Trade wars, real wars and the markets

0:05Pushkin. Donald Trump sounds increasingly serious about taking over the island of Greenland using economic coercion or even military force. Markets don't know how to respond. Neither do the rest of us. Today on the show, a Greenland trade war or perhaps worse. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong coming to you from Unhedged World Headquarters in a freezing cold New York. I am joined down the line through the miracles of technology by FT Alphaville's Toby Nangle. Hi, Toby. Hey, Rob. How are you doing? I'm a little frazzled this morning, if I can be perfectly honest.

1:02I don't know what to make of this story, and we have our work cut out for us trying to make some sense of this. Absolutely. Let's just make sure our listeners are up to date on the events of the last couple of days. Late last week, Donald Trump threatened retaliatory tariffs against eight European countries that have sent military support to Greenland. And since then, he's made increasingly belligerent comments saying that there is no turning back from the U.S.'s pursuit of the Arctic island. Meanwhile, markets are freaking out. The dollar has fallen significantly since Friday. European stocks have been down now for two days with the biggest European firms falling the most.

1:58Those big companies like ASML and LVMH and SAP that have big global operations, those stocks are down sort of 4 % to 6%. Gold is up. Treasury yields after the market opened this morning are rising significantly. Toby, what is the world responding to here? And in particular, what is Europe seeing that has their markets in something of what looks like an uproar from where I'm sitting? Yeah, well, I mean, if you have a NATO ally essentially threatening to annex the territory of a friendly nation, that does spell a meaningful step back in globalization for one. And any company that is sought to benefit and make profits out of globalization, they're going to be in for a tough time, right?

2:55I mean, I guess that's the picture here is that actually it's not about Greenland. It's about a system that Trump and the Trump administration have always been hostile to. But until this moment, they've done nothing overtly that would break it up wholesale, right? In other words, there is an attack on a economic slash financial system here, not just a land grab. Well, I mean, I think that this is an attack on as a much larger and more blatant visible attack on a rules based order than we've seen before. Although it's pretty consistent with persistent attacks on the rule based order from the Trump camp.

3:43But this basically says, OK, right, you know, we're not going to draw a line now which might prevent us marching soldiers into a friendly territory, friendly nation's territory and calling it our own. That's quite a big step up. I mean, it's something that European leaders will absolutely go to the wire on. It's something that has united all the opposition parties, all those Trump friendly alt-right parties across Europe. that suddenly found themselves backed in the corner and they're having to denounce Trump because you can't just say, okay, oh yeah, sure, it's fine to go and invade a country.

4:20That's just not okay. One thing that's been really interesting to me is how market observers looking at these moves in gold, the dollar, European stocks, US stocks, they look at this and some of them say the market is overreacting. there's going to be a taco trade here, while others are saying the market is underreacting. The world order is changing here. And this is not the market falling. This is the market sort of frozen in the headlights, not seeing what a serious situation we're in. I'll tell you, I'm not quite sure which side. I'm uncharacteristically frozen in the headlights myself. I'm not sure which side of that I come down on.

5:06Do you have a view? I think that's a great characterization because, you know, as a great man once said, you know, Trump always chickens out. And if that's the case, then you buy and you dip because it always comes good, right? If the guy does chicken out, then people who are selling, you know, Microsoft 5 % down or treasury yields, you know, ditching those when they're at 10 basis points higher than they would otherwise be, they're going to feel pretty stupid. But, you know, it does feel like some... How do you feel? What are you buying? Are you selling? I'm pushing you here. Oh, I'm sat firmly on the fence.

5:44You're a cool guy. I'm trying to push you out of your company. I'm sat firmly on the fence here. I do feel, though, that with this Rubicon sort of crossed, I mean, he hasn't actually literally marched soldiers into a friendly nation to take it over yet. But he said he's going to do that. And just saying he's going to do that is some kind of line that he has crossed afresh. That's going to make people feel, okay, right, you know, we're going to stick to our base case, but we're going to have to consider some other scenarios. And we're going to have to maybe put a little bit of weighting on that.

6:20We're going to have to have some contingency plans. I mean, you know, actually talking about contingency plans, I don't know if you saw the story today that the Canadian military have been wargaming a U.S. invasion of Canada. Good Lord, I hadn't seen that. I mean, this is, it's not like the Canadians are saying we think the U.S. are going to invade, but you've got to have some contingencies. You've got to put in new contingencies that you've never had before. So how does a stock with massive U.S. investments based in Europe, how does it think about organizing itself? How does it make its investment decisions going forward?

6:56I mean, it makes everything more complex. And even if you don't care two hoots for the global rules-based order, you're going to have to be thinking about what happens when things are different than what they used to be. And that feels like the new world we're in. Let's talk about Europe's arsenal of response in the face of what you call Trump's bellicosity. Europe has got a bunch of kind of nuclear responses, as in financially nuclear responses. And it's a question of, you know, if you fire one of those off, what happens? Is that too much? What I think that Europe is trying to do is provide what they see as proportional and potentially escalating series of responses.

