Today's number: 42. That's the average age of a new hire in America today. The highest number ever. Standard benefits now include a 401k rollover and a referral to an orthopedic specialist.
Welcome to Prof G Markets. I'm Ed. 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.
Okay, what's happening? The war with Iran is escalating. US Defense Secretary Pete Hegseth told reporters at a Pentagon press conference on Tuesday that Iran was, quote, badly losing. 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.
Hegseth's comments came just hours after President Trump suggested the war would end, quote, very soon. However, Trump also warned that the US 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, quote, 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 Ruwais refinery, one of the biggest in the world, halted operations after a drone strike nearby. Saudi Aramco CEO Amin Nasser warned of, quote, catastrophic consequences if the war drags on, and oil has continued its volatile ride. Brent crude, after spiking to $119 on Monday, fell to $85 by midday 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 it seemed 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?
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, though. 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 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 9/11. 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 that bond markets, government bond markets were very sensitive. They are really very much on a knife edge, worried about a resurgence in inflation. We, 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.
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?
First of all, I have to return to that quote from Hegseth you played at the top of the show. I felt like you've been reading my mind. Hegseth said it was going to be intelligence, more refined, and better than ever. That's how I think about it, frankly.
And 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 transition 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.
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. 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 there's strife in the rest of the region, the first thing we want to do is go and check our portfolios?
I know you're better than that, Ed. And that's not what's going on. What we're in right now is just a horrible news environment. 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 happening 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. 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 can interview a maximum of two people right now. Well, financial markets are like interviewing thousands of people. You might think they're not all sophisticated, but at the very least, I want to say financial markets might be the least unsophisticated or 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 countries' stocks fall roughly in proportion to how much they're net oil importers. 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. You'd see a flight to safety. Okay, that's one part of the story.
There's another part of the story. This isn't just an oil shock. This is a war. 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. 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 into all sorts of fiscal trouble in the long run. That would explain the bond market.
But another, I think, is actually, I'm going to use some shorthand here and call it a competence shock. In case you haven't been watching lately, the US is run by fools. 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 grown-ups are in charge, 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.
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.
Well, 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 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 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. And Scott Bessent 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. 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 60, 70% 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 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. And that also kind of goes hand in hand with people 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 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 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 shock hit the system because those markets have done so well as part of this diversify away from America trade. So stocks 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 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 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.
Can I draw two threads together from what Katie just said? Apologies, Ed. I'm going to send you an unemployment insurance check. Do you want to say...
No, no, no, no, no, no. Please, please.
She's such a great guest. I want to get in on it.
I know. I'm well aware. Please.
Bringing two of the threads together, 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 and you're seeing much larger effects. I graphed last night G20 stock markets and I think 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 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 Prof G Markets with Justin Wolfers. I got a question for you. Katie, I'm so interested in what you had to say. So you're calling sell America, 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 the following two stories are identical. 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. Safe haven is a social convention, right? It's safe because everyone else thinks it's safe and that social convention has broken down. Is there a way to separate those stories and what are the markets telling you?
Yeah, they are two sides of the same coin really. 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 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. It tells you that there is less confidence in US Treasuries 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 them at all. And so as soon as you get inflation start to hit, that's when you get borrowing costs shoot higher.
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 UK government bond market was pricing in interest rate cuts 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 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 this because it is always ultimately about the oil price.
And you know, to the extent that markets do spook Donald Trump and, you know, as Justin was saying, you know, some of the US indices are some of the least affected by this. So that's possibly not the best way to read it. The oil price was deeply problematic for Trump and his administration. 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 a gallon of gasoline in the States. You know, you guys don't need me to tell you that the US consumers, US voters are hyper-focused on the gasoline price. And that there did come a point where it looked like this is something that hadn't been baked into the calculations of what the US and Israel were doing in Iran.
How they hadn't borne that into account, I don't know. But yes, if you effectively block off a pretty thin strip of sea that is used to transport 20% of the world's oil, you've got a problem, you know, pretty obviously. 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 is in the past. Rightly or wrongly, I don't know.
This is exactly, and this is the thing 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. I mean, the way that prices seem to be spiking up and down and even in my conversations with investors. I spoke with Steve Eisman, who's the legend of The Big Short, and 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. 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 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. 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?
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.
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. But we sort of knew what was happening. So we had a baseline expectation and we're getting mildly interesting signals.
The 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, which is unlike world leaders we've ever had before. I think it's actually possible he could do that. 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 your question was, why isn't it down more?
