Why are markets listening to Trump?

0:05Rob Armstrong: Pushkin. Markets are getting more than a little seasick. Every time the war in Iran goes from bad to worse, oil prices jump and stocks tumble. Then along comes an announcement from Donald Trump about talks with Iran, pointing to a resolution. Oil drops, stocks jump, and then Iran says, essentially, what talks? And back we head again. We're in, we're out, we're shaking all about on seemingly every headline. And honestly, still, no one knows what will happen next. Although some very lucky traders in the oil market, with some really exquisite timing, do seem to have made some extremely good guesses and made a load of money.

0:53Rob Armstrong: Today on the show, seriously, how long can we keep doing this? This is Unhedged, the markets and finance podcast from the Financial Times. I'm Pushkin. I'm Katie Martin, a markets columnist at FT Towers in old London town, just about holding on to my sanity and sense of humour. Joining me down the line from New York City is Rob Armstrong from the Unhedged newsletter. Listeners, please be nice to him because he has a cold. In fact, please be nice to both of us. I also have a bit of a cold. heaven knows we are not the hardest working people at the FT. We have colleagues putting in some superhuman efforts, but I do feel like the constant barrage of headlines is starting to grind everyone down.

1:35Katie Martin: Don't sell yourself short, Katie. We are complete heroes.

1:38Rob Armstrong: We definitely have colleagues who work harder than us.

1:41Katie Martin: Loads.

1:42Rob Armstrong: Rob, are you dosed up and ready for podcasting action?

1:46Katie Martin: Yeah, I'm ready to rock. Let's do it.

1:48Rob Armstrong: So much going on. Too much going on. That's part of the problem. So look, if you needed proof that we are just living from one headline to the next, and investors are in exactly the same boat, right? So let's do a little post-mortem of Monday. So we walked in, oil was going up, up, up, up, up, about$114 a barrel. Stocks were sinking. European stocks at one point entered correction territory, which means they're down 10 % from their peak. And then enter stage left, a post on Truth Social from your president saying he'd held in all caps, very good and productive conversations regarding a complete and total resolution of our hostilities with Iran.

2:34Rob Armstrong: And markets went way did a total 180, didn't they?

2:38Katie Martin: It was wild and it was instant. And the question you have to ask about this is why are we still doing this? because exactly two Mondays before that, Trump had said the war was absolutely over pretty much or whatever his precise words were. And the market did the same thing, only to have to embarrassingly reverse itself in the two weeks that followed. So he spoke back then, oil down, stocks up, yields down, and then we reverse that over two weeks. And then he says it again. and to the casual observer, it might feel like markets fell for the same trick again, that the boy who called peace had tricked us again.

3:29Katie Martin: And at some point you're like, when do the villagers stop responding when this guy says anything, right? It's a bit of a mystery.

3:39Rob Armstrong: I mean, he is the president, but yeah, like a colleague was asking me earlier, What is going on here? Are markets stupid?

3:50Katie Martin: I think they are not stupid. And I think there is an interpretation of the market response to the president's comments that make the market look perfectly rational. So here it goes. The first thing you have to note is that the market is probably, to use the hackneyed phrase, taking the president seriously, not literally. So when the president says we are having prolonged talks, very constructive talks with the Iranians, no one trading in the market is foolish enough to really take seriously the possibility that talks are happening. what they are hearing is an emotional message from the president about his frame of mind.

4:38Katie Martin: And that frame of mind is, I, friends, am looking for an exit. I do not like this war and I want to be out of it. And the fact that his actual claims about talks could be either a motivated belief or an untruth. Well, that's neither here nor there. What the market needed to hear from the president was, where's the door? And that's what he said.

5:07Rob Armstrong: Because Iran denied holding direct talks to end the war.

5:11Katie Martin: No, no. They denied holding indirect talks. It was worse than that. We're not even talking through mediators, they said.

