Pricing the Iran War's Future — Are Markets Right?

Ed Elson is joined by Katie Martin and Justin Wolfers to break down how the war with Iran is moving markets, what signals the bond market is sending, and where the economy could go from here. Katie Martin is a markets columnist and editorial board member at the Financial Times. Justin Wolfers is a Professor of Economics and Public Policy at the University of Michigan. Check out our latest Prof G Markets newsletter Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on InstagramSend us your questions or comments by emailing [email protected] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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• 1:29Ed Elson?

  Today's number? Forty-two. That's the average age of a new hire in America today. The highest number ever. Standard benefits now include a 401(k) rollover and a referral to an orthopedic specialist.

• 1:46Speaker 05

  Money markets mad. If money is evil, then that building is hell.

• 1:56Ed Elson?

  Welcome to Prof you Markets. I'm Ed Elson. It is March 11th. Let's check in on yesterday's market vitals. The major indices initially climbed as oil shock fears were tempered, but they ultimately closed flat. Crude oil prices declined, the dollar fell, and Bitcoin jumped above $70,000.

• 2:17Ed Elson?

  Okay, what's happening? The war with Iran is escalating. U.S. Defense Secretary Pete Hegseth told reporters at a Pentagon press conference on Tuesday that Iran was, quote, "badly losing."

• 2:30Speaker 06

  Today will be, yet again, our most intense day of strikes inside Iran. The most fighters, the most bombers, the most strikes. Intelligence more refined and better than ever.

• 2:44Ed Elson?

  Hegseth's comments came just hours after President Trump suggested the war would end, quote, "very soon." However, Trump also warned that the U.S. would hit Iran, quote, "20 times harder than they have been hit thus far if Tehran stops the flow of oil through the Strait of Hormuz." An Iranian official said the country is absolutely not seeking a ceasefire. At least 20 countries are now militarily involved, making it one of the biggest conflicts since the Cold War. Meanwhile, the energy market is on edge. The Strait of Hormuz remains effectively closed, and Abu Dhabi's Rewais refinery, one of the biggest in the world, halted operations after a drone strike nearby.

• 3:25Ed Elson?

  Saudi Aramco CEO Amin Nasser warned of, quote, "catastrophic consequences if the war drags on." Oil has continued its volatile ride. Brent crude, after spiking up to $119 on Monday, fell to 85 by midday on Tuesday. So we have lots to talk about. We are joined by another expert panel. We've got Katie Martin, markets columnist and editorial board member at The Financial Times, and also Justin Wolfers, professor of economics and public policy at the University of Michigan. Two of our favorites, Katie and Justin, thank you so much for joining us on the show. Katie, I'm going to start with you. It's been hard to make sense of the market's reactions to what's happening here because

• 4:10Ed Elson?

  it seems that originally markets were not too worried about it. You wrote about this. Everything, from stocks to bonds to gold, seemed to be behaving in the opposite way you would expect if there was some global catastrophe that might be unfolding. Then it seems to kind of reverse. Oil prices spike, back down again. I'm struggling to make sense of it myself. What do you make of how the markets have digested what's happening in Iran?

• 4:36Speaker 07

  Yeah, it was quite a weird market reaction to this whole situation. So the oil price shot higher and that much makes kind of instinctive sense. But then the other things that tend to go hand in hand with a big geopolitical shock like that, like gold generally goes up, the Swiss franc generally goes up, the yen generally goes up, bonds generally go up in value and push down borrowing costs. The opposite of all those things happened. So gold went down a little bit, certainly didn't sort of strike any new highs, the Swiss franc weakened, the yen weakened, bonds weakened on the potential inflationary impact of having higher oil prices. And also what you saw was the

• 5:16Speaker 07

  stocks that did the worst, the most heavily affected stock indices were those in Asia, for example, and a lot of those in Europe. And I think what that is telling you is that investors were not saying this is the end of the world, this is equivalent to the 1970s oil shock, this is equivalent to nine 11. What they were saying was, I'm just going to take a few profits on some very successful bets that I've had running for quite a long time. I'm just going to take a little bit of risk off the table. But they weren't sort of running to the hills and scrambling for safety. So it's been really quite a confusing market response to what we've seen. But I think the one that will be the most durable and the one that we need to pay the most attention to is

• 6:01Speaker 07

  that bond markets, government bond markets were very sensitive. They are really very much on a knife edge, worried about a resurgence in inflation. You know, we just got to the point where it looked like central banks in major economies had inflation kind of under control. This is a new risk factor that's come out of nowhere that people weren't anticipating and that could get messy.

