The
TACO Theory, Fed’s Dilemma, Negative Equity Risk Premium, and BLS Chicanery
By Victor Sperandeo with the Curmudgeon
Introduction:
A lot of topics to cover this week, so let’s get started….
Fear Turns
into Greed on Wall Street:
The
S&P 500 and NASDAQ made new highs this past week, which capped a
spectacular recovery from the April 8th closing lows - 4982.77 for
the S&P 500 and 15,267.91 for the NASDAQ Composite.
At
Friday’s close of 6279.35, the S&P is up +26.9% from its intra-day
low of 4948.43 on April 10th.
The NASDAQ Composite at Friday’s close of 20,601.10 is up +36.85%
from its April 8th intra-day low of 15,053.39.
“One
by one, all the tail risks that took the stock market nearly into bear market
terrain in early April are being removed from the list,” notes Rosenberg
Research’s David Rosenberg. “All it has taken is dodging bullets to
bring the S&P 500 to new record highs as the momentum- and sentiment-driven
market rally continues unabated.”
Goldman
Sachs
reports that the riskiest corners of the market, including high-beta
momentum stocks, a bitcoin-sensitive index, and unprofitable tech, far outpaced
the S&P 500 in the second quarter as investors chased speculative momentum.
According
to Bespoke Investment Group, nearly 420 stocks in the Russell 3000
jumped more than 50% between the lows on April 8 and June 27, including 14 that
soared over 200%. Of those highfliers, only four are profitable. On average,
the 858 unprofitable companies in the index gained 36.4% during that stretch,
more than doubling the 15.6% return seen among the 500 stocks with the lowest
price-to-earnings ratios.
-->That’s
quite a transition from fear to greed in less than three months!
What
caused the dramatic turnaround in U.S. equities?
After
the S&P 500 and NASDAQ dropped ~20% after “Liberation Day” in early
April, President Donald Trump “chickened out” on his call for strong
tariffs. As a result, equity markets
rallied strongly.
Trump
then got the embarrassing nickname of “TACO” or “Trump Always
Chickens Out,” by Financial Times columnist Robert Armstrong on May
2, 2025. The TACO theory is based
on the fact that investors profited by buying the dip that followed Trump’s
tariff threats after the markets closed on April 2, 2025.
Sevens
Report Research founder Tom Essaye insists that Trump does, in fact,
always chicken out. “The TACO trade has worked and buying stocks on extreme
tariff-related threats has worked,” he
wrote.
On April 9th, U.S. Secretary of
the Treasury Scott
Bessent made a strong statement on how the rich have done well in the past
and now it was labor’s turn.
“For the last four decades, basically since I
began my career in Wall Street, Wall Street has grown wealthier than ever
before, and it can continue to grow and do well,” Bessent said at the American
Bankers Association’s Washington Summit. “But for the next four years, the
Trump agenda is focused on Main Street. It’s Main Street’s turn. It’s Main
Street’s turn to hire workers. It’s Main Street’s turn to drive investment, and
it’s Main Street’s turn to restore the American Dream,” he said.
Victor says that Bessent’s talk the talk was
hype-bologna. In Italian, he would call it “mortadella” or advanced super
bologna. It went out the window,
like the famous quote by Mike Tyson, “Everyone has a plan till they get
punched in the face!”
The
stock market sensed the STRONG tariff threats were over! In other words, Trump
was now officially part of the DC ESTABLISHMENT.
The
equity markets continued to rally as the U.S. bombed Iran’s nuclear sites. That was followed by Iran’s telegraphed
missile attack on the American Al Udeid Air Base in Qatar. Iran did not close the Strait of Hormuz,
which signaled that the war with the U.S. was effectively over.
Indeed,
Iran does not plan to respond further to the U.S. strikes on its nuclear
program, the Iranian deputy foreign minister said on Thursday — but the country
still pledges to forge ahead with its nuclear development program despite the
attack. “Our policy has not changed on enrichment,” Takht-Ravanchi reiterated
to NBC. “Iran has every right to do enrichment within its territory. The only
thing that we have to observe is not to go for militarization.”
