Is The Chaos Of Trump's Tariffs An Intentional Negotiating Strategy?: CIO Gives His Take

2 days ago

David Bahnsen, the founder, managing partner and chief investment officer of The Bahnsen Group, joined Forbes senior editor Maggie McGrath to talk about President Trump's announcement of a 90-day pause in most tariff implementation and the market's reaction to the news.

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00:00U.S. equity markets are surging Wednesday afternoon on the heels of President Trump

00:07announcing a 90-day pause in the majority of his reciprocal tariffs. I'm Maggie McGrath,

00:13Senior Editor at Forbes, and joining us to discuss these very new developments is David

00:18Bonson. He's the founder, managing partner, and chief investment officer of the Bonson Group.

00:23David, thanks so much for joining us on a breaking news Wednesday afternoon.

00:27Well, thank you so much for having me. Good to be with you.

00:30So let's talk about what we're seeing first in the equity markets right now. S&P,

00:34Dow, NASDAQ, all up north of 6% following the President's announcement. What do you make of

00:40the equity market reaction right now? Well, you know, it's funny. We got a little

00:44sneak preview of it Monday for a brief minute when there was a false report that they were

00:49doing a 90-day pause, and markets had been down thousands of points, immediately spiked higher,

00:54and then markets, of course, continued in retreat when they found out it wasn't the case.

00:59The announcement today, after several days of assurances from the President's advisor,

01:05Pete Navarro, that no such announcement was coming, essentially does what a lot of people

01:13wanted him to do to begin with. It isolates China from the rest of the country. So it maintains

01:18the positioning and the more aggressive posture with China, but stops some of the, what I consider

01:25to be insanity of what they were in the midst of doing. It's impossible to time the market and to

01:33know exactly where it's going, but does that dichotomy between what Navarro is saying and what

01:37President Trump is now posting on social media, does that give you concern for future volatility

01:42and swings, or what's your projection for what the market may do the rest of this week?

01:47No, that's a fair question because it speaks to not just that specific example of what the President

01:52is now announcing and what Navarro's been saying, but it speaks to the whole climate that we're in,

01:58where Treasury Secretary Besant says one thing on a Sunday morning news show at 7.30,

02:02and Commerce Secretary Howard Lettening says something different on a different news show

02:07at 8 o'clock. There is a certain chaotic dimension to this that lends itself to uncertainty,

02:15that lends itself to the possibility of reversals and whatnot. Part of it is that President Trump likes

02:23that style. I do not think he has liked the last four or five days, and I think that's where this

02:28announcement is coming from. But investors that are trying to trade around this should be extremely

02:34careful, unless they think they're inside the President's mind. I'd be very careful thinking you

02:41know what President Trump's going to do next when I can assure you that he doesn't know what he's going

02:45to do next. He doesn't know what he's going to do next. So is the chaos the point?

02:51It is a point. It's a means to an end. It isn't the end. I mean, I, you know, I'm sometimes critical

02:57of the President. I'm sometimes very complimentary. I do my best to call balls and strikes. But no,

03:02I don't believe that he does chaos for the sake of chaos. I happen to disagree with him that chaos is a

03:08great means to an end. But I still think he's end focused. It's just that the ends he's focused

03:14on are not always ones I agree with. I don't believe that the United States has a problem

03:18with foreign countries ripping us off just because they sell us more things. And that's partially what

03:25you're seeing right now in this market recovery is and why you saw the market sell off of the last

03:30four or five days is that last Wednesday afternoon in the Rose Garden, he announced that Switzerland

03:36was ripping us off, that Vietnam was ripping us off, where they have very low tariffs, in Switzerland's

03:41case, no tariffs. And the markets were not expecting that those countries were going to be included that

03:48way. But where does it come from? What is this end he's after? He believes that a country selling us more

03:54than we sell them is itself problematic. And I don't agree with that. So yes, the chaos is a means, but not

04:01the end, but even the end itself is sometimes nebulous. The end itself is nebulous. Very well

04:07put. What do you make of this 90-day pause? Over the last four or five days, the major Wall Street

04:12banks have been increasing the percentage odds for a recession this year. The recession word has been

04:19used a lot. Does this pause come in time to maybe stave off a recession, in your view?