• 6:22Ed Elson?

  So we've got some investors saying it's kind of a big deal, other investors saying it is a big deal, some investors saying not a big deal at all. Justin, what do you think?

• 6:33Justin Wolfers?

  First of all, I have to return to that quote from Hegseth you played at the top of the show. I felt like he'd been reading my mind. Hegseth said it was going to be intelligent, more refined, and better than ever. And that's how I think of Ed Elson, frankly.

• 6:48Ed Elson?

  I'll take that.

• 6:50Justin Wolfers?

  And I'm also, I would love it if this administration were intelligent, more refined, and better than ever. And if Hegseth were serious, it would cause a huge market rally. And that's how I transitioned from a joke to economics. Katie correctly said, if you thought about this in fairly simplistic terms, what the market's doing is very confusing.

• 7:14Justin Wolfers?

  Let me come back, because not all of us are financial market nerds, and say, why are we talking about financial markets? I understand on a podcast called Markets, that might be self answering, and then give a frame that I think will help unravel Katie's dilemma there. I don't think I'm going to say anything Katie doesn't know, she already knows everything. First of all, why are we looking at financial markets? Are we really such bloodless cretins that at a moment when the US is declaring war, or not declaring war, bombing a country of 90 million people and their strife in the rest of the region, the first thing we want to do is go and check our portfolios? I know you better than that, Ed, and that's not what's going on. What we're in right now is just a horrible news environment.

• 7:59Justin Wolfers?

  Almost no news organizations have people over there. When you turn on the TV, you know that on Fox News, they'll say it's splendid, you know that on MSNBC, they'll say it's terrible. When you try to figure out what sort of data we have, the real question is, are the Iranians telling the truth, or are the Americans telling the truth? So for a serious citizen genuinely trying to understand what's trying to happen right now, all our usual news sources are broken. So what do we want? We want a news source where people are not just talking, they've got skin in the game. Well, financial markets do that. We could call the Bureau of Economic Analysis and ask them for economic data, but this all happened in the last eight days, and there's no numbers on anything yet.

• 8:41Justin Wolfers?

  So what we need therefore is a forward-looking indicator, bets on the future. And so that's what financial markets are. So we're not there because we love them, and we're not there because we think that this is the most important thing going on right now. We think that this is a very sophisticated machine for aggregating news from around the world. The other thing that this has is, there's a ton of people on Wall Street who realize they can make a ton of money if they can understand the current situation better than anyone else. And so they've got satellite imagery, and they're talking to international relations experts, and blah, blah, blah, blah, blah. So, Ed, on your show, you could interview a maximum of two people right now. Well, financial markets are like interviewing thousands of people.

• 9:24Justin Wolfers?

  You might think they're not all sophisticated, but at the very least, I want to say financial markets might be the least unsophisticated. Yeah. Or the least bad way of trying to understand what's going on. And so then the reason Katie says this is up, that's down, blah, blah, blah, blah, blah is, well, they're telling us something, but what are they telling us? If this were a classic oil shock, you would just see oil prices go up. You would see country's stocks fall roughly in proportion to how much their net oil importers. Um, and maybe you'd see a flight to safety. This is why I hate talking about gold and silver and the franc, but Katie did it, so I'm going to blame her. Um, you'd see a flight to safety. Okay. That's one part of the story.

• 10:10Justin Wolfers?

  I think there's another part of the story. This isn't just an oil shock, this is a war.

• 10:16Justin Wolfers?

  What kind of war is it? Why are markets going up and down like crazy right now? Well, it's a war with unannounced intentions, unannounced allies and an unannounced exit plan. And all of us are trying to figure out what the hell is going on. Mm hmm. And so when the president just says something that sounds like he's declaring success, we think, oh, that means he's about to back out. And when he uses the word month instead of the word week, then it sounds like, oh, he's all in. And so we're overreacting, but it's not overreacting. It's because we have no idea against a baseline of no knowledge, you should respond to every single thing you hear about. One way of thinking about this second shock is it's a war shock, war can land you with all sorts of fiscal trouble in the long run. That would explain the bond market.

• 11:00Justin Wolfers?

  But another, I think, is actually, I'm going to use some shorthand here and call it a competence shock. Um, in case you haven't been watching lately, the U S is run by fools. Um, I'm overstating my case, but they appear not to plan. They appear to have an expansionist worldview. They blunder and do whatever they want, wherever they want. And if we're in a world in which an old man can turn the world on its head according to his mood, we're in a very, very shaky world. What does that do? That puts something that's sort of like what about a year ago, people were calling the sell America trade. If you no longer have faith that the US is the shining beacon of freedom, that it's well run, that the technocrats and grownups are in charge,

• 11:43Justin Wolfers?

  then you might be not only selling American bonds, you might not think of America as your safe haven asset. And so maybe that's some of what you were learning here. Now, the thing is, I'm over my skis here. Katie knows all of these different markets. So I'm not your interviewer here, Ed, but I would love to know how Katie puts these pieces together.

