“Great in the short term, questionable in the long term – Reflections on the taco trade”

The Greenland drama seems to confirm the “taco trade”: the US president has backtracked after the markets showed him the yellow card. The advantages of countercyclical investing are one thing. But another is the tectonic shifts that the US administration is triggering with its policies, warns Ali Masarwah, fund analyst and managing director of the consulting firm Envestor.

January 26, 2026. FRANKFURT (envestor). It would not have been without a certain irony if Donald Trump had blown up NATO in Davos of all places. The World Economic Forum (WEF) brings together the global elite from business and politics to exchange ideas. It would have been the perfect setting to plunge the “Davos Man,” so hated by MAGA, into the crevasse. The loudmouth from Queens takes particular pleasure in offending liberal, transnational decision-makers, especially European politicians.

Well, the worst-case scenario did not come to pass. In his decisive speech at the WEF, Trump withdrew his threat to annex Greenland to the US by military force. He then distanced himself from punishing Denmark's supporters with tariffs. NATO chief Mark Rutte can take credit for the fact that the US is refraining from its annexation plans for the time being. So, much ado about nothing? Not quite.

At first glance, the Greenland drama was a typical example of the “Taco Trade”: the US president backs down when his policies threaten to damage the markets (Taco stands for “Trump always chickens out,” copyrighted by FT journalist Rob Armstrong). Consequently, investors buy when prices fall after the “enfant terrible” backs down – because Trump will backtrack. Keeping an eye on “Taco” is even more important because investors then don't enable the Taco Trade through overreactions – and turn their portfolios into cannon fodder for shrewd traders.

However, the Taco thesis falls short because it fails to grasp the extent of the changed conditions for investors. In just twelve months of Trump II's administration, something important has been broken: the transnational consensus between the US and Europe, and even the principles of a rules-based order for the global economy. At best, we are seeing a return to mercantilism; at worst, a comeback of gunboat diplomacy from the period before 1914. Trump is steadily turning the spiral of escalation: while April 2025 was “only” about tariffs, Trump prepared to attack an ally militarily ahead of Davos 2026.

Analysts at Deutsche Bank are talking about the possibility that European investors could sell US government bonds on a large scale. PIMCO has already taken this step: the world's largest bond manager and a pure-play US asset manager is in the process of reducing the country risk of the US in its portfolios. (We at Envestor have been implementing this strategy in our advisory mandates since 2024 and feel increasingly comfortable with this approach!)

Investors should not react hastily to Trump's outbursts. However, they should bear in mind that the US's brazen and clumsy projection of power is leading investors to reduce their exposure to US country risk. This works best with bonds and the US dollar. Investors outside America learned the hard way in 2025 that a falling dollar can have a huge impact on returns. So beneath the taco surface, decisive tectonic shifts are taking place in the markets.