Trump Keeps TACOing. What If Markets Stop Caring?

0:01Bloomberg Audio Studios Podcast Radio News. So far this week, and it's only Wednesday, President Trump has threatened to raise tariffs on South Korean exports to 25 percent. He said he's OK with a weakening dollar. And Trump announced a massive armada is heading to Iran. Last night at a speech in Iowa, the president once again criticized the Federal Reserve chair. We call him too late. He's too late. Jerome, too late, pal. He's too late. Trump's latest attack on the Fed's independence came in the middle of a two-day meeting on interest rates. And, as expected, policymakers decided not to lower them.

0:42It used to be any one of these announcements could have upended global markets. But in the second year of President Trump's second term, investors seemed to be shrugging them off. It is Taco Tuesday, but it seems that every day is a taco day these days. Is that taco trade sort of emerging here once again? The taco trade, if you want to call it that, the boy who cried tariff. Taco, of course, stands for Trump always chickens out. And this is the theory that Trump is not powerfully committed to any policy position in general. Rob Armstrong is a columnist for the Financial Times and the co-host of the Unhedged podcast.

1:20He's also responsible for that taco moniker. He came up with the acronym. So when he makes an extreme threat and he is faced by resistance, either from markets or from the body politic, He turns around and walks the other direction. The guy folds, is what it says. Since Election Day in 2024, many investors have been making a bet that whatever Donald Trump threatens to do, he probably won't. It's unlikely to happen. The taco trade is the smart money when the dumb money panics and sells on the last crazy thing the president said. That's when the smart money buys. This week, Bloomberg Economics published a report analyzing all the times President Trump threatened to raise tariffs and found that roughly three times out of four, the tariff he threatened didn't materialize.

2:12In other words, the taco trade was right far more often than it wasn't. When I saw that finding, I immediately thought of two people I wanted to talk to. Bloomberg Opinion columnist John Authors and Rob Armstrong, again, the columnist who gave us the term taco. You can identify me as Anakin Skywalker to John's Obi-Wan Kenobi. John hired me at the FT 15 years ago. The professional path I currently trot at the FT writing a daily newsletter about markets is a path that was, of course, blazed by John. So I'm doubly indebted, and it's a thrill to just be able to be here and chop it up with him. To get these two guys together in a studio on a Tuesday night when John was on deadline, I promised them we'd line up dinner.

2:57What's cooking? Looks like tacos. I couldn't resist. The three of us ate, and then we talked about how the taco trade has evolved over the past year and how it seems to be changing in real time. More than one economist has pointed out to me that taco seems like an unstable equilibrium. Because, you know, each time we go through the cycle, the market is less impressed with the stuff Trump says. And so in order to get the response that would make him change direction, he has to say progressively crazier and crazier stuff. And eventually you drive the car over the cliff and the joke's on everyone.

3:39I'm David Gurra, and this is The Big Take from Bloomberg News. Today on the show, digging into the taco trade, why Wall Street has come to count on President Trump backing down, and what it could mean if investors keep getting rewarded for not taking the President of the United States at his word.

4:03A pivotal moment in the evolution of what FT columnist Robert Armstrong calls taco theory was on April 2nd, 2025. Nice crowd. What a good-looking group of people. That's when President Trump made a big announcement about changes to trade policy. My fellow Americans, this is Liberation Day. Waiting for a long time. April 2nd, 2025 will forever be remembered as the day American industry was reborn, the day America's destiny was reclaimed. Like many of us, Rob and Bloomberg's John authors were paying close attention. The president had made a lot of noise in the run-up to this event in the Rose Garden.

4:45And John says he was expecting more bluster and maybe a flat across-the-board tariff rate. And then it turns out that he was doing 10 % plus reciprocal tariffs, and then it turned out that the reciprocal tariffs were reciprocal in a way that no other person had ever even attempted to use that word before. I was literally open-mouthed and started swearing at the computer because this was ridiculous and because it meant I knew I was going to be in until midnight. I think I spoke to you at about 10 o 'clock that night. I think that's right. But I just literally couldn't believe that he was doing something that stupid.

5:19I mean, it was just a jaw-dropping moment. It was so chaotic. It was so weird. They taxed an island with only penguins, all of this stuff. And it spoke. It was so bizarre you were almost paralyzed. Rob and John were shocked. And so were markets. Stocks plunged and the bond market tanked. The price of bonds fell because everybody at once had the very same reaction that John and I had, where you're seriously contemplating the possibility that these people are f***ing crazy. Rob says it was a real moment of despair for everyone. But in the days that followed, President Trump started cutting deals and making exceptions.

