When the rumour is the market

CNBC reports a pattern that will surprise no honest student of markets: the Trump administration dangles the prospect of an Iran nuclear agreement, oil prices lurch, equity indices surge — and then the deal fails to arrive. The markets, apparently undeterred, stand ready to do it all again at the next presidential tease. One is tempted to call this irrational. I would call it entirely, depressingly, predictable.

The rational-expectations school — whose influence grew considerably after my time, I am told — would have us believe that prices reflect the aggregated wisdom of well-informed agents discounting future cash flows. There is something in that. But it misses the prior question: what determines confidence itself? When a president hints at a deal, the market does not wait for the treaty text. It moves on mood. That is animal spirits at work — the spontaneous urge to action rather than inaction, driven not by a weighted probability calculation but by a shift in the prevailing narrative. CNBC notes that analysts are now openly wondering how long this reflex can be sustained as oil reserves and munitions stockpiles reportedly dwindle. The honest answer is: longer than you think, and then suddenly not at all.

There is a structural point here about information asymmetry that I find more troubling than the volatility itself. When the signal-sender is also the executive power deciding whether the deal happens, the market is not pricing geopolitical risk — it is pricing the disposition of a single actor. That is not a market in any meaningful sense I would recognise. It is a wager on temperament. The price of oil, which flows through every cost curve in the industrial economy, is thus being set partly by the news cycle management of one administration. If I were advising any finance minister who relies on stable energy input prices for a credible investment programme, I would note that this is precisely the kind of uncertainty that suppresses the long-term capital formation a modern economy requires.

The episode also illuminates something about the relationship between financial markets and the real economy that orthodoxy consistently underweights. A surge in equity indices on a rumour creates a brief wealth effect; its reversal creates anxiety. Neither the surge nor the correction reflects a single new factory built, a single worker hired, or a barrel of oil actually flowing. Yet both move consumer and business confidence in ways that eventually reach the real economy. This is the channel through which financial instability exports itself — not through some arcane mechanism, but through the animal spirits of the very investors the rational model claims to describe. (This inference about the confidence channel goes beyond what CNBC's lead explicitly states, but it is a straightforward application of principles I have always held.)

What, then, is the policy lesson? It is not that governments should stop negotiating with Iran, nor that markets should be forbidden from pricing geopolitical news. It is, rather, that any government serious about a stable investment climate must reduce the degree to which critical price signals — energy costs above all — are hostage to the improvisational diplomacy of any single power. That argues, as it always has, for international frameworks: predictable rules, multilateral institutions, and the kind of deliberate architectural design that a table of nations sitting down together can provide. I spent considerable energy at Bretton Woods trying to build exactly that for monetary relations. The energy markets require an equivalent seriousness of purpose — and they are not getting it from a presidential tweet cycle.