Taco and Predictions

Trump makes these announcements (more tariffs, no support for Ukraine etc) and then, a while later, backs off. Rob Armstrong coined an acronym: Taco. Trump always chickens out. Here is what he means: Trump announces something, the markets fall, Trump panics and retracts earlier announcement.

 

If the markets are part of the story, well, there is money to be made in such situations. It is called the Taco trade! Explanation: Trump makes announcement, market falls, so you buy stocks at this point, Trump panics and retracts his announcement, markets rise, and you sell the stock at this higher point.

 

Sounded logical? Except, as Tim Harford says, pull on the story a bit and it begins to unravel:

“The fact that the markets were so alarmed in early April suggests that they weren’t really swallowing the Taco hypothesis.”

 

Harford then does an intellectual exercise. So stock traders stop believing in the Taco trade. Hence, after the next weird announcement by Trump (“deporting to Peru every pygmy hippo he can find”), the markets don’t crash. Well, since the markets didn’t crash, Trump doesn’t retract his announcement! What’s next?

“The market will belatedly plunge, Trump will belatedly chicken out and the pygmy hippos will be saved — until the next time.”

~~

 

The above may have sounded like an amusing thought experiment. But, says Harford, this is how all prophecies work. Predict a disaster (Y2K meltdown in the year 2000; CFC’s destroying the ozone). People took action to try and prevent those; and so the disasters didn’t happen. Well, that’s one perspective. Another alternative is that the prediction was wrong which is why nothing bad happened.

“(Were we) being silly because there was never a serious problem in the first place?”

Other examples include COVID measures and nuclear deterrence – did they prevent a catastrophe? Or was the threat overblown? Forget the specifics of the examples cited – Y2K, CFC-ozone, COVID measures, nuclear deterrence. The point is that, in general, we can rarely be sure if the prediction was valid and prevented or if it was just plain invalid and we wasted time and resources on things that were never needed.

 

This then is the paradox of predictions:

“If they change our actions, they are changing the very future they hope to describe.”

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