The Dividend Cafe - Special Tariff Monday - February 3, 2025

Episode Date: February 3, 2025

Today's Post - https://bahnsen.co/42GZ7TT Tariff Monday: Analyzing Recent Tariff Developments In this special 'Tariff Monday' episode of the Dividend Cafe, host David Bahnsen discusses the recent escalation in tariff declarations by President Trump. The episode covers the impact of these announcements on the stock market, including significant drops in the Dow, S&P, and Nasdaq. Bahnsen explains the invocation of the International Economic Emergency Powers Act for imposing tariffs on imports from Mexico, Canada, and China. He also delves into the economic implications and potential legal challenges surrounding these tariffs, while urging listeners to focus on the broader economic impact rather than political opinions. Bahnsen announces plans for a more in-depth exploration of tariffs in the upcoming Friday episode. 00:00 Introduction to Tariff Monday 00:29 Market Reactions to Tariff Announcements 00:53 President Trump's Tariff Strategy 03:08 Economic Implications of Tariffs 06:14 Market Summary and Analysis 11:31 Future Outlook 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. Hello, and welcome to The Dividend Cafe. I'm your host, David Bonson. We're doing Tariff Monday. All things tariffs. I didn't even do a Fed section or housing section today. We still have economic data, market summary, the top news, and some of the other things

that we normally would have in the Monday Dividend Cafe. There is a question from a reader that is addressed in the Ask TBG, but it's a little different today in the Dividend Cafe because of the tariff issue. But I will tell you, if someone were looking at the market at the end of the day and said, oh, the Dow was down 120 points, S&P was down 6%, a little bit more severe. The NASDAQ was down 1.2. It would still feel like a normal down day

that was tech heavy on the downside. You wouldn't know it was newsworthy per se. It would just feel like a regular down day, not even a particularly bad one. But what happened that has caused me to want to devote today to a discussion of the events of the last 24 to 48 hours, and why I'm going to do a more exhaustive

dividend cafe on tariffs this Friday, is that President Trump took it one step further in the last couple of days, not announcing promises or intentions or this and that, but he said, we have hereby implemented and actually appealed to, I want to tell you the name of this particular act he was utilizing to legitimize the Declaration of Tariffs, the International Economic Emergency Powers Act, to say that he was implementing broad-based universal tariffs on all imports from Mexico

at 25%, all imports from Canada at 25%, except for energy imports, which would be at 10%, and then all imports from China at 10%. Now that was what he said over the weekend. There was talk of this going on Friday afternoon and markets dropped 300 or 400 points late Friday around the chatter. And then it appeared to be quite serious over the weekend. And futures last night were down between 600 and 700 points in the Dow, with the NASDAQ being on a percentage basis, much worse than that. And there was a lot of hand wringing over what would happen.

This morning by 4 a.m. Eastern time futures were still down 600, 650 and all the way up to the opening bell stayed in that range, ultimately opening down more than 400 points, worsening from there. down more than 400 points, worsening from there. And so there was a lot of reason to have this issue front and center. Before the market even opened today, I was live on television saying that I still believe there was a chance these were threats with Mexico and Canada to implement another domestic policy agenda.

Kevin Hassett, the National Economic Council director, had been on CNBC saying the same thing, that it was not a trade war. It was that they wanted to control the inflow of fentanyl and get more assistance in controlling the border as it pertained to illegal drug trafficking. This is a very difficult thing to assess economically because there are times where the president clearly says tariffs are a great way to raise revenue, tariffs are a great way to balance trade, tariffs do these other wonderful things. And then there are times when his own key people, Secretary Besant, Kevin Hassett, sometimes even himself will say, hey,

we need the threat of tariffs to get other things done. And I've been saying for some time, it's very hard for me to understand. President Trump is a better negotiator in life than I am, apparently, because this is what he's done for a long time. I don't really truthfully understand how a threat works in a negotiation if the other side knows it's just a threat works in a negotiation if the other side knows it's just a threat, but pretend I don't know anything for a second, that the tariffs with Mexico and Canada in particular are intended to be a broader threat towards some other policy objectives doesn't

seem particularly controversial of a claim. And in fact, by about 10 a.m. Eastern today, it was announced that the Mexican terrorists were being suspended, that they were going to put some troops at the border to help secure the border as it pertains to fentanyl coming in. And so those terrorists were off. So we went down an entire path and then had to pull it away, but then they still can come back 30 days later and so forth and so on. The phone conversations with Prime Minister Trudeau of Canada continued throughout the

day and then ultimately just after the market closed, it was announced that Secretary Besant, Secretary of Commerce Howard Lutnick, Secretary of State Marco Rubio, the three of them were going to chair discussions with Canada over the next 30 days to essentially do the same thing, work out a broader deal that really satisfied the president that they were taking steps to secure the border. Am I supposed to talk about this from a market standpoint as to the effectiveness of tariffs as a negotiating tactic? That's not really what people pay me to do.

I want to be able to address the subject as to what tariffs are, what they do economically, about what tariffs are and what they do economically. And it's very hard to assess the impact of tariffs that don't happen. And as far as people's opinion as to whether or not this worked, he really got a good outcome. Even then, I don't really want to chime in because I think everybody under the sun is going to answer that question around their own political priors. I think there are going to be fans of the president say, see, he really got a great outcome.

