USA: The real economy is collapsing, while the historic highs of the stock market show a false picture

President Trump’s panic about the unpleasant situation he faces and the risk of losing his position, comes from the real economy and specifically from the high cost of living with gasoline reaching $4.50 a gallon. The high cost of living for American citizens and the collapse in the polls forced President Trump to cancel Project Freedom, the operational plan for the Strait of Hormuz, in the Persian Gulf. The selective presentation of the height of the stock market and the attempt to convince that gasoline prices have decreased shows the intensity of the problem he is facing. This presentation of technically accurate data creates the impression of prosperity, which, however, the reality at the gas stations clearly belies. It’s a rhetorical shield that deserves closer examination, because the stock market being “too high” is not what most Americans recognize — and the “peace” that supposedly fostered it was at the time almost entirely imaginary.

The Picture Behind the Stock Market Rise and the Strait of Hormuz

On February 28, the United States and Israel launched joint airstrikes against Iran. Iran closed the Strait of Hormuz, and over the next five weeks the S&P 500 fell nearly 9%. Hedge funds sold at the fastest pace in 13 years. Total leverage exceeded 300%, near an all-time high. Short exposure in macro ETFs reached levels not seen since the pandemic. The mood on Wall Street was not just pessimistic, it was reminiscent of October, Black Monday-Tuesday, 1929. Everyone in the market knew that a prolonged closure of the Straits of Hormuz without alternative pipelines would force the world to lose 15 million barrels of daily demand.

  On April 7, the president’s post on Truth Social, hinting at a ceasefire, sent the stock market into a tailspin. By the next morning, the Dow had its best day in nearly a year, up 1,300 points, while the S&P and Nasdaq followed with significant gains of 2.5% and 3%, respectively. The mainstream financial media, playing their predictable role, labeled the rally a “relief rally.” The market, the anchors explained, was celebrating peace. By the next morning, the reality at sea was far from the markets’ optimism. According to shipping information firm Windward, only about five tankers had been recorded passing through the Straits by midday. By comparison, before the war the average was about 130 crossings per day. Despite the headlines, the sea route through which one-third of the world’s oil passes remained, in practice, closed. The “peace” that the market rally was supposed to celebrate actually amounted to a 96% decline in activity in the Straits compared to normal conditions.

• On Wall Street — the world of stock indexes and ticker symbols — prices are at historic highs.
• On Main Street — the world of growth forecasts, consumer spending, and hiring — forecasts are being revised downward.

These two are happening at the same time, and the gap between them is not an anomaly. It is history itself. Part of the explanation has nothing to do with the Iran war. The markets of the United States, Japan, and South Korea are soaring thanks to the explosion of artificial intelligence, which has proven largely indifferent to geopolitical turmoil. The Seoul and Taipei indices are dominated by semiconductor and memory chip makers, the backbone of the modern digital economy. Their orders are being bolstered by investment in data centers and AI infrastructure, which continues regardless of what happens in the Strait of Hormuz. When these stocks rise, so do the broader indices, whether more oil is flowing through the Persian Gulf or not. But the April 8 rally was more specific than a simple tech rally. By early April, Wall Street had bet so heavily against the market — borrowing and selling in anticipation of further declines — that it had essentially compressed a spring. Trump’s post on Truth Social was his release. Goldman Sachs estimated that systematic trading firms alone bought back $86 billion worth of shares in five sessions — one of the fastest mechanical buying waves on record — as algorithms automatically reversed course and dealers rushed to rebalance their portfolios. The Strait of Hormuz was still operating at 4% of its normal flow. The market was not pricing in peace. It was pricing in its own disintegration.

 

The Vicious Cycle as Political Cover

What makes President Trump’s political narrative resilient is that the market to which Trump refers has quietly transformed into something that most Americans no longer recognize as the institution they once trusted. The stock market of a generation ago functioned, at least in theory, as a collective judge of the health of the broader economy. Today, that market has largely been replaced by a system where more than $13 trillion moves automatically with fintech through passive index funds. In this new landscape, giant trading firms buy and sell based on programmed numerical limits rather than fundamental economic analysis. Perhaps most importantly, the AI ​​and semiconductor giants that now dominate the indices operate in a growth cycle that is structurally disconnected from traditional indicators like energy prices, consumer confidence, or the cost of filling up a gas tank. When a company like Nvidia does well, the S&P 500 goes up—and that’s true whether gas is $2.50 or $4.50. This disconnect is precisely what makes the stock market so useful as a political tool right now. A president can stand on the podium and point to a number that reflects the health of the AI ​​economy, the automatic liquidation of short positions, and the strength of Asian semiconductor stocks—and present it as proof that managing a war in the Middle East is paying off. He thinks he’s selling “mirrors” to the natives.  

A Gallon of Gas vs. an Investment Portfolio – The Two Americas

This observation brings us back to President Trump’s press conference and the response that deserved far more attention than it received. The gas pump and the investment portfolio are now telling two very different stories to two very different groups of Americans. While a stock market at an all-time high is technically “good news,” the benefit is severely limited. It affects the roughly 58% of Americans who own stocks and disproportionately favors the wealthiest households, who hold the vast majority of that wealth. Gas at $4.50 a gallon is news to everyone, but it hits hardest those who spend most of their income on transportation and energy — those who are less likely to have an investment account that benefited from an $86 billion mechanical buying spree. Trump’s response on May 7 is his new argument, one he will repeat many more times to avoid discussing gas prices. He will try to shift attention from the number that pressures his voters at the pump to the number that flatters his political legacy, the stock ticker. Answering the reporter’s question honestly would require a level of transparency that the government has been unwilling to provide. It would mean admitting that gasoline prices remain high because the Strait of Hormuz remains effectively closed and because the Strategic Petroleum Reserve has been depleted to historic lows. More importantly, it would require acknowledging that the stock market’s all-time highs did not come from faith in a resolution to the Iran crisis. Instead, they were the result of a mechanical “short squeeze” — the aggressive liquidation of the most extreme bets that Wall Street had placed against the market since the pandemic. A “short squeeze” is a stock market phenomenon in which investors who had bet on a stock or market falling are suddenly forced to buy back their positions, causing prices to rise even further. That answer was never given. And it is precisely this gap — the gap between what was said and what actually happened — that is the most important economic story happening in Washington right now. And that’s why President Trump’s popularity will continue to collapse.