The Dividend Cafe - Beautiful or Terrible Tariffs: A Truth Bomb

Episode Date: February 7, 2025

Today's Post - https://bahnsen.co/4hrygzX Deconstructing Tariffs: Economic Impacts and Investor Insights In this episode of The Dividend Cafe, host David Bahnsen, managing partner at The Bahnsen Group, delves into the complex topic of tariffs. Exhausted by the politicization and ambiguity surrounding tariffs, Bahnsen aims to deconstruct the economic impact of recent tariff actions and the risks for investors. He discusses the events of the past week, including the latest announcements of tariffs on imports from Mexico, Canada, and China, and their market implications. Highlighting the conflicting messages from the U.S. administration, Bahnsen outlines four key takeaways that explain the current stance on tariffs, their potential costs, and the resulting market volatility. He also touches on the broader macroeconomic and philosophical aspects of tariffs and calls for a balanced understanding of their impacts. Listeners are encouraged to consider the real-world economic trade-offs and market responses as Bahnsen offers insights into navigating the current investment landscape. 00:00 Welcome to The Dividend Cafe 00:42 The Complexity of Tariffs 01:05 Deconstructing the Political Noise 03:26 Recap of the Week's Events 05:48 Evaluating the Impact of Tariffs 07:12 Conflicting Messages on Tariffs 08:44 Four Key Takeaways 12:36 Sector-Specific Impacts 14:51 The Cost of Tariffs 22:46 Conclusion and Final Thoughts 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. Hello and welcome to The Dividend Cafe. I am your host, David Bonson. I am the managing partner at The Bonson Group. This week, I am absolutely, totally exhausted talking about tariffs. We have done a significant amount of work this week in the subject of tariffs because that was the topic du jour and it all came to a head over last weekend going into Monday day in the markets.

And I decided to devote today's dividend Cafe to the subject at large, because I feel that it's important that especially clients of ours, I care about everybody, but I care about our clients the most. And I feel that there is a understandable complexity and ambiguity around the issue right now that is making it very hard for investors to really narrow down what it is we're talking about, what is going on, what could be going on, what the risks are going forward and so forth. And I want to do something today that I don't get a chance to do very often, which is deconstruct what has become a largely political issue, but deconstruct it sans politics.

Really allow the noise of the political and the controversial to come out and just have a more specific talk about the economic impact and reality and the risk reward paradigm that exists for those of us who are of course investors. We'll start with what exactly happened this week and then move forward from there. And I hope the sequence in which I do this provides a little logic and simplicity to the topic at large. Easier for me to talk about tariffs outside of a particular moment in political reality, to talk about tariffs philosophically, to talk about what tariffs do, what they don't do, where they could be good, where they could be bad, and so forth. You don't really have a chance to have that conversation right now because what investors

most care about is, hey, is this thing that happened Monday real? Or is this thing that happened Monday going to happen again? What did happen Monday? Or what's going to happen a week from Wednesday? It's ad hoc. In 2018, the conversation was not about, let's pull out our old economics textbook and review David Ricardo's law of comparative advantage. It was not refreshing Milton Friedman, although I will say I put a link to a Milton Friedman

YouTube in dividend cafe today and I did it for a very good reason. But it wasn't philosophical in 2018. It was what tariffs are going through in China and what's it doing to the market and what's it mean for US manufacturers? And that I think is the situation right now that I have this desire constantly to talk about macroeconomics and do so from a philosophical standpoint and then bring it down to microeconomics where it impacts investor portfolios. But we have this analogy I use, which is a very overused cliche, I understand, but in

Divya Cafe today I talked a little bit in the introduction about Lucy moving the football. How do you get a chance to talk about the macroeconomic impact of tariffs that never happened? How do you get a chance to talk about the macroeconomic impact of tariffs when you're talking about macroeconomics one day and you're talking about drug policy the next, or national security or border control. When you're talking about computer products from China or avocados from Mexico, these just are different conversations. And so trying to narrow it down and become a bit more

coherent, I think would be useful. And so let's start with the recap of this week and allow that President Trump, we actually started last Friday and the Dow and markets were down on Friday at the end of the day in response to the rumors and reports of some Trumpian tariff impositions. But then they became reality over the weekend. And when I say reality, I should use air quotes. But over the weekend, it was said, there's now nothing that can be done. We're done. We're going forward midnight Monday, so meaning going into Tuesday. Both Mexico and Canada face 25% universal tariffs on all imports coming to the US, except for Canadian energy would be 10%, which I would point out changes the definition

of the word universal. And then additionally a 10% tariff on Chinese imports. And there wasn't a lot of clarity as to what would be included, not included there, and where tariffs that have already been added under section 232 would be adjusted and whatnot. So futures dropped a lot, markets Monday morning were down a lot, and then they opened Monday down, but then they didn't stay down because I think it was an hour and a half into the market day that Mexico announced a deal had been worked out where the tariffs would be suspended, not happen, and they would be providing border reinforcements and troops.