04:25I hope so. I don't think so. I think that there's already been enough of a decline in capital

04:31expenditures, in capital goods orders, in hiring, in R&D, that there's just a good possibility

04:40of a mild recession already. Because I say this all the time to clients, demand can almost

04:47be turned on and off with a light switch. Supply cannot. And I believe that we've likely impeded

04:54production enough through this period that we're going to see a bit of a downturn. However, if we end

05:00up spending 90 days not going into that high tax, high tariff, high regulation insanity we were about

05:07to do, and Congress gets a tax and budget reconciliation bill done, and we end up coming

05:13out of this with some positive announcements about trade deals, lower trade barriers, lower trade

05:19impediments with the European Union, with Canada, with Vietnam, with India, et cetera, you could end up

05:25having a better outcome on the other side, and the recession could end up being much shorter and

05:30more shallow than I have been fearing. Shorter and shallow, but nonetheless still there. I want to ask

05:38you about specifically something President Trump said about China. Amidst this announcement of a 90-day

05:44pause, he said, quote, based on the lack of respect that China has shown to the world's markets,

05:50I am hereby raising the tariff charged to China by the United States of America to 125%

05:56effective immediately. David, what do you make of that part of his announcement?

06:03Well, it's clearly a flex negotiating tactic. China's been flexing back. I believe the president

06:12got bad advice, primarily from advisor Pete Navarro, perhaps from Secretary Lutnik,

06:18but I don't believe it was ever true that China was just going to lay down and take this.

06:24They do have more to lose than we do. It's just that the cost to them losing isn't as severe. The

06:30American people don't tolerate economic pain. They certainly don't tolerate inflation.

06:35And the political structure of China as a communist country enables them, I think, to dig in a little

06:42bit deeper. So I agree that they have economic vulnerabilities that are going to be exacerbated by

06:49a trade war. But I also agree that they're willing to take on economic vulnerabilities. So, look, ironically,

06:56this language of lack of respect China showed for world's markets. Obviously, many people think that

07:03what we did last week in the Rose Garden was not super respectful of global financial markets.

07:08At the end of the day, I think President Trump's trying to get a better deal with China and we're going to

07:14have to see how this plays out. But this is not something I can make a prediction on. And it's not something

07:19people in the Treasury Department, in the Commerce Department, in the National Economic Council can make a

07:25prediction on. It is that wild right now and erratic how much it's moving around.

07:30When you talk about supply and demand and demand can stop, if the 90-day pause affects the majority

07:37of countries, but we still have these very high tariffs on China, do you have any prediction on

07:42what that will do to the American consumer or consumer sentiment?

07:47Well, it's going to make prices go higher on certain things. Some of it depends on the implementation,

07:53which I'm very unclear on right now, how they're going to collect. Are there exemptions? Is there a

07:58process for waivers? See, a lot of people use the 2018 tariffs of China as a parallel. And they say,

08:05well, prices may not go up a lot because we did these other tariffs in 2018 and they didn't.

08:10But they don't realize that we granted over 1 million waivers, exemptions, exceptions. And of

08:16course, they were giving subsidies, I think $27 or $28 billion of subsidies to farmers. So how this

08:25happens is a big question? I mean, if the question you're asking me is, what would happen to consumers

08:30if we literally had China tariff us 84% and us tariff them 125%, it would be substantially problematic.

08:39But the reason they're going to these extreme numbers is it's sort of a mutually assured destruction

08:45policy. You go to those numbers because you can't. Neither side can. And so it's supposed to force

08:51them to come up with some sort of detente sooner than later. Is this an effective negotiation strategy

08:58in your view? I've given up on trying to offer my own commentary on President Trump's negotiating

09:04tactics. Because what happens here, if I can just be a little political, is the fans of the president

09:11will come and say he got a great deal done. And the detractors of the president will say he accomplished

09:16nothing. And the truth is always somewhere in the middle. You can't ever answer. If you get some

09:22sort of deal, it doesn't mean the negotiation worked because you have to compare it to what

09:26you could have gotten if you hadn't done it the way you did it. And that's, to me, what I think

09:31gets missed in the conversation. I believe that we could have done this much better than we've done

09:36it. And no matter what the outcome ends up being, we could have gotten a better means and end. Yes.

09:43Better means and end. Now, over the past few days, you've been collecting stories from small business

09:50owners and entrepreneurs about how the tariffs are already affecting their businesses and how

09:55they're planning for them. Now, obviously, this 90-day pause kind of shifts the landscape a little

10:00bit. But I'd love to hear from you what has stood out to you amid these stories.

10:05Well, there's a lot of different moving parts to it. And they're different stories in a lot of ways.

10:11And then they overlap. The way in which certain aspects of stocks have behaved, the fact that the

10:15very high valuation stocks that were already a bit overpriced got hammered the most, and that a lot

10:21of investors out there who didn't believe stocks can go down, they've never been investing in a real

10:26downward period. And they thought Nvidia just would eventually be a $50 trillion company or something.

10:33I think a lot of people learned a lesson from this experience. And it's not like it's over yet.

10:37We don't exactly know where everything's going to go. But as far as on the global stage,

10:42I do have a concern as to lumping together the way we're dealing with allies and with adversaries.

10:52And that's why this news today is very welcome. If there's room to improve certain deals or limit

10:58non-trade barriers, non-tariff trade barriers with some of these countries, I'm all for it.

