Back to the Glory Days of the Spice Trade

Various spices in metal bowls

Global trade was once fragmented into many regional economies. Goods like spices traveled overland through countless intermediaries before reaching the gateway cities of Venice, Genoa, Pisa, and Amalfi. So, what can we learn from the glory days of the spice trade?

The era of deep-water navigation that Portugal pioneered is coming to an end. The global trading system is changing, and no single country will be able to secure the sea lanes. This makes a more regionalized and militarized trade system much more viable.

The complex and vast supply chains that have become the norm will soon begin to break down. Those more regional production networks will be the new standard, and the countries that realize this sooner will come out ahead.

Prefer to read the transcript? Click here

Transcript

Hey everybody. Peter Zeihan here. Coming to you from the promenade, Barstow, Adriatic Sea. So I thought I’d talked about the geopolitics of trade and how it’s evolved in this area. We used to be the terminus of the spice trade. So in the world before roughly 115 hundred, everything was basically transported by land or coastal ship. And as a result, the world was separated into dozens of little micro economies compared to the globalized system we have now.

And in the cases of things like spices or silks or porcelains, they all originated either in East Asia or Southeast Asia, and they pass through dozens, if not hundreds of middlemen on their way through to Western Europe. Most of those routes funneled through Central Asia and eventually ended in the Ottoman Empire, in the city that is today Istanbul.

And then the Turks of Istanbul shipped them by water coastal trade to the cities of the Italian coast, most notably Venice, but also places like Genoa and Amalfi, which is just to the south of here, Pisa as well. And then those of these became the gateway for those products into Western Europe, and they made mad money on it as a result, getting too windy, going to relocate.

Okay. That lasted for a few centuries. And the Italian city states involved just got madly wealthy. And since they were on the opposite side of the Alps from all of the powers of the Northern European plain, they basically could do whatever they wanted. And they did. And they partnered with Islamic Turkey in order to make themselves wealthy at the expense of Christian Europe.

Different cultural conversation for another time. Anyway, this lasted until the Portuguese, which at the time were one of the poorer countries in Europe, all the way out on the western end of the Iberian Peninsula, figured out how to sail out of sight of land, deepwater navigation and guys like digamma figured out how to go around Africa and hit India direct and eventually take over the spice trade, directly cutting out all those middlemen.

And so, over the course of a couple of centuries, Istanbul and the Italian city states went from being the wealthiest parts of the world to all of a sudden being completely cut off from what until then had been one of their primary sources of funds.

Why is this relevant today? Well, the technologies of globalization are failing, and the system that has allowed the whole world to go wherever it wants and access any particle are breaking down. And in the world we’re about to be in, we’re going to have to go back to kind of sequestered trade and the Adriatic model. The spice trade model is probably the best one. We have to understand what’s coming. You see, deepwater navigation isn’t going away, but everybody who has ships has access to the wider world. The question is whether they can protect their sea lanes.

And I would argue that there is not a single country on the planet that can do so on a global basis. We have a number of countries with the US being the most powerful, that can intervene in those trade routes on a global basis, but none can actually protect them, which means that most trade is going to become much more regionalized or even localized, and we’re going to have to militarize a lot of it.

That changes everything from the culture of what it means to be a shipping company, to the nature of what it means to be a military and a Navy. We’re probably going to be going into a world where the single biggest impact is going to be a collapse in what we considered manufactured goods trade, because right now, unlike the world of the Silk Road, where it was all one way, we have thousands, tens of thousands, hundreds of thousands of products that require multiple supply chain steps and sometimes in the thousands and the intermediate parts that go into the final product shoot back and forth and back and forth among countries.

Many, many, many, many, many times that entire model is going to collapse. And things that can’t be produced relatively locally or within a network like, say, the European Union, simply aren’t going to be produced at all. So if you’re looking at what the economy of five, ten, 15 years is going to look like, not bad place to start is going back to the 12th, 13th and 14th century when the spice trade was all that.

It’s a great baseline to start the conversation. All right. That’s it for me today.

Ukraine Is Shooting Fish in a Barrel

Statue in Kiev, Ukraine against a misty forest

Ukraine has created a system to determine which ships belong to the shadow fleet and which belong to major companies. By sourcing ship identities, transponder data, routes, and ports from these companies, Ukraine can strike unidentified vessels with high confidence.

The result? Roughly 200 shadow fleet vessels have been attacked around the Black Sea and the Sea of Azov. Even if the Russians can replace the downed ships, storage capacity will be overwhelmed by damaged vessels and disrupted ports.

