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There are many reasons to feel confused by current American policy. US President Donald Trump keeps issuing \u201cfinal\u201d tariff threats<\/a> \u2014 then backing down.<\/p>\n The White House wants to create industrial jobs <\/a>\u2014 but is gutting the Inflation Reduction Act that was doing just that, mostly in red states. Scott Bessent, Treasury secretary, wants dollar dominance, but has presided over a 10 per cent fall<\/a> in its value. And so on.<\/p>\n However, if you want to feel more baffled, look at markets. This month the one-year swaps market is pricing modest rate cuts from the Federal Reserve, which normally implies lower growth and inflation.<\/p>\n However, equity prices suggest an improving economy: American stock markets are at record highs and Wall Street analysts are projecting<\/a> continued gains amid strong earnings forecasts. Moreover, so-called cyclical stocks (which benefit from growth) are significantly outperforming defensive ones, notes Torsten Sl\u00f8k,<\/a> chief economist at Apollo, the private capital group.<\/p>\n \u201cThis is not consistent,\u201d Sl\u00f8k adds. \u201cEither the bond market is wrong, and rates must move higher due to accelerating growth. Or, equity markets are wrong, and stocks have to move lower because growth is slowing down.\u201d\u00a0Ouch. <\/p>\n Why? There are at least three possible explanations. One might be a \u201cdouble Taco\u201d trade (I am referring here to my colleague Robert Armstrong\u2019s idea that \u201cTrump always chickens out\u201d<\/a>). More specifically, equity prices might be pricing an assumption that tariff threats will be watered down, and bond markets pricing a belief Trump will not actually execute debt-expanding measures and cause investors to spurn Treasuries. <\/p>\n This is not crazy. Trump has repeatedly reneged on tariffs this year, along with threats to fire Jay Powell as chair of the Federal Reserve, and a so-called Section 899 clause that might have caused non-American investors to flee from Treasuries was recently removed from Trump\u2019s \u201cbig, beautiful bill\u201d, which passed into law last week. Hence that Taco tag.<\/p>\n But there is an alternative explanation that might be dubbed the \u201cdouble genius\u201d idea: investors believe that Trump will actually execute his plans, but they will be so brilliant that they deliver higher growth, lower prices and falling debt \u2014 all at once. <\/p>\n More specifically, figures such as Kevin Hassett, Trump\u2019s economic adviser, insist that the BBB act will turbocharge growth, while inflation is lowered through deregulation<\/a> and lower energy prices. And when the rating agency Moody\u2019s cut the US credit rating because of its $37tn (and rising) debt, Bessent dismissed that as a \u201clagging indicator\u201d<\/a>, arguing that revenues will rise due to tariffs and growth. <\/p>\n In the meantime, he is rolling out tricks to ease the scheduled $9tn Treasury auctions in the next 12 months, such as reforms to encourage banks<\/a> to buy more bonds and weighting issuance towards short-term, not long-term, bonds. (That is ironic since Bessent\u2019s team lambasted his predecessor<\/a> Janet Yellen for doing just that.)<\/p>\n And some investors accept this spin \u2014 or so it seems. No wonder: the Atlanta Fed\u2019s real-time estimate of current GDP growth is 2.6 per cent<\/a>, and there is little evidence that tariffs have caused major price increases \u2014 yet. And while institutions such as the World Bank have slashed their global growth forecasts<\/a>, due to tariffs, the Oxford Economics group \u2014 to cite one private sector entity \u2014 thinks this week\u2019s \u201cnew tariff rates\u2009.\u2009.\u2009.\u2009and the 50 per cent copper levy\u201d creates \u201conly modest downside risk\u201d. <\/p>\n Indeed, it thinks these measures will \u201conly\u201d add 0.08 percentage points to core inflation next year, and reduce real GDP by a mere 0.1 per cent \u2014 and the latter will be offset by the BBB\u2019s fiscal boost. Thus while \u201cthe mix of trade agreements and threatened tariffs will push the US effective tariff rate to almost 20 per cent on August 1\u201d that is \u201cless than our recession threshold\u201d. Hence the market calm.<\/p>\n However, another, more cynical, way to explain the disjunction is that it is simply impossible to make credible \u2014 or consistent \u2014 forecasts now due to a lack of recent historical precedents for Trump, and pernicious time-lag effects. One problem is that US companies have amassed huge stockpiles to dodge tariffs. Another is that companies are \u201crearranging\u201d China-linked supply chains, as a McKinsey report says<\/a> \u2014 and while <\/a>this is easy in some sectors (like T-shirts) it is hard in others (like laptops and fireworks). <\/p>\n