Dear Valued Clients and Friends,
This week, I am endeavoring to do something rather challenging in the Dividend Cafe. I do not want to simply repeat what the Trump administration is doing with trade and tariff policy (something will have changed by the time I hit “submit” on the piece), and I do not want to merely offer my own editorial take on the tariff policies (I generally do not like the ones I do understand and do not understand the ones I do like). Rather, I want to offer an idea of how we assess the total package of policies that have been (and will be) implemented. There have been a lot of moving targets. There remains a fair amount of uncertainty. And there have been partisan attempts to cheerlead on one side and declare failure on the other, way before it is time to do either.
But markets matter, here (I would suggest market discipline has been the greatest friend in keeping the administration from its worst temptations imaginable).
And economic impact matters. How this affects jobs, wages, economic growth, and any number of economic metrics matters.
The problem, as I see it, is that people are highly susceptible to confusing what they want to be or even (in fairness) what they sincerely believe will be with what will be. And what we want, and what we predict, are not necessarily what will be. So today I am going to offer some thoughts on expectations, how to assess it all, and, wait for it, when.
I will let the political hacks say things they don’t really believe about how great it all is and how horrible it all is. And I am totally fine with speculation, forecasts, and punditry. But for our purposes in the Dividend Cafe, today we will look at what will matter, so that at least when it is time to issue a real report card, we know how to grade the papers.
Let’s jump into the Dividend Cafe …
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No Revisionism Here
If I write a Dividend Cafe in a week, a month, or a year, saying that I was always on the side of the Trump administration’s policy on tariffs, it will be a lie. I have not been, I am not now, and I will not be in a year. I advocate for economic policy according to certain “first principles,” and those principles lead me to believe, in the context of marginal utility by which all economics need to be understood, that tariffs do more damage than good. A larger priority in my economic toolbox than what I oppose is what I support, and I support free exchange, mutual cooperation, and the rigorous pursuit of comparative advantage. I believe these principles have driven wealth creation in civilization for 250 years, and that is the fundamental story of the modern world. And I believe that, on the margin, more government taxation and regulation denigrates the freedom, choice, and exchange that drive prosperity. My high-level opposition is and always has been rooted in long-held principles I have no interest in abandoning.
He Said, He Said
Like most people, I have also had a hard time staying on the same page as the administration in tracking the intent of tariff policy. I have never been as opposed to “pretending to do tariffs” as I have been to real ones. The claim that tariff threats were a negotiation tactic has been made on and off, even as other claims were somewhat contradictory to that idea (i.e. tariffs will make us rich, tariffs will replace the income tax, tariffs will bring back all of our manufacturing jobs, tariffs will mean we make everything in America again, tariffs will protect our national security and critical infrastructure, etc.). As you can see, it is hard to formulate a monolithic response to what has largely been a lot of moving targets in the rationale for a given tariff policy, and if one believes the rationale has moved all over the map, they must really believe the policies themselves have (because they have).
But just as much as my principles are not altered by blowing winds, an honest pundit must be able to reflect on forecasts and contrast those forecasts to what actually transpires. Some pro-tariff advocates have claimed that U.S. manufacturing dominance is coming back, and we will have a chance to generate a report card based on their standard in the next year or two or longer. Some have claimed that tariffs will drive economic growth, or eliminate the trade deficit (heaven help us!), or eliminate the fiscal deficit (LOL?), and on all of these measures, objective assessment will be warranted. You should be able to tell how I think that review is going to go for those who made some of the more inane and untenable predictions.
However, the anti-tariff folks will be held to account as well, particularly when some finality or clarity is finally available as to what it is we are assessing. I said back in the immediate aftermath of the Liberation Day announcements that recessionary consequences were very likely if the President did not veer off of the path that he was on.
“While we have made it past [Trump’s] ‘Liberation Day,’ there is still no clarity on tariffs. … For a stock market that was craving certainty, there is now even more ambiguity than before this announcement,” said David Bahnsen, chief investment officer at the Bahnsen Group. “If the current slate of tariffs holds, a recession in the second or the third quarter of 2025 is very possible, as is a bear market [for U.S. stocks]. The question is, does President Trump seek some sort of off-ramp for these policies if and when we see a bear market,” he wrote in emailed commentary on Thursday.
Well, he obviously did veer. A lot.
The announced tariffs of April 2 were never implemented. The threats were delayed, and after those delays, wholesale carveouts, exemptions, and waivers were announced. The Chinese tariffs were walked back, and significant reductions implemented from where things stood at that point in time. Yes, various threats were held out there but after multiple changes, delays, reversals, and so forth, a lot of the economic impact that was feared never materialized, for obvious reasons.
This is not to say no tariffs happened. They did. As a matter of pure cost to the economy, it was worse in Q2 than it has been, even if that “worsening” is a tiny fraction of what was threatened at the beginning of the quarter.
