Prof G Markets: “Pricing the Iran War’s Future — Are Markets Right?”
Date: March 11, 2026
Hosts: Ed Elson, Justin Wolfers
Panelists: Katie Martin (FT Markets columnist), Justin Wolfers (University of Michigan economist)
Overview
In this episode, Prof G Markets explores the escalating Iran war and its impact on the global capital markets. Ed Elson, Justin Wolfers, and Katie Martin dig into the confusing, sometimes counter-intuitive reactions of stocks, bonds, oil, and currencies. They examine how market signals should be interpreted when both political messaging and on-the-ground news are chaotic or unreliable, and ask: Are markets minimizing the risks, or is there wisdom in their “resilience”? The discussion weighs scenarios ranging from market overconfidence to a possible $200 oil dystopia and addresses the immense uncertainty that new conflict in Iran brings to the global economy.
Key Discussion Points
1. Market Reaction: Why Are Markets Confused?
- Oil Price Spike, but Not a Classic Flight to Safety (05:00)
- Katie Martin: Oil surged to $119, but gold, the Swiss franc, yen, and bonds fell—unusual for a geopolitical crisis.
- Quote: “Gold went down a little bit… the Swiss franc weakened, the yen weakened, bonds weakened… so it’s really quite a confusing market response.” — Katie Martin [05:00]
- Stocks in Asia and Europe were more adversely affected than U.S. stocks.
- Government bond markets displayed sensitivity to inflation risk.
- Investors are cautious but not panicking; more “profit-taking” than flight.
2. Why Do We Care About Financial Markets During War?
- Markets as Information Aggregators (07:13)
- Justin Wolfers: In a fog of war and unreliable news, markets “aggregate” thousands of real bets and real-time information.
- Quote: “Financial markets…are a very sophisticated machine for aggregating news from around the world.” — Justin Wolfers [07:13]
- Markets provide the “least unsophisticated” forward-looking indicator available.
- Current conflict is “a war with unannounced intentions, unannounced allies, and an unannounced exit plan” — that uncertainty leads to wild price moves.
3. Sell America or Avoid America?
- Trend Toward Diversifying Away from the U.S. (12:55)
- Katie Martin: It’s more about “Avoid America” than “Sell America.” New money isn’t flowing into the U.S. as mechanically as before; investors spread funds more globally.
- Improved global portfolio diversification (Europe, Asia, especially South Korea for AI exposure).
- U.S. markets less affected because the U.S. is geographically far from Iran and more energy independent.
- “The US will take the pressure through inflation and…gasoline prices, but the rest of the world...is really sensitive to that in a way that the US isn’t.” — Katie Martin [14:41]
4. Is the Safe-Haven Status of U.S. Treasuries Breaking Down?
- Changed Bond Market Dynamics (18:52)
- Bond yields rose (prices fell), which is the opposite of the usual “safe-haven” response.
- Possible reasons: Diminished confidence in Treasuries as sanctuaries and rising inflation fears.
- Extreme bond moves in the UK show just how sensitive the situation is to inflation risk and rate expectations.
5. Effect of Political Leadership and U.S. Policy
- Trump’s Focus on Markets and Political Calculus (12:55, 22:31)
- Trump watches the Dow, oil, and gas prices closely.
- “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.” — Katie Martin [12:55]
- Administration may moderate or escalate based on market pressure (particularly gasoline/oil price spikes and mid-term election needs).
- A key risk: “He’s the only person on earth who does care where the Dow is, but he really cares where the Dow is.” — Katie Martin [12:55]
6. Markets: Proactive or Reactive? Conflicting Signals
- Despite heavy volatility, many top investors (like Steve Eisman) are not changing strategy.
- U.S. seen as insulated; the real macro risk falls on Europe/Asia due to their energy dependence and proximity.
7. Comparisons to Past Wars: Overconfidence and Mispricing Risk
- Lessons from Iraq War (28:35)
- During the Iraq war, a 10% shift toward war probability dropped the S&P 1.5%, implying full-scale war would have cut U.S. stocks by 10-15%.
- Present market reaction is far more muted than it was for Iraq—possibly unjustifiably so.
- Quote: “It’s almost always the case that when we go in, we go in thinking it’ll be short, sharp and easy — and it never is.” — Justin Wolfers [30:14]
- Early forecasts are usually wrong by “a factor of more than 365.”
