Power Lunch - Tariffs Impact on the Oil Market & U.S. Gas Prices 02/03/25

Episode Date: February 3, 2025

CNBC’s Tyler Mathisen and Kelly Evans take you through the heart of the business day bringing you the latest developments and instant analysis on the stocks and stories driving the day’s agenda. ���Power Lunch” delves into the economy, markets, politics, real estate, media, technology and more. The show sits at the intersection of power and money. “Power Lunch” gives viewers a full plate of CNBC’s award-winning business news coverage, plus a healthy dose of personality from the show’s anchors and the network’s top-notch roster of reporters and digital journalists. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

All right, a big flip-flop on Mexico tariffs, turning the market around, we think, and the market hopes. But the Canada issue is still a big deal. Plus, President Trump reportedly speaking with Justin Trudeau, the current Prime Minister of Canada. A little bit later on today, Kelly, there's a lot hanging in LeBalance. Reportedly in an hour, however you say that in French, the S&P 500 down 600 and 6. No, I'm sorry. Okay, okay, let me back up. The S&P was down more than 100 points at the lows.

The Dow was down 665, but the Dow is down 30 points at the moment. It's basically fractionally lower. More pressure across the NASDAQ. We were just talking about some of the chip names there. We're also watching the dollar shooting higher today. In general dollar index hitting about 110. It still remains, these FX charts, Brian, just always give me a headache. But there you see it versus the Mexican peso.

Maybe there's a good time to go to Canada or Mexico on a vacation. Who knows? All right, the tariffs are still stuck on Canadian products like lumber and oil, but more oil stocks are higher right now, and maybe the market ends overall today higher. We're going to talk about all of that coming up in moments. But let us start with breaking comments from the president in the Oval Office minutes ago. He always, as the president tends to do, making news on a lot of topics, including signing an executive order to pave the way for the creation of the first ever United States.

state's sovereign wealth fund. Listen. I think in a short period of time, we'd have one of the biggest funds. And, you know, some of them are pretty large. I must tell you, some of the, like the Saudi Arabia fund is on the large side. But eventually we'll catch it. But we're going to create a lot of wealth for the fund. And I think it's about time that this country had a sovereign wealth fund. And so we're going to get to Megan Kassel in a second.

But for those viewers and listeners that are thinking sovereign wealth fund. I know I've heard this term before. A sovereign wealth fund is effectively an investment fund that is created from the assets of the state. Norway has a multi-trillion dollar one. Bingo. Singapore called Tamasic has a multi- and Saudi Arabia. It's called PIF a multi-trillion dollar fund. But this is an important point and this will this will be what the market cares about. How would this one be funded? Right. We don't have a surplus. What does it buy? Could it be funded with oil revenues? That would be, but if it's funded with something on the government side that adds to borrowing. You'll see the bond market perhaps a little bit more reactive to that.

Let's see if Megan Kassela has those and more details from Washington. Megan, what can you tell us? Hey, guys, some questions here, too, about the viability of a sovereign wealth fund, I would add, for a country that's $35 or $36 trillion in debt. So much more to watch on that front. A whole lot of headlines to bring you here. We just listened to the president talk for about 35 minutes with the pool reporters in the Oval Office. We're just getting that now. And the first thing I want to do was clarify what we were talking about last hour, about whether or not there's still a deal with Mexico to delay these tariffs. It looks like, yes, of course, that deal is still in place. There was a question from a reporter that asked, could Canada and China also be out of the tariffs

with negotiations are ongoing today? And the president responded, nobody's out of the tariffs and signaled that, of course, the next 30 days will matter greatly as to whether the tariffs will take effect a month from now or whether they'll be postponed further or perhaps indefinitely. But he went on to say that he had a great talk with Mexico, and he said that over the next 30 days, Scott Besson, Howard Letnick and Marco Rubio, three of his top secretaries, will be leading a delegation to have to continue negotiations with Mexico. And that Trump and his counterpart, Mexican President Claudia Scheinbaum, will be part of that as well. Then he went on, he talked about Canada and said Canadian Prime Minister Justin Trudeau.

They had a good conversation today, but he has some qualms there, including whether U.S. banks can operate in Canada. He also is worried about Canada not taking U.S. agricultural products. It is true that the dairy market is very protected up there in Canada. He says, you know, we don't need Canada for energy, lumber or cars, but he emphasized several times. They do have another call today at 3 p.m. So much more to watch that very consequential call and whether Canada might be able to get a deferral the way we've seen with Mexico. He also talked about China. We haven't seen them talking with Chinese officials yet today.

