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Andy Xie

Stock markets have roared back to levels seen before “Liberation Day”, seemingly on the mere belief that US President Donald Trump always chickens out – otherwise known as Taco – so no harm will be done in the end.
However, the Taco trade is based on a bubble. Collective self-deception can work for a while but only when there is enough money behind it. Despite recent talks to de-escalate, the US-China trade war is still pushing the global economy to the brink. A looming recession and higher inflation will mean there is a lot less money available for speculation, especially for the Taco bubble.
The Taco trade has worked because three major fund management firms – BlackRock, Vanguard and State Street – control large swathes of the market. These firms have a vested interest in supporting their assets.
A lot of money is in circulation due to the US$8 trillion in quantitative easing undertaken by the US Federal Reserve between 2008 and 2022. Moreover, quantitative easing policies are still taking place around the world, which means there is enough money to keep the bubble going. Taco is just another psychological fix to bring back speculative courage.
Trump would like to sell the recently concluded US-China trade negotiations in London as a victory for Washington. He talks about a 55 per cent tariff on China versus 10 per cent the other way round, and that rare earth minerals will soon flow to the US again.
In reality, the London talks were just aimed at getting the Geneva agreement back on track. In the bilateral deal reached in May, they agreed to lower their tariffs by 115 percentage points each while de-escalating tensions. The 55 per cent tariff isn’t an increase from the Geneva deal but rather a reflection of the 10 per cent baseline tariff and pre-existing levies from before April 2.


However, right after the Geneva talks, the US warned businesses against buying Huawei’s artificial intelligence chips on the pretext that they may have violated US export controls. The US also restricted the sale of electronic design automation software to China. Meanwhile, China continues to restrict rare earth sales to the US.
It is hard to believe that the Geneva agreement could be implemented without the US walking back its recent escalations. Moreover, China has merely agreed to six months of relaxed rare earth export regulations, provided that the US also de-escalates.
During those six months, China will wait for the US to lift tariffs and barriers. However, the US is unlikely to abandon any past measures and is probably likely to add even more. China would suspend supplies again and we’d be back to square one.
The future of US-China trade is likely to include such bartering of key commodities and hi-tech goods. However, barter trade will go smoothly only if the US keeps its word with China. Because the US believes it has all the leverage and power, this new reality will not come true until something breaks.
The tariff war gives us quite a different reality from the premise of the Taco trade. The US has a 10 per cent baseline tariff on goods made in dozens of countries, a 25 per cent tariff on auto and auto parts and a 50 per cent tariff on steel and aluminium. These tariffs are some of the biggest consumption taxes in American history.

Even worse, the constant fluctuation in US trade policies has put the investment decisions of multinational companies on pause. Demand will weaken and tariffs will feed into inflation, making it difficult for the US Federal Reserve to cut interest rates. The US economy is headed towards recession and inflation – a fate much worse than a stagflation scenario.
The Taco trade is just the latest iteration of the decades-long asset bubble which has its origins in the break-up of the Bretton Woods system in the early 1970s. When the value of the US dollar was decoupled from the gold standard, the Federal Reserve naturally began printing more money, eventually leading to inflation. In the late 1970s, then Fed chair Paul Volcker’s efforts to bring down inflation and control the money supply weren’t popular.
The more palatable solution for the US financial industry and its lobby in Washington was to hold down inflationary pressure through deregulation, union busting and outsourcing – holding down labour costs while allowing money to flow into assets as opposed to the real economy. Inflation in the asset market and deindustrialisation are two sides of the same coin.


Wealth concentration and deindustrialisation have destabilised the US economy. As the US ditches globalisation and embraces trade protectionism to reindustrialise, printing money will only produce more inflationary pressures.
Hence, interest rates are likely to remain high. However, the US has accumulated a massive amount of debt compared to its gross domestic product (GDP). That debt could become harder to manage if interest rates aren’t kept low. In the US, domestic credit to the private sector as a percentage of GDP rose from 91 per cent in 1971 to almost 193 per cent in 2023. Extra debt will lead to a crash in a normal monetary environment, making it even harder to avoid a financial crisis.
The world is floating on trillions of dollars of fake paper wealth. It will all vanish in the coming years. Let’s hope that the world remains peaceful while unwinding the excesses from the past half a century.


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Despite a brief reprieve for the stock market, trade tensions and weaknesses in the US economy still threaten global financial stability


Despite a brief reprieve for the stock market, trade tensions and weaknesses in the US economy still threaten global financial stability.


US-China trade war

US-ally trade wars

Global monetary policy

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Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Will markets wake up from the Taco bubble before it’s too late?

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Despite a brief reprieve for the stock market, trade tensions and weaknesses in the US economy still threaten global financial stability

Despite a brief reprieve for the stock market, trade tensions and weaknesses in the US economy still threaten global financial stability