This is an audio transcript of the Unhedged podcast episode: ‘Trade wars, real wars and the markets’

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**Robert Armstrong **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’m joined down the line through the miracles of technology by FT Alphaville’s Toby Nangle. Hi, Toby.

**Toby Nangle **Hey, Rob. How are you doing?

**Robert Armstrong **I’m a little frazzled this morning. If I can be perfectly honest, I 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.

**Toby Nangle **Absolutely.

**Robert Armstrong **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 US’ 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. Those big companies like ASML and LVMH and SAP that have big global operations, those stocks are down sort of four to six per cent, 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?

**Toby Nangle **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 globalisation for one. And any company that is, sought to benefit and make profits outta globalisation, they’re gonna be in it for a tough time. Right.

**Robert Armstrong **I 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 an economic slash financial system here, not just a land grab?

**Toby Nangle **Well, I mean, I think that there 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.

But this basically says, OK, right. You know, we’re not gonna draw a line now which might prevent us marching soldiers into a 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, you know, go to the war room. It’s something that has united, all the opposition parties, all those Trump friendly alt-right parties across Europe, they suddenly found themselves backed in the corner. And they’re having to denounce Trump because you can’t just say, OK, oh yeah, sure, it’s fine to go and invade a country. That’s just not OK.

**Robert Armstrong **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 gonna 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.

**Toby Nangle **Rob. I think I . . .

**Robert Armstrong **Do you have a view?

**Toby Nangle **I think that’s a great characterisation 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, five per cent down or treasury yields, you know, ditching those when they are at 10 basis points higher than they would otherwise be. They’re gonna feel pretty stupid. But, you know, it does feel like some . . .

**Robert Armstrong **Well, how do you feel? What are you buying? Are you selling I’m pushing you here.

**Toby Nangle **I’m sat firmly on the fence.

**Robert Armstrong **You’re a cool guy. I’m trying to push you outta your comfort zone.

**Toby Nangle **I’m sat firmly on the fence here. I do feel though that with this Rubicon sort of crossed. I mean there is this, you know, he hasn’t actually literally, marched soldiers into a friendly nation to take it over yet. But he said he is gonna do that. And that, just saying he is gonna do that is some kind of line that he has crossed afresh that’s gonna make people feel, OK, right, you know, we’re gonna stick to our base case, but we’re gonna have to consider some other scenarios and we’re gonna have to maybe put a little bit of weight on that. We’re gonna have to have some contingency plans. I mean, you know, actually talking about contingency plans. I dunno if you saw the story today that the Canadian military have been war gaming, a US invasion of Canada.

**Robert Armstrong **Good lord. I hadn’t seen that.

**Toby Nangle **Yeah. I mean, this is, it’s not like the Canadians are saying we think the US are going to invade, but you’ve gotta have some contingencies. You’ve gotta put in new contingencies that you’ve never had before. So how does a stock with massive US investments based in Europe, how does it think about organising itself?

How does it make its investment decisions going forward? I mean, it makes everything more complex. And even if you care to note, you know, if you don’t care two hoots for the global rules based order, you’re gonna 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.

**Robert Armstrong **Let’s talk about Europe’s arsenal of response in the face of what you called Trump’s bellicosity.

**Toby Nangle **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 file one of those off, what happens? Is that too much? What I think that Europe is trying to do is provide a, what they see as proportional and potentially escalating series of responses.

So, 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 block in providing kind of, you know, 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 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 trauma understands very well. And they actually can be, you know, calibrated pretty carefully.

But you can then go into like much bigger things of . . . things like saying, you know, OK, well we’re gonna repeal the anti-circumvention laws that protect US intellectual property. And so, you know, you can jailbreak all of US 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 shut, we’ll turn off Euroclear or anything like that or impose additional capital charges for US Treasuries or . . . 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, you know, ditch the entirety of its US holdings.

**Robert Armstrong **Let me give you an example of this idea. The idea about Europe ditching Treasuries and mass driving US 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 US Treasuries 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.

Well, that sounds like a plan. What did you and Robin say about that?

**Toby Nangle **So Robin and I were pushing against a much, much more straw person than that. (Laughter) Because they were initially kind of views that, ah, Europe owns eight trillion and we kind of looked at numbers and looked like 12.5tn of US 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. The 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 US, funded public pension funds are enormous. In the UK, proportionate to the UK 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.

But 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.

**Robert Armstrong **Just in the UK?

**Toby Nangle **Yeah.

**Robert Armstrong **To say nothing of the rest of Europe.

**Toby Nangle **Yeah. Well there aren’t that many in the rest of Europe. (Laughter)

**Robert Armstrong **Right.

**Toby Nangle **And they’re not that big a deal. But yeah, I mean it would certainly send the message. You could say but whether you can actually execute it, I don’t know.