But attempting to spike the football by taking April 2 fears around April 2 announcements and comparing them to July 30 reality is just dishonest. I say dishonest because that is a nicer thing for me to assume than the alternative (intellectual deficiency). The question before us in evaluating market impact and economic reality is gauging what has actually been done, what the goals are, and then how we will be able to measure it all in a reasonable amount of time.
Defining the Goals
I have basically made two lists in my office regarding the objectives or goals the administration had or still has regarding tariffs. I refer to one list as the “Pete Navarro list” and it really captures the elements that we have heard publicly stated most often over the last six months, including from the President:
- Elimination of the trade deficit
- Restoration of American manufacturing jobs
- Revenue to the Treasury
The second list I refer to as the “Secretary Bessent list” and it captures some different objectives around the various trade deals currently being announced. I wouldn’t quite classify it as “contradictory” to the Navarro list, but I certainly would say it reflects a substantial paradigm shift in focus and priority:
- New open markets for the U.S.
- More Foreign Direct Investment (FDI)
- Revenue to the Treasury
You will note that only the third item exists on both lists. Now, sure, there may be some lip service and occasional reference to some things from the “Navarro list” in Secretary Bessent’s communications, but I think these two distinct lists are pretty accurate and are profoundly important.
If the administration is to be judged by how the policies lower the trade deficit, or serve as protectionist barriers for certain sectors of the U.S. economy, I believe they will not be very happy with how that gets scored in the end. Nor do I believe those are pro-growth, useful, or productive policy aims. But if the administration is to be judged by the items on what I have called the Secretary Bessent list, there is a more noteworthy and meaningful objective at play that not only has a chance of being successful, but is actually positive for the U.S. economy.
The purpose of my forthcoming analysis is to suggest how we will know what the impact has been, and how to rate its success for the American economy.
The Economic Basics One Must Understand Here
So much of the discussion about tariffs as an economic winner or loser has centered on inflation. The debate has largely been a sort of frustrating (mostly confused) discussion as to whether or not prices would go up because of tariffs. Some of this discussion has confused monetary inflation with particular price escalations. And some of it has assumed that the only bad thing that could happen is higher prices for consumers, as if lower profits for businesses were not also problematic.
But besides missing the mark on how to think about [both] price impact and profit impact, the constant discussion of “inflation” also misses how all of this actually works.
Let’s assume that the overall demand curve were to stay level, prices on the items tariffed would go up (higher input costs, same demand). But if the overall demand curve were to decline, then prices will not go up, and in fact, they might even decline. Should there be a decline in the quantity of goods demanded, then there would be a decline in growth. The extent of the decline in demand would determine the total effect on prices and on total growth.
If the pressure on demand is severe enough, the underlying tension becomes one of either losing market share because prices are too high or cutting margins to try to maintain market share. Either way, aggregate profits decline. If aggregate profits decline, and this is basic economic stuff here, then factors of production must decline (labor, natural resources, capital), and the economic domino effect begins.
But I repeat – the magnitude of impact on the demand curve is the major (and mostly unknown) variable. That impact is largely based on “availability of substitutes” – and the speed of substitution. This is why tariffs impact some products, some sectors, and some companies very differently. The longer a tariffed product will take to substitute, the greater the impact to demand but less impact to price; the greater the substitution options, the less impact to demand but greater impact to price. In this conundrum, we find the great unknowns of how tariffs will play out over the next 6, 12, 18 months. High impact to demand or to price; or to both; or to neither. Good times.
Our Friends are not Our Enemies (duh)
There will be a simple way to measure if the intended realignment here worked or not, and it is not measurable now, or in the next quarter or two, and every honest economist knows this. If international trade volume declines, that means the intention of opening new markets failed. This will put downward pressure on aggregate demand, and foreign investment will decrease. We are used to talking about concerns with our trade deficit (for reasons that mostly escape me). But it is important to remember that our trade deficit is the lion’s share of our current account deficit (about 80%), and the inverse of our current account deficit is, by definition, real foreign investment.
Investment = savings, and we have three options for total savings: private, governmental, or foreign. We currently have about $30 trillion of foreign savings in our country – $18tn in stocks, $7.6tn in treasuries, $1.3tn in agency bonds (Fannie/Freddie), and almost $5tn in corporate debt. Foreign investment accounted for $9 trillion of U.S. stock investment as of 2019; it has almost doubled to $17.5tn in 2025. If this foreign investment declines in response to downward pressure on demand and the mathematical reality of a tighter current account deficit, the threat of declining liquidity picks up significantly.
So declining liquidity and capital flows will result from declining foreign investment, which would be the result of declining international trade. If the result of these deals is more trade (!!!!), then this will not happen; new markets will mean more trade, and the downside of the policies will be averted. If the end result is declining trade, the data will bear that out over time, and the results will be empirically visible as laid out (impact on savings, which impacts investment, which impacts growth).
