Ed Elson (2:18)

Welcome to Property Markets on 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, a yield on 10 year treasuries dropped and the dollar declined. Okay, what's happening? The war in Iran may be entering a turning point. On Saturday, Trump gave Iran a 48 hour ultimat open the Strait of Hormuz or the US would destroy Iranian power plants. Iran responded by threatening to take out US 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 and P rose more than 1% and Brent crude oil fell more than 10% on the news. So here to help us make sense of what is actually happening here, we are 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?

Justin Wolfers (3:58)

It's the most extraordinary thing that the most critical issue facing American financial markets is whether to believe the American present or the Iranian leaders about what the Americans are doing. Should 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 believed 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. Maybe it rose about one and a half percent, 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. 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.

Ed Elson (5:46)

What do you think about how investors are going to make decisions based on what they believe or don't believe going forward? Because, 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, 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 that $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?

Justin Wolfers (6:37)

Yeah.

Ed Elson (6:38)

And 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 onto his every word, making decisions about his every word, which often just don't pan out to be even true.

Justin Wolfers (6:58)

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?

Ed Elson (7:06)

Right.

Justin Wolfers (7:07)

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 reevaluations of the value of stocks, of your future forecast for the economy, of bond rates, the whole nine yards. So 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 present about what his intentions are is so uninformative about the future.

Ed Elson (8:19)

Right.

Justin Wolfers (8:19)

George W. Bush, when he said, let's go ahead, you kind of knew that's what he meant. And when he said, let's pull back, you kind of knew what he meant. And here I think we're all just guessing.

Ed Elson (8:29)

Do you think that this kind of goes back to Taco, where, I mean, the whole premise of Taco 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 regulating effect where the markets basically slap him on the wrist and tell them to do the right thing. Like what 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?

Justin Wolfers (9:23)

Yeah, so I think that's. 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. 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 taco that people found very reassuring is in fact, the President's very predictable.

Ed Elson (10:19)

Right.

Justin Wolfers (10:20)

I don't know that that's true, actually. So yes, he tacos sometimes, except when he doesn't. And so you could 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. When you see them move 1 1/2 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 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

Ed Elson (11:35)

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 A U. Michigan, I assume that what's happening in the news is making its way into your classes and into your lectures. What kinds of takeaways are you trying to convey to your students right now in the middle of this moment?

Justin Wolfers (12:05)

Yeah, Ed, I'm not teaching this semester. Sorry about that.

Ed Elson (12:08)

Okay, fair enough.

Justin Wolfers (12:09)

I am 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. And 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. 11 billion is. Well, if there's 100 million households, you can do this for me. Ed, come on.

Ed Elson (12:56)

What is that like, don't put me in his position.

Justin Wolfers (12:59)

It's 100 bucks a household. It's 100 bucks per household. Not much. But then, you see, markets today rose one and a half percentage points. And as we talked about, that's a trillion. That's a trillion dollars. And so the stakes aren't tens of billions. The 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.

Ed Elson (13:51)

All right. Justin Wolfers, professor of economics and public policy at the University of Michigan. Justin, always appreciate it. Thank you so much.

Justin Wolfers (14:00)

Great pleasure, Ed.

Ed Elson (14:03)

After the break, OpenAI locks in. And for even more markets insights, you can subscribe to my weekly newsletter, simply put@simplyput. Prof. Gmedia.com. Support for the show comes from ShipStation. When your company is growing, nothing stops that growth quite like a bad customer experience because they couldn't get your product. Luckily, ShipStation's intelligence driven platform brings order management, rate shopping, inventory and returns, warehouse systems, and comprehensive analytics all in one place. They say they can even save you up to 15 hours of time per week on order fulfillment. ShipStation automatically chooses the right carrier, finds the best rate, prints labels in bulk, and even sends tracking updates to your customers. Shipstation even compares rates across major global carriers like USPS, UPS and FedEx, including any discounts you already have to select the best shipping option for every order with savings of up to 90% off. You can try ShipStation free for 60 days with full access to all features. No credit card needed. Go to shipstation.com and use code markets for 60 days for free. 60 days gives you plenty of time to see exactly how much time and money you're saving on every shipment. That's shipstation.com Code Markets shipstation.com Code Markets

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Stassi Schroeder (16:06)

This is your fix. I am your host, Stassi Schroeder. Welcome to Tell Me Lies, the official podcast. What's the the most unhinged thing of season three?

Chef Meilin (16:17)

Steven because he's so evil.

Justin Wolfers (16:19)

I do think he is misunderstood.

Stassi Schroeder (16:21)

You see everyone face consequences.

Ed Elson (16:23)

It's intoxicating.

Stassi Schroeder (16:24)

The writers just know how to trick. Yeah, there's always a twist in this show. Tell Me Lies, the official podcast January 6th and stream the new season of Tell Me Lies January 13th on Hulu and Hulu on Disney.

Ed Elson (16:41)

We'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. So 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?

Alex Heath (17:45)

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 Ed, over the last couple 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, they're still. Meanwhile, what Anthropic did is during that same period it focused almost entirely on enterprise. 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, was consumer. Now that OpenAI has one consumer, guess what? The vast majority of its users actually cost it money to, to serve. This was 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 incentiviz their employees to burn as many tokens, which are just the atomic units of AI as possible. And there's literal leaderboards of who is doing this and spending the most money inside the company that doesn't exist in consumer land. So OpenAI 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 is to go after enterprise and they finally have a model and a product in 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 mind share, but has exploding usage. 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 think the super app idea is like this is the future of all of these assistants. I think cloud code is going to be the interface to access what we think of as Claude the chatbot. And I think the same will happen for ChatGPT. Codex will eat it.

