The Fire Hose of Chaos: American Brands

Image of the iconic Nike swoosh logo

Many of America’s most beloved brands rely on Chinese manufacturing, but what happens when that goes away?

The impacts and shortages faced will vary based on how dependent each company is on China. There are three groups these businesses fall into: tech firms, consumer brands, and mid-tier companies. Tech firms like Apple, Dell, and Microsoft have complex and integrated supply chains that would be difficult to pick up and move; these companies will need years to rebuild, and they’ll face shortages in the meantime. Consumer brands like Nike, Mattel, and Keurig can be easily replicated. Middle-tier companies like Whirlpool and GoPro will face lots of competition and will need heavy investments to recover.

This disruption was inevitable, but Trump moved it up on the calendar and left companies no time to adapt. So, get ready for shortages, bankruptcies, and inflation. There might be one upside here though, we may not have to see Crocs around anymore…

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Transcript

Peter Zeihan here. Coming to you from Colorado. Today we’re talking about some of the impacts of the Trump tariffs on the American corporate space. There are a lot of companies that sell consumer goods in the American market, American companies primarily, that have outsourced most of their manufacturing to China. And with the tariff policy, we’re basically getting two things. 

Number one, people can’t afford these products anymore. And so most shipments from the United States to China already stopped. And you’ll see that hitting the shelves at some point in the next 3 to 6 weeks, based on where you live in the country. From the point that the Trump administration were to cave on all of these tariffs and just say, you know, bygones, and the Chinese just say, okay, it will then be another six weeks before product starts to return. 

So, let’s say that, June 1st is when that happens, you’re talking about three months without product. For most of these companies, that’s enough to kill them. And even if it wasn’t, the Chinese basically have the technical capacity to take over a lot of the supply chains themselves, because all of the equipment is already in China. 

Most of the intermediate products are already in China. So these are companies that in some form are just going to die in the not too distant future and vanish from American shelves forever. Now, not all of them are the same. They fall into three general categories. The first are products that are more advanced, where the Chinese do a lot of the assembly, but a lot of the product in the intermediate product comes from outside of China. 

These companies have at least a chance to rebuild their supply chain in other countries. But you’re talking about hundreds of billions of dollars of sunk cost for some of them. And you don’t do that in a year or two years or three years. This is five years or more minimum. And that just means that these products are going to disappear until that happens, or they’re just vanished from your lives for probably five years, maybe a little bit more. 

And most of those fall into the category. Apple, Dell, Microsoft and Hewlett-Packard. So if you haven’t gotten your backup computer, do it now, because the inventory that is in the country right now is all that is left. Yes. Electronics have been at least partially exempted, but it’s already too late. And the Chinese are moving to take this stuff over. 

Second, these are products that are on the other end of the spectrum. Things that the Chinese can take over now. There’s nothing that’s particularly sensitive about them. From a technological point of view, it’s just a the brand is what’s special, and it’s the brand that’s going to disappear, or they’ll misspell it and they’ll just make it a Chinese brand. 

And this this is a very long list that includes a lot of consumer products and a lot of clothing. So Nike, Levi’s, Hasbro, Mattel, Ralph Lauren, Skechers, Under Armor, Estée Lauder, Columbia Sportswear, Patagonia, Yeti, KitchenAid, Black and Decker, Stanley Tools, shark, Ninja of At-Home Appliance Fame, Keurig iRobot Ray-Ban Pvt. That’s Hilfiger and Calvin Klein. Newell, which is Rubbermaid and Sharpie and Crocs. 

So I guess there’s at least some bright spot here. Crocs will finally fucking go away anyway. They’re gone. There is absolutely nothing they can do at this point to salvage the production that they have in China. I do not feel all that guilty for any of these companies. Everyone who has been paying attention has been seeing some version of this coming for a long time. 

And I’ve been warning companies like this that the Chinese were going to vanish from the space anyway because of demographic collapse, and they should get out while they can. Anyone who is left has basically lost. And then we’ve got companies that are somewhere in the middle. These are companies where, you know, they’re halfway between Apple and Crocs. There are some parts of the supply chain for some products that are more advanced that the Chinese can’t just walk in and take over. 

So we could see these companies come back after some significant reinvestment. Not as much as will say for somebody like Apple, but they’re going to be dealing with a massive amount of competition in the international space from the Chinese, who can make their lower end products exactly as they used to. That’s fossil, the watch company whirlpool, other white goods companies, GoPro and Fitbit. 

It’s a long list and this is only partial. Now again, some version of this was always going to happen, but Chinese were always going to go away. But the way that the Trump administration has done, the tariff policy basically front loading the penalties and not giving people a chance to adapt means that all of these companies and more are going to break in the American space. 

Most of them will end up filing for bankruptcy, and someone will probably come and buy up the pieces and then do limited restarts of the production lines and other places. That does mean that in the interim, and we’re talking here for the lower tech stuff, a period of 1 to 3 years for the higher tech stuff, probably four or more. 

We just don’t get the product. So one of the big challenges that we’re going to be having in the United States is inflation driven not just by tariffs directed not just by higher capital costs directly, not just by higher labor costs directly, but high tariffs caused by extensive product shortages in the consumer space, whether that is electronics, home goods, apparel, you name it. 

We can recover from this. We can recover from this faster if we have Mexico and Canada and our other trading partners involved. But it’s not going to be quick and it’s not going to be free.

The Russians Continue Stirring the Romanian Pot

Romanian flag

Romania just held its second attempt at the first round of presidential elections, after the initial round was invalidated due to Russian interference. Looks like the Romanians are having some major déjà vu.

Both elections yielded an unqualified pro-Russian candidate surging to the top. Translation: the Russians are meddling, and frankly don’t care about hiding it. The question that must be asked here is why do the Russians care so much about Romania?

Think of Romania as the next steppingstone after Ukraine. If the Russians prevail in the Ukraine War, the next logical target would be fortifying the southwestern flank – aka Romania. The scariest part of all this is that Russia already has a political foothold in all the other countries in the region. Should they push into Romania, they will be at the doorstep of Vienna.

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Transcript

Hey. Peter Zeihan here. Coming to you from Chicago. And before I go and get some pizza, because, we’re going to take a break from American politics and economics and, for the moment, and we’re going to talk about a country that doesn’t come up very often, and that is Romania. Now, Romania just had their second run, second attempt of the first round of the presidential elections. 

The first round a few months ago was canceled. We’ll link a video to that piece here. After basically, the Russians massively intervened to the point that it was just stupidly obvious. And it appears on the surface like that has now happened again. The Romanians do a two round system where everybody gets to run the first round, and then they were to have to have a run off for the second round. 

Now, last time around, the guy in play was a guy by the name of Georgia Screw, who was kind of a nobody. He had been a minor cabinet minister, back in the 1990s, and that was it. Then he vanished from the political scene, barely held down a real job, and all of a sudden, wow, he’s back on the political scene and came in first in the presidential election. 

The Russians basically made up 20 million fake accounts in a country that doesn’t have 20 million accounts on social media. And, canvass the country for him, this time around. The guy’s name is Simeon, and something similar has happened. Semyon is even more of a nobody. He was never in government before, has never had a real job. 

He was a professional protester. So imagine AOC in the United States, if she hadn’t had that job of being a bartender and she just went straight into the presidential election and did well. That’s basically this guy. Anyway, he actually, he sued the government a couple of years ago for accusing him of being a Russian agent. And in the court case, they actually proved that he was a Russian agent. 

