TACO and Dumpling
Doug Nolan
The S&P500 traded within 3% of February’s record high in Thursday trading.
To be sure, the rally off April lows has been nothing short of spectacular.
Like the “old days” (aka September to February).
Nvidia. MAG7. Manic AI and crypto.
Heck, the Broker/Dealer Index traded to record highs a week ago.
Junk bond and leveraged loan prices have recovered along with equities.
The month saw record ($153bn) month of May investment-grade bond issuance.
Financial conditions have loosened significantly.
Looks too much like a set-up.
Risk markets have quickly settled back to their baseline: disregard myriad risks until one strikes between the eyes.
Squeeze the shorts.
Buy the dips like you mean it – with options, of course, offering the best bang for the buck.
As they have throughout history, speculative Bubbles are just phenomenal at ensuring no one is spared.
My concerns have not been assuaged.
If anything, there is ongoing confirmation of my analytical thesis.
I see an equities Bubble incapable of orderly adjustment, which only boosts odds of “disorderly” – market disorder beyond last month and last August.
Quick policy responses reversed both nascent de-leveraging episodes.
But all the speculative leverage remains – festering and susceptible.
Meanwhile, looming economic and Credit Cycle days of reckoning are closing in.
Extraordinary late-cycle resilience is only fitting of history’s greatest Bubble.
Explanations include Credit system might that comes from steadfast $2 TN or so of annual federal debt growth – the reckless expansion of money-like Treasury debt.
What’s more, Trillions of Treasury/Agency market speculative leverage create a hardier market structure than, say, levered positions in more suspect corporate debt or risky mortgages.
And it’s worth noting the recent comments of the robustness of private Credit and private markets more generally.
Indeed, April’s instability and quick recovery showcased the trumpeted “private market” advantage of being insulated from the whims of the public marketplace.
No need to fret volatility, sinking market prices or illiquidity – for a marketplace that doesn’t do a lot of asset pricing or trading.
In another extraordinary late-cycle Bubble twist, some of the most levered players are making money hand over fist from booming market trading.
May 27 – Bloomberg (Katherine Doherty and Carmen Arroyo):
“Citadel Securities reported record profit and trading revenue in the first three months of the year, buoyed by market volatility that’s continued since President Donald Trump took office.
The market-making giant posted $3.4 billion in net trading revenue in the first three months of the year, up roughly 45% from the same period last year…
Net income surged 70% to $1.7 billion, the people said…
The firm took in $9.7 billion in net trading revenue last year, its largest haul since the company was founded in 2002.”
One of these days, deleveraging will careen from “nascent” – easily rectified by timely policy responses – to a full-fledged market crisis posing extreme challenges for global policymakers.
For starters, if hedge funds (massive levered “basis trades” and such) panic in concert with foreign holders (i.e., Asian insurance companies and levered institutions), buyers would need to materialize for potentially Trillions of Treasury and debt securities.
Such a liquidity challenge would blow holes in critical derivatives market assumptions (liquid and continuous markets), along with premises for scores of investment strategies.
It would unmask major structural shortcomings throughout the “private markets.”
In short, structural issues these days create acute vulnerability to a spiraling crisis of confidence in Treasuries, derivatives, risk markets and the dollar.
Market rallies, tariff pauses, and China deals and “resets” notwithstanding, the Trump administration presents clear and present market turmoil risk.
My worries of trade wars and worse with superpower rival China were not allayed by the Geneva “deal” or the President’s talk of “total reset”.
I assumed it was a mere tactical retreat by an administration petrified by market fragilities and mounting economic risks.
I doubted there would be any softening of Beijing’s resolve to “fight to the end” in an ongoing test of wills between fierce adversaries battling on multiple fronts.
I did not expect President Trump would respond kindly to the outpouring of scorn and mockery (at home and abroad), of what the Wall Street Journal editorial board called the “The Great Trump Tariff Rollback.”
“‘Trump Chickens Out’ Goes Viral In China Over Tariffs!”