The Heart of the Matter
One of the reasons the economic minds in the Trump administration are so concerned to see the Fed lower rates is that they understand these intertwining concepts, probably more than the President does. The President has his own reasons for wanting rates lower, no doubt, but I am certain that his team has a very holistic understanding of the things I am referring to. A more accommodative monetary posture is needed to prevent a decline in foreign investment, which will lead to pressure on savings, productivity, and growth.
Hence, Secretary Bessent’s huge priority is public messaging on FDI (foreign direct investment) and new markets being opened out of these trade deals.
Hence, the relentless public messaging campaign to accelerate a period of easier monetary policy.
Savings = Investment = Growth. Declining trade impacts demand (negative feedback loop). Declining imports impact foreign savings. And these two things (and either-or that becomes a both-and) represent downward pressure on growth. The avoidance of this in the face of higher tariff costs or greater impediments to business activity will have to be new markets, new investment, and, yes, some aiding and abetting from the Federal Reserve.
And I believe this is all the heart of the matter.
Along the Way
As I was writing this morning, the labor report came out reflecting a very weak jobs report for July (only 73,000 jobs created) and, far more concerning, a revision of the June number from 147,000 to 14,000!! That 147,000 print had been used to rebut those worried about the economic outlook, and to see 90% of it “revised” away is the stuff some friends of mine on the right used to make conspiratorial hay over (but, alas, not now, not now). No conspiracy is needed – it was not sinister – but it also is really bad. Many have been thinking all summer that the labor market is doing great, and in one report, two months of narrative have been completely undermined.
Is the economy growing at 3%? No, it is not. The Q2 number this week was a by-product of the reversal of trade imports from Q1 and the one-time numerical adjustments they each represented (i.e. front-running of tariffs in Q1 causing a nearly 5% impact to the GDP growth number, creating a -0.5% contraction in the annualized Q1 number; a reversal of that import number in Q2 now causing a 5% impact the other way resulting in a 3% annualized quarterly number for Q2; the bottom line: YTD, an economy growing at an annualized pace of +1.25%). Ugh.
The “trade war” is, for now, not happening. That was the reversal in policy of early April, and it explains the market rally of May-July. Out of what has been done, new taxes are in effect (tariffs) that represent a higher cost to the productive economy than had been previously anticipated, even if far less than had been recently feared. In concert with that, certain pro-growth provisions were part of the new tax bill that may offset some of this impact. Or may not. Are you detecting a theme?
Corporate profits are needed to drive capex. Capex is needed to drive productivity. Will the pro-growth provisions of the new tax bill (OBBBA) facilitate this? Will those facilitations be offset by tariffs? Will the trade deals being announced actually drive new production, or not? There will be no way to avoid the objective reality of this: If they do, it will be positive, measurable, and undeniable. If they do not, it will be negative, measurable, and undeniable.
And it will not be subject to political spin from the cheerleaders or the haters.
Concluding Thoughts
No, I have not varied in my core convictions. It is one of the advantages of having convictions. That tariffs are a tax is just basic vocabulary. And that they represent a cost to the productive economy is not debatable.
The question before us is less about whether or not certain products will see price increases, but rather what the interplay of demand erosion, price impact, and profit impact will be.
Out of that interplay, there will be an impact (positive or negative) on total trade. Out of that interplay, there will be an impact (positive or negative on corporate profits. Out of that interplay, there will be an impact on foreign investment. And whether or not savings (investment) declines enough to pressure growth will prove to be the primary economic determinant of this entire tariff saga.
Who could’ve seen this coming?
Chart of the Week
I received a dozen or so inquiries after last week’s Dividend Cafe, wondering why I thought part of the issues with the U.S. labor participation force were cultural more than economic. I addressed some of the non-economic aspects of this subject in my Capital Record podcast. The social, cultural, and sociological dynamics that are reflected here get ignored by economic commentators to their own peril.
Quote of the Week
“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
~ Winston Churchill
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It has been a very, very productive few weeks here in New York City, but it also has been the only time of year that I cannot stand New York weather. As a lifetime Southern Californian who went most of my life with one season (boring, perfect weather), the last eight years of bi-coastalism introduced seasonality that I have loved, and actually never complained about East Coast winters. But wearing a suit walking all over midtown Manhattan when it is > 90 degrees is not enjoyable. I will be back in our Newport Beach office next week and will spend the bulk of August and into early September there. I have a few ideas for Dividend Cafe topics in August, but still have more contemplation in front of me.
In the meantime, have a wonderful weekend and just know that when it comes to objectively analyzing the impact of current trade and tariff policy on corporate profits, total trade flows, capital investment, and economic growth. To that end, we work.
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
thebahnsengroup.com
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