And there are going to be critics of the president say, ah, it's cosmetic. There are already troops at the border. What did we really get? And perhaps there's a little bit of truth in both those perspectives, but I am so tired of all of it that I don't think it's helpful for me to go there. I really do think the more important aspect is the economic side, and that is really not the story here today. It could have been.

It looked like it was going to be three or four hours ago, but it isn't now. So when all is said and done, what we do know is before the sort of reversal, intraday, the dollar was up against the euro, the yen, certainly South American currencies, certainly against the yuan in China. The bond yields were a bit lower. They closed down, the tenure closed down one basis point a day, about one and a half basis points at 4.55%.

And the defensive sectors today were all up. Consumer staples was up 68 basis points, utilities, energy, healthcare were right behind that. Technology was down 1.8%, obviously a lot of trade-weighted implications with tech and with chips, not to mention they've been in the midst of their own turmoil anyways. So you don't really have a market day to evaluate here. What I would say is that the president doing a 10% carve out for the oil imports with Canada shows that he does believe there's a real economic impact.

I do not think he wants oil price inflation or energy inflation. So by cutting a separate deal on energy versus the rest of tariffs, they can end up doing things that are economically problematic, especially if they believe it's for a greater good and overall policy objectives. But I don't think there's anyone who doesn't believe that there's a cost here. President Trump last night said there may be some short-term pain we have to go through to get to a gain. And some people may agree with that as a policy objective or with the trade-offs that are involved. I don't really have anything to say about it other than I think it's the first time I've heard him say that there would be pain.

And in his press conference today, he asked how the stock market was responding. This is exactly what I wrote about in our year ahead paper, that the notion that there would be no impact at all in market volatility and the issue that everything was going to fall completely off a cliff and we'd be in a global trade war, that both those scenarios I consider very unlikely and that the truth would be somewhere more in the middle, where there would be up and down movement, volatility, tweets and pressers and announcements and headlines, and then some things that never happen, some things that might happen a little bit but then don't happen. And that is exactly where we are.

And if that changes, it changes, but that's where we are. And some people are going to be real happy with how we got here today and some people are not, but that's the case. Invoking the International Economic Emergency Powers Act to justify the tariffs will certainly be legally challenged. It's never been done before. And there are plenty of people that will claim legal standing to bring the challenge, because it would be those negatively impacted by tariffs. And that could be a lot of economic actors. So that lingers if this thing comes back around. Had the level of tariffs gone through, 25% Mexico, 25% Canada, 10% Canadian energy, 10% China, you're talking about $150 billion of annual cost to the economy.

That's the equivalent, my friends at Strategies Research tell me, of 10 to 11% more in the corporate tax rate. The 2018 tariffs, by comparison, total, you hear all the time those 2018 tariffs, they said were going to be so bad and they never did anything. They were $30 billion total in size. The government right now is spending $6 trillion. Let's say it was spending $4.5 trillion back then. The tariffs were

$30 billion. These were going to be $150 billion, five times the size. So there's also the fact that the 2018 tariffs were just filled with exemptions, carve-outs, waivers. So what kind of provisions get made this time for carve-outs is an important factor as well. Look, I think ultimately to solve the debate about whether or not tariffs are a cost to the economy and what kind of impact they'd have, you're not going to get it solved in hypotheticals.

And I don't know if it ever happens, if it does happen, how long it happens. But to go forward with a bunch of large and universal tariffs without exceptions and keep them on for a while, that would solve the debate very quickly. I happen to believe I know how it would end up, but I don't know that we'll ever get a chance to see, but I do think that's at this point what it would take to really solve that hypothetical. There's a chart at DivinityCafe.com. Peter Bukvar, morning economic reading I do every day, market macro, had pointed out,

there's a chart from Bloomberg, but he commented about how for all the people that say the 2018 tariffs didn't destroy jobs or didn't raise prices, and I'm pointing out how many exceptions there were, how short-lived many of them were, how small magnitude all of them were. But even the impact they did have, manufacturing fell, and it never has come back. It's still not back to 2018 levels in terms of the US's ISM manufacturing reading. So I don't know that people could say there was no impact. A lot of it depends on what category you're looking at, and a lot of us are looking at US manufacturing as one of our policy objectives. Certainly what I've heard. So check out that chart.

Oil prices were up earlier this morning, came down along when the dollar resettled, when equity prices resettled, all of these things trading in tandem around the tariff threat. So that's where we are. We'll see where markets wake up tomorrow. The market closed today, still believing the Canadian tariffs were up for grabs. And then the 30-day delay got announced right after the market closed there. We'll see if there's any relief with some of this tomorrow. Enhanced volatility, enhanced uncertainty.

30 days, by the way, may not be proved to be a gift. I say all the time, markets like to price in bad news more than they like to not know how to price in any news. And if we got to wait around 30 days to see where this goes, that could exacerbate volatility and delay certain risk asset decision-making. We're still plugging away. We're not quite to the halfway mark of earnings season. So there's a lot of things to expect that will play into markets in the days and weeks ahead. We'll be here for all of them. Thanks for listening.

Thanks for watching. Thanks for reading The Dividend Cafe, the special Tariff Monday. I hope it's invaluable for you. I welcome your questions. I'm going to do a deeper economic dive into tariffs in Friday's Dividend Cafe. Thanks so much. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC member FINRA and SIPC with Hightower

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