Trump Always Chickens Out? Maybe, But Wall Street isn’t Out of the Woods Yet

It has been some time since I’ve provided detailed analysis of the Trump Tariff situation. Others are covering the details of the Tariffs themselves quite well. The best coverage of the tariff details comes (unsurprisingly) from Joey Politano. I especially recommend checking out this piece as well as last week’s piece on the car tariffs. As usual then, I want to cover the underdiscussed aspects of this drama. This starts where I left off, writing about how the tariffs were putting the financial system under intense stress. Volatility, as measured by the “VIX” index peaked April 8th, and has been declining ever since. My last commentary on this topic was in my interview with Paul Krugman published last month. In it, I focused in on the desperate desire of financial traders to “see past” Trump’s erratic and destructive behavior:

[…] [That] kind of person is the kind of person who's going to look for any off ramp, any sort of little sign that things are going to be better. And so when the stock market went up a whole bunch after Trump's announcement and volatility pared back some, it's not so much that these are more protectionist tariffs, at least as of last Wednesday—Of course, it's changed even more in the week since then. It's not like they were great, but it was just a headline in the news that would make people say, “My God, Trump is backing off. Okay, good.”

And what matters is not so much the reality of this thinking, but how different factors interact with each other. And the media apparatuses present a general mood that comes from a certain perspective. It's not so much that Trump needs to actually back off on tariffs or needs to be doing sane tariff policy, it just needs to be perceived as not crazy by these specific kind of idiosyncratic groups of people. [emphasis added]

As time has passed, Trump has erratically backed off some of his most extreme proposals, or at least the speed at which he was implementing them. He agreed to a 90 day “pause” for the China Tariffs. Yet, his decisions are still erratic. Despite this, volatility — as measured by the Chicago Board Option Exchange’s Volatility Index (VIX) has just declined and declined. Why?

In a way, I explained it in my piece written at the peak of the instability. In my view, it remains to be seen whether my real-time prediction that that volatility peak was a “Lehman Brothers moment”, as I claimed. It certainly is a qualitatively different issue than Lehman Brothers failure in the details insofar as things still hang on what Trump says. If I was wrong in my boldest claim, it was for a reason I described in the piece itself:

In essence, this kind of extreme instability is definitionally a crisis because it must be resolved so that the basic stability, even if it's a “false” stability produced by highly motivated conventions, can be established or reestablished. [emphasis added]

The highly motivated convention that has taken shape over the past month started solidifying with the Financial Times’ Robert Armstrong who coined TACO: Trump Always Chickens Out on May 2nd. This phrase has everything. It insults Trump, it's catchy and memorable, and it boils down a set of complex issues to its essentials. Wall Street has run with it. Hence why, despite everything that has happened, the S&P 500 is basically flat on the year.

Of course, this reached a crescendo last Wednesday when a reporter asked Trump himself about “TACO”. I think it's worth quoting the back and forth verbatim and in full. We have gotten so used to Trump that we have generally tuned out the way he goes on and on. But there’s a lot of insight to be gleaned from his mental state by listening to or reading his attempt to explain his policy views at length. I also think there are important differences between how he articulates himself now, versus his first term:

Reporter: Mr. President, Wall Street analysts have coined a new term called the TACO trade. They're saying Trump Always Chickens Out on the tariff threats and that's why markets are higher this week. What's your response to that? 

Trump: I kick out? 

Reporter: Chicken out. 

Trump: Oh, isn't that nice. chicken out? I've never heard that. You mean because I reduced China from 145% that I set down to 100 and then down to another number and I said you have to open up your whole country and because - uh - I - I gave the European Union a 50% tax uh tariff and they called up and they said “please let's meet right now. Please let's meet right now.” And I said okay I'll give you till July. I actually asked them I said what's the date? because they weren't willing to meet. And after I did what I did, they said, "We'll meet anytime you want." And we have an end date of July 9th. You call that chickening out because we have 14 trillion dollars now invested, committed to investing; When Biden didn't have practically anything, Biden, this country was dying. 

You know, we have the hottest country anywhere in the world. I went to Saudi Arabia. The king told me, he said, "You got the hottest c.”- We have the hottest country in the world right now. Six months ago, this country was stone cold dead. We had a dead country. We had a country people didn't think it was going to survive." And you ask a nasty question like that. Uh it's called negotiation. You set a number and if you go down, you know, if I set a number at a ridiculous high number and I go down a little bit, you know, a little bit, they want me to hold that number. 145% tariff. Even I said, "Man, that really got up." You know how it got? Because of fentanyl and many other things. And you added it up. I said, "Where are we now? We're at 145%." I said, "Woo, that's high. That's high." They were doing no business whatsoever. 

And they were having a lot of problems. We were very nice to China. I don't know if they're going to be nice to us, but we were very nice to China. And in many ways, I think we really helped China tremendously because, you know, they were having great difficulty because we were basically going cold turkey with China. We were doing no business because of the tariff, because it was so high. But I knew that. But don't ever say what you said. That's a nasty question. Go ahead. To me, that's the nastiest question.  [emphasis added]

Despite this reporter tempting fate, so far “TACO” is holding. Yet, we also haven’t seen empty shelves that seem to be coming. Will Wall Street’s response shift when Trump’s erratic behavior comes with a more visceral impact? And, knowing Trump, his response to shocking economic pain will likely be even more dramatic, erratic behavior. 

That’s all without discussing the surprise decision from the Court of International Trade. But that will have to wait for next time.