JP Marín Arrese | The markets are betting on Taco, the acronym coined by Robert Armstrong to assert that ‘Trump always chickens out’. It appears to work for the time being, at least as far as trade is concerned. Upon entering office, Trump threatened to wage an attrition war on Canada and Mexico, leading them to utter misery. Later on, he scaled back such bellicose plans to mere increases in tariffs for products not covered by the free-trade zone deal. On Liberation Day, he promised to deliver a fatal blow to countries showing a surplus with the US. Yet, the steep downfall in stocks and the turmoil in T-bonds forced him to cave in and reduce the menacing tariffs to a flat 10% rate. Even his campaign against China lost steam as Bessent openly recognised the mutual damage seemed unacceptable.
On foreign policy, Trump’s deeds largely fail to match his words. While threatening to use the US military might to recover the Panama Canal, take over Greenland or bomb Iran, nothing of the sort will happen. Even if Putin is flouting his pledge to bring the Ukrainian conflict to an end, he will refrain from putting all the blame on Russia. Netanyahu also proves a constant headache for the US strategy in the Middle East. Yet, Trump prefers to ignore the political damage the Gaza war inflicts.
You may conclude Armstrong strikes right in describing Trump’s conduct when confronted with stiff resistance. He tends to back down and select less resilient targets instead. For instance, clamping down on illegal migration always pays out, the more so if it leads to open rioting, as the latest Los Angeles battleground shows.
So, the markets seem overconfident that trade disputes will end up in amiable settlements. They even disregard the dangers the fiscal plan poses, involving steeply rising deficits and indebtedness. They buy into the Treasury fairy tale that cutting taxes and red tape to the bone will skyrocket business activity and overall income. Betting on Taco might backfire should the economic performance deteriorate or the financial system come under severe stress. A likely prospect, even if an open trade war doesn’t materialise. Trump’s constant threats may be sufficient to sap confidence in US stocks, the dollar, and T-bonds. The more so, as investment and jobs suffer from such a climate of perpetual uncertainty and recurring upheavals.
