Moneybeat: Pause and effect

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

EICHER: Well, David, President Trump and China’s President Xi Jinping met last week and struck what they’re calling the third trade truce in a year. The Wall Street Journal calling it more cease-fire than breakthrough. Tariffs down a little bit, soybeans flowing again, and China lifting rare-earth export controls for a year. So what do you think—was this a genuine turning point this time, or just sort of letting off steam to calm things down?

BAHNSEN: Turning point back to 2019. I mean, it’s literally almost a cut and paste of what they called back then, pre-COVID, the phase-one trade deal. And it was basically China’s gonna buy more soybeans, but also liquefied natural gas—LNG—those are two things China needs and two things the U.S. has that are export-friendly. And that we will, in fact, buy more rare-earth minerals from China, and that we will be nice to them by selling them semiconductors. I mean, that’s literally the scope of the deal, and it’s more or less what was there in 2019.

So I think a lot of people can be forgiven for kind of wondering what all the hubbub was about. Now, I don’t say this critically. I’m saying it as a good thing. I don’t believe that elevated tariffs that decrease the level of trade would be a good thing. But I do think it’s interesting that we were a lot more punitive with allies than we ended up being with an adversary.

EICHER: So how do you read the China-U.S. situation? Do you think that we, the U.S., have leverage with the Chinese, or do you think the Chinese are more self-sufficient now and not as dependent on U.S. markets as they have been?

BAHNSEN: Oh, they’re definitely not as dependent. Their total exports are up, and the percentage of their exports going to the U.S. are down. But we still have plenty of leverage. It would be brutal for their already weak economy to lose some degree of market share with a customer like the world’s biggest economic power. But that doesn’t mean that we have leverage and they don’t, and that’s the hard part, Nick, about economic leverage.

I’m a little hesitant to use this analogy, because I do think that things like nuclear war and military action are categorically different for all the obvious reasons, but it is very similar to mutually assured destruction. Who had leverage with two countries pointing nuclear weapons at each other? The answer is both.

And the United States economically would hurt a great deal if the things that were threatened four, five, six months ago went through—and China would suffer a great deal. I’ve always argued that at that point—like they talk in baseball about a tie goes to the runner—the tie goes to China because of their political system. The United States, we just don’t have a lot of tolerance politically for weak economic times. I think that’s a good thing. And in China, they’re very used to having prolonged periods of economic distress, and with their form of government, it wouldn’t really matter. So in that sense, they have a little bit more leverage.

But the whole thing isn’t over. There’s still more that will kind of shake out. And I do believe that China is and will do more to try to curb the amount of fentanyl coming into the country. So perhaps the president, you know, could feel good about getting some progress in that regard. But no, I think that those who were to go back and look at what was being said in March, April, May of this year, about what we were going to try to accomplish versus what the final result is—I think they would be very, very confused.

The notion that what we’re doing is going to lower trade with China so that we increase manufacturing in the United States—there’s absolutely nothing happening that’s going to do that.

EICHER: Let’s jump over to the Federal Reserve. Chairman Jay Powell announced another quarter-point rate cut, and then he warned not to expect another one in December. And the comment that showed up in a lot of reports—Chairman Powell’s statement that the Fed is “driving in a fog.” And I’m curious what you think about that. But I looked at the Fed funds futures market and saw that the probability of that second rate cut—or that last rate cut for December—went from 90 percent likelihood to about 60 percent after those comments. So do you think the Fed is showing some prudence here, or driving in a fog? Do you think they’re confused?

BAHSNEN: No, neither. I think that it was Chairman Powell poking the bear at President Trump to some degree, but I also believe he was saying what you’re supposed to say—which is, if you want credibility for your central bank, to say, “We have made our mind up two months before the next meeting on what we’re going to do in two months,” that’s what you do in a banana republic. That’s what you do when you’re not even pretending to be data-driven.

And I do think they’re going to cut in December. As we sit here talking right now, the futures are at a 63 percent chance. And you’re right, they were at about 90 before that meeting. They got as low as, I think, 55 after his comments. But let’s be clear—he didn’t say, “Don’t expect it,” meaning expect we won’t. He said, “We just are far from having reached a decision.”

And I do believe that that is a case of him saying what he should say. But they’re going to cut. Now, you get a couple months’ reports indicating that, wow, this economy is looking really strong, job markets are better than we expected—perhaps they will go forward with not cutting. But I think that the weight of his comments is that they see greater risk of a weakening economy than they do upward price pressure.

I think that those comments he’s making are accurate, and I think that they should be getting to a more neutral rate. I think they’re still in a net-tightening position. And so ultimately, I think that what you’re going to see is a cut in December. But Powell definitely surprised markets this week with his posturing.

EICHER: What is the fog about—what’s the metaphor there?

BAHNSEN: It’s a reference to the dual mandate—that there is a need for price stability, and there’s a risk of inflationary price pressures. He’s talking about tariffs in that case. And then there’s a risk of a weakening economy—their dual mandate for full employment. So there’s a fog between these push-pull factors of what they consider to be a tension between employment and prices.

And that—he’s saying the fog is which risk is bigger right now. And it’s an odd way to do monetary policy, because if you think about two risks—you know, for us, like, let’s say we were driving down a road and you go, if I turn left, there’s a hurricane, and if I turn right, there’s an earthquake—most of us just don’t turn either way.

But he’s painting it as if we’re gonna invite one risk by avoiding the other, and that is a fog. I don’t think it’s quite so binary, but that’s sort of the language that he’s using.

EICHER: David, I want to bring up the government shutdown again, because there was something of a change—the president urging Senate Republicans to scrap the filibuster to get the government reopened. We also have the development of a couple of federal judges ordering the administration to tap into something like six billion dollars in emergency funds to keep the food assistance program, SNAP, to keep that going for those 42 million Americans. So how do you see things here? Are we in a pressure situation where something really will start to give now?

BAHNSEN: Well, I mean, at some point something’s going to give. There was never, ever, ever a time this thing was going to be perpetual. But I don’t think that the filibuster comments from the president are helpful here at all.

So let’s be really clear: if one is a conservative Republican who believes in separation of powers, who has appreciated the long tradition of the filibuster, of constraining the ability of one party with 50 or 51 votes to do what they want—the last thing you want is to get rid of the filibuster.

And the Democrats, to their credit—despite the fact the president’s right that there were some Democrats who said they wanted to do it—they didn’t do it. And there were Democrats who kept them from doing it.

I’m afraid, Nick, of the Republicans making the mistake that Harry Reid made, where he went to the nuclear option on approving federal judges, where they didn’t have the 60-vote requirement—they used a 50-vote threshold to get federal judges in. And Mitch McConnell warned him not to do it. They did it. And then now the Republicans said, “Okay, we’re going to do it,” and then that’s how you got Amy Coney Barrett and Gorsuch and Kavanaugh and so forth.

And I’m telling you, if the Republicans get rid of the filibuster, we will rue the day when the Democrats are back in power. So this is not necessary to end the shutdown, and I also don’t believe it’s going to be useful for any key elements of the president’s agenda.

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 so much. We’ll talk to you next time.

BAHNSEN: Thanks so much, Nick.

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