So the fact that he’s even allowed to run, you know, Romania, who knows? Who knows what’s going to happen with the specifics, whether or not the Romanians are going to try to do this a third time? I have no idea. But why the hell are the Russians so focused on Romania? Well, it’s a geographic thing. There are two pieces of geography that define this part of the world. 

The first is the Eurasian steppe, just this broad, wide open, about the same size as the United States is in total. That’s flat and it’s open and it’s arid, and you just can’t get much economic activity about it. And that is in essence, Belarus, Russia or western Russia and Ukraine. And so the Russians, being from the Eurasian steppe, the only way they’ve ever figured out that they can be secure is to conquer all of it and eventually get to the zones where you can’t just run across the great wide open and punch them in the face to to a place where there’s a geographic barrier, and that barrier is the second of those geographic items. 

And that’s the Carpathian Mountains, which starts in the northwest at roughly the gates of Vienna, and then wraps along the Slovak Polish border, curving south through the eastern parts of Hungary and the western parts of Moldova and Ukraine, and eventually ending up in Romania and Romania, is where the southern anchor of where these two great features of the space come together. 

And so what the Russians have been after, what the Russians have always been after, is once they conquer the stepped anchor in the gap between the Carpathian Mountains and the Black Sea, where the Eurasian steppe ends. And so if and when the Russians succeed in conquering Ukraine, they’re just going to turn their sights further west and go for the line of countries that basically make the entire periphery of the Eurasian steppe. 

So getting to Finland and the Baltic states right up against the Baltic Sea, getting through Poland up to Vistula, that’s the river that separates the Eurasian stuff from the northern European plain. And then getting up into Romania and Moldova in order to plug the gap access from the southwest. That’s what the goal has been. That’s what it’s always been. 

And they’re using politics as a way to soften up opposition, of which Romania is part of this. Romania is actually the state in the region where they’ve had the least success, if you can believe that. So Hungary is ruled by a neo authoritarian, the name of Viktor Orban, who has been blanket pro-Russian for the last several years, to the point he’s actually using his position as president of Romania to sabotage NATO and EU operations from the inside. 

Next door, you’ve got Robert Fico in Slovakia, who’s trying to become Slovakia’s Orban. But the democratic traditions in Slovakia are a lot stronger than they are in Hungary. And so far it’s very back and forth. You’ve got Bulgaria, where about a quarter of the parliament is so tightly in Russian’s pocket they don’t even have to be directed. They do what the Russians want before the Russians even say. 

And then you’ve got Serbia, which Serbia is kind of a mess, but it’s Slavic and it has been pro-Russian, really, for the better part of the last 200 years. All that’s left is Romania. And if Romania falls, then not only would the Russians have no problem pushing into the Carpathians, there’s a very distinct possibility they might be able to push all the way to the gates of Vienna. 

And that would obviously get a lot of attention from a lot of places. So this is an election and a place that most of you have probably never heard of. That matters hugely, because if Romania falls the entire southeast quadrant of the EU and NATO falls with it, splitting Turkey and Greece off on their own. And we are in a fundamentally different game.

The Fire Hose of Chaos: Agriculture

A tractor working in crops

US agriculture is heading towards a major crisis, and yes, Trump’s trade policies are to blame for this as well. Many of the US ag export markets are closed off, and farmers are feeling the heat.

China has already cut purchases of US agricultural products to (nearly) zero, and this market is likely gone for good. Not long ago, China was the largest buyer of US products, meaning US farmers are losing a huge chunk of change and output will need to shrink accordingly.

The meat industry is reeling. Demand is falling, per-animal profitability is tanking since there’s no export market for byproducts, and overexposed beef producers are in for it. Row crops like soy are in trouble as well since China was the largest market for much of this. Specialty crops like pistachios and cherries will face devastating losses.

The only path to recovery is through an extensive, long-term government support. Think France’s permanent ag welfare. Without it, American farming will face a collapse worse than the 1980’s farm crisis.

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Transcript

Hey, y’all. Peter Zeihan here. Coming to you from Colorado. And today we’re going to continue our Firehose of Chaos series about how the Trump administration’s domestic and international policies are affecting the US economy. And today, it’s the agriculture edition. Agriculture in the short to mid-term is probably the sector that’s facing some of the sharpest challenges. And it’s entirely feasible for me that over the course of the next 3 or 4 years, we’re looking at somewhere between a quarter and a third of U.S. producers just going out of business because of the trade war. 

The issues pretty straightforward. Trump has basically picked fights with America is number one, number two, number three, number five, number nine, number 11, number 12, number 14, and number 17th largest trading partners when it comes to agricultural exports. And as a rule, agricultural importers fall into two categories. Number one, those who don’t have a choice, they just can’t grow the food themselves. 

And then those who do have a choice, who can always switch products or switch consumers. And when it comes to export destinations like, say, China or the European Union, they’re definitely in the latter camp. And so what usually happens is that whenever there’s a trade spat for any reason, anywhere, agriculture is usually the sector that is targeted first. 

A couple reasons for this number one, agricultural interests around the world tend to be very politically powerful, and they, can make their desires known to the local political system. And second, people have this wildly inaccurate view of how farmers work that they might be a little bumbling, that they’re a little backwards. But of all the audience that I ever speak to, they are always the most sophisticated and always the ones that look for the most because they have to. 

Everything that they do is dependent upon supply lines and manufacturing and finance Trends go out a year, five years, a decade because of the decisions that they make now are going to reverberate throughout their operations for years to come. And this is true everywhere. So when there’s a trade fight, the other side knows that if they can damage agriculture, they can take producers off for the long term. 

And that’s exactly what is happening now. Specifically, the United States, number one export partner for agricultural produce and meats is China. And because we now have in excess of 100% tariff going both ways on products, U.S. sales to China have functionally gone to zero. And they will not be coming back this year or next year or the year after. 

And considering China’s export dependency and its demographic decline, it is highly unlikely that American farmers will ever have access to unified China again. China will break before that is fixed. And so you’re looking at an industry that is basically tapped out. Pretty much all the growth that has happened in American agriculture since the year 1995 has been from export markets. 

They’ve been a direct beneficiary of hyper globalization, arguably the sector after tech and finance in the United States that has benefited the most. And now that some of their major consumers are simply beyond them, either because of economic stress or the trade war, they’re looking at basically needing to reduce overall output by something around 20 to 25% on a nation wide basis. 

Now that’ll change specifically based on region based on crop based on season. But that is a horrific headline number that the industry now has to deal with. Let me break this down into three general categories. So first, meats, as the world has become richer, they want more protein, whether that is chicken or pork or beef or, fish. 

And the sector that sells the most into the Chinese market is not pork. I’d like to take a little bit of credit for this one. I have been warning the pork guys for years that if they bet the farm on China, they will lose the farm. And in the aftermath of the last trade war with the Chinese during Covid, when, Trump was president, we had our phase one trade deal. 

The Chinese decided that they were going to try to slim down their exposure to the US system. And the pork guys suffered, and they learned their lesson, and they’ve diversified into other markets. Well, the beef guys were like, oh, there’s a protein shortage in China. We can help with that. And they just surged into China and they made themselves exposed in a way they had never had been before. Well, now they’re kind of screwed, particularly those who are operating in the industry. 

That is more export geared. And that’s where the slaughterhouses in Nebraska, South Dakota and Missouri kind of fall in, Texas. There’s a little bit more insulation because most of their market is either domestic U.S. or Mexico. 

