Wall Street's Trump TACO trade has a chicken and an egg problem

CNN

09-07-2025

Tariff Man is back again — and so is Wall Street's TACO trade.
President Donald Trump is once more threatening to lob massive duties on a wide swath of US imports, everything from copper and pharmaceuticals to goods from Japan and Russia.
Yet Wall Street is barely flinching, with some investors betting Trump will repeat his tendency to back down from his most extreme threats.
The muted response is just the latest instance of what's known as the TACO trade, short for Trump Always Chickens Out.
'He steers us toward disaster and then — at the last minute — steers us away from disaster and says, 'Look, I saved us,'' Michael Block, market strategist at Third Seven Capital, told CNN in a phone interview on Tuesday.
That's what happened in early April. Trump announced sky-high 'Liberation Day' tariffs that alarmed investors, convincing many that a recession was imminent.
The market freakout — both in stocks and bonds — was so intense that it convinced Trump to back down. He abruptly froze those 'reciprocal' tariffs for 90 days, setting off an epic market recovery that continues today.
Flash forward to this week's 'Liberation Day' sequel. US stocks retreated on Monday after Trump sent letters to Japan, South Korea and a dozen other nations dictating tariffs to take effect on August 1.
But the selling wasn't dramatic. It was a modest (and arguably overdue) pullback from all-time highs.
Markets barely budged at all on Tuesday as Trump vowed to put a 50% tariff on copper, floated a tariff of up to 200% on pharmaceuticals and promised a 10% tariff on Brazil, China, India, Russia and other members of the BRICS economic club.
'At the end of the day, no one really anticipates most of these tariffs will go into effect. The TACO trade is still the market's expectations,' said Ed Mills, Washington policy analyst at Raymond James.
Yet there could be a flaw in Wall Street's TACO trade logic.
If investors widely bet that Trump will blink, that means there is no market freakout. And no market freakout in turn means no one is holding Trump's feet to the fire, pressuring him to back away from policies that could damage the economy and corporate profits.
'It's a dangerous game when you need a market reaction to get a policy change,' Mills said.
It's the market version of a chicken and egg problem.
Bob Elliott, CEO of alternative investment firm Unlimited, noted on X that TACO is 'consensus and already fully priced in at these levels.'
'Trouble is, without the pain of falling markets, he won't chicken out,' said Elliott, a former executive at hedge fund giant Bridgewater Associates.
The paradox is complicated even further by the fact that Trump himself is aware of the TACO trade.
When first asked about TACO, in late May, Trump recoiled and described it as the 'nastiest question' and told the reporter not to 'ever say what you said.'
'I chicken out? Oh, I've never heard that,' Trump said at the time.
Then after investors seemed unfazed by the Monday tariff letters, Trump posted a message insisting he won't chicken out this time.
'TARIFFS WILL START BEING PAID ON AUGUST 1, 2025,' Trump wrote on Truth Social. 'No extensions will be granted.'
But investors aren't buying it.
No extensions — 'until further notice,' Ed Yardeni, president of Yardeni Research, said to CNN.
Yardeni said there is 'far less panic' in markets today than in early April because investors are betting Trump doesn't want to sink the US economy and hurt his own political standing.
'The market figures this is the art of the deal. While there is a lot of bluster here, this is the way Trump negotiates,' Yardeni said. 'Trump is going to have to put this issue behind him by the end of the summer or early fall because he's risking causing a recession that would diminish the odds that Republicans hold onto their thin majorities in the Senate and the House.'
Of course, there is a risk that without an outcry from Wall Street, and emboldened by mostly upbeat economic numbers, Trump goes forward with the same tariffs investors are betting against.