Moneybeat: Leverage and layoffs

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

NICK EICHER, HOST: It’s time now to talk business, markets and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm the Bahnsen Group, and he is here now. Good morning to you.

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

EICHER: Trade tensions flared with China again this week. Beijing announced sweeping new limits on rare-earth exports—metals essential for everything from electric vehicles to fighter jets.

Moments after that surprise announcement, President Trump hit back: He threatened a 100% tariff on Chinese goods effective November 1st, along with new export controls on key U.S. software.

By the end of the day … markets turned a modest rally into a plunge.

Analysts say both sides are testing leverage ahead of a possible meeting later this month between President Trump and President Xi Jinping—which may not happen, and that may be part of the strategy.

But David, China controls about 90 percent of global rare-earth processing. How did we get here, and what does that imbalance mean for American manufacturers?

BAHNSEN: Well, that is a very complicated subject that is the subject of a lot of debate. I mean, fundamentally, how things like this happen is certain countries do possess natural comparative advantages. The bigger issue is with the natural advantages in place, what countries have done to address their own needs over time. It’s important to say that what China announced was not limits on orders, but controls, essentially requiring licenses for some of these exports—I mean, some of the very same exact things that the US has done with different products and with different trading partners.

I think what really bothered the President was that it came off as sort of a flex from China. And it’s been my position for some time that as we’ve seen the way these negotiations have been playing out between the U.S. and China since April, that what the President really wants is not to limit trade with China, but to have the kind of cosmetic victory that he likes. A big headline that, you know, shows some better markets being opened, better terms, and accrues to the cosmetic favor of the U.S. And I think that China putting out that word about the requirement of a license and so forth, it kind of undermined that appearance of a victory, and it spoke to China’s leverage in this matter.

And then the President defaulted to what he had previously considered his leverage, which was that he was going to go put 100% tariffs on these imports from China. And I got to say, I would be really surprised if China believes that the President is correct, that he has that leverage. Still, I don’t believe China thinks that those tariffs at this point hurt them anywhere near the level that they hurt the US. So we will have to see how this plays out. But I imagine that it’s just going to be a bit of jockeying back and forth regarding who does have leverage and who’s going to get more of an appearance of the upper hand.

But it’s also a surprise to me that it hasn’t happened earlier. I mean, the fact that we’ve gone six months where it’s been a pretty straight line of progress—in the deal in 2018 and 19, there were a lot of hems and haws and pauses and backups. And this is largely, and you saw this with the TikTok deal a month ago and other things, it’s largely just kind of moved along. And so the fact that there has been a sort of pump fake here isn’t a surprise to me, but what I think people need to prepare for is that it just isn’t true that the US has massive leverage over China here.

EICHER: Given that neither side’s moves take effect right away—the Chinese set December 1st, Trump November 1st—does that delay create room for a diplomatic off-ramp?

BAHNSEN: There’s all sorts of opportunities for off-ramp, and there’s—as we’ve seen this entire time—there’s also ample opportunity to find out all the exemptions, carveouts, and waivers. And so we’re living in such an incredible time of sort of presidential discretion about things that it’s impossible to know what will and will not play out, because it’s filled with caveats. But yes, you are correct. There’s plenty of time, and it’s all done by design. I mean, both sides are giving each other time to go churn knobs here and try to, you know, jockey for a slightly better position.

What is not going to fundamentally change in 15 days or 45 days is that China has rare earth minerals that the United States wants to and needs to buy, and that’s going to be part of this ultimate transactional outcome.

EICHER: Let’s turn to the federal budget. The Wall Street Journal analyzed the government’s fiscal year, which ended September 30th, and concluded that not much really changed administration to administration—early months under Biden, later months under Trump. How do you assess the year overall and the performance of the government’s finances? How do you analyze it?

BAHNSEN: I analyze it by saying that it’s all shameful, and it doesn’t matter who’s president. We’re dealing with budgets passed by Congress that are budgeted to spend way more money than we bring in. And that was true in the prior administration. It’s true in this administration. It’s true of, I think, 63 of the last 65 years, or something like that. So all of it is shameful.

But there are certain things that can be a bit better than expected from the vantage point of the budget, meaning better-than-expected collections. And there was a lot of that in the last fiscal year, that capital gain tax revenue outperformed expectations. There’s been some degree of these tariff revenues that have come in, but then we’ve also spent more than expected in interest expense and some other things. But yeah, when you net it all out, all we’re talking about is whether or not the deficit is going to be a trillion and a half or two trillion. I mean, these are just barbarically bad numbers.

EICHER: Alright, let’s talk about the government shutdown. This morning we enter Day 13—already one of the longest in recent decades.

The administration appears to be handling this one in a pretty aggressive way. I’m interested in the guy who’s become a focal point—and that’s budget director Russell Vought. For a couple of years between administrations, Vought wrote for WORLD Opinions. I want to go back to a piece he did for us about the debt-ceiling debate a few years ago. In that column, he argued that Republicans ought to use every bit of leverage they have to impose fiscal discipline.

Now he’s back at the Trump OMB and using that leverage—carrying out what he calls reductions in force: about four thousand federal employees laid off at agencies like Treasury, Health and Human Services, Education, and HUD. He’s also frozen billions in projects in Democratic strongholds such as New York and Chicago.

The stated goal is to cut waste, but the practical effect is to make the shutdown hurt and pressure Democrats to come to the table.

So David, is this really about political leverage … or is it about long-term economic efficiencies?

BAHNSEN: No, I don’t think that the issues that Russ is doing are necessarily leverage in trying to bring the shutdown to an end. I think that what they are is that Russ genuinely believes that he can find some inefficiencies that he can now get rid of that he normally wouldn’t have had statutory authority to do, but by nature of the discretion that comes to him during a shutdown, the Democrats teed up the opportunity for him to do it. I’m sure you’re right that some of it is him looking to extract pain, but I also believe some of it is fundamental—that he wants to, you know, use the old Rahm Emanuel idea of not letting a crisis go to waste.

These are sort of Doge 2.0 opportunities for Russ. But, you know, again, the Democrats are confident that these types of things politically will accrue to their benefit, because they’ll be perceived by the public as retaliatory and unnecessarily cruel. And how the politics of it all shakes out, it’s a little unknown. But, you know, Nick, ultimately, the way this thing’s going to end is whichever side believes they need the political advantage of ending it around the subsidies from Obamacare.

And that’s what’s most interesting. I’m pretty sure what’s going to happen is the Republicans are going to give the extension of subsidies, and President Trump has already kind of hinted at that. Some of the more MAGA-oriented people in Congress have talked about doing that, and these are extensions that took place during the COVID era that were supposed to be temporary, that we all know never stay temporary. But my guess is that then Republicans will do it and want to get credit for doing it, the Democrats will then want the credit that they got the Republicans to do it, and both sides will end up, you know, having their own fight about who wants to take a victory lap. But I think that subsidies around Obamacare are going to end up being the issue. And candidly, I’ll be shocked if there are Republicans that hold the line here.

EICHER: David Bahnsen, founder, managing partner and Chief Investment Officer at The Bahnsen Group. He writes regularly for WORLD Opinions, and at dividend-cafe.com. David, thanks, have a great week.

All right, thanks so much, Nick. Good to be with you.

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