• 12:01Ed Elson?

  That was exactly going to be my follow up because Katie, you have been studying how the sell America trade has been unfolding. And you are in conversation with many of these fund managers in Europe and around the world. And you were the one who pointed out to us that, yeah, maybe it wasn't the sell America trade that everyone thought was happening when Liberation Day occurred. But we definitely did see some momentum in international markets that we didn't see in US markets. So yes, please respond to Justin.

• 12:32Speaker 07

  I just want to return to something that Justin was saying about why we care about markets in these situations. You know, as Justin was saying, we're not monsters. You know, I described this kind of obsession with markets around awful events like this. Yeah, the other day in a column as foolish and ghoulish, right? You know, you have short term market moves that don't necessarily mean anything. And we all understand that there's a human cost that outweighs any financial cost to what's going on here. But the one of the reasons why markets are a really important thing to watch during this process is that Donald Trump is watching them. He really cares about the oil price. He really cares about the gasoline price. He really cares. He's the only person on earth who does care where the Dow is, but he really cares where the Dow is. He cares about these, you know, some of these measures of the stock market.

• 13:15Speaker 07

  And Scott Besson cares very deeply about bond yields. So he really doesn't want bonds to weaken too far, doesn't want borrowing costs to shoot up too much. So to the extent that the geopolitical news has moved markets around, that's one of the stabilizing factors around what Trump does and how he thinks and what he does next. I'm sure we'll go on to talk about that later on. But in terms of sell America, you know, I've talked about this on this show in fact before, is that's kind of not really the right word for it. It's avoid America. Nobody's talking about selling down US holdings that they own in any sort of meaningful size.

• 13:55Speaker 07

  What investors that I speak to around the world are doing, however, is that they are, you know, every incremental euro or pound or yen or Australian dollar that comes into their investment pot, they're not mechanically sending sixty, seventy percent of that to the US anymore, which you would do if you're sticking to the big global indices. What they're doing is saying, maybe I can spread this a little bit more evenly, maybe I want to be more exposed to, to Europe, to Asia, to emerging Asia, to all sorts of different places. And so people are doing two things, that they're hedging out the currency risk, they're making sure that they're not too exposed to big moves in the US dollar, but also they are diversifying their mo— and that also is, kind of goes hand in hand with people

• 14:39Speaker 07

  thinking that the AI trade has got a little bit ahead of itself and maybe they want to invest in other things in other places. So there's a lot of reasons why people are putting money to work in places other than the US at the moment. I still find the vast majority of US asset managers who I speak to about this don't know what on earth I'm talking about. And everybody else, all the, all the asset managers, wealth managers, hedge fund managers that I speak to in Europe and Asia all the time, this is absolutely a standard part of their job, they're absolutely diversifying away from the US. There's a large part of the investment community in, in the US and a large part of Wall Street that really has not got this memo yet. But that is one of the reasons why it was those markets that sold off hardest when this

• 15:22Speaker 07

  shock hit the system, because those markets have done so well as part of this diversify away from America trade. So stocks in, in South Korea got absolutely monstered because that's been such a big beneficiary of this, it's been a way to get into AI without being in the US, there's a lot of very AI reliant stocks in, in South Korea that are very important to that stock market. So all of those things that have been very popular as an alternative to the US were the things that suffered the most in this shakeout. The other reason why US markets, US stock markets didn't suffer as much as those in the rest of the world is, you know, if you look at a map... The US is quite a long way away from Iran. Don't know if you know that, but it's a long

• 16:05Speaker 07

  way and it's got plenty of its own oil and gas. Thank you very much. It's not reliant on these energy supplies that come from the Middle East. So this is one of those situations where this is a war that is being conducted or initiated by the US along with Israel. The economies that are going to feel the pain from this, the most amount of pain are Europe and Asia. So thanks for that, US. But you know, this is one of the kind of really important factors about how this is going to affect the global system. The US will take the pressure through inflation and through higher gasoline prices. But the rest of the world, as you can see with what's happened with, for example, UK borrowing costs over the course of this week, we're really sensitive to that in a way that the US isn't to quite the same degree.

• 16:49Justin Wolfers?