But he says probably over the next 24 hours, he'll be speaking with China. did say it was just an opening salvo, these 10% tariffs. He's been talking about there and saying if they can't make a deal, then the tariffs will be very, very substantial, potentially moving higher than 10%. And then we heard him talking about the European Union again, once again, threatening tariffs on the EU saying there's massive deficits there that they don't take our cars or our agriculture, which is true, again, a very protected agricultural market in the European Union, wanting to potentially go after that with some tariffs to try to make it more balanced. And then on the sovereign wealth fund, I would just add to that there was a TikTok element

to this, that he was saying that that sovereign wealth fund could potentially be used maybe to purchase TikTok. TikTok could be part of the fund. He said maybe we'll get a deal or maybe not. And that we also on TikTok could do a partnership with, quote, very wealthy people. And I will note for you guys that Larry Ellison, co-founder of Oracle, was in the room for this conversation there as well. something to watch as we continue to wait and see what's going on with TikTok, guys.

That's interesting. There's a lot there. Megan, thanks. Appreciate it. Megan Casella. You also wonder what the relationship is between Howard Ludnick and Scott Besson in Treasury and Commerce. We're going to go to Steve Lee's in a second. Just to kind of wrap what we heard there at the top, the Sovereign Wealth Fund.

I want everyone out there listening and watching to understand what we're talking about. And correct me if I'm wrong, Kelly. Well, let's see what we're talking about. Oh, I actually don't know. I'm going to make it up, but what we know about sovereign wealth funds is this. To Kelly's point, you sell something. You raise money, and with that money, you buy stuff, and then you hopefully make money for the citizens.

So if you have a lot of oil, look what Alaska's done, something similar. You know, there are some U.S. states who have kind of tried to look at this model already, and it's a good idea, especially with something problematic, like fossil fuels. You can give people revenue while you work on that transition. this is something they've been doing. And the wealth built in the meantime can then go to a bevy of projects, which also raises questions on the sovereign wealth. You know, you caught me on the Alaska.

I knew it. I mean, I knew. Kelly Evans, folks, the Alaska, you're exactly right. Alaska is the perfect example. They take money from oil and they invest and they write a check to the people every year. If you live in Alaska, you actually get a check. All right. Your money is moving with every tweet or post or utterance from President Trump about tariffs

and more. and I want to be very clear. There's as much we don't know. But what we do know is what this morning looked like a stock market disaster has mostly turned around. Theoretically, it's because Mexico's president reportedly will send about 10,000 troops

to the U.S. border to try to help with the flow of immigration and fentanyl. But Trump implying that there might be no deal, at least yet, with Mexico. So Steve Leesman, we don't know a lot. We know some. And every time you're on TV, I feel like there's a breaking headline, which adds to the story.

So I'm just going to leave it there for you. Well, we have some breaking data from our survey. Of course we do. But whether or not there's breaking news, we'll just leave that up to the fates. Short-term tariffs that are part of a negotiations likely have modest effects economically, long-term tariffs. They can have much more far-reaching impacts on business, inflation, and jobs. That's not news.

What might be news is for the moment. The 27 respondents to a flashed CNBC Fed survey over the weekend finds most expect to, Most expect tariffs to be a short-term affair. In fact, 44% say they'll be around for less than three months. 26% say three to six months. So add those two together. Somebody check my math. 70% believe it will be six months or shorter.

There is a contingent that says, well, might be around a little bit longer. But that right now is a small contingent with a chunky contingent there, emphasizing the uncertainty that Brian was emphasizing of just 15% saying they do not know. So every one of our forecasters in the flash survey predicted lower GDP in 2025, oh, sorry, except for one. We got a late answer with an average of minus 0.6 for GDP and plus 4% on CPI, with expected to price rise about 0.4% above what the otherwise would. True Mattis from MetLife writes,

any tariff impact is acutely sensitive to magnitude and duration. Mark Zandi writes in, this trade war is a lose-lose for the U.S. and global economies. The only question is how big a loss it will be. CNBC asked the White House if there had been an economic analysis of the tariff impacts. They responded the focus was on fentanyl deaths, and they don't put a price on that. They sent a background sheet with no numbers, but it said in part, quote, tariff strength in the American economy, raise wages and create jobs.

They bring back manufacturing to the U.S. and reduce trade deficits. Well, all of that suggests effects of longer term tariffs. But the White House is emphasizing today this is a drug war. not a trade war, and a drug war you think is more temporary. So I don't have breaking news, but I do have breaking confusion, perhaps, if that's a phenomenon. Today, it is. Here's what I would say, though, is that there is a free trade act between the U.S., Canada and Mexico. Trump himself signed.

U.S. MCA, right? That's it. Yeah, I don't know if that was a beastie boy, but yes, MCA. But it is out there. And Trump himself signed it from what I'm reading. And again, this could be just garbage, is that, If you frame it as a drug war, you can implement the national security aspects that go around the trade war restrictions. You mean the 1970s era law they're using to actually declare these tariffs?

