The TACO Equilibrium Despite the closure of the Strait of Hormuz for three months due to the Iran war, oil prices have remained relatively stable. This is largely due to investor psychology, rooted in the ‘TACO theory’ (Trump Always Chickens Out), which assumes Trump will yield to economic pressure and end the war. However, this dynamic creates a circular logic where low prices reduce pressure on Trump to end the war, potentially prolonging the conflict.

• 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.