Signals and scenario planning: Navigating Trump’s tariffs with Penta CEO Matt McDonald

Welcome to this week's episode of what's at Stake. I'm your host, Brian DeAngelis, a partner here at Penta's Washington office.

And I'm Ilan Mui, Managing Director at Penta.

Tariffs are the big economic story here in the US and around the world. They're on again, off again. We're recording at the start of a 90-day pause. We'll see if it's still paused at the end of the recording but with markets swinging wildly on every piece of news and that putting companies in a really difficult position as they try to determine the impact to their operations and figure out how to respond, they try to determine the impact to their operations and figure out how to respond. We know businesses are struggling with this uncertainty and it's a little bit of a sign of the times. So we wanted to bring in one of our experts and Pentas CEO, matt McDonald, to help us think through a framework that companies can use to navigate this situation and the next 90 days and beyond. So, matt, welcome back to what's at Stake.

Thanks guys, it's good to be with you. It's quite a crazy week, so let's get right into the discussion. I'll give you the big question what exactly is the Trump administration really doing here?

I think if everybody knew exactly what they were doing, or maybe if they knew exactly what they were doing, I think the market response wouldn't be quite as volatile as it is. I think the reality is that there are two competing dynamics at work. One is at work. One is you know, one version of the world. One story that you could tell is that this is art of the deal and this is how do you create negotiating leverage and create a little more balance in trade. You know the US runs a sustained multilateral trade deficit, which you know there's kind of questions about how sustainable that is over time. Bilateral trade deficits really don't matter and people shouldn't care about. You know, plus here, minus there, that's what trade is about. That doesn't seem to be the orientation of at least you know President Trump's mindset on this stuff. The you know. So one version of the world is hey, this is creating leverage. You know we need a reset on trade. I think that there's a little bit of, you know, post-covid re-realization of oh, there are actually some strategic considerations, geopolitical considerations that are legitimate. Ok, fine, right, there's another version of the world of trade is bad. The US needs to operate in autarky, which is like the economics term for like an isolated economy, and this is a revenue raiser and we need to, you know, bring back manufacturing and all the things. That is not a, if that's the view that prevails, that is not a good sign for the economy, for the world economy. That would be bad. It's not really 100% clear which view is going to prevail on this, and every time Treasury Secretary Besant goes out it's like, oh, negotiations, country's coming, we want to talk. And then you get Peter Navarro going out there and it's the opposite. It's reordering the world economy.

You know markets as you look at market, where you know I don't know when our listeners will be listening to this At this moment it is 1.39 on April 10th. So markets are down again today. I'm looking at like five-ish percent after rising 10-ish percent yesterday. You know, I think that what we're seeing is there was a relief rally that, oh, it's negotiations, it's not as bad as we thought. And then today is, oh, it's negotiations, it's not as bad as we thought. And then today is, oh, it's still not good. So it's complicated. There's a lot of really fascinating reporting coming out about the process, or lack of process that's going on behind the scenes. But you know, I think it's not clear what the end game is, and I think we're all along to the ride a little bit here.

Yeah, I think that both things seem like they're true simultaneously for some members of the administration, even within the administration, right. For some members of the administration, maybe it feels like negotiations. Others it feels like terrorists are actually the end state that they want to be in. And maybe the same thing can be true when you look at different countries. Right, for some countries, maybe the goal is to negotiate. In other countries, like China, maybe there's no negotiation to be had, right, and tariffs are the end state for that country. So it's multilayered, and I think that seems like. What's so confusing for companies is that it's not a binary decision. Right, it's either this or it's that, but it can be different variations of this at different points in time, with different allies or different adversaries, depending on what the case may be, trying to create a matrix that is as complex as the policy itself and perhaps as fungible at times as the policy itself is really challenging. And so what are your thoughts around how to begin to parse through that?

So the thing that I typically think about in scenarios of high volatility is how do you do scenario planning or representative futures exercise to say, okay, if this is where we're heading, what would that imply in terms of what we need to do and how we need to position ourselves ourselves? We've been internally, we've been using scenario A, a more optimistic view. This is about negotiations. In that world you could even imagine oh, not only did the reciprocal tariffs go away, but there's lower non-tariff barriers to trade right, whatever you want to call that but like more fair trading structures of like this goes away, or this conditions go away, or something like that. That's. I mean, that's a best case scenario, right? The pessimistic scenario is that this is you know, this is going to be a permanent feature of. The tariffs are just going up and you're going to have. You know this is going to be a permanent feature of. The tariffs are just going up and you're going to have. You know that is a. That is it's taxes. It's going to incrementally hurt the economy. There's distortion effects that come into play in terms of where stuff comes from.

