New York
\n CNN
\n \u00a0\u2014\u00a0<\/p>\n
\n Tariff Man is back again \u2014 and so is Wall Street\u2019s TACO trade<\/a>.\n <\/p>\n \n President Donald Trump is once more threatening to lob massive duties on a wide swath of US imports, everything from copper and pharmaceuticals<\/a> to goods from Japan and Russia<\/a>.\n <\/p>\n \n Yet Wall Street is barely flinching<\/a>, with some investors betting Trump will repeat his tendency to back down from his most extreme threats.\n <\/p>\n \n The muted response is just the latest instance of what\u2019s known as the TACO trade, short for Trump Always Chickens Out.\n <\/p>\n \n \u201cHe steers us toward disaster and then \u2014 at the last minute \u2014 steers us away from disaster and says, \u2018Look, I saved us,\u2019\u201d Michael Block, market strategist at Third Seven Capital, told CNN in a phone interview on Tuesday.\n <\/p>\n \n That\u2019s what happened in early April. Trump announced sky-high \u201cLiberation Day\u201d tariffs that alarmed investors, convincing many that a recession was imminent.<\/a>\n <\/p>\n \n The market freakout \u2014 both in stocks and bonds \u2014 was so intense that it convinced Trump to back down. He abruptly froze those \u201creciprocal\u201d tariffs for 90 days<\/a>, setting off an epic market recovery<\/a> that continues today.\n <\/p>\n \n Flash forward to this week\u2019s \u201cLiberation Day\u201d 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.\n <\/p>\n \n But the selling wasn\u2019t dramatic. It was a modest (and arguably overdue) pullback from all-time highs.\n <\/p>\n \n 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.\n <\/p>\n \n \u201cAt the end of the day, no one really anticipates most of these tariffs will go into effect. The TACO trade is still the market\u2019s expectations,\u201d said Ed Mills, Washington policy analyst at Raymond James.\n <\/p>\n \n Yet there could be a flaw in Wall Street\u2019s TACO trade logic.\n <\/p>\n \n 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\u2019s feet to the fire, pressuring him to back away from policies that could damage the economy and corporate profits.\n <\/p>\n \n \u201cIt\u2019s a dangerous game when you need a market reaction to get a policy change,\u201d Mills said.\n <\/p>\n \n It\u2019s the market version of a chicken and egg problem.\n <\/p>\n \n Bob Elliott, CEO of alternative investment firm Unlimited, noted on X<\/a> that TACO is \u201cconsensus and already fully priced in at these levels.\u201d\n <\/p>\n \n \u201cTrouble is, without the pain of falling markets, he won\u2019t chicken out,\u201d said Elliott, a former executive at hedge fund giant Bridgewater Associates.\n <\/p>\n \n The paradox is complicated even further by the fact that Trump himself is aware of the TACO trade.\n <\/p>\n \n When first asked about TACO, in late May<\/a>, Trump recoiled and described it as the \u201cnastiest question\u201d and told the reporter not to \u201cever say what you said.\u201d\n <\/p>\n \n \u201cI chicken out? Oh, I\u2019ve never heard that,\u201d Trump said at the time.\n <\/p>\n \n Then after investors seemed unfazed by the Monday tariff letters, Trump posted a message insisting he won\u2019t chicken out this time.\n <\/p>\n