Trump says “there’s no going back” on the Greenland takeover

Outlook

The WSJ has a worthy headline—markets “don’t know what to make of” Trump’s Greenland ploy. “New world order may be so hard to imagine that investors just ignore it.” It’s a tough article and identifies the issues well: “Here’s what should happen when you blow up the world order and tax your closest allies: volatility and higher inflation, with pullbacks in corporate investment, stock prices and growth.

“Stock futures duly fell, the implied yield on 10-year Treasury futures rose and gold prices jumped, while the dollar fell against the euro and sterling. Yet if investors are trying to price disaster, the probability they are assigning is very small. 

“In financial theory, investors should be putting a probability on the extreme outcome. Trump says his escalating tariffs are designed to force Denmark to sell Greenland—but they risk European trade retaliation and undermining NATO.

“The long-run prospect is of Russia and China exploiting a weaker and divided West, or even, with rearmament, the eventual rise of Europe as a new third global power. Either could be very bad for investors.”

This is a pretty good nutshell.. As for the consequences, the WSJ goes on to survey four ways to wonder how the land-grab can be justified. First is that everyone has become inured to Trump. The April tariffs failed to hurt markets for very long.

The writer notes that geopolitical crises are not always bad for markets. “Something like this happened when Austrian Archduke Franz Ferdinand was assassinated in 1914. Investors ignored it for almost a month, then when it became clear that war was coming they panicked—prompting a financial meltdown in London, then the mainstay of global finance.

“Similarly, the price of Russian bonds went up, not down, for months after the new Communist government repudiated Russia’s debt in 1918, virtually wiping it out. …The outbreak of World War II in September 1939 initially hit British stocks, but by March 1940 they were the highest in a year… Investors missed that the Nazis would overrun continental Europe and destroy much of British industry in air raids, and that the U.K. would lose its empire. Stock prices plunged when France fell.”

A second idea is that Trump may not impose those new tariffs, another TACO. The Supreme Court can rule against tariffs so “It is easy to see why investors could treat this as a blip.”

“Third, perhaps investors can see the benefits. A frightened Europe will spend a lot more on its military, while remaining reluctant to pass the costs fully on to taxpayers. European defense stocks jumped Monday, while Europe’s domestic utilities benefited from a flight to safety. If European governments respond by spending more, that’s good for shareholders, if not for bondholders.”

“And fourth, it’s hard to imagine a new world order, and it’s plausible that investors find it so hard to price in this prospect that they just ignore it.”

“But it’s perfectly plausible either that there’s a sudden, catastrophic break, maybe as Russia and China take advantage of Western splits, or that nothing much happens and Europe concedes to the U.S. A new world order could take many forms, and investors betting on it need to stay flexible.”

Forecast

Trump says “there’s no going back” on the Greenland takeover. A possible dent in that armor may come from a crashing stock market, since he sees its rise over the past year as to his credit alone. A big fat stock market pullback hurts his ego. On the other hand, he thinks slapping his name on a place the size of Greenland is going to cover him in glory in history. It won’t. It took hundreds of years, but the world has accepted self-determination as a ruling principle.

We wrote yesterday that Europe is the economic loser if we get those new tariffs and the bazooka response and “We see little chance of the dollar getting sold off as the week progresses.” Boy, was that dead wrong. The market responded the same way as in April and August—sell the dollar. What was a weird reversal yesterday while the US was on holiday is turning into a serious rout.

But we worry about false breakouts, even big moves like this one.  If we get de-escalation of some sort, at Davos or the coming week—Trump seems to be moving fast—the markets can calm down and we will go back to acceptance of the unstable American president. Focus can return to growth, earnings, etc. and Trumpism put in its place in the background.

Market participants really, really dislike political stuff. Almost any excuse will do. So the dollar recovery is out there but it’s not coming in the next few days. 

Go back to the Reuters CFTC positioning chart. It may be interpreted as an acceptance that to a large extent, foreign investors simply need dollar assets due to the absence of alternatives.  Will some sell off? Of course.  But as we have been seeing all this past year, not enough to drive the dollar into the slough of despond.