5:18Rob Armstrong: I guess this is the thing with this whole conflict is like everybody I speak to says, nobody in markets has got an edge here, right? So nobody has superior knowledge to anyone else about what is actually going on here. It's not like there's somebody in the market somewhere or there's like an advisor somewhere or there's an analyst somewhere who genuinely knows what's going to happen next or what to expect. We're all just flying blind here because the situation remains anything from we find some sort of resolution and Iran agrees to stop harassing ships going through the Strait of Hormuz to this thing is blocked pretty much indefinitely and oil is going to$200,$250 a barrel and then we're all stuffed.

6:04Rob Armstrong: So you've got a huge range of outcomes and it's really difficult to know which way to jump. But I agree with you. What Trump is essentially saying here with this talk of talks is, yeah, I want an out. This excursion, which is how he was describing it the other day, is actually not fun.

6:19Katie Martin: The fact that we are in an information desert in the way that you just described also helps explain the market's reasonably strong reaction to the president's very likely untrue statements. because even if you think there's only a 1 in 10 or 2 in 10 chance that the United States and Iran are actually having productive talks on the basis of those presidential comments, you have to price that 10 or 20 % chance in, right? If you are a macro hedge fund and you have a bet on oil futures, you better be stepping damn lightly out there, right? Because the day peace does break out, and may it come soon, there is going to be some rearrangement going on and you don't want to be on the wrong side of it.

7:16Katie Martin: So even if it's a pretty vague clue that the president is giving you, you sort of have to act on it sometime.

7:23Rob Armstrong: One thing to bear in mind is that even if Trump does try and just switch this whole thing off, you can't necessarily do that. There's like energy production facilities that have been damaged. it's really not clear whether they can just be brought back on stream completely seamlessly and quickly. So, for example, Iraq has declared force majeure on all oil fields developed by foreign companies as the region's military operations disrupted navigation through the Strait of Hormuz. So that basically means contracts that they've got with people, they can just tear them up and say, well, there's no way we can fulfill this because there's been this kind of, you know, because we've been attacked or because it's impossible to get these products through the Strait of Hormuz.

8:08Rob Armstrong: So there's just a lot of things that are going to take ages to get back up and running properly. And already we've got airlines in Southeast Asia saying, yeah, we're not sure how much more jet fuel we've got. And we've got suppliers of like cooking fuel to again to parts of Asia, sort of public announcements out there saying, please don't deep fry your food in parts of India, for example.

8:35Katie Martin: It's funny, my doctor is telling me the same thing. Do you think she's trying to preserve oil?

8:41Rob Armstrong: Yes, got your best interests at heart. But so oil is -

8:45Katie Martin: Katie, to your point, I think there is a discussion to be had either today or another day about how the world has been forever changed or at least almost forever changed by this war. And I think there are going to be some ways in which that is true, small and large. But just kind of focusing in on the market's day-to-day action, there's one explanation of its responsiveness to the president's possibly not true comments is that traders are going to trade, right? And there's a lot of people and a lot of algorithms out there who are going to trade when the president talks. And they're going to buy the comment and then sell it 10 minutes later.

9:30Katie Martin: And you put it well and very simply earlier. The guy's the president. And there's going to be trading action around presidential comments. It's noise. There's a lot of noise in markets. And when we have, you know, a 2 % move in stocks on a presidential comment, some of that is just traders trading, you know, and you can't read too much into it. It's not a sign of irrationality. It's just a sign of how the machine works, as it were.

10:00Rob Armstrong: So one of the things that's moved around a lot on this whole conflict is gold. Oh, boy. Now, this really has been a bit of a curveball, right? So normally you get like war, geopolitical shocks. Gold goes up because traditionally it's been treated by lots of investors as a haven. It's a place to go and hide when bad stuff is happening in the world. Actually, what we've seen since this conflict broke out is that gold prices are down pretty significantly. I think we're down about, correct me if I'm wrong, about 17 % since this war broke out. The useful thing about this for me is that it settles the issue once and for all about is gold a defensive asset?

10:45Rob Armstrong: Is it something you go and hide in when bad stuff happens? Or is it a speculative asset that attracts lots of retail investors and lots of kind of just betting that a price is going to go up? It's the latter. We now know this for sure. It's just a speculative thing.

11:05Katie Martin: Well, I certainly think$5 ,000 gold is a speculative asset.

