The Market has a Price Tag on War

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Incompetence and corruption are really expensive.

The Iran/Israel conflict started 9 days ago and since then, I’ve been worried about a big red day that hasn’t happened(yet).

The real market damage doesn’t come from the missiles and airstrikes. It comes from not knowing what the U.S. government will do next and how the world(and market) might react to that decision. The actual cost of this uncertainty has always been hard to measure but if you follow the geopolitical crap long enough as a trader you know markets HATE uncertainty. Not to brag, but I did call this in a private convo with a friend in real time and I do apologize for misspelling a countries name in advance. This is me legit ranting to a trading buddy.

When Israel launched “Operation Rising Lion” and hit over 100 Iranian targets, the VIX jumped from 19 to 26. Oil shot up 13% overnight to $78.85, which pushed Treasury rates higher as investors worried about inflation. That was just the immediate reaction. The real question is what happens next and that’s where fiscal policy uncertainty gets expensive.
Nobody knows if we’re about to spend another $500 billion on military aid, or get pulled into a bigger conflict that costs tax-payers trillions.


When the government can’t give clear answers about what it plans to do, markets start charging extra. And that uncertainty tax is measurable.

So how do you actually measure government incompetence?

Some smart people at the IMF and Yale figured this out. They created something called the Fiscal Policy Uncertainty index (FPU) that tracks news reports about government policy confusion ( linked above). It's different from the regular Economic Policy Uncertainty index that I use all the time because it focuses specifically on what Congress and the government are doing… or not doing.

Green line (FPU): Measures confusion specifically about what the government will do - spending, taxes, regulations, etc. Based on news reports about fiscal policy chaos.

Purple line (EPU): Measures broader economic uncertainty - everything from market crashes to trade wars to pandemics.

The researchers wanted to know what happens when this uncertainty goes up by just one point.

Here's what they found:

• Industrial production drops 0.4% to 0.6% and stays down for 20 months

• Stock market falls about 2% over the next 30 months

• Most importantly: The IMF/Yale paper found that every time fiscal policy uncertainty spikes by one point, government borrowing costs jump by 20 basis points and stay elevated for about 2 years

That last one is important. When the government needs money, they sell bonds right - with the promise of borrowing cash and a promise to pay back with interest. When investors see policy chaos (like not knowing if we're going to war or how much we'll spend), they get nervous. People think something like "what if this government makes some stupid decision that makes it harder for them to pay me back?” So investors demand higher interest rates

The US government paid over $1 trillion in interest on $33 trillion of debt in 2024. If rates go up by 20 basis points, that's an extra $66 billion per year in interest costs.

$66 billion could build new roads, fix schools, or cut everyone's taxes (please). Instead, we're burning it on higher interest payments because our government sometimes can't get its act together and communicate whats going on. It's a stupidity tax that we pay every single year.

Disclosure: Always conduct your own research and consult with a financial advisor before making investment decisions. This analysis reflects Pivot and Flow’s views and isn’t personalized advice. All investments carry risk, including complete loss of principal.

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