I think part of this has to be part of the way people have to interpret this is that, if that's the scenario you're in is that this is a restructuring of global supply chains and global trade. That is not unwound easily and even if you, you know from when you think about the economics of it, just you know the tariffs are going to be a negative effect. But then you've got this kind of if you, if this is a beginning of a material change, you've got a lag effect that comes in of like OK, even if, even if you could snap your fingers and change this, you're in a worse position, but you can't, and so this is going to be years of pain, of undoing. You couple that with like, what if the administration changes its mind? Or what if there's a new administration that comes in? Do you really want to like, go build or move a factory or something like that? So it's all.

It's all very difficult on that end, but you know one of the ways to think about these. You look at these two scenarios and you want to think about okay, what are the signals that we would want to see or expect to see over time to understand which scenario we're in or, to your point, elon, I think, which version of you know the administration is winning the fight, because that that's. I mean, that's part of the problem here is that it's not. I suppose you know the president is is fairly transparent in terms of what he thinks and how frequently he speaks. I do think that you know the dimensions of this. Where he likes, he simultaneously likes deals and he likes tariffs and he likes markets to go up and he likes manufacturing. In the US, the markets are having a real difficult time finding a bottom and understanding what world they're living in, because these can't both be simultaneously true. I mean, I think it has to be somewhere in the middle, but that's the struggle, yeah.

Yeah, I mean, what's always struck me about Trump is he is very consistently inconsistent and very comfortable in that. So in ways, I almost feel there's not two scenarios, that we are in a scenario of both and we are going to be in that scenario for a while, where tariffs will be on, tariffs will be off. We will be negotiating a deal. We won't be. It'll be back. And to your point, matt, I think you know what we started to work on a little bit this week with companies, and probably the best way to keep your arms around this is looking for those indicators and those signs from within the administration. You know who's being sent out on the Sunday shows who's being sent out. You know to go speak with the press secretary at the briefing as where we are today and maybe tomorrow, but it doesn't mean where they are next week, right? So we've got to stay vigilant across all of this, given his like volatility.

Yeah, I think that's helpful in navigating through complex situations like this is that you have to ask yourself okay, what is the end state, what are the, what are the scenarios? Which scenario? What would be the indicators of which scenario? You're in right? So like, right, you know, obviously the the first indicator was a pause. I, I think you know, obviously there's a lot of you know governing by tweet or truth, I suppose, at the moment. So it's not there. These aren't coming out in kind of detailed papers, I think.

With the pause, I think part of what you saw yesterday was probably an assumption that all of these tariffs are being paused, but it looks like it's actually that the core tariffs of like the 10% and the China tariffs are going to be in place. So that is bad. So you had kind of a relief rally yesterday but like a recognition of oh, this is, you know, I forget. Like the net tariff in the US was like 3%, now it's going to be like 20, like net or something like that. The China stuff is weird too, because it's like OK, I think today we're at 145% and counting, or whatever, like why don't we just go to a bajillion percent and be done with it?

on some of this stuff is like this is going to don't tempt them, just kill. It's well, but at some point, like, what are we talking?

about.

It's a policy right here, you know right but at some point on this stuff is like, at some point the trade just shuts down yes, I mean there's almost a totally separate China conversation where it's clear he, it seems he's heading to just, yeah, isolate completely from China and there's ripple effects in other parts of Southeast Asia and the world. But you know, you almost have to look at them both separately of. Ok, what is Trump v China, us v China? And then what is Trump's approach to the rest of the world on tariffs?

Yeah.

Well, I think, too, that this sort of stop start approach makes it even more difficult for companies to step out and decide to respond publicly, because one by the time you respond, it could be outdated. Right, you're saying this is horrible, and then he pulls it back, and then you know you're sort of left twisting in the wind. But I also think that it it speaks to the importance of companies acting in concert with each other. So I think one thing that appeared to be effective and and appear to, at least you know, push Trump toward, toward this pause is that you saw the CEOs of major banks, his billionaire friends, you know, executives from every sector start to step out and say this is really hurting our business, this is causing potentially a recession.