  Can I draw two threads together from what Katie just said? Please. There's a very sharp sense in which the US markets are responding far less than elsewhere. There are other countries that are a long way away, Australia, but we're oil dependent. You're seeing much larger effects. I graphed last night G20 stock markets, and I think China is the, China and the US are the least affected. And then it's the rest of the world. And what's interesting then is to draw that into conversation with your earlier observation, Katie, that the president is focused on stocks. He's focused on the one stock index in the world that is least affected by his actions because his country happens to be oil independent. And so

• 17:33Justin Wolfers?

  that changes the economics, the politics of all of this in, I think, very, very interesting ways. Because I'm now hosting this show, Welcome to the Podcast with Justin Wolfers. I've got a question for you, Susan Ed. Katie, I was so interested in what you had to say. So you're calling Sell America or Avoid America. I love it because also now you call it AA. And we can all turn up with paper cups of black coffee and talk about our feelings. And whether our mothers loved us. I was wondering whether you can just, it might be that following two stories are identical, it might be that they're different. One is, I don't believe in America, I want to avoid it. Another is historically, America was a safe haven.

• 18:18Justin Wolfers?

  Safe Haven is a social convention, right? It's safe because everyone else thinks it's safe. And that social convention is broken down. Is there a way to separate those stories and what are the markets telling you?

• 18:29Speaker 07

  Yeah, they are two sides of the same coin, really. I was, I was really surprised when the first thing that happened, or the most notable thing that happened in government bond markets, when the bonds started falling on Iran, was that the prices of the bonds fell and the borrowing costs went up and the yields went up. That's very weird because as you say, Justin, like, you know, when the brown stuff hits the fan, people want to own nice, safe, boring government bonds. And so you would normally see borrowing costs absolutely crater and the price of these bonds go through the roof. That didn't happen and I think that's a combination of two things. You know, the, the move in bond yields was global, so we can't pin it all on the US, although the US does drive global direction here. But it does tell you two things.

• 19:12Speaker 07

  It tells you that there is less confidence in US Treasuries as, as a retreat when the going gets tough. But also it tells you that the bigger preoccupation for investors right now is the inflationary impact. Bonds hate inflation. It's like kryptonite. They just do not like it up at all. And so as soon as you get inflation start to hit, that's when you get borrowing costs shoot higher. Um, so there were some very messy moves around what we call the short end of that market over the course of the past few days. That's very short term borrowing costs, which most closely reflect benchmark interest rates. And so, for example, in the UK, we went from a situation where the, the UK government bond market was pricing in interest rate cuts.

• 19:55Speaker 07

  And it flipped all the way around to almost fully pricing in a rise in interest rates over the course of just a few days. I know that doesn't sound like a lot to normal people. For bond nerds, that's like, that's serious. This, this never happens. This was a very severe move. There's a lot of hedge funds that got caught out on the wrong side of it and it was quite ugly. But it does just go to show you that that's the bit where the rubber really meets the road on, on this. Because it is always ultimately about the oil price. And, you know, to the extent that markets do spook Donald Trump and, and, you know, as Justin was saying, you know, some of the US indices are some of the least affected by this, so it's possibly not the best, not the best way to read it. The oil price was deeply problematic for Trump and his administration.

• 20:40Speaker 07

  So we saw the oil price Brent shot to about $120 a barrel as the market opened on Monday, right before the FT reported that G7 authorities were looking to release strategic oil reserves to try and hose the price down a little bit. But all of a sudden, US gasoline prices are up 16% in a week. You're looking at $3.48 average for, for a gallon of gasoline in the States. You know, you, you guys don't need me to tell you that the US consumers, US voters are hyper focused on the gasoline price. And there, there did come a point where it looked like this is something that hadn't been baked into the calculations of, of what the authorities would, of what the US and Iran were doing.

• 21:24Speaker 07

  The US and Israel were doing in Iran. How, how they hadn't borne that into account, I don't know. But yes, if you effectively block off a, a pretty thin strip of sea that is used to, to transport 20% of the world's oil, you've got a problem, you know, pretty obviously. And, and that came to bite the administration. And I think it was around that point that the oil really got into nosebleed territory. That was where the administration thought we're going to have to soften our language here. And as Ed was saying, the language is either softer or harder, depending on whether you're listening to Trump or Hegseth. But the market has decided, and you can tell this judging from the decline in the oil price, the market has decided that the worst of this conflict has passed. Rightly or wrongly, I don't know.

• 22:07Ed Elson?