From the Financial Times’ Robert Armstrong:
“Can I just say one very important thing, which is, you know, obviously I didn’t expect this to happen, and the outcome I really, really hope does not happen is that this has anything to do with the President stopping his habitual chickening out.
Let us state clearly, chickening out is good and something to be celebrated.
Bad policy chickening out, hooray.
So, this is an unintended consequences thing if, as I think is quite unlikely by the way, given that I am an unimportant person and the President is an important person, if this gets into his head and he digs in his heels about some of this stuff.
That is really a disaster for which I am very, very sorry.”
“Quite likely” would be a better bet.
Robert Armstrong coined TACO – Trump Always Chickens Out - in a piece discussing Wall Street traders keen to wager on the President’s propensity to lose his nerve.
The memes and media attention can’t be sitting well in the Oval Office.
May 28 – Associated Press (Josh Boak):
“President Donald Trump wants the world to know he’s no ‘chicken’ just because he’s repeatedly backed off high tariff threats.
The U.S. Republican president’s tendency to levy extremely high import taxes and then retreat has created what’s known as the ‘TACO’ trade…
Markets generally sell off when Trump makes his tariff threats and then recover after he backs down.
Trump was visibly offended when asked about the phrase… and rejected the idea that he’s ‘chickening out,’ saying that the reporter’s inquiry was ‘nasty.’
‘You call that chickening out?’ Trump said.
‘It’s called negotiation,’ adding that he sets a ‘ridiculous high number and I go down a little bit, you know, a little bit’ until the figure is more reasonable.”
Concluding his rambling response, the President scolded the reporter: “Don’t ever say what you said.
That’s a nasty question.
Go ahead.
To me, that’s the nastiest question.”
My thoughts returned to the September Trump/Harris debate, when the President should have laughed it off and not taken the bait: “People start leaving his rallies early out of exhaustion and boredom.”
The President absolutely revels in being the world’s most powerful specimen.
Aspirations to cozy up to Putin, Xi and the Nobel Peace Prize are slipping away.
I suspect he will struggle mightily adjusting to waning power, much less jeers and taunts.
“Trump Warns Putin is 'Playing With Fire'
After Declaring the Russian President has ‘Gone Absolutely CRAZY’.”
“Kremlin Muses About 'Emotional Overload’
After Trump Asks if Putin is ‘Crazy.’”
“Iran Calls Trump Wish for Deal That Lets US ‘Blow Up’ Nuclear Sites a Fantasy.”
“‘Sleazebag’: Trump Attacks Former Federalist Society Chair Over Court’s Tariff Ruling.”
“Trump Declares War on His Own Judicial Legacy.”
“Supreme Court Walks a Tightrope as it Confronts Trump’s Power Moves.”
President Trump (Truth Social 5/30/25):
“Two weeks ago China was in grave economic danger!
The very high Tariffs I set made it virtually impossible for China to TRADE into the United States marketplace which is, by far, number one in the World.
We went, in effect, COLD TURKEY with China, and it was devastating for them.
Many factories closed and there was, to put it mildly, ‘civil unrest.’
I saw what was happening and didn’t like it, for them, not for us.
I made a FAST DEAL with China in order to save them from what I thought was going to be a very bad situation, and I didn’t want to see that happen.
Because of this deal, everything quickly stabilized and China got back to business as usual.
Everybody was happy!
That is the good news!!!
The bad news is that China, perhaps not surprisingly to some, HAS TOTALLY VIOLATED ITS AGREEMENT WITH US.
So much for being Mr. NICE GUY!”
Drudge: “Trump Serves Taco Friday! Talks ‘Tough on China.’ Wall St Yawns.”
Wall Street may yawn, but in Beijing, the President’s comments are fighting words.
Invoking “civil unrest” was no accident.
Few issues carry such sensitivity for Xi Jinping and the Chinese communist party.
It’s a disturbing post.
Neither the tone nor content will be well-received by the Chinese.
Both are disrespectful and threatening.
Ain’t Gonna Work.
