Today's number: 25. That's how many years old Wikipedia turned last week. Sadly, that also means it can no longer date Leo DiCaprio.
Welcome to Prof G Markets. I'm Ed Elson. It is January 21st. Let's check in on yesterday's market vitals. The major indices sold off in their worst session since October. Bitcoin dropped below $90,000. The dollar weakened and the yield on 10-year Treasuries jumped to its highest level since August.
Okay, what's happening?
The S&P plunged 2% yesterday, erasing its gains for the year as Wall Street reckoned with President Trump's escalating threats to acquire Greenland. Volatility spiked with the VIX, the market's so-called fear gauge, hitting its highest level since November. And you guessed it, gold hit another record high as investors ran for cover. The drama is playing out in Davos right now as business and political leaders gather for the World Economic Forum. President Trump arrived yesterday and he agreed to meet with officials to discuss Greenland, but he says, quote, 'There can be no going back' on his plan to seize the territory. Meanwhile, Greenland's prime minister is urging the island to prepare for an invasion, which is still unlikely, but no longer unthinkable.
How far are you willing to go to acquire Greenland?
You'll find out.
All right. Joining us now to tell us what's happening in the markets, how this all relates to Greenland. We're speaking with everyone's favorite, Justin Wolfers, professor of public policy and economics at the University of Michigan. Justin, thank you for joining us. Would you believe me if I told you I was coming to you live from Greenland?
I'm not sure I would. I'm not sure I would.
Looks the same. Looks like you're in Ann Arbor right now. Is that right?
It's as cold as Greenland, mate. And we have been taken over by federal authority as well.
Right, right. It's not too dissimilar. Well, what's happened in the markets is quite astounding, really. Stocks are plunging, yields are rising, all the safe haven assets like gold are hitting record highs. I guess let's just start with your initial reactions. It's kind of remarkable what we're seeing here, at least to me. Do you feel the same way?
Look, the thing that's more remarkable than what's happening in the markets is what's happening in the world. The president woke up and decided the United States needed Greenland, which had never been part of the US — well, not never, in recent years — hadn't been part of the US security planning at all. And he's saying he wants to buy it, take it, something it, rename it. No one's quite sure what. And he's putting tariffs on countries who have sent vast forces of up to dozens of troops to defend Greenland from American hostile aggression. That is astonishing on its face. I know that your podcast is called Markets. Mate, sometimes we got to pause on the world. The world's where the action is. So yes, markets are responding to this.
I guess the reason that the market's response seems relevant to me is we see a lot of crazy stuff from the president. We saw crazy stuff in the past few weeks. We saw the Powell investigation. We saw the invasion of Venezuela and the capture of Maduro. We saw what happened in Iran. And so I find that the markets help to give us a sense of what's maybe real and what isn't. And it seems that the markets are telling us right now, this one's real. This one is different. This one is actually giving us pause. And it feels almost like we're back in April 2025. Everyone's deciding to sell. So I guess that's why it's kind of interesting to me, or seems important. I guess my question to you would be, why is this different, or at least why do markets maybe believe that this is different?
I'm not sure I'd give exactly the same explanation that you would, Ed. Okay, let's say the president. So, here's the problem, right? The bloke comes up with a hairbrained idea every day. Nine out of 10 times he chickens out. Trump always chickens out and the world moves on. And so, if you're a trader, you want to discount these because if you responded to each and every one of them, you'd sell off and then the next day the markets would rise as it became clear it wouldn't happen and then you lost a lot of money. So you got to scale your response to the likelihood that Trump will actually follow through.
If Trump follows through in the short run, the obvious is he launches a trade war with the European Union. Because remember, he's talking about 25% tariffs by June. You can't just — it's not as much as he's picked out Germany that he wants to go after the United Kingdom. You don't just declare a trade war on particular members of the EU. The entire union responds. The EU plus Norway plus the United Kingdom collectively is 22% of American exports. So that's a big economic threat right there. There are two other things you learn if he's serious. One is if he follows through with a trade war, there's actually a chance he follows through with a war war.
That then is the end of NATO and the end of the postwar world order. That in turn is the end of American military leadership. We move into some complicated world and you can get one of these guys who likes to point at the globe and tell you how complicated that gets. All I know is that, Ed, in the brief time you and I have been alive, we haven't seen fighting on our shores. And that's not true for our grandparents. And so even if you don't like what we've had, it's been remarkably successful relative to the rest of human history that we've grown up without wars on our shores. So there's some chance that that's the end of that for the United States, the world, economic productive activity. It would be catastrophic. One war is a lot of wars. Walking closer to one war is a lot of problems. I think the markets have probably priced in.
