Trumpist Economics Are Coming Home to Roost

For months, equity markets indulged a mass delusion: that a second Trump term would combine the market-friendly aspects of his first term (deregulation, tax cuts) with none of the downsides (trade wars, policy uncertainty). This pleasant fiction died today when Trump floated using the International Economic Emergency Powers Act to impose new tariffs, sending Treasury yields surging past 4.7% and equity markets into a tailspin.

This was entirely predictable. Trump literally told us his plans. He's been explicit about wanting to implement punitive tariffs, conduct mass deportations, and engage in various forms of economic nationalism. Yet somehow the market priced in only the upside scenarios. It's like watching a crowd bet their life savings on a poker player who's showing his hand to the entire table.

The remarkable part isn't that Trump might do exactly what he says he'll do – it's that the market spent months constructing elaborate narratives about why he wouldn't. This reveals something about how markets process political risk: they don't. Instead, they build convenient narratives that justify whatever positioning they already want to take.

Look at the actual market mechanics at work. Bond markets are staging what amounts to a buyers' strike. Recent Treasury auctions have been "sloppy" (market speak for "terrible"), with investors demanding increasingly higher yields to hold U.S. debt. This isn't just about Trump – it's about the collision of three realities the market tried desperately to ignore:

1. The Treasury needs to refinance trillions of dollars debt over the next two years
2. Trump's proposed policies would be massively inflationary
3. The Fed can't easily cut rates in an inflationary environment

The market tried to simultaneously believe that rates would come down quickly, inflation would moderate, and Trump's policies wouldn't matter. This is what happens when those contradictions resolve.

The yield curve is steepening dramatically – the spread between 2-year and 30-year Treasuries hit its widest level in three years. The market is pricing in higher long-term risk premiums while still clinging to the idea of near-term rate cuts. It's cognitive dissonance expressed in basis points.

This matters beyond trading profits. The entire financial system is built on Treasury yields as the "risk-free" rate. When that foundation shifts, everything built on top of it has to reprice. We're seeing this ripple through currency markets (the dollar is surging) and international bonds (UK gilt yields just hit their highest level since 2008).

We're watching the narrative shift. Wall Street analysts who spent months explaining why Trump 2.0 would be "market friendly" are suddenly discovering the downsides of economic nationalism. It's like watching a cult realize their leader isn't actually going to take them to the promised land – but instead of admitting they were wrong, they're furiously rewriting their prophecies.

This matters for two reasons. First, it shows how narratives drive market pricing until reality forcibly intervenes. Second, it suggests we're still early in the repricing process. If markets are only now starting to price in the obvious implications of Trump's stated policies, what happens when those policies actually start being implemented?

The bond market is notoriously unsentimental. It doesn't care about narratives or hopium or elaborate theories about why this time is different. When it moves like this, it's usually telling us something important about reality. Right now, it's telling us that the market's collective delusion about consequence-free Trumpism is officially over.

The result? We get to observe in real-time as markets are forced to reprice political risk they should have seen coming months ago. The process will be messy, painful, and probably highly educational for anyone paying attention.

For bonus points, watch how this interacts with the Fed's attempt to engineer a soft landing. They're trying to thread the needle between controlling inflation and not crashing the economy. Trump's policies – particularly the tariffs and deportations – would make this dramatically harder.

This isn't just about Trump – although he seems to inspire a particularly virulent strain of delusion. It's about the market's capacity for self-delusion and its eventual collision with reality. The only real question is how much further this particular reality testing has to go. Given that the policies haven't even been implemented yet, we might be in for quite a ride.