  Stay tuned for more of this panel after the break. And for even more markets insights, you can subscribe to my weekly newsletter, Simply Put, at simplyput.profgmedia.com.

• 22:25Speaker 00

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• 23:57Ed Elson?

  We're back with our panelists. To go back to Justin's point of what the markets are doing for us. They are our best attempt at understanding the future. And so here we are trying to understand what do the markets think? Because maybe the markets know better than we do. Or at least, that's the idea. The trouble is, when I look at what's happened with the markets, this is a market that appears to be entirely reactive and not at all proactive. In the way that prices seem to be spiking up and down, and even in my conversations with investors, I spoke with Steve Eisner, who's The legend of the big short. I asked him, how does this change your investment strategy? Does this change things for you? He said, it doesn't change my strategy by a single dollar.

• 24:42Ed Elson?

  And that seems to be the consensus among many investors. And perhaps there's an argument that the US is insulated. This is going to affect other countries. It's not going to be a problem for us. I then look at, say, the oil price. And then I read about how much does the oil price affect the gasoline prices at the pump? What does that do to inflation? Could inflation go out of control? Does that mean stagflation? Does that mean we raise rates? Does that mean a recession? I'm going a little bit crazy thinking about the downstream effects. And I'm thinking, this seems a lot more dangerous than a lot of investors and then that markets seem to think. And now I've got a problem because I disagree with the markets. Who are supposed to be the smartest people in the room?

• 25:24Ed Elson?

  So, Justin, what do you make of this seeming message from the markets? Which is, it's not going to be a huge problem for America.

• 25:36Justin Wolfers?

  Anytime any of us thinks we're smarter than the big group of people with billions of dollars on the line. It's not impossible. We just want to be humble. Secondly, the fact that market prices are going up and down like crazy might sound like irrationality, and it would if we knew a lot about what was happening. And the underlying state of play was stable.

• 26:00Ed Elson?

  Yeah.

• 26:01Justin Wolfers?

  So you knew when George W. Bush was president and he wanted to invade Iraq, that news was changing. It might change his mind a little bit. We might go in earlier, later, longer, shorter. We sort of knew what was happening. That's not where we, and so we, we had a baseline expectation. And we're getting mildly interesting signals.

• 26:23Justin Wolfers?

  Thing about this president is, you know, the market rallied yesterday because they thought he had suddenly declared victory and was going to pack up and go home.

• 26:29Ed Elson?

  Right.

• 26:30Justin Wolfers?

  Which is unlike world leaders we've ever had before. I think it's actually possible he could do that.

• 26:38Justin Wolfers?

  Given that, if you hear a rumor that he's about to declare success, you probably should change your mind. So I don't think the market in reacting in terms of large swings is being at all irrational. And then, so the ups and downs aren't irrational, but I think, Ed, your question was, why isn't it down more? Yeah. And here I want to tell you two stories that I think speak to that, that I think are exactly on point. So I was a young economist during the run up to the Iraq war. The great thing about the Iraq war was it played out slowly. Powell would go to the UN, we'd get new information, Saddam would say boo, like all of that. And we were able to track, because there was prediction markets on whether the US would go to war,

• 27:22Justin Wolfers?

  one of the very early prediction markets, we were able to track. I wrote this study back, in real time back then. In a day or a week in which it became 10% more likely the US would go to war in Iraq, the US stock market fell one and a half percentage points. And so from that, if you're one tenth of a probability of a war moves the market one and a half points, that says the entire, the difference between going to war or not will be 10 times larger. I think our conclusion was it would wipe 10 to 15%. The market was acting as if the market believed it would knock 10 to 15% off the value of US stocks. Right. We weren't entirely energy independent back then, but we were well and truly on our way.

• 28:02Justin Wolfers?

  So one thing to do is a case study here, which is the case study suggests the market seems less concerned about Iran than it was about Iraq by an entire order of magnitude. And I'm not sure I see the reason to be confident of that. Right. Second big lesson from Iraq is, you remember Rumsfeld early on says, this could take six days, maybe six weeks, I doubt six months. And it took longer than six years. What that says is that early forecasts can be wrong by a factor of more than 365. So when Katie calls her friends on Wall Street and they say, here's what I think is going to happen.

• 28:47Justin Wolfers?