Prefer to read the transcript? Click here

Transcript

Peter Zeihan here, coming to you from Colorado. Today we’re taking a question from the Patreon page. Specifically, it has to do with how Ukraine is targeting Russian ships on the Black Sea, but ignoring others since a lot of countries are just not using the transponders anymore. Great question. The backdrop is we have had the Ukrainians attack about 200 shadow fleet vessels on the Black Sea and the Sea of Azov. During the past roughly two months, and we’re nearing the point where enough damage has been inflicted on the shadow fleet that it’s probably going to stop functioning later this year, which is going to end Russia’s presence as a significant oil exporter. A lot going on, but there are six countries Romania, Bulgaria, Russia, Ukraine, Georgia, Turkey, yeah, six countries on the Black Sea. And how do the Ukrainians know who to attack and whatnot? We will also note that the Russians, from time to time hit a ship that is not Ukrainian. So why are the Ukrainians able to target and the Russians aren’t considering that the Russians are the ones who are the superior military power by most measures? 

What happened is about a month ago, the United States government, the Trump administration, transmitted some information to the Ukrainians that they weren’t very happy about. The Ukrainians had been attacking a place called Novorossiysk, which is a significant naval port and commerce port on the Black Sea, on the Russian section. And at Novorossiysk is the terminus for a pipeline called CPC, the Caspian Pipeline Consortium, which transports crude from Kazakhstan, specifically the Tengiz field that is operated by Chevron and Exxon through Russia to that port and then to the wider world.  

And the Trump administration was angry that the Ukrainians were attacking what they see as American infrastructure. Russians obviously don’t see it that way anyway. And basically said, stop doing it. Well, what the Ukrainians have done is they’ve contacted every shipping company in the world and said, hey, if you’re operating in the Black Sea, A, tell us the name of the ship be give us their transponder so we can follow them. C, give us their course and D,the ports you expect them to be at and when and if we can confirm that information as part of our operations, we will not attack those ships. And so far, every shipping company in the world is complying except the Shadow Fleet. Shadow fleet runs dark. Shadow fleet doesn’t report, and that’s the whole point. 

So what the Ukrainians have basically done, they have mapped out the entire commercial world of shipping in the Black Sea and attacking the ships that don’t report. And so far, attacks on third parties have, I think, single digits while the shadow fleet is taking a complete pounding. Is it enough? Will it last. Well, I mean, really ultimately that depends upon how the Russians pay out their providing insurance for their own shadow fleets. And from what we’ve seen so far, it’s, they’re not paying out. But the Russians take ships that otherwise would be scrapped. So they’re not reducing the global supply of vessels. They’re reducing the global supply of vessels that were on the scrap heap. 

There’s going to be some churn as the Ukrainians burn through what the Russians have. But there is an end in sight here. Because if the Russians cannot load cargo, whether it’s grain or crude, eventually the ports just run out of storage facilities, and that cuts down production inland. Just as effective as stopping the shadow Fleet would. So one way or another, we’re getting there. We’re getting there this year. And it’s kind of a minor miracle that it’s all happening without interfering with other shipping in the Black Sea. The Persian Gulf, a completely different situation. Nothing nearly so friendly is happening over there.

Global Shipping Comes Under Attack

Cargo ship with containers

While oil is still moving through the Strait of Hormuz, flows remain a fraction of pre-war levels.

Some tankers have made it through by using tactics similar to the shadow fleet, obscuring their movements to avoid detection. Once the tankers clear the Strait, they conduct sea-to-sea transfers under American protection. But this strategy is extremely expensive, and the U.S. cannot sustain it indefinitely.

More importantly, it demonstrates how difficult it is for even the world’s most powerful navy to protect critical maritime chokepoints from relatively small-scale disruptions.

Prefer to read the transcript? Click here

Transcript

Hey everybody, Peter Zeihan here. Coming to you from the Denver International Airport. Before I get on a plane, I just wanted to give people an idea of what was going on at the Strait of Hormuz, because there’s been a lot of confusion lately. Statements from the administration, from the Iranian government. It’s kind of a mess. Short version is that some crude is getting out. The Trump administration says it’s 9 million barrels a day. The Iranians say it’s something closer to zero. The truth is undoubtedly someplace in between. I don’t have a number for you. Independent Western consultants that track traffic say it’s probably in the 3 to 5 million barrels a day range, which is, you know, better than nothing. But this is down from 20 million barrels a day, 22 million barrels a day at the start of the war. And even if you include all the bypass pipes running at full capacity, we’re still somewhere between 4 and 10 million barrels per day short, based on whoever’s numbers you’re using. Still more than enough for an energy crisis. Anyway. A few things. 

