TACO Comes In Different Forms
Davos Diplomacy And Market Meltdowns
The past week offered a masterclass in policy whiplash — and a reminder that in today’s macro environment, the most important economic indicator may not be inflation, growth, or employment, but the US President’s tolerance for market pain.
Much of the turbulence began with the administration’s increasingly theatrical standoff with Europe over Greenland. As President Trump arrived in Davos for the World Economic Forum — the annual gathering where the global élite discusses cooperation over canapés — markets braced for the possibility that rhetoric would harden into action. The fear was not merely symbolic: Investors worried that Trump might formally announce an intention to annex Greenland on U.S. security grounds and to secure access to critical minerals.
On Tuesday, those fears seemed justified. Trump reiterated that the United States would impose a 10% import tariff effective February 1 on eight European nations opposing the Greenland initiative, with the levy scheduled to rise to 25% on June 1. France received special treatment. The President warned that tariffs on French champagne would soar to 200% should President Emmanuel Macron refuse to join Trump’s proposed “Bureau of Peace” — a shadow United Nations intended to resolve the conflict in Gaza.
Markets responded the way markets usually do when trade wars stop being metaphors. The Dow Jones Industrial Average fell 870 points on Tuesday, while the yield on 10-year Treasurys rose roughly 7 basis points from the start of the week to around 4.30% -- partly in response to the surge in Japanese bond yields. The message from investors was unmistakable: Geopolitical brinkmanship is fine — until it isn’t.
Then came Wednesday. Trump clarified that he had no intention of taking Greenland by force. Markets promptly staged a relief rally with nearly the same enthusiasm they had shown for the selloff. By Friday, the 10-year Treasury yield had slipped back to 4.23%.
TACO — Trump Always Chickens Out — was once again served hot and fresh.
But this week’s reversals should not be mistaken for a guarantee of reduced volatility going forward. The lesson is not that markets have trained the President to behave, but rather that they have identified the threshold at which policy threats begin to hurt politically.
That dynamic is now spilling into monetary policy expectations. After weeks of speculation around “the two Kevins” — Kevin Warsh and Kevin Hassett — as potential successors to Jerome Powell when his term as Federal Reserve Chairman ends in May, markets have increasingly warmed to Rick Rieder of BlackRock. Rieder’s appeal to markets — and, by extension, to the President — is simple. Compared with the Kevins, he has made fewer public pronouncements calling for rapid rate cuts.
In other words, he sounds less eager to please. Markets are putting a premium on being least sycophantic. The importance of relative independence was enhanced by the publication Thursday of the PCE price index, the Fed’s favorite measure, which rose year-on-year by 2.8% in November, accelerating from 2.7% in October. Perhaps anticipating the data release, the President called Rieder “very impressive” after meeting with him on Wednesday.
It is ironic that restraint has become a market positive. Investors appear to believe that a Fed Chair who is not overtly campaigning for looser policy may be more credible — and therefore, more stabilizing — even in a White House that openly demands rate cuts.
Still, no one should assume this détente will last. If the next Fed Chair — whoever he or she may be — fails to reduce rates at the pace the President demands, criticism is certain to follow. Trump’s history with Jerome Powell, his own first-term nominee, offers a clear precedent. Public pressure, social media salvos, and renewed threats to Fed independence would likely return to center stage.
The implication for investors is clear. TACO is real — but it is not automatic. Profiting from this environment requires developing a finer sense of how much market turbulence the President and his inner circle are willing to tolerate before the rhetoric softens, policies reverse, and reassurance replaces confrontation.
In financial markets, volatility is not an accident. It is the price of admission — and TACO is the release valve.
Dr. Komal Sri-Kumar
President, Sri-Kumar Global Strategies, Inc.
Santa Monica, California
www.srikumarglobal.com
@SriKGlobal
January 24, 2026
Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.
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