And hopefully, hopefully, hopefully, the Trump administration will ultimately salvage NAFTA in some form, in which case their primary export market will be okay. But if NAFTA goes away, then Mexican industrialization goes away and then the Texas agricultural sector goes away. That is still much a TBD, but the kind of stuff that’s locked in at this point. Also keep in mind that not everybody eats the same things. 

So the United States does the select cuts the rump, roasts the tenderloins, or we grind it into ground for burgers, things like that. We we do that for all of our meats. But there are other parts of the animal that Americans like that other people are like, oh, that’s delicious. So chicken feet, for example. Entrails. Oh, Menudo. Or the Koreans are big fan of ass sphincters. Yes, yes. They cut out that little bit, they flip it in and they prepackaged it and microwave it. And they’re just like, know. And I’m just like, love me some Korean food. But no. Anyway, based on the animal and the region, somewhere between 10 and 30% of the proceeds from the sale of an animal comes from those. 

What we would consider undesirable parts that are sent to foreign markets where they just yak it up. Well, that’s gone. So we’re now looking not just at a headline reduction in the number of head of cattle or swine or number of chickens that we need. Also, the profitability per animal just dropped by about 25%. If your business had a drop in income of 25%, what would that do to you? 

And that’s a secondary effect to what’s happening to the agricultural folks in the meat production sector, a second row crop. Primarily, we’re going to talk here about corn and soy. In the short term, soy is the really big hit here. The Brazilians had a great production year last year, so there’s plenty of soy in the global markets. 

And the Chinese will never buy soy from the United States again unless they have no choice. So we’re basically looking at that sale drop very close to zero. The decisions for planting for this year have already been made. So if you are a soy farmer, you are. You’re kind of fucked. There’s really nothing you can do at this point. 

It’s too late in the season. Longer term, soy will do fine because it’s a cheap protein. And as the world, globalized as people are going to do, the switch the other direction for meat back to plant protein. So soy long term looks great. It’s there that corn’s a problem because if you’re exporting corn, it’s really only being used for animal fodder. 

About the only, good thing I can put there is that if you grow corn, you can also grow soy. You actually need fewer inputs for it. You have to worry about a different sort of crop rotation, but you’ll ultimately be okay. But for this year. Ouch. For the soy folks. And then finally, specialty crops. This is mostly an issue for the West Coast, especially for the California Central Valley, but really, there are pockets of specialty crops all throughout the United States. 

Michigan is known for its cherries, for example, apples out of New York. Any time you’re sending a specialty crop anywhere, you’re going to be sensitive to things like currency changes, which the United States isn’t doing so hot. So the prices have gone up, so sales have gone down, or climate, or especially politics. And in the case of China, they have basically underwritten the development of the US specialty crop industry for the last several years. 

The Chinese follow a hyper financialization model where they basically print currency like mad, expand their money supply like mad in order to underwrite their industrialization. They treat money as a political good because that is what is necessary to keep the population employed and therefore not rebelling. Well, that also means that they’re relatively cost in sensitive, because for them, money doesn’t have an economic value like it has in a Western system. 

And so they will pay anything for anything. Well, that means that they have paid for the development of specialty crops throughout the United States, especially on the West Coast, and doubly so in California’s Central Valley. And if you look at what the Central Valley produces, for example, things like pistachios, which I am doing my personal best to establish an American baseline for that. 

Most of it goes to China. And now that is going to zero. So if you’re looking for a zone that is particularly screwed, there is very, very little in California’s Central Valley that is going to survive the next two years because their primary source of demand, the majority of the demand has just gone away completely. Now, can we save all this? 

Well, like I said, agriculture is politically powerful. Trump considers rural communities to be part of his core constituents. But you have to keep in mind a couple things. Number one, Trump has not so far in his term treated his allies particularly well. He’s demanded a lot, but he hasn’t offered a lot in return. So if the farmers are going to get bailed out in a way that they were the last time around, Trump has to go back to Congress and get more money. 

That hasn’t happened yet. I’m not saying it can’t happen. I’m not saying it won’t happen. I’m saying it hasn’t happened. And if you’re going to keep all of American agriculture above water, it’s going to take a lot more money than last time. And more importantly, it’s going to take it for a lot longer. China is not coming back. 

Globalization is not coming back. The ability of the global system to absorb American agricultural production is not coming back. And until such time as we are on the other side of globalization and other agricultural producers, most notably Brazil, have shattered. We’re looking at a really hard transition time for anyone in American AG, especially if you’re producing protein or specialty crops. 

The only solution. Is to become France. France gets a lot of crap for good reason for supporting its agricultural sector, even when it is wildly disconnected from demand trends. They see it as a cultural issue. And if we’re going to keep our current slate of ranchers and farmers alive, it’s going to take tens of billions of dollars a year from now on, 

Or we get something about twice as bad as the 1980s farm crisis, which drove ultimately about 20% of agricultural producers out of business in a five year period. Those are our choices.

The Fire Hose of Chaos: The Fed

Seal of the federal reserve on a 0 bill

Jerome Powell has been on the receiving end of Trump’s threats and the markets have reacted negatively to the undermining of the Fed’s credibility. Here’s the full picture.

The Fed is raising rates to combat inflation driven by Trump’s tariffs. Higher rates = more expensive borrowing = slower economic activity. A necessary evil to prevent an inflation spiral. Trump wants rates lowered to encourage economic growth, counter to the Fed’s mandate. There’s no legal ground for Trump to fire Powell unless he wants to alter the Fed’s charter through Congress. Which, to be frank, is a feasible route given a weakened Republican party unlikely to resist.

Stagflation is just the tip of this iceberg. A deep recession is lying just beneath the surface, and Trump’s undermining of the Fed’s independence would only surface more problems.

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Transcript

Peter Zeihan here. Coming from Canada….Coming to you from Colorado. Sorry. It’s been a long week. One of the big things that happened in the week ending April 25th. On a number of occasions, Donald Trump indicated that he planned to fire the Federal Reserve chairman, Jerome Powell. Eventually he backed out and said it was just a joke. 

And he never really considered it. But the damage has been done in the markets are kind of on fire in a bad way. So why does this matter? Well, the Federal Reserve is responsible for determining the monetary policy of the economy. And the tool that is generally gets the most publicity and is most directly relevant to most of us is interest rates. 

When the fed raises interest rates, everyone else in the economy that is involved on the credit side of things raises the cost of everything. Whether it’s your mortgage rate, your car rate, or your credit card rate. And so higher rates means that it costs you more to do whatever it is you want to do, and your mortgage will go up. 

Well, if you get a new mortgage, you’ll be more expensive. You get a new car, it’ll be more expensive if you do a purchase on layaway, it’ll get more expensive. And when you do that, you slow down economic activity. And that is the intent to slow down economic activity, because what they’re trying to do is suppress demand. 

Because if you suppress demand, enough inflation goes down. And courtesy of the Trump tariffs, we have a significant inflation problem that is only going to get more intense in the weeks to come, as the product that used to come in from China is no longer arriving. So we have product shortages. And the fed is anticipating that the Trump tariffs on China, in addition to all the other Trump tariffs, are simply going to generate shortages in supply, and they want to reduce demand to match it. 

So we don’t have an inflation spiral. Trump doesn’t like this. He wants economic activity to be robust. And so he’s pressuring Powell and the fed to drop interest rates in order to reduce those credit costs. 

