Today's number: 4.5. That's how many gallons of alcohol the average Romanian male drinks each year. That's roughly 70% more than the average American, but it's 70% less than Kash Patel.
Welcome to Prof G Markets. I'm Ed Elson. It is April 21st. Let's check in on yesterday's market vitals. The major indices fell as relations between Iran and the US remained strained ahead of the ceasefire deadline. Oil prices rose, but still remained below $100 a barrel. Shares of Fermy, the AI data center company that we predicted back in October would implode, plunged 20% after several top executives, including the CEO, resigned. And finally, Apple stock dropped roughly 1% after hours on news that Tim Cook is stepping down in September. He will be replaced by senior vice president of hardware engineering John Turnis. Okay, what's happening?
The US-Iran ceasefire expires tomorrow and tensions are mounting. Both countries' delegations are headed to Pakistan to engage in talks ahead of the deadline. President Trump said it's, quote, highly unlikely that the ceasefire would be extended if a deal was not reached before Wednesday. He also said the US would continue to blockade the Strait of Hormuz until a deal is signed. And the meeting follows an active weekend of fighting. On Friday, Iran announced it would reopen the Strait of Hormuz after Israel and Hezbollah agreed to a ceasefire. Stocks soared to record highs on that news. However, Tehran reversed course after the US refused to lift its own blockade. Then on Sunday, the US Navy fired on an Iranian cargo ship and Iran threatened retaliation. Oil prices rose yesterday and stocks slipped. So, here to give us the update on the war and what it means for us and for the economy, we're speaking with everyone's favorite, our favorite, Justin Wolfers, professor of economics and public policy at the University of Michigan. So, Justin, the ceasefire might end tomorrow. That's at least the deadline. I mean, there's a lot to get into, but I guess my first question is, does that even matter? Because, you know, this weekend we heard from Trump that Iran violated the ceasefire. Iran said that we violated the ceasefire. We saw this news where we actually did fire at an Iranian cargo ship. So, I just can't tell if this is even meaningful at all. Uh, what do you make of it? Does this change things for you?
I think none of us can make anything of anything. So, I want the audience to feel really good about themselves if they feel lightly confused right now. Now, there's a reason we've always felt lightly confused about the Middle East, which is it's a long way away. If you miss a day in the news cycle, 17 things happen. Some of the words and the places are very long. It's not central to our lives. Many of us lose track of many Middle East stories. In fact, I have been trying very hard to keep track and not let anything go by and still I'm confused because we have one extra layer that we don't normally have, which is we have no idea what the truth is. There was a time when someone said the following is a red line, you would understand it to be a red line. There was a time when someone said these are the conditions, you understood it to be the conditions. There was a time when someone said we've reached an agreement, you would understand that they'd reached an agreement. So none of those things are true right now. And we've seen in many cases that no one, including markets, knows whether to believe the American president or the Iranian leadership more. That's actually not a joke. Okay? So that makes our lives hard, but no one cares about you and I, Ed. We're just two extraordinarily handsome blokes talking about the world. But I think what makes it harder is how do you resolve this? Let me describe something completely unrelated that happened to me this week. And then hopefully we can draw the analogy. And I was talking to a young fellow about Mexico. He was talking about how Mexico should behave and what they should expect when NAFTA, which has been renamed several times, comes up for renegotiation. What should Mexico look for? What should they be worried about? What's going to happen? And at face value, that seems like a very sensible and important question. But a different view is that the president has unilaterally torn up NAFTA now four or five times, which is another way of saying anytime NAFTA yields outcomes that are not perceived to be in America's best interests, the president doesn't abide by it, whether it's in Mexico's best interest or not.
