Afford Anything - Treasury Tantrums, Arctic Routes, and McKinley's Ghost

Episode Date: February 8, 2025

#580: "If you want to understand what's happening in the economy, look at bonds," begins today's episode, where we explore how the bond market acts as a crystal ball for economic trends. The bond market has been sending some clear signals lately. Interest rates remain elevated, with 10-year Treasury yields about 1 percent higher than their September 2024 low. After a challenging 2024 where bond returns flattened to just 1.18 percent, both the U.S. and U.K. are seeing historically high yields. We break down what's driving these changes and explain key concepts like term premium — the extra return investors demand for holding longer-term bonds. The Federal Reserve's recent moves are shaping this landscape. After cutting rates by 1 percentage point between September and December 2024, Fed officials are now signaling a more cautious approach, wanting to see further inflation decline before considering additional cuts. Then we explore why President William McKinley is suddenly relevant again. McKinley, whose term began in 1897, was known for his imperialist expansion and love of tariffs. His presidency came towards the end of what historians call "the long 19th century" — a period from the French Revolution in 1789 to the start of World War I in 1914. This era was marked by massive social upheaval, major technological advancement, the First Industrial Revolution, and huge migration into cities. It also included the California and Klondike Gold Rushes. The episode then turns to what some are calling the "Cold Rush" — the race to claim influence in the rapidly changing Arctic. With ice melting four times faster than global averages and the potential for ice-free Arctic days by 2030, nations are competing for new shipping routes and access to resources. We examine three emerging paths: the Northern Sea Route along Russia's coast, the North-West Passage along North America, and the Transpolar Sea Route across the North Pole. Finally, we dive into an overlooked story: the global tax war. In 2021, 136 countries agreed to establish a 15 percent minimum corporate tax rate to prevent profit-shifting to tax havens. While the U.S. already exceeds this minimum with its 21 percent domestic rate, implementation faces challenges due to different methodologies for calculating tax bases and recent political developments that could affect its future. Resources mentioned: https://www.federalreserve.gov/econres/notes/feds-notes/the-treasury-tantrum-of-2023-20240903.html https://www.pimco.com/us/en/insights/will-the-true-treasury-term-premium-please-stand-up https://www.bls.gov/news.release/pdf/empsit.pdf https://youtu.be/gQqcKepuQdA?feature=shared https://www.morningstar.com/bonds/how-largest-bond-funds-did-2024 https://www.npr.org/2025/02/05/1229167003/mckinley-trump-tin-tariffs https://www.economist.com/finance-and-economics/2025/01/23/the-arctic-climate-changes-great-economic-opportunity https://www.clingendael.org/pub/2020/presence-before-power/4-greenland-what-is-china-doing-there-and-why/ https://www.clingendael.org/pub/2020/presence-before-power/ For more information, visit the show notes at https://affordanything.com/episode580 Learn more about your ad choices. Visit podcastchoices.com/adchoices

If you want to understand what's happening in the economy, look at bonds. In today's episode, we're going to talk about what the bond market can tell us about where the economy is headed. We're also going to take a look at the new jobs data, which dropped this morning. The numbers were not as high as expected. We're going to add some context to that story. Meanwhile, what's the deal with President McKinley? Why is he back in the zeitgeist? We're going to discuss this in today's special History Corner segment, which leads us into a look at today's

modern gold rush, which some historians are calling the cold rush. And we'll end with a look at a story that has really gotten overshadowed. And that's the global tax war. Not the trade war, but the tax war. Welcome to the Afford Anything podcast, the show that understands you can afford anything but not everything. Every choice carries a tradeoff. And that applies not just to your money, but to your time, focus, energy, attention to everything that's both scarce and valuable. This show covers five pillars, financial psychology, increasing your income, investing, real estate and entrepreneurship. It's double-eye fire. I'm your host, Paula Pant, I trained in economic reporting at Columbia, and once a month on the first Friday of the month, we host our

monthly economic update. So welcome to the February 2025, first Friday monthly economic update. Interest rates remain high as anyone who has applied for a mortgage or a car loan knows. This is largely because of the benchmark 10-year treasury yield, which is currently hovering around 4.4 to 4.5%. This is actually down slightly from its peak in mid-January, which is at 4.79%, just shy 4.8. But by recent standards, it's still considered quite high. In fact, it's one percentage point higher than it was in September 2024, which was its recent low. Here's what's interesting. 2024 was a sucky time to be a bond investor. The Bloomberg aggregate bond index generated a total return of 1.18%.