Because there have been questions. Would circumvent or cert- The USMCA? The USMCA. That's a-if-you-claim it's a drug war and about drug deaths, you go around the clauses in the 2017 Free Trade Act, which suggests no tariffs may be implemented. I think it's a very important point, especially if this gets challenged again. Let's not trade chairs, but let's trade positions for a second.

What's happening with Western Canadian Select? Crude? Crude. I'll say you why I asked this question. Well, you asked me yesterday. I called you at home. We both of us worked all day after. I said, Brian, what's with WCS?

And the reason is because there may be no greater ability to gauge the impact. There's WTI up a little bit. And I want to get to my comments on this in a second, but I want to get your info. Is it up higher today? It's about up the same. And Western Canadian Select. Well, I don't say exactly the same, but I will say this. Western Canadian Select is far less liquid.

Let's see what I did there. It's heavier. Literally and figuratively, then the WTI contract. So we are waiting to see significant price moves on that Canadian oil contract, the WCS, Western Canadian Select. But as I will go back to you, like a song or a bad movie. Steve, length is important because... The length of the... You're talking about...

You can watch a bad movie for 90 minutes, but after hour three, maybe you can't. And that's my... Tariffs are kind of the same way. If we're talking about them tomorrow, that's the difference. The ending tomorrow, that's one thing. If in three months we're still talking about them, then we're going to start to see the impact of much higher oil prices, much higher gas prices,

particularly to all my friends watching on the Upper Peninsula, Michigan, you're going to pay a lot more. So I hope when they show this part of the Daily Show, they edit me out of it. You're talking about length being important. But here's the thing. When they put this tariff in place, you would expect there to be a quick move. But here's the thing. Canada is landlocked in the sense that it has no other place, except for, let's go to talk about Vancouver in a second.

Leave that to the side. No other place to send their oil. We're almost a monopsony buyer. We have a monopoly on buying their price. We get it at a discount. Right. When they add the 10%, Brian, does that make it more profitable to ship it someplace else? No.

So it's still landlocked. We still have a deal. In fact, it would be less profitable because to get, so let's say what Steve's talking about, I think, is what I would call the nuclear option. I talked about this earlier, which is that let's say Canada gets so mad at us. They say, you know what? Screw you, United States. We're going to reroute, divert our oil from Alberta. That was going from Alberta to Illinois, Ohio, because 61% of it.

of our oil imports come from Canada. But they do have a port to get it out. They do. Right. In Vancouver. Right. But to get that amount of oil, first off, you can't get three, four million barrels a day over that way. But you could do some, but I think it would be more expensive unless you'd make less money. But at this point, we know that Canada, which today said, oh, we might tariff Starlink of Elon Musk, amazingly after Musk for some reason, and other things, maybe they'd be willing to do that nuclear option. So when it comes to oil, President Trump is still sort of beating up on a weakling in the sense that at some point the 25% tariff broadly says, okay, I can ship this anywhere.

But the 10% you're saying is not enough to say, and also the infrastructure, that we're not going to still get a good deal on Canadian oil coming down. It's a 25 cent increase in the price of a gallon of gasoline for the refineries that are impacted, which is Illinois, Ohio, Minnesota, St. Paul Park, outside of Detroit and probably Pacific Northwest. that would take gasoline prices back to mid-August level. So yes, gas prices would go up, but they would only go up to the back to where they were in August.

But the president promised lower prices, lower inflation. So any up is a bad up. Do you think they got spooked this morning by the market reaction? That's why they made the deal with Mexico. I mean, I didn't think the market reaction, you know, 1.5% on the Dow. Do you know what I did? I went back and looked at 2008.

Remember 2008? The financial crisis, sure. But do you remember how much it took for the Republicans to change their mind about TARP? The day they voted it down. How much they changed their mind? 7%. Wow, wow. So it took a big number.

This was not, I agree with you. I agree. See, I changed the whole thing. I was the anchor. You were thinking I could paint the same. When they put this in front of the Canadian John Stewart, I hope they edit me out. I don't know how to say that in French. Steve, thank you.

Thank you. I appreciate it. Steve Leasman. Let's get some more insight now from our panel. Carlos Gutierrez is the former Commerce Secretary and the former Kellogg, CEO, DeWordrick McNeil, is managing director and senior policy analysts at Longview Global. Both are CNBC's contributors. Secretary Gutierrez, let me just start with you.