So the consumption remains stable or even better, goes higher and generates faster economic growth. But if you do that, you get higher inflation. So three things come from this. 

First of all, the Federal Reserve is not going to bend the knee to Donald Trump because it legally cannot. The Federal Reserve Charter as established by Congress is very clear. The Federal Reserve is supposed to achieve a balance between inflation concerns and growth and employment concerns. 

But when the two sides clash, it always should go with inflation, because getting inflation under control can be very difficult and in some cases can take years and trigger massive recessions. But boosting growth is easy. You just make the credit easier and it can come back roaring in weeks to months. So Donald Trump is not going to get his wish here. 

So the threats against the Federal Reserve chair probably going to continue. Which brings us to the second thing the president can fire the Federal Reserve chair for cause. And for cause does not include doing your damn job. So if Donald Trump were to fire Jerome Powell, two things. I mean, number one, it would go through the courts over and over and over again. 

And the federal charter is pretty clear or so. It’s pretty obvious to me that the Trump administration would lose that fight and would be very public and would be very humiliated. And I think Donald Trump knows that. In addition, power would still be on the Federal Reserve Board for another two years. So it’s not like it’s going to generate some sort of activity that is all of a sudden going to be in Donald Trump’s favor. 

And I think he realizes that now. That’s one of the reasons why the threats have stopped a little bit. Which brings us to the third issue. If this is what Trump wants to do, if he really wants lower interest rates, if he really wants a looser monetary policy, he can get that without replacing the fed chair. 

He just has to change the Federal Reserve Charter. And that just requires an act of Congress. In that, considering that he’s basically ripped the backbone out of the Republican Party that is normally in favor of fed independence, it would be a much easier route. So as the economy starts to slow, as inflation starts to tick up to levels that are incredibly uncomfortable, expect a Trump to slam his head in the fed a few more times, and then just go to Congress, and we will find out at that point whether or not there’s anything left in the Republican Party that can stand up to Trump when he makes a very, very, very bad economic decision, because we’re already in an environment where stagflation is our best case scenario. And if the tariffs continue in their current form, much less get expanded as Trump says they’re going to be. We are looking at a very deep, dark recession, just a few weeks from now. 

And gutting the independence of the Federal Reserve will only make it deeper and darker. 

The Night the Lights Went Out in Geor- er, Spain

A candle in darkness

On Monday, April 28, a widespread power outage hit Spain and Portugal. Other than our marketing guy who was on vacation in Madrid at the time claiming he “had no signal” and “couldn’t work”, this outage highlights a broader issue with renewable energy infrastructure.

The root of the problem comes from the use of green energy sources like solar and wind, that lack the built-in stabilization that traditional energy sources like coal and natural gas have. This meant that there was no safety net to stabilize the grid once a fluctuation entered the system. Thus, the automatic shutdowns were triggered, resulting in a widespread outage.

Preventing future outages will require some changes. An expensive and multi-decade integration with a fast-discharge battery system. Keeping 15-20% of the grid powered by coal or gas. Or using microgrids, like a hippie compound. No solution is perfect, but outages will continue until something changes.

Oh, and don’t think this won’t happen anywhere else. Grids that are defined by isolation (think the United Kingdom, or Australia) will be next up.

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Transcript

Hey, Peter Zeihan here coming to you from Colorado. It’s kind of like Seattle today. Anyway, today we’re going to talk about the power outage in Spain and Portugal, what it means, how it happened and how you fix it, because it’s kind of relevant to a lot of other things that are going on in the world right now. 

Okay. Electrical engineers out here. I’m not going to give this in the purest form. I’m going to try to make this safe for laymen. So hate me if you want to, but hopefully I’ll get this right. The issue is something called alternating current, which is what we use for electricity distribution. And throughout pretty much all of modern life and alternating current, as it might suggest, is a wave. 

So there are peaks and troughs. It follows a very regular route. And in the European situation they use a 50Hz, oscillation. We use a 60 here in the United States. Just for a point of comparison. Not one is not better than the other, just is. Anyway, basically, there’s a wobble built into the power system, and that wobble has to stay stable. 

And if, for whatever reason, you introduce, a change in the wobble or a second wobble, all of a sudden all the gear that is operating at that wobble starts to have issues and it starts to shake, and oftentimes it catches on fire. Sometimes explosively. And it doesn’t take long for the disruption to manifest as a problem. 

So for example, when the wobble was changed in Spain, it only took about four seconds for things to go horribly wrong. And because the things that catch on fire are critical pieces of equipment like transformers, what you have into the system is a series of failsafe built into every node where they sever themselves from the grid. Should that wobble, shift, or second wobble get introduced and everything just goes dark. 

And the same happened at the interconnectors that connected the Iberian Peninsula to Morocco and France. They just shut themselves off from everything else. And we had a cascading failure, to kind of put it into layman’s terms. The normal wobble is very regular, and it’s kind of like at a junior high dance when everyone’s doing the Macarena. Da da da da da da da da da da da, and then all of a sudden somebody flips a switch and everyone attempts to do the lambada, and it’s chaos and everything is destroyed. 

Anyway, the problem that was introduced here is that the Spanish and the Portuguese no longer have a failsafe to stabilize the wobble. What normally happens, and the reason why we don’t have this kind of blackout on a regular basis, on a global scale, is that most of the power generation of the world comes from coal or natural gas, which are thermal units. 

And when you burn the natural gas or burn the coal, you get a stream of energy that basically spins a turbine. And that turbine, in addition to generating electricity, also has a lot of pent up kinetic energy stored within it. So if something changes the wobble, something changes it away from that 50MHz that the Europeans have to have. 

You can either spin up or slow down, or otherwise tap the power of that spinning turbine to buy yourself a few seconds so that we mere humans can react and bring on or take off other capacity to stabilize the current in Spain and Portugal. At the time that this breakdown happened, about 80% of the electricity was being provided by solar and wind, which sounds great from an environmental point of view and from a national security point of view. 

However, all of the energy that comes out of solar and wind is direct current. And so every solar panel and every wind turbine has an inverter that turns the power from direct current to alternating current to match the wobble. And there aren’t a lot of moving parts, so there’s no kinetic energy that you can tap. 

And so there just wasn’t enough coal and natural gas, enough turbines spinning in order for them to stabilize the entire thing. And in four seconds, all went straight to hell. Now, if you want to fix this, you’ve got to options. Option number one is to continue down the net zero route and put in another type of battery. So right now you’ve got grid storage which is typically lithium ion or lithium phosphate or lithium cobalt. 

And these batteries do not charge or discharge very quickly. But that’s not what they’re there for. They’re there to provide supply to the grid so that everyone has power. Instead, you need a fast charge or a fast discharge battery that’s usually lithium. Titanium. Now, titanium sounds all impressive, but really the supply chains for titanium are more or less okay. 

The issue is one of manufacturing. These batteries are made in six different places. Only one of those places China. So it’s know South Korea, Japan, the United States, Switzerland I think are the big four outside of China. But they don’t make very many of them. They’re relatively new battery type. And so if all of the lithium titanium batteries that were capable of grid storage were provided to Spain and Portugal, it would take a year of global production just to fix the situation on the on the peninsula of Iberia. 

So we’re talking about needing to do a very significant industrial build out on a global basis if we want to solve this on a global basis. And of course, you have the other little minor problem that pretty much all of the world’s lithium is processed in China. And between China’s pending impending in-progress demographic collapse, including the trade war, that is absolutely smashing. 