Ed Elson (20:09)

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, but 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. But 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?

Alex Heath (21:10)

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 Claude 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, they will. 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, all the margin is really. If you start doing really good ads on a surface that high intent, 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.

Ed Elson (22:23)

Yeah.

Alex Heath (22:23)

So I'm not sure, I don't know if they really feel like, oh my gosh, we forfeited enterprise and now we gotta scramble. 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.

Ed Elson (23:00)

It does seem like focus would also just mean building out this ad business. If they, 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. And 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?

Alex Heath (23:34)

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 superintelligence 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, 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 get hyped a lot in the industry is maybe not as dramatic as, as, as it said, but there's no, I, I think ChatGPT 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. Yeah. 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 early adopters right now who just anecdotally, I, I'm, I'm also part of this. But here just like switching from chat to cloud, 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 going to be very hard to unseat.

Ed Elson (25:02)

Yeah. The other final news, I just want to 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 and a half percent. So basically saying if you invest in us, we guarantee you we will return 17 and a half percent of your of your money. Which for those who don't know, that's like a ridiculous return. That's, that's significantly higher than the S and P average. This just seems ridiculous to me. How can you guarantee 17 and a half percent? 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, I don't really know. I just wanted to know if you know anything about this and if that sounds right to you.

Alex Heath (25:53)

I don't have reporting to share on it. I do agree with you that it's unusual and maybe a red flag. Someone has been picking up the bill constantly. Yeah. And who is like going to keep picking up the bill? That comes back to why they need to do enterprise, why they need to do ads. Like at the end of the day, you need to eventually control your own destiny, which as a company is producing free cash flow. Right. Which is what the Meta and Google and Apples of the world have, is they have control of their destiny because they have massive money cannons. And OpenAI right now is contingent on Sam's ability to convince another large pool of capital that he has somehow not already tapped to invest more money until they become profitable. Right. And like maybe the IPO is the next phase of like someone paying the bill, then it's dumped on retail and maybe that's, you know, if you're going to IPO by Q4, maybe you feel confident giving a 17/ whatever percent guarantee. But certainly strange I'm old enough to remember when OpenAI was a nonprofit and all investments up until a year ago were labeled with disclaimer, this can go to zero and you should treat this as a donation. So definitely a new territory we're in.

Ed Elson (27:06)

It was the capped profit company. Now There's a flaw. 17%. It's really, really incredible. Okay. Alex Heath, author of the Sources newsletter and co host of the Access podcast. Alex, appreciate your time.

Alex Heath (27:18)

Thanks, Adam.

Ed Elson (27:23)

Well, we started the week on the right foot. Trump said he had, quote, very good and productive conversations with Iran, and that is what created $2 trillion in market value in a matter of hours. The implication was that the war with Iran might be coming to an end, or at least that is what investors thought. But then, as usual, we got some clarifications that complicated things. Iran denied having any direct talks to end the war, and the nation's Foreign Ministry said they'd had no negotiations with the U.S. that was when stocks started to fall back down again as investors reckon with the possibility that the President might be once again talking out of his ass. Is that really what was happening here? Was he lying? I guess we don't know, but I guess that is also kind of the point. And this was yet another reminder that anything that comes out of the President's mouth cannot really be taken seriously, especially if you are an investor. And we know this because we've seen it over and over again. Two weeks ago, for example, Trump told us that the war with Iran was, quote, very complete. Investors bought that news. And then here we are two weeks later and the war continues to rage on. Before that, we had the debacle with Greenland where Trump suggested America would simply take Greenland and he refused to rule out the use of military force. Investors sold on that news. $1.2 trillion in market value, which was erased. But then he got bored of that idea and then he decided to move on to the next thing. Last year, he suggested firing Jerome Powell. He said his termination, quote, cannot come fast enough. Everyone sold. And then he turned around and he said he had, quote, no intention of firing him. He did the same thing with, of course, the tariffs. The tariffs were on and then they were off, and then they were on again and off again. And with each announcement, trillions of dollars worth of stocks and bonds were traded each time it happened. And so here we are again, this time betting not on trade policy, but on all out war. But if there's anything we've learned at this point is that if you want to actually understand things, if you want to understand the global situation. If you want to get closer to the truth, well, then there is one thing that you should not be doing, and that is you should not be listening to the President. Because what we know now is that despite the power he has, his words genuinely mean nothing. That doesn't mean he's necessarily lying right now. And it also doesn't mean he's telling the truth. What it means is it means nothing. There are no conclusions you can draw. There are no predictions that you can make based on what he says. And if you try, well, then you will fail, just as millions of traders have failed before you. So we'll end here with a message to Wall Street. If you want to stop losing money, it's quite simple. Stop listening to the President and for one simple reason. Meaning cannot be made out of that which has no meaning at all. Okay, that's it for today. This episode is produced by Claire Miller and Alison Weiss, edited by Joel Patterson and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shalon, Isabella Kinsel, Kristen o' Donoghue and Mia Silverio. And our social producer is Jake McPherson. Thanks for listening to Prof. G Markets from Prof. G Media. If you like liked what you heard, give us a follow. I'm Ed Elson. I will see you tomorrow.