The Dividend Cafe - A Trip Around the Globe

Episode Date: May 9, 2025

Today's Post - https://bahnsen.co/4dasMZ5 Friday's Dividend Cafe: Market Recaps, Trade Deals, and Future Forecasts In this episode of Dividend Cafe, the host discusses various market updates, including the relatively calm market movements of the week compared to previous weeks. Key topics include the announced trade deal with the United Kingdom, which includes changes on tariffs for steel, aluminum, and automobiles, and agreements on agricultural and industrial products. The host also explores the implications of a potential budget reconciliation tax bill in the US, and updates on trade negotiations between US and China. Additionally, the host examines the role of currency valuations, particularly the strength of the US dollar, and private equity activities in current market conditions. The episode concludes with a discussion on market uncertainties and potential forecast scenarios, advising against market timing due to high variability. The host also teases an upcoming special episode on Warren Buffett's investment legacy. 00:00 Introduction and Market Overview 01:02 US-UK Trade Deal Insights 03:23 Budget Reconciliation and Tax Bill 05:34 US-China Trade Negotiations 08:53 Currency and Emerging Markets 10:56 Private Equity and M&A Activity 12:00 Market Scenarios and Conclusion Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to this Friday's Dividend Cafe. I am back in New York City where it is storming outside, but it wasn't really storming in markets this week. It was actually, as far as these things go compared to past weeks, a reasonably boring week, which is not to say it was boring in terms of new cycle and events and things that are definitely relevant to markets, but just

the markets have not had huge up and down movements and certainly not compared to what we've been used to. So some may take that as a welcome reprieve. I will conclude today's Dividing Cafe with some thoughts on why I think the tug of war between a better outcome for markets and a worse outcome for markets as distinct possibilities continues. What I really want to do is just jump around a little bit across some of the bigger events that are relevant this week in markets and then tee up what I'm planning on doing in next week's Dividing Cafe, which I'm already excited about it.

As far as this week goes, on Thursday, the President via speakerphone announcement basically announced that the deal with UK, this trade deal with the United Kingdom is done. It's a sneak preview of more things to come. What we do know, allegedly, is that the 25% tariff on steel and aluminum imports is going away. The 25% tariff on auto is going down to 10%. They're agreeing to buy a bunch of agricultural products, which is a lot of money, and they The 25% tariff on auto is going down to 10%. They're agreeing to buy a bunch of agricultural, chemical, industrial product, and we're agreeing to buy a fair amount of automotive imports, particularly from one major British company. And so the question I guess we have is whether or not... I mean, I think that framework probably is going to be somewhat applicable, not really big needle moving things, but some

issues that will kind of make a press release when all is said and done. The challenge though in saying like, okay, this is what we're going to get with India, this is what we're going to get with South Korea is we run a trade surplus at the UK. And President Trump has been saying for a long time that all of these countries that run a trade surplus with us are ripping us off, that we have a trade deficit with them and we're getting ripped off. And so, in the case of the UK, I doubt that they would follow the logic through of that and say, oh, we're ripping the UK off. But the point being that the kind of starting point is different enough that I'm not sure

that whole issue makes for a very good model on how the rest of it is going to play out with other countries. But we're going to see. I still would like to understand this deal itself better. And unfortunately, a couple of tweets and a speakerphone call don't really give me the meat on the bone I'm looking for. So I'll have more details when they announce more details, which may not be for a couple weeks. Here's where there is a bit more detail coming, although it's still most certainly not announced because it's not even close to being legislation ready. But I do want to share as it pertains to this budget reconciliation tax bill potential that

while the size of the tax cuts, the nature of the extension of the original Trump tax cuts, the amount of spending cuts that have to go therein with this whole thing to make it reconcile to a budget, that while all of those things are still to be determined, the fact of the matter is that they can get 100% expensing for capital equipment, no depreciation schedules. I think a very big story in terms of the incentive it produces for supply side growth, R&D expensing, dollar for dollar at the time of the expenditure, interest expense deductibility up to 30% of EBITDA, and more favorable rules around small business expensing. I'll get way into the weeds if I get into that.

Well, I'm hearing that this is teed up to be part of things and you go, okay, well, wait a second. How are they fitting this into budget reconciliation when all these other bigger issues that are more important to President Trump and bigger campaign promises and much more substantive in terms of their size and expense are not necessarily yet fitting in. Salt cap increased, obviously no tax on tips, not to mention the 2017 tax cut extensions. The reason is everything I just said, which are actually things I most care about, have already been scored by the Congressional Budget Office. They've already been scored at a zero dollar impact over 10 years.

The House passed this bill in 2024. The Senate never took it up, so it didn't become law. But those components I just listed with the various pay-fors that are included came out to actually a slight reduction in deficit over 10 years. So that part is not that politically problematic and yet I think much more on the supply side as far as pro growth, a more substantial part of what could be in the cards. Okay, so we know that Treasury Secretary Besant and US Trade Representative James Ingrier are in Switzerland this weekend and are scheduled to meet with Chinese Vice Premier He Lafing, who is their sort of delegated trade and economic representative for the matters at hand.

Obviously, an eventual meeting with President Trump himself and President Xi is the highest level, but what I had been concerned about is that the initial meetings would be with such junior level people on both sides that they'd be almost meaningless in being able to extract anything. I don't know what's going to come of the meeting. I don't know if it's going to be a handshake where we say, let's agree that we're going to have a conversation later on about having a conversation where we can agree to further on pursue agreement about a conversation in which we will one day agree.