7:42So, I mean, you'll know that back in 2023, Europe puts together what's called this anti-coercion instrument, which basically allows them to act as a unified bloc in providing kind of tariffs and financial sanctions on powers that are seeking to blackmail them, really. And it was put together in response to what was perceived to be a threat from China. Not at all with the US in mind. And that's something that's being talked about right now, which would provide a variety of retaliatory tariffs. And those are a language that I think Trump understands very well. And they actually can be calibrated pretty carefully.

8:26But you can then go into much bigger things of things like saying, you know, OK, well, we're going to repeal the anti-circumvention laws that protect U.S. intellectual property. And so, you know, you can jailbreak all of U.S. tech. I mean, that would be fairly nuclear from an economic or financial perspective without even going to things like, oh, well, you know, we'll turn off Euroclear or anything like that or impose additional capital charges for U.S. treasuries. I mean, there's a whole host of things they can do. You're right. Robin Wigglesworth and I wrote a piece yesterday which was kind of pushing back on the idea that Europe could just ditch the entirety of its U.S.

9:08holdings. Let me give you an example of this idea, the idea about Europe ditching treasuries en masse, driving U.S. interest rates up and, you know, twisting the president's tail that way. This is from the pages of the FT from Rebecca Patterson of the Council on Foreign Relations. She writes, if Europe wants to deter Washington from a Greenland takeover, it could signal it wants government-affiliated investors such as public pensions funds to review and potentially scale back U.S. Treasury's exposure. That would create expectations of weakness in the market, spurring other asset owners to also cut holdings, pushing up long-term yields, and creating a contagion across other financial markets.

9:57Well, that sounds like a plan. What did you and Robin say about that? So Robin and I were pushing it against a much, much more straw person than that, because there were initially kind of views that, ah, Europe owns eight trillion. And we kind of looked at numbers and it looked like twelve and a half trillion of U.S. financial assets that it could somehow sell. The problem is, of course, that this is owned by millions of individual private entities, some of which are based in Europe and some of which just happen to have their money in custody in Europe. And it's not owned by European sovereign states.

10:33The measure that you talk about just then, which is talking about public pension funds, that would send a signal. I don't think it would send a huge signal. I mean, that just comes from my geeky fascination with funded public pension funds in Europe. In the U.S., funded public pension funds are enormous. In the U.K., proportionate to the U.K. economy, they're pretty big. Elsewhere, not so big. I mean, so you've got a few Danish funds, you've got some Swedish funds, you've got the Norwegian sovereign fund, the big oil fund, which could do something if it wanted to, but tends to try to avoid these kind of things.

11:11But the pension system on the funded side isn't so much on the public side in Europe as it is in the US. And so, yeah, sure, that would be something they could announce. It would mean coordinating with 88 different local government pension scheme administering authorities in the UK to talk about how that fitted in. Just in the UK? Yeah. To say nothing of the rest of Europe? Yeah, well, there aren't that many in the rest of Europe. Right, right, right, right. And they're not that big a deal. But yeah, I mean, it would certainly send a message. You could say that. But whether you can actually execute it, I don't know.

11:49I mean, what we're talking about here is whether Europe can move the U.S. 10-year treasury. And what you seem to be saying, Toby, is maybe not. I think that it's very hard to mobilize everyone's independent private actions together. If you wanted to really hurt the U.S. 10-year Treasury, you could do something like have the ECB apply an additional risk rating for any banks that use them in transactions as collateral. And that would certainly hurt the Treasury market. It could also really throw a spanner in the European financial institutions functioning as well. That was kind of my next question for you, actually.

12:38and you touch on this briefly in your alpha bill piece, how much are we in a mutually assured destruction kind of situation? If Europe decides to pivot away from US financial assets, you know, overlooking all the coordination problems you just referred to, what kind of damage does that do to Europe? And what form does that take? This is the issue which European policymakers and also private sector actors have been increasingly focused on in terms of the integration over the past few years, just in terms of contingency planning or resilience planning. and I bumped into this when I was having actually a look at the development of potential central bank digital currency in the European Union and I was really surprised to see the level of concern that I encountered around the duopoly of payments in Europe from MasterCard and Visa.

13:40It wasn't about you know are they extracting too much profits because that could be regulated but it was rather, do we really want to have our payment rails in the hands of a couple of companies controlled by a foreign power who may not always be friendly? And that really struck me as very, very strange. That was about a year ago. And those conversations have always been going on for a couple of years before that. No matter what, I mean, if everything just reverses back to where it was a few weeks ago, I can still see that the trajectory for integration will be different from now, just because of what's happened.

14:18You can't kind of undo it. If I am a big state actor, non-state actor, pension fund, fund manager, sovereign wealth fund, whatever, and I decide I want to own less treasuries, what do I own instead? That's what I'm wondering. I'm looking here at the yields on sovereign bonds. The United States 10 year gives you 4.3%. The United Kingdom gives you a little bit, a bit more than that, 4.4%. The rest of Europe is notably lower. Japan is 2.3. point number one is where else do you get the kind of yield America affords you right now? And the second point is, is there enough of this other stuff? In other words, the great thing about treasuries is the deepest market in the world.

