154. Trump Turmoil: Why Billionaires Are Panicking

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1:13hello and welcome to a trump tariff madness rest of money special with me Robert Peston and me Steph McGovern it's just crazy isn't it I feel like we're living in some like movie now the way it's just so dramatic and it's it's quite it's frightening watching it all because it's one man who's basically dicking about with the entire world and everyone in it it's really scary isn't it uh yeah it is certainly uh like no financial crisis i've ever reported on and you know i've reported at the front line of financial crises actually since the 80s. I was a cub reporter on The Independent in 1987 on Black Monday, which is when we had this sort of global wave of share price falls across the world.

2:09And so it was sort of odd yesterday to have another Monday of share prices crashing around the world. Yesterday, You know, we saw these dramatic movements starting in Asia, the Hang Seng in China, I think falling 13 % yesterday. And then just these crashing waves of share prices falling Asia, Europe, America. And then just the volatility is off the charts because we had a moment in the sort of early afternoon UK time where CNBC was reporting a White House official saying that the tariffs might be delayed. And at that point in America, you just saw this astonishing surge in share prices based on, as it turned out, false hope.

3:05that there would be a delay because President Trump has sort of doubled down on tariffs. And so share prices sank again. So a combination of, I mean, we've had three days of market falls, stock market falls, ever since Trump on Wednesday announced these extraordinary tariffs on every country in the world, minimum of 10 % and then much higher retaliatory tariffs in his mind. That's how he thinks of them against a bunch of other very powerful economies. And just to put that into context, three successive days of downturns happens only when you have crises of the magnitude of COVID or the global financial crisis.

3:57You know, so what we are looking at here is a stock market crisis, but different from, and in fact, we'll talk later about how it's infecting other security classes. But I think the important differences, and this is like no other financial crisis I've ever reported on. Normally, they are the product, these crises, of, in the run up to them, banks or investors being reckless. You know, it's that reckless enthusiasm for an asset class that means the asset class becomes overvalued. And then you get a day of reckoning when investors suddenly work out that there is this overvaluation. This is different.

4:43This is Donald Trump engineering the crisis personally. This is all about one man's recklessness, not the recklessness of investors. Yeah, it's worth as well, because loads of people have been asking me about this, just explaining how he's come to these ridiculous tariffs. Because as you just said there, Robert, he's saying these are reciprocal tariffs, but they're not. Because when you look at how this has been worked out, it's about the business a country does with the US. It's about the trade deficit, as you'd call it. So if you're a country that's selling loads to America, like Vietnam, but you're not a country that buys much from them, so you're not importing much from America, you have this huge, what the Americans call this trade deficit with them, which means you are being hit the hardest by them.

5:34Even though, you know, if you look at a country like Vietnam, they are probably never going to reach a point where there would be a trade balance with the US. You know, these countries are always going to sell more to America than they're going to buy from America. So this ridiculous calculation, and, you know, I'll just quickly tell you what it is. So this is the trade deficit the US has with a country divided by the total value of business between the countries. So the value of the imports and the exports. And then he adds what he says is a discount by dividing it by two. And from this gets this ridiculous made up really percentage, which he is slapping on as a tariff.

6:15But then, you know, we see China retaliate and then he goes, right, OK, I'm just going to whack another 50 percent on you as well. And China now has a tariff which is over 100 percent on it. Or rather, if Trump goes through on his threat, and we'll know that later today, if he goes through on his threat, as you say, we'll now be in the extraordinary position where America would be imposing 104 % tariff on China. Just again, to put all the tariffs in historical context, we are now seeing America imposing tariffs of a sort that we haven't seen in 100 years. And the point about these tariffs, which again, Trump has got wrong, is it's not paid for by the foreign exporters.

7:00It's paid for by the domestic importers. So, you know, you're seeing all these stories appear now of these businesses, particularly like, for example, on the borders of the US and Canada that are absolutely dying because of the tariffs that are being slapped on. For example, if it's farming, the feed that they buy from Canada or the other materials they need, they're now unable to carry on because of these tariffs. So when Trump is doing this, he is not looking at who actually is being hurt by it, is he? He's just doing this ridiculous, I'm a big bully man and this is what I'm going to do. I mean, where does it end, Robert?

7:40Because, you know, you mentioned the other financial crises we've had. in the 2008 one, there was, of course, bank bailouts that kind of solved it. With COVID, it was a vaccine and it was other bailouts. With this, it's just a completely different kettle of fish, isn't it? Yeah, it's all about effectively what he ends up doing. And also, obviously, how other countries respond. If we see much more retaliation from other important countries or trading blocs like the EU, then we will see a further lurch downward in share prices. I think it's also important, I mean, you know, after a very clear explanation of how he calculated these so-called discriminatory practices by other countries, it's worth just highlighting the absurdity of it with a couple of examples.

