Now that the Trump global trade war ceasefire is over with both allies (Canada, EU, Mexico) and adversaries (China), the hot takes are coming in, and none more exhaustive than a note by Goldman Sachs released overnight, in which economist Alec Phillips writes that less than two weeks after Steve Mnuchin declared that the “trade war is on hold," a statement which China trade hawk Peter Navarro subsequently blasted as inaccurate, Trump's policy has shifted substantially and "following trade announcements over the last few days, the trade war does not appear to be “on hold” but simply "on", leaving even longtime observers of trade policy confused about the direction from here."

So how should one try to make sense of Trump's unique, confusing negotiating style? According to Goldman, at the start of the Trump Administration, “reciprocity” was the watchword guiding trade policy.

Since taking office the President has cited many examples of “unfair” trade policies where foreign tariffs are higher than US tariffs on the same product.

Trump made as much clear on Saturday when he tweeted:

The United States must, at long last, be treated fairly on Trade. If we charge a country ZERO to sell their goods, and they charge us 25, 50 or even 100 percent to sell ours, it is UNFAIR and can no longer be tolerated. That is not Free or Fair Trade, it is Stupid Trade!

— Donald J. Trump (@realDonaldTrump) June 2, 2018

While the assumption of "reciprocity" may have been a useful concept in evaluating the Administration’s stance on various trade issues - indeed, Trump restated his reciprocal principle again June 1 - Goldman notes three other observations that help explain trade policy in the Trump Administration.

• First, the President has said in the past that, when it comes to foreign policy, “we have to be unpredictable.” Unpredictability is also likely to be a side-effect of an administration made up of officials with widely divergent views on trade policy. This could result in sudden changes in policy depending on who is leading negotiations, speaking to the media, or taking the lead in advising the President.
• Second, the Administration’s focus seems to be on bilateral trade deficits and heavy industry, particularly in areas where the two overlap. For example, while China’s intellectual property-related policies are of great concern to US multinationals, the President has often focused more specifically on heavy industry, like steel or the auto sector. This might explain why the President has recently focused on national security-related trade investigations on the EU and NAFTA countries, i.e., US allies that export substantial amounts of autos to the US, rather than China, a strategic  rival which exports a negligible amount of autos to the US.
• Third, the negotiation might be at least as important to the White House as the outcome. While we believe that the President ultimately is seeking “wins” on trade policy, like an eventual renegotiation of NAFTA or an agreement with China to reduce the trade deficit, we also believe that the White House places substantial political value in the negotiation itself. This keeps the issue in the headlines and, in theory, keeps voters engaged.

And while the three considerations above are useful in framing the Trump admin's thought process in how it goes in and out of negotiations, Goldman makes another far more relevant point, at least as far as traders are concerned, namely that to maintain leverage in negotiations, the Administration must convince trading partners that the US intends to impose trade restrictions. However, and this is the key part, "it is unlikely that the White House can convince trading partners that tariff threats are credible without also convincing financial markets."

In other words, for Trump's trade negotiations to be successful, and for US trade partners to take a flip-flopping Trump credibly, the market has to crash. Incidentally, this makes sense when one considers that when Trump officially launched the trade war with China in early April, the president explicitly warned that stocks "may take a hit", and told investors to prepare for "pain" in the market, a statement which promptly became a self-fulfilling prophecy and sent the market sharply lower.

The other consequence is that markets may tumble not as an effect, but as a cause of the trade war: after all Trump needs to be taken seriously, and that could mean another slide in the S&P. Goldman agrees as much:

... we do not expect trade policy risks to fade anytime soon. While we think that financial market sentiment around trade issues is unlikely to become as negative again as it was in early April, when the President floated the possibility of tariffs on another $100 billion in imports from China, we do not expect markets to become entirely comfortable with the outlook for trade policy, either.

The punchline: "The challenge that the White House faces is that, to maintain leverage in negotiations, trading partners must believe that the US intends to follow through with proposed actions like tariffs. However, repeated threats begin to lose credibility unless they are followed up with action."

In short, just as China said earlier, the US can't have its cake and eat it too: Trump can't have trade war, or the threat thereof, and record high stocks:

It seems unlikely that the US Administration will be able to convince financial markets that the trade war is “on hold” while convincing trading partners that tariffs might be imposed. Assuming that the White House will try to maintain maximum leverage, markets are likely to assume that further trade restrictions are likely to be imposed.

The flipside is that the higher markets rise, the more diluted Trump's threats and warnings will become, until the moment comes that Trump "snaps" and - not used to be ignored - does actually enact tariffs that have a dire impact on markets, at which point risk assets will have no choice but to crash.

The message to traders here is: keep a close eye on Trump's twitter feed. If he repeats what he said two months ago, when speaking on WABC Radio's “Bernie & Sid in the Morning’’ program, Trump said "I’m not saying there won’t be a little pain so we might lose a little of it but we’re going to have a much stronger country when we’re finished, and that’s what I’m all about" it will again be time to move to cash.