clout to get exceptions and waivers, that don’t have the capital-markets access to get through it, and they end up freezing a lot of hiring.

I think that will put some upward pressure on unemployment, so again, it’s just a broken record week after week. But for good reason, all eyes are on how quickly they can put an end to this trade war.

EICHER: David Bahnsen, founder, managing partner, and chief investment officer of The Bahnsen Group. David writes at WORLD Opinions and at dividendcafe.com. Thanks … we’ll see you next week!

BAHNSEN: Thanks so much, Nick.

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