Where is Mexico now a winner here? Because they've resolved this issue, whereas Canada and China, as of now, are facing tariffs. Yeah, I think the circumstances are different. You know, in these things, the technicalities are important, but the relationship is just as important. President Trump and President Scheimbaum has spoken in the past a couple of times before this morning. And there's been a good relationship. It's been cooperative. They both connected. So the fact that President Scheinbaum agreed to sending 10,000 troops to the border is a big concession. That, you know, military matters with the U.S. are very sensitive in Mexico. She used political capital to do

that. But she made the decision. I think the relationship had a lot to do with it. Canada is a very different story. President, Prime Minister Joe has been combative. It's been a difficult relationship. But my concern is that he has boxed himself into a corner to the point where if he shows willingness to cooperate, it'll look like he's backing down. Right. And it's less clear to Wardrick what, you know, the Canadians can do to quickly a swat. Do they send 10,000 troops to the border? Yeah, I think Secretary Gutier's is right here. The brilliance of this call with Chambalm first is that in some ways it does box in Canada.

But remember, Kelly, there's still the – the Chinese side here, and there's this case at the WTO. So in theory, Canada could sign on to that WTO case. Now, again, Trump is going to ignore the WTO, but it does send a strong signal for China and perhaps Canada, if they sign on, to the European Union who loves following trade rules, who understand that what we're looking for are rational actors. And so you can still play the rational actor game in this process. But, you know, I do think that the Sean Belmont call really put Canada in a bind here early in this process. But this is the long game, Kelly. And countries are going to have to play chess and order to win this way. DeWordrick, I'm going to go back

to you because we're showing our viewers. And if you're listening on your car, I'm sorry, you can't see anything. But I'm going to, the Dow is now positive. It's positive by 0.01 percent, basically one point. But it is positive. So the market either, DeWordwick is blowing off. the news or it believes these tariffs, maybe the China tariffs, by the way, layering on top of tariffs President Biden put on nine months ago, I should point that out, that these tariffs are short-lived. What is your take on the markets? Yeah, look, I've been very shocked by this. I saw the study that Steve released from our network here. And what they're not talking about is how long will the threat of terrorists last? So these may be short-term tariff events, but the threat

when you look at pattern recognition, we're going to live with these threats of tariffs for the rest of the Trump administration. And at some point, you run out a deal space, Brian. So, you know, it may not be today, but I do think markets should take this more seriously than they're taking it. With respect to China, this was never the big one. China is waiting for the America first trade policy tariffs that may come into effect after April 1st. So I think the Chinese, going back to pattern They're going to keep their powder dry. They know April 1st, there may be something bigger coming down the pipe. Carlos, what would you add to that?

Well, I would just say with China, I think the goal has shifted. And I believe the president wants to make a bigger deal with China, a grand bargain. And that's why the 10% is almost symbolic. But it's bigger than just tariffs and trade. It includes most of the issues that we have together as two countries. And potentially it could be something that really moves the relationship forward. So it could include technology, obviously trade, but expand that. It could include Taiwan.

It could include China's involvement in Latin America. It is a bigger objective, a bigger strategic initiative than just a trade fight. What is it then, Carlos? What do you think is, I know you have to get it? No one knows what's inside his mind, maybe but him. What is the strategic goal of all this? Well, if you're President Trump, you look at what are the issues with China. We have these issues in the South China Sea,

considering military engagements, escalation. We have China coming into Latin America, Panama, Peru. There are a lot of instances where China is challenging U.S. interests. And I think the president would like to solve that, not just the trade issue. So, you know, you name it. You make it as big as you'd like. But I think the president is thinking bigger than just today's tariffs. That's very interesting.

And whether that makes it easier or harder to solve, I guess time will tell. Gentlemen, for now, thanks, Carlos Gutierrez and DeWordrick McNeil. All right, we were just getting started and on deck. Will the Canada tariff cost you gas money? Well, as we said earlier, it may depend on where you live. explain more with energy coming up. All right, welcome back. Certainly the tariffs on Canadian oil

a big deal, but it's even a bigger deal depending on where you might live. All right, so here you go. The U.S. imports about 4 million barrels of Canadian oil per day. Most of that is going to refineries in the Midwest. Illinois, Ohio, Minnesota, Michigan, some states that rely on crude oil

from Canada. The companies, Marathon Petroleum, Valero, Phillips 66, ExxonMobil, and Canadian company, Sinovus, are just some of the names that have exposure or the most exposure to oil from Canada and a potential impact from higher costs. Now, Canadian oil is what we would call heavier than U.S. oil. It requires a slightly different refining technique. It's sludgy. And while oil isn't moving much today, there are some who suggest that if the tariffs go on for a few weeks or longer, we could see an impact on Canadian oil flows to the U.S. and

possibly higher gasoline prices for you, especially all of my friends and listeners and viewers that live in the Rocky Mountain States or the Midwest, you may be right sort of in that target. Let's talk about more of it with American Petroleum Institute CEO Michael Summers and Lipout Oil Associates President Andy Lipout, Mike. I'm going to start with you. You represent the industry. It's a weird spot to be in because there are different relationships with Canada and its oil. What is your message or the message of the American oil? industry right now? Well, let's put this into perspective. The United States produces about 13.4 million barrels of oil a day, but we consume about 20 million barrels of oil every single day. So we do depend