Number one, what’s happening is that the United States is providing overwatch for tankers that are going through, if they originate in countries on the Arab side of the Persian Gulf. So that’s Kuwait, Saudi Arabia, Qatar, United Arab Emirates. Second, what’s going on is kind of an echo of what the Russians and the Iranians did with the shadow fleet. So the shadow fleet is a bunch of tankers, thousands at this point, that run with the transponders off. Their ownership is obscured through shell companies, and you never know where they’re going to be. And oftentimes they will do sea-to-sea transfers to mix their crude with somebody else’s crude, to obscure where it came from in order to evade sanctions. Well, what we’re seeing in the Persian Gulf is that local state companies, whether it’s Kuwait or Saudi or the others, are using their own tankers to load up their own crude and then sailing with the transponders off under American Watch through the southern approaches to the Strait of Hormuz, as far from Iran as they can get. And then when they get on to the Indian Ocean, the Gulf of Aden, they will then do a sea to sea transfer to a buyer, which is India, China, whoever else. So basically, the United States is encouraging, kind of an echo of the shadow fleet happening in the Persian Gulf. And so far that has succeeded in getting some crude out. Again, the specific numbers are in question by everyone. Third. This is not something the United States can sustain indefinitely. The cost to the United States is in probably the dozens of millions of dollars a day, because we’re basically having a carrier anchored task force basically just parked in an area. And as long as it is there, it can’t do anything else. And since it’s not involved in combat, at least at the moment, this is a really high cost, low utility approach for using American military power. The Trump administration says that, you know, only do this into Iran completely capitulates. But if Iran was going to completely capitulate, it probably would have done so in the four decades before now, at some point. So if you want Persian Gulf crude to get out, you basically need a force of this size all the time. Which brings us to the next point. 

There are eight major transit chokepoints in the world, like the Strait of Hormuz, like the Bab-al-Mandab, like Malacca, like Panama. No country has the ability to defend all of them at the same time. The U.S. can probably manage 2 or 3, but that would consume all of its deployable assets, meaning that the world’s largest and history’s largest expeditionary power would be locked down to a couple of footprints, which would be strategically, incredibly stupid. So I wouldn’t count on that happening. In addition, the United States can’t do this very well. So, for example, Hormuz is a problem, but the United States is not making any effort to keep the Bab-al-Mandab open, even though the Yemenis are now launching attacks on shipping there. And we even have Somali pirates back in the action. What we discovered with the Somali pirates over the last 20 years is if the United States anchors an international force to patrol the area and everybody joins, including China, then the Somali pirates basically go away. But the amount of territory here is extreme. You’re talking about a territory roughly the size of Texas, and the US Navy just doesn’t have that kind of capability. And so even though it’s just at the next checkpoint over in Hormuz, we’re now starting to see piracy again. This is going to be our new normal. 

No country, including the United States, no coalition of countries can keep the seas safe any longer. So it’s just a question of when and how and where it breaks down first. I do want to hold one other little bit of information out there, however, before I sign off. And that’s that keep in mind, while protecting sea lanes, patrolling them, convoying ships is very, very hard and very, very expensive and very, very naval ship heavy. Interrupting those flows is very easy. And so, yes, the United States lacks the ability to patrol the world’s oceans and to keep the checkpoint safe, but it perfectly, perfectly, easily can disrupt all of them at the same time, should it so choose. It’s basically an echo of what we’re seeing with drone warfare. Defense is really hard, but if you just want to stick it to someone, you can do that in an afternoon.

The Collapse of the World’s Strategic Straits – Part 2

Shipping containers being transported by a cargo hauler in a strait | Licensed by Envato Elements

Should Iran manage to turn the Strait of Hormuz into a toll-based waterway, what does the domino effect look like?

There are a handful of straits and chokepoints that will follow suit, including the Bab al-Mandab, Turkish Straits, and Danish Straits (the Strait of Malacca will likely remain open). Each of these has regional players with strong incentives to adopt their own version of the Iranian model. Just another line item pushing us toward a more regionalized world.

Prefer to read the transcript? Click here

Transcript

Hey, all. Peter Zeihan here, coming to you from Colorado’s Front Range, taking a break to talk about Hormuz and what’s next. We’re probably going to have some sort of format before the end of the year where Iran is able to gather charges, whether it’s a service fee or toll, whatever you want to call it, for ships passing through. 

