Iran Deadline Looms for an Economy on the Edge

0:14Today's number, 60. That's how many days it's been since the Dow hit 50 ,000. The index has since fallen to roughly 46 ,500, which means we were only 3 ,500 points away from keeping our attorney general.

0:42Welcome to Prof G Markets. I'm Ed Elson. It is April 7th. Let's check in on yesterday's market vitals. The major indices rode out a volatile trading session to end in the green. Traders wavered between hopes for a ceasefire and fears of escalation from President Trump. Brent crude climbed again above$110 per barrel. Meanwhile, treasury yields and the dollar were flat. Okay, what else is happening? Trump's deadline for Iran to open the Strait of Hormuz is tonight at 8 p.m. Eastern. So far, both sides have rejected each other's proposals to end the war. President Trump escalated his threats against the country on Sunday, and yesterday he warned that the entire country could be, quote, taken out as early as Tuesday.

1:28The conflict has already triggered the largest oil supply disruption in the history of the global market, according to the IEA. That inflationary pressure gets its first real test on Friday with the release of the March Consumer Price Index data. We also saw the March jobs report last Friday, which provided a snapshot of where the economy was before the war. The economy added 178 ,000 jobs and the unemployment rate ticked down to 4.3%. However, the hiring rate fell, the participation rate declined, and wage growth slowed. Meanwhile, the February numbers were revised from a loss of 92 ,000 jobs to a loss of 133 ,000 jobs.

2:07A lot there. Here to get the state of the economy. We're doing an economic update. with Justin Wolfers, Professor of Public Policy and Economics at the University of Michigan. Justin, great to have you on the show again. We wanted to get your update on the economy now that we're in week six of this war. They said it was going to be four weeks or four to five weeks. We are now extending beyond that. What do you make of what's happening right now? Ed, I think the good news is you and I have had a rehearsal for this. So, So, you know, we spent all of 2025 saying the president is on edge, the president might be about to do dramatic things that could upturn how we think about global commerce.

2:50The jobs reports looked weak and then they looked not quite so weak and we've been on edge. And one thing I can say, and I'm a little older than you, so grasshopper, it's not always this way. There was a time when I'd be able to do a long and serious interview with it about the economy, understanding that it would have a shelf life of more than six hours. That's not the world we're in right now. So, look, let me go back and answer your question. I think the jobs report was unabashedly good news. If you didn't update after that and say the economy's a little more robust than I had feared, then you're not paying attention.

3:33Equally, when you say that we created, was it 178 ,000 jobs in a month? Yeah. In the current moment, if that were the true underlying pace of job growth, you would see me grinning from ear to ear. I'm not grinning from ear to ear. There's some underlying weakness there, which is some amount of this was, you know, a bunch of folks are on strike one month aren't on strike the next. That gives you a lot of the health care. A bunch of people are out because of bad weather. and they're now back because of good weather. And that also plausibly explains quite a lot of what's going on. So it's sort of a fantastic number with a weak underbelly, but does suggest that at the very least the economy is running somewhat out.

4:16It doesn't look like we're in a recession. Our expectations for the rate of employment growth should be substantially lower because we have no population growth. So the US economy is, to some degree, the little engine that could. The thing I like to see most is that the unemployment rate, I think we should all keep our eye on the unemployment rate, especially right now, because looking at employment is only useful if you know how many jobs we ought to be creating. Right. And because of the shock to immigration, how many jobs we need to create is much, much less clear. So the unemployment rate sort of tells us how we're doing relative to how we've got to do, and it's moving roughly sideways sideways, that's certainly not a failing grade.

5:03It's not incredible success, but, you know, we're doing okay coming. So what that says is on the eve of the Iran war, the U.S. economy is doing relatively well, better than pessimists, and I've been a pessimist over recent months, would have expected, and not as well as the optimists have boasted. Yeah. Yeah. A couple questions that come to mind. The first is, and well, I'll start with the first question. It's good plans. The revision, we keep on getting these down revisions. And so I look at the numbers that are coming out from this employment report, 178 ,000 jobs added. And it seems like the way this always goes is we all go, oh, it's not so bad.

5:52It's actually pretty good. And then we come back to it a month later and we learn actually it's like 40 to 50 to 60 ,000 jobs lower than we originally projected. And in fact, Jerome Powell told us as much. He was literally telling us in the previous Fed meeting that we're basically overshooting the jobs added by around, I think he said, 60 ,000 jobs each time. So I guess my first thing, I see the number that I'm like, well, I don't even know if this even matters or if this even means anything. because I'm pretty sure that it's going to get revised in the next round. That's the first thing. And then the second thing is, well, now we also have this war with Iran, which is kind of a big deal.

