$1T Moved on Iran “Talks” — Did They Even Happen?

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1:14Today's number, 49 billion. That's how many dollars VC firms invested in defense tech companies last year. The largest number ever. New products include subscription-based missiles and nuclear solutions that scale. Money market's mad. If money is evil, then that building is hell. The show goes on! The folks in there are questions. Show! Show! Welcome to Prof. G Markets. I'm Ed Elson. It is March 24th. Let's check in on yesterday's market vitals. The major indices rallied as President Trump signaled a move to de-escalate in Iran. More on that in a moment. Oil fell on that news. Meanwhile, the yield on 10-year treasuries dropped and the dollar declined.

2:07Okay, what's happening? The war in Iran may be entering a turning point. On Saturday, Trump gave Iran a 48-hour ultimatum. Reopen the Strait of Hormuz or the U.S. would destroy Iranian power plants. Iran responded by threatening to take out U.S. energy and desalination infrastructure across the Gulf. Just two days later, Trump said the two countries were engaging in, quote, very strong talks and that he would pause all strikes for five days. However, Iran's parliament speaker quickly dismissed the news, saying the talks never happened. Nonetheless, the S &P rose more than 1 % and Brent crude oil fell more than 10 % on the news.

2:48So here to help us make sense of what is actually happening here, we're joined by Justin Wolfers, professor of economics and public policy at the University of Michigan. So, Justin, first Trump tells us that we're having these constructive talks with Iran. It starts to look like maybe the war is coming to an end. Then Iran tells us, no, that didn't happen. Markets kind of digested that. They sort of fell down a little bit, but ultimately they're still up. What do you make of what we've learned here in the past 24 hours? It's the most extraordinary thing that the most critical issue facing American financial markets is whether to believe the American president or the Iranian leaders about what the Americans are doing.

3:43Should we believe the American president talking to the American people about the actions of America? And I think it remains very much up in the air. And just to be really clear on the stakes here, Ed, as you said, markets rose very strongly on news that these talks were going ahead. Probably about a third of it unwound as it appeared that the Iranians were not so confident that anyone had ever called them. So that right there tells you that markets believe that our president is slightly more credible than the Iranian leadership, but not substantially so. Look, 1 % on the S &P 500 is$600 billion.

4:31Maybe it was about 1.5 % actually, if I remember. So that's about a trillion dollars. There's about 100 million American households. So that says whether the president was telling the truth or not makes a difference in the wealth of the average American household of plus or minus$10 ,000. dollars. It's just a way of saying the stakes here are incredibly high and we are sailing through fog at midnight with a blindfold on while listening to the sweet, sweet tunes of our president telling us what may or may not be happening. What do you think about how investors are going to make decisions based on what they believe or don't believe going forward?

5:20Because, I mean, it's clear that literally the entire world, the entire economy, all of global markets depend on these questions here, on what happens in Iran, what happens in the Strait of Hormuz. And as we're learning more and more, it's also going to—I mean, our entire economy is going to depend on this question. If this area remains closed, then we will see unbelievable amounts of inflation, I mean, if we see oil consistently remaining at, I mean, let's call it$150, maybe$200 a barrel, I mean, the implications are tremendous here. And it all comes back to literally like, what is this guy going to do?

6:03And do we believe him? And it reminds me of Greenland. It reminds me of the tariffs. And then it just brings up this question like, are we in the same position again, where we're basically just hanging on to his every word, making decisions about his every word, which often just don't pan out to be even true. Yeah. So for sure, over the next few weeks, lots of people are going to say financial markets are crazy. They're hormonal. Why are they moving up or down like crazy? Right. But if you're actually in a situation where there's two choices we could make, aggression, non-aggression, and they have huge effects on the economy and we don't know the probability and we really, really don't know the probability if we end up here or here, then small statements rationally lead to large re-evaluations of the value of stocks, of your future forecast for the economy, of bond rates, the whole nine yards.