**Robert Armstrong **I mean, what we’re talking about here is whether Europe can move the US 10-year Treasury. And what you seem to be saying, Toby, is maybe not, right?

**Toby Nangle **I think that it’s very hard to mobilise everyone’s act, independent private actions together. If you wanted to really hurt the US 10-year Treasury, you could do something like, you know, have the ECB apply an additional risk rating for any banks that use them in transactions, you know, 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.

**Robert Armstrong **That was kind of my next question for you actually and you touch on this briefly in your Alphaville 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 co-ordination problems you just referred to, what kind of damage does that do to Europe and what form does that take?

**Toby Nangle **This is the issue which European policymakers have be 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. It 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, I mean, and those conversations obviously going on for a couple 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, you can’t kind of undo it.

**Robert Armstrong **If I am a big state actor, non-state actor, pension fund, fund manager, sovereign wealth fund, whatever and I decide I want 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 per cent. The United Kingdom gives you a little bit more than that, 4.4 per cent. 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. And I’m wondering, is there anywhere to move your fixed income allocation to?

**Toby Nangle **I’m gonna have to start asking you questions in a minute because . . .

**Robert Armstrong **Yeah, please do.

**Toby Nangle **. . . you’re asking me all the hard questions, Rob. I don’t have all the answers.

**Robert Armstrong **I know. I’m just airing my thoughts. I’m not expecting you to be some kind of genius, Toby.

**Toby Nangle **Oh goodness.

**Robert Armstrong **I’m just using you to vent my anxieties here. So, basically you’re my therapist is what I’m saying.

**Toby Nangle **All right. I like this. I like this. OK. Here’s my answer then, Rob. Is this all about the dollar, right?

**Robert Armstrong **Mm

**Toby Nangle **So the US Treasury market is the biggest in the world with the dollar at this, at the current rate, you know?

**Robert Armstrong **Yes.

**Toby Nangle **If you reduce the value of the dollar, then it shrinks the US Treasury market compared to other markets around the world. It’s kind of like, you know, when people talk about gold, I think that just isn’t enough gold to make it a viable, you know, store a value or anything. Because it can all fit in some, you know, X by X cube, 30 meters by 30 meters or so. 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 . . .

**Robert Armstrong **Yeah, it is big enough.

**Toby Nangle **You could fit the world into the, you know, if at like a million dollars an ounce. Yeah, yeah, yeah. That’s easy, right?

**Robert Armstrong **Yes.

**Toby Nangle **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. And that kind of sophistication and liquidity is astonishing. And I don’t think you see it replicated 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, OK, I tell you what, we’re gonna 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 US economy and a collapse 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.

**Robert Armstrong **Wait, I wanna step in here for a second.

**Toby Nangle **Wait, wait, wait. No, no.

**Robert Armstrong **Yeah.

**Toby Nangle **I’m gonna make your point for you, Rob, is that actually, 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 wanna 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.

**Robert Armstrong **No, it’s really, really hard to replicate what you can do in the US. It’s kind of the US stock market is the global market, right? So basically it has the preponderance of the world-spanning companies in it. Even those who may only be half in the US operationally, they’re a hundred per cent 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 sabre-rattling around Greenland makes the dollar weaker, as long as Treasuries, the 10-year Treasury doesn’t go above 5 per cent, they’re perfectly happy with this. What’s wrong with that idea?

**Toby Nangle **Yeah. I mean . . .

**Robert Armstrong **. . . 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? Can the Trump administration thread that needle?

**Toby Nangle **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 dollar’s 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 keep yields low, you can keep the currency strong. And you can also run a massive crown account deficit without essentially kind of like, you know, enslaving the world. But I’ll leave that with you, I think.

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**Robert Armstrong **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/Short.

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Listeners, welcome back. This is Long/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?

**Toby Nangle **I have a long Rob.

**Robert Armstrong **Tell me.

**Toby Nangle **OK. My long is live TV. I never watch live TV anymore because I, you know, I watch my Netflix or my, you know, my whatever.

**Robert Armstrong **Yes.

**Toby Nangle **And, uh . . .

**Robert Armstrong **This is a very quixotic long, I can’t believe you’re doing this. So what is it?

**Toby Nangle **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.

**Robert Armstrong **So you’re talking about, not literally live, you’re talking about like broadcast TV. TV that comes on at a particular time.

**Toby Nangle **That’s right.

**Robert Armstrong **Scheduled TV. Yeah, yeah. No, I go around declaring that to be dead all the time. But you’re taking, you’re taking the other side of the trade.

**Toby Nangle **Yep. In the Nangle household, absolutely.

**Robert Armstrong **I am going to go long ASML stock, often mentioned in the context of what we discussed today. It 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.

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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 adviser, not some journalist with a podcast.

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alistair Mackie, Gretta 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/unhedgedoffer.

I’m Rob Armstrong. Thank you for listening.

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