In poker, it’s called a tell: an unconscious action that demonstrates deception. Trump’s poker game is less sophisticated. It’s based on bluff, a threat to go all in, to scare his opponents into throwing in their cards.
Team TACO – those who subscribe to the view that Trump always chickens out – saw the bluff this week and called it.
After a weekend of fear and panic in response to Trump’s Sunday threat to use whatever means necessary to annex Greenland and tariff-trash European countries that opposed him, players of the international markets poker game should have recognised the bluff.
Most didn’t, but the smart money picked it up immediately.
After a long weekend in the US that caused many investors an expanded head of anxiety, Tuesday’s bond and stock markets predictably went into meltdown, with the S&P 500 falling more than 2 per cent and notching up its largest dive since October.
The VIX index that measures market fear shot up, the US dollar fell, and the gold price moved closer to the sun as investors stampeded towards its safe haven.
But even before Trump’s bluff had been exposed, and he backed away from invading Greenland with troops and then retraced his tariff ultimatum, the markets had already begun to lift.
For investors who had found the steel to see through Trump’s bravado, TACO Tuesday was deliciously lucrative.
The president’s statement on his tariff backdown arrived towards the end of the trading session in New York and put a rocket under the S&P500, sending it up 1 per cent in the final hour of trading.
The TACO play has its risks. In Aesop’s parable of The Boy Who Cried Wolf, the wolf does eventually show up and eat the boy.
But so far, it has worked.
When Trump announced his so-called Liberation Day tariffs last year, markets went into a tailspin, only to recover all of their lost ground and plenty more after they were subsequently watered down.
Plenty of investors who panicked got caught on the wrong side of the trade and were financially stung when the markets recovered.
But perversely, any successful TACO trade relies on the need for the market’s initial violent knee-jerk negative reaction to Trump’s extreme and sometimes mind-exploding policy moves.
If all investors reacted calmly to threats by Trump to blow up the world economic order, he would have less incentive to reverse them.
For the TACO trade to survive and its users to prosper, we need markets to respond with chaos and Trump has to feel that pain.
Trump listens to the message that equity and bond markets convey, viewing them as an instant report card on his performance.
Additionally, it wasn’t a complete win for the TACO trade, given the Wednesday recovery made up only just over half the ground that had been lost on Tuesday (US time).
Thursday’s trading in the US will play into where the verdict stands. At the time of writing, S&P 500 futures were trading up by about one-third of a per cent, while the riskier Nasdaq futures market was ahead 0.5 per cent.
But this week’s market reaction can’t take all the credit. European leaders such as French President Emmanuel Macron, British Prime Minister Keir Starmer, Danish Prime Minister Mette Frederiksen and others pushed back hard. After months of being pushed around, they found some of their strongest words yet to face up to the president and called Trump’s bluff.
Trump’s backdown mean that he has walked away from any ambitions towards Greenland, though.
The framework agreement he has negotiated with NATO Secretary-General Mark Rutte is detail-light.
So there may be some further bumps in the road ahead.
But for now, roll on, TACO Tuesday.
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