Now, of course, that's an aggregate bond index, so it's all kinds of durations. And when you break this out a little bit, you can see that in 2024, short-term bonds did better. The Vanguard short-term inflation-protected securities ETF had the highest total return out of the 10 largest U.S. bond index funds. That TIPS. brought in 4.8% over the span of the year. But by contrast, long-term bonds did terribly. The I-share's 20-plus year Treasury bond ETF lost 7.8%. So bond investors, and particularly long-term bond investors, had a terrible 2024. And the most newsworthy part of that year really started in September.

which, as you recall, is when the Federal Reserve made its first rate cut. Now, that was a highly anticipated rate cut. It actually happened a little bit later in the year than many people were expecting. There was, in early 2024, there was a lot of talk about whether or not that first rate cut would happen in the spring or in the summer. And the central banks of many other large developed economies started cutting rates in the summer of 2024. And so the fact that the Fed waited until September, you know, later than our cohort of economic peers, was something that a lot of borrowers were really looking forward to because many borrowers hoped that once the Fed began cutting rates, that meant that interest rates would decrease. Instead, what happened was that 10-year treasury yields began climbing at exactly that same time in September 2024. And that's what kept interest rates high because the federal fund's target rate has a more direct impact on short-term bond yields.

But long-term, like the 10-year treasury, those are more influenced by investor expectations around inflation and economic growth. And so investors signaled that they were still worried about inflation, which is what's keeping the 10-year yield high. Now, this isn't just happening in the U.S. over in the United Kingdom, 10-year government bond yields have hit their highest-level. level since 2008. Now, with all of these factors in that recent history in mind, the Fed met at the end of January. They had a meeting January 28th and 29th. They decided to hold rates steady, and they are widely expected to hold rate steady at their next two meetings, which will be in March and in May. Remember that the Fed cut the federal funds target rate by a total of one percentage point between September and December of last year. But in December, the Fed signaled their plan to pull back on further cuts in

2025. And investors who initially thought that 2025 would see a series of maybe five or six cuts are now broadly pricing in the probability that across the span of this calendar year, we will likely see maybe only two or three cuts as inflation worries still linger. There's an interesting component of this that I want to talk about, and it's called the term premium. The term premium is how much investors get paid for the risk of holding bonds over a longer time period. And so in the U.S., that's measured as the expected excess return that investors would earn by holding longer dated U.S. treasuries as opposed to holding T-bills and rolling over those T-bill purchases. The reason that I say in the U.S. is because the concept of a term premium can apply to bonds issued by any country, but for the purposes of this discussion, we're going to focus on the U.S. The term premium on a 10-year treasury would be calculated as the yield on that 10-year treasury minus the average of the expected T-bill yields over the next 10 years.

Now, in order to make that calculation, we have to engage in some guesswork because, we know what the yield on a 10-year treasury is. That's widely available public information. But the average of expected T-bill yields over the next 10 years is, I mean, it's right there in the description. It's expected. That's just a fancy way of saying it's a guess. Since T-bill yields and the federal funds rate are pretty tightly linked,

the way that investors will take a guess on the average of expected T-bill yields, in the future is by effectively taking a guess on what the federal funds rate is going to do, meaning they're going to be guessing what moves the Fed is going to make. And while it's relatively simple to guess that a few months in advance, I mean, it's currently February, so it's not that hard to make a guess as to what the Fed is going to do in March or even in May, but it's much harder to guess what Fed policy will be over the span of the next 10 years. We don't know what Black Swan events might arise, etc. investors have been making these guesses for decades.