11:10Rob Armstrong: Yeah.

11:11Katie Martin: Right. Different assets can be different things at different prices. Right. And at$2 ,000 an ounce, maybe gold is a hedge and a safe haven. At$5 ,000, it's a meme stock. And when weird things happen in the world, it's going down.

11:26Rob Armstrong: Yeah. And as I think you pointed out before, it's also very important to mention in this context the interesting trend we've seen in this war of previous winners getting sold.

11:39Katie Martin: That this is not a standard risk-off market. It's a market where people are like, let me take some profits in the stuff that has really worked. And boy, oh boy, despite Rob Armstrong's idiotic predictions to the contrary, has gold worked well in the last year or so. So it's prime take profits territory, which makes it act more, to your point, like a risk asset.

12:03Rob Armstrong: But let me tell you something interesting. Just before we started recording, there was a headline out from Bloomberg. Turkey is considering tapping its gold reserves for defending the lira. Now there's a lot of this going on, this idea that there's lots of central banks out there and kind of government adjacent kind of big pots of money around the world that actually might look to sell some of their gold to pay for stuff like defense or defending their currency or all sorts of other things. There's an awful lot of spending on infrastructure, for example, that's going to have to happen as a result of what's happening in Iran.

12:38Rob Armstrong: So maybe, you know, some of that underlying support that is there from central banks buying loads of gold, which has been a big thing over the past four years or so, maybe that's going to start melting away. So the tide has really turned on gold in a way that I definitely wasn't expecting through this crisis. I don't think you had this on your bingo card either.

12:58Katie Martin: But I think in particular, the currency explanation makes sense in a world with expensive oil. it makes sense that some central banks would be worried about the strength of their own currency and the impact that has on domestic demand. And they look, you know, talk about selling your winners. If you're a central bank and you bought gold a year ago, you now have a higher allocation to gold than you ever imagined possible just by virtue of the price going up. Without buying any more of this stuff in the last year, you've got twice as much of it in dollar terms as you had a year ago.

13:34Rob Armstrong: Yeah.

13:34Katie Martin: So, you know, maybe, you know, just as a portfolio manager, as it were, a central banker says, let me lighten up on this stuff a little bit. I think that makes all the sense of the world.

13:45Rob Armstrong: So, look, as we've been chatting about, the vast majority of people have absolutely no idea what is going on here. However, Robert Armstrong, allow me to read you some lines from the top of the story that we had yesterday from the very lovely George Steer, Amelia Pollard and Malcolm Moore of the FT. traders made bets worth half a billion dollars in the oil market about 15 minutes before Donald Trump's post touting productive talks with Iran so oil futures contracts so that's a little bet on how oil is going to perform in the weeks and months ahead a whole stack of these things got traded a quarter of an hour ahead of the president's post and then after that of course as we were saying the oil price fell really heavily.

14:31Rob Armstrong: So a lot of these contracts will have made a lot of money. This I'm going to say has raised some eyebrows, has it not?

14:39Katie Martin: My eyebrow is like in the middle of the top of my head right now, reading that story. But let me say this, you know, reading down the story and listening to experts in the oil market, it is not absolutely clear that somebody knew something they shouldn't have known or traded something they shouldn't have traded on. The volume of these trades at that time of day is not completely unheard of. It's just very rare. But if somebody is trading presidential comments, it is difficult to exaggerate how bad that is for markets, for the country, whatever. So I really hope somebody takes a hard look at what went on here.

15:30Katie Martin: It really demands being linked into because you can't have... The markets in this context have to be... What is the phrase about the emperors? You have to be purer than the something. Anyway, there's a cliche about this. They have to be more holy than the Pope in this context.

15:49Rob Armstrong: It is worth pointing out that a spokesperson for the White House said that the only focus of President Trump and the administration is doing what's best for the American people. It does not tolerate any administration official illegally profiteering off insider knowledge. You know, hashtag charts on the radio. If you look up a chart of trading volumes in these contracts just ahead of when the announcement came out, there is a great big spike. There is a real sudden surge in demand for these contracts right before the statement came out. So it's reasonable to ask what is going on here. You know, albeit that the White House says nothing, but it certainly looks quite spicy.

