So in yesterday’s article I shared my initial views on the US-Israel-Iran conflict.
Having had some more time to mull over it, and after watching a full day of market price action, I wanted to share updated thoughts.
I hinted at this in yesterday’s article that this war could get a lot messier than Trump may have expected when he started it.
And having thought about it more – I think my original assessment may have been too optimistic.
This war is not good news, and things could get worse before they get better.
So I wanted to share my latest thinking in this article.
What are the fundamental constraints here?
In yesterday’s article, I shared the 3 potential outcomes as:
- Ceasefire + new nuclear/security deal — the best-case market outcome. Requires a new Iranian leadership willing to negotiate.
- Sustained low-intensity conflict — ongoing drone/missile exchanges, Strait partially disrupted, elevated but not catastrophic oil prices ($85-100). Resembles a “new normal” akin to the Houthi Red Sea disruption but more consequential.
- Full regional war — Gulf state infrastructure damaged, Strait closed, energy crisis. Oil $120+. This is the tail scenario that would trigger recession in import-dependent economies (Japan, South Korea, India, China, much of Europe).
The more I think about it, the more I think the US will face real challenges in achieving (1).
The problem here is that the initial airstrike took out Khamenei (the No. 1), and by the US’s own admission the No. 2 and No. 3 – creating a leadership vacuum at the top.
To achieve (1), the US needs to:
- Ensure that a pragmatic leader (a non-hardliner) consolidates power during wartime when US-Israel is actively bombing them
- The pragmatic leader agrees to a deal with US that gives up Iranian nuclear and ballistic missile capabilities
- The leader can “sell” this deal to the Iranian people without being immediately thrown out of office
It’s by no means impossible, but I would no longer say this is my base case – in fact I would say this is a low probability outcome today.
The analogy is Ukraine – why is it that after 4 years of conflict the Russians never attempted to assassinate Zelensky.
Sure you can say that the Russians are incompetent, but my view is that the Russians never did so because they know that if you cut off the head, you’re opening the pandora’s box as to who assumes power next.
Maybe you’re lucky and a moderate pragmatic comes to power.
But this is war, in times of war how likely is it that a moderate pragmatic comes to power?
So better the devil you know, than the devil you don’t.
And my assessment is that Trump may have gotten carried away with his success in Venezuela with Maduro, and made a big mistake in assassinating Iranian top leadership (although you could argue that this was by design by Israel).
Iran is not Venezuela or Gaza.
This is a country of 90 million people that used to be the Persian empire.
And just like Ukraine, they are fighting in their homeland, for what they view as their regime survival.
Their pain threshold is way higher than what Trump may be willing to bear.
War at $120 and S&P500 down 20% is a mere technicality when you think your survival at stake.
My fear is that Trump was approaching this like a “Art of the deal” business transaction. Against counterparties (Iran and Israel) who are viewing this as a century long religious battle. Trump views this as a dollars and sense business transaction, the other guys are not.
This is an FH Premium article that I am releasing to all readers, in the hopes that it helps you in your decision making. It will not be updated going forward.
My latest macro views, as well as my full stock watch and personal portfolio, are shared on FH Premium.
Is there a TACO (Trump always chickens out scenario) here?
That said – Trump has a consistent pattern: escalate dramatically, absorb the initial rally of “decisive action,” then reverse when costs materialise and reframe withdrawal as triumph.
Basically, TACO – Trump always chickens out.
We saw this well documented during the 2025 tariffs, where he was quick to walk back on them once the S&P500 started falling too much.
We also saw this in Syria 2019 (declared ISIS defeated, withdrew, left Kurds exposed), the June 2025 Iran strikes (hit nuclear sites, declared ceasefire on day 12 without a deal), Afghanistan (inherited the withdrawal framework, owned the timeline).
The bottom line is that based on track record, when markets start to drop, Trump has demonstrated a remarkable willingness to change his mind, while declaring victory regardless of ground truth.
So what would a Trump TACO over Iran look like?
I suppose its not hard to imagine:
- US casualties mount, oil prices continue to rise, markets drop hard enough
- Trump decides enough is enough – he claims that Iran’s nuclear program and ballistic missile capability is wiped out
- US withdraws from the war
- Iran gets regime survival – the new leadership consolidates. IRGC while degraded, remains intact. The war solidifies their belief that the only way to ensure regime survival is to get nuclear weapons (which after this conflict looks like an accurate assessment), and they rebuild their nuclear program – setting the stage for a future conflict.
I suppose if both US and Iran were acting rationally (which to be clear is not guaranteed because this is war), this is the win win outcome.
The wildcard here is Israel.
Recent evidence suggest that it was Israel who pulled the strings to bring the US into this war with Iran.
Will Israel accept the above TACO outcome, or will they settle for nothing less than regime change and complete destruction of the Iranian nuclear and ballistic missile capability?
Frankly – not clear at this point in time.
This could get messier than Trump expected
It seems like Trump went into this expecting a Venezuela kind of outcome.
Get rid of Maduro, and the rest of the leadership falls in line and negotiates with the US.
But I keep coming back to the point that Iran is not Venezuela.
And the US made a critical difference here in that they assassinated Khamenei.
Assassinating a top religious and political leader, and then expecting the country to negotiate a deal with you to fully disarm, in a country with a long and proud history as the Persian empire.
I just don’t like those odds.
Best case outcome here is that Trump will TACO in the next 2 – 4 weeks and declare a US victory, despite the practical reality that you probably won’t win this war without boots on the ground and a full regime change.
But I frankly think Trump has opened the pandora’s box here, and whether the forces in play (including Iran and Israel who are fighting what they perceive as a religious war of survival) allow him to TACO.
I genuinely don’t know.
What does this mean for investors?
Long story short?
I think my assessment yesterday may have been too optimistic – and I think the chances of this spiralling into a negative outcome is higher than markets are pricing in.
I was frankly surprised that the market had such a strong close yesterday, and it looks like today the market is waking up to this sobering reality.
Oil has jumped to $83:
And US futures are pointing to an ugly open:
I would say the best case outcome is for Trump to TACO in the next 2 – 4 weeks.
But that first requires things to get worse before they get better.
And whether the forces in play even allow for a US offramp if Iran is engaging in a regional war with Israel.
It’s really not clear.
For investors – I would say keep your mind open, and be flexible on what happens next.
This is an FH Premium article that I am releasing to all readers, in the hopes that it helps you in your decision making. It will not be updated going forward.
My latest macro views, as well as my full stock watch and personal portfolio, are shared on FH Premium.