If we go back to the equation, term premium equals the yield on the 10-year treasury minus the average of everyone's collective guess about what T-bills are going to do over the span of the next 10 years. Well, we can chart this out, right? So there are four major models, or four common models, I should say, that are used to, calculate the term premium. And if you take a look at a chart of the estimated term premium since 2014, what you'll see is that this figure is rising quickly. And there's particularly a pronounced spike in the term premium that starts right around 2021 and 2022, which, as you'll recall, is when the COVID lockdowns ended. That was when the term premium started to spike. And it

really intensified in the summer and fall of 2023 during a phase in which treasuries sold off really sharply where 10-year yields spiked from 3.35% all the way up to 4.99% between May and October. That's a huge spike in a really short amount of time. In fact, it was so dramatic that investors actually gave it a nickname. They called it the Treasury Tantrum. So summer and fall of 2003 when the treasury threw a tantrum, that was when we saw a very dramatic spike in the term premium. But that spike had already, you know, the roots of it, the Genesis had already started right at the end of the lockdowns, 2021 and 2022. Now the so what, the what's the big deal here is essentially this. The term premium on a treasury note, I've told you how to calculate it,

but I haven't explained necessarily why we calculate it. What does it represent? And fundamentally, the term premium represents the reward for duration risk, the reward for holding those longer dated bonds. Now, pre-pandemic, that expected reward was pretty low. And post-pandemic, when we started to watch the term premium climb, that reward got sharply increasing, steadily higher. That's all encompassed in what I mean when I say that we can really learn a lot

about investor expectations for the future of our economy, including inflation, interest rates, growth. We can learn a lot about that by watching treasuries specifically and bonds more generally. This asset class, more so than equities, this asset class, more so than equities, this asset class, is the closest thing that we have to an omen. I'm going to link in the show notes to two really interesting pieces. One is from the Fed itself. It's from Federal Reserve.gov. And it's titled The Treasury Tantrum of 2023.

It starts off by saying this Fed's note investigates the rise and fall of the 10-year treasury yield during the second half of 2023. And it goes on to say that our analysis suggests that the rise in yields was primarily driven by an increase in term premiums. And then it talks about other corroborating factors including quantitative tightening and heightened economic uncertainty. So I'll link to this in the show notes if you want to read more about it or understand this piece of the economy better.

I'm also going to link to an article from PIMCO, which is an investment management firm that is renowned for bond investing. And they've also written a great piece that you can check out for future reading. Turning now to the jobs report, this morning, the BLS, the Bureau of Labor Statistics, released fresh data showing that U.S. employers added 143,000 new jobs last month. That's less than what was expected, but it was enough to allow our unemployment rate to edge down slightly to 4%. Average hourly earnings rose 4.1% over the year, which is more than what economists were forecasting and it's above the rate of inflation. The jobs report also included some

revisions to data released over the past two years. Now, to be clear, revising previous data is normal and a routine part of labor department processes. And this time, what we saw in those revisions is that the economy added 655,000 fewer jobs in 2023 and 2024 than previously expected. So in total across 2023 and 2024, we added 4.6 million new jobs to the economy, which breaks down as 2.6 million new jobs in 2023, and the remaining 2 million in 2024. In terms of data

from the previous month, the sectors that led job growth were education and health, followed by retail and government, largely at the state and local level. So what we're seeing is a continuation of the same patterns that we've been seeing, for a few years since the end of the pandemic, which is jobs continue to grow. Unemployment remains hovering right around the 4% line, keeping it near historic lows. Wage growth is strong, and because that wage growth is coupled by productivity gains, it is unlikely to trigger what is known as the wage price spiral in which higher wage growth triggers higher prices because

companies have to raise their prices in order to pay those higher wages, which then creates this inflationary cycle. So even though wage growth is strong, the productivity gains that have accompanied that have acted as a barrier towards that growth becoming inflationary. Now, the big dip that we saw was in the University of Michigan's Consumer Sentiment Index, which is a measure of how people are feeling. Consumer sentiment is now at a seven-month low. dropping from 71.1, which was January's final reading, down to 67.8. And the expectations for personal finances dropped by six percentage points from the previous month and is now at its lowest value since October of 2023. So if we put all of this together, the summary is

people have jobs and they're still worried. Mostly, they're worried about inflation. That's what we can see from both the University of Michigan Consumer Sentiment Index, as well as from the Labor Department jobs report. And if we put that together with our earlier discussion around the Treasury yield, what we see is that Wall Street investors feel the same way that Main Street mom and pop people do, which is they're also worried about inflation. And then when we look at the Fed holding rates steady, looks like they're also worried about it too. So we have broad consensus here from the Fed, from investors, and from ordinary people, that inflation is the biggest worry. Jobs continue to grow, and unemployment remains low, so unemployment is not the worry.

