Tariffs to toasts

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

NICK EICHER, HOST: 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's here now. 

Good morning to you, David!

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

EICHER: Well, a big summit week in Beijing last week. President Trump coming home saying: fantastic trade deals, lots of good imagery, good feelings, nice meals, I assume. When you strip it all of that away though, David, what do you think was actually accomplished?

BAHSNEN: Well, I think two things. I think, number one, that we don’t really know, because if there were certain geopolitical things as it pertains to China’s efforts with Strait of Hormuz and Iran, and including ongoing issues with Russia and Ukraine, I don’t think that we are going to hear about that.

And then I think that the other side of it is more or less the press accounts, that it doesn’t appear there was much done on the economic side. That announcing, that if I have a nickel for every time I’ve heard they’re going to buy more soybeans, I don’t know how many soybeans a country needs and how many we have to sell, but I’ve been hearing this for 10 years. And I get it, because it is certainly one of the few agricultural commodities we have that we can sell to them. But you know, the Boeing airplane thing seems to have been a disappointment. I think people thought they were going to commit to buying more. 

But I think it was mostly a setup, Nick, for when President Xi comes to the U.S., I believe that’s in September, I think that’s probably going to end up being the more substantive summit, and this seems to have been mostly relational.

Now people can say, no, no, we really wanted to decouple from China, and I think that’s fine, but that isn’t happening. What the president clearly has backed off of that. They’re looking to sell more and buy more, not decouple, and this appears to have been a positive meeting.

EICHER: Yeah, okay, and that was my followup, David. What do you think the expectations were going in, and could it be that maybe because the summit didn’t blow up or the two of them didn’t get into an argument, at least an argument that we saw, that that just by itself is a good thing?

BAHNSEN: Well, I think that the whole relationship right now centers around the fact that we are basically trying to figure out what the trading partnership is going to look like for the decade ahead, and that there is a desire for the U.S. to not alienate China, and yet for us to somehow be able to get a little more sovereignty over our critical minerals and other critical infrastructure components, including semiconductors.

You know, I do the economic side. The geopolitical side is very hard for me because I am fascinated by it, I study it, and I talk to a lot of people I trust, but I want to stay humble, because I know what I know, and I don’t know what I don’t know.

But I will say this: I don’t think that the current administration is as concerned with Taiwanese independence as they are with making sure that the U.S.'s semiconductor interests are protected before whatever happens with China and Taiwan happens. 

In other words, I think that our strategic imperative right now is more focused on us getting more domestic control over semiconductor manufacturing than it is whatever is going to end up happening.

I don’t want to be cynical and say, "let us get our semiconductors out, and then you can go have Taiwan." I don’t think that’s the case. And I also am not one who believes it’s true that China wants to go imminently take Taiwan either. I think China’s benefiting a great deal from having stabilized their bond market and their currency. The U.S. would have done very well to have had China’s bond market and China’s currency over the last 10 years, I hate to say it. So why China would disrupt that with a globally frowned-upon invasion of Taiwan, I’m not certain that that’s the case. 

But those are the things that matter into the future right now. It’s hard to think about stuff that’s five and 10 years out when we’ve got to get the Strait of Hormuz open. And I think that my guess is that’s where President Trump is angling, is to see where China can agree to be an ally in that cause.

EICHER: Yeah, and I'm curious, what is your sense on that, David? Can you gauge from way over here how China is weathering the closed strait? I mean, this is where they get their energy, they don’t produce their own energy. Are they hurting?

BAHNSEN: Well, I don’t think it’s where they get all their energy, but it’s where they get a significant amount. They do get an awful lot, obviously, out of the Persian Gulf, but not all of it has to come through Strait of Hormuz.

You know, I think about this ideologically, because I’m a worldview-oriented guy. Communists are not my friend, and jihadists are not my friend, but that doesn’t mean that communists and jihadists are each other’s friends either. And I think that China’s relationship with Iran is entirely transactional. I don’t think it is in any way ideologically sympathetic. And so to the degree that the U.S. can become pragmatically more beneficial to China than Iran, I think that China would leave Iran in their dust in a second.

So, yeah, China’s hurting from this, but there’s no question that a lot of oil got shipped in the early stages of this, and I think there was a lot in storage that’s been able to get going.

But no, I think that everybody involved on the buy side and sell side right now—and you see even U.S. oil prices this week and bond yields as well—we’re at the point now we’re continuing to say, "wink wink, nod nod, we got this,"... people need to see this strait opened up.

EICHER: David, I want to touch on interest rates before we go, but before we leave China, is there one final takeaway to add on the Summit?

BAHNSEN: The last thing I’d say, Nick, is that you look back a year ago, we were threatening 145% tariffs, and now they’ve got children dancing and they’re talking about how beautiful the flowers are and stuff, right? Things have moved a lot.

I mean a lot of that is what I refer to as market discipline. That China is well aware that markets—both U.S. stock, bond, currency, financial markets—discipline the president, and some of his threats of a year ago are a little less efficacious now than they were. And I think China knows that.

We’ll see where final deals end up going, but as I said before, I think it’s going to result in more trade with China, not less.

EICHER: Alright, so Kevin Warsh is now taking over as chairman of the Fed, and I took a peek over at the CME FedWatch to find out if there’s any change to the interest rate indicated and it appears that it’s actually going the other direction—up, not down. 

Does that come as a surprise to you?

BAHNSEN: Well, it’s not a surprise at this point. It will be a surprise if it actually happens. I don’t think there’s any scenario by which this Fed is going to be raising rates, but I think that in a way you could argue Kevin Warsh might be benefiting from this situation, and the amount of dissenters at the Federal Open Market Committee, because he does have the ability to try to go vote for a rate cut now and not get one, and say, “Mr. President, I’m sorry that there’s four other people voting against it,” or five other people voting against it, or what have you. 

So there’s just enough kind of disarray going on.

Let’s talk about interest rates in two ways real quick. The long end of the bond curve skyrocketed this week, and not just in the U.S., but globally. That’s Strait of Hormuz-oriented, that’s global disruption. U.K., E.U., and Japan, you saw bond yields going up at the long end everywhere, and then it happened in the U.S. and, for the first time in a while, got well above four and a half percent. So nothing brutally high, but I mean, it moved 20 basis points on the week. 

The short end you’re referring to about what the Fed funds rate control, you’re exactly right that the futures market at CME is buying contracts based on no cuts and even a small possibility of a hike.

And I think that the markets now have to get Kevin Warsh in and hear him talk. He’s only been talking as a candidate and doing the highly politically sanitized Senate confirmation rhetoric. Once he gets in with his colleagues and makes an argument and makes a vote and does a press conference, then markets can see what his posture is.

And it’s not really about the very next meeting, but the meeting or two after that. Everyone can look at it the way it is now, but if you get one bad unemployment number, that’s going to change the narrative significantly.

Right now everyone’s saying, "hey, the jobs thing has gotten a little bit better, and the price issue has gotten worse. Why would you be talking about cutting rates?" But the data tweaks in this stuff can turn very quickly.

So I am not at all convinced that we won’t be getting another rate cut by the end of the year, but let’s put it this way: I’m not buying Fed funds futures contracts saying so.

EICHER: All right. David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. He’s a writer for WORLD Opinions and he writes each week at Dividend Cafe. 

His current Dividend Cafe expands on the conversation we had last week here about the U.S. debt. So if you'd like a deeper dive on that, we’ve got a link to it in today’s program transcript—or you can just sign up and have it sent to your inbox. That’s the easy way to go. 

David, I hope you have a great week.

BAHNSEN: Thanks so much, Nick.

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