This week, President Donald Trump announced that he was considering a 50% tariff on goods from the European Union; just days later, he reversed himself, announcing that any such tariffs would be delayed until July 9. Traders rejoiced, with the S&P 500 spiking dramatically. The market's leap at Trump's flip-flop was not unusual; in fact, it's become a common feature of the financial landscape. As one Financial Times columnist has flippantly suggested, traders are making bank by betting on the "TACO" trade -- Trump Always Chickens Out. The notion is that, like Liberation Day tariffs and threatened tariffs on China and now threatened tariffs on the EU, Trump enjoys launching shots across the bow of his geopolitical opponents, but then quickly backs off once the prospective damage becomes clear.
Now, the buried lede in this arrangement is obvious: The markets are ready and raring to rip, looking for any sign that Trump will revert to the economic policies of his first term -- deregulation, tax cuts and low trade barriers. If he does that, investors are prepared to open the floodgates. In fact, the TACO bet is presumably the only reason the stock markets haven't totally tanked since Trump's Liberation Day gambit: Investors expect that Trump's largest mistakes will never practically materialize.
But uncertainty creates its own form of paralysis. The question for market-watchers isn't merely whether the markets are up or down overall under Trump (the S&P is down a little over 2%; the Dow Jones is down around 4%); the question is where the markets would have been had Trump never launched his barrage of inconsistent and vacillating policies. There, the answer is more troubling: If we calculate the rate of increase in the S&P 500 from Election Day 2024 to Inauguration Day 2025, and assume the same rate of growth until today, and then contrast that growth with the actual market numbers, the markets are underperforming around 10%.
And the problems for Trump don't stop there. The benefit of a non-ideological president is that Trump can quickly jettison policy that doesn't work in favor of policy that does. But it also means that our geopolitical enemies don't actually believe that Trump is willing to maintain tough policy over the long term. Take, for example, Trump's vacillation on Russian aggression in Ukraine. Trump entered office pledging to end the Ukraine conflict, and launched his quest for peace by exerting extreme pressure on Ukrainian President Volodymyr Zelenskyy, who quickly caved to his every request. Russian President Vladimir Putin, however, has rejected every demand Trump has made. This week, after Trump posted that Putin was "playing with fire!" Russia Today responded, "Trump's message leaves little room for misinterpretation. Until he posts the opposite tomorrow morning."
Meanwhile, the Iranian regime is banking on the White House's rising isolationism to push its own agenda in nuclear talks. Trump repeatedly labeled Barack Obama's Iran deal the "worst deal in history" during his first term; Iran now seeks to remake that deal, under a different name. And the White House has signaled different positions to every side: that the United States seeks complete denuclearization, or a ban on Iranian nuclear weaponry, or a ban on Iranian nuclear weapons development ... Iran sees daylight, and they're acting.
For China, the calculus is similar. China has been ramping up its activities in the Taiwan Strait, preparing for the possibility of a blockade of the island nation. Meanwhile, the Trump administration has variously threatened massive tariffs, withdrawn those massive tariffs, threatened to ban TikTok, delayed that ban ... China sees vacillation, and they're acting.
Strategic ambiguity is sometimes useful. But uncertainty interpreted as weakness is wildly counterproductive. For the sake of Trump's presidency, a return to free markets and peace through strength would do far more to ensure success than the whipsawing policy prescriptions emerging from the White House on a near-daily basis. Trump knows the right thing to do; he did it the first time around. All he has to do is learn from his own history.
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