Ideologue Vs. Pragmatist

Stocks surged in early trading this morning, but quickly gave way and are now about flat. Following a few really tough trading sessions, investors are beginning to pick through the wreckage for discounted stocks. The VIX fear gauge, which briefly jumped to 60 yesterday, backed down to around 47. Mirroring the stock market, safe-haven Treasury bonds opened lower but are now gaining some ground. On the other hand, corporate bonds are trading along with stocks. Higher-risk junk bonds are selling off more than investment grade issues. That makes sense given the rising risk to economic growth.

Markets are primarily reacting to daily—or even hourly—headlines regarding trade policy. A rumor briefly spread and was debunked that President Trump is considering a 90-day pause on tariffs. His press secretary last week said that tariffs are “non-negotiable,” but we just learned that Treasury Secretary Bessent is negotiating with the Chinese at the direction of the president. And I saw a report that the White House may dial back its negotiating demands regarding non-tariff trade barriers. Who knows whether that holds any truth.

President Trump’s top advisors are now openly split regarding trade policy. Elon Musk is calling Peter Navarro, the president’s trade & manufacturing advisor, “truly a moron” and warns that what he says is “demonstrably false.” This comes after Mr. Musk criticized the administration’s formula used to calculate tariffs as overly simplistic, and Mr. Navarro derided Mr. Musk as a “car person” who opposes high tariffs because he “wants the cheap foreign parts.”

This is of course entertaining political theater, but in light of the severity of the administration’s trade policy shift I think we should pay attention. Investors are increasingly concerned about the president’s inner circle. Ken Langone, one of the founders of Home Depot, said Mr. Trump is being “poorly advised by his advisors.” Billionaire hedge fund manager Ray Dalio agrees that we have a trade problem, but he’s “very concerned about the solution.”

Mr. Navarro is an economist and more importantly a “China hawk” and policy idealogue. And he is thought to be a primary architect of the new tariff policy. So this very public confrontation pits a global business owner against a theoretician. The situation seems untenable for the administration. Which of these men does the president trust more? Firing Mr. Musk would signal that hardliners are very much in control and policy will remain inflexible. Firing Mr. Navarro on the other hand could signal a return to pragmatism.