  I think a rational thing to do is take their best guess and multiply by 365 and say, you know, this could happen too. Right. And I'm doing YouTube now, Ed. And I have a, and tomorrow, or maybe today, I don't know, I have to get around to making it. I've written a script. I have a piece coming out that looks at the history of wars. And it's almost always the case that when we go in, we go in thinking it'll be short, sharp and easy. Yes. And it never is. And just as a question of economic theory, if two countries are going to war, given there'll eventually be some outcome,

• 29:25Justin Wolfers?

  and it would be more efficient for them just to go to that outcome and not kill young men and women on both sides first, that tells you that one of them must be overconfident. Yes. At least one. And so you should always be thinking, is it us? And if people are not thinking that, whether it's in Washington DC or Wall Street, then they should be. And that puts me a little bit in your camp, Ed. Yeah, maybe the central scenario is that things aren't so bad, but gee, I don't know. There's lots of times we thought stuff would be easy and it turns out not to be. Exactly.

• 29:59Speaker 07

  I mean, to be fair, everyone I've spoken to, whether they are bankers or investors or anyone in between, they have all had a good dose of humility around what's going on here. We don't know how this is going to pan out. And so various, you know, people have been sketching out various scenarios to me. One of them is that the oil price stays somewhere around the eighty, ninety dollar kind of mark where we are now. And that's probably something that the global economy can absorb without too many shocks. It complicates monetary policy, right? So it makes life difficult for central bankers. It possibly does on the margins, keep inflation more elevated than it would otherwise be, but it's probably consumable. We can cram this one down. What people say is not so easily consumable is if the oil price shoots to a hundred and

• 30:44Speaker 07

  fifty, two hundred dollars a barrel, particularly if that happens in a straight line. And we have quite poor visibility around how and whether that might happen, partly because I personally cannot discern what the president of the US is trying to achieve here. So it's a little bit difficult to kind of read what he would do and how far he would push this. Secondly, you know, one of the things that people have been saying around this apparent step back from the president over the past few days is, see, the oil price shot higher, gasoline got more expensive and taco, right? Trump always chickens out and he has kind of reeled back some of this language.

• 31:22Speaker 07

  The problem with that is Iran has agency here and Iran is politically very unstable at the moment. It has a new leader. It's got presumably competing groups and competing interests. Any one of them can keep the Strait of Hormuz shut or virtually shut pretty much indefinitely. You know, it's not as if you pull up a shutter or put a sign across the Strait of Hormuz saying closed. You keep that straight closed by buzzing drones over it day and night. And Iran has got plenty of drones that it can do that with. So regardless of what Trump wants to happen, he's not fully in control of this situation.

• 32:04Speaker 07

  You know, there are, there are, there are organizations in Iran that could keep that straight under pressure for a really long time. Just before I left the office to come home and, and, and do this here, there was a headline kicking around from an Iranian minister saying, no, this straight is closed and we will keep it closed. And we've got the drones to keep it closed. So I think there is still a large amount of uncertainty around whether that straight is open for business.

• 32:28Ed Elson?

  Right.

• 32:28Speaker 07

  You might get the odd ship through, but you know, but we could end up with supply disruption here for a really long time. And so the nightmare scenario for central bankers, for finance ministers around the world, and honestly for investors, is that we do get $150 oil and it stays there. That, that's a different matter. That's a different situation to what we're in today. And it's difficult for investors to price in that possibility before it's actually happened. So I guess we should cut investors a little bit of slack. They can't price in completely fanciful situations, but it's not beyond the realms of possibility that we could get there, I think.

• 33:04Ed Elson?

  Right, and we can use our imagination about the downsides, just as the markets decided to do when Satriani releases an article about what happens if AI. When we can play this game, so let's play this game. Justin, what if oil hits $150 a barrel, perhaps even $200 a barrel? What if this war isn't contained? What if it does continue along? What then?

• 33:29Justin Wolfers?

  So I think the other way of describing the point you just made is make a list of things that could go right, better than current expectations. Make a list of things that could go wrong, worse than current expectations. And it could be that I haven't taken Prozac in a while, but my list of things that could go wrong is much, much larger than my list of things that could go right. And Ed, one of the things I want to commend you on in your question, you led with oil, but oil's not the only pathway by which things go wrong. Right. I'm just spitballing here, but I have a feeling that having your hometown bond to smithereens or having a local elementary school bond could radicalize people. I have a sense, I've got, I'm talking to two folks with accents, so you guys can help me with

• 34:14Justin Wolfers?

  this. In fact, I think the three of us should be called Accents Anonymous. We can take this show on the road. My sense is folks in Europe are starting to rethink the idea that they're in a serious security pact with the United States. Yeah. I don't know how true that is. I'm not a foreign relations guy, but if that's true, that ups military spending in Europe and it has to up military spending in the United States as we have to provide the protection for ourselves that our European friends once gave us. If you look at the big movements in public debt in any industrialized country, they all coincide with wars. So this could be a huge shock to public debt. It could

