The TACO Equilibrium
Oil markets expect Donald Trump to end the Iran war imminently. That might be why he doesn’t.
TL;DR
- Oil prices have remained surprisingly calm despite the ongoing Iran war and the closure of the Strait of Hormuz.
- The 'TACO theory' suggests investors believe Trump will back down from conflict due to economic pain, keeping oil prices low.
- This expectation creates a circular logic: low prices mean less pressure on Trump to end the war, thus prolonging it.
- Trump appears to manipulate markets by hinting at peace deals to calm rising oil prices.
- The effectiveness of this strategy is diminishing as markets become aware of the pattern.
- Supply and demand realities, coupled with dwindling oil reserves and rising inflation, may eventually force prices higher.
- Bond investors, unlike equity investors, are less swayed by optimism and more by current economic realities, responding to inflation by selling U.S. Treasuries.