The
Fed’s Rate Cut Dilemma:
The
already strong pressure on the Fed to lower interest rates will continue. Trump has repeatedly called for Fed Chair
Jerome Powell to step down in a series of attacks that have raised concern
about the independence of the U.S. central bank.
Trump
asked Powell to “resign immediately” on Wednesday after his administration’s
top housing regulator urged the U.S. Congress to launch an investigation into
the central banker. Trump’s broadside
attack comes days after he sent Powell a letter demanding that the central
banker lower the benchmark interest rate, which is currently set at a range of
4.25 percent to 4.5 percent, by “a lot.”
Powell
maintains that the uncertain economic impact of Trump’s tariffs have prevented
the Fed from lowering rates. The tariffs
are expected to put upward pressure on prices which would increase inflation.
Furthermore, the U.S. unemployment rate is 4.1% which is considered to be “full
employment.” The U.S. economy continues
to add jobs, albeit at a slower rate than in previous years.
Goldman
Sachs economists
expect a one-time inflation boost from tariffs, raising the year-over-year core
Personal Consumption Expenditure (PCE) index (excluding food and energy)
to 3.4% in December, significantly higher than the 2.7% increase in the latest
12 months for the Fed’s preferred inflation gauge.
Goldman’s
inflation forecast is well above the Fed’s 2% target, making it difficult to
justify cutting rates now. Yet two Fed governors, Christopher Waller and
Michelle Bowman, have said they would consider rate cuts if inflation were
stable.
The
fed-funds futures market is pricing in two cuts of a one-quarter percentage
point each by year end, with a 69.5% probability of the first cut at the
September 17th FOMC meeting, according to the CME
FedWatch site. There’s only a 4.7%
probability of a 25 bps cut at the July 30th Fed meeting.
Rates
will be coming down for sure after Powell leaves his position as Fed Chair next
May 2026. Trump will make sure he puts
in a new Chairperson that will lower rates to 1% to 2% area with 2.5% the
minimum.
Stocks
vs. Bonds Conundrum:
The
belief that short term interest rates will be eventually coming down
(substantially?) is a major reason why the equity markets are going straight
up. Not so for bonds, as future fears of
inflation and massive deficits are of great concern to fixed income
investors.
We’ve
discussed the supply/demand imbalance and increased term premium for
U.S. government bonds, but here’s a new method of comparing the risk in
stocks vs. bonds.
The Equity
Risk Premium (ERP) is the additional return investors expect to receive for
holding stocks (which are riskier) over a risk-free asset like a government
bond or note. A positive ERP suggests that investors are being compensated for
taking on the risk of investing in the stock market. A negative ERP implies
that investors are willing to accept a lower return from stocks compared to a
risk-free asset, which indicates that stocks are relatively expensive.
While
there are several ways used to calculate the ERP, we chose to subtract the
S&P 500 earnings yield from the interest rate on the 10-year U.S. Treasury
note.
l The
trailing 52-week P/E ratio for the S&P 500 has been increasing and is
24.09, according to WSJ as of July 3, 2025.
The earnings yield is the inverse of the P/E which is now 4.15%.
l The
10-year T-note currently yields 4.35% - up substantially from 3.68% when the
Fed cut rates by 50 bps at its September 18, 2024 FOMC meeting.
-->
Therefore,
the current ERP = 4.15% - 4.35% = - 0.20%.
Curmudgeon
Comment:
The Artificial Intelligence (AI) frenzy and 'U.S. exceptionalism' narrative led
by a handful of Mega Cap tech stocks have fueled a boom in U.S. stock indexes
that has lifted aggregate valuations to their highest level in decades if not
all-time. As a result, the ERP is
collapsing and is now negative, which in the past was a warning sign for stock
market investors. A negative ERP might also indicate that investors are overly
optimistic or complacent about potential risks.