I think it was Larry Fink who said that all of his companies if you talk to any of the companies they're invested in, that they would say that they're in a recession right now. And so I think that that chorus is helpful. But the challenge is, in order to develop the chorus, in order to get everybody to send the metaphor on the same song sheet, it takes a really, really strong action, right? So it's almost like you delay and delay and delay and CEOs were, you know, sort of very loudly quiet at the beginning of the first round of tariffs, and it took until there were blanket tariffs on basically everything and there was nowhere to hide for CEOs and for companies to be willing to step out and to say something. And so I think that while that strategy of sort of a strong coalition, coordinated effort, et cetera, is effective, it takes a really long time before you can actually deploy that, deploy that approach, and by then the damage may have been done.

Yeah, I mean the only other piece I would. I think there there is. There's definitely something to that. I think that you know, listen, like this is why they get paid opinion or corporate impact. Is that the markets are having their way with the policy. Is that you know one way or another? The reporting on this is obviously interesting, but the bond markets judgment on this seems to have really forced his hand in terms of you know, a perspective and you know, listen, trump and a lot of his advisors really do understand markets in the economy.

Right, this is not foreign territory for them and you know, some of the indicators on some of this stuff was not just like a potential recession but a potential financial crisis in terms of the movements of bond prices Plus not only that, but like you've got, you've got bond yields going up and you've got markets going down, and that is that is bad news, and I, I think part of the um, you know that's what we saw in like, uh, the kind of covid slash inflation period of like the six traditional 60 40 portfolio broke.

Um, you know we're he's he's playing with a lot of fire on this and whatever people think about how he thinks and how he makes decisions and all the rest of this stuff is that he workshops everything he does with his supporters and figuring out where the support is, and the tolerance for this is going to taper off. I mean, this is tough stuff for people who are looking at their 401ks or whatever it is. And I think, the markets I think if you have CEOs bellyaching about this absent market reaction, I don't think we're in the same world. I think that the market reaction dominates on this stuff and I think that you know he's he's he's talking right now, so who knows what? What will be, what will be valid after this um?

you called it at the beginning. Brian is what we started. Are the ground truth going to be the same?

yeah, I think, listen, part of it, part of it, part of what we've seen over the past couple weeks, is that there's there's a couple of things that you can draw conclusions on. Is that, unless you get a true financial crisis, liquidity crisis, fed is not coming in to save his hide on bad trade policy. So, from a market perspective, the Fed put is off and you saw when it gets, when push comes to shove on this stuff, is that he did back off and that I mean Trump doesn't want the market to go down. He wants the market to go up. He likes higher stocks. That's not the question here, right? So it is a little bit of a question of how much pressure he can take and how much pressure he can from the markets in this entire exercise. You know he's up there talking about. You know we'd love to do a deal with China, but it's got to be blah, blah, blah, you know. So I mean, I suppose one of the virtues of a self-inflicted economic wound is that you can uninflict your self-inflicted economic wound.

You can clean it out yourself.

Pour the hydrogen peroxide on it. Yeah, the damage you do is to the credibility, stability, understanding of what the future holds, that type of thing.

Yeah, which are, I mean, in some ways, rules he doesn't play by. I mean, we were talking about this earlier today, Matt, but you know, fascinating to see, like Bill Ackman, over the weekend, right when you just go from huge supporter to like just losing his mind on X of like everything's being burned down. What are you guys doing to? Oh my God, this is the greatest you know negotiator of all time Wonderful, and you know, we're just in a different environment where the short term memory of his supporters and just the public in general, where he can cause this pain for two weeks if things bounce back. If he does, I'd love to hear more from you If he does get the Fed to bring down rates and so he runs around saying, you know, I got us back to zero percent interest rates and the economy's humming and well, and the inflation numbers we got this morning were were lower, so inflation numbers were lower.

I don't, Ylan. I don't know when the measurement was on. That though, I can't.

It's I can't well, I mean, here's the other component of it. Right is that? You know, the inventory that we have on the shelves right now is not the inventory that's impacted by tariffs, right, it's all the inventory that would come, you know, a couple of months from now, so you wouldn't necessarily see it reflected in the CPI numbers currently.