Their, their home industries. We also need to relocate the entirety of the lithium processing industry away from China into more stable places. So solving this from a battery point of view is very problematic if you want to do it on anything less than a 15 to 20 year time scale. The other solution might not be as ideologically friendly. 

If you’re agreeing, but it’s a lot simpler. Just keep 15 to 20% of your grid constantly running on coal natural gas so that you have those term bits spinning all the time. The reason we’re seeing this in a place like Portugal and Spain first is because Portugal and Spain are on the Iberian Peninsula. They don’t have a lot of physical interconnections to other grids, so they can’t rely on the spinning turbines of the country next door. 

One of the reasons that the Germans have not experienced this problem is even though they have for a few days in the summer, basically go 100% green. All of their neighbors have coal, natural gas plants, and so when things start to spin out of control, they can rely upon the stabilization provided by all of their neighbors. So you’re going to see this first in places that try to go green, that are more isolated. 

So your islands and your peninsulas watch Australia because you’ve got a disconnected grid there. Watch New Zealand, it’s an island. Watch the United Kingdom. Holy crap, the United Kingdom is very lucky. This hasn’t happened to them already, because their green tech is not nearly as reliable as it is in Spain and Portugal. It’s not as windy. It’s not a sunny and so you have a lot more spots pouring in. 

But if you happen to get a windy, clear day, all of a sudden they go from being 100% green to 100% unstable. The only other solution I can think of is microgrids. That works for some people. They’re incredibly expensive. And you have no backup should something go wrong? The advantage is in a microgrid. If everything’s on direct current, you don’t have to worry about the wobble at all. 

But you have different problems anyway, one way or another, as green tech gets more integrated into systems, one of these three solutions has to happen. One of them requires a multi-decade build out. One of them requires a big step back from an environmental point of view, and one of them basically means becoming a rich hippie commune. 

None of these are great solutions, but that’s where we are.

The Fire Hose of Chaos: Recession Time

Photo of 0 bill being cut

What do you get when you mix overly aggressive trade measures and a poor economic plan? Trump’s idea of a great start. Or, as I like to call it, a policy-induced recession. Here’s what’s happening.

Cargo shipments from China have collapsed and shortages will begin in a month or so. Trump’s eager to dump $1 trillion into new deficit spending, raising capital costs. Those DOGE cuts failed to offset spending and have backfired. Customer confidence is at its lowest since the ’08 crisis. We’ve already chatted about the construction issues. New tariffs are killing growth across numerous sectors. Policy confusion has stalled investment. And the global demographic picture isn’t getting any prettier.

The recession that the US is facing is no longer avoidable. Political choices have led us here, not economic fundamentals. Even if we flipped the switch today, recovery would be months away.

Prefer to read the transcript? Click here

Transcript

Hey, all, Peter Zeihan here. Coming to you from New York. There’s the World Trade Center, and I couldn’t think of a better place to discuss the recession that’s about to hit us. This is the latest in our series on the fire hose of chaos. How the Trump administration’s domestic and international policies are affecting the US economy. 

If you were looking to avoid a recession, I’m afraid that that ship has sailed like it literally sailed out of China about three weeks ago. I’m recording this on the 29th of April and back on the first week, we had tariffs kicked into China that rapidly ratcheted up to 145%, and that basically turned into a trade embargo and ships just stopped sailing. 

And at first it was just a few. And by now more ships have been canceled by a factor of two than what happened in the darkest days of Covid. The last of the three tariff vessels will dock in Los Angeles on or about May 5th. About two weeks later, the last will hit Houston about a week after that here in New York. 

And at that point, the inventory that’s in the country is always got to work with, and we will see good shortages of almost every kind within a month. There’s also not much of a chance of changing policy to avoid this at this point, because even if the Trump administration were to climb down completely, and even if everyone in China were able to go back to work the next second, you still wouldn’t see loadings within a month, and then it’s another month for it to cross the ocean. 

We’d already be talking about sometime in September or October. And that’s just one piece of the equation. We also have weakness everywhere else. The Trump administration says it wants to increase deficit spending by $1 trillion. That’s going to raise capital costs that won’t be compensated by the DOJ’s cuts. Doge has steadily revised down how much they think they’re going to cut out of the federal government, from 2 trillion to 1 trillion to 150 billion. 

And the most recent data suggests that cutting that 150 billion actually cost 130 billion, because a lot of the jobs that were let go were people that were actually essential workers that Congress mandates. And so they’re being had to be rehired on a contract basis, which costs more. That’s before you consider what’s going on in the housing sector, where we’re seeing consumer confidence at its lowest since the financial crisis back in 2007. 

That’s before you consider that industrial construction spending has dropped to zero, something that never even happened during Covid and that kind of blip doesn’t exist is going back as far as the data is. The issue is we’ve had roughly 100 different tariff policies in two months, and no one knows what the rules of the game are. 

And we have had no effort by the Trump administration put in place an industrial policy. We actually encourage manufacturing construction. And so it’s just withered on the vine from lack of confidence. Also, we have significantly slower economic growth in places like Michigan and Indiana already from the car tariffs that are already in place. And if the Trump administration does what it says it’s planning on doing on May 2nd, those car tariffs expand to cover car parts, which will trigger a manufacturing recession in roughly 25 states. And that’s before you consider the consumer spending is going to hit by agricultural tariffs that are just around the corner. And that’s before you consider drug tariffs or semiconductor tariffs, which are being promised. Basically we’re looking at a secular slowdown in economic growth in almost every sector. At the same time, almost none of it has to do with economic fundamentals. 

It all has to do with policy. And even if we got a complete policy change today, we’re going to have several months before we recover from this, just by unwinding things. And perhaps the darkest point of this is that some version of this was probably going to happen anyway. Birth rates have been dropping for decades, and it was always going to be the period between 2025 and 2035 when a number of countries including but not limited to Germany, Italy, Japan and China, basically aged out of being productive systems. 

And when that happened, globalization was going to crash. But the tariffs are making it crash now harder. And in a way that is causing a lot of heartbreak for Americans. That wasn’t necessary. What is the other side of this look like? I don’t know, that has become a policy question.

The Fire Hose of Chaos: Housing Problems

Construction of a home

Does everyone remember that bedtime story about the Three Little Pigs and the Big Bad Wolf? Well, the Trump administration is doing its best wolf impression and trying to blow the entire housing industry down. (We’re running out of metaphors for this administration, so cut us some slack on this one)

There are a lot of things hurting the US housing industry. The labor shortage will only worsen as more undocumented workers are deported. Material costs are on the rise, thanks to tariffs. All the stuff that goes into a home, whether you’re furnishing it or renovating it, is now more expensive due to tariffs. Mortgage rates are at 20-year highs and available capital is shrinking. Insurance companies are taking a hit. Not a fun time…

The pressure is on for the housing market, and it’s only a matter of time before the foundation cracks. What was a relatively healthy market just months ago is now the problem child in the US. And if that doesn’t worry you, we’ll talk about the recession tomorrow.

Prefer to read the transcript? Click here

Transcript

Hey, all. Peter Zeihan here. Coming to you from New York City, near Rockefeller Park. That’s like new Jersey or something over there. We’re gonna look over here, Trade Center and, Lady Liberty’s over there somewhere. Yeah, there. Anyway, today we’re going to continue our firehose series about how the Trump administration’s domestic and international policies are affecting the American economy. 