8. Nightmare Scenarios: Oil at $150-$200, Prolonged Conflict
- Why Markets Struggle to Price Complex Risks (31:17, 34:22)
- Katie: $80-$90 oil is “consumable” by the world economy; $150-$200 is a real crisis—possible if the Strait of Hormuz remains closed.
- Hard for investors to price “tail risks” before they arrive.
- Iran can shut oil lanes via drones, and has strong incentives to do so.
- “The nightmare scenario ... is that we do get $150 oil and it stays there. That’s a different matter.” — Katie Martin [33:19]
9. Wider Risks Beyond Oil
- Geopolitical, Fiscal, and Security Shocks (35:16)
- Justin: Beyond oil, potential for broader radicalization, increased defense spending, ballooning public debt, possible accelerated U.S. isolation.
- Deep institutional risks (“Autocrat Project”) if patterns continue.
10. Market Resilience vs. Complacency
-
Are Markets Underestimating the Risks? (37:18, 40:09)
- Katie: Markets do recover from shocks (COVID, tariffs, past wars), and central banks are better firefighters now.
- Green tech will get a boost; fossil fuel dependence is the geostrategic vulnerability.
- Justin: Economic resilience may not protect us from institutional decay or long-term policy risk.
“If you ever needed a big advert for the reason why spending on green technology makes sense...it is this.” — Katie Martin [39:18]
- Justin: “If what we’re learning about is how serious [the president] is about the Autocrat Project, the Autocrat Project undoes the resilience of the economy.” [41:00]
11. Investor Psychology: Why Aren’t Investors More Worried?
-
Is it Faith in History or Faith in Quick Victory? (44:09)
- Katie: It’s partly faith in historical resilience and partly hope that midterms and Trump’s political needs will contain escalation.
- Investors are “paid to be invested,” not to exit at every sign of trouble.
“There is a very genuine risk that this gets out of hand for central bankers and investors and for real humans... We’re not at the worst-case scenario yet. Doesn’t mean we can’t get there.” — Katie Martin [45:30]
Notable Quotes & Memorable Moments
-
On Market Signals (Wolfers):
- “Financial markets…a sophisticated machine for aggregating news from around the world.” [07:13]
-
On Investor Behavior (Martin):
- “It’s avoid America. Nobody’s talking about selling down US holdings in any sort of meaningful size…it’s about where new money goes.” [12:55]
- “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.” [14:45]
-
On Political Volatility:
- “The thing is… the market rallied yesterday because [the president] declared victory, which is unlike world leaders we’ve ever had before. I actually think it’s possible he could do that!” — Justin Wolfers [27:34]
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War and Overconfidence:
- “It’s almost always the case that when we go in, we go in thinking it’ll be short, sharp, and easy. And it never is.” — Justin Wolfers [30:14]
-
Oil and Political Restraint:
- “It is the oil price that might save us from disaster here...maybe it will keep a bit of a check on him.” — Katie Martin [42:33]
Timestamps for Key Segments
- Market Reactions: 05:00–06:46
- Why Markets Matter During Conflict: 06:57–12:25
- Sell vs. Avoid America: 12:55–17:13
- Safe Haven Debate (Bonds): 18:44–22:31
- Panel Returns: Market Reactivity: 23:45–26:52
- War, Overconfidence & Historical Parallels: 28:35–31:16
- Tail Risks & Oil Shock Scenarios: 31:17–34:47
- Beyond Oil: Security, Fiscal, Institutional Risks: 35:16–40:09
- Market Resilience vs. Political Risk: 40:09–44:50
- Final Thoughts on Investor Sentiment: 44:50–45:53
Conclusion
This episode balances deep market analysis with historical perspective on the limits of both market wisdom and political decision-making. It raises significant warnings about overconfidence and the many risks that markets may be downplaying, while noting the system’s repeated resilience. The conclusion: markets may not be “right,” but they are the best real-time barometer we have—though that barometer may not be forecasting storms that could yet arrive.
Panelists:
- Ed Elson (Host, Prof G Markets)
- Katie Martin (Markets columnist, Financial Times)
- Justin Wolfers (Economist, University of Michigan)
Notable Topics: Iran war, oil price shocks, market psychology, resilience, political leadership, tail risks, global diversification, green tech investments, U.S. safe haven status, autocracy risk.