Featured in Wealth of Nations: Dangerous Complacency

Thoughts on Trump's latest trade salvoes, who's afraid of the strong euro, and how Italy and France have traded places

The End of the Economic World as We Knew It (redux)

What remains remarkable is the extent to which the financial markets continues to take Trump’s trade wars in its stride. Although the EU letter only landed on Saturday when the markets were closed, it followed a week in which Trump announced a new 35 percent tariff on Canada, a 25 percent tariff on Japan and South Korea, a 50 percent tariff on Brazil as a punishment for the country’s legal pursuit of former president and Trump ally Jair Bolsanaro on charges of trying to forment a January 6 style insurrection, and a threat to raise the baseline tariff from 10 percent to 15 to 20 percent on anyone who doesn’t receive a letter.

Yet the S&P500 closed only a fraction lower on the week, the VIX volatility index (often referred to as the Wall Street fear gauge) fell, and the gold price declined. Indeed, Nvidia last week became the world’s first $4 trillion company. That suggests the markets have become desensitised to Trump’s tariff threats. Even Jamie Dimon, the JP Morgan boss, thinks this is complacent. So what lies behind this insouciance? The most common explanations include:

• the TACO trade: so far, the bet that Trump Always Chickens Out has paid off for investors. Indeed, for all the latest tariff threats, the real impact of Trump’s latest letters has been to push back the deadline for countries to reach deals by three weeks to August 1. Whether this deadline is any more real is an open question. According to one White House insider quoted by Politico: “It’s all fake. There’s no deadline. It’s a self-imposed landmark in this theatrical show, and that’s where we are.”

  
  

• US earnings momentum: so far there is little evidence that Trump’s trade wars are having an impact on the economy or corporate earnings. Inflation has not noticeably picked up, nor has growth slowed, despite predictions of imminent stagflation in the wake of “Liberation Day” on April 2. Instead, renewed confidence in US exceptionalism, driven by optimism about AI and technology, has seen some Wall Street banks raise their forecast for the S&P500 this year. Goldman Sachs, for example, expects the index to rise a further 6 percent to 6,600 by the end of the year.

  
  

• the Trump trade: investors are betting that any negative consequences of higher tariffs will be offset by other aspects of Trump’s economic agenda. His “One Big Beautiful Bill” which appears to bake in budget deficits of six percent per year as far as the eye can see may pose serious questions about America’s long-term debt sustainability, but as Marco Annunziata notes in his latest Substack post, “in the long-run we are all insolvent”, while in the short-term, the budget is likely to boost growth. Add to that hopes that bank deregulation will boost demand for US Treasuries, thereby helping keep borrowing costs down, and the domestic outlook looks positive.

Nonetheless, the biggest bet that investors are making is that globalisation remains intact, as David Bowers and Ian Harnett of Absolute Strategy Research argued in a recent presentation to clients. Investors are sticking to this view that the old rules of the game will continue to apply despite everything that leading members of the Trump administration have said and despite all the evidence that the US president is determined to disregard all constraints on his power.

Read further here: Dangerous Complacency