6:00And eventually, he took a huge step back. I did a 90-day pause for the people that didn't retaliate. Because I told them, if you retaliate, we're going to double it. And with that announcement that those tariffs were off temporarily, markets rejoiced. Then it was just straight north. He starts taking a step back, and we're on the escalator. This is like paradigmatic taco. Yeah, yeah. And those who realized, you know, I wasn't one of them, that they don't care about any of this stuff. They made a lot of money. And a few weeks later, Rob wrote about what had happened. I ended up writing about this pattern of big talk, huffing and puffing, strong market reaction, Trump pulling back, the market recovering.

6:45I just needed a short way to refer to this thing that just kept happening. Taco was funny. I wasn't aware that I was doing something wonderfully clever at the time. It's a really simple claim underneath there that the president doesn't really care about anything. And so if he is forced to pay costs in popularity or power for a policy, he'll always change it. That could be false. But that's the serious underlying thesis, that there is no there there. And that markets trade on that assumption. And that markets trade on that assumption. Exactly right. Since Rob's first newsletter about the taco trade, we've seen that pattern over and over again.

7:28It was electronics. And then, no, we're just kidding about that. It was almost any sector-specific tariffs. We've seen this. John has a better memory than I do. There was one on India for some reason that went away again. there was the Bolsonaro tariffs against Brazil, that they were punishing Brazil for not being very nice to Jair Bolsonaro. That's a very important example, because that is an example where the country on the other side of the table really stood up and fought, and it worked. And it's one thing to be China and stand up and fight, but if you're Brazil and you stand up and fight, it shows that the range of people who could possibly put up meaningful resistance is much larger.

8:13I want to bring up a study that our colleagues at Bloomberg Economics did recently. They wanted to see how often President Trump has threatened a tariff that doesn't get implemented. They identified 49 tariff threats or new trade investigations between the November 2024 election and January 25th, 2026. They found that about 20 % of those tariffs were imposed in full, another 6 % were imposed and then withdrawn, the China threats among them. That means more than 70 % of the president's threats of tariffs or trade investigations did not pan out. They were either imposed in part, where they haven't been imposed, where they've been withdrawn, where they're still under investigation.

8:48I want to be clear here, Bloomberg Economics did not use the taco term, but I think you could argue, two of you might hear, that the results imply a taco rate of about 70%. People in the office have been referring to it as the taco story. The taco story. Carry on, yes. If they didn't use the term, we're branding it as such. Rob, what do you make of that? When you look at that raw data, what does it tell you? answer as if I was a taco hater, which there are plenty. The taco hater says, just as the president said, this is negotiation. He starts with an extreme offer. He pulls you in his direction and he gets something at the end of the negotiation and he looks magnanimous.

9:27That's the story anyway. And so you might, if you wanted to write taco off as just an idiotic joke by a second rate journalist, you might argue, what's the overall tariff rate now? Which is much higher. It's 15%. We tariff more now. Has it achieved the things the president wanted that to achieve? You can have a debate. But he moved the ball forward on the economic field. So I guess that's what I have to reckon with as somebody who believes, still believes the taco thesis, is that it's not the guy who's done nothing. I mean, I think in a way it's more interesting to talk about where Taco has failed to hold, right?

10:08And where he has followed through. I mean, I got very unpleasant emails after the missile strikes on Iran. And I got very unpleasant emails after Maduro was snatched up and brought to Brooklyn. And the text of these emails or these social media posts was like, who's Taco-ing now? Right. Right? Right. And I guess my response to that is where we are now is taco for the strong, faffo for the weak. This is how I've been characterizing it. If you are a country like Iran or Venezuela that is not strong enough to push back, the taco - Or Bangladesh. Yes. There is no tacos for you. You will be fooling around and finding out instead.

10:57Coming up after the break, the state of the taco trade today, where it goes from here, and the consequences for everyone of Wall Street's bet the president will always back down.

11:17Last week, President Trump had Europe on edge. The president made it clear he wanted to make Greenland part of the United States. His administration went so far as to say military force was not off the table, a move that would pose an existential threat to NATO. And Trump said he'd put additional tariffs on European nations that had rallied to Denmark's side in the standoff. In a speech at the World Economic Forum's annual meeting in Davos, the president doubled down on his demands. You can say yes, and we will be very appreciative. Or you can say no, and we will remember. But only a few hours later, Trump announced he'd met with NATO Secretary General Mark Ruta, and they'd agreed on a framework for a future deal with respect to Greenland, and, as the president put it, the entire Arctic region.

12:06And Trump backed off the threat of those additional tariffs. I asked Bloomberg Opinion's John Authors and the FT's Rob Armstrong if the president's move in Davos could be categorized as a taco. I think it's an ambiguous case. John may disagree. And why is that? Why is that? Markets didn't move that much, first of all. Complacent during the speech? Right. End of the day higher. Yeah, yeah. And, you know, markets were down. The dollar was down one and a half or something, and the S &P was down 2 % on this really serious huffing puffing. So if he was backing off in the face of pressure, it was political pressure in the form of a more unified Europe.