To the reasonably well-informed, the post lacks all credibility to the point of bordering on irrationality.
Caved “for them, not for us”?
And I fear this is the type of lashing out we can expect from a President agitated by - and compelled to aggressively respond to - a world skeptical of his power and fortitude.
In today’s tinderbox geopolitical landscape, it’s a dangerous dynamic.
May 30 - Bloomberg (Jennifer A. Dlouhy):
“US President Donald Trump expressed confidence a talk with Chinese President Xi Jinping could ease fresh trade tensions, after White House officials vented anger over Beijing’s pace of issuing promised export licenses.
The dust-up threatened to again upend trade relations between the world’s two largest economies, which have been held together by a fragile, weeks-old tariff truce.
‘They violated a big part of the agreement we made,’ Trump told reporters Friday...
‘But I’m sure that I’ll speak to President Xi, and hopefully we’ll work that out.’”
For Beijing, it’s surely “those who live in glass houses…”
This week’s developments wouldn’t seem to encourage Xi Jinping to pick up the phone.
May 29 – New York Times (Keith Bradsher):
“After stepping back this month from an escalating and dangerous war of tariffs, the United States and China are now threatening to undermine their uneasy truce.
On May 12, the countries announced after weekend meetings in Geneva that they would suspend most of their recently imposed tariffs.
Since then, however, both governments have shown that they are still prepared to wield controls over critical exports as weapons against one another, with moves that are potentially even more damaging to trade and global supply chains.
China has restricted its exports of rare earth magnets, which are crucial for cars, semiconductors, aircraft and many other applications.
Close to 90% of the world’s rare earth metals, including magnets, are produced in China.
And the United States on May 13 banned the latest semiconductors from Huawei, a Chinese electronics giant.
Then on Wednesday, President Trump suspended the shipment of American semiconductors and some aerospace equipment needed for China’s commercial aircraft, the C919, a signature project in China’s push toward economic self-reliance.”
May 29 – Bloomberg:
“The US plans to start ‘aggressively’ revoking visas for Chinese students, Secretary of State Marco Rubio said, escalating the Trump administration’s push for greater scrutiny of foreigners attending American universities.
Rubio said… students affected would include ‘those with connections to the Chinese Communist Party or studying in critical fields.’
The US will also enhance scrutiny ‘of all future visa applications from the People’s Republic of China and Hong Kong,’ he added…
Chinese Foreign Ministry spokeswoman Mao Ning accused the US of taking its decision ‘under the pretext of ideology and national security’…, adding that it would harm people-to-people relations.
‘Such a politicized and discriminatory move lays bare the US lie behind the so-called freedom and openness that the US touts…
It will only further undermine its image in the world and national reputation’.”
The administration’s move against Chinese students is an alarming escalation.
Perhaps it’s a trade negotiation ploy that will be reversed.
But throwing 270,000 existing - and many thousands of prospective - students’ futures into turmoil is not damage (to students, families, and universities) easily rectified.
For me, it signaled a hard-line approach in the middle of already fraught negotiations that, following a ratcheting up of export controls, will stoke only stronger resolve from Beijing and the Chinese people.
As for Chinese nationalism and Xi’s domestic popularity, Trump is the ultimate gift that keeps giving.
The Geneva “total reset” was merely an offramp allowing the resumption of (higher priced) Chinese exports to the U.S. – with little expectation in Washington for a resolution to trade and other critical issues with Beijing.
It’s difficult not to be pessimistic.
The unfolding U.S./China trade war remains a major problem, with especially broad ramifications, knowing the President will be determined to quash all the TACO talk.
The U.S./China trade “deal” quieted April’s fears of Chinese Treasury selling.
Hardly missing a beat, concerns shifted to Taiwan and Japan.
May 29 – Financial Times (Bertrand Benoit):
“A closely watched auction of 40-year Japanese government debt has drawn the lowest demand in 10 months as concerns mount over the world’s third-biggest bond market.
