The "Trump always cries out" strategy of buying beaten-down shares on the assumption that U.S. President Trump will eventually back down from more extreme policies has been,?for most part, a profitable investment strategy. The Iran war could change all that.

The U.S. and Israeli attack on Iran, which took place on February 28,?has sparked a war in the Middle East. It has triggered the biggest energy'shock' since the 1970s as well as record volatility for oil and gas.

So far, the?U.S. The equities market has been relatively calm. This is likely due to the assumption that Trump would pull back, if needed. Since February 28, European and Asian stocks, as well as emerging markets have fallen 4-7%. The S&P is down by 1%, and the Nasdaq has gained 0.5%.

This conflict could be a TACO too far.

Even if Trump declared an end to the conflict tomorrow, there is damage that has already been done. It cannot be reversed quickly, not even by him.

It is not possible to fix the problems of bombed out infrastructure, shut down oil production, or the disruption of global energy flow with a few strokes of the pen, or even a Truth Social posting. It will take many months or even years to restore everything to pre-war condition.

Even after the hostilities end, it is unlikely that the costs of shipping out of Middle East or insuring ships in the region will return to "normal".

The economic and geopolitical implications of the Iran War are likely to be far more significant, says Eswar Pradosad, professor at Cornell University.

It is the first instance that the Strait of Hormuz, the vital waterway where 20% of daily energy consumption in the world passes through, has been effectively closed. The first Gulf War, in the early 1990s, or the Iraq War in the 2000s were the only conflicts in the past that brought oil tankers to a virtual halt.

Even in the most optimistic market scenario, where the U.S. ends its attacks quickly, there would still be instability almost completely beyond Trump's reach. Who knows how bad things could get or how long they could last.

THE 'TACO' PLAYBOOK

Trump's geopolitical and economic playbook for his second term was to push accepted norms and rules to the breaking point, or beyond. Then he would wait to see what the market reaction would be. Investors who barely blink are given the green light to continue, or even accelerate. Trump will step back from the edge if markets crash.

Since Trump returned to his White House office 14 months ago, the president has unraveled America’s 80-year-old alliance with Europe. He has also threatened to annex Greenland, Canada, deposed Venezuela’s President, and threatened the Federal Reserve Chair Jerome Powell.

Markets trembled to varying degrees in response to these incidents, forcing Trump's rhetoric to be toned down. This led to the "TACO trade".

The risk premiums have been relatively stable despite the geopolitical turmoil of the past year. Volatility has remained mostly subdued and U.S. stocks have continued to appreciate.

Tariffs imposed on "Liberation Day", last April, were the biggest "TACOs" to date. After trillions of dollars had been wiped from the?U.S. Trump has backed off on his most punitive tariffs after the stock markets reacted in just a few days.

The conflict today in the Middle East, however, is different and more dangerous than any in recent years. Investors looking for historical precedents may find the 1973-74 'oil shock' useful in determining its economic impact.

The oil prices will not quadruple as they did in the 1980s, especially now that the U.S. has become the largest energy exporter and producer. Remember that although the OPEC embargo lasted for only six months, inflation caused by it haunted industrialized nations like the U.S. throughout the remainder of the decade and into the 1980s.

Stagflation could be triggered by a persistent rise in energy prices, or if global supply chains are disrupted. Investors might now ask?if this crisis is something Trump cannot solve, even if "chickens out."

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(source: Reuters)