Economy and Gulf War III – Waiting for TACO

When it comes to unpredictability and off-the-cuff statements, we thought we had seen everything last year with President Trump’s tariff war: threats , followed by U-turns, then more threats, but in the end a lot more fear than pain. Yet he has now triggered a “real” war in the world’s most inflammable region that cannot be ended by a simple tweet or statement. To do a TACO without completely losing face, he will have to negotiate with desperados who have taken the Strait of Hormuz hostage in order to ensure their survival. It is hard for anyone to predict if this war will end next month or drag on forever. The world economy has been hit by a large supply shock. This rekindles distant memories of the 1970s oil crises (stagflation, blah blah blah) or the more recent invasion of Ukraine. The immediate adverse effects are already being felt in the form of greater uncertainty, higher energy bills (though far less so than in 2022) and bond yield tensions. Growth is set to weaken. This is a moment when we can only hope that central banks, particularly the ECB, keep a cool head. The preventative tightening that some are calling for is not a remedy and would only aggravate the problem.