11:05Okay. But that should not be as part of the same process in dealing with China. And that's really

11:12what I think has been a big takeaway here is you want to deal with allies differently than you deal

11:18with adversaries.

11:19Some of the people who wrote into your request for stories from small business owners talked

11:26about passing the costs onto their consumers. Others talked about the cost of goods potentially

11:32doubling. After reading some of these and after looking at the market reaction today, what's your

11:36advice to those who have a company, who have a small business, who are looking at their supply chains

11:42and this whiplash of news? What should they be doing over the next days and weeks?

11:48Well, business owners, this is the beauty of myself, what's called a Hayekian economist,

11:54a follower of Friedrich Hayek. I believe that knowledge is very broadly dispersed. And so the actions that

12:01come from knowledge are going to be dispersed. I don't want it centralized with President Trump,

12:06with President Biden, with the White House, with Congress, with some bureaucrats. I don't want it

12:11concentrated or centralized with me. The beauty of this approach to a free and open market is that

12:17business owners, what they should do, they're going to have the most time and place circumstance

12:23familiarity to make those decisions. They know their suppliers, they know their vendors,

12:28they know their customers. So they can make decisions on what to do with payroll, with cash

12:33flow, with capital expenditures. When you go to a central planning approach that's one size fits all,

12:39you get a misallocation of resources. You get decision making that is suboptimal because there

12:45isn't enough knowledge in Washington, D.C. about what's going on in Sheboygan, Wisconsin or Tucson,

12:51Arizona. So I want local businesses to be able to make those decisions and they have to do it the way

12:56all of us do, by measuring opportunity with risk. We want to be defensive, we want to be prudent, but at the

13:07same time, look to be proactive and opportunistic. That's sort of the mindset of an entrepreneur. You can't be

13:13proactive and opportunistic when everything is about playing defense, when everything is about whether or not you're

13:19even going to get goods imported that you desperately need to stay in business, when you're worrying about

13:24making payroll, when you're worried about your bank cutting off your credit lines. So the more they can

13:30play offense, the more we can grow the economy, grow profits, grow jobs and ultimately grow wages. That's

13:36why I believe my approach to this is pro worker. And the idea that we're trying to help workers with this

13:44heavy command control economy is ironic. I think it's hurting workers.

13:49Recognizing that there's also no one size fits all advice for investors, I would love your words of

13:55maybe comfort for those who are reeling after looking at their 401ks this week. Is there anything

14:00that you would say at this moment in time to America's investor class?

14:05Unless you were getting ready to pull out all of your money to buy a boat next week, what your

14:10retirement account is doing in a few week period, while emotionally difficult and turbulent and

14:17understandably unnerving, it isn't actually materially relevant. Most people have retirement

14:23accounts for a long period of time in the future where they will begin accessing it for a long period

14:29of time. So what it's doing in a short period of time, no matter how violent, it actually isn't

14:36something that materially, even though emotionally, it matters. It materially should not. Panicking,

14:43going to cash, disrupting what was hopefully an already good financial and investment plan,

14:50those good and appropriate investment plans should be held and your behavior is what can hurt the plan

14:57by panicking at the wrong time or getting overly euphoric at the wrong time. So this allocation that

15:04you use in creating a 401k is very, very important. And unfortunately, about every five years or so on

15:11average, we go through periods like this. It's exactly five years ago now that we went through

15:16that month from hell with COVID. And markets dropped 36% in 31 days. And the fact of the matter

15:23is that COVID, this trade war, those aren't the only ones we've gone through. Going back over the 50

15:30years I've been on planet Earth, it's happened about every five years. I've gone through four or five of

15:35myself in my 25 years professionally managing money. And I think that investors can hurt themselves by

15:42taking rash actions. Very well said. Obviously, this afternoon's news is breaking. So there's a lot

15:51to digest. But I'm curious, what will be the primary questions that you will be asking over the next day,

15:58two or seven? What's at the top of your mind? Oh, it's got to be about China at this point. I mean,

16:03if there's a 90-day pause, you're just going to have to take for granted that in that 90 days,

16:09they're not going back to another Rose Garden speech where they announced that they're going

16:12to stick it to Cambodia again. I mean, that is out there. But I think that's now a very far left

16:19tail risk. The lower hanging fruit for where we are immediately is how this is going to be resolved by

16:24China. We threw the first punch, they punched back, and now we're in a trade war with the two largest

16:32economic powers on earth. So there's much wood to chop here till we're out of the woods, no pun

16:38intended. A good pun nonetheless. David Bonson, thank you so much for joining Forbes on a busy

16:44news day. We so appreciate your time and your insight. Thank you for having me.

Is The Chaos Of Trump's Tariffs An Intentional Negotiating Strategy?: CIO Gives His Take

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