Another way of saying that is we've lost the ability to contract over time. There is no NAFTA. There literally can't be a NAFTA. Um, if I were to say, Ed, I'm going to marry you, which would be beautiful, but I just didn't come home on Tuesday, and then I came back a week later, and then I didn't come home on Thursday, and I didn't cook dinner for you on Friday. Are we married? So, there's sort of two types of agreements you can do. There's a paper-scissors-rock agreement, which is I'll do something and you'll do something and we'll both do it at the same time. Not really paper-scissors-rock, and it's in both of our best interests, right? For instance, this interview, you said, Justin, I'll meet you at 4. It's not live, folks. Sorry. Um, but Ed said, I'll meet you at 4 p.m. And I said, okay, I'll meet you at 4 p.m. And we're able to contract within time at this time. I'll turn up and you'll turn up. But Ed, if you developed a reputation for never turning up on time, I wouldn't have turned up and vice versa. And so we've lost... let me bring all this from Mexico and from you and I back to the Middle East. If we never do what we say we're going to do, we can't form agreements over time. We can't say you give something up today and I'll give something up tomorrow. It becomes impossible, right? And so therefore, the range of plausible outcomes narrows and it takes off the table every outcome in which we ask the Iranians to do something good in stage one and we get something good in stage two because they know we will not deliver in stage two. And this is the deep sense in which this is the exact opposite of the art of the deal. You think about all the possible futures that could occur and the president has taken off the table a whole bunch of them. That worries me deeply.
Yeah. I mean, it seems as though we can't really trust anything that's being said. In addition, the deals that are being quote-unquote made don't really turn out to be deals. They break the agreements of those deals and then they say that the deal is off, but then they continue to say that there's a deal and say that there's going to be a deadline for that deal and then talk about extending the deadline and or renegotiating the deal, etc., etc. And so we're supposed to kind of play this game of, oh, let's follow along with the story. There's going to be a ceasefire and then they're going to extend it. But ultimately, as we kind of began, like none of it really means anything. So the question becomes for us, how do we actually determine what is real and what isn't, right? And I mean, one thing that I do consider to be real, and I'd like to get your views on this, is the fact that the administration has proposed a one-and-a-half-trillion-dollar defense budget for 2027, which makes me think, okay, this is all noise. This is all nonsense. Gas prices continue to be elevated. I think they're up more than 30% since the war began. It seems as though this is only going to continue. At least that's my sense, but maybe I'm being pessimistic. What do you think is real? Like what are some real signals as to what will happen versus fake or meaningless?
Great. There's a lot of meat in the questions you just asked. So, let me come back to what you said about deals. I have a proposal for you, Ed. Let's agree to never use the word deal again. And I mean that in the interest of honesty. What the president calls a deal is not 'I promise I will give up this and you will give up that.' Promise means I'm going to follow through. What he has at the moment is press releases. Um, and what he's capable of delivering is if you do this and I do this and it's in your best interest and it's in my best interest, we can get there, which is basically a small set of possible outcomes. The stuff where we can get Iran to do the stuff Iran wants to do and in return America will do the stuff America wants to do today. That's it, right? You don't even need a deal. You could just send someone a text message and say, 'Hey, have you thought about doing this?' Um, so deals are a bad idea. Um, I wanted to take you away from your question, then I promise to come back to it. Um, what has the president achieved over the last week? I actually think he's achieved something. So Iran showed that it has control over the Strait of Hormuz. That's actually very important and a major loss to the United States. When someone reveals a weakness that you had, that's as bad as them creating a weakness. And so if eight weeks ago Iran didn't understand itself to have leverage, it never had the opportunity to test it, today it does. So it's as if they'd created an American weakness, as if they'd won it in the war. By the way, we saw the same thing happen in the trade war with rare earth minerals. Yeah. What if we... there's a... two data points is too much to draw a law from. But what if we learn that this world is wildly interdependent, more so than most of us appreciate. The moment you try and chop off an arm, all of a sudden you discover interdependencies or not. There seems to be at least those two stories tell us that that may be a fairly general thing. The president has also showed that we have the ability to blockade Iran. Now, we probably knew that two weeks ago, but we definitely know it today. Um, I want to just enjoy a moment of irony with you, Ed, because you are the person in the world I most want to share this with. In 2025, the president started a trade war which made it harder for ships or more expensive for ships to enter the United States and retaliatory tariffs made it harder for ships to exit. Effectively in 2025, then the president imposed a small-bore blockade on the United States. He blockaded the American people and he did that because he loved them. In 2026, he's imposing a blockade even more severe. It's no longer a 30% tariff. It's now a 'we'll bomb you to smithereens' tariff, but it's still a big tariff. He's blockading the Iranians. He's blockading the people he hates. Guy's got one hammer: blockade. And it turns out you