7:06So things are going to look crazy. it will, but I think here this is not a statement about financial markets necessarily being temperamental. It's more a statement about the president's inability to convince anyone that what he's saying he means. And this is actually, I think there's one profound sense. There's many senses in which these are uncharted waters. But one very profound sense is I don't think we've ever been in a situation like this where the word of the president about what his intentions are is so uninformative about the future. George W. Bush, when he said, let's go ahead, you kind of knew that's what he meant.

7:49And when he said, let's pull back, you kind of knew what he meant. And here, I think we're all just guessing. Do you think that this kind of goes back to TARCO, where, I mean, the whole premise of TARCO was Trump threatened something crazy, and then the markets throw up and then he gets worried because he values the opinion of the markets or he values the dollars that are related to those investment decisions and then he tacos he chickens out and then it became a question of maybe he's immune to taco at this point or maybe the markets aren't reacting anymore to sort of front run the taco which means that we no longer have this regular regulating effect where the markets basically slap him on the wrist and tell them to do the right thing.

8:34What do you think the relationship between the markets and Trump's decision-making actually is at this point? And is that relationship still strong as it seems to be back during the tariffs of last year? Yeah, so I think it's been a question very much on a lot of people's minds. So if your simple model was the president will do what he wants until he hears markets don't like it, when he hears markets don't like it, then he'll undo it. and if markets can think one step further, then they'll see the president does what he wants. It's not very good. They think he'll undo it. Given that they think he'll undo it, they don't need to move.

9:12Right. What's the equilibrium of this game? It could be that markets don't move very much and the president becomes hypersensitive to markets. Who knows? This feedback loop is profoundly broken and it would be a lot easier if it was genuinely mechanistic, but it's not. Maybe, you know, all of this comes back to what, how do you rewrite the rules of the game when you have an unpredictable president? And so the idea of Tarko that people found very reassuring is in fact the president's very predictable. Right. I don't know that that's true actually. So yes, he Tarko's sometimes except when he doesn't.

9:53And so you can think about, you know, and I do think you're right to bring up all the past analogies, I think most clearly through the trade war. But if you remember, Canada went from our number one enemy to our number one friend, and it did like three or four round trips on that journey. Actually, right now, the rhetoric is profoundly anti-Canadian. The reality is not very anti-Canadian, but it's very hard to keep track of, and it's not even clear that the president has. So, mate, if I look a little bit lost, it's because this is very confusing. So, look, here's the safest thing to say. Markets are reacting as if developments in Iran are tremendously important for the development of the global economy.

10:36Yes. When you see them move one and a half percentage points based on a truth social post, and that takes into account that he might taco, that one and a half percent is a profound an underestimate of the true effect of going to war, because they don't think that he pulled back from war. They think there's some possibility he did and some that he didn't, in some sense, what's already priced in. The economic implications here are numerous, and it's kind of hard to put any numbers on it. I'm just wondering, when you teach your students over at UMichigan, I assume that what's happening in the news is making its way into your classes and into your lectures.

11:23What kinds of takeaways are you trying to convey to your students right now in the middle of this moment? Yeah. Ed, I'm not teaching this semester. Sorry about that. Okay, fair enough. I'm talking to a lot of people. So let me give you a couple of very quick answers. The first is the orders of magnitude involved with war are very, very large. Second is what I think of as being the most important macroeconomic skill, which is being able to keep track of orders of magnitude. To give an example, I was interviewed a bunch of times a week ago just after it came out that the Pentagon had said that the first week of the war cost$11 billion.

12:04And commentators like, oh, my God,$11 billion, this is outrageous, it's terrible, it's too much. And I'm like, you know, actually$11 billion is not that much. um 11 billion is well if there's a hundred thousand hundred million households uh you can do this for me ed come on what is that like uh don't put me in his position so it's a hundred bucks a household it's a hundred bucks per household um not much but then you see markets today rose one of the half percentage points and as we talked about that's a true that's you know, a trillion dollars. Right. And so the stakes aren't tens of billions.

