Chapter 1: What is the main topic discussed in this episode?
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The show goes on! The folks in there are watching. Show! Show! Welcome to Profiteer Markets. I'm Ed Elson. It is March 24th. Let's check in on yesterday's market vitals. The major indices rallied as President Trump signaled a move to de-escalate in Iran. More on that in a moment. Oil fell on that news. Meanwhile, the yield on 10-year treasuries dropped and the dollar declined.
Okay, what's happening? The war in Iran may be entering a turning point. On Saturday, Trump gave Iran a 48-hour ultimatum. Reopen the Strait of Hormuz or the U.S. would destroy Iranian power plants. Iran responded by threatening to take out U.S. energy and desalination infrastructure across the Gulf.
Just two days later, Trump said the two countries were engaging in, quote, very strong talks and that he would pause all strikes for five days. However, Iran's parliament speaker quickly dismissed the news, saying the talks never happened. Nonetheless, the S&P rose more than 1%, and Brent crude oil fell more than 10% on the news.
So here to help us make sense of what is actually happening here, we're joined by Justin Wolfers, professor of economics and public policy at the University of Michigan. So, Justin, first Trump tells us that we're having these constructive talks with Iran. It starts to look like maybe the war is coming to an end. Then Iran tells us, no, that didn't happen. Markets kind of digested that.
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Chapter 2: What triggered the recent market rally related to Iran?
But if you're actually in a situation where there's two choices we could make, aggression, non-aggression, and they have huge effects on the economy...
and we don't know the probability and we really, really don't know the probability if we end up here or here, then small statements rationally lead to large re-evaluations of the value of stocks, of your future forecast for the economy, of bond rates, the whole nine yards. So things are going to look crazy. It will... But I think here this is not a statement about...
financial markets necessarily being temperamental. It's more a statement about the president's inability to convince anyone that what he's saying he means. And this is actually, I think there's one profound sense, there's many senses in which these are uncharted waters. But one very profound sense is I don't think we've ever been in a situation like this where
The word of the president about what his intentions are is so uninformative about the future. Right. George W. Bush, when he said, let's go ahead, you kind of knew that's what he meant. And when he said, let's pull back, you kind of knew what he meant. And here, I think we're all just guessing.
Do you think that this kind of goes back to Taco, where, I mean, the whole premise of Taco was Trump threatened something crazy, and then the markets throw up, and then he gets worried because he values the opinion of the markets, or he values the dollars that are related to those investment decisions, and then he tacos, he chickens out. And then it became a question of...
maybe he's immune to taco at this point. Or maybe the markets aren't reacting anymore to sort of front-run the taco, which means that we no longer have this regulating effect where the markets basically slap him on the wrist and tell him to do the right thing. Like... What do you think the relationship between the markets and Trump's decision-making actually is at this point?
And is that relationship still strong as it seems to be back during the tariffs of last year?
Yeah, so I think it's been a question very much on a lot of people's minds. So if your simple model was the president will do what he wants until he hears markets don't like it, when he hears markets don't like it, then he'll undo it. And if markets can think one step further, then they'll see the president does what he wants. It's not very good. They think he'll undo it.
Given that they think he'll undo it, they don't need to move. Right. What's the equilibrium of this game? It could be that markets don't move very much and the president becomes hypersensitive to markets. Who knows?
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Chapter 3: How did Trump's statements affect investor confidence?
This feedback loop is profoundly broken and it would be a lot easier if it was genuinely mechanistic, but it's not. Maybe, you know, all of this comes back to what, How do you rewrite the rules of the game when you have an unpredictable president? And so the idea of Tarko that people found very reassuring is, in fact, the president's very predictable.
Right.
I don't know that that's true, actually. So yes, he Tarkos sometimes, except when he doesn't. And so you can think about, you know, and I do think you're right to bring up all the past analogies, I think most clearly through the trade war. But if you remember, Canada went from our number one enemy to our number one friend, and it did like three or four round trips on that journey.
Actually, right now, the rhetoric is profoundly anti-Canadian. The reality is not very anti-Canadian. But it's very hard to keep track of, and it's not even clear that the president has. So... Mate, if I look a little bit lost, it's because this is very confusing. So look, here's the safest thing to say.
Markets are reacting as if developments in Iran are tremendously important for the development of the global economy. Yes.
When you see them move one and a half percentage points based on a truth social post and that takes into account that he might taco, that one and a half percent is a profound underestimate of the true effect of going to war because they don't think that he pulled back from war. They think there's some possibility he did and some that he didn't. In some sense, what's already priced in.
The economic implications here are numerous, and it's kind of hard to put any numbers on it. I'm just wondering, when you teach your students over at U Michigan, I assume that what's happening in the news is making its way into your classes and into your lectures. What kinds of takeaways are you trying to convey to your students right now in the middle of this moment?
Yeah. Ed, I'm not teaching this semester. Sorry about that.
Okay.
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Chapter 4: What does Justin Wolfers think about the credibility of the U.S. president's claims?
The first is the orders of magnitude involved with war are very, very large. Second is what I think of as being the most important macroeconomic skill, which is being able to keep track of orders of magnitude. To give an example, I was interviewed a bunch of times a week ago just after it came out that the Pentagon had said that the first week of the war cost $11 billion.
And commentators were like, oh, my God, $11 billion. This is outrageous. It's terrible. It's too much. And I'm like... You know, actually, $11 billion is not that much. $11 billion is, well, if there's 100 million households, you can do this for me, Ed. Come on. Don't put me in his position. It's $100 per household. It's $100 per household. Not much.
But then you see markets today rose one and a half percentage points. And as we talked about, that's a trillion dollars. Right. And so the stakes aren't tens of billions. The stakes are hundreds of billions. and plausibly trillions. And so therefore the stakes for the average, and no one is average, the average American household are thousands and plausibly tens of thousands of dollars.
So two things that you learn out of that. One, big deal. Two, keeping track of orders of magnitude is actually the most important skill here. I can probably guess how many zeros are involved. I can't, anyone who thinks they know what number is in front of the zeros is kidding themselves about how precise they can be.
All right. Justin Wilfers, Professor of Economics and Public Policy at the University of Michigan. Justin, always appreciate it.
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Chapter 5: What are the implications of the Iran situation for global markets?
Thank you so much.
Great pleasure, Ed.
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