8:29So Lesotho, a poor African state being hit by, the biggest tariffs of any country, 50 % tariffs imposed by the US. And that is simply because it has one major export, which is diamonds. And, you know, America is a buyer of diamonds, not a significant producer of diamonds. So inevitably, when you're trading with a poor country that effectively has one export, America is going to have a very significant trade deficit. And yet it's punishing a very poor country for essentially just having one ability to earn some foreign income. And that is that is absurd. And I think it's also important, you know, it's also important to look at other examples of the sort of madness of this.

9:22You can just about make a case, which is the case that he makes, that, you know, America would have more better paid what they call middle class jobs in manufacturing. We would call them working class jobs in manufacturing. If it was able to attract to the UK shores, this was actually something that Joe Biden was trying to do, more upper end high tech manufacturing, what they call added value manufacturing. This is something Biden tried to do with his so-called CHIPS Act, where he was giving big subsidies and encouragement to semiconductor manufacturers to go to the US. If you're successful in attracting those sorts of jobs to the US, then a big constituency of Trump supporters, the disillusioned working class, as I say in their terms, middle class vote, gets better paid jobs better living standards but when you are punishing a country like for example crippled Myanmar which they are doing massive tariffs a country that is in dire straits because of the earthquakes you're basically saying you know that its specialization is in things like low-cost clothing manufacture low-cost shoe manufacturing in what world does America want low-paid manufacturing jobs back on its shores.

10:51Those are not the kinds of jobs, truthfully, that the kind of Trump working-class supporters would claim they want. They want to be making motor cars. All right, so maybe it's potentially rational. I would argue it's not. It's potentially rational to punish Germany if you want more motor car manufacturing in the US. But it is nuts to punish a Vietnam or a Myanmar where there is so much of this, you know, low cost manufacturing. Because why does America want those jobs if it wants to raise living standards? That's a sort of argument for lower living standards in America. And the whole reason why these jobs went to other countries was to make the products cheaper for Americans to buy.

11:38So it was to make the cost cheaper for them. So like you said, it's ridiculous. And obviously the other ridiculous thing in all of this are the uninhabited islands who are also facing tariffs where the penguins and seals of Herd and MacDonald are suddenly facing the consequences of these tariffs. And you're just like, what? Did nobody point out to him and go, oh, by the way, Mr. Trump, President Trump, there isn't anyone there. We don't do any business with him. So, no, put a tariff on them. It's like so ridiculous. And that's where he looks stupid. I mean, he looks stupid most of the time. But, you know, and even now we're seeing his biggest supporters go against him and criticise him.

12:20No, that's exactly right. And just to be clear, it is impossible to find a credible trade economist who thinks the way they calculated these tariffs, the way that they assess the discrimination against the US is remotely credible. And indeed, you know, there's also even if you accept the formula, there's been a completely brilliant takedown of this approach, simply on the basis of what's known as the price elasticity of imposing tariffs. And that is essentially the sensitivity of import prices to the actual tariff. So the whole framework for what he's doing is both irrational in terms of what you're trying to achieve and in economic terms, pure hocus pocus.

13:14Yeah, it really is. And after the break, I want to ask you what your, you know, all the people you normally talk to about these things are saying about it, all the investment managers and all of that. So let's have a quick break.

13:29welcome back to the rest is money with me robert perston and meet steph mcgovern with a bit of a special on what's happening with trump there's so much going on um in economics and markets and everything that we thought it would be good to try and bring you a bit of an update every day on what it all means we mentioned before the break about how ridiculous this calculation is for the tariffs, but also there's a lot of people coming out now who you would class as Trump supporters who are saying that this is all happening too quickly, that tariffs are too high and they've been set too quickly. And we're talking people who've given a lot of money to Trump in the past.

14:07You know, we've got the founder of Home Depot, Ken Langone, who was a big Republican donor. He thinks that this is ridiculous. You've got Trump's mate Bill Ackman as well, says the tariffs are a major policy error and even Elon Musk is I mean he's slagging off Trump's trade advisor isn't he so he isn't slagging off Trump himself but he's saying uh Peter Navarro um and he says his quote is ain't built shit is what Musk says about him because he's saying obviously hasn't got the experience to be making decisions on trade um tariffs but what's your take on it Robert, because obviously you've always chatting to the people who are directly involved in all of this, who have to suffer the consequences of these decisions and then decide what to do next.

