Can US President Donald Trump’s thought process be summed up in a mathematical equation?
Financial markets have been searching for a formula to help predict the erratic US president’s next move during periods of major political upheaval, and may have hit upon a result.
Analysts from Germany’s Deutsche Bank have published the “TACO stress index” as a measure of anticipating when Trump might change his mind, financial media reported on Wednesday.
“TACO” has become a popular acronym in the financial world since it was coined nearly a year ago by a Financial Times editorial as a way of describing an emerging pattern of behaviour within the White House: Trump Always Chickens Out
‘Lost in Trumplation’
The "TACO" theory suggests that Trump systematically reverses his major policy decisions – such as imposing hefty tariffs on other countries – as soon as the consequences become too negative.
The president has denied the claim and chided reporters for asking him “nasty” questions about taking a "TACO" approach to tariff policies.
But war in the Middle East has ratcheted up global tensions and increased the potential for a Trump volte-face to have a devastating financial impact.
“For much of my career, the impact of geopolitical events was often limited and quite fleeting in that financial markets would get over it fairly quickly. Now, we're starting to see, in a world that is being unpicked geopolitically, financial markets being knocked off balance by geopolitical events,” says Alex Dryden, a specialist in financial markets at SOAS University of London and former employee at investment bank JP Morgan.
Hence, the "TACO" index was created by analysts at Deutsche Bank.
With investors increasingly "Lost in Trumplation", the "TACO" index aims to impose “something that's rational on what may otherwise be irrational-looking behaviour”, says David McMillan, a specialist in international finance at the University of Stirling in the UK.
The "TACO" index uses four factors to measure negative impacts and evaluate the probability that Trump will change his opinion.
These are: one-year inflation expectations, changes in Trump’s approval ratings in the month prior, the performance of the S&P 500 stock market index (which tracks stocks from the 500 leading Wall Street companies) and the evolution of US Treasury yields (interest rates that the government pays to borrow money).
“These are factors that stock market analysts were already examining separately, so it makes sense to combine them into a single index to assess the level of political and economic pain that Donald Trump is likely to be able to withstand,” says Alexandre Baradez, an analyst for the broker IG France.
Pricing uncertainty
The criteria used to measure the index “are all things that Trump himself has talked about”, says McMillan. “We know that Trump, because he said this himself, measures his own success by what's happening in the stock market … He talks about inflation and how his approval ratings prove he’s the greatest president ever, even if they don’t.”
The "TACO" index takes the leap of assuming that Trump himself follows these criteria and reacts to their movements.
The theory goes that the higher the results from these indicators, the more likely it is that Trump will announce a policy reversal.
Currently the index is at the highest level it has ever been since Trump’s return to the White House – which could account for the president’s sudden insistence on pushing Iran to negotiate a deal to end the war in the Middle East.
Read moreTrump insists Iran is ‘begging to make a deal’ after Tehran dismisses ceasefire plan
Even so, the very existence of such an index raises questions.
Trump is the first US leader to require such decoding. “I haven't seen this for another president. Most leaders are consistent in their messaging because they want to provide stability,” McMillan adds.
But the war in the Middle East and the economic fallout of the conflict have amplified the risks for investors of the impact on financial markets of Trump’s seemingly impenetrable decision-making process.
“He can give alarmingly different indicators as to where this conflict in Iran is going. One minute, he could be declaring victory, the next, he could be calling on allies for support,” Dryden adds.
“The logic of being unpredictable to keep your adversaries off balance might work in the business world, but it doesn't work for an administration trying to instil calm or ensure orderly functionality in financial markets, which thrive on a clear and concise narrative.”
Read more'Conflicting and confusing statements from Trump': The latest from Iran
Even more problematic is the fact that “Donald Trump is one of the US presidents whose words and actions have the greatest impact on financial markets. It’s impossible to ignore what he says on social media if you don’t want to be caught off guard as an investor,” adds Baradez.
Under Trump’s second presidency, the markets have become volatile as investors don’t know which way to bet.
“The financial markets are very good at pricing risk, but what we’re dealing with is not risk. It's uncertainty. When we don't know what's happening we have no way of pricing it. We do not have models for that,” Dryden adds.
Predicting the unpredictable
If the "TACO" index is a natural response from the markets to want to reduce everything to numbers and equations, it is also endemic of the “troubling” way in which markets now must take into account – and even be “influenced and shaped” – by what is happening in political circles, Dryden says.
Even so, the “TACO” index should be taken with a grain of salt, experts say.
“It’s interesting metric to consider, much like how social media sentiment indicators can be useful to investors,” says Baradez.
But “there is certainly a bit of reverse-engineering going on”, says Peter Tillmann, a specialist in monetary and financial politics at Giessen University in Germany. “There is no chance to validate the quality of such an index. To do so, we would need many TACO moments.”
“Predicting the unpredictable seems a bit futile,” he adds. “I think Trump wants to be destructive and self-enriching. We should not try to rationalise this.”
Doing so could bring its own risks. “There's a danger that you overly rely on the statistics and make serious mistakes,” McMillan says. “Prior to the financial crisis, people had risk models that they believed in and then they all failed and there was a huge recession.”
The "TACO" index might be a “nice indicator”, he adds, “but don't bet your house on it”.
This article was adapted from French. Click here to read the original.
English (US) · 