on exports into the United States, particularly from Canada. You mentioned it. Pad 2 into the Midwest, about 75 percent of the oil refined in the Midwest is from Canada. And so we've worked very hard with the Trump administration so that they understand how important those exports, into the United States are. And we thank them for that recognition, lowering the tariff from the potential 25% to 10%. But we're going to continue to work with them and hopefully carve out more exclusions for the oil and gas industry. So you think that, back to you very quickly, that the reduction from 25% to 10% was partly the work of you, API, and maybe the American oil industry to convince the White House, hey, go after tariffs if you want, but this is

something that we actually use more of than they do. Well, one of the most important components of this is that American refiners buy that oil from Canada at a discount. In most cases, it's about a 20% discount. So if you were to put a 25% tariff on that Canadian oil, you're basically eliminating the incentive for us to process that oil in American refineries. So it was very important to us that we carved out this exclusion for American oil and gas. And we're going to continue to work with them to get it down to zero. Andy, what should consumers expect?

Are we going to see prices at the pump go up? Well, of course, it depends on where you live. Now, if you're in Maine down to Boston, you should be ready to see a 20 cent per gallon increase in gasoline prices. As Irving Oil, the major refiner and supplier in that region, is already notified their customers that they're passing through every bit of the tariff to them.

If you're in a place like the Rockies and especially a state like Montana where those four refineries do depend on Canadian production, you could see Canadian producers try to divert some of that oil to the Pacific markets as there's still pipeline space available. And if you were to run short of crude oil, especially in a state like Montana, you can see prices increase there. 20 cent increase, Andy, that's kind of a big deal. although someone said that prices were higher just as recently as the summer. Is that right? Where does that take us back to? Well, it does take us back to the summertime. And right now we are trading winter grade gasoline.

So in a couple of months, we're going to see gasoline prices increase another 20 cents a gallon just from the switch between the winter and the summer. So basically, we could see gasoline prices 40 cents higher by the summer of this coming year or no. Is that putting it too sharply? No, I think that's exactly right, especially if the tariffs stay in place. And while we haven't talked much about tariffs on Mexico, which had been at the 25% level, the United States is still importing about 500,000 barrels a day of crude oil from them and a couple of hundred thousand barrels a day more of refined products. And that's where it starts affecting refining on the Gulf Coast and the East Coast.

What would be the message, Mike? A lot of our Canadian friends might be watching this right now. now, you represent the U.S. oil and gas industry. What would be our message as Americans to our good friends? Many of them are watching or listening right now, north of the border. Well, Canada continues to be a major trading partner to the United States, and we want to continue to import that kind of oil into the United States because the truth is that these refineries in the Midwest and in other parts of the United States can't refine the oil that has actually produced here in the United States. It is that heavier sour oil that we find that we need to continue to import to keep prices low for American

consumers. So we want to keep working with them on this. We're working with the Trump administration. Again, we appreciate the important recognition that they put forward to reduce that tariff from 25 to 10. But long term, we need to be able to produce and process the kind of oil that we find here, WTI here in the United States. But the way we do that is we have to get permitting reform done through the United States Congress so we can actually build something here. We haven't built a large-scale refinery here in America since 1977, which is one of the reasons why we're dealing right now with the situation where we are still processing this heavier crude that we get from Canada. Hard to believe the last refinery built in America was when I was six and Kelly was just

a thought. Wow. Here's a wall graphic that we have and there's a lot going on in this graphic and that's the point, okay? And what this graphic's going to show, and if you're on the radio, It's basically a blue line, which is Canadian oil imports soaring over the last 20 years and a mishmash, a spaghetti of a bunch of other stuff, Nigeria, Venezuela, Saudi Arabia, Iraq, all kind of remaining steady or going down. The idea, Mike, that we need to import about six to eight million barrels and Andy Chimin as well, Mike, we need to import that many millions of barrels of oil a day because it's not just where or what kind of oil it is, correct? it's where it goes. If you're shipping something to Houston, that's very, very different than needing the oil in St. Louis Park, Minnesota.

Is it not? And getting there is actually less environmental and more dangerous if it has to go by, say, barge than maybe rail or pipeline. Well, that's exactly right. And this interdependent relationship that we have with Canada

continues to be very important. And we want to continue to work with Canada on bringing that oil into the United States. But remember, there's not a lot of other places where that oil has to go. So we want to continue that important relationship and continue to work with Canada. Not just an oil, by the way, but a natural gas as well,

which was also subject to only a 10% tariff rather than a 25% tariff. We need that natural gas also, particularly for the Northeast and the Pacific Northwest. We're going to leave it there, but Mike and Andy, invaluable insight. Go the whole hour, but then I'd be fired, and we'd never do it again.

