It's related to tmux 2.0 release, but I'm not exactly sure what has caused this problem. There seems to be more bugs introduced by tmux 2.0 than expected.
I'm running iTerm2 2.1.1 and still see the problem when tmux is nested. In my case, I run tmux locally, and within tmux, I ssh to a remote machine, run tmux on that machine, and run emacs, the cursor goes away. If I do NOT run tmux locally, ssh to the remote machine, run tmux on that machine, and run emacs, I still see the cursor.
@gnachman You are right. I had tested Terminal when I was trying to figure out what was going on, but didn't circle back to test the tmux in tmux case. Thanks.