Markets Keep Betting Trump Will Back Down -- But His Predatory Foreign Policy Is Here to Stay

When Trump's tariffs crashed global markets last year, traders watched him blink. When he threatened to fire Federal Reserve Chair Jerome Powell, markets tanked -- then soared when he backed off. When he floated invading Greenland, then dropped it, the pattern seemed clear: Trump talks big, markets panic, Trump retreats, markets recover.

Financial Times analyst Robert Armstrong gave this cycle a name: TACO, or "Trump Always Chickens Out." And for a while, it worked as a trading strategy. Every hint that Trump might end his war with Iran sent stocks climbing. Even his contradictory signals got spun as proof he wanted an off-ramp.

But here's the problem with treating market rallies as proof of normalcy: markets adapt to new realities, even catastrophic ones. And the reality Trump is building -- one where the US treats allies like adversaries and deploys its power without the old guardrails -- isn't going away.

As foreign policy analyst Stephen Walt argues in Foreign Affairs, Trump views all international relationships as zero-sum. During the Cold War, containing the Soviet Union meant the US acted as a benevolent hegemon toward Europe and Asia. Trump has ditched that model entirely. Canada's Prime Minister Mark Carney called it a "rupture" -- and he's right.

The shift goes deeper than Trump's erratic messaging. Political scientist T.V. Paul's concept of a "tradition of non-use" helps explain what's happening. Paul argues that norms around wielding power -- like the nuclear taboo -- develop over time through consensus about reputational costs. They create path dependency: once established, they're hard to break.

But traditions can also erode. And Trump has spent years chipping away at the norms that constrained US behavior toward allies. His first term brought trade wars with China, threats to annex Greenland, and open questioning of NATO's collective defense. Each move pushed the boundaries of what counted as acceptable. The strikes on Iranian nuclear facilities last June weren't an aberration -- they were the logical next step.

In other words, Trump isn't just breaking old rules. He's building new ones. And those new traditions -- predatory, transactional, willing to treat allies as adversaries -- will outlast his presidency.

Markets will keep having their TACO moments. Trump will keep hinting at de-escalation when things get too hot. Traders will keep rallying on the hope that he'll back down. But those rallies are momentary relief, not a return to the old status quo.

The framework that kept American power in check for decades is gone. What replaces it is a superpower that views every relationship as a shakedown opportunity, every ally as a potential mark, and every norm as negotiable. Markets can price in volatility. They can't price in the collapse of the entire system that made American hegemony work.

As analyst Adam Tooze put it, "in the court of the mad king, Donald Trump, there is no real knowing." But the pattern is clear enough. Trump doesn't always chicken out. Sometimes he just resets the baseline for what counts as normal -- and then goes further next time.

The TACO trade will keep working until it doesn't. And when it fails, we'll realize we've been trading on the assumption that the old rules still apply. They don't. Trump has already rewritten them.