15:13And I'm wondering, is there anywhere to move your fixed income allocation to? I'm going to have to start asking you questions in a minute. You're asking me all the hard questions, Rob. I know. I'm just airing my thoughts. I'm not expecting you to be some kind of genius, Toby. I'm just using you to vent my anxieties here. So basically, you're my therapist. Okay. All right. I like this. I like this. Okay. Here's my answer then, Rob. It's all about the dollar, right? So the US treasury market is the biggest in the world with the dollar at the current rate. If you reduce the value of the dollar, then it shrinks the US treasury market compared to other markets around the world.

16:00It's kind of like, you know, when people talk about gold, they think there just isn't enough gold to make it a viable, you know, store of value or anything because it can all fit in some, you know, X by X cube, 30 meters by 30 meters or something else. And, you know, the answer to that is, well, you know, I may not believe in gold or anything, but at the right price, you know, you could fit the world into the, you know, So if you add like a million dollars an ounce, yeah, yeah, yeah, that's easy, right? Yeah. So, I mean, with the treasury market, it's very large, it's very liquid, it's got very tight bid offers, it's got extremely high functioning and sophisticated plumbing systems around it.

16:40And that kind of sophistication and liquidity is astonishing. And I don't think you see it replicated elsewhere. elsewhere but in terms of size the size of it compared to other markets is really a function of the value of the dollar and so if people start to like decide okay i tell you what we're going to help trump out in his quest for a zero like current account deficit or zero trade deficit and that occurs through a contraction of the u.s economy and a collapse in the in the value of the dollar then a lot of these issues that you know about comparable assets they fall away quite quickly. But I mean, I'm waiting for you there, Rob, to come back.

17:22Wait, wait, wait. No, no. I'm going to make your point for you, Rob, is that actually, yeah, the US still has some of the best companies in the world that cannot be found anywhere else. And so when you're looking for stocks, I think it's less of a question of treasury. I think it's more a question of stocks. Like if you want to own an Nvidia, if you want to own an Apple or a Microsoft, There's only one of those guys, and they're all based in the US. No, it's really, really hard to replicate what you can do in the US. The US stock market is the global market, right? So basically, it has the preponderance of the world-spanning companies in it.

18:04Even those who may only be half in the United States operationally, they're 100 % based in the US officially. That's a huge problem. Here's a question for you. Is all this anxiety around the dollar actually fine with the Trump administration? At the outset, there was a lot of the dollar is overvalued talk from them. And if this kind of insane saber rattling around Greenland makes the dollar weaker, as long as treasuries, the 10-year treasury doesn't go above 5%, they're perfectly happy with this. What's wrong with that idea? Yeah. Or I could almost frame it as a question. I could say, can you get the dollar weaker without getting the 10-year yield higher?

18:59Can the Trump administration thread that needle? I mean, there's nothing to stop that happening. I think you can quite easily have low yields and a weaker currency. But I think that, you know, I mean, Trump says so many things, and you can choose to focus on one thing or another thing. I mean, back last July. No, wait, hold on. it was the july the year before he said if we ever lose the status of the dollar that's the equivalent of losing a war that would be unbelievable so if he thinks that losing dollars dominant world status is like losing a war or in his words a major world war and he doesn't want that to happen then i don't know how you can you can keep yields low you can keep the currency strong and you can also run a massive current account deficit without essentially kind of like, you know, enslaving the world.

19:54But I'll leave that with you, I think. Well, while it is probably impossible to predict what is going to happen in the coming days and weeks, we'll be here talking to you about it. And for now, we'll be back in a moment with Long and Short. Listeners, welcome back. This is Long and Short. That portion of the show where we go long things we like or short things we don't like. Toby, do you have a long or a short for us? I have a long, Rob. Tell me. Okay. My long is live TV. I never watch live TV anymore because I watch my Netflix or my whatever. Yes. This is a very quixotic long. I can't believe you're doing this.

20:42So what is it? Well, I mean, in the UK, we've got this series called The Traitors, and I've been watching The Traitors, and it's been a lot of fun gathering around the TV with my kids, watching live TV together. It's been a revelation. So you're talking about not literally live. You're talking about like broadcast TV, TV that comes on at a particular time. Scheduled TV. Yeah, yeah. No, I go around declaring that to be dead all the time, but you're taking the other side of the trade. Yep, in the Nangle household, absolutely. I am going to go long ASML, a stock often mentioned in the context of what we discussed today.

21:21It is the indispensable manufacturer of chip making equipment. It has been down. It's been up a lot recently, but down a bit in the last couple of days. I think however this situation over Greenland ends, ASML comes out the winner because it can simply do stuff the world needs better than anyone else. So if that stock keeps dipping, I think it's a great long. Of course, this is not investing advice, as anyone who has followed my results in the FT stock picking contest will know. Talk to your financial advisor, not some journalist with a podcast. Unhedged is produced by Jake Harper and edited by Bryant Erstat.

22:08Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thank you for listening.