Once that happens, there’s going to be a lot of dominoes falling as other states realize that they, too, can demand control of a waterway and gain financial assets from that. Until this point, international law has made it very clear that any naturally occurring waterway cannot be regulated in such a way. So we’re breaking with a century plus of tradition here. 

Artificial waterways like the Panama Canal or Suez are exempt because they are fully within sovereign territory. There’s infrastructure that has to be maintained. And so that’s not new. You can charge tolls there. But once Hormuz goes the other direction into something that is regulated, other places are going to follow. And the first one will be the Bab al-Mandab. 

So Hormuz is in the eastern corner of the Arabian Peninsula that connects the Persian Gulf to the Indian Ocean. The Bab al-Mandab is on the southern tip of the Arabian Peninsula, which separates the Red sea from the Indian Ocean. Now, the countries that are clustered around Bab al-Mandab are oddities. One is Djibouti, which in for nearly all intents and purposes, remains a partial French colony. One is one of the remnants of Somalia, which is not exactly what it screams state function. And the last one is Yemen, which is a country only in name. The central government in Sanaa is weak at best. It’s been in and out of civil war really, ever since it’s united back in the 90s, and now the single largest group in the country, the most powerful, and are the Houthi rebels, which are backed by Iran and have been using the Iranian connection to get weapons, most notably missiles and more recently, drones to attack ships in the Red sea. 

If we have Iran succeed in Hormuz, the Houthis are absolutely going to try to do the same thing in the Bab, and they won’t be alone as the important thing. Because remember, the Houthis are not a state power. They’re a rebel group. And if they start to have the ability to carve out a little bit, Sanaa, the capital, will certainly follow. And the idea that you’ve got a broken state of Somalia that doesn’t need income is silly. And it’s already the land of pirates, so they already have a way to enforce that, too. And then you’ve got Djibouti, which for all intents and purposes, is in France’s pocket. And if there is any first world power that senses an opportunity here from a changing in the international order, it would be France. 

So it very quickly turns into a multi-sided argument/conflict over how to regulate it. And probably what would happen is that all four of these entities would be able to extract value from the Bab, because basically what we’re talking about here with Iran and Hormuz is protection money. You pay us and we won’t attack you. And while the entities of the Bab aren’t as powerful as Iran, you know, the French can send a ship or two. Somalis can always dispatch pirates. And the Yemeni have already proven that missiles are more than enough to cause damage. So there you’ve got two of the places where international energy flows that are going to be facing much higher fees. There’s two others that I want to draw to your attention to. Well, actually, you know, first let’s eliminate one. 

Let’s eliminate the Strait of Malacca. Malacca is off the coast of Singapore. It’s between the Malay Peninsula and the Indonesian and Malaysian archipelagos. It’s the busiest waterway in the world. Most of the things that flow out of Hormuz eventually go to Malacca and on to Northeast Asia. And most of the things out of Northeast Asia that don’t cross the Pacific go around Malacca on their way to Europe. So busy, busy, busy busy, busy. But what about Malacca compared to, say, the Bab, is that the states around it are more capable and more importantly, they’re more regularized and they benefit from that trade. So the big three Malaysia, Indonesia, Singapore, these are trading countries. And not only do they benefit from the transoceanic trade that goes through the strait, they are part of a group called the Association of Southeast Asian Nations, Asean. That’s a regional trade grouping where most of that trade goes through the strait, too. So the countries that would suffer the most from some sort of toll regime would be the countries that would be responsible for implementing a toll regime. So, Malacca, I don’t expect to fall into this trap. There have been problems with pirates in the past, but Singapore, Malaysia and Indonesia working together have usually been able to keep a lid on that. I don’t see that changing in the near future. So not there, but the big one that would absolutely flip almost overnight would be Turkey, the Turkish Straits, the Bosporus and the Dardanelles connects the Black Sea to the Sea Marmara, to the Aegean Sea, and on to the Mediterranean and the wider world. The international laws that regulate international waterways were basically built with Turkey in mind at the end of World War One, and they basically say that the Turks cannot regulate this waterway, despite it being the narrowest of the natural ones, and despite the fact that it flows through the largest city in Turkey, which is Istanbul. 