16:32Katie Martin: I hope something happens. I hope this story does not simply fade out.

16:36Rob Armstrong: You know, I'm old enough to remember when this would have been like the number one story for like weeks. It's such a big deal. The problem is there's so much going on now that you're just constantly pulled from one direction to another, which does make you think, is the sensible thing to do here if you are a money manager, right? If you're running my pension or your pension or an investment fund or whatever it is, or if you're a retail investor who's just got like a bunch of like stocks and bonds and whatever, maybe the right thing to do is just put the phone down, like stop doom scrolling, stop reading the news, just tune it all out and hope that it goes away.

17:17Katie Martin: I think that probably is the right thing to do if you have the iron will required to do it. But I also think there is space here, as we suggested earlier, to kind of reflect what kind of world will it be when this is over? Because one day it will be over and you kind of want to be ready. So like one question is, this is just an example. Are we in a more inflationary world after this war happens? and if the world has a greater tendency to slip into inflationary crises or we realize it does because of this war, because of the tightness of the energy supply chain and so forth and so on, maybe you need to think about allocating less to bonds and hedging your stocks with something else.

18:07Katie Martin: I mean, these are kind of legitimate questions and there's a couple more of them that you might be asking about the post-Iran world.

18:15Rob Armstrong: Yeah, I mean, certainly, you know, this is what the sort of energy analysts are saying at the moment, which is, you know, Europe, for example, has got to get its stuff together here. You know, one of the reasons why Spain has been really quite isolated from this big energy shock is that it produces so much of its energy from solar and wind that, you know, long term, this is the way. This is the way to avoid being so, so reliant on that part of the world.

18:41Katie Martin: And you've got to say that nuclear power looks a lot more attractive after this latest incident.

18:48Rob Armstrong: Yeah, none of that. None of that is cheap. So what are you saying, Rob? Are you going to stop tracking the news? I hope you don't because we need to write a newsletter.

18:56Katie Martin: No, no. I'm in the unfortunate situation of being in the news business. So I got to just inject it into my veins every morning. That's how it goes.

19:05Rob Armstrong: Yeah, hopefully it will make us both feel better. Although the evidence for that currently is quite scant. I think it's making us feel worse. So let's just take a very short break and we'll be back in one sec with Long Short.

19:32Rob Armstrong: Alrighty, it is time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Rob, what are you saying?

19:41Katie Martin: Katie, I am short being tall. And I'm not saying that just because it's a clever sounding thing to say. It's because as a tall man, I read in the FT, there's a piece in the FT about how being over six feet tall is great. And I'm sure that has been true in my own life. And that without my massive height, I would have been a failure. However, let me tell you about being a tall old man. I am horribly uncomfortable on every plane. I have a bad back and I'm going to die young. This is something we know about being large is that, you know, it's like we're all swanning around being tall. And then at the end of life, the short kings are all alive and pissing on our graves.

20:29Katie Martin: Yes. I'm short, tall. We will have the last laugh.

20:32Rob Armstrong: Yes. Yeah, you will. I'm very comfortable on planes as a rule. I don't need any leg room really. you sit in the little bin the luggage bin it's fine perfect it's absolutely fine i am long saturday night live in the uk or more accurately it launched over here more accurately i'm long review of it in the guardian which said and i quote from the headline it didn't fail and it could have been worse.

21:01Katie Martin: Oh my God. It's a hit.

21:05Rob Armstrong: I hope someone has explained to Tina Fey that like, this is like pretty much the highest praise that the nicest thing anyone in Britain has ever said

21:16Katie Martin: about anything. Yes.

21:18Rob Armstrong: Much like this podcast. I think broadly it has not failed and it could, it could definitely have been worse. Yeah.

21:27Katie Martin: If you're lucky, Katie, that's what it's going to say on your gravestone.

21:32Rob Armstrong: When I died much later than you on account of being.

21:35Katie Martin: Could have been worse, to be honest.

21:39Rob Armstrong: So assuming I'm not dead by Thursday, we will be back in your ears then. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forehead. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. And a 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

22:29so