Team TACO cashes in as Trump folds again: A Poker Game of Bluffs and Counter- bluffs
In the world of poker, a tell is an unconscious action that reveals deception. Trump's approach is less sophisticated, relying on bluffs and threats to intimidate his opponents. This week, Team TACO, who believe Trump always backs down, spotted his bluff and called it.
The drama unfolded over the weekend when Trump threatened to use any means necessary to annex Greenland and imposed tariffs on European countries that opposed him. The markets reacted with fear and panic, causing a bond and stock market meltdown, with the S&P 500 falling over 2% and reaching its lowest point since October. The VIX index, a measure of market fear, soared, the US dollar dropped, and investors sought safety in gold.
However, even before Trump's bluff was exposed, markets began to recover. Investors who could see through Trump's bravado profited handsomely on 'TACO Tuesday'.
The president's statement on his tariff backdown, delivered towards the end of the trading session in New York, sent the S&P 500 soaring by 1% in the final hour of trading.
The TACO strategy is not without risk. In Aesop's fable, The Boy Who Cried Wolf, the wolf eventually eats the boy. But so far, it has proven effective.
When Trump announced his 'Liberation Day' tariffs last year, markets initially panicked, only to recover fully after the tariffs were scaled back. Many investors who panicked got caught on the wrong side of the trade, incurring financial losses when markets recovered.
However, the TACO strategy relies on the market's initial negative reaction to Trump's extreme policies. If investors remain calm in the face of Trump's threats, he has less incentive to back down.
For the TACO strategy to thrive, markets must respond with chaos, and Trump must feel the pain. He listens to the equity and bond markets, viewing them as a report card on his performance.
Despite the successful TACO trade, the market recovery on Wednesday only partially reversed the losses from Tuesday. Thursday's trading will determine the final verdict. At the time of writing, S&P 500 futures were up by about 0.3%, while riskier Nasdaq futures were ahead by 0.5%.
This week's market reaction is not solely attributed to the TACO strategy. European leaders, such as French President Macron, British Prime Minister Keir Starmer, and Danish Prime Minister Mette Frederiksen, pushed back strongly against Trump, calling his bluff.
While Trump has walked away from his ambitions to invade Greenland, the framework agreement negotiated with NATO Secretary-General Mark Rutte lacks detail. Further challenges may lie ahead.
Despite the setbacks, 'TACO Tuesday' has been a triumph. The Business Briefing newsletter offers major stories, exclusive coverage, and expert opinion. Sign up to stay informed (https://www.smh.com.au/link/follow-20170101-p56j4t).
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