I can't remember if the fentanyl czar is part of the Mexico deal or the Canadian deal, but there's some sort of czar of fentanyl involved and all that kind of stuff. That took place in the middle of the Market Day Monday. Markets came back and the Dow ended up. And then after the market closed almost immediately, Canada announced something basically very similar. So you ended up all on Monday getting a microcosm of a really important idea of what's going on right now, which is I'm going to summarize these things in four basic points.

I'm going to wait to do that. What I would say is it's very hard to evaluate the impact of these tariffs when they haven't happened and we don't know anything will happen. And then a lot of people want to say, look at the genius of what took place. But that does become a political question. And I have a lot of respect for people that say, this clearly worked out very well. President Trump got a big victory. It's indisputable he did get a political victory net that more people see this as him having

gotten something without having to give up a lot than don't. And obviously there's some who don't think he got a lot and it was just saber rattling and hyperbole to claim a rhetorical victory, a cosmetic victory, whatever you want to use. But the truth is I would guess somewhere in between. And that seems to be the case all the time these days. There's people who hate President Trump that say this is all nonsense. There's people that just adore Trump that think he just pulled off the greatest art of the deal ever.

And my view is not because I'm just constantly trying to land somewhere in the middle, but in reality, there was something accomplished and it probably wasn't earth shattering. And I don't feel like that's a very controversial statement and it is somewhat apolitical, but it isn't relevant to the market side of it. It doesn't help us evaluate what investors ought to be thinking about the current tariff moment or even if we're in a tariff moment. What we hear is two things being said by the administration, and they're said at once, but the two things do not, cannot coexist.

That is one, tariffs are beautiful. They're this great source of revenue we can't wait to get. We're going to make trade deals fair with tariffs, and they're going to bring money to the US from other countries. Those countries are ripping us off. We're going to get money from them, and all of the while, it's going to protect American jobs. That's one theory of the case that is being said, but then also being said, not in replacement of, but in addition to, it is said tariffs are a negotiating tool tool and we don't want to use them.

We're just using them to extract concessions from allies and adversaries. The current focus in that is of course things like immigration or border security. So the National Economic Council director, Kevin Hassett, was on CNBC Monday morning saying exactly that, saying this is not a trade war, it's a drug war. I thought that makes sense and I don't mind hearing that. But then even Pete Navarro, who's one of the most protectionist people with any kind of access pass to the Oval Office, said the same thing. And he has explicitly said over the years how effective tariffs are and how good it

would be to not trade with foreign countries. And so there is all at once a conflicting message going on. And I don't believe both can happen at once, but then I'm forced to try to extract some investment messages here. And so that's where these four takeaways I want to offer to you are there and allow you to see for yourself how we want to apply these things into what we're doing with the portfolio and the way we think about markets. Number one is that the indication thus far is clearly that hyperbole, rhetoric, and audacity

notwithstanding, the new administration favors tariffs as threats more than tariffs as policy. That could change. That's most certainly been the indication so far, no matter what gets said and flexed along the way. Number two, cosmetically, this approach has generated headlines and real policy concessions that President Trump loves. The thing with Columbia a week ago, this thing this week, of Mexico and Canada. Number three, market volatility skyrockets at the threat of tariffs and more specifically the uncertainty around them. Even with this concession now and the 30-day waiver and the hope and belief that Mexico

is going to provide troops and they're not going to go forward, there's economic activity out there that's not happening because people don't know exactly where this thing is going. So it has some uncertainty cost associated with it. Number four, the president of the United States is as concerned with market response to tariffs as foreign countries are with tariff impact on their economies. So essentially, when you combine those four things, I think it helps inform the way one ought to think about tariffs. Now, when you unpack the data around it all, at one point, 22% of China's exports were coming to the United States.