The second it becomes apparent that the Iranians can enforce their will on the Persian Gulf. In this way, you can bet your ass at the Turks are going to be doing the same thing. And the Turks have a functional navy. They have a functional army. They can physically interdict every single ship that passes through these waterways without really breaking a sweat. And so you should just kind of file that in as a done deal as soon as something gets regularized in Iran. 

And then the fourth one to consider, fifth one consider excuse me, is the Danish Straits. The Baltic Sea empties into the North Sea and onto the Atlantic, and in doing so, it passes through a series of straits that are controlled almost exclusively by Denmark, plus Sweden. Now, these are two countries that haven’t really tried to regulate the strait in modern times. But if you go back to the times before World War one, this was one of the big hullabaloo things in northern Europe. With the Germans ultimately building the Kiel Canal that crosses that narrow little section of northern Germany in order to bypass anything that the Danes could do. As soon as that canal was built, everyone basically stopped paying the sound dues as they were called, and simply it was a free waterway. But once it becomes clear that the rules are changing, expect the Danes to get in on this, because pretty much all Russian commerce that flows out of northern Russia comes out of Saint Petersburg and Vyborg, and then onto a boat and then through the Danish straits. And the Danes have not been happy about that for the better part of a century, and certainly not since the Ukraine war started. And now that Sweden and Finland are no longer neutral countries, you can count on the Scandinavians working as a group. So Norway, Denmark, Finland and Sweden working as a group to enforce some sort of structure on this waterway because it is to their economic and especially national security interests versus the Russians. 

Now, if you step back and look at all of these in unison, you see two big patterns. The first is that anything that wants to flow out of the Middle East in terms of oil has to use either Hormuz, the Bab or the Suez Canal. And so all of a sudden, the countries that hold the leverage there have huge leverage when it comes to energy. And if I were them, part of the tolls in my mind would simply mean making sure that I never had to pay for oil again. Just something to think about. And since France has a thumb on that scale, that gets really interesting really fast. 

When you’re talking about the Turkish Straits and the Danish Straits, however, the THE issue is Russia, because almost all of their exports in the post Ukraine war environment flow through those two waterways. And all of a sudden you’ve got countries that are in NATO completely controlling their access. That doesn’t mean that deals can’t be cut, but it does mean that Russia’s access to the world as an exporting power becomes limited to just what it can get out through the Pacific. And that is a small fraction of what goes west simply because of the nature of the infrastructure in the distances involved. 

Most of the people, most of the refineries, most of the oil flows west, not east. So we get a rewiring of what’s left of global commerce in the scenario. And all of a sudden a lot of these products are trapped regionally rather than being able to go globally. And so the closer you are to these things, the easier it is for you to cut a deal with the powers that hold the knife over the roots. And the farther away you are all of a sudden, you’re talking about needing to find a way to source things that are not coming from these two zones. And for a lot of countries, there aren’t a lot of good options for that.

The Collapse of the World’s Strategic Straits

Shipping containers being transported by a cargo hauler in a strait | Licensed by Envato Elements

The Strait of Hormuz needs a new model for running things, but copy/pasting the voluntary system used in the Strait of Malacca isn’t going to work.

Iran isn’t just concerned about security; it wants international recognition of its right to control access to Hormuz and collect the associated access fees and tolls. With a clear ability and willingness to disrupt traffic through Hormuz, Iran has forced everyone to take these demands seriously.

Prefer to read the transcript? Click here

Transcript

Hey everybody. Peter Zeihan here. Coming to you from Colorado’s Front Range…found a gap in the wind. So we’re taking a question from the Patreon crowd. Specifically, there is a lot of talk from all corners true about what to do about the Strait of Hormuz. True. What about replicating what has happened in the Strait of Malacca these last 30 years? Is that a model? Because it’s one that’s being discussed. Great question. The short answer is no. 

Let’s talk about what the Iranians are after and then go into the Malacca model. So what the Iranians are trying to get is any sort of even tangential acceptance by the United States that they should be able to regulate the Strait of Hormuz as they see fit, and that includes charging tolls or service fees or whatever. The numbers vary wildly from the equivalent of $0.10 a barrel to $2 a barrel for the equivalent cargo. 

So like a supertanker that comes through with a million barrels, that could be anywhere from $100,000 to $2 million per passage. And the Iranians think they should be able to say, whenever a ship comes or goes, that they have the ability to say, you either can’t come, and here’s the toll you have to pay before you can proceed. 

