"Chicken Little" on Wall Street: Trump's Dance of Escalation and De-escalation
Wall Street finds Trump acting timidly
Whenever the trade war ticker winds up, Wall Street acutely sensitizes itself to the rhythm of Donald Trump's unpredictable dance. From calling the U.S. a global trade victim to flip-flopping on tariffs, Trump's strategies often leave investors scratching their heads and doubting which interpretation of his words to trust.
A recent skirmish offers a striking reminder of this ever-evolving trade war drama, as China and the U.S. inched towards a dangerous cliff before announcing a brief reprieve. They had agreed to a 90-day tariff truce back in May, and the world breathed a collective sigh of relief after both parties reached a preliminary framework agreement in London. But the constant pattern of escalation and de-escalation leaves us questioning: What exactly are we getting that we didn't have before?
As Trump and his Chinese counterpart continue theirtango of economic brinkmanship, investors can't help but notice the familiar dance—a dance that has come to be known as the Trump Tariff Cycle (TTAC).
Trump Tariff Cycle (TTAC): Study the Patterns, Master the Play
The Bullish Side
After Trump takes the stage with a compulsive need to show strength, he puffs himself up, going head to head with global leaders in unrelenting trade skirmishes. This turns out to be a lucrative opportunity for those who can predict and properly respond to market movements. As traders have learned to capitalize on Trump's ego, many have realized it's all about riding the tariff rollercoaster:
- Bite the Bullet: When Trump escalates his trade rhetoric, investors go short on the S&P 500, aiming to make a profit on every dip.
- Hold Your Breath: Wait five days. During this time, market volatility increases as investors anticipate Trump's next move, but prices start to recover as the fear subsides.
- Buy the Recovery: Take advantage of the momentum and jump back on the uptrend.
By riding the tariff rollercoaster, participants can cash in big when Trump "taco-es" yet again. Those who have mastered the cycle can theoretically generate consistent returns: statistics show that since February, a simple bet yielded 12 percent in returns following this strategy.
The Bearish Side
Unfortunately, this cycle doesn't come without its risks. The constant tug-of-war between Trump and China gradually erodes investor confidence and sows confusion about the long-term impact of this unprecedented trade war. The whirlwind of market volatility, combined with uncertainty about the outcome, can have dire consequences for businesses and consumers alike.
Moreover, the TTAC may be unsustainable in the long run. As leaders become more entrenched in their positions, negotiators may find themselves backed into a corner, making a compromise increasingly difficult to strike. Trump's unpredictable nature, paired with his tendency towards hyperbole, often clouds the negotiation process. If market participants become complacent, they may one day suffer from the consequences of being caught off guard when Trump flips the script.
The Elephant in the Room: China's Kingpin: Rare Earths
In the midst of this dance, there looms a cold, hard reality for the U.S. economy: China's leverage. China currently controls 80-90% of the world's market for rare earth minerals, elements crucial for manufacturing a plethora of high-tech products, including electric vehicles, smartphones, and wind turbines[3]. If Beijing were to snap and withhold these vital resources from the U.S., the American economy could face disastrous consequences.
The prolonged trade war has already started to hurt U.S. exporters, driving up prices, and threatening to leave American supermarkets shelves barren. Even Trump's supporters feel the pinch in their wallets, as the World Bank has significantly lowered its economic outlook for more than two-thirds of all countries, warning of the slowest global growth since the 2008 financial crisis[3].
The End Game: The Stretch and the Release
While investors thrive on turning each "trade taco" back into tacos guisados, the dance of escalation and de-escalation takes a toll on global supply chains, small businesses, and consumer confidence. As the truce between Washington and Beijing expires in August, there is no clear indication that Trump is ready to extend it, or completely remove the astronomical tariffs.
Market participants should remain vigilant during this critical period. While Trump may be playing a predictable pattern, when the stakes are this high, anything can happen. Many analysts believe Trump has already overplayed his hand against China, but Trump's reputation for unpredictability ensures that not even the most seasoned investor will leave their chips comfortably resting on the table.
- Donald Trump
- Tariffs
- Trade Conflicts
- Stock Prices
- Wall Street
- The continuous dance of escalation and de-escalation in trade conflicts, as seen with the recent tariff truce between China and the U.S., highlights the importance of understanding the Trump Tariff Cycle (TTAC) in business, finance, and politics, as well as general-news and crime-and-justice sectors.
- For investors, mastering the TTAC cycle can potentially generate consistent returns, as demonstrated by the 12% returns since February, following the strategies of going short on the S&P 500 when Trump escalates trade rhetoric, waiting five days, and then buying the recovery.
- However, the TTAC comes with risks, as the constant tug-of-war between Trump and China can erode investor confidence, sow uncertainty about the long-term impact, and lead to disastrous consequences for businesses and consumers in case of unpredictable actions from Trump, especially regarding compromises and the withholding of rare earth minerals, which China currently controls 80-90% of the global market for.