• 34:53Justin Wolfers?

  be a shock to defense spending. You think about, you know, if, if we end up with troops on the ground, if people come home injured, maimed, killed, those are, and I want to be clear here, expensive in every sense. Expensive in a human sense, but economics recognizes humanity. Also expensive in a fiscal sense, that Veterans Affairs looks after them for the rest of their lives. It could be that this is the next step in the Trump isolation dance and America finds itself now one big step closer to Ortaqi, which is a fancy dinner party word for cut off from everyone else, which would mean

• 35:33Justin Wolfers?

  that the United States and North Korea were the world's two great isolated nations. There's just so many things that could play out here. And again, most of them come off the naughty list, not the nice list, that, you know, and, and they don't all run through oil.

• 35:53Justin Wolfers?

  And that's where I would be very nervous betting my family's future in financial markets, given that.

• 36:00Speaker 07

  The counterpoint to that is, you know, just the past six years have had some moments of serious trauma in financial markets. You know, we had Covid, we had the Liberation Day tariffs, which, you know, it's not even a year ago now, and it took like twenty percent off US stocks, you know, it was a really violent move. They bounce back, they always bounce back. Markets are so much more resilient than we give them credit for. I think because the system has got safer since the financial crisis, because banks are safer beasts than they used to be, there are just a lot more safety nets kicking around in the system. And we know, what we've learned over the past six years and longer, is that central banks are really good at putting out fires. They've absolutely got this licked. They

• 36:45Speaker 07

  know how to stop banks falling over. They know how to support bond markets. They know how to support economies. So whether that's complacency or not, I don't know, but you absolutely have to take your hat off to how resilient markets are. And I think there's a certain element of that coming through now, where the calculation by investors is, yes, this situation is bad. Is it worse, is it worse than shutting down the entire global trading network overnight like we did with Covid? Probably not, all things equal. The other thing, you know, as Justin was saying, there is definitely a conversation in Europe about can we rely on the American security umbrella? That, that definitely means much more defence spending across Europe, and we're starting to see some of

• 37:27Speaker 07

  that kicking in, you know, from Germany and the UK and elsewhere. But one of the interesting things that a number of investors have brought up with me over the course of this week is that if you ever needed a big advert for the reason why spending on green technology makes sense, and green energy, it is this.

• 37:44Justin Wolfers?

  Yeah.

• 37:44Speaker 07

  For some reason, we failed to do this at scale after Russia's full-scale invasion of Ukraine in twenty twenty-two. But this is just another thing bashing us over the head, saying we've got to be less reliant on fossil fuels. You know, if we ran the country on solar and we ran the country on wind, we simply wouldn't have this kind of vulnerability to anywhere near the same extent. So I do think this will be a shot in the arm for that. And on that front, Europe. You know, okay, some of the regulation may have been pulled back, you know, encouraging green technology, and that is problematic. But for a lot of investors, it never went away. We, no one utters the letters E S G anymore. No one talks about green and sustainable

• 38:28Speaker 07

  funds. But in reality, that's what a lot of investors here are still doing. And it's and it's about energy security.

• 38:35Justin Wolfers?

  Yeah.

• 38:35Speaker 07

  And I do think that when we come out of the other side of this mess, which I hope we do soon for a number of reasons, that I hope this is one of the things that we take away from it is that we, you know, green technology is not nice to have. It is a geo strategic imperative.

• 38:51Justin Wolfers?

  Can I come as close to disagreeing with Katie as I will all day?

• 38:54Speaker 07

  Yeah.

• 38:54Justin Wolfers?

  Not about the second stuff. The second point you made there is about green technology. I agree. You said markets are resilient, and we should expect that it implied we should expect that to continue. Now, I think really what it is, is economies are resilient and markets are betting on the future of an economy. And so if we're thinking about regular economic shocks, even irregular ones, financial crises, COVID wars, I agree with you. Here's a different thought experiment. The question is, what are we learning in the current moment? One thing we might be learning about is the president's determination in Iran. Another might be what's going on with world oil markets. But a far deeper one is, how far will the president

• 39:35Justin Wolfers?

  go? How much of an autocrat is he? Is he willing to start a war because he feels like it? Start a trade war based on a misunderstanding of his undergraduate days? Take on central bank independence? Destroy the federal bureaucracy? Are we going to see elections? Look, I sound, I understand how much of a nut job I sound like saying that. But so I talk to very serious people. I say, is this a question that now belongs in polite society? And the answer I get is yes. And so the question is, is he a big personality, but in the tradition of American presence? Or do we put him next to Orban? And do we put him next to, you