Demand for the government’s offer on Wednesday of about $3.5bn of 40-year notes attracted a bid-to-cover ratio… of 2.2, the lowest level since July 2024 and a reflection of what some traders have called a ‘buyers’ strike’ among Japanese life insurers and other domestic participants…
If this had been a Japan-only story then it might be easy to ignore, but the JGB sell-off was a major factor in the recent global duration wobble, and today’s renewed weakness seems to once again be infecting the long end of the yield curve pretty much everywhere.
The Japanese government bond market is one of the largest in the world, so it has always exerted some influence elsewhere.
The Bank of Japan’s ‘yield curve control’ programme certainly seems to have acted as an anchor for global bond yields for much of the past decade.
But the way JGBs now seem to be actively driving other developed bond markets is interesting.
As Ajay Rajadhyaksha wrote on FTAV last week, the core problem is an acute imbalance between supply and demand.”
May 28 – CNBC (Lee Ying Shan):
“Japan's 40-year government bonds yields hit an all-time high of 3.689% Thursday…
Yields on 30-year government debt are up more than 60 bps this year at 2.914%, also not too far from all-time highs…
Higher Japan government bond yields could spark a wave of capital repatriation with Japanese investors pulling funds from the U.S.
There could be a ‘trigger point’ where Japan’s investors suddenly move their capital from the U.S. back home, Macquarie's analysts said…
Should Japanese government bond yields continue to climb, the move could ‘trigger a global financial market Armageddon,’ said Albert Edwards, global strategist at Societe Generale…
As higher yields strengthen the yen, it will impact domestic appetite to invest abroad…
With the Bank of Japan scaling back bond purchases in a seminal monetary policy shift last year, and private players not stepping up, the demand-supply mismatch is likely to fuel higher yields.
‘If sharply higher JGB yields entice Japanese investors to return home, the unwinding of the carry trade could cause a loud sucking sound in U.S. financial assets,’ Edwards said.”
May 27 – Reuters (Takaya Yamaguchi and Leika Kihara):
“Japan will consider trimming issuance of super-long bonds in the wake of recent sharp rises in yields for the notes, two sources told Reuters…, as policymakers seek to soothe market concerns about worsening government finances.
Super-long bond yields slumped on the report, pushing down the Japanese yen and U.S. Treasury yields along the way, as markets cheered Tokyo's readiness to arrest spikes in long-term interest rates.”
Ending the week down 11 bps at 4.40%, one could have missed that 10-year Treasury yields traded at 4.54% Thursday morning following the rough 40-year Japanese bond auction.
JGBs, Treasuries and global bonds remain vulnerable.
By the end of the week, signals that Japan would cut the size of long-bond issuance had done the trick – for JGBs, Treasuries, derivative “swaps,” and global bonds more generally.
Curiously, the dollar rallied versus the yen on the news.
Bond, currency, and swaps markets seem these days one big, highly correlated, volatile, and fragile (highly levered) “trade”.
On the subject of elevated market yields – and in the context of looming economic and Credit Cycle days of reckoning noted above – it’s time to keep a watchful eye on increasingly vulnerable housing markets.
Pricing data from earlier in the week were noteworthy.
The FHFA House Price Index (March data) posted a weaker-than-expected 0.1% decline, the first negative print since August 2022.
S&P CoreLogic (March) prices were reported at a much weaker-than-expected negative 0.12%, the first decline since January 2023.
May 30 – Bloomberg (Conor Sen):
“House prices are falling, and it’s no longer just a Florida and Texas story.
Rising inventory across the country and still reluctant buyers mean that those looking to sell face the prospect of more competition and lower prices next spring if they don’t close on a deal soon.
For buyers, holding out can mean a better price.
This shift in market psychology should finally break the impasse that has choked transactions for the past few years…
But the enormous cost of homeownership has continued to turn off buyers, leading to a steady grind higher in the number of existing homes for sale.
These increased 40% over the past two years and, in April, were at the highest level since 2020.
There are now nearly 500,000 more home sellers than buyers, according to Redfin Corp., the biggest differential since the company began tracking the data in 2013.”
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