blockade people you love and you blockade people you hate. I have a feeling you're not going to succeed on both missions. In fact, it could be... My view of the world is a blockade hurts both sides. And so it hurt Americans last year and it's hurting Iranians this year. But even if I'm wrong, if it was helping Americans last year, it's got to be helping Iranians. Or if it's hurting Americans last year, it's hurting Iranians. But um, it does suggest these are quite incongruent policies. Okay. You asked about one and a half trillion. Is that right? Let's go there. There is... I have a deep feeling from studying history that wars are really, really, really important moments that we rewire the world in deeply important ways. And it's not as simple as like with a trade war, you throw on a tariff and you take it off and you hope that we can hug it out and all get back to normal. I have a sense from history that wars are turning points. I don't know what the turning point is with this war, but your question points to one of them. Uh, so just to bring everyone up to speed, the United States had a military budget last year of roughly 900 billion. The president has just proposed in his budget 1,500 billion, one and a half trillion. So 600 billion more. That's for next year. That is normally when we talk about budget numbers, we're talking a 10-year period, right? So if the question in your mind is how much more dangerous did the world just get and how much more has the United States made it so other countries feel they have to arm themselves and therefore if we want to maintain military superiority how much more do we have to spend in this arms race, and we call it an arms race for a reason. We have an answer from the White House. We need to spend another 600 billion a year. Now, you're very good at long division, right, Ed? Long division is a superpower. I wish someone had told me this in school. We're spending another $600 billion. And I'm going to make it easy for you. I'm going to say there's 120 million American households. How much more are we spending per household? Well, no. I just did it in my head. Cuz it's easy, Ed. Uh, it's $5,000. Okay. Cuz you can just divide both sides by a million. Right. Now you got, uh, you know, 600 divided by 12... 600 divided by 120. That's why I chose 120. It's actually 130 million. So $5,000 per household per year. Okay. And I'm now going to give you the easiest one. If the president keeps this up for a decade, how much does that add up to for a typical household? You are so good at this. You should be less self-conscious about doing math on air. That's incredible. And I hope your audience understands and appreciates your mathematical acuity. So, basically, the president has decided that he has made the world so much more dangerous that he needs to spend over the next decade an extra $50,000 per household. By the way, if you spend 50,000 per household, you have to tax 50,000 per household. That is just accounting. So, another way of saying this is the president is imposing a $50,000 tax hike because of this adventure. Now, I'm not going to go the next step and say that's bad or wrong. That's a question of personal judgment. If we were freeing 90 million people from a life of oppression, that's a price that might be worth paying. Probably not if you're an America-first guy, but you might be a humanitarian-first guy. But this is the point of your question, Ed, and I think it's really significant, is if you believe the president about our future military needs, he's imposing very, very, very large, very meaningful costs on the American people.
Which is likely a signal, it seems, that this is going to continue for some time. I mean, whether it's this or something else, something related to this, uh, I mean, it's hard not to assume that we're not approaching the endgame here, especially when nothing meaningful happens in these headlines. And I think the next question, although we do have to wrap it up here, is what this impact would be and will be on the economy. The big question for investors seems to be not whether oil prices will be high. They already are high. We already know that. The question is whether they will remain high and remain elevated, right? And from what I'm hearing, it wouldn't be a bad bet to assume that they will.
Right? So when the president declared war, the thing that was interesting, he said, 'We're going to go in for 4 to 6 weeks,' but 2027, 2028, and 2029, oil price futures all rose. Now, actually, last Friday when it looked like peace was about to break out, they fell quite substantially. And so it looked like people really genuinely believed there was something good happening on Friday. Just before I came on air with you, I checked the latest betting markets on Kalshi where you can bet on how long until the straits reopen and the flow of oil is back to normal. And for sure, no one believes that 4 to 6 weeks was ever going to be true. But they're talking about months rather than years. So let me break that down there. That says the direct what's going on in Iran with the Strait of Hormuz is a months-long issue. The world, though, is more dangerous and will remain more dangerous for years. And I think the thing that's really... and so that's why you're going to continue to see oil price futures substantially elevated because there's now a risk. We don't know who's going to do what, but there could be a next chapter in this story. Um, and then the final deeply depressing thought I want to leave you with is if 2025 is the year of the unprovoked trade war and 2026 is the year of an unprepared war, it's time for folks in markets to think about what 2027 holds and 2028. Um, if you extrapolate, then you should be building in a pretty big risk premium. And if you're an optimist, you think, well, the bloke has rolled the dice a couple of times. Surely he'll learn by now. And we're going to go back to incredibly competent technocratic economic policy any day now. And I got all my fingers and toes crossed.