12:43The stakes are hundreds of billions and plausibly trillions. And so therefore the stakes for the average, and no one is average, the average American household are thousands and plausibly tens of thousands of dollars. So two things that you learn out of that. One, big deal. Two, keeping track of orders of magnitude is actually the most important skill here. I can probably guess how many zeros are involved. I can't, anyone who thinks they know what number is in front of the zeros is kidding themselves about how precise they can be. All right. Justin Wilfers, Professor of Economics and Public Policy at the University of Michigan.

13:23Justin, always appreciate it. Thank you so much. Great pleasure, Ed. After the break, OpenAI locks in. And for even more markets insights, you can subscribe to my weekly newsletter, simply put, at simplyput.profgmedia.com.

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15:52We're back with Prof G Markets. OpenAI is changing course as the AI race intensifies. In an internal memo, the company's chief of applications said that OpenAI needs to ditch its side quests in order to, quote, nail productivity on the business front. That new strategy includes building a super app that combines ChatGPT, Codex, and the Atlas browser. The company is also planning to double its headcount by the end of the year as it works to keep up with Anthropic. Here to discuss OpenAI's new strategy, we're speaking with Alex Heath, author of the Sources newsletter and co-host of the Access podcast.

16:33So, Alex, this new news from OpenAI, they are trying to ditch the side quest. This is sort of the initiative that's being spearheaded by Fiji Simo, who I know you have interviewed and who you've been talking with. Tell us a little bit about what you know about what they're trying to do at this point. How has the OpenAI business strategy actually changed here?

16:55Alex Heath:Yeah, I mean, I've been seeing people calling this a pivot, and I guess you could say it is. But if you look at what's really happened over the last couple of years in AI, OpenAI went square for consumer, being the biggest consumer AI platform. And they did that, right? They have 900 million users, and they're growing there still. Meanwhile, what Anthropic did is during that same period, it focused almost entirely on enterprise. us. And now Claude has, you know, some traction, especially off of, you know, people wanting to support the company due to what happened with the Pentagon. But Anthropic was B2B, OpenAI was consumer.

17:31Alex Heath:Now that OpenAI has one consumer, guess what? The vast majority of its users actually cost it money to serve. This is something I was talking about with Fiji when she was on Access a couple months ago. And that's a problem. If you are a venture-backed, unprofitable AI lab who needs to IPO, right? And where is the money in AI? It's in enterprise applications. It's in putting agents in large companies, doing forward deployed engineering, building all these kind of bespoke products for enterprise usage. That's where, I mean, in Silicon Valley, people are talking about token maxing, right? Companies literally incentivizing their employees to burn as many tokens, you know, which are just the atomic units of AI as possible.

18:16Alex Heath:And there's literal leaderboards of, you know, who is doing this and spending the most money inside the company. That doesn't exist in consumer land. So OpenAI, you know, needs to make money. It needs to become profitable. And short of the ads thing that they're doing, which we've talked about a lot, this is the way to do it. It's to go after enterprise. And they finally have a model and a product and codex that is growing on that front, on the coding front, and finally can challenge what Claude has been able to do, specifically on coding. Definitely doesn't have the mindshare, but has exploding usage.

18:54Alex Heath:And so, yeah, the super app idea makes a ton of sense, and as does growing the enterprise push, if you look at it that way. And I think this is just the beginning. I mean, I think the super app idea is like, this is the future of all of these assistants. I think CloudCode is going to be the interface to access what we think of as Cloud the chatbot. And I think the same will happen for ChatGPT. Codex will eat it. Do you think that they see their push for consumer versus enterprise as a mistake at this point? I mean, that's really how it seems on my end. I look at how Anthropic, how Claude is taking over the enterprise market.

19:34But I always thought that this would happen. And one of the predictions that I made a while ago, about two years ago, I thought that ChatGPT as a consumer product was going to kind of fall by the wayside. And my prediction was OpenAI was going to sort of shift their focus. They had this awesome hit product, but they're going to go after the real big fish that everyone wants, which is enterprise customers. So ChatGPT will kind of fade out of view and we'll see more emphasis on enterprise. That's not what happened at all. But if they had gone with what I thought they were going to do, then maybe things would look better for them.