So Andy and Mike really appreciate both of your times. Thank you very much. Thank you. Well, the tricky thing about any trade war, as we talked about earlier, is the timing. You'd hope to have the growth stocks holding everything up, but they've had their own problems lately. While tariffs mean higher prices, near-term inflation that could affect the Fed's plan, we'll talk about it next on Power Lunch. Welcome back to Power Lunch. I'm Courtney Reagan with your CNBC News Update. President Trump appointed Treasury Secretary Scott Besant as the acting director of the Consumer Financial Protection Bureau, after firing former head Rohit Chopra over the weekend.

The Washington Post reports that Bessent sent an email to agency staff, ordering them to cease all work pending a review, signing a need to, quote, promote consistency with the goals of the new administration. Philadelphia officials say 24 people on the ground were hurt after a medical jet crashed Friday night shortly after takeoff. The six people on board were killed. The investigation into the crash is ongoing. Transportation Secretary Sean Duffy says federal agencies will look at weather as a possible factor as well as potential technical or mechanical issues.

And Homeland Security Director, Christy Noem, visited New Orleans today ahead of Sunday's Super Bowl game between the Philadelphia Eagles and the Kansas City Chiefs. She says there are no known threats to the game. Security in New Orleans is heightened following last month's terrorist attack on the city's iconic Bourbon Street. Kelly, back over to you. Courtney, thank you very much. Courtney Reagan. Well, a hot and cold trade war is creating some lukewarm market reaction.

We had a big sell-off this morning after the president's tariff announcement, only to do a U-turn when good news emerged out of Mexico, about mid-morning, about 10.30 a.m. We were down 665 on the Dow. Then we went positive. We're down three. The tariffs on Canada and China are still scheduled to take effect tomorrow. But the president will be speaking again with Canada's Prime Minister, Justin Trudeau in a couple of minutes' time.

And regardless of what comes out of that discussion, my next guest says damage has already been done because fear is now trickling down the supply chain. Joining us now is Brian Jacobson, the chief economist at Annex Wealth Management. And Brian, this is what we're trying to figure out, because I have people arguing to me that the market reaction today tells you in some ways, even at the worst of it, that the markets are becoming inured to tariff talk.

And then I have other people saying, well, no, now this back and forth means they have to kind of constantly deal with the threat. Which one is it? Well, it's probably somewhere in between, right? I mean, that's typically the way that the truth works out. And I think that actually the market might be a little inert to this, as you you put it so eloquently. I don't pronounce that quite as well as what you do.

But until it shows up in the data, right, until it shows up in the profit margins. And I think that's one of my big concerns here is that it's a bit of a catch-22 for investors because with the fear of tariffs, knowing that they could be imposed at any time for any particular reason, what does that do to margins or inflation? Now, margins are elevated across the board if you're looking at the S&P 500, especially with the biggest names out there. But when you dig beneath the surface, margins aren't particularly high, say, for consumer staples or for consumer discretionary if you exclude Amazon. And so are they going to be able to pass on those price increases, in which case the Fed is likely going to stay on pause for a while? That's not great for financing rates, especially for smaller cap stocks.

or is it going to show up in compressed profit margins and show up in the earnings numbers, which also isn't great for investors? Right, and it's not great for small caps. So I thought it was really interesting at the lows this morning. Small caps were way underperforming. So the Dow was down about 1.5%.

The Russell 2000 was down 2.5%. And the line, Brian, has kind of been, oh, you want to go with small caps. They don't have the pressure from the strong dollar. They're not as global. They don't have to worry about the tariff exposure. But if this all comes down to, the Fed might be a little less likely to cut,

rates, well, then they have that problem all over again. You know, when profit margins aren't as strong, would they have that problem all over again? Yeah, that's the way that I'm looking at things here is, you know, I do like midcaps for the long term. Small caps, you have the issue as far as the number of names that are profitable now or profitable in the future. But with we look back at 2018 to 2019, the part of the market that did the best during the trade war back then was large cap growth. It was the tech names. You had actually those areas outperforming, despite their global presence. Now, most of that could be attributable to the fact that they actually got exclusions from those tariffs, right? So the tariffs, it was a smaller base, 300 billion

versus now it's like 1.4 trillion as far as the base. The rate was lower. It was phased in. But plus, you had companies like Apple and many others that were able to get exclusions from the tariffs. This time, maybe it'll be a little bit different, but I suspect that they're already probably lobbying for some exclusions if actual tariffs do go into place. So maybe large cap growth is a slightly better way to play this. It's amazing, Brian. Last week, all we were talking about was Deep Seek and Invidia and AI. Last week was so last week ago.

