Playing Poker with Mr. Trump

The last 24 hours have been insane by any capital markets measure.

This started a couple of days ago when interest yields on US Treasury bonds began to spike in an unusual way. That alerted everyone to huge selling volume. Through most of this stock market correction we’d seen steady buying into Treasuries, which are considered a safe-haven asset in times of financial trouble. But when that pattern abruptly changed, investors took notice. Investor confidence, smooth operation, and ample liquidity are hallmarks of the Treasury market, providing a big benefit for both investors and our federal government, which relies on these bonds to fund itself. So Wall Streeters began to worry about rising stress in the financial system as a result of the trade war.

At the same time, corporate leaders like Jamie Dimon and Charles Schwab intensified efforts to lobby the president & his aides to dial back the intensity of his tariff plan. So did some GOP lawmakers. The Wall Street Journal reports that Treasury Secretary Bessent was “flooded with worried calls,” and the overriding message was that the trade war’s game of chicken could “tank the economy.” In Wall Street parlance they were begging the president to exercise the “Trump put.” And it worked.

Yesterday started with President Trump posting a social media comment urging us to “be cool” and asserting this is a “great time to buy” stocks. This comment seemed laughable and tone-deaf at the time. After all, reciprocal tariffs had just gone into effect. The Dow and S&P 500 Index meandered around flatline in early trading, having already fallen about 20% in the past couple of months.

Then Treasury Secretary Scott Bessent told an American Bankers Association audience that he believes “we can probably reach a deal with our allies.” No real detail was offered, but by now we’re used to that. The comment was received warmly. At the same time, an orderly Treasury bond auction encouraged investors.

And then in the middle of the trading session the president suddenly announced his decision to pause most reciprocal trade tariffs for 90 days. He said this would apply to all countries that have not retaliated with their own increased trade barriers. However, he made a point of saying that tariffs on Chinese imports would not be delayed, but instead would notch up to a kabillion bazillion percent. (Seriously, I’ve heard so many numbers and they’re all ridiculously high.) This last minute and partial reprieve cheered the stock market, which went on to post one of its best trading days on record.

Afterward, an administration spokesperson chided the media—and really all of us—for missing the “art of the deal” in this situation. I don’t think anyone believes this political poker game was scripted. And it certainly isn’t over.

While positive, the announcement doesn’t sound an all-clear to investors. The new baseline 10% trade tariff will still apply to most countries. For example, the EU’s rate temporary falls to 10% from 20%. Automobile tariffs are unchanged. And the situation with China is an abject mess. But there is a sense that we avoided the worst-case scenario. It appears that the president 1) is listening, and 2) isn’t hell-bent on the economy’s destruction. This is a very important point.

As I said, Wall Street’s reaction is generally positive. Goldman Sachs immediately rescinded its prediction for an economic recession this year. Economist and investor Mohamed El-Erian said, “I think of it as…this was a necessary step to calm markets, but it will not prove sufficient unless we go further in the reversal [of tariffs].” He also relayed the gist of his conversations with corporate CEOs. “They’re saying that [the tariff pause] will stop us from cutting costs, which is where we were…but it doesn’t give us enough confidence to go back to normal operations.” So reading between the lines, layoffs won’t spike immediately but we’re in a wait-and-see mode.

In our view, triggering the Trump put is an important first step, buying time to negotiate. And we’re looking forward to the next put—the Fed put—to be exercised in the near future. In the face of slowing economic growth it’s time for the Fed to resume interest rate cuts.