If that's all that comes of it, it's a five minute handshake, photo op, water cooler thing, then obviously it's going to be very underwhelming. But if they do start to say, here's some substantive things we can do to deescalate, we're not close to a deal, we have 53 things we've got to work out, but while we're at it, let's immediately take the heat off with this and this. If that were to be an outcome this weekend, I think that would be favorable, and I think it would be a good sign of both sides showing their need to get to the table. Chinese exports to the US were down 21% in April.

So you would say, okay, that gives a lot of leverage to the US. China's getting killed here. But their total exports were up 8.1% in April as they were exporting more to Vietnam, Africa, India, Europe. So there's kind of enough in the data to give both sides pause as to where the leverage stands. I don't know what will come out this weekend. My general framework of what I'm expecting, which I have no chance of perfectly forecasting, either the sequence, the magnitude, the timing, and without those things, what I'm about to say is basically worthless, but that the US is going to drastically reduce the tariff levels the president is charging as a good faith step to getting negotiations going.

President Trump already throughout this morning, he wanted. is making a lot of the right statements. And that's the first thing that we're going to see. And that's the second thing that we're going to see. And that's the third thing that we're going to see. And that's the fourth thing that we're going to see. And that's the fifth thing that we're going to see. And that's the sixth thing that we're going to see. And that's the seventh thing that we're going to see.

And that's the seventh thing that we're going to see. And that's the seventh thing that we're going to see. And that's the seventh thing that we're going to see. And that's the seventh thing that we're going to see. all the right statements and all the right rhetorical and substantive commitments on fentanyl. Number three, China agrees to purchasing a bunch of US products, likely mostly agricultural and energy, perhaps some technological, that the US then lowers tariffs further. And then number five, that we settle for reciprocal tariffs, various waivers and exceptions, and that there's headline announcements about other new markets and new terms, but that the trade basically goes back to what it was before or very close to it.

Some tweaks around the edges. That last point I just made in my number five is so open-ended with so much variability in it that I freely acknowledge is almost worthless, but that's the general sequence of events without a timeline that I expect to play out. One of the things I want to get to as we get ready to wrap up is the currency discussion. I came into this year saying I thought the currency was a very underappreciated variable that could be used for some of the administration's policy goals.

They believe, both Secretary Besant and President Trump, that a strong dollar and weaker currencies from our trading partners is being used to hurt American competitiveness in trade. And one of the president's main economic advisors, Stephen Moran, believes that the dollar is just catastrophically overvalued. Well, look, the dollar is down 1.5% against the Chinese yuan over the last month, but it's up 20 basis points, 25 basis points over the last year. It's basically a flat line over a year. However, the Taiwanese dollar had its strongest week, so the dollar dropped the most against Taiwan's currency last week in history.

Had its strongest single day and strongest single week ever. You've seen the dollar drop against all of these emerging market currencies, Southeast Asia, India, et cetera, at varying degrees. South Korea, Taiwan have plenty of incentive to play ball with the US on currency. China and India less so. But my point is that what benefits with weaker dollar, weaker energy prices, central banks having this extra variability now where it's not going to weaken currency and they can be more accommodative in their own monetary policy.

I mean, imagine being able to lower rates if you're a central banker in emerging markets and it's not going to weaken your currency. Emerging markets are the big beneficiaries. Now they're already at 10% more than the S&P is on the year, but my point is that framework there, that's a really interesting perfect storm across a number of particular angles. So I still believe the currency aspect needs to be watched. Okay, dry powder. Very interesting that M&A, unsurprisingly, across investment banks and public company

acquisitions and whatnot, totally collapsed in April with all the tariff uncertainty and market volatility. But I would say that private equity buyouts were up 25% year over year, and they were up about double, 100%, from their normal monthly average over the last three years. Private equity has a lot of dry powder, came into the year with over trillion dollars of cash commitments. Private equity has private credit available to back deals, to fund deals where the bank loan market and the high yield bond market are tighter. And so private markets continue to represent an innovation in corporate finance that is

right now being used in what is a very slow and challenging M&A and activity environment. You're seeing increased activity both in size and quantity in the private equity space. It's very much worth understanding why that is. Finally, the argument says to where markets go here, I need to wrap up. You could very easily make a bearish argument that we're already at expensive valuations, the damage done to the economy goes longer and ends up being worse than expected, and various trade discussions get worse than they

are right now. There's plenty of possibility in that. And again, that's all on top of what's already high valuations. You could also say that the trade standoff ends, that the damage that's already done proves to be less severe than is feared, already priced in, that you get a little lower oil prices that stick, but you don't get deflationary force against you. That's a sort of Goldilocks scenario that threads the needle. I would not be betting on the worst case or best case scenario, but I never do bet on either.

And I do acknowledge about a are real and everything in between, and that nobody knows. No pundit, no analyst, no policymaker, and God knows no media. The headlines, the clicks, all of these things, those scenarios are not real. They're not real. They're not real. They're not real. They're not real. They're not real. that nobody knows. No pundit, no analyst, no policymaker, and God knows no media. The headlines, the clicks, all of these things, those scenarios are all out there, but there is real uncertainty

that could go in a lot of different directions, all of which lend themselves to the folly of market timing right now. Very good chart of the week this week on why the small business vulnerability with hiring is so severe right now. In the meantime, we chewed on a lot this week. I'm looking forward to a special Dividend Cafe next week about what we ought to really be able to learn from the investing legacy of Warren Buffett as he gets ready to retire at the age 94 at the end of the year. I will leave it there. Thank you so much. Thank you for watching. Thank you for listening. Thank you for reading The Dividend Cafe. Have a wonderful weekend, particularly all of you moms on Mother's Day.

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