And today we’re going to tackle housing. Now, there’s a lot of inputs that go into a successful housing industry. But generally you’re looking at the big four. The first one is going to be labor based on where you are in the country, seasonality, all that good stuff, somewhere between 20 and 40% of the cost of a house is just from labor. 

And as a rule, somewhere between 25% and 35% of that labor is immigrant labor, with that number going to 40 to 50%. If you’re in California or Texas. So if you do what the Trump administration says it wants to do and deport 5 million illegal laborers, you can imagine what that’s going to do to housing costs, because there simply aren’t enough people in the country to fill those jobs. 

And that’s before you consider that immigrants play an outsized role in the trade. So carpenters, electricians, that sort of thing. Plumbers. So you can see that turning housing into a very expensive proposition just right off the bat, the next raw material inputs, which again, 20 to 40% were based on where you are, what kind of structure you’re building. 

And these fall into a bunch of different categories. First, most obviously is wood for framing. The second largest source comes from Canada that now has a 25% tariff. Next up are steel and aluminum, which are used for framing, flashings window frames, structural support, nails, that sort of thing. Right now, again, 25% tariff on both of those items. 

Next up is one that people don’t think about very much. And that’s copper. But you know, if you don’t have copper, you’re not going to have electricity. Now, most of the world’s copper, or at least mostly copper that comes to the United States, is either from Canada or the United States or Mexico or especially Chile. But that’s the raw copper. 

Once you turn it into wires and electrical outlets and all that other assorted stuff, most of that stuff is going to be coming from China. And now there is a 145% tariff, which basically means we stopped shipping stuff from China for this product category. About a month ago. And even if we were to flip the switch back on today, we wouldn’t get new shipments for another two months. 

It just takes that long for everything to spin up and cross the ocean. Then there’s things like tile and stone. Most of that comes from the Mediterranean. That’s another 20% tariff. So for all of the things that go into the physicality of the House, we’re looking at significantly higher rates of cost. Assuming you can get the stuff at, oh, the third category is what you put into the house. 

Once you buy the house, for anyone who’s a homeowner, you know, you’ve just started to spend your money. You then have to put things into it, whether it’s furniture or washer dryers, refrigerators, or you have to do an overhaul. As a rule, in the United States, for every 3 to $4 we spend on the primary purchase of housing, we spend another dollar or two on add on costs to fill it up with stuff, or to overhaul it, or put in new drywall doing additions, whatever it happens to be. 

All of that has gotten more expensive to and then forth finance between the baby boomers retiring and liquidating their savings, and the Trump administration planning to increase the federal budget deficit by $1 trillion a year, the availability of financing for the private sector has shrunk precipitously. And we’re only at the beginning. Now, in, the end of you see, you’ll probably see this May 1st. 

We’re only be beginning to see the increases of what that’s going to do. The financing costs. Right now, mortgages are at about a 20 year high. Expect that to get significantly higher. Now if you look back historically, like back to the 70s when mortgage rates were like 15% or more, we’re nowhere close to that yet. But we’re getting there pretty quick because of the problem and the discombobulation between supply and demand. 

And that’s before you consider Trump’s tariffs, which and Trump’s financial policies, which are only going to drive financing up more. And then finally, something that’s not technically a housing cost, but we all have to have if we’re gonna get a mortgage insurance, because as much as construction is going to become more expensive, it is nothing compared to what’s going to happen to re construction. 

Whenever there is a national disaster, a storm, a hurricane, a forced fire, and you need to rebuild, all of a sudden you need to rebuild lots and lots of things in exactly the same spot, which means that the cost for the repairs and the recovery are significantly higher than what happened before. Which means the insurance guys are getting hit on all sides. 

All of the input costs are going up. Insurance guys, basically take your premiums and invest them into the market in order to generate capital that they’re going to need to pay out claims while the markets are tanking because of Trump’s policies. In addition, you have a real problem with foreign access of capital because that money is going away. 

Maybe referenced the finance video we did a couple of days ago. I would not want to be the insurance. Right. Because between the level of populism and Trump government and the popularity of populism, the American political scene right now, the normal thing that the company would do would be to raise premiums and to reduce payouts. But populism isn’t going to allow that to happen. So we will have federal action to grind away the insurance companies in a way that is designed to benefit the consumer. 

And the only way that insurance companies can deal with that is by stopping to offer coverage. Boy, so this all adds up to a housing sector that all of a sudden, from being an actually pretty good space four months ago, is looking to be the sector that is potentially most damaged by the mid and long term trends that are coming together. 

And that’s really just the beginning, because we’re also about to have a recession. We’ll talk about that tomorrow.

The Fire Hose of Chaos: Steel and Aluminum

Photo of Steel pipes stacked

The Trump administration has given us a masterclass on how to set supply chains ablaze using tariffs. While some supply chains are smoldering, others are raging wildfires. So, let’s look at two that are in the thick of it: steel and aluminum.

Given the industrial growth and manufacturing buildout that the US has set its sights on, these two materials are essential; however, the US does not currently have the domestic capacity to produce the amount of steel and aluminum needed for what is coming.

That means the US will still have to import a good chunk of these materials…but it will cost 25% more than it would have previously. This throws yet another wrench into the US industrial buildout, especially for industries like construction and housing.

Prefer to read the transcript? Click here

Transcript

Hey all, Peter Zeihan here coming to you from Denver International. Today, we’re going to do the most recent in our host of chaos series about how the domestic and international policies of the Trump administration are affecting the American economy. And today, we’re going to dive into those two base materials on which everything runs. And that’s steel and aluminum. 

There are similarities within the markets, but I think it’s best to just kind of break down what you do with these things and how you get those things, and then we’ll go into the broader impact. So let’s start with steel. Roughly 75% of the steel that the United States uses is actually recycled. Steel is one of those wonderful materials that you can recycle at once, or a thousand times, and it’ll still work. 

But that doesn’t mean that all steel is equal. Recycled steel tends to be kind of ugly. And so you use it in places where you need strength, car frames, I-beams for construction, that internal skeleton you see in high rises, ships, that sort of thing. But if you’re going to do something where it needs to be pretty or where it needs to regulate electricity, you need something different. 

Basically, there’s two kinds of steel you’ve got hot rolled, which is the ugly stuff that is usually recycled, and you’ve got coal, which is virgin steel made from iron ore and coke. And cold rolled steel can be used in more advanced applications, specifically in manufacturing and in the world that we’re in now, where most manufactured steel products aren’t about strength, they’re about regulating electricity. 

You have to have something called grain oriented or non grain oriented steel. Different types of those things regulate electricity flows at different speeds and different insulation levels, and that really needs to come from virgin steel. The complication is something called a roller—when you pull the steel out of the molten mix and you’re really hot bars? 

You then push that through a roller because the way the steel cools determines the crystalline structure, which determines how well electricity does or does not conduct through it. Now you can take recycled steel and put it through a roller, but rollers are big and expensive, and you only usually put that on a very large foundry. And only the very large foundries are making virgin steel, recycled steel, hot rolled steel typically is made locally because you basically you take down a building in your state and then you’ve got a local facility that can turn it into hot rolled steel. 

If you wanted to get it to a roller, you’d have to get a completely different facility that operates on a different scale. Well, the United States needs to roughly double the size of its industrial plant. That means a lot of industrial construction. That means a lot of that ugly, high rolled steel. And while the United States is the world’s greatest steel recycler, there just isn’t enough to double the size of the industrial plant on anything less than a two century time scale, which means we just need more and more, more and more. 