Victor’s
Market Views:
Technically,
the S&P 500 and the NDX 100 are bullish and are now above their 200-day
moving average which is also up-sloping.
Dow Theory has not definitively spoken but is moving up in bullish steps
so is currently neutral.
In
addition to my 50% gold position, I am buying 5-year T-note futures in
size, with a patient longer term view of rates coming down. Always know that
markets discount the future.
Victor
on Tariffs:
Fundamentally,
tariffs are still an unknown, but (as we have previously stated in past
Curmudgeon/Sperandeo posts) they are NOT necessarily inflationary. Tariffs are
a tax, which may or may not be passed on to consumers via higher prices.
For
reference, consider the views of the greatest leftist
economist of the 20th century - John Maynard Keynes, who
is best known for his support of government intervention in the economy. Keynes did not generally view tariffs as
inflationary. In fact, he even suggested that tariffs could be used to combat
deflation and increase domestic production without significantly impacting
prices. Keynes acknowledged that tariffs could lead to some price increases for
imported goods, but he believed these increases would be minor and comparable
to normal fluctuations.
“I am
prepared to maintain that the effect of such duties on the cost of living would
be insignificant—no greater than the existing fluctuation between one month and
another.”
News
Flash:
Tariffs
will revert to April 2nd “Liberation Day” levels on August 1st
if countries around the world don’t reach deals with the U.S., according to
Scott Bessent. The Trump administration’s self-imposed deadline on trade deal
negotiations expires this coming Wednesday. Without a deal, tariffs currently
set at a 10% baseline will go back to the 20% to 49% set on April 2nd,
Bessent told CNN’s State of the Union on Sunday.
Victor’s
Conclusions:
1. The Fed: Jerome
Powell should be more than embarrassed for not cutting rates,
as he looks completely ignorant in his strong
view of tariffs being inflationary. Keeping rates high is a
great deterrent to consumers who need reasonable credit terms to
borrow, e.g. auto loans, credit card debt, mortgages, etc. Also, the
historical proven fact is that inflation is always a monetary
phenomenon.
Powell
along with his gang of FOMC members and 400 PHD’s are punishing the common man
- not the wealthy!
The only
logical conclusion is this is aimed at making the economy weak for political
reasons. Does it not seem odd that other Central Banks are not concerned with
tariffs as they lower rates. The Swiss National Bank (SNB) cut rates to 0 on
June 19th!
2. BLS fake numbers: Besides
the unknown effects of tariffs on inflation, the Fed uses employment data from
the Bureau of Labor Statistics (BLS) to keep the Fed Funds rate
high. The BLS is headed by Biden
appointee Commissioner Erika McEntarfer, PhD - a long time Democrat.
It sees that
BLS data can now be manipulated to any outcome that suits the Democratic
agenda. A glaring example is the non-farm payroll data that shows for
the first six months of 2025 that the “non-seasonally adjusted” counted jobs of
562,000 are less than the “non-seasonally adjusted” estimated new jobs created
by the Birth Death Model (an algorithm) which is 614,000 jobs. That
makes the job market much stronger than it actually is.
-->It
seems impossible that the actual counted jobs are less than estimated jobs!
3. U.S. Political System: The
same manipulation applies to Republicans when they appoint the heads of
government agencies. President Trump has the ability to fill roughly 4,000
politically appointed positions in the executive branch and independent
agencies, including more than 1,300 that require Senate confirmation. The Washington Post and the Partnership for Public
Service are tracking nominees for 822 of
those positions.
-->
This type of massive political corruption may someday result in a collapse of
the U.S. system of government as we know it.
End
Quote:
This quote suggests actively participating in the demise
of something deemed obsolete, corrupt, or harmful by “pushing it down.”
This
act is seen as a way to clear the path for something new and potentially
better. Readers are encouraged to ponder
how it might be related to the U.S. political system.
….……………………………………………………………………………………………………..
Be well; success and good luck. Till next time……………….
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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