12:46It did look like what happened after Liberation Day, but just a tiny echo of it. Tiny? Like, yeah, again, you did have the combination of bond yields going up while the dollar goes down, which is a sort of classic emerging markets crisis. And John and Rob emphasized it's the bond market, not the stock market, that really matters here. The stock market, despite appearances, matters less. we discovered that Donald Trump was actually prepared to look through a fairly big reverse in the stock market and he probably recognizes that his people don't care as much about the stock market the bond market is normally when you're scared you buy bonds when you are scared in such a way that you sell bonds, that is very dangerous.

13:45That's a very unusual state of affairs. And that puts far more direct pressure on the government itself and on the economy. So the bond market is very, very big. The market for treasuries makes even the stock market look illiquid by comparison. It's very difficult to move once it has started moving against you. The kind of classic Wall Street way to phrase this is that the bond market is math and the stock market is a bunch of adrenaline addled risk monkeys. Yes. And so the so that you get these much more dramatic responses much more quickly in the stock market. But you kind of expect it from the monkeys.

14:27When the grownups in the bond market start to freak out, then you really have a problem. There is another dynamic. As the idea of taco is absorbed widely, with more investors assuming Trump will walk back his threats, the taco trade loses its power and it takes bolder threats to make markets respond. Like any good economic insight, it degrades itself over time. The market incorporates it and it starts to disappear. So, you know, these things have a half-life and I think taco has had a lot of its half-life. The economist Aaron Dubé at the University of Massachusetts has written about a kind of taco cycle.

15:04As markets learn to shrug off increasingly extreme statements from the president, that could encourage him to make even bolder promises before he has to contend with a market reaction. I asked John and Rob about the risks of increasing brinksmanship setting off a kind of vicious cycle. I am inclined to agree with that. And I guess that the I mean, again, it's just this agonizing thing that we all have to spend so much of our time gauging the thought process of this one individual whose thought processes are idiosyncratic. Reverting to the my FT training for a second to give you some British understatement.

15:47In the past, markets have acted as a kind of check on policymaking. If a president did or said something unexpected, that would spook Wall Street. Well, Rob wonders if those days are done. Is the relationship between markets and American presidential power forever changed by Trump? Is the game different now? I don't, but that, you know, what will the next person to sit in the Oval Office learn about the kind of dance that presidents have to dance with the market from Trump? And I think, OK, that's a fascinating question, way to put it. Throwing things forward, I think a lot depends on the midterms.

16:31The administration, the reason markets are doing as well as they are at the moment is because there is an awful lot of stimulus and liquidity out there. And the administration is not being shy about this, is trying to stimulate the economy to push us through the midterms. if it succeeds that will be very much taken in in britain where the incumbent party could choose when to go to the polls you had the concept of stop go economics that you would prime the pump win your election and then give people their medicine for a year or two before you prime the pump again you might find that there is an attempt to impose that cycle again here or at least when there isn't gridlocking in congress that there's there's some kind of an attempt to make that work When I talk to shell-shocked market participants about being exhausted in the way John described and not knowing how to read this stuff and being worried about their portfolios, which is what they're paid to do, is worry all along.

17:33The topic of the Supreme Court comes up pretty quickly. That the Lisa Cook case and, of course, yeah, the whether he was allowed to do the tariffs in the first place. Yes. These are really in front of investors' eyes and a real reason for hope and optimism. Not about politics, it's just stability, knowing the rules and being able to play by them in the taco world, as it were. Markets historically have been a guardrail. We've talked about the degree to which the taco trade or the taco theory is baked in now. Investors expect there to be this walk back time and time again. Rob, I'll start with you.

18:12What is lost if markets aren't providing the kind of guardrail that they have been in the past? In a world where markets don't believe anything the government says, the worry is that markets realize too late the damage that has actually been done. So markets don't believe that the stuff he's saying is going to happen. if they wake up to the reality that something big has happened too late. I mean, that's the risk. That's the risk. But by the way, I believe the guardrails are in place. We just saw it in Minnesota. Americans didn't like him trying to grab Greenland, and they certainly didn't like civilians getting shot on the streets of Minneapolis.

18:58That's polling badly. It's getting opposition politicians and his own politicians riled up against him, and it seems to be having an effect. Certainly both the Supreme Court and the Republican majorities in the two houses of Congress have been less of a tight guardrail than one would have expected ahead of time. Plainly, those guardrails have been less strong or less. They haven't been utilized in quite the way that you might have expected, but they are still there. The action is at the Fed, right? From the point of view of us, of markets people, is the action is, can Trump bring this institution to its knees?

19:42And once he does that, it almost doesn't matter what the rate decisions are or whatever. Just the message that the Federal Reserve is now responsive to the president, first and foremost, that message would be a disaster. And so for markets people, that's where the guardrails need to be. And that's where the test is.

20:29tomorrow.