Crazy Like A Fox?

Arguably, it’s not so much what Donald Trump’s Sunday evening tariff threats mean for the chances that a trade deal eventually comes to fruition that’s disconcerting. Sure, market participants would be aghast if the whole thing fell apart in earnest and an all-out trade war ensued, but presidential posturing aside, that still seems far-fetched. Rather, the most worrisome thing about what Trump did on Sunday is that it underscores his penchant for throwing caution to the wind — for shooting from the hip, with little to no regard for the consequences.

That’s from “Anarchy Reigns“, a little postmortem we ran on Monday afternoon.

Suffice to say Friday morning’s convoluted tweetstorm from the president reinforces the notion that at least part of what’s got markets off-kilter is the perception that Trump has reverted to irrational posturing. That might be in the service of some domestic political agenda or else designed to reinforce his “tough guy” bonafides ahead of trade negotiations with Europe and Japan. If that’s the case, then “irrational” might not be the right adjective.

But even a generous interpretation that assumes a strategic element still leaves investors to ponder whether the man in the Oval Office is taking the “crazy like a fox” act a bit too far. The fact that US equities fell following the president’s highly confusing string of tweets is a testament to the level of angst he’s creating by live-blogging his thought process.

Irrespective of how things ultimately pan out by the bell, this will not go down as a good week. The five-day string of losses is the worst stretch since December and through noon Friday, this was easily the worst week of the year for the S&P.

Trump’s desperation to reclaim control of the narrative came through loud and clear when he decided to weigh in on inflation just minutes after the latest read on CPI showed consumer prices rose less than expected last month.

“Great Consumer Price Index just out”, Trump tweeted. “Really good, very low inflation! We have a great chance to ‘really rock!’ Good numbers all around.”

In addition to proving, once again, that the president doesn’t understand how to use scare quotes, the fact that he is tweeting about discrete CPI prints betrays how keen he is on micromanaging the narrative. The idea, obviously, was to try and suggest to markets that Fed cuts predicated on subdued inflation are still in the cards.

It didn’t work. Stocks eventually fell anyway, even as the dollar was undercut by the data. 

At the same time, implied vol. on the popular EM equities ETF spiked versus implied vol. on US small-caps this week, suggesting Trump’s bombast and general unpredictably might be bringing back the “America first” trade – at least in terms of how relatively jittery folks are feeling about emerging markets versus US-centric equities. 

Needless to say, EM has enough to worry about on its own without having to suffer through another six months of Trump’s “greatest” tariff escalations. 

Ultimately, Trump has injected all manner of uncertainty into a market that had become, by many measures, entirely comfortable in the notion that a Sino-US trade deal was all but done.

The relative wisdom of the president’s approach when it comes to expressing his displeasure at what were, by most accounts, a series of highly consequential last-minute “edits” by Beijing to the prospective deal, is questionable at best.

There’s a fine line between “crazy like a fox” and just plain old “crazy.”