And if you’re to get more and more, more and more and more, you’re probably going to be important. And if you want to go into manufacturing, you need a lot more cold rolled steel. And if we’re going to triple the amount of steel products that we put in the manufacturing, we need more and more, more and more and more. 

If you want to do this with foundries, you’re talking about a ten year buildup. If you want to do with imported steel, you could do it now. And what the Trump administration has done is put a 25% tariff on anything that is imported, which has brought construction and manufacturing costs up while decreasing the flow through of the input that we need to make any of this work at the base level. 

So everything is now moving more slowly, at a higher expense at a time. We just need more. The second metal, of course, is aluminum. There is somewhat similar policy, about 45% of what we use. We produce ourselves. And almost all of that is recycled. But just as with steel, if you want to manufacture something that is pretty, that has the combination of corrosion resistance and light weight and strength and flexibility, then it’s probably going to have to be from virgin materials. 

And the United States just doesn’t have the raw material here. The raw materials, bauxite, you basically mined that you dissolve in sodium hydroxide. You get a white powder called alumina, and then you electrocute the crap out of it to turn it into aluminum metal. And just as with steel, you can use recycled steel for construction things like window frames, for example. 

But if you’re going to do high end work like, say, I don’t know, airplanes, you’re going to want the Virgin stuff in the US just doesn’t smelt much of the Virgin stuff itself. And again, just as with steel, we need to use 2 or 3 times as much as we have yet to get the smelters on line. And so this is an ongoing problem with all of the Trump administration’s policies. 

The CART has been put several steps before the horse. We’ve raised the cost of imported steel and aluminum, but we have not. First built out the capacity of the US economy to smelt or foundry more of the stuff itself, so we get lower supplies at a higher cost when we need huge increases in the volumes that we use to in order to build out the industry, as the Trump administration says it wants to. 

And so everything’s just slowed down and got more expensive. But there’s no sector where this is more true, where it’s more of a problem than construction and especially residential real estate. And that’s what we’ll turn to tomorrow.

The Fire Hose of Chaos: Finance

Money being burned

The US has known that a capital crunch was inbound for decades now. With the Baby Boomers retiring and Trump’s trade policies hitting at the same time, these financial woes might sting a bit more than we thought.

The retirement of the Boomers was always going to cause a capital supply crunch; it’s just what happens when people retire and begin shifting their investments to safer things. So, the cost of capital was already on the rise. Now mix in Trump’s rapid-fire tariffs and aggressive foreign policies…and you magically begin losing capital inflows into the US, exacerbating the US capital problem.

Prefer to read the transcript? Click here

Transcript

Hey all. Peter Zeihan here coming to you from Colorado. We are continuing our Firehose of Chaos series today about how various Trump administration policies are causing negative effects for the American economy. And today we are going to tackle finance. Now there’s a lot that’s going on in finance. On any given day, the bond market, the stock market, corporate bonds, municipals, blah, blah, blah, blah blah. 

But the bottom line is that it’s ultimately an issue about the supply of capital. The more supply you have, the cheaper that capital is, the faster the economic growth is. And we even before Donald Trump got into office, we’re already facing an adjustment period. And the issue is retirement. When you retire you liquidate your savings. You go from stocks and bonds into T-bills and cash, because if there’s a market crash or a currency adjustment, you have lost out, you haven’t locked in your savings and you no longer have an income to recover. 

So, for example, for those of us who are not retired, we’ve seen the markets drop by somewhere between 10 and 20% over the course of the last three weeks, and we are all feeling that, but we’re all young enough to continue to do contribute to our portfolio. So there’s hope that will emerge on the other side in a better position. 

If you’re over 65, there is no hope because there is no income. So if you had not liquidated, you would be looking at a permanent loss in your portfolio. Even as you continue to draw income out of your savings, which would put you in destitution a few years down line. So if you’re a baby boomer and you hadn’t liquidated your savings already, you’re in trouble and you did everything you weren’t supposed to do. 

Anyway, the issue for the economy writ large is the balance between the number of people who are turning 65 every year and the rest of us. So in the case of this current situation, the issue is the baby boomers, because the baby boomers, the largest generation we have ever had, are already two thirds moved into retirement and the remaining third are going to retire over the next 4 or 5 years. 

As a rule, 70% of total global private capital originates with people who are doing this saving for retirement, people who are over age 55 but have not yet turned 65. Well now the number of people who are over age 65 is rapidly expanding, while the number of people age 55 to 65 is rapidly shrinking. 

And that split has caused most of the movements in the credit market in the last few years. So I would argue that we’ve seen roughly a quadrupling of costs of credit writ large. I’m not talking about any specific credit product, but writ large over the last four years. And while there is a little bit of fed in there, there is a little bit of trump. 

There is a little bit of Biden. It’s mostly just the baby boomers doing what you do when you retire. We expected this. We’ve anticipated this coming for 30 years. And really, no one got ready for it. Certainly not in government financing. But now we’re here and we’re living through it and we’re having to deal with it. So that’s that’s piece one that has nothing to do with the change of administration at all. 

But the second piece does, we have now had 97 official tariff policies in the last 55 days, which is, you know, two orders of magnitude more than we normally get in that sort of time frame. And no one knows what the rules are. In addition, Donald Trump keeps changing his tune every day. It’s either we’re not going to be even going to have a memorandum of understanding with countries that we’re negotiating within six months, or we’re gonna have a finished trade deal in four weeks, both of which are kind of silly. 

We’re not going to get any new manufacturers out of the plants for the first two years. Or maybe it’s going to be ten years. We’re going to have new tariffs on agriculture. Or maybe we’re not. We’re on drugs, or maybe we’re not, or in shipping or yes, we did, but then we didn’t. But then we decided to do port fees. 

The point is that no one knows what the rules of the game are. So no one is doing anything to prepare for whatever the future is, because we don’t know what the future is going to look like in terms of industrial construction, to build the industrial plant that we’re going to need to live in a high tariff world that actually has gone to zero under Donald Trump, because no one knows what is going on. 

On top of that, Trump keeps threatening other countries and not just with tariffs. He’s threatened to invade Canada, make it the 51st state. He’s threatened to invade Greenland, which is a NATO ally. He’s threatened to pull everything back from Ukraine, which is encouraging the Ukrainians, the Romanians, the poles, the Swedes, the Finns and the Germans to all get nuclear arsenals. 

The bottom line is he’s shattering everything that worked and has yet to provide a vision or preparation for whatever might be next. And in that sort of environment, no one really trust the United States. Now the US dollar is the global currency. I don’t mean to suggest that that is in danger. And the US Federal Reserve stands ready to step in to save the government bond market, to prevent a run on the bonds, to prevent a financial catastrophe in this country, because that’s part of its job. 

I don’t worry about those kind of headline disasters, but there’s a lot on the margin that is measured in trillions of dollars. In any given year. We have about $2 trillion of capital flight from the rest of the world to the United States. Now, that comes for its own reasons. And Europe, it’s because the countries of the eurozone are aging out, and you just can’t get a good return in Europe. 

In China, it’s because you have an over financial situation system where capital is considered a political good and you can’t get a good return on it, and the government restricts where you can put your money. So people try to get their money out of these systems and into other systems. And while Canada looks great, it’s not enough. There is only one country that has the liquidity and the depth of capital markets to absorb this sort of capital flows, and that is only the United States. 

