TACOs and BTFDs
Trump Always Chickens Out
Wall Street’s newest acronym, TACO, has gone supernova in the last couple of days, and with good reason. As the equity markets have exploded higher, investors have returned to the expectations they had prior to Trump’s inauguration. That is, lower taxes and regulation are key to a potential boom. Or at least it seems that way. Uncertainty still remains, but worst-case scenarios are believed to be off the table for now.
The trade war prospect had been there throughout the 2024 presidential campaign, but the investing world had completely dismissed it. Trump did a lot of tough talking on trade in his first term, but most of that was just talk compared to this time around. Besides that, what aggressive actions he did take in his first term only came after passing large, and unfunded, tax cuts that provided upfront stimulus to the economy. All told, the first term was much ado about nothing in regard to trade war prospects, and most people figured Trump 2.0 would be a replay. He renegotiated trade deals with Mexico, Canada, and China, but for the most part, changes weren’t substantial.
The take among supporters of Donald Trump from the beginning has been to “take him seriously, but not literally”. He threatens a ton of action, but given enough time, much of it falls by the wayside as he loses interest. What many did not understand is that, in Trump’s first term, most of his top appointees had been serious people with proper qualifications for the job who had some government experience, or at least, a respect for the rule of law. Many of these appointees acted as guardrails that kept Trump from indulging his worst instincts.
A Systematic Attack on the Rule of Law
Trump realized his mistake coming into his second term. He’d had enough time to vet who were the most loyal to him, after repeatedly stress testing them. That is, most of his second term appointments have gladly parroted misinformation on his behalf. His cabinet this time around is filled with a number of conspiracy mongers, and people who are not at all constrained by truth, or the rule of law. At the same time, he has unleashed an onslaught upon the judicial system with scores of absurdly unconstitutional executive orders (EOs), some of which are nothing but petty personal attacks.
One of the most egregious moves has been to write EOs which damage the businesses of large law firms who have argued cases against his unconstitutional EOs. Thereby attempting to cripple legal means to stop what is a blatant power grab. Shakespeare illustrated this common theme in authoritarian power grabs in Henry VI. Degrade the rule of law first, so that you may twist it to your advantage. Then the opposition has no choice but to work outside the law, which allows you to brand them all criminals.
The judicial system is working at its usual tortoise-like pace to weed through this giant pile of EO garbage, and so far, they are holding the line. Most importantly though, the intent needs to be clearly understood. Our constitutional republic is under attack. Trump’s sycophantic Republican allies continue to rubber stamp most all of his actions, along with the occasional expressions of “concern”, yet do little to protect our democratic norms. Despite that fact that judges all across the political spectrum, including Trump appointees, have been almost universally in agreement as to the unconstitutionality of these moves, Republicans are mostly blasting all of the judges as “left-wing radicals” for simply upholding the Constitution, and safeguarding the rule of law. Another disturbing example of our eroding democratic norms.
No one in Trump’s Cabinet has had the courage to stand up and tell him the truth when he doesn’t want to hear it, whether it’s broad policy issues, or trade. Even those who should know better. Disappointingly, Treasury Secretary Scott Bessent, a multi-decade market veteran, has completely gone along with Trump on his tariff policy. DA sees this as a fallacious application of novel, high-minded economic “theory”, over practical considerations. Free trade is an ideal, not a religion. It doesn’t logically follow that it should be a goal without regard to the path to get there. There are costs and benefits to be weighed, including our relationship with our trading partners. By repeatedly insulting our best allies and ignoring the huge natural advantage the U.S. has in trade (lowest exposure in the world), we have alienated ourselves from the world.
Both Canada and the European Union have consumer led boycotts of U.S. products as a response to Trump’s policies. The Trump Administration’s rallying cry has been that every other nation around the world would be hurt worse than us, since most of them run trade surpluses with the U.S., and that would send them running to the table to “negotiate”. That is true in theory, but it doesn’t mean that all of these nations will immediately roll over. MAGA types love to tout their patriotism and pride in country but fail to see that other countries’ citizens have similar feelings. Trump’s ridiculous rhetoric about making Canada the “51st State” by itself delivered liberals to power in the latest Canadian election. The political reality in these countries is that opposing Trump is a winning political strategy, which means that quick capitulation is not very likely.
It seems all of this hasn’t been lost on Trump. Whether it was the stock market collapsing 5% in a day, or U.S. Long-term Treasury yields starting to blow out, Trump got the memo. He was dangling the global economy over an abyss with his “reciprocal” tariffs and had to pull back before it was too late. Beyond that, he has shown a consistent pattern of announcing extremely high tariffs only to back off quickly. The TACO term most likely became popular due to a desire to humiliate Trump, but on an immediate level, it dovetails with one of Wall Street’s all-time favorite themes. BTFD. BUY THE F**king DIP!!!!
BTFD rarely goes out of style for long. All bull markets have some adherence to this mentality, and Trump repeatedly backing off on all of the tariff threats has fueled the recent powerful stock market rally. The announcement of tariffs on April 2 of this year threw stock markets into a tailspin, which caused Trump to pause implementation, and to slash the initial tariffs to 10% (except for China). Since Trump felt he had to remain tough for the sake of his image, he then placed massive tariffs on China of over 100%. Then two weeks ago agreeing to pause those for 90 days.