It's now only 15. So we're a lower percentage of their customer base than we used to be, but we're still a significant. You can imagine no business wants to lose 15% of their customers. It's not really primarily things like food. When you look at where food and energy are what drive the headline inflation that is most politically problematic, tariffs on food and energy are not likely to happen with China, and so there's less of inflationary risk there, but the lion's share of what we do import from China are in the computer electronic product space.

That's about 30% of our imports from China, and less so things like chemicals, rubber, leather, metals, but those things all put together out of something. Textile, apparel, clothing, that's 10%. Electrical equipment, which is different than electronics and computers, electrical equipment is another 12%. So those are the categories that are more pertinent. But then Mexico has become our largest trading partner in terms of who we import from. They were about, I believe, 10% just a decade ago, and now they're 15% of our imports. So they've increased their share a lot while China's come

down. But 50% of our motor vehicle imports, which is largely parts and components, come from Mexico, China, Canada, the three countries together, which is mostly Mexico and components come from Mexico, China, Canada, the three countries together, which is mostly Mexico and China there. With Canada, by the way, it's largely energy. Oil and gas is 25% of our imports. 18% are transportation equipment. There's negligible relevance with Canada on computer, electronic, and all that. So definitely with Mexico, the largest is the automotive side, 34% of imports are transportation oriented. But the thing I wanted to point out is from a stock market standpoint, the MAG-7, those big huge tech names that are such an important part of the S&P, they're currently 55%, seven

names of the Russell 1000 index, the growth index, and 34% of the S&P 500, 7 names. And they have virtually no revenue relevance with Mexico or Canada at all, but a significant amount with China. So there are certain sectors, certain companies that are more impacted if some of these things were to happen than others. But again, the issue that I want to share with you that I know is subject to people pushing back on, because these people will give me an opportunity to look bad. So please hear me out. I believe Secretary of Treasury Scott Besson is a free trader at heart and mind who knows

that tariffs are a cost on the US economy. I believe Kevin Hassett, the National Economic Council Chair, believes that. I believe that Stephen Moran, the Chair of the Council of Economic Advisers believes that. And I believe all three will on occasion in the moment and somewhat understandably for circumstances that I hope you can get, will have to say things that sound a little bit more economically nationalistic. Will say things that have to sound a little more protectionist, but that I do think they

know that trade-offs are at the heart of all economics. They are the crux on which economics turn and that there are trade-offs involved with tariffs. What do I mean by trade-offs? It's the reality of scarcity. Economics is the allocation of scarce resources. And this is really all you need to know about economics is that human beings are out acting and reasoning around this law of scarcity and they're allocating resources because of

the reality of scarcity and they're trade-offs. You have to get rid of something to get something. And with tariffs, I think that there are people who fall on my side of this issue, which is that, how do I say this? Tariffs come at a big cost and it is not worth it. There are some who believe tariffs come at no cost at all. They are the people who should most be ignored. There are people who believe tariffs come at a cost, all. They are the people who should most be ignored. There are

people who believe tariffs come at a cost, but it is worth it. And then there is the political moment now where it's not really so analytical. It's not really so philosophical. Let's throw it out there now, see what happens, adjust. It's a little more chaotic. And I disagree with those who believe we can implement $150 billion of tariffs and that the cost will be worthwhile to some other agenda, but I at least think they're intellectually honest to acknowledge the cost. My intent here is to say that the cost is significant. Now people will say, but what about 2018? It didn't seem like things were that bad.

Look how good the economy was in 2019. However, it was a very minimal amount of tariffs with, and I put links all through Dividend Cafe for you to see this for yourself. I didn't go to left-wing press. I didn't go to right-wing press. I didn't go to commentary. I put the US Trade Representative governmental page. There were so many exceptions and exemptions. There were $27 billion of subsidies given to the farmers who were hit hardest by the retaliatory tariffs. The 2018 case is proof of my side of this issue. Their costs to the tariffs were so high that they did everything they could to avoid the cost. The cost to the tariffs because of the inevitable retaliation was so high, they went and had to go have taxpayer fund subsidies to help the people most negatively impacted.

So there cannot be any serious denial that there were costs. And as you see in the chart of the week in DivCafe, the domino effect of it all took down ISM manufacturing in the US and it stayed down. And so I do believe that the 2018 analogy is very disingenuous, but I also would just point out the magnitude of it is such that we don't have any kind of apples to apples analogy. I don't know if I need to be making this point because my earlier point that President Trump, number four, is very focused on market response. Point number one, that they're mostly interested in tariffist threats, not tariffist policy, it largely seems to make a lot of this moot.

