We shouldn't rely on markets to tame Trump

Why it’s premature for the “Trump put” to take a victory lap.

I wasn’t planning on Trump’s “Liberation Day” tariffs upending the Silver Bulletin editorial calendar to the extent it has. But I’m enough of a newshound that we’re always going to prioritize breaking news stories where we think we can add value. We’re hoping to get back to a more regular schedule next week, including some paid content, but everything this week is running free. We also have some other new politics- and economy-related landing pages launching soon to join our Trump approval tracker — Trump’s numbers have experienced a noticeable dip in recent days, by the way. If you appreciate this sort of coverage, please consider joining our free or paid mailing lists:

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It’s sometimes said that wealth is “destroyed” when the stock market declines, but it’s worth unpacking what that means. On the one hand, it’s true that when your investment portfolio loses value, like mine has — I try not to check my brokerage statements every day, but it’s harder when it’s April and you’re getting your taxes ready — nobody exactly “finds” the money you lost.¹

Rather, what’s really being destroyed is the expected value of future economic wealth. When you own shares of a company, you essentially hold a stake in its discounted future profits. If the company is expected to earn less because the economy is about to go into recession, for instance, or it relies on an orderly financial system led by the United States, the present value of that equity decreases.

So when major stock indices bounced by as much as 10 percent on Wednesday after President Trump announced that he was pausing his “Liberation Day” tariffs — though keeping a 10 percent baseline tariff and escalating his trade war with China — I found it a little disconcerting. And not just because there was a significant “correction” today as investors thought the situation through. Rather, it’s just the magnitude of the swing. Can Trump, with the whim of a tweet or the stroke of a pen, really create or destroy 10 percent of discounted future corporate earnings — the sort of shifts that are ordinarily associated with “acts of God” like pandemics²?

And actually, investors are implying that more than 10 percent is at stake. The tariffs were not fully rescinded by any means. China was our second-largest trading partner in 2024, and 10 percent tariffs on the rest of the world are still fairly high. Nor is anything about this permanent. Investors breathed a premature sigh of relief after Trump initially paused tariffs on Canada and Mexico in February — only to re-implement them later, then to postpone them again, and then to implement his more “ambitious” Liberation Day plan after a round of auto tariffs. The implied delta in stock prices between a White House that wasn’t monkeying around with tariffs at all, and one that’s fully committed to seeing the Liberation Day tariffs through for the next four years, is considerably more than 10 percent. And you can see that in some higher-volatility sectors. Tech stocks in particular — based on the Silicon Valley 50 index I introduced earlier this week — are still down more than 22 percent from their peaks in February.³

Nor are the reasons for the see-saws in stock prices so straightforward. Investors are trying to account for several degrees of uncertainty at once:

1. The immediate effect of tariffs;

2. Second-order effects on consumer, business, and investor confidence;

3. Potential spillovers into broader financial markets — particularly the bond market, which had apparently spooked Trump, and

4. What the tariffs imply about Trump’s future actions and the United States’ overall state capacity.

Presumably far-fetched scenarios that could further roil the markets, like Trump undertaking military action to claim Greenland or reclaim the Panama Canal, probably aren’t the first things that investors are worried about. But if Trump is unwilling to listen to reason, they have become slightly less unlikely. Investors are relying on a lot of implicit assumptions about an economic world order led by a relatively rational superpower — the United States — that may no longer hold.

The market isn't a fourth branch of government

Wednesday evening’s headlines after the bump in the market were full of happy talk about the “Trump put”. But the celebratory tone already looks premature. The term is borrowed from options trading — a “put” is an option to buy a stock at a specified price that’s typically lower than its current value, which caps your downside risk. So more broadly, the “Trump put” is the idea that Trump will back down if markets have too much of a tantrum.

I’ve expressed skepticism of this idea before because it anthropomorphizes “the market” into an entity that has agency and is capable of strategic behavior — when, in fact, the market is composed of individual firms and investors who are on a financial and emotional roller coaster.