And now, of course, we're talking about tariffs. What is an investor to do? It's a frustrating, very busy time. Aside from listen to you and watch and listen to CNBC, how do we process this insane flow of information that's coming out in the last couple of days? Well, I'd like the fact that you use the word process as far as how do we process the information? is about what is your investment process? Stick to it, right? The way that we're looking at things here at Annex is focus on the fundamentals. Near term, there's that greater uncertainty

about the outlook for the fundamentals, but what's the longer term? Because we will ride through this eventually, right? It might result in slightly higher prices, lower purchasing power for consumers in the near term. But really, if you map this out over the course of, say, three to five years, what does that do to your forecasts for those types of earnings? It might not move the needle all that much. So focus on the fundamentals, look for the valuations, considering that margins are likely going to come under some pressure. Growth expectations might need to come down to earth a little bit. And so where is that margin of safety? So really sticking to that process, I think, is the best way to kind of process your way through this. And we'll see if names like Apple,

which should theoretically have it, can kind of shake it off and not have those supply chain. Because I didn't mean to make a Taylor's. I would say that was quick, but I would, I would Actually, I was going to say it was very swift of you. Thank you. Brian, thank you as well. Brian Jacobson joining us today. All right. So we talked about it a little bit earlier.

The dollar can be confusing, but let's just say this. The U.S. dollar's been getting stronger the last couple of days, really a fuse lit by Trump's trade war. We're going to break down and more importantly make sense of all this currency stuff that's going on. Stick around. Welcome back to Power Lunch. Plenty to discuss with Rick Santelli today watching yield. in particular, as we're seeing the 10-year kind of flat, but the two years pricing in some near-term inflation, I guess that's kind of re-it. It's not an inverting the curve, Rick, but it's moving

in that direction. Let's bring in Mr. Santelli for more. Rick, what do you make of it? Well, I'm not sure I'd jump to the inflation notion. I would just jump to the central banking notion. Central Bank already has an inflation problem, but what I see is the 2's 10 spread has flattened about six or seven basis points today. And early in the session, we saw that two-year yields were slightly elevated and 10, 20, 30-year yields, the longer ones, weren't elevated at all. That relationship has changed somewhat, but the spread hasn't changed. So we see that two-year yields have gone even higher and 10-year yields have gone higher. They're virtually unchanged now in a 10. You're up about six, seven basis points in a two-year. Why am I going through all that? Because

we don't really know why, but the fact that the spread hasn't changed tells me that the short maturities are thinking more about how the central bank has to deal with these issues, and the long end is a little nervous about how it could affect the economy. Okay. And maybe there's a little inflation on the back end as well, but it puts the priorities. The spread has moved so it's the burden of inflation and central banking is on its short maturity. And I think that's not going to change, but what I find fascinating, and after the dust settled and Mexico capitulated to some extent, the spread hasn't changed, but yields have moved higher. So we're making a lot, potentially, Rick, of a few basis points here and there, but it's a big story in currencies. And this one

has huge implications. The dollar is near the strongest levels we've had in basically 30 or 40 years. You know, you get to, I don't know what the high was, 110, 112. We're getting in that neighborhood. And we're talking about, you know, the fallout that's had on the economy these past several decades. So we have that to contend with. Maybe it helps consumers absorb the tariff hit, but could be a headwind for certainly corporate America, maybe some manufacturers. Well, you know, a couple of things. You know, take a step back. The dollar has been doing very well for a long, long time. Long before it was assured Trump would even be in the White House now. But, of course, some of that has had an effect to the upside of the dollar as well. But here's what I see.

When it comes to foreign exchange and tariffs, think about it this way. The country, The country imposing the tariffs most likely sees their currency appreciate. The aim or the target of the tariffs, most likely in a macro sense, sees their currency go down a bit. But the issue is so much more complicated. In Canada's case, the currency is already at a 22-year low versus the greenback. In case of the Mexican peso, virtually the change, the relationship between our currency and theirs is about where it was before all the volatility with COVID. And if you look at what the Mexican Peso did today, the minute the capitulation occurred,

we saw the dollar go down. Very much a predictable event. When it comes to something like China, it gets much more confusing. You have the offshore dollar versus the yuan. The yuan is lower. If you have the onshore, which the government really, of course, has more control of, the one's higher. That tells me that the currency has a lot of issues outside of what's going on here,

tied up in politics. And central banking figures in. If your country's currency is weakening and you're an export economy, of course, that's going to give you potential upside on exports. Think Japan keeping their yen weak on purpose intentionally. But let's say you need to buy inputs. Let's say you don't have domestic resources and you're in manufacturing and exporting. Then you have to go outside the country. Your currency's weaker.