Yeah, it'll be. Cpi will be messy for a while because you're going to have anti-wealth effects combined with, like the inflationary pricing stuff and I don't know how they do the sampling on some. It's going to be weird. The most positive booster responses to this are believe that he is operating in the optimistic scenario that we outlined. I've actually heard this from multiple people, kind of in Wall Street world. Is that like, oh, if this brings all tariffs down to zero, like reciprocity, zero, zero isn't that good. Right, that is the optimistic scenario that we kind of held out, but that's not where we are now. So, and Brian, to your point on kind of the okay, this is gonna be an extended exercise. Is that like, how long the next year? So we talked about like okay, how do you do scenario planning? And then, how do you do signposting Right Of like a? Ok, what? What would you have to see to think that you're in scenario A or scenario B, right? So when.

I was when we were doing these internal conversations last weekend. You know we outlined these scenarios and, like my, you know my my thing on this was either you see, either a a pause, or you see which the markets there was a rumor on that, yeah.

Yep, oh yeah, that was the embarrassment on CNBC.

We don't need to talk about that.

That was oh man, that was such a great the guy who quoted it was like Walter Bloomberg and he was quoting a Reuters report. This was so funny because, like, some of the tweets I saw were like, oh, you know, I heard it on Bloomberg, now it's Walter Bloomberg, and then it was like he was reporting Reuters. Oh yeah, that's Bob Reuters. Like the whole thing was sent the markets on a trillion dollar spike. I think the thing that the signposts that we outlined and talked about were is there some sort of quote unquote deal announced where the ink isn't dry, but like Vietnam offers zero for zero and Trump is like, yeah, zero for zero, see, it works. That's scenario one. You've got the pause version of that. So he still has that tool in his toolkit. So, like you see today markets saying like, oh good, they're on pause. Oh bad, this is still really crappy compared to the pre-liberation day trade regime. He still has in his toolkit a start to like some aggressive, more aggressive deal making of like they've still got inbound on this stuff and some of these they could just start saying, yes, we're doing this, yes, we're doing this. And if you get, if you get that where the 10% comes off in the deal, then I think that's the next signal that we're in scenario A right and if he if we get you know it's Thursday we get through Friday at the end of this week. I would be surprised if he announces more deals, but you can imagine what had Besant said that Japan is first in the queue, right. So if Besantant makes the, I think we'll get through tomorrow. We're obviously, you know markets are off, so S&P is now off like three and a half percent, so it's gone up since we've started doing this podcast Must be us, yeah, like, oh, we need, and you know my.

What I've heard is that is that you know Lutnick is not in the driver's seat on this stuff as much, and that Bassant is, but that Trump calls the final shot.

If there's a judgment that, hey, we need more market stability around what the end game is on this, market stability around what the end game is on this, look for an announcement around Japan in the first half of next week that will give and if that is a kind of a net positive trade relationship where it's better than it was, that will give markets the view of oh, the end game is very much like a more you know, whatever you want to call it, a more fair, quote unquote trade arrangement where that will, at the end of the day, benefit, candidly, both parties.

If that's where some of this stuff landed, it still leaves China hanging out there as like the big caveat to all this. China hanging out there is like the big caveat to all this. But it would also, you know, a deal with Japan or starting to a bit of snowballing on some of these deals, would kind of isolate the China question aside from the other stuff and would drop the floor on what the future looks like in terms of the trade relationship. So, like in that scenario, people price in a below 10% tariff where, like, oh, the tariffs are the bottom is going to go further down on this stuff. So that's the next signal that I would look at to interpret again which side of the argument is winning?

So you think, matt, though let's say that's the case, let's say we actually are in the more optimistic scenario. The amount of pain that he's been willing to endure and that the country's been willing to endure has been significantly larger than what we saw when we were threatening just the Mexico-Canada tariffs, and I think they took the automakers and exemption the day before it's supposed to begin or the day after very, very short term. Each time we seem to be willing to endure more pain before we get to the optimistic scenario, and so, if you play it out over the next four years, how far are we willing to swing each time if we are optimistic?