But I don't think the conversation is going away. I don't think the threats are going away. I don't think the media coverage is going away. I don't think the uncertainty dynamic is going away. And so if people are just asking, do you really think there would be this sort of response, I think it's very much worth pointing out that I do. And the answer is the reason for that is no more complicated than the obvious fact that taxes, tariffs are taxes and they come at a cost.

And to the extent someone says, yeah, but it does something we like, not the threat of it that gets us a better drug deal in Mexico. But the actual tariffs, that it protects a certain American actor, it does not do that without hurting another American economic actor. And that's the problem is I would love to be able to make this point by demonstration, but it's non-falsifiable. The claims that the tariffs have no cost is non-falsifiable if they never happen. People ask me, are you petrified? Do you think you go to global trade war?

You think these things could be complex and problematic and downward pressure on economic activity and animal spirits? First of all, I do believe of course correction would be quick if something were to fully happen. I don't know if it'd be as quick as Monday. That lasted about five minutes.

But again, that wasn't done from the vantage point of we're going to go use tariffs for revenue. We're going to go use tariffs for trade policy. It was done from the vantage point of we're going to go extract border security. Once they got that victory at whatever rate, one to 10, you want to give the victory, once that was done, it moved on. Should we go forward with a full blown situation, I stand on the side of the invisible effects being problematic. That's not to say I don't acknowledge there would be visible effects. Some may believe it would help protect a certain economic actor, but the assumption

that exporting more than we import would be good, and the better way to put it is that importing more than we export is bad, is itself an economic fallacy. I think it's usually a well-meaning one. I've met some people that know better that say it anyways, and I think it's usually a well-meaning one. I've met some people that know better that say it anyways, and I think they're intellectually dishonest. But for the most part, I think people are coming at this from a good place, but it's really problematic. Good intentions don't help. It is not true that to import more than you export is a bad thing.

But regardless, when one manufacturer in the United States benefits from us hurting a foreign competitor with tariffs, I do believe the price goes on to American consumers, but I also believe retaliatory tariffs hurt other US-based manufacturers that are in the business of exporting goods. So you're just picking winners and losers. There's no option in the box that you're checking a win for US economic actor A and a win for US economic actor B. There's not that option because of tradeoffs. Now I do want to say that having a national policy framework that avoids any kind of supply chain dependency that is relevant to national security, vital goods and services for the

national health, the national defense, pharmaceutical, there's all kinds of things out there that involve a lot of complexity and nuance that don't involve tariffs and are not rooted in, let's go pick a winner or loser in the economy that I'm in favor of. So this is not to say that there is not room for some national policy around national security. However, that is just simply not what's happening here. Are all these tariffs really on the table now? I don't think so. Will there be an enhanced volatility like we saw with this Mexico Canada thing? Again, maybe. Will there be one when we get around a more substantive deal with China?

I think there will be. I don't think this is done. Markets though are the great mediator and the president of the United States cares about markets and some can say he shouldn't, some could say he should, and some could just say he does. That's my view. And I think there's a lot of competing voices in the president's ear. I think that there will be up and down movements, not just in the way the press covers it and

the way markets respond, but in the actual flow of consideration in the Oval Office. I think that's just something that's been embedded into the reality of this particular president for good or for bad. Ultimately, it's my belief societies get wealthier when they freely exchange more, not less. And I believe that those who disagree with that statement have a privilege that many don't have, which is their theory doesn't have to be case tested in the real world, at least not yet. Thank God. Thanks, as always, for listening to, for watching, and for reading The Dividing Cafe.

I do, by the way, believe there's other additional questions that might exist about tariffs. I wanted to keep this simple enough to focus on market considerations, what the framework is right now, where I see things going, and I've tried to do that in a simple and succinct way as I could. But if people want to ask about IP theft, if people want to talk about unfair trade deals, whatever that means, if they want to talk about how our founding fathers use tariffs, comparative analysis of a tariff system versus income tax. I'm open to all those questions. And if I need to do a part two on this, I will.

We'll see what the feedback is, questions at thebonsangroup.com. But it also may be that you guys are as exhausted by this topic as I am. So we'll see where it goes. It's a political moment. It's a noisy moment. We're in early stages of a new administration. Lots to go here, but I stand by the reasoning I've presented to you today around both my view of the tariff subject, but also what we should expect in markets now and expect in terms of the real machinations of this administration.

Thanks again. Have a wonderful weekend. We'll see you again next week in the Dividend Cafe. LLC, advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research

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