14:55So what are people saying to you? So many of them would share some of the concerns of Bill Ackman, the hedge fund, Supremo, runs a hedge fund called Pershing, as you pointed out, was a big Trump supporter, but has warned in really emotive terms that these tariffs, if not seriously amended, could lead to what he calls an economic nuclear winter. Really quite powerful language. I mean, broadly, what investors are saying are that we will not find a flaw. I mean, as we speak, There has been a bit of a bounce in stock markets. To be clear, it's a really quite modest bounce in share prices. We haven't made up the ground that's been lost over the last three days.

15:48And, you know, there's nothing unusual about after three days of falls, the market's taking stock. You know, some people deciding that there's value to be had and coming in and sort of what's called buying the dip. All of this stuff is normal, but nobody should be fooled into thinking that the crisis is over. What the big managers of pools of money in simple terms say to me is they do not believe the market will find a flaw unless and until they are confident that the cycle, not only of tariffs imposed by Trump, but of retaliation by other countries is at an end. You mentioned Elon Musk. It was very striking.

16:35The other thing he said is he wants a zero tariff arrangement between the US and the EU. Were that to be negotiated, right, that I think would give confidence to a lot of investors. But Trump has explicitly said he doesn't believe that is remotely credible for him because he believes that a lot of discrimination against the US is not the numerical figure of EU tariffs. It's, for example, he says that EU regulation discriminates against US businesses. So he's explicitly rejected Musk's preferred zero-tariff deal with the EU, which, to be clear, the EU says it's definitely open to Ursula von der Leyen And the president of the European Commission has said she's open to it, but there doesn't seem to be any prospect of that happening in the short term.

17:29The other thing that investors are looking for is central banks to provide liquidity. That's cheaper money. Central banks to accelerate cuts in interest rates. We were anyway expecting cuts in interest rates this year. Inflation has proved sticky. Markets are discounting now as a result of these stock market falls. a faster cut in interest rates. For example, in the US, there is, you know, markets are discounting five cuts in interest rates over the next year. They were expecting three before this shock. But Jerome Powell, who is the chairman of the US Federal Reserve, other members of the Federal Reserve Board are cautioning markets that they're not going to do anything.

18:20and we'll see whether that holds up, but they are cautioning that they are not yet in a position to assess whether the bigger economic impact of Trump's tariffs will be on depressing economic activity, in which case they would have to cut rates faster, or on spiking inflation, putting inflation up, in which case they would be slower in cutting interest rates. So although the American president is desperate for the Fed to bail him out by cutting interest rates fast. The Fed, and you just never know on these things whether they are putting economics first or whether they're putting pride first because, I mean, Trump has consistently been critical of Powell and the US Federal Reserve.

19:07And Powell is basically saying to the world, I'm independent, I'm not going to be bullied by Trump. Now, whether him taking a stand in that sense of not being butted into interest rate cuts is rational when it comes to the outlook for the American and global economy. I'm not 100 % sure about. I think there probably is a case for cheaper money sooner because my own view about tariffs is partly because of the incredible uncertainty that it's been causing, which means that companies are delaying big investments because actually they've got too much fog around the economic outlook. So they're delaying big investments.

19:46Consumers, we already see a collapse in consumer confidence, which means that almost certainly consumers will be delaying particularly big purchases, right? That's another negative impact. I'm aware from talking to financial advisors that companies that were thinking of listing are likely to delay. So one of the big things the London stock market was hoping for was a listing by this Chinese giant, Shein. There is literally no chance of Shein listing anytime soon because how do you price a company like that when you've just had this sort of barrage of tariffs heaped on it as a Chinese company when selling into the enormously important American market?

20:34And this is just one example of the kind of corporate deal that will be put on hold. Lots of companies up until this moment were thinking of making takeovers. I mean, I was aware of, for example, British businesses thinking they might be taken over because obviously the stock market has been underperforming for years now. And when you just get a moment of stability, takeovers tend to happen. Now, for better or worse, many people say it's good that foreigners aren't buying British businesses, but that is definitely not going to happen in the way that some bankers were hoping it was going to happen in this climate of uncertainty.

21:09So, you know, uncertainty is the greatest cancer when it comes both to market stability and indeed economic activity in the round. And it's why, it's the big reason why, you know, the base case, most investors now say to me, is that we are certainly heading for a recession in America and probably something that feels like a recession everywhere, including the UK. I mean, that's really scary. And the point you make about uncertainty, that example you gave earlier on in the show about the fake news, or as Trump called it, this fake news that came out that said he was going to pause tariffs for 90 days and then it turned out it wasn't true.