That's actually not how I would interpret it. My mental model for this would be closer to what we saw when inflation accelerated during COVID, during the period where people are like, oh, it's transitionary. I think the practical reality of that time was that there, functionally, there was a generation of leadership in place that did not I mean, you know, like President Biden accepted did not actually live through the inflationary period of the 70s. I mean, I was born in 1978. And, like, I can remember my dad being really excited about an 8% mortgage in the 80s when that stuff came down Like the, the. But that's not, that hasn't been my professional life and you have to be like I don't know, below 70 to like really have or above 70 to have any real material professional memory of that time and that's just so.

So in that moment I think it was very difficult for people to recognize the change that was happening because it was out of generational memory. And I think you're probably seeing the same aspect with the trade fight now is that, like, trade has largely been from a policy perspective, a one way direction towards international cooperation to lower barriers. And so I think probably the way that I would interpret China, Mexico as previews, then liberation day as as just a difficulty of people accepting that there was really a new norm and that Trump was really going to do all these things, especially because in the first term there was like a little bit, but there was way more talk about it than there was action. And so I don't. I think what you're seeing now is is like I wouldn't think of it as a tolerance, a like increase in tolerance or a a rising of the pain threshold on it. I actually view it as kind of a call it a market capitulation of oh he really means it.

Although I would say if you flip that around a little bit, the stock market fluctuations, there's probably a higher pain tolerance, or at least like some. For the volatility yeah, given you know, if you're 30 years old, you've seen an up and down from the 2000 recession, the 2008 crisis. Covid, like I, I think that there's a drop of 2000. You're like, oh well, it's right back the next week well, we're, we're, yeah there.

Yes, I think that there's a slice of that. I also think there's a slice of um on the professional side. Is that like there's a couple of dynamics at work? One, we were pretty toppish in terms of multiples. Two, I think in the first round of this there's been some like wrong-sided positions that have probably been unwound and so you kind of get on the back side is like now. I think it's just a question. I think there's going to be ups and downs and I think it's going to be kind of riding along, but there's going to be a. You know, people are trying to find the floor of like where it is. It kind of goes back to the scenarios that we talked about at the top of this. Is that like we don't know and really he doesn't know which world we're kind of operating in, and until we get, until there is a more internal consistency or alignment within the administration, we are all along for the ride.

And you know, probably a good place to wrap. And, matt, maybe just the final question to sum things up. Maybe just the final question to sum things up, you know, if you're, as we advise clients to think about the next 90 days, those kind of scenarios, signposts are going to be things like the Japan deal. What do we see kind of ticking forward from one camp in Trump's world versus the other? What else are you kind of looking at or people should be thinking about over the next few weeks?

So the other, the other piece of so those, those that's the signpost piece we can reconvene next week and I'll give you, like, the signposts for the week after. But the the thing that I would say is that I think people who have a have risk, have a perspective on where this is all going, need to get more aggressive about making that known. I think one of the bigger risks that we have at the moment is a gap between the administration's perspective of the risks and the business world's perspective of the risks, and that gap needs to close. If, like, the administration has a secret plan, they need to like there needs to be a little more sharing so that, like, people understand what the plan is and that the market stuff can settle out of like, ok, he's got it handled. We are actually trying to get lower.

The reverse side is that you know if this is the end state, you know business world. Obviously, markets are making their voice known, but the business world needs to say no, no, no, no. Like this is, there are going to be layoffs, this is going to be bad, you are going to have blood on your hands and I, you know, whatever, whatever people think about the Teflon properties, of Donald Trump's outrages to the extent that it becomes an exercise in like voters 401ks getting hammered and people losing their jobs in the real economy. Downstream there is. There is one person who is responsible for this and the politics of that are not good for him.

I mean, you saw how quickly some of his major backers with big audiences turned on him this weekend and turned right back on. You know, yesterday afternoon Right.

But that turn back is predicated on the optimistic scenario that we've articulated.

Exactly yes, yeah, yeah.

Yeah, I would also say it's maybe not a coincidence that Congress is going on recess this afternoon and tomorrow, so they're going to be going home, they're going to be facing voters, and nobody wants to face your constituents when they've got red all over their 401ks. So I think that might also be a factor into some of the timing here. And with that, thank you, matt, for joining us along for this ride To our listeners. Remember to like and subscribe wherever you listen to your podcast and to follow us on Twitter or X at PentaGRP and on LinkedIn at PentaGroup. I'm your co-host, Ylan, and, as always, thanks for listening to what's at Stake.