And in many ways, they’ve already set something like that up on their side of the Gulf that has been obeyed erratically, I might add. Sometimes they shoot at them even if they’ve paid the toll. But overall, their ability to strike across the entirety of the strait means that people have to take these threats seriously. And it’s very rare now that we have 10% of the cargo going through that used to go through back in January before the war started. So their threshold is pretty high, and they’re demonstrating that if they don’t get their way, they can impose a cost on anyone who defies them, including the US Navy. 

Let’s talk Malacca. Now, Malacca, obviously an international waterway, busiest waterway in the world, significantly more so than Hormuz, because most of the stuff that comes through Hormuz ultimately goes through Malacca. In addition to cargo going between the manufacturing countries of Northeast Asia and the consumer economies of Europe. Now, Malacca has a voluntary system that was set up roughly 30 years ago, where countries and governments and bureaus of those governments can voluntarily contribute some cash to maintain safety procedures in the waterway. Sometimes aids to navigation, things like buoys. Sometimes it’s satellite navigation assistance. Sometimes it’s search and rescue, and sometimes, if, and God forbid, there’s a collision, it’s port facilities to help with recovery and repair. The thing is two things. Number one, voluntary. And so a lot of countries, a lot of companies just don’t do anything. And number two, because it’s voluntary, what gets donated is chump change. In the 30 years that this structure has been in place, the grand total of all fees paid, voluntarily paid, is under $50 million. And from the Iranian point of view, that should be in the vicinity of the income they get every 1 to 3 days.  

So not a good model. Not saying there is a good model. The question really is a different one, I would argue. We are clearly in a position where the world’s the strongest naval power in human history, the United States, is unable to force a country that doesn’t even have a hull in the water, from making what needs to be a busy waterway nonfunctional. And in that sort of scenario, it’s honestly just a matter of time before the rest of the world, grudgingly, and maybe looking the other way, accepts that fact. 

And when that happens, we will have taken one of the world’s great international waterways, Hormuz, and turned it into some sort of toll system. And when that happens, we will have formally or informally broken with over a century of international maritime law that makes specific waterways open for all for free. Because once Hormuz falls, we have to revisit that issue with every other waterway that is like Hormuz. 

That’s a better question. We’re going to tackle that one tomorrow.

Welcome to Captain Phillips’ Nightmare

A jolly Roger Flag on a ship

Captain Phillips is shaking in his boots because piracy is returning to the high seas, specifically in the Red Sea and off the Horn of Africa. Somali pirates have already attacked multiple ships.

With a large share of the global oil supply offline, the U.S. preoccupied with the Iran war, and nobody else able to step in, I would expect things to worsen quickly. The Red Sea will quickly become a no-go zone.

This would disrupt a major global shipping route and force vessels to reroute (which isn’t an option for everyone). So, the already strained global system will face even more shortages and disruptions.

Prefer to read the transcript? Click here

Transcript

Hey all, Peter Zeihan here. Coming to you from Colorado. Today we’re going to talk about piracy because it is back in the off the horn of Africa and the Red sea. We have seen Somali pirates active again with at least three ships being attacked. This is a direct outcome of the Iran war, and we should expect a lot more in the days and weeks to come. 

So very, very short version. In case you haven’t been paying attention, the Strait of Hormuz. is offline. And that means roughly three quarters of a billion barrels of crude haven’t made it to the market. That’s roughly equivalent of 10 to 15% of global supply is just gone. Probably not coming back. And the United States has this largest concentration of naval forces in the area, really in the history of the region. 

So those two things, make it almost impossible for people to patrol countries that might be a little hostile to the United States, say, China. They’re not going to put any of their naval vessels in the In an area with so much American military ordnance running around. And number two. The oil shortages means that more conventional navies, because most navies in the world are not nuclear powered, can’t actually get the fuel to keep their economies running. 

So the idea of doing a long range projection force into a war zone to fight pirates? No. So what we basically have is the United States concentrated on Iran the Strait of Hormuz It no longer has the bandwidth to patrol the Red sea and the coalition of forces from ten, 15 years ago that did it can’t function in this environment. 

What it basically means is, as this ramps up, not only is the Strait of Hormuz a no go zone, the Red sea will once again become a no go zone that will also hit energy prices, because a lot of stuff is currently being exported through the Red sea and then up through Suez. That’s going to not work anymore. 

You’re going to have to go all the way around Africa. And for shuttle tankers that are coming in from, say, the Russian space and the Baltic or the black, they originally would go through Suez and the Red sea. Now, if they can’t arrange some sort of ransom system or a prepayment system to Somali pirates, which don’t exactly have crypto accounts like the Yemenis or the Iranians do, those ships simply can’t sail the distances necessary to get them all the way around to. So this is going from bad to worse in a very short period of time. Everybody enjoy your 2026.