True, you’d rather have seen Trump capitulate yesterday than not. One remarkable feature of markets is that they provide a scoreboard — real-time feedback that even notoriously stubborn Silicon Valley types tend to take seriously. But considering those four buckets above, how secure should investors be feeling? Even with the 90-day pause, consumers and businesses will still be spooked by this and will experience higher prices from the tariffs that remain in place. The long-term effects on the United States’ cultural and financial hegemony are harder to quantify but potentially significant.

Markets and elites “got through” to Trump this time, but what if he wakes up on the wrong side of the bed 90 days from now and isn’t in such a generous mood? Not that I think headline writers should be catering to Trump’s mood swings, but triumphant headlines from Democrats about how Trump “surrendered” might give him second thoughts about doing the same thing next time around if he’s worried about looking like a loser. Still, they’re better than what Trump supporters like Stephen Miller, the White House Deputy Chief of Staff, are churning out. Even though all major stock market indices are substantially down from when Trump retook office, Miller called this “the greatest economic master strategy from an American President in history,” which might plant the idea in Trump’s head that he’s coming out ahead in this dumb and dangerous game.

But Trump's games with tariffs are causing collateral damage. According to Polymarket, the chance of a US recession this year is still 58 percent.⁴ It fell to 49 percent yesterday, but even at that interim low, it was still twice as high as when Trump took office:

At this point, investors might be happy enough to settle for a recession — hoping this doesn’t morph into a full-blown financial crisis. But even a mild recession would still hit consumers hard. And how the economy would emerge on the other side of it is hard to say. In some sectors of the economy, businesses might take the opportunity to transition from human employees to AIs, not hiring back jobs that were cut due to downsizing.

Stocks will bounce around and bounce back, but the story doesn’t necessarily have a happy ending, in other words. Actions by Congress to curb Trump’s tariff authority would provide for longer-lasting relief — but while there’s been some movement in that direction in the Senate, the House is actually considering making it harder for itself to check Trump. I’ve sometimes been inclined to defend the American system of government — our economy has been growing much faster than Europe with its parliamentary systems, at least, even if we have plenty of other problems. But the delegation of power by Congress and the courts to the executive branch isn’t necessarily good business when the executive in charge can tank the global trade system on a whim.

If you want to treat the market as a de facto “fourth branch” of the government, an emergency backstop to provide checks and balances when the rest of the system can’t, I’m not sure that will work out well. This isn’t the market’s role, constitutionally or otherwise.

The “Trump put” is also a little contradictory on its face. If investors believe that Trump will react to stock downturns, should they be buying because their downside is capped or selling because that might motivate Trump to behave? Where’s the line between a “correction” and a panic? (I’m not sure we should be calling anything a “correction”, by the way, when the fundamentals of the global economy are changing.) And if there’s a panic, what’s to prevent it from spilling over into bond markets and other assets?

In game theory, some actions are so severe that the optimal strategy involves randomizing your strategy. For instance, in poker, you can deter a thin “value bet” from your opponent by threatening to go all-in with a huge stack. But it becomes very expensive to execute this strategy against an opponent who has the wherewithal to call you down. Here’s where the analogy breaks down: the economy isn’t a zero-sum game like poker is, so Trump can be bluffing and the investors will still lose money if he “calls”. Still, even other non-zero-sum “games” like nuclear deterrence rely on some degree of implicit randomization — what Thomas Schelling called “the threat that leaves something to chance”. (Basically, you don’t want to escalate when nuclear weapons are involved because mistakes can be made in the fog of war.)

If investors could get together and say: “every week you keep up with this tariff crap, Donnie, there’s a 5 percent chance we’ll have a panic that triggers a global financial crisis, with unrecoverable long-term damage to the economy,” then maybe that would work if Trump had read his Schelling, which he surely hasn’t. But that’s not how markets work. You can’t half-panic any more than you can be half-pregnant And even markets could work this way, the strategy entails sometimes pulling the trigger, so you’re playing Russian Roulette.

1. There are some complications because of wealth effects — when the stock market goes up, people spend more, which can contribute to inflation in sectors like housing.

2. It’s not the time for the lab leak debate.

3. And that peak value already priced in some expectation of tariffs, even if it didn’t do so sufficiently

4. Now up to 65 percent shortly after publication time, but I’m not going to update this article with every market move.