• 40:19Justin Wolfers?

  know, Putin? Do we put him next to Turkey? Do we put him next to Argentina? Because what we're learning about is how serious he is about the autocrat project. The autocrat project undoes the resilience of the economy. And here, I just want to, you know, Turkey is a shadow of what it could be. Hungary is a shadow of what it could be. A hundred years ago, Argentina was one of the richest handfuls of countries in the world. The autocrat project came up, they destroyed institutions and it struggled for a century since. And I do think there's, there may be a very real sense that what we're reacting to right now is not Iran as Iran,

• 41:01Justin Wolfers?

  but Iran is, this is to oversimplify the case, a mental health check. Iran as, how far is the White House willing to go? Because if we're willing to start a trade war and a war war, then, hey, Jingo, what are you forecasting for 27 and 28?

• 41:15Speaker 07

  Yeah, I, I do think, ah, I run hot and cold on this idea that markets are a controlling factor on, on, on the president. You know, when we had the liberation day tariffs, the, the moment when he pulled back was when there was a, a slightly weak auction of relatively short-term US government bonds. I have a hard time believing that he's keeping a very close eye on, on government bond auctions on a day-to-day basis. I have an easier time believing that he's keeping a close eye on oil prices and on the price of gasoline with the midterms coming up in November. So I think he's playing with fire and I think there's a genuine possibility that this runs away from his control

• 41:54Speaker 07

  and that he hasn't mentally accounted for what the retaliation from Iran could look like over the long term. That there really is a genuine scenario potentially where oil goes to 150, 200 dollars a barrel, but we're not there now. And I do think that one of the reasons we are not there right now is that he has taken a look at the price of gasoline and thought, this is a political liability for me. So in a way, it's the oil price that might save us from disaster here or from further disaster here. And, you know, maybe it will keep a bit of a, a bit of a check on him. But it is an incredibly dangerous situation and, and investors currently are not positioned for disaster. They, they've taken a little bit of risk off the table and they've been a little bit cautious for 10 days or so.

• 42:38Speaker 07

  They are not positioned for that hellscape where things do absolutely run out of control. And we should be alive to that risk, but aware that it hasn't happened yet and the markets are very good at withstanding shocks.

• 42:51Ed Elson?

  Could I just ask you, Katie, before we end here? These investors who are less concerned about this, and you brought up the point of market resilience. Are they not concerned because markets have been historically resilient throughout the history of difficult experiences, difficult times, crises? Or is it that they believe that this war will be quick and dirty and over? And Trump said it's basically complete and so it's over and so we don't have as much of a reason to worry anymore? The first one seems, I can kind of get my head around, I still have a little bit of an issue with it. The second one, I don't believe at all.

• 43:30Speaker 07

  Um, I think it is a little bit of both, and I think the midterms are a very big controlling factor here. I think if we didn't have midterm elections coming up in November, then I do think we would potentially be in a different space. Um, so, you know, look, I share your concerns that this could very easily run out of control and, and the, and the, uh, the US and Israel have lit a fire that they, that they cannot douse down. I'm very aware of that as a possibility. Right now, you know, today, the betting is that that won't happen and we should hope that, that that remains the case. You know, investors, you know, the, the clue's in the name, right? They are paid to be invested in markets, they are paid to take risks, they're not paid

• 44:15Speaker 07

  to be big scaredy cats and get out of everything that looks potentially risky, you know, at the, at the first sign of trouble. So it is a calculation for them, there is a very genuine risk that this gets out of hand, you know, for central bankers and investors and for, you know, real humans in, in, in developed economies and emerging economies. We're not at the worst case scenario yet, doesn't mean we can't get there.

• 44:35Ed Elson?

  Okay. Justin Wolfers, Katie Martin, thank you both so much.

• 44:39Speaker 07

  Pleasure.

• 44:40Ed Elson?

  Okay. That's it for today. We appreciate you joining us for another Prof G Markets panel. If you have a guest you think we should speak to on this topic or any other topic, please drop us a line in the comments or email our producer Claire at [email protected]. We hope to hear from you.

• 44:59Ed Elson?

  That's it for today. This episode was produced by Claire Miller and Alison Weiss, edited by Joel Patterson and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shalane, Isabella Kinsel, Chris No Donahue and Mia Silverio. And our social producer is Jake McPherson. Thank you for listening to Profiteam Markets from Profiteam Media. If you liked what you heard, give us a follow. I'm Ed Elson. I will see you tomorrow.

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