Moneybeat: The China complication

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, and glad you’re here.

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

EICHER: You’ve already made it clear in your writing that last week’s tariff reversal wasn’t some carefully laid-out strategy. You see it as reactive. So what convinced you this 11th-hour pivot wasn’t part of a long-game plan?

BAHSNEN: Well, for one thing, there was the president of the United States saying that he did it because he could see that people were getting queasy and what was the other word he used? Yippy?

So, the president is the one who's denied that it was part of a master plan.

My own contacts in both the Treasury Department and the National Economic Council denied that it was part of a master plan. And the Occam’s Razor of the whole thing, the simplicity of this, make very clear that it was a reaction to what was happening in markets and the economy—and ultimately the advice he was getting from some people who I think are better advisors than those he had been getting advice from previously.

EICHER: Let’s talk about the bond market—because some are saying bonds, not stocks, applied the real pressure last week. You’ve suggested that wasn’t exactly the case. What was happening in bonds, and what do you think it tells us?

BAHNSEN: Well, I'm not convinced that what was happening in the bond market was necessarily pushing it. Remember, he made this announcement on Wednesday morning, and my belief through the middle of the week was that that investors were having to sell even safe assets to raise cash, because risk assets had dropped so much.

Nick, this is something you and I talked about in our very first few sessions we ever did together back in March of 2020, that we got to reminisce about a couple of weeks ago.

When you have to sell, you sell what you can sell, not what you want to sell. Treasuries are a very salable asset for leveraged financial actors—think of hedge funds and large global players that way, okay? So that was still, I think, the simplest explanation, that there were just people having to go to the treasury market to sell more liquid assets, as everything else had been dropping so quickly.

But by the end of the week, and as we're sitting here talking, going into a new week, I do have questions as to what's going on because it persisted through the remainder of the week.

The bond market didn't crash. It just stayed up there around a 4.5% yield, and it looks to me that there were some foreign investors lightly selling. (I say lightly because they're not a huge portion of the bond market. You know, we have $36 trillion in national debt, and that basically means $36 trillion of bonds. Canada owns only about $300 billion of them, Japan, a decent chunk, around a trillion, China, less than a trillion. It isn't a huge percentage.)

But were foreign investors selling treasury bonds? Does that explain why the Canadian dollar, the Yen, the Euro, were all appreciating against the dollar last week? I suspect some of that was happening, but I really do need this week, Nick, to get a better feel for what's going on.

I think a lot of the story last week in the bond market was misunderstood by the media. You probably hear me say that a lot. But I think it is important for financial markets, and I think that it played in to the story. I just don't think it drove the story.

EICHER: So that leaves China. Those tariffs are still sky-high—even if we’ve backed off the global trade fight. You’ve said this isn’t necessarily a recession trigger, but it could be. What makes the China piece different?

BAHNSEN: Well, it's the pure size of it. And remember, since the Dividend Café was written on Friday, the president announced over the weekend that he's exempting all smartphones, semiconductors, computers, electronics. So, the largest things in American life that we get from China are now excluded.

Yet, of course, small businesses and factories that employ small numbers of people in America are still paying tariffs on their imports. The reason China is such a big deal is not because the tariff is so high. At any level above a 50% tariff, that’ll shut down trade with China.

So, the president exempted all these key things because, obviously, they don't really believe that the tariffs are going to create revenue, and that they are this wonderful thing to protect American jobs. I think that they're petrified of what the impact would be—and there's no greater example of what needs exemption than the most popular successful consumer product in world history, the iPhone. So, it puts the president in a really difficult position politically. He’s exempting multi-trillion-dollar companies like Apple and Nvidia, and now Samsung, but not exempting the mom-and-pop shops that make textiles and widgets.

So you're talking about a country that is the second largest economic power in the world and the largest economic power in the world not trading with one another. That won't last. It already hasn't lasted—because they've exempted the major products that are relevant here and that took just a couple days.

Where we go from here, we'll see. That is not something I can predict how it will play out. But I don't really believe it's a stretch to say that the president is quite eager to make a deal.

EICHER: And while all this was going on, the House quietly passed a tax reform framework—just barely, but enough to keep it alive. You’ve called it a “heartbeat,” not a solution. Is that something markets are watching yet, or will they soon?

BAHNSEN: Yes, especially if the trade war issue is more and more subsiding. It isn't over yet, but if it goes from being 100% of the story down to 70% of the story, that frees up 30% to care about something else in markets. This is a huge story, Nick. It's a huge story politically and economically.

Speaker Johnson continues to rack up victories that without them could kill the whole thing. Yet just because he gets another victory, it doesn't mean the thing is over. He still must move on to the next. But each little battle along the way could be fatal, and he's surviving them.

Now the hard part is for some of the fiscal hawks, which, if were in Congress I'd be one of them. They voted for the framework but based on promises that have to be delivered on in conference, where they are going to negotiate the specifics of these spending cuts. Promises made to fiscal hawks in the House go against promises made to some of the senators who voted for their framework.

So, they have wood to chop. It's not over, but they've allowed it to move forward to a place that it can get passed by Memorial Day.

There's still not a lot of margin for error, but I really believe this is a very big story.

EICHER: David Bahnsen, founder, managing partner, and chief investment officer of The Bahnsen Group. David writes at WORLD Opinions and at dividendcafe.com … and I will urge a close read of this week’s Dividend Café to dive into the details. But I’ll say, even when the news isn’t great, I do always appreciate your calling the balls and strikes each week. Thanks very much!

BAHNSEN: Thanks so much, Nick.

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