The Theater of Tariffs and the Very Expensive Art of Backing Down

It's Thursday night in Davos, and the markets have just exhaled. After three consecutive days of screaming red, the S&P 500 clawed back 1.16% today on the simple news that we're maybe, possibly, not going to burn the global trading system down before dessert. How thrilling.

Let's walk back what happened.

On Monday, the Twitter sphere erupted. The president announced escalating tariffs on eight NATO members—10% on February 1, climbing to 25% by June—unless they agree to give him Greenland. (Yes, that Greenland. The Danish ice sheet.) Nasdaq went down 2.39%. The Dow fell 1.76%. VIX spiked to 20.99. The whip was cracked, and equity traders, conditioned like Pavlov's dogs, flinched.

Then Wednesday arrived with a different temperature entirely.

At Davos, the president said he wouldn't force Greenland. By market close, he was claiming a "framework" with NATO was within reach. The Nasdaq rose 1.18%. The Dow jumped 1.21%. Goldman Sachs got hammered—down nearly 4%—because heaven forbid we have stable tariff policy and healthy bank margins simultaneously. The small caps (Russell 2000) finally exhaled after a 14-day winning streak that had frankly become exhausting to watch.

It would be easy to laugh at the arbitrage of crisis-theater, but it's worth asking: what just happened to the credibility of policy communication?

When the president's geopolitical positioning swings the S&P 500 by 2%+ in 48 hours, we're not dealing with policy anymore. We're dealing with noise masquerading as signal. The tariff threats may be real, the Greenland gambit might involve genuine strategic logic (it doesn't), but the volatility is entirely performance—a function of markets trying to price an unpriceable variable: what does the administration actually want?

Here's what gnaws at me: retail traders are buying these dips like clockwork. The "buy-the-dip" muscle memory from 2025 is so ingrained that even a legitimate policy risk registers as a sale opportunity. You saw it this week. Every equity dump found buyers within 24 hours. By Thursday, the benchmarks had recovered most losses. This is market dynamics on steroids, and it works beautifully until it doesn't.

The Real Story Nobody's Talking About

While everyone was watching the Greenland theater, something grittier happened: consumer sentiment ticked up to 56.4 in January, well above the December reading of 52.9 and crushing the 54.0 consensus. More importantly, the one-year inflation expectation dropped to 4%—the lowest since January 2025.

This matters because it suggests the inflation paranoia that strangled consumer confidence last year is quietly evaporating. People still feel broke (long-term inflation expectations rose slightly to 3.3%), but they're not panicking about near-term prices anymore. That's the kind of data that makes the Fed's next meeting—January 27-28—a legitimate pivot point.

The Fed won't cut. Market pricing is now rock solid on that. But here's the real tension: we've got an economy running at escape velocity (GDP growth revisions are up), unemployment that's ticking higher, and inflation that's behaving itself. The Fed's own dot plot projects just one cut in 2026. Compare that to Fed Governor Stephen Miran, who's howling that we need "over 100 basis points" of cuts. The committee is fractured. And new voting members coming online in 2026 include hawks like Cleveland Fed President Beth Hammack, who'd prefer to sit put until spring.

So we're entering a period where the Fed is immobilized by its own contradictions, the president is threatening everyone with tariffs, and the labor market is quietly weakening beneath a surface that still looks glossy. That's the operating environment for the next six months.

Intel Is Dying, And Everyone's Acting Surprised

Intel tanked 16% this week on a "tepid outlook" warning about manufacturing snags. This is the stock that once was the semiconductor sector. Now it can't deliver nodes on schedule, its fab strategy is a mess, and the market has rendered its verdict: dead company walking.

The irony is exquisite. You've got Nvidia CEO Jensen Huang planning a visit to China ahead of Lunar New Year, a calculated geopolitical move to shore up relations as U.S.-China chip tensions mount. And Chinese officials have told the country's tech giants they can prepare orders for the H200 AI chips. This isn't a thaw so much as a choreographed dance. Nvidia gets to sell into China, the Chinese government gets plausible deniability, and the pretense of "export controls" continues.

Meanwhile, Broadcom expressed confidence in its backlog and said customer demand appears "insatiable," and the networking gear story remains robust. The moral: winners are still winning, and dead weight like Intel is being junked.

The Russell 2000's Victory Lap Is Ending

For 14 straight sessions, small caps beat large caps. That's the longest streak since June 2008—and it finally broke on Friday. The Russell 2000 pulled back sharply from all-time highs, sliding nearly 1.7% and posting its worst day since November.

This deserves attention because that whole trade was predicated on two things: Fed rate cuts heading lower, and domestic tax policy stimulus. Small caps make most revenue inside the U.S., so they're immune to tariff blowback. But as the Fed's own projections show just one cut in 2026 and the tariff machine keeps humming, that insulation theory is getting thinner.

The Russell's 7% gain year-to-date made sense for three weeks. Now reality is reasserting itself.

What Happens Next Week?

The Fed meets January 27-28. The decision will be to hold. The real theater will be Powell's statement and dot plot—will he signal any cuts in 2026, or does the committee hold the line at just one? And when does the president announce his Fed chair pick?

Because here's the thing nobody's saying out loud: if it's Kevin Hassett or someone in that camp, Treasury yields could spike. If it's Kevin Warsh, markets breathe easier. The signal matters, and the market knows Powell's out come May. The Fed's independence isn't really a question anymore. It's a negotiation.

Until then, we're playing the whipsaw game. Buy Nvidia on China news, sell it on tariff threats. Buy Intel on the assumption they go private. Watch the Russell for signs that the small-cap thesis is breaking. And pay attention to Treasury auctions—that's where the real pain will show if government spending is about to get unmanageable.

The markets have recovered from Tariff-pocalypse I. But we're only six weeks in, and there are lots of ways this year can still go sideways.

Stay sharp.

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What did I get wrong, or what's the trade you're making right now? Drop it in the comments. I read them all.