21:49That completely changed the market. Again, everyone is so jumpy. We're seeing incredible troughs and then that spike that came from that rumour. Everyone is jumpy. So there is no wonder, as you say, businesses are going to put off investing because they're just going to wait and see what happens. And that, as we say all the time on the show, is really bad for particularly our country. I mean, it was only a couple of weeks ago we were talking to the Chancellor about what she's going to do next, about what we might see later on when the autumn statement comes out. I mean, this blows anything we were talking about out of the water, doesn't it?

22:30It's absolutely irrelevant what Rachel Reeves is saying at the moment because of all of this. Certainly the plans this government have for getting our growth rate up are now facing the most overwhelming headwinds. It doesn't mean it's impossible, but it makes it much harder. And I suspect we will come back to much of that in the coming days. I think the thing that surprised me in all of this, Robert, is normally, and we've talked about this a lot on the show, when you see the stock market volatility, people tend to put their money, don't they, in a kind of safe havens, as they're called. So, you know, it's gold, it's bonds.

23:02But even there, they're not doing very well at what's going on. Why are we seeing that happen as well? So this does worry me. And as you say, normally when you get this kind of global uncertainty, investors go, I mean, yes, gold, but also they buy U.S. government bonds, treasuries, and they buy the dollar. And one of the things that is really striking is, yes, for a period in the absurdist uncertainty, US government bonds rose a bit, which means the price that the US government pays to borrow fell a bit. But in the last trading period, actually, US government bonds, particularly bonds of longer maturity, they fell.

23:52Yields, the amount the government pays to borrow, actually rose a bit. As you say, gold has fallen a bit in the most recent period. And the dollar has been weak. Now, there are a number of possible explanations for this. One is that there are some investors that are in trouble and they are just being forced to liquidate whatever they can to raise cash. And obviously, investors hold vast amounts of U.S. government bonds, the dollar and gold. And if this is a sign that we are about to see some quite big investment institutions in trouble, that would be a concern. And when you have this kind of turmoil, it is normal.

24:42But worrying if big investment institutions, big financial institution gets into trouble. There is that I think it's Warren Buffett who used that sort of immortal phrase. It's only when the tide goes out, you see who's not wearing any swimming trunks. You know, this is the tide going out with a vengeance. So that is one thing I'm worried about, that we haven't yet seen who has been reckless in terms of investors or banks in the run up to this and who will get into trouble. I would be slightly surprised if this went on if we don't see any institutions in that sense getting quite close to failure.

25:18But there's something else that's going on, which I think is important, and we need to explore it later in the week, which is, are we moving into a phase where consumers and indeed even investors are acting in a way that you might think of as being patriotic rather than following their normal instincts? And to what extent are we now seeing a mood in which even investors are saying, I'm not going to touch American assets? I don't trust Trump. I don't think he's acting either in the interest of America or the world. And actually, at the moment, therefore, I do not regard American assets as a safe haven.

25:57And that if that is happening, you know, you talked earlier about the concerns of billionaires. You know, billionaires in America ought to be absolutely panicking because what made them billionaires was the knee jerk reaction of the world's investors that America is not only a dynamic economy, but a safe haven. And if what Donald Trump is doing is blowing up the idea of America is a safe haven, then they are all and America is in the deepest trouble. That is so interesting. I hadn't thought of that point because you're right, because we've said on this podcast before, haven't we, that, you know, it's the frustrating thing about what Trump's doing is often when there's volatility, people will put their money in assets which are backed by the dollar.

26:42therefore no matter what happens Trump will be all right but what you're saying is this patriotism this F you Trump I'm not going to try and help you I'm not even though that's the safest place to put it I'm not going to put my money there is fascinating because then it means this might really backfire on Trump which would I guess be brilliant for the rest of us even though obviously the uncertainty that comes with this is terrible. It wouldn't be brilliant for the rest of us in the short term at the moment we've talked about this before that America is abandoned as the world's reserve currency, the shockwaves for the world will be enormous.

27:17So it might be brilliant over the medium term. You know, we are looking at the mother of all global financial crises, where that happened in the short term. So anyway, look, there's tons more to explore and let's unpick more of this tomorrow. Yes, I think that probably is the time to wrap up then. But we will be back every day this week just to give you the latest on what's happening and of course, our analysis on all of that as well because it is changing within the hour isn't it as every hour goes by something something else has kicked off so it's worth us just trying to keep you across all of that but that's it from us for now bye-bye goodbye