‘Trump Always Chickens Out” has been the glib phrase in financial markets to describe the president’s first few months in office. Today, Taco sounds like a throwback to an innocent age after the US bombed Iran’s nuclear facilities, and could trigger a regional war that the president can’t control.
Understanding what drives Trump has always been an exercise in human psychology more than it is conventional analysis of political or economic ideology. Taco, which was first coined by Robert Armstrong at the Financial Times last month, was fast adopted by traders as a descriptor for the White House’s flip-flopping over tariffs on China and the EU. The Taco thesis stuck and coincided with a broad stock market rally that pushed US indices back to their pre-“liberation day” highs.
The Taco trade also had a self-fulfilling quality, as markets shrugged off Trump’s repeated attacks on Jerome Powell, the Federal Reserve chairman, the fiscal implications of the big beautiful budget bill, and the administration’s mostly empty “deals” with China on raw materials and tariffs. Such has been the chokehold of the Taco maxim on Wall Street that little has disrupted the broad rally across US asset prices since May.
Getting back to the human psychology, the Taco thesis clearly stung a thin-skinned Trump. When first asked about it, the president was clearly irked by the “nasty” in-joke at his expense. In hindsight, Taco may have unwittingly emboldened the president into proving his doubters wrong. His bellicose bombing of Iran was an escalation that was anticipated by next to no one in the markets before this month. This is, after all, a man whose presidential ambitions were born out of revenge against Barack Obama who mocked Trump at the White House correspondents’ dinner in 2011.
Trump doesn’t always chicken out it seems. That’s not to say the investor community is in any way responsible for Israel or the US’s actions, but rather, it is an illustration of myriad unintended consequences of having a uniquely capricious president.
In some ways, little has changed for the Taco bulls since Israel’s bombing of Iran and the US’s intervention on Saturday night. Oil prices, the main proxy for market jitters, touched a five-month high of $80 a barrel before falling back to about $77 on Monday. Oil has gained $10 this month and is trading at levels last seen in the aftermath of the April tariffs announcement. Over the year, Brent crude is still cheaper than it was in June 2024.
Commodity markets have taken the escalation in their stride for a number of reasons. The main driver is the belief that Iran is in a weak position to retaliate and will not launch full-scale economic warfare on its rivals and the world economy by closing the Strait of Hormuz. The strait is 21 nautical miles long and a global chokepoint for energy transit, accounting for 20 per cent of the world’s oil and liquefied natural gas transit, flowing mainly from the Middle East to Asia. Analysts expect a closure of the strait to result in prices surging above $100 a barrel.
Interestingly, betting markets think there is a more than 50 per cent chance the strait will be shuttered after Iran’s parliament voted to back the plan, but oil prices have hardly reacted. This is likely to be driven by a judgment about how far Iran’s production going offline will have a short-term, or a lasting, impact on the oil market.
With the exception of the Yom Kippur war in 1973, when western economies were rocked by oil-induced inflation and recessions for a decade, none of the other dozen conflicts involving Israel and its regional neighbours has had a lasting impact on oil prices, according to commodity analysts at JP Morgan. Instead “the largest impact on prices arises from regime changes and the ensuing destabilisation in oil-producing countries”, says the bank.
A toppling of the Islamic Republic cannot be ruled out but it is not the immediate danger oil traders are confronting. Instead, the economic fallout from disrupted supply and delayed transit is still a concern about inflation. Here too, analysts and economists expect limited danger. The pass-through of oil price spikes to consumer prices in western economies is far more modest than it was in the Seventies. In the US, a permanent 10 per cent jump in global oil prices would amount to a rise in annual core inflation of about 0.02 percentage points, as the US is now a major exporter of oil.
In Europe, the pass-through rate is higher but varies across the continent with poorer, eastern member states most reliant on oil imports. Analysts at Morgan Stanley estimate an average 0.25 percentage point acceleration in EU inflation, with half of that being felt immediately in the event of a permanent 10 per cent climb in oil prices. In Asia, China is most exposed to imported oil price shock emanating from Iran, but the world’s second-largest economy is in need in a price jolt as it stares down the barrel of deflation, rather than the reverse.
These are all good reasons that explain why oil prices are not reacting to the week’s seismic events. Investors don’t think the bombing of Iran will be of the magnitude of the 1970s oil crisis or Russia’s 2022 global gas price “shock”. Historical precedent, structural changes in global supply and demand, and the inflationary outlook all support the case for a muted reaction.
Markets don’t think “this time is different” — a judgment they make at their peril. The Iran episode is one of a litany of conflicts and potential supply shocks in a global economy where old certainties about trade, disinflation, and economic co-operation are falling away. This is what Neil Shearing at Capital Economics calls the era of “radical uncertainty … where the future is unknown and probabilities cannot be meaningfully assigned”.
Like the belief in Trump’s chickening out, the idea that the bombing of Iran will be a contained episode with limited repercussions looks dangerously complacent.