6:33We have to stop at one thing. Okay, let's go with the first thing. Look, so what I don't want you to do is see revisions and say, oh, none of this matters, because what you're looking for is the least bad indicator in a universe of terrible indicators. If it helps you see it that way, that's fine by me. It's hard to see through fog. It's hard to measure an economy of the size and scope of the United States. It's even harder when you're in the middle of so much change, which, and I think this is where you're going with your second question, what happens in March? What happens before the war may be much less relevant than what happens after the war.

7:12We could say the same thing with the trade war as well. So it's hard. So you're sailing through fog. what do you do? You pull out your flashlight. The thing you discover about your flashlight is it helps you see about 12 feet in advance and a lot of really interesting stuff is like 13 or 14 feet in the future. And that's sort of your point about the revisions, which is we have a rough sense that there's not a massive iceberg right there. Do we know that we're not going to run into a couple of penguins on the way? We could. Yeah. They might be there. So even with all the revisions, what's true for any sort of serious analyst of business cycles is if you look at the ups and downs of every other economic indicator, payroll still, even with its revisions, is timely.

7:59Yeah. Right? Just came out. Extremely reliable. Even though you just described it as extremely unreliable, that's correct. There's some distance between it and the truth. but that distance is shorter, smaller than it is for anything else and with this extraordinary track record over time. And it's the most watched market indicator not because guys in markets like to do what everyone else is doing but because it still has more signal than anything else. So, and then I just want to separate one other issue you described. So, there's the revisions and the revisions are very large. They're actually separate from what Jay Powell was talking about.

8:37Jay Powell, where he said payrolls is being overestimated, he's talking about benchmark revisions. So let's nerd out. I know you love to nerd out. Three ways in which each month we learn more about the past and we go back and revise it. The first is what we think of as being revisions. We use the word revisions for it, which is there's a bunch of firms that didn't send in their form last month telling us how many people were on their payroll. They eventually get around to it. And we figure rather than using statistical extrapolation, let's count what they actually told us. And so then we have to update what we thought happened last month.

9:12That's a standard revision, right? Second thing, not many people appreciate the following, is also seasonal adjustment, which is a very complicated beast. We update the seasonal adjustment factors every month. And so some of the – there's a further revision. There's a revision to non-season adjusted data. That's the new forms that come in. There's also a revision, usually pretty slight, to the seasonal factors. So how much of it we think is the ups and downs of summer and winter. And then the third thing that happens is what we have at any point in time is a sample of the population of all firms sending in their forms.

9:50But to know what that means for the economy, we have to know whether that's a 1 % sample or a 2 % sample. We have to know what share of the economy is being featured. and we also have to make sure that it's representative of small firms and large firms and all of that stuff. That's what's called the benchmark revision. The benchmark revision is we go to a near universe of firms and we say, oh, this sample we have, how representative is it? Let's rescale things once we know how representative or unrepresentative it is or isn't. The near universe is called the QCEW. It comes from unemployment insurance records.

10:25And what we saw through 2024 and early 2025 was that there were fewer firms than we'd implicitly been assuming. And we will get a benchmark revision much later in the year or some distance away from it. But we see early data from the numbers that are used as an input to that benchmark revision. And that's what Jay Powell's talking about where he says, I'm expecting another revision to come. He's not talking about the monthly revisions. He's talking about the annual benchmark. It all matters because it's all, he's saying what's going on right now probably overstates the extent of job growth. Right.

11:04But it's not going to get washed out next month. It'll get washed out. It'll get fixed up in several months with the benchmark revision. Sorry if that was boring. No, no. It's helpful to understand exactly what goes into this stuff. And it's interesting because these things, they're so important to the cultural conversation and the economic conversation. But then there's a lot of caveats and details that sort of get lost in the complexity of it all. But people should really know about it. I do want to pivot to what's happened with Iran here because what is so interesting is that employment report comes out, big deal, very important for someone like you as an economist.

11:40But then we also see this message. I'm going to read it verbatim from the president. Quote, Tuesday will be power plant day and bridge day, all wrapped up in one in Iran. There will be nothing like it. Open the fucking strait, you crazy bastards, or you'll be living in hell. Just watch, praise be to Allah, President Donald J. Trump. I guess my question for you, which one is more important as an economic piece of data or economic piece of news to you as an economist, that tweet or the employment report? The tweet. Yeah. The tweet for two reasons. One, this tells us something about the future of the war.

