Donald Trump takes questions in the James S. Brady press briefing room at the White House on Monday.Evan Vucci/Reuters
Chris Gay is a contributing columnist for The Globe and Mail. He is a former Wall Street Journal staffer and writes the newsletter Figure at Center.
Has Donald Trump just revived the “TACO trade”? That’s one way to read the market’s response to the U.S. president’s latest reversal in Iran.
Astute investors have known for a year about the TACO trade, the phrase referencing the acronym for “Trump always chickens out.” The strategy involves buying securities that fall on an impulsive Trump initiative and profiting when he reverses course and prices rebound. Last year it was on-off tariffs; this year, shifting positions on Iran. (U.S. News and World Report has even suggested ways to profit if Mr. Trump retreats on tariffs.)
Mr. Trump’s Tuesday night decision not to wipe Iran off the face of the earth might prove the mother of all TACOs. Mr. Trump had vowed to terminate Iranian “civilization” by 8 p.m. ET if Tehran did not open the Strait of Hormuz. Two hours before the deadline he announced a two-week ceasefire.
Mr. Trump presented it as a win, saying Tehran had agreed to reopen the strait. But if you parse the words of Iran’s Foreign Minister, it seems that the waterway would be open only under the good graces of its military – Tehran could still choke the strait if it wanted.
All the same, oil prices plunged 15 per cent and stock futures soared more than 2 per cent on the news.
Analysis: The U.S.-Iran ceasefire, full of uncertainty, brings relief to both sides
That suggests the TACO trade is still viable, even though arguably it shouldn’t be. University of Massachusetts economics professor Arindrajit Dube wrote on X in January, “TACO undermines itself” as markets begin to anticipate reversals. Moves that once rattled investors may now provoke a muted response.
Mr. Dube argues that this creates a cycle: Markets price in reversals, reducing reactions to new announcements, which in turn may encourage more aggressive policy signals until markets begin to doubt a reversal and react more sharply. Over time, he suggests, this dynamic could contribute to larger market disruptions.
Mr. Dube’s observations about the self-negating quality of the TACO trade reflect something called the Lucas critique, after the late University of Chicago economist Robert Lucas, who posited that market actors change their behaviour as their expectations adapt to shifts in policy.
Adaptive expectations can neutralize the intended effect of policy changes that make static assumptions about how actors will respond. “The parameters of the models economists use to evaluate policy are themselves functions of the policy regime,” Mr. Dube said in an e-mail. “Change the regime, and the parameters shift.”
If that’s right, it should become increasingly difficult to profit off Mr. Trump’s zigs and zags in Iran.
To be sure, there are ways other than TACO to generate alpha from Trump’s volatile foreign policy, some more suspect than others. Five hours before the U.S. invasion of Venezuela in January, an unknown trader wagered on Polymarket, the crypto-betting platform, that Venezuelan leader Nicolás Maduro would be ousted. The bet netted US$400,000, a 12-fold return.
Similarly, well-timed Polymarket bets placed in the days before Mr. Trump’s Feb. 28 attack on Iran generated profits of US$330,000, according to the Financial Times, which reported that about half of the bets came within six hours before the strike.
Then, on March 23, traders made bets worth US$583-million 15 minutes before a Truth Social post by Mr. Trump on “productive” talks with Iran sent crude prices plunging and stock indexes soaring.
(Whether any of this reflects insider trading is unclear. If there were helpful hints beforehand, they weren’t as obvious as Mr. Trump’s April 9 post last year – “THIS IS A GREAT TIME TO BUY!!! DJT” – hours before announcing a 90-day pause on the tariff wars that had alarmed global markets for the previous week. Stock prices immediately spiked.)
Another way to profit might be the stocks of major defence contractors. Trump on Friday released a budget proposal seeking US$1.5-trillion in defence spending, including US$350-billion for critical munitions. That should please investors in General Dynamics GD-N and Lockheed Martin LMT-N.
Short-term, though, the market seems to be saying that TACO is where the alpha is. Volatility and surprise can be profitable if you bet the right way, and Mr. Trump offers plenty of both.
“The optimistic reading by investors [Tuesday night] could turn out to be reasonable,” Mr. Dube said. “Or not. We will have to see – though I don’t think we’ll have to wait long.”