Your import costs may go up, fueling some inflation and slowing of your economy. economy and central banks. Central banks have to deal with the aftermath of this. And what it will be is anybody's guess. Yeah. I mean, we have the resources, though, and I guess we're going to go travel and make the most of it. Rick, and you know one thing we have to say, Kelly, real quick. You're right, though. It's not good for multinational companies, but it's great if you're sitting home in your lounge chair because your dollar's going to go way farther with all the countries sending things here that they're exporting. Rick, thank you very much. Appreciate it. Rick Santell. All right, on deck trading the trade war, the stocks you may actually want to buy.

All right, welcome back. It's time for three stock lunch. We asked our trader for three names that you might want to look at as a potential buy right now because, you know, these tariffs on Canada and China and maybe Mexico taking effect or not. Let's talk about all these companies with Ari Wald. He is the head of technical analysis at Oppenheimer. All right, Ari slash Ari. the first name is Crowd Strike, however you pronounce it.

The stock has rebounded strongly from its outage over the summer, jumping more than 80% in that time. What does your take on CrowdStrike? All right. Well, my mom will say Ari, so half my friends call me Ari. But listen, Brian, our 2025 outlook, it's balanced by our belief that following two above average years in the market, historically would be consistent to see some moderation for 2025.

That was a basis for our expectation for only a 6% year this year, which is a below average assumption. With that said, as we've seen some volatility creep in the market, I think it could linger through the balance of February, which is a month that historically hasn't been great for the stock market. But I do think that the longer term trends are intact. And so for us, the key is a focus on selection. And the three sector standouts for us are technology, financials, and industrials. And for technology, it's a call on software, which had a terrific breakout after the U.S. presidential election. And really over the last six to eight weeks, it has consolidated and I think provided a tactical opportunity, but to buy some of the names within that group.

We had a weekend report dedicated to those ideas. We highlighted a whole broad list of stocks breaking out to the upside to mention. just won, one of the larger cat names, CrowdStrike. It's rallied right into its July peak at 397. It's paused here, but with a positive trend behind it and a bullish industry, those top-down tailwinds, I think you see a breakout in CrowdStrike over the coming weeks to months. A breakout in CrowdStrike. That sounds bullish. But what about Hamilton? Hamilton Lane, we don't talk a lot about, but we're looking for possible winners amidst all of this. They're an investment management and advisory firm down 12% in recent months. Why does this one also jump out to

you? Sure. Well, this is part of our call within the financial sector, specifically capital markets more so than banks. I could have called out JP Morgan or Goldman Sachs, but Hamilton Lane is tactical. It's down about 20% off its recent high. It's corrected right into the bullish slope of its 200-day average. What we see as a near-term opportunity to buy long-term strength, There was a nice false breakdown there. You fell below that level, came right back above it. That's a sign of selling fatigue. Plus, it was recently upgraded by the fundamental analyst that covers it at Oppenheimer.

You add it up, and I think Hamilton Lane is at a bullish inflection point. Another major name that we talk about every day, I'm kidding, is Mueller or Mueller, Bueller, water products. There were the largest manufacturers of fire hydrants, and I assume water products, I know nothing about Mueller water products. Who are they and what you take? Sure. So this is, they fall into the capital goods and infrastructure theme, which is an established leader through the cycle.

We initially upgraded the group back in September of 2022. And it has become a little bit more mixed, but we're seeing strengthen these mid-cap names that aren't necessarily household names. They are covered at Oppenheimer, though. So there are some fundamental underpinnings here. This is actually what we would call an Opco trifecta, our animal. is positive and outperform rated on the fundamentals. I think there's a bullish trend here. I see the support at the industry level as well. So it's another stock down double digits from

its prior high, building a platform above that rising 200-day average. I think it sets up to see a resumption of its up trend. Mueller Water, MWA. Love it. A new name, Ari, slash Ari Wald, Oppenheimer, head of technical analysis. Ari, thank you very much. Thank you. I loved that. Remember, you can always get good content like that. If you listen to our podcast, just find it on any platform. Search for Power Lunch wherever you go. And we'll be right back after this. Or I'll leave you with the markets here this morning. I mean, you want to go right back to bed, dive under the covers. But stock shaking off the tariff shock. Tcha. Tariff shock. That was not. But that was not the only shocking trade. I've said shock a lot. The Dallas Mavericks sending their star, one of the NBA's star, Luca Donchie, to the Lakers for Anthony Davis and a draft pick. Big trade.

Huge. Not tariffed. Shocking. Maybe more shocking than all the tariff development. Absolutely shocking. Mark Cuban is a minority owner of the Mavs now. Aedelson family is the controlling group. Eric, obviously, big Lakers fan.

He's not loving it. He thinks maybe they got the short end of this. And Joe Biden apparently just signing with creative artist agency. See what he has up his sleeve. Bye. Closing valve starts now.