How to Price A Liar

For the 50th time this year, we're on the cusp of peace. Apparently.

Here we go again.

President Trump just announced that he has cancelled the strikes on Iran that he had scheduled for tonight. If you’re keeping count at home, this is the fifth time he’s walked back a threat like this during this war. 🌮🌮🌮🌮🌮

The president also tells us that the United States is on the cusp of a deal with Iran.

Hmm. Where have I heard that before?

By my count, he’s made similar claims fifty times so far. Fifty. Possibly more — I might have missed some. And he’s made these claims on at least twenty-five separate days. A sample:

• Feb 10 (before the war): “Iran wants to make a deal very badly.”

• March 23: “We have points, major points of agreement. I would say, almost all points of agreement.”

• April 5 (that’s weeks, not days ago): “It should be days, not weeks.”

• May 18: “We’re getting close to making a deal”

• May 31: “The U.S. is close to a deal.”

• June 8: “We are very close to a final deal with Iran.”

I’ve included the complete list (with sources) at the end of this post, so you can check them out for yourself.

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The market responds every time

And here’s the thing that you’ve probably noticed. Each time he de-escalates like this, markets go up. And each time he escalates, markets fall. Substantially.

Today’s announcement sent markets up 1%.

When you buy or sell stocks, you’re making a bet about the future profitability of American companies. So when stocks rise on de-escalation news, markets are saying: American firms will be worth more if this war ends.

The scale of these moves has led me to estimate that markets are behaving as if the Iran war destroys trillions of dollars of wealth. That, in turn, translates into tens of thousands of dollars per household.

All of this raises a natural question: why do markets keep responding? Are they getting suckered, over and over again, by a resident who keeps crying peace?

I’d offer a different interpretation.

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The known liar problem

It’s possible markets aren’t being suckered. They may understand perfectly well that the president only occasionally tells the truth. Indeed, only a fool would think otherwise. If that’s right, it changes how you interpret market reactions.

Think about it this way. If there’s only a one-in-ten chance that what the president says is true, then markets should respond only one-tenth as vigorously as they otherwise would.

So, when a known liar says something that could be good news (but may just be hot air)—and markets still rise 1%—that implies the news (if it were actually true) would be enormously valuable for American corporations.

By this view, markets aren’t responding because they’re naive; they’re responding because the Iran War has such outsized implications for our economic health.

Indeed, the market’s fluctuations in response to even the slightest hints of good (or bad) news suggest that traders believe that the war in Iran is the single most important economic story.

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Feedback loops are breaking down

We’ve seen this two-step before. The president moves forward on a policy he believes in, markets tank, and he walks it back. We watched this play out repeatedly during the tariff wars. We’re seeing it again in Iran. This creates two big problems.

First, when the president spouts so many untruths, the market responds by discounting what he says. We all recognize the move; after this much shock and outrage, we've grown inured to the reality-TV aspects of the presidency. But here's the catch: as markets stop believing him, they stop responding to him. That's individually rational for traders — why react to hot air? — but it breaks the feedback loop. As a result, the president's next dum(b) idea is met with a Wall Street shrug.

There’s a second, related failure. If markets know that the president responds to falling stocks by reversing course, they can reason: if he does something dumb, he’ll undo it when stocks fall. And if that’s the case, why bother selling your stocks? But if that happens, markets don’t fall, the president doesn’t get the signal, and he persists with the dumb thing. Again: the loop breaks.

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A flawed—and dangerous—information environment

President Trump has fundamentally transformed our information environment. Historically, the White House carefully managed its communication with investors, allies, and voters. Today, it’s more about presidential mood, and barely tethered to the truth. We’re all still adjusting to this change. Economics teaches about general equilibrium effects — consequences that spill over across domains. And my point here is that this doesn’t just change the media environment: It changes how all communication should be interpreted—by markets, by citizens, by everyone.

And once you account for this, and you still see markets responding to the president’s language, you should understand what that means. Markets are saying: this is so dangerous that we respond to it even knowing the president is probably lying. That’s not naivety. That’s a warning.

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