An Offramp - If Trump Wants to Take It
Yesterday, the U.S. Court of International Trade ruled that former President Donald Trump exceeded his authority by imposing broad tariffs under the International Emergency Economic Powers Act (IEEPA). These tariffs, known as the "Liberation Day" tariffs, included a 10% duty on all foreign products and higher levies on goods from various countries. While the court's decision halts the enforcement of the Liberation Day tariffs, it does not impact sector-specific tariffs on steel, aluminum, and automobiles, which were imposed under different legal authorities. The court found that the IEEPA does not grant the president the power to impose such sweeping import taxes, as it allows emergency powers only in response to an "unusual and extraordinary threat". Consequently, the court vacated these tariff orders and permanently barred their enforcement.
The ruling has significant implications for U.S. trade policy and executive authority. It challenges the use of emergency powers to implement broad economic measures without congressional approval. The decision also affects ongoing international trade negotiations and introduces further uncertainty into the administration's trade strategies. While the court's decision halts the enforcement of the Liberation Day tariffs, it does not impact sector-specific tariffs on steel, aluminum, and automobiles, which were imposed under different legal authorities.
Not surprisingly, the Trump administration has filed an appeal against the ruling, and the Federal Circuit Appeals Court has temporarily stayed the lower court's decision, allowing the tariffs to remain in effect during the appeals process. If Trump were smart, he would use this ruling to provide an offramp to reverse this catastrophically stupid trade policy.
But we shouldn’t hold our breath. The proliferation of the TACO slur toward Trump may just mean he lashes out in other ways that can be detrimental to the economy. One doesn’t need a Ph.D. in Psychology to guess how he will likely react. Few things bother him more than the implication that he is weak, particularly in the dealmaking arena. The cottage industry selling Trump ridicule is already in overdrive, and the end result is a likely reemergence of tensions.
MAGA world is apoplectic over the trade court’s decision. Once again, believing it to be some sort of “radical leftist agenda”, despite the ruling involving 2 conservative judges out of 3. Needless to say, MAGA actually believes these tariffs will benefit them eventually, by bringing manufacturing back to the United States. Trump’s persistent refrain that every country in the world is “ripping us off” has indoctrinated them into believing a load of economic nonsense. The best thing that could happen is for Trump’s trade war to be completely short-circuited, and for us to go back to before they were implemented.
As If Nothing Happened
Markets have now battled back to the same level they were at right around the election back in November last year. The extreme oversold condition (via RSI) in Chart 1 below hit in early April created a ton of dry fuel for the rally we’ve seen over the last couple of months. Triggered initially by Trump backing away from his global “reciprocal tariffs”, another gap up took place on May 12 when Trump massively lowered tariffs on China after initially imposing 145% tariffs. Hence the “Trump Always Chickens Out” trade.
Chart 1: SPX 1 year Chart with RSI
As the reader can see in the chart, the stock market gapped higher after Donald Trump was reelected in early November last year, and then the market traded up to new highs before giving it back in March. Markets were relatively stable, until the world was thrown into chaos on April 2. The ensuing collapse created extreme fear, which set the stage for a massive rally when Trump lowered all tariffs down to 10% for 90 days (except China). Trump then capitulated on China as well, lowering those tariffs to 30% while negotiations can take place.
Capitulation on China produced a final gap up in markets, completely erasing most all of the losses. It’s as if nothing ever happened! In some ways, it never did. The tariffs barely had any time to have a negative economic effect. They would have, had they remained in place, but for now the world has a reprieve. The 10% across the board tariffs may be considerably lower than the initial “reciprocal tariffs”, but they are still considered substantial - and for now, remain in effect. More importantly, Trump is being humiliated by the “TACO” slur at the same time China has been snubbing his efforts. Headlines like below are not likely going anywhere anytime soon.
No more ‘Mr. Nice Guy’? Trump says China is ignoring trade deal
Deseret News - Art Raymond
Trump is also finally figuring out that Vladamir Putin couldn’t care less want he wants. Putin has one goal when it comes to Ukraine - complete victory, and Ukraine under Russian control.
Putin is gambling that he can enrage Trump to the point he abandons peace talks and Ukraine, expert warns
New York Post - Ronny Reyes
We have received a substantial amount of good news in the last few weeks, but investors need to be aware that the market seems to have priced out any sort of bad outcome. Prospects are definitely better than they were two months ago, but uncertainty is still extremely high. Trump is being ridiculed for being “weak”, his efforts are falling apart in various areas (tariffs, Ukraine, DOGE etc.), and he’s even started to see some pushback from Republicans (on a limited basis). An angry, belittled, and chastised Trump is a dangerous Trump, as we saw on Jan 6. With the markets having priced out any bad outcomes to tariffs, investors should be on high alert for Trump “Tape Bombs”.
The Devil’s Advocate
Disclaimer:
The information provided in this newsletter is for educational and informational purposes only and should not be considered as investment advice, a recommendation, or an offer to buy or sell any securities. The views expressed are based on personal opinions and analysis of market conditions, which are subject to change at any time without notice. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Readers are advised to conduct their own research or consult with a qualified financial advisor before making any investment decisions. The publisher is not responsible for any investment decisions made based on the information provided in this newsletter.