20:10But do you think that they view that as a mistake, that they went after the consumer and they realized this actually isn't that great of a business compared to enterprise and now they're switching over?

20:21Alex Heath:I think they view not focusing on coding and coding model progress earlier as a mistake, as a huge strategic mistake that they're now catching up on. And they gave Anthropic the opening with cloud code that it has. I'm not so sure about the consumer versus enterprise thing. I mean, look, when you get to a billion-ish users, you can kind of just figure it out. That's like the hardest thing to do. Right. And, you know, what is harder, you know, Anthropics Enterprise deployments or getting hundreds of millions of free users to be very retentive in your product? It's hard to say. I mean, I think, you know, it's incredible long-term optionality if they can figure out the ads piece, which they will.

21:03Alex Heath:They just hired a senior meta ad exec this week. Fiji ran, you know, monetization at Facebook. They'll figure that piece out. that's the thing Anthropic doesn't have. And that's probably where all the margin is, really. If you start doing really good ads on a surface that high intense, that data rich for hundreds of millions of people, you've got the next massive scaled consumer internet business, which Anthropic just doesn't have by the function of Claude not being huge yet as a consumer product. Yeah. So I'm not sure. I don't know if they really feel like, oh my gosh, we forfeited, enterprise and now we've got to scramble.

21:40Alex Heath:I do think, though, the coding piece, I think these companies judge themselves based on the model progress. And I think OpenAI got distracted with, I mean, Fiji said it, all the side quests, but with being a massive consumer company and hiring all of these consumer previous era tech employees to come in and do all these different things and Sora and all this stuff. And meanwhile, Anthropic was singularly focused on coding and the enterprise market, and now that's paying off. So they're playing catch up there for sure. It does seem like focus would also just mean building out this ad business. If they want to win in the consumer world, which they have done, and they want to figure out how to monetize it, now it's time to get into ads.

22:22And as you just said, they just hired one of the top advertising executives from Meta, who's now going to lead their ad sales. Would you say that advertising is still top of mind for OpenAI in spite of being made fun of for it after the Super Bowl with those Anthropic Super Bowl ads, people saying we don't want ads in our AI apps. Do you think they're still going for the ads?

22:45Alex Heath:Yes, they are. I mean, they're testing it and the early reporting on the tests are that they've been super low tech, surprisingly very bespoke and white glove. And I think they're just trying to feel it out and feel out the limits of advertising on a surface like this. And now they're productizing it and they're building the system to kind of deploy it at scale. They have to do it for the reasons we talked about. Yeah. I think if you bought the theory from Sam Altman that super intelligence or some version of it is just around the corner and this technology is really going to automate all labor and replace, you know, scientific drug discovery and all the things that they talk about.

23:22Alex Heath:Would you be doing a concerted ads push? Maybe not. Right. Like if you've got like AI God right around the corner. So I think it also suggests that this model progress that gets hyped a lot in the industry is maybe not as dramatic as it's said. But there's no – I think Chagipity is going to be around for a long time. I think it's going to be big. It's just ingrained. You know, it's like the Kleenex of AI for a lot of people. That takes a long time to unseat. That's what Google managed to accomplish. And sure, like, there will be nipping at the heels and at the edges of it like what Claude is doing with a lot of, like, tech-related adopters right now who just anecdotally – I'm also part of this, but here just like switching from chat to Claude.

24:03Alex Heath:But in terms of your mass average consumer, chat is still the only AI experience that they have and that they know. And that's just gonna be very hard to unseat. Yeah, the other final news I just wanna get your reaction to that I saw today. This is exclusive from Reuters. Apparently OpenAI is offering private equity firms investment deals with a guaranteed minimum return of 17.5%. So basically saying, if you invest in us, we guarantee you we will return 17.5 % of your money, which for those who don't know, that's like a ridiculous return. That's significantly higher than the S &P average. This just seems ridiculous to me.

24:47How can you guarantee 17.5 %? It makes me think maybe they're just going to lose money on this thing, or maybe some sort of foul play? I don't really know. I just wanted to know if you know anything about this and if that sounds right to you.