12:20the war is overwhelmingly the most important economic thing going on right now. You don't have to be too much of a careful student of history to understand that wars have enormous implications for politics, for economics, for geopolitics, for our ability to do business with each other, for our future defence budgets, for those of our allies and our former allies, for our fiscal situation and, in fact, for our monetary situation. So the way this war will have direct effects through oil and indirect effects through geopolitics, defense, and all the stuff that I feel somewhat unqualified to opine about.

13:01The problem, of course, is the folks who understand that stuff don't understand economics very well. No one's really qualified. We need someone to talk about it. I think you're the guy. You're as good as we're going to get here. Well, I'll be honest about what I don't understand. I think that's probably the most useful role that I can play. But I think there's a second thing no less important that we learned in that tweet. And we saw the same dynamic actually play out during the trade war. During the trade war, there were some really important moments, particularly around Liberation Day and the aftermath, where the market movements were enormous, even though what the president was doing was pretty small.

13:36And I think what was happening was markets were updating on this fundamental idea of how competent is this administration? How much do I trust it to react in a way that defends America's interests to challenges that come our way? And some of the lunacy around Liberation Day led to the sell America trade, if you remember that language. And it led to, I think, an outright lack of trust in the administration. when you have a president using you know i'm a parent ed my kids would be in trouble for that tweet um they'd be in trouble for swearing but fuck that i'm okay with swearing trying to offend people about their deeply held religious beliefs at a moment where what's actually more important is that you both find a path forward towards peace is inane, insane, and does not serve America's interests at all.

14:34And so what we're learning from that tweet is not just something about the process of this war, but what's going to happen over the four years, right? How much better do you feel about, I don't know the next thing to come around the corner. What if it's a drought? What if it's an earthquake? What if it's a pandemic? What if it's, I mean, just a productivity slowdown? What if AI does something crazy, whatever it is? How reassured do I feel that the president is going to make smart choices with our enormous military and scientific might in a way that leads to a more productive future? I feel much less confident.

15:21there are very real questions about the president's judgment there are questions about his age there are questions about his mental acuity and if not that then there are questions about his political strategies and his understandings of economics so I made that list broad so I can include folks who are somewhat on the conspiracy side but also at the other end these are questions of judgment do you feel well led, do you feel confident do you uh think now is a good time to invest in the united states or would you like to see some of these big issues resolved um before you're going to lay down millions or billions of dollars on a major investment here yeah just before we let you go i mean the the idea is that by tuesday evening we have some sort of a deal and some sort of a ceasefire in some capacity this comes to an end or we get a signal that it's coming to an end, whatever.

16:14That's the idea. I know you're not a geopolitical expert. I know you're not a military strategist, but you are a smart person who pays attention to what's happening and pays attention to the implications of what will happen. Do you think that this is going to end anytime soon? I hope and pray, and I'm not even religious. I think the stakes, you know, I think the only smart thing I can say that's moderately informed that comes from my expertise is the stakes here are really, really large. I will spend the next 24 hours on the edge of my seat. I am deeply worried. I worry partly because I care about the consequences for the American economy.

16:58I worry partly because I care about the consequences for the global economy. And remember that many of the consequences of our actions are being felt two times, four times, 10 times larger in other countries. And I worry because there are people around the world right now living in fear, and we should never lose sight of that. And great leadership is about removing that fear, giving us all the capacity for joy and safety and freedom. And it's a really, really critical few moments right now for trying to help spread that freedom around the world. Justin Wolf is a professor of public policy and economics at the University of Michigan.

17:43Justin, always appreciate your time. Thank you. Pleasure, mate. After the break, an update on the AI IPO race. And if you're enjoying the show, please follow our new Prof G Markets YouTube channel. The link is in the description.

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20:05We're back with Prof G Markets. OpenAI and Anthropic are racing towards what could be the largest IPOs in history. The Wall Street Journal obtained confidential financial documents from both companies, giving us the first real side-by-side look at their books. Both companies are growing quickly. OpenAI has reached$25 billion in annual recurring revenue, while Anthropic is at$19 billion. But they both share the same problem. The cost of training these new AI models is devouring their margins. OpenAI expects to spend $121 billion on computing power in 2028. Anthropic plans to spend roughly$30 billion.

20:45Meanwhile, there is fresh drama inside OpenAI. The company's CFO, Sarah Fryer, reportedly told colleagues that the company isn't ready to go public this year. And that put her directly at odds with Sam Altman, who is pushing for a listing in Q4. Since those comments, he has reportedly cut her out of key investor meetings. Lots to discuss here. Here to discuss the state of the AI IPO race. and he's already laughing, is Paul Kodroski, managing partner at SK Ventures. Paul, thank you for joining us. I guess we'll just start with what's making you laugh right now. You know what it reminds me of is there's this great horror movie trope where the heroine is inside the house towards the end of the movie and she's talking about what's going on and she feels really threatened and somebody jumps on the call and says, the call's coming from inside the house, get the hell out.

