The “TACO” theory suggests that Trump systematically reverses his major policy decisions – such as imposing hefty tariffs on other countries – as soon as the consequences become too negative.
“For much of my career, the impact of geopolitical events was often limited and quite fleeting in that financial markets would get over it fairly quickly. Now, we’re starting to see, in a world that is being unpicked geopolitically, financial markets being knocked off balance by geopolitical events,” says Alex Dryden, a specialist in financial markets at SOAS University of London and former employee at investment bank JP Morgan.
Hence, the “TACO” index was created by analysts at Deutsche Bank.
The “TACO” index uses four factors to measure negative impacts and evaluate the probability that Trump will change his opinion.
These are: one-year inflation expectations, changes in Trump’s approval ratings in the month prior, the performance of the S&P 500 stock market index and the evolution of US Treasury yields.