Moneybeat: All tariffs, no dessert

JENNY ROUGH, 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: Well, good morning.

EICHER: David, you’ve been on the road quite a bit lately—including a trip to Washington. I want to start with that. You’ve said you came away encouraged about the prospects for tax reform, but your latest Dividend Café paints a pretty downbeat picture overall. Talk about why.

BAHNSEN: Well, the negative read all centers from the concerns about tariffs combined with the questions as to whether the offsetting thing, the good thing, is going to come—the tax reform. So I think that if there were no tariffs on the table, with tax reform and deregulation coming, that’s the best case scenario where policy positively impacts the economy.

If we were in a case where there were tariffs on the table, an uncertainty about trade impairment, that would be a negative. But then there was this positive of tax reform about to happen extending the tax cuts along with deregulation. You could argue that becomes a little bit of a mixed bag. Then inverse to the double positive is the double negative, where theoretically, what if you get the tariffs and uncertainty surrounding them—and yet you don’t get the upside supply shock of tax reform, tax cut extension.

The analogy we’ve been using is like if you get your spinach, but don’t get the dessert. I don’t know that that is going to happen, but that would certainly be a scenario that markets are worried about.

I came away from my time in Washington a little more encouraged that there’s a very substantial priority to get this tax reform done at Treasury. They acknowledge that their messaging got off a little bit. The media is going to run with all of the negative and none of the positive, but no, I do believe it’s still a priority for the administration to get these tax cuts extended and hopefully to get it all done sooner than later. There’s two things going on: not just getting it done, but when you get it done.

Because if this isn’t going to happen till the very end of the year, that is going to leave months and months of uncertainty that could very well impact business decisions and capital investment along the way. So the bulk of my negativity centers around the tariff policy.

Unfortunately, as we’re sitting here at the beginning of this week, when April 2nd, Wednesday, a couple of days from now, is when they’re anticipating these big announcements.

My view is we’re not really going to get a lot of clarity, that we’re going to get some announcements, but then they can very well un-announce it the next day. And that’s sort of the posture the administration’s taken so far, Nick.

EICHER: Your friend Larry Kudlow wrote a piece in which he argues that fears about tariffs are overblown, because Trump’s supply-side tax cuts and deregulation plans will more than offset any negative effects—potentially delivering over $5 trillion in pro-growth stimulus, versus the cost of just a few hundred billion in tariffs.

What do you think of the argument?

BAHNSEN: Oh, sure, I had dinner with Larry four nights ago and we talked about this for a long time.

So I have a couple of thoughts: I don’t agree with Larry entirely about it. I believe that Larry is also speaking to that second part that I alluded to, the dessert that he feels more sanguine about—the spinach if the dessert is going to come and he’s confident it will.

I personally do not agree with him on the spinach portion either. I’m more in Steve Forbes camp here. You know, you have these guys, Steve Forbes, Steve Moore, Larry Kudlow, Art Laffer, who are all key economic advisers in Trump 1.0. Two or three of them are still pretty much with me on being free traders and tariffs, and a couple have taken a little bit more open posture around tariffs.

Without speaking out of turn, I’ll just say that there’s some friendly disagreement amongst all of us.

EICHER: Let’s drill down into the tariffs just announced on automobiles and auto parts. The messaging seemed all over the map—leaks to the press, reversals, surprise inclusions. What’s your read on what actually happened and how it’s landing in the markets?

BAHNSEN: Well, I think the 25% tariffs he did announce last week on both auto imports and auto parts—and it would take billions of dollars in years to move a lot of that on shore—that cost is very detrimental to U.S. automakers.

I don’t believe companies are going to be able to onshore that anyways, because they know that we have an election in a few years and why spend billions of dollars for a four- or five-year plan when you could ride it out and see what the political winds are doing in a few years? It was also kind of surprising because the administration leaked to The Wall Street Journal on Wednesday afternoon that they were not going to impose that tariff cost on auto parts. Then when the president made the announcement, they did include auto parts.

So it just sort of speaks to the fact the administration feels, for whatever reason, that there is a benefit in keeping markets and people on their toes and the changes that are coming so frequently. There are some days where he has said, this can’t be undone, we’re going forward, we’re going to get this fairness, and this is going to be a tariff cost that’s going to really help America. Then he said on Thursday, “Oh, I might lower China’s tariffs if they let us buy TikTok.”

It’s very difficult to know, are these tariffs really important or not? Why would a little teenage dancing app change the tariff policy? It’s just kind of bizarre, but I think that we may end up needing to talk in a couple days because we are going to know more April 2nd that might enable me to answer this question better.

But one of my big points right now is I’m not really sure that I’m going to know more in a couple days because I believe that the president is holding on to a lot of personal discretion—outside of his Commerce Department, outside of his Treasury Department—for him to say, this one I’m gonna do, this one I’m not gonna do, this goes up, this goes down. That’s a difficult policy framework for companies to make investment decisions. It’s very difficult for markets to price in what the cost are going to be. And I assure listeners that there is a cost.

EICHER: We’ve been spending lots of time in the Washington policy zone, and really nowhere else in business, markets, and the economy. Are we right to hang out there, or is there a big story elsewhere we’ve missed?

BAHNSEN: The Washington policy zone is the largest story right now in markets in terms of day-to-day sentiment and how risk takers are feeling about being investors. But it’s certainly not the only story. Valuations are still very elevated, even for a lot of these tech companies that have gotten hit pretty hard. From a pure investment story, Nick, I think it’s fascinating that a lot of dividend stocks and value stocks are up on the quarter.

It has not even been a down quarter, even as the S&P 500 and the Nasdaq entered correction territory, both going down over 10%. That elevated volatility, whether it’s a good or bad story, markets were up 600 points Monday and down 700 points Friday. So there’s a lot of give and take. Then now, as we get into the middle of April, we’re still a few weeks away, earnings season will start again. Then you get to see what companies are reporting from their first quarter results and their projections going forward.

This is where that Dallas Fed survey that I talked about is so important because it’s certainly not a political deal. These are absolutely, for the most part, Trump voters, you know, oil-and-gas executives in the energy exploration and production space, all saying that steel costs going up 30% is hurting them. That uncertainty about tariffs is causing them to lay low on different projects. That’s the oil-and-gas sector, let alone other parts of the industrial economy.

So, there’s plenty going on. People can say tariffs are the variable that may or may not tip the economy in recession. But recession is a question. You know, are we facing better economic conditions or worse ones as we go into the spring, summer, you know, later into 2025? All of these stories are separate, but they all kind of connect from the Fed to tax policy to tariffs, and then ultimately these economic conditions.

The last thing I’ll say next from last week was non-defense capital goods orders went down in the month of February. They had been up almost one percent in January. They contracted a half of a percentage point, but they were supposed to go up a little bit.

I think that again, it’s only one month. We want to look for how this kind of plays out for a longer period of time. But that to me is a very big story around business investment holding the economy and our growth expectations.

EICHER: David Bahnsen, founder, managing partner, and chief investment officer of The Bahnsen Group. David writes at dividendcafe.com, for WORLD Opinions, and you hear his news and comment here each week. David, thanks!

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