Aftermath: Wall Street Is Lying to Itself

This story was first featured in the Aftermath newsletter, a series from David Dayen exploring the economic consequences of the war in Iran. To have these stories delivered to your in-box as soon as they are published, sign up for the newsletter here.

“Buy the rumor, sell the news” has been a mantra of Wall Street for decades. The idea is that information is currency, and that having that information before it is widely known gives you an advantage. But with the war in Iran, the attitude has been more buying on hope and hype, using information from Truth Social that everybody knows the moment it’s posted. Investors are showing that they want to believe that a head of state would not be stupid enough to plunge the world into an unnecessary economic crisis. Those investors are wrong.

That and more in today’s edition of Aftermath.

Are We Still at War?

I’m going to say no, not really, although the ultimate resolution is still to be determined. Donald Trump blinked again on Tuesday, announcing an indefinite extension of the cease-fire until the Iranians “can come up with a unified proposal.” Unnamed advisers came out later and told go-to regurgitator Barak Ravid that the open-ended cease-fire isn’t open-ended, but I don’t know who they think they’re convincing. Trump is not going to risk further damage to his rapidly deteriorating political position by greenlighting a full-scale attack. He’s had several opportunities to do so and demurred.

That’s of course better than the alternative. But instead, we have an “end” to the indiscriminate bombing part of the war that keeps all the economic consequences intact. The U.S. is continuing to blockade Iranian ships in the Strait of Hormuz, while seizing ships outside the Gulf that they deem as aiding Iranian exports. Iran is also attacking and seizing ships within the strait. Senior Iranian lawmakers from the hard-liner military wing are saying they will never relinquish control of the waterway, as it has become their main point of leverage, not their nuclear program. Iran is conditioning talks on lifting the blockade, and the U.S. wants to use the pain from the blockade to force talks.

What you have, then, is a recipe for an ongoing, unbreakable crisis for global shipping, something short of a war but well beyond business as usual. And if that’s the case, why is there such a preternatural calm over the public markets?

The Best Delusions Are Self-Delusions

The stock market is higher today than it was on February 28. I’ve heard a few rationales for this: day traders not caring about risks when there are short-term gains to be made, speculative bets (like shoe company Allbirds moving into AI) being impossible to resist, and a general disregard for the fundamentals. Anyway, Trump has successfully manipulated markets, continually making announcements timed to the NYSE open suggesting that the crisis has lifted, only for those plans to fade.

But nearly two months into a shipping supply shock, you’d think that investors would wake up and act accordingly. In fact, their compulsive wishful thinking is making the crisis worse, by not providing the kind of signal that has historically gotten Trump to back off his most destructive impulses. Sadly, this time it may be too late, given the operational control of the Strait of Hormuz that’s firmly in Iran’s hands.

The evidence that investors are overlooking the implications of the current situation is piling up. The war’s end is no longer the point at which things will return to something approaching normal. U.S. inflation was at 3.3 percent last month and is expected to rise further, and the second-order effects on goods that are derived from fossil fuels or rely on energy—in the latter case, all of them—haven’t even hit yet. Diesel and jet fuel, the heavy transportation fuels, are rising faster than gasoline. There are trucking costs and fertilizer costs and plastic and aluminum packaging costs, all of which will spark more core inflation, which hasn’t budged much relative to more volatile benchmarks like energy.

Then there’s the impact on capital flows coming from the Persian Gulf. The major Gulf states are in no position right now to invest, which had hitherto propped up projects and asset managers globally. Losing Gulf state capital might be a bigger deal than losing their oil. The fact that the U.S. is considering a bailout of the United Arab Emirates is a terrible sign.

The Asia-Pacific region has been hit hard like the Gulf, because it is more reliant on energy resources from that part of the world. There, flights are being canceled, factories and production lines are closing down, shelves are empty, and shipments are being delayed. The supply chains that swap components back and forth in this cluster all run on energy that is growing more expensive. People on the front lines report that it’s worse than the COVID crisis in Asia; there is a reason that Xi Jinping is periodically stamping his feet demanding a reopening of the strait. The impotence of really all the global superpowers to deal with this problem is a very notable feature.

This happens to be the part of the world where a majority of overall manufacturing output comes from, so their pain is almost certain to reverberate elsewhere. In fact, it already is in America, at least in the noncontiguous parts of the country like Hawaii and Alaska, where electricity prices are set to jump.

The forecast for reversing this damage will be measured in years. Even if the strait opens tomorrow, it will take months to get production at undamaged wells flowing at something like normal, not to mention repairing all the various infrastructure that has been damaged. That’s what the EU’s energy commissioner said on Wednesday, adding: “This is a crisis that is probably as serious as the 1973 and the 2022 crises combined.”

That flies in the face of the complacency in the markets. Donald Trump has been dictating the price of stocks so much that investors seemingly cannot comprehend a situation that’s out of his control. So every time he extends a pretend cease-fire or announces fake talks, investors are relieved and the market pops. The realities of shipping, logistics, production, and the energy fueling all that has been completely left out of the conversation, and it’s creating a near-term mismatch. As analyst PSI Capital wrote late last week: “The market priced peace. The oil system didn’t.”

Now, there is potential relief here. The Strait of Hormuz is just going to be too volatile to be reliable for the near future. Those dedicated to the current system are going to search for ways to bypass the strait, either with pipelines, coal production, or eventually renewables that aren’t dependent on traversing a body of water. But that infrastructure won’t be built or scaled up enough to resolve the crisis anytime soon. It also doesn’t resolve non-petroleum goods shipping from the Gulf, like with fertilizer and aluminum. Rebuilding domestic supply chains is the only answer there.

Ultimately, the market’s aversion to reality reflects a problem that’s been talked about a lot: the tendency to let short-term thinking dominate over the long-term fundamentals. Algorithmic traders looking for arbitrages or small price movements aren’t going to internalize a dramatic shock to global supply chains. It has to come at a level of international recognition that the way we have structured the economy is prone to this level of risk. That should have dawned on people after COVID, and so far it hasn’t dawned on people now. But it will.

Thanks for reading. If you have tips or ideas for future stories, let us know! You can email us at aftermath@prospect.org.