"Chicken Little" on Wall Street: Trump's erratic trade policies keep everyone on their toes
Written by Janet D. Davis
Financial leaders on Wall Street view Trump as a timid политиcal figure.
These days, when it comes to Wall Street and trade wars, Donald Trump's "bluff or bluff" game is becoming predictable -aping like a nervous chicken every time. Investors no longer take his constant threats seriously; instead, they rely on his typical pattern of threatening, caving, and announcing dubious deals.
The recent agreement between the US and China, announced this week, had everyone on the edge of their seats. After two grueling days of negotiations in London, both sides seem to have returned to the 90-day tariff truce they agreed to in Geneva in May.
Once again, a familiar pattern has taken shape. Trump whips up a commotion, portraying the US as a victim in global trade, ranting about grotesque tariffs. But just like before, he caves, announcing a deal that often offers little new or concrete. "Escalation to de-escalation" is the military term for this strategy. Wall Street calls it "Trump always chickens out" (TACO).
Investing in the era of Trump's trade chaos
Financial Times columnist Robert Armstrong coined the term TACO a few weeks ago, and the internet has been flooded with TACO memes ever since. Savvy traders have long since factored TACO into their brokerage strategies, reaping the benefits of riding Trump's tariff rollercoaster.
Nomura, an investment bank, calculated that a simple bet since February would have yielded a 12% return. It went like this: Whenever Trump escalated rhetorically, they would bet on a crash of the S&P 500 with futures, only to buy them back five days later. This tactic hinges on the fact that Trump has imposed a high tariff only to retreat, thus creating a "buy the dip" opportunity.
However, while traders can make a fortune with these tactics in the short term, they risk getting caught off guard by an unexpected flare-up or escalation of Trump's trade war.
China's vice grip on rare earths
The American economy is increasingly feeling the pangs of the US-China trade war. The World Bank has significantly downgraded its economic outlook for more than two-thirds of all countries, warning of the slowest growth since the 2008 financial crisis. Trump's voter base is beginning to feel the pinch in their wallets.
Moreover, China has found a powerful leverage against Trump: rare earths. The US relies heavily on these vital minerals, needed predominantly in the high-tech industry for magnets. China controls 80% of the global production. Despite Trump's threats, the US can do little to counteract China's export controls.
A fragile truce, and an unstable future
The persistent unpredictability of Trump's trade policy makes the situation precarious. The longer the trade war continues, the smaller the gains as the market grows accustomed to Trump's ups and downs. On the flip side, the danger of being wrong or caught off guard by Trump increases.
While the deal reached with China offers some temporary relief, there are no concrete signs that it will last beyond the August expiration of the 90-day truce. Should Trump decide to reimpose astronomical tariffs, investors should brace themselves for another round of market tumult. In the words of a former chief lobbyist of the U.S. Chamber of Commerce, "It seems like we're going in circles. What exactly are we getting that we didn't have before?"\
- Donald Trump
- Trade War
- Stock Market Volatility
- Global Economy
- China - US Relations
Enrichment Data:
Diversification, currency hedging, sector rotation, international investment, active management, risk management tools, fixed income and bonds can all help mitigate risks associated with trade conflicts and tariff announcements. These strategies involve spreading investments across different asset classes, sectors, and geographies, hedging against currency fluctuations, identifying resilient sectors less likely to be impacted by trade tensions, reducing exposure to vulnerable sectors like manufacturing and agriculture, investing in countries with stable trade relationships or those less affected by trade conflicts, exploring emerging markets that might benefit from trade realignments, staying informed and monitoring trade developments, regular rebalancing of portfolios, using derivatives to hedge against potential losses or capitalize on gains from trade policy changes, and considering financial instruments designed to mitigate specific risks associated with trade disruptions. [1][2][4]
- The volatile stock market, influenced by Donald Trump's erratic trade policies, has led some investors to diversify their portfolios, hedging against currency fluctuations and sector rotation.
- Given the uncertainties in China-US relations and the global economy due to the trade war, many are considering international investment and active management, coupled with risk management tools, to lessen the impact of tariff announcements.
- As the American economy feels the effects of the US-China trade war, some are looking to explore emerging markets that might benefit from trade realignments, aiming to capitalize on opportunities hidden amidst the chaos.
- To navigate the precarious market conditions, investors are advised to stay informed, monitor trade developments, regularly rebalance their portfolios, and consider financial instruments designed to mitigate specific risks associated with trade disruptions.