And then the other part is, so he's launched a trade war, a new trade war with you. The other part is you then learn Tariff McTariffface wants to tariff everyone at will. Deals don't mean anything. The idea that we'd get through 2025 and that was the end of tariffs because we would have done deals is clearly hopeless and we just have trade wars and trade uncertainty for the next three years ahead of us as well. Those are really, really big generational shifts. I know I wrote a study years ago looking at the stock market effect of the invasion of Iraq. We found that the stocks were valued 15% lower if the US invaded Iraq relative to if it didn't. So if you thought something like that, if you thought Greenland were Iraq — there's lots of reasons to think it's not, right — you would expect stocks to fall on the order of 10 to 20%. Today they fell on the order of 1 to 2%. So my interpretation is they've built in a 1 in 10 chance the guy is serious.
In some sense, markets are really useful here. They're a wakeup call. It's not about the probability he follows through, it's about the consequences if he follows through, which is they're screaming, 'This is terrible.' But they're not screaming screaming. If you remember Liberation Day, they screamed, they howled. We weren't quite used to the Trump two-step of two steps forward and an immediate backdown. If we're in a world in which he never followed through on anything, of course, markets would react to nothing. The problem is that the president actually does sometimes do things. You could ask the Venezuelans about that. And the problem is we couldn't tell before the fact if he was serious about Venezuela and then we learned after the fact he was. And I would like to think he's not serious about Greenland, but I don't want to wake up tomorrow and all of a sudden discover he was. So I think this is the markets putting in only a small chance, but it's a small chance of a big bad outcome.
Just looking at what he's said recently, it does seem that he's somewhat serious from what he's been saying. That's a hard question to answer, but he's at least trying to present as serious. He also sent that text to the prime minister of Norway saying that he wouldn't be doing this if he had won the Nobel Peace Prize. This is maybe like a hyperbolic question, but I don't think it is. At what point do you think it's fair to say that he's actually lost his mind?
And I mean that like very legitimately. And not in the sense that, oh, he has dementia and he's just totally crazy, but I mean he's clearly operating on a different level of reality. He's decided that the world order as it is now is unacceptable. That globalism, this is the end of it and we're kind of going back to the 1800s. I mean it appears that he might have gotten, I don't know, so drunk on power, so deluded by something that he might have actually like lost his mind here. Is that too far?
I've had the same thought and look, I like to speak to my expertise. I'm a PhD economist and so there are many questions where, and I've increasingly had to do this, say I think you should talk to a psychiatrist, not an economist. But what's striking is that the most important economic question of the day is best answered by a psychiatrist. That's your point, right? And it's a profoundly important point. There are actually ethical reasons why psychiatrists are not meant to — you're not meant to speak up about someone whom you've not examined.
And I hope you don't mind. I might take your idea a little deeper because I've been thinking about this quite a lot. I certainly don't think the president, as he's currently acting, is rational, or at least we should put a high probability on that. And that worries me and I'm like, 'Oh, wow. What happens if once every hundred years we have a leader, a world leader who is bonkers?' We've certainly had people who were bonkers.
I think Adolf was bonkers.
I don't want to draw that comparison, but the point is that's —
Yeah. Then I got to thinking about it. Indulge me for a moment here. You would have — what sort of person would want to run for president of the United States? Who wakes up in the morning and thinks, 'I know I should run the free world. I and I alone am uniquely qualified to run this country and this country is the largest economy with the largest military in the world.'
Yeah. I think if you ran a survey of Americans, people with profound personality disorders would be much more likely to say yes than people without profound personality disorders. That's just an obvious statement. You could say, 'Justin, run for president tomorrow,' and I'd be like, 'Are you kidding? I'm going to teach Econ 101 tomorrow and I'm worried I've got too many students. I'm not qualified.' I hope you'd say the same, Ed.
I don't know. This pod's going pretty well.
Boy, you give a bloke 30 Under 30 and all of a sudden he thinks he can walk on water. But it's actually a really interesting point because if that point is correct, it says the amount of mental illness among world leaders is likely exorbitantly high. That in turn changes how we ought to think about institutions. It says that we basically need to design our political institutions so they're lunatic-proof. Yeah.