21:39This is kind of that, right? I mean, it's literally, I've been around this stuff for decades to my shame. And a public, well, a public IPO, an IPO candidate's company's CFO saying that we think we should probably not go public just doesn't happen, right? The job of the CFO is to say yes, and alternatively, we could be sued for that. And that's really it. That's all you're supposed to say as a CFO. You really, you've got like sort of two options, right? Right. Option three is not, you know, I kind of feel a little bit meh about the IPO thing, but option three doesn't really exist. So this is really unusual.

22:15And to be somewhat serious, I mean, the idea that someone would say that at this point in the process and then potentially be cut out of conversations with respect to the book building and putting together documentation with respect to the IPO and that someone happens to be your CFO, which is the primary reporting officer from an SEC standpoint in terms of bringing the company public, is, to use the technical term, ridiculous. I mean, it's just ridiculous. So, well, I mean, just so people know, I mean, you were an engineer, you were a tech equity analyst, now you're an investor. So that you have seen this world before.

22:51I guess the question becomes, if it is ridiculous, and I happen to agree, is it because the CFO is the problem here? Is it because she's doing her job wrong? Or is it because the company is the problem, the company isn't ready to go public, it's in such a bad position that she is actually maybe doing a good thing by saying, hey, we really shouldn't do this? She's right, but it doesn't matter, right? If the CEO wants to take the company public, and your view as the CFO is we should not go public, then you're at the wrong company. I mean, it's literally that straightforward, right? You can't have that kind of disconnect.

23:26This isn't, you know, providing guidance to Pete Hegseth before he sends troops into Iran and saying, you know, Pete, I'd rather we didn't do this right now. It's like, no, dude, you're fired. That's not the advice I want right now. Here's the advice I want right now. And the same thing applies in the context of OpenAI. You're simply telling people in a very strange way that you're at the wrong company. Which, by the way, to your point, though, she's not wrong. I mean, there are all kinds of things that were just, you know, wacky in the Wall Street Journal article. The accounting treatment of Frontier Training, the provisions with respect to suspending the NASDAQ requirement to becoming part of the index.

24:06All of these things raise all kinds of problems that will all become obvious over the next 12 months. So, you know, the idea that in some sense this company should not be going public right now is much broader than just, you know, their unit economics suck or some such thing like this. It's a much broader problem in that. It's more systemic about the nature of what's going to happen when multiple trillion dollar market capitalization companies come to market in the course of 2026. this is like a like a economic shock treatment because you have to think about where's the money going to come from that flows into these well it's going to come out come from a host of other companies who happen to be very liquid traded and overlap well who are those guys it's google microsoft amazon and others so money is going to flow from those places into these places because in a sense you're being forced to by putting them into the index so quickly because index uh etfs must immediately purchase the stock they don't hold cash they're not like some somebody with a bag of money in the basement.

25:05They have to sell something else to move it over there. And so you're going to see this giant series of tsunamis of cash flows that are going to be wildly disruptive, all because this thing, this behemoth, these three behemoths are coming public this year. So much there, and it's so interesting. Almost your answer to my question is like, it's both a problem that the CFO is making a mistake, and also the company is not in the right position. It's sort of like a double whammy of badness. Well, in a triple whammy, it's also systemically problematic because of the amount of money is going to cost.

25:36You can model it out and hedge funds are doing it right now. I mean, one of my side gigs is talking to a lot of some of the largest hedge funds on earth, and they're already looking at this and saying, OK, the outflows from these places are going to do what to their share prices? OK, then that has to mathematically happen because I have to fund my purchase because of this new requirement that they can be in the index very, very quickly. So what does that mean? It's kind of like a giant index rebalancing exercise. It's going to have consequences for one group of companies and consequences for another group as this great big pile of money goes swooshing through the economy.

26:07So there's high-level issues and lower-level issues, not least of which is this bizarro method that they want to use to handle frontier model expenses. So it's just the issues are legion. Tell us a little bit about what you make of the business itself. I mean, they just crossed$25 billion in ARR. They are the number one AI company. They have a ton of users. I guess it starts to get a little crazy when you look at the valuation,$852 billion as of this most recent round. I mean, what do you make of the business? 40X revenues, yeah. Yeah, what do you make of, I guess, the valuation and also the fundamental business itself?