The Death of the US Tech Sector: Part 1

Photo of wires and tech

We’re doing a two-part series on the tech sector. Today, we’ll be looking at the disruption caused by deglobalization and Trump’s policies.

The gadgets and gizmos that fill our homes rely on highly complex supply chains, with most of that work happening in Asian countries. Any disruption to these interconnected networks could send devastating ripple effects down the line. US Tariffs on Asian imports discourage US participation in supply chains and incentivize companies to move production entirely outside of the US.

As tech manufacturing floods out of the US and we continue down this path of deglobalization, the future of American tech production looks worse and worse. Tomorrow, we’ll tack on the issues of demographics and rising capital costs.

Prefer to read the transcript? Click here

Transcript

Hey, all. Peter Zeihan here. I am in the Hoover Wilderness, which is one of my favorite spots on the planet. Lots of rock and water. Anyway, today we’re taking another question from the Patreon crowd. And specifically, what’s the future of the tech sector as everything Trump and everything de globalization kicks in? Well, the summation is it’s not pretty. 

There’s a lot going on. So we’re going to break this video into two parts. First we’re going to talk about classic manufacturing. Lots of folks think that all of our tech products and electronics in general come from China, but that’s a bit of a misnomer. China is a place where some of the parts are built. 

Certainly, and where a lot of the final stuff is assembled, but it’s not typically where it’s manufactured. And when you’re talking about tech products, you’re talking about not dozens, but hundreds and maybe even thousands of supply chain steps. For example, your typical laptop or smartphone has somewhere between 1 and 2000 pieces in it, and each of those pieces have their own supply chain. 

What happens in this weird world we live in of globalization is that the parts are made incrementally by different labor forces with different industrial plants, typically in different countries, and then those various components are brought together at a location and assembled into a sub piece. And that sub piece is then shipped off somewhere else, where it’s put into another piece, and on and on and on until you get your finished product. 

So when you’re talking about something like a smartphone, it probably touches 5 to 11 countries. On its way before it even gets to you. Much less before it crosses the Pacific. So East Asia, because of its widely differentiated supply chains and widely differentiated labor structures, is where most of this is done, because the high end is done in places like Korea or Japan. 

So we’re going to pause until the appeal is done. 

All right. Where was I? So the high end stuff. Taiwan, Korea, like Dram chips come from Korea. The GPUs that everyone obsesses about come from Taiwan. But the photo masks that make it possible to make these things. That all comes from Japan. The purified materials might come from the United States. The lasers from California, the etching machines from the Netherlands. 

Injection molding might be done in China. Wiring might be done in Vietnam. You get the idea. It’s a really big network. Any part of the globalization that hits any part of the world is going to break up those chains. And since roughly, 80, 85% of tech manufacturing is Asia centric, we’re looking at basically cascading failures. 

Because, remember, if you have a phone that has a thousand parts and you’re missing one part, you just have a really expensive paperweight. Anyhow, in this way, what’s going on with U.S. trade policy is, borderline suicidal because what it has done is put a tariff barrier between all the Asian countries and the United States, which actively, aggressively disincentivize this American participation in those supply chains. 

Because if you were once reliant on a part from, say, California, and now, shipping the inputs in from Asia to do the value add, has this onerous tariff cost upon it, you’re going to look to move that thing out of California to someplace like Korea or Japan. And so what we’re starting to see in the manufacturing space for tech is a de Americanization. 

Not that we were doing a whole lot of it either. Any way we were doing certain pieces, but there’s now no incentive for those pieces to stay here. So if you look down the road when globalization gets worse and say, when China goes away, we’re going to have very, very little to work from. We’re just not going to have tech products. 

Obviously, I would like to thank everyone sees that as a bit of a problem. If you want to move that stuff here, tariffs are absolutely not the right tool for the job. They do the opposite. That’s problem one. Next time we’ll talk it up. Problem two.

Say Goodbye to the World’s Trade Routes

Cargo ship with containers

It’s always lovely when everything you’ve talked about throughout your career decides to happen all at once. At this critical decade, how will the globes trade routes fare? And which routes will fracture first?

