The TACO Equilibrium

Oil markets expect Donald Trump to end the Iran war imminently. That might be why he doesn’t.

The TACO Equilibrium

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.