And so this is where most of that cash goes, $2 trillion a year, and as we move into circumstances that are more problematic, Europe getting closer to its demographic cliff, China facing a trade war with the United States. Those flows can often increase. So, for example, at the height of the subprime crisis, after an initial shock, we were probably seeing three, $3.5 trillion of capital flight into the United States. 

Now, this helps out the United States in any number of ways. It puts more strength into the real estate market. It keeps borrowing costs down for everybody, especially the federal government. But when you have the United States as the source of the geopolitical uncertainty, and when you have the white House is the single largest source of regulatory uncertainty in the United States, all of a sudden, putting things into US financial assets doesn’t look nearly as attractive. 

And so what we’re seeing is some of that money is no longer coming and some it’s being reversed. So let’s go around the world real quick and see what that looks like. First of all, the Middle East, the Middle East has been desperate to build some sort of alternative financial system that doesn’t work on interest based functionality like the Western system does. 

And that requires basically applying a degree of Sharia law to their financial sector and having their own financial systems to, at a minimum, serve as a bulwark and an intermediary between the Middle Eastern savers and the United States. They’ve been somewhat successful at that. And that has made places like Dubai to be pretty robust financial centers. But what we’re seeing now is the limits of that approach. 

People are realizing that if you put your money into a middle eastern financial center that doesn’t allow interest, you don’t earn interest, and it’s starting to lose some of its shine. And so people are looking for other alternatives. On top of that, most of the oil Emirates in the Middle East, up to and including Saudi Arabia, have vastly overspent their income and simply don’t have money to send abroad at all. 

So, for example, Donald Trump is trying to get Riyadh to invest a few hundred billion dollars in the U.S. and they don’t have the money to do it. They’ve wasted a lot of things on their own white elephant projects. They’re spending a lot more on social programs at home. There’s no money to send to the United States. So what used to be a relatively robust partner is going somewhere else or is shrinking in on itself.  

And, you know, that’s several hundred billion dollars a year. Second is East Asia. Japan has been a big source of capital for the US for decades. China more recently, largely because both of these systems treat capital as a political good. I actually don’t think that this is going to change because the Japanese, the Chinese have known for a very long time that if you keep the money at home, it just can’t do very much. 

The only reason we should expect countries like China and Japan to send less money to the United States is if they figure out that they can build industrial plant for their export industry somewhere else, and there aren’t a lot of good options. What? There are some options in Southeast Asia, but those are under U.S. tariffs as well. So we might see a little bit of weakening, but nothing compared to say what we’re going to have in the Middle East. 

The big movement though is out of Europe. The Europeans have basically started to treat the United States like a security threat, because that’s exactly what the US under Donald Trump has evolved into. They realize they’re going to have to take their militaries in a completely different direction. They realize they’re going to fight on their own. For many of them, that means they have to have nuclear weapons. 

And that means why, why, why, why would you ever send capital to the United States? So what? Until recently, and by recently, I mean January. It was about $1 trillion of capital flight from the eurozone to the United States. Every year has probably gone very close to zero, and in fact, is probably going in reverse as people liquidate their holdings. 

Yeah, that all up. And we’re looking at capital flight into the US financial markets probably dropping by a little bit more than half. And if you put that on top of what’s happening with the baby boomers, it means capital costs are going up as well. And that’s before you consider that the US currency has dropped by about 10 to 15% in the time since. 

All that adds up for significantly more expensive financing, regardless of who you are. If you’re the federal government and you’re issuing T-bills, you now have to pay more money. If you’re looking to buy a car, your car loan is now more expensive. If you want to refinance your mortgage, that goes up as well. 

And it all adds up to slow economic growth across the entire American economic space.

The Fire Hose of Chaos: Port Fees

Photo of port of savannah, GA

Today we’re discussing the Trump administration’s 96th tariff policy which imposes port fees on Chinese ships.

Chinese ships that enter a US port will be slapped with the higher of a $50/ton (rising to $140/ton overtime) fee or $150/container fee. This policy was initially set to be more extreme, but public comments helped scale the fees back as to avoid crippling US port logistics.

The issue with this tariff is that it increases costs for everyone but fails to offer any solutions. Since the US has no capacity to build cargo ships (as military shipbuilding is the priority right now), shipyards are already overwhelmed and dysfunctional. So, the intention is to reduce reliance on China, but there’s no path to doing it…

Prefer to read the transcript? Click here

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Transcript

Hey all. Peter Zeihan coming to you from Atlantic City and today we’re talking about something that actually happened a little bit back on April 17th. That’s when the U.S. Trade Representative Office announced the 96th tariff policy of the Trump administration in less than two months. Oh my God. And this one is on port fees. Specifically, any Chinese registered Chinese built Chinese operated vessel will now have a $50 charge per ton, ramping up by $30 a year until it hits under $140 a ton.Or, $150 per container, again ramping up over a few years. Whichever one is higher. 

This one is unique in that it was actually put out for a degree of public comment. And so people pointed out to the administration that there are no American ships. So, some of the more ridiculous versions of this, were rooted out originally was supposed to be like a million, a million and a half, maybe even 3 million per ship per visit. 

Which would have basically taken everything and concentrated it. So, well, China is the source of most of our manufactured goods. It’s not where they’re necessarily manufacturers, where they’re assembled. It, the manufacturer requires basically everyone in East Asia and China is the low man on the totem pole, but the largest one. So it’s where everything’s put together. 

And then it sails in finished form from Shanghai or Tianjin to, Los Angeles or Houston or New York or Savannah. If the old system have gone through, all of our secondary ports would have basically been starved and we would’ve just had endless traffic jams at the biggest one. So they decided to go with a weight slash volume version rather than just a flat fee, which make it a little less onerous. 

From a logistical point of view, anyway, there’s still some problems here because, it’s starting to interface with other problems the Trump administration experiencing. And that has to do with Defense Secretary Pete Hegseth, who is rapidly showing himself to be up there with RFK Jr to be the most unqualified, and, incompetent cabinet secretary in American political history. 

In the last two weeks, he’s basically fired everybody he brought in with him. And so in his office now, it’s just him. It’s wife, his brother, his lawyer, and that’s about it. And then, of course, Trump fired all of the deputy undersecretary, assistant secretaries and everybody and basically hasn’t replace him with anyone who knows what they’re doing. 

And so Pete says big breakthrough in the last few days has been to build a studio and an editing platform, within his office. So he can share videos of himself working out in the morning. Because that’s what we need to prepare for military readiness. Yeah. Anyway, bottom line is that one of the things the Trump administration says it wants to do, which I broadly agrees to build more military ships. 

Okay. Well, I take shipyards. And so basically, we’ve got an incompetent defense secretary managing a underfunded and unplanned shipbuilding program, which basically takes up every berth drydock that is available at every, shipyard the United States has of it’s being managed just completely incompetently. And so if you want to build a civilian cargo vessel, there’s no room and there won’t be for years. 

So step one, if you want to start mucking around with the ports, is to build more ships so that you have options. And just as with steel and aluminum construction and all the other tariffs, the Trump administration has failed to do that. So we if we want stuff at all, we have to now pay more for the stuff because of the tariffs and then pay more at the ports because of these new port fees. 

And there is no alternative for building an American equivalent, because the building blocks of what you need to industrialize still haven’t been done. And everything is just going to cost more for everyone. Yep. That’s it.