Tariffs and Bessent

It’s difficult to analyze the new tariff data when it is likely to change again in the near future. Trump’s Liberation Day tariff speech focused on a 10% general tariff and a series of reciprocal tariffs. Despite the supposed clarity of the numbers shown on the tariff chart, there are still many unanswered questions. We don’t know all of the exceptions, if those numbers are correct and will need to be revised, how other countries will respond and the degree to which there will be further revisions. The stock market’s reaction in the coming days and weeks will also affect Trump’s plans.

There is no blueprint for what the Trump administration has proposed. There is also no blueprint for the overall economic and political territory they are navigating. Trump’s tariffs aim to incentivize domestic manufacturing by making it financially attractive to invest in capacity. There are certain products that must be made in the US for national security reasons even if they aren’t profitable. Trump named them as ‘ships and chips, metals and medicines.’ That critical manufacturing capacity is going to happen with or without tariffs. Chips (semiconductors) have received massive subsidies in recent years, for example.

Businesses do not make long term investment decisions on policies that are unreliable. A factory might use 15-20 years of projections to determine profitability, debt and valuation. Investors will have to underwrite the scenario that Trump’s new tariff plan will cease to exist. Or to flip it around, they most certainly cannot assume Trump’s tariffs will be there to protect their profitability in perpetuity. Also consider that robotics and automation will play a bigger role going forward than they ever have. It’s possible that in five years domestic manufacturing for certain products could approach competitive global economics without tariffs.

I do think it’s important for investors to be aware of Treasury Secretary Scott Bessent’s stated goals. He also happens to be much more consistent.

• Grow The Economy: Grow the private sector via deregulation to grow the economy overall. A growing economy can support higher debt levels.
• Cut Spending: Aka DOGE. Reduce the deficit by cutting discretionary spending.
• Generate New Tax Revenue: Tariffs are part of this plan. The golden visa is an early view of another source of tax revenue.
• Protect Dollar Reserve Status: Consider embracing stablecoins (USD crypto) as a strategic way to maintain the USD reserve status. Stablecoins buy treasury bonds. They are effectively fractional liquid treasuries. On this topic, Circle, a leading stablecoin provider (USDC), filed their S-1 this week to go public.
• Future Entitlement Reform: This administration will not tackle entitlements but they will work to set this up for the next administration.
• 10 year yield: This is not a stated goal, but both Trump and Bessent want the 10 year rate to fall. Consider having an adjustable rate mortgage at 3% expire and jump to 6%. That same effect is coming for maturing US Treasuries that will be forced to reissue at current rates which are much higher. Interest expense is over $1T annually and growing and double the amount pre-Covid. Falling treasury rates help our $30T US debt refinance itself more sustainably.

There is a lot to digest with the tariff plan. This is a quick note to offer some perspective. There are still many unknowns. Markets will appreciate when those ‘unknowns’ finally convert to ‘knowns’.