Just another TACO Tuesday
Trump chickened out, markets rallied, and global consumers are left footing the bill for a new toll in the Strait of Hormuz.
Just like that, after days of Trump tweeting out threats to Iran's leaders like "you'll be living in Hell", and "a whole civilization will die tonight", we ended up with a two-week ceasefire.
Was it predictable? Kinda: the TACO ("Trump Always Chickens Out") acronym exists for a reason! But prediction markets weren't so sure; as recently as yesterday, the odds of a ceasefire by 15 April were under 20%, and the 7 April contract – the day the deal was eventually agreed – was below 1%.
The fact the TACO trade was only partially priced in explains why stock markets reacted so strongly to the news, with US futures currently up around 2.3%. Was that a mistake? Clearly, and I suspect as the next critical juncture approaches, markets will be quicker to price in the odds of another TACO event. He may be a madman (seriously, who in their right mind fires off tweets like that?) but he's not yet mad enough to follow through on his most extreme threats.
Now, the crisis isn't over by any means. As part of the truce, Iran and Oman will start charging a toll on Strait of Hormuz ship traffic. That will increase the marginal cost of delivered crude from the Gulf, which will be passed through, with the incidence falling on global consumers. If that's a permanent outcome of Trump's "military operation" in Iran, higher prices will also be permanent (they probably would be anyway, given the inevitable increase in the risk premium built into charter rates and insurance).
I don't know about you, but if the goal was to cripple Iran and stop it building weapons, letting it walk away with a permanent revenue stream paid for by US and other consumers seems like a bad outcome. I know Trump will frame it as a victory, but that's a genuinely bad trade.
The ceasefire is only for two weeks; who knows what side of the bed Trump will wake up on as the date draws nearer and a decision needs to be made? When you're a madman, the nature of your strategy is to be unpredictable. I think on balance he's likely to just declare victory and walk away from this one – high fuel prices aren't popular with the electorate, and the mid-term elections are only around six months away.