There are three major trade routes that come to mind. Southeast Asia is made up of many regional states that rely upon each other, so none of them want this to shut down. While this should hold, there are some other players (China, Japan, and India) that could add some tension. The Persian Gulf and Strait of Hormuz are easy to disrupt and will likely be the first to go; this will have an outsized impact on places like Japan, Korea, Taiwan, and China, that rely on oil coming through here. And the last route to keep an eye on is the Baltic Sea; the Ukraine War’s outcome will likely determine what happens here.

Bottom line…get your s*** while you still can.

Prefer to read the transcript? Click here

Transcript

Hey all, Peter Zeihan here. Coming to you from the Lost Creek Wilderness. I have moved out of the jump on him into the narrows. So I like a one sided canyon sort of thing. Anyway, trail goes. 

Back in there somewhere. Anyway, taking a question from the Patreon crowd, specifically, as globalization breaks down and as military alliances fracture, which trade route will fracture first become unusable? 

We’re at the point in history where there’s a lot of things going wrong at the same time. Most of my work has been saying that all of these factors, whether it’s demographics, globalization, American isolationism, European fractures, the Chinese fall, whatever happens to be, they all come together in about the same ten year period. 

And we have now entered that ten year period. So the partial cop out to answering this question is, I really don’t know, because everything is going wrong. And all of these, routes are going to be in some degree of danger. But let me give you the two that I think. Well, let me do the three that I think are most concerning. 

First, the one that I think actually will hold together and that’s the Southeast Asian route through, Indonesia, Malaysia, Singapore, Strait of Malacca, the Luna Strait, that area basically connecting Northeast Asia with the rest of the Eurasian continent. This is an area with 15 countries, all of which have their own ideas of what should happen, and none of them have the ability to project naval power, far enough for the entire zone. 

The reason that I think it’s still going to work out for this area, though, is that most of those countries in Asean and then link in to, say, Australia, see the world through similar lenses. I don’t anticipate them launching wars of aggression against their neighbors. They know that they occupy different parts of the manufacturing supply chain. 

They know they need inter-regional trade and agriculture and energy and intermediate manufactured parts. So they have a vested interest in finding a way to make it work. The problem would be countries from out of region India, China, Japan who might see things differently. But even here, I think it’s pretty safe to say, that it’s going to hold. 

Japan might try to raid Chinese shipping, but they have no intention of shutting down shipping through the region as a whole. With Australia, you have the Americans of all to a degree. And India is really not a trading power. And China, of course, if it’s going to survive in any form, has to have access to this trade route. 

So that one’s probably okay. The second one, the ones absolutely hosted so opposite is coming out of the Persian Gulf here. You’ve got a number of countries with limited global reach, but missiles and jets and drones would have no problem closing the Strait of Hormuz. And even if you get past the Strait of Hormuz, you then have India and Pakistan, who in a globalized world would love to see the other one lose access to things like energy. 

And so I can see any number of scenarios where Iran or Pakistan or India or Saudi Arabia or even the United Arab Emirates find it in their interests, at least for periods of time, to close that entire route down. And that’s 20 million barrels a day of crude that could no longer make it to market. It would have catastrophic impacts for everyone further east, most notably Japan, Korea, Taiwan, and especially China, which uses more than the other three put together. 

And then the third route, depends on what happens in the Ukraine war. The Baltic Sea has always been a zone of commerce, but it’s always been a zone of conflict. And in times past, the countries that are either adjacent to the sea or just one step removed. So we’re talking here, all of the Scandinavian countries Finland, Sweden, Norway, Denmark, also Poland, also Germany, also the United Kingdom, also the Baltic, also Russia, have all at various times in their history tried to militarize their part of the sea, to shut it down for the people. 

At the moment, everyone is on the same side except for the Russians. And the Russians are using the Baltic Sea because we’re still in globalization, barely to ship 1 million to 1 million, a half barrels of crude out to the wider world around sanctions. Sooner or later, that’s not going to work anymore. Either. The Western countries are going to interfere with the oil shipments, which I’m a little surprised hasn’t happened already. 

Or the Russians are going to say screw it and basically Mess up, corporate shipping on the Baltic Sea. One way or another, this is likely to happen. The question is, how long will it last? If Russia does well in Ukraine, it can last a long time because you don’t need to be able to poke out. 

All that much pressure collapses in Ukraine that this is no longer concern. And the issue is how Europe evolves or devolves in the future, whiskey or any number of directions. So Middle East shipments, most notably through Hormuz, look really bad. Red sea is not much better. Baltic something to keep an eye on. But there’s reason for hope. And then Southeast Asia. That’ll only break if things go really horribly bad.

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.