Inflation is. And what I think about when I look at this data, if you recall the interview that I did last year with Bill Benkin, he is the MIT-trained former rocket scientist who developed the 4% Safe withdrawal rule. It was his research that discovered the 4% rule. That interview is on YouTube. We shot it at the Bogleheads conference in Minneapolis last year, and we're going to put the link in the show notes if you want to watch his remarks directly. He said something that really stuck with me. He said, don't worry about a recession because recessions are temporary. They're cyclical. They'll come and go. And in fact, he was giving this advice to retirees.

So even if you're approaching retirement or in retirement, he said, you know what, don't worry about a recession. It's temporary and there will be a rebound. But do worry about inflation. That is an actual legitimate cause for concern because that is not temporary. Once prices rise, they are higher forever. And so a recession only inflicts temporary pain on your portfolio, whereas inflation inflicts inflicts permanent lasting pain. Now, the only case in which inflation would ever reverse course is if we entered into a deflationary environment, but that comes with its own massive set of

alternate challenges. And besides, there is no evidence that the U.S. is going to enter into a deflationary period. So while that's an interesting academic theoretical, it's not something that we need to discuss right now for any practical purposes. And so what do you do if you are concerned about inflation, well, your best move is to put your money into any type of tangible asset because tangible assets are inflation proof, historically speaking. So if you think about the Weimar Republic or you think about Zimbabwe, you think about even Argentina, these places that experienced massive hyperinflation, what did people do? They loaded up on tangible assets because that was how they could present.

protect their wealth, protect their portfolio from inflation. So examples of tangible assets include real estate, art, precious metals, floating rate bonds, tips, treasury inflation protected securities. There are, of course, drawbacks to all of these. Flooding rate bonds and tips will give you inflation protection, but they don't tend to offer huge returns as compared to some other asset classes. Precious metals can be enormously volatile. And real estate is, of course, the asset class that I favor the most because real estate values and rental income both tend to increase with inflation.

But of course, there's a large learning curve to get into it if you decide to hold it directly. If you don't, there are REITs, real estate investment trusts that you can invest in, but it's uncomfortable to have too much of your investable portfolio in REITs. as opposed to keeping your money directly into properties that you can oversee and manage in a way that is directly inside of your locus of control. If you are worried about inflation, then make sure that you have inflation-resistant assets in your portfolio. Speaking of precious metals, you remember historically the gold rush. Well, we are now on the frontier of the cold rush.

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apply. Don't miss out on early Black Friday deals. Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-F-A-I-R.com. Sale ends December 7th. Welcome back. Let's kick off our special history segment of this podcast with a discussion about William McKinley, whose name has resurfaced lately. Many people are asking why? President McKinley, his term began in 1897. And while it is tempting to say that 1897 was the end of the 19th century, and certainly that's technically true, chronologically speaking, historically speaking it wasn't, because historians have an expression where they talk about what they call the long 19th century. And they say that effectively, the beginning of the 19th century was actually

in 1789, that the 19th century began with the French Revolution, and it ended, the long 19th century ended in 1914 with the start of World War I. The beginning of the Great War, of course, being a major turning point signifying the beginning of a new era in global history. This long 19th century saw huge developments. We mentioned the French Revolution, there were the Napoleonic Wars, there was the rise of industrialization and urbanization. and it was a time period that was characterized by a few things. One were huge technological advancements, steam power, the development of telegraphs, early forms of electricity. These were groundbreaking new technologies that all came out of this time period.

There was enormous social upheaval. This was the century in which slavery was abolished in much of Europe and the Americas. And this was the century in which you saw huge migration into cities due to. to industrialization. This is when you had the first industrial revolution. So you pull all of that into context and then we land on 1897 when President McKinley is sworn in. And he is an extremely pro-tariff president. In fact, prior to his presidential election, he pressed Congress to pass a bill to raise tariffs up to 50 percent, 50-5-0. President McKinley was also an expansionist. and an imperialist. He added Hawaii, Guam, the Philippines, and Puerto Rico to American territory.

McKinley was also backed by some of the most influential business leaders of his time, including John D. Rockefeller, Andrew Carnegie, J.P. Morgan, and the Vanderbilt family. Cornelius Vanderbilt himself passed away in 1877, and his heir, Billy Vanderbilt, passed away in 1885, but the Vanderbilt Fortune in addition to Rockefeller, Carnegie, and Morgan, were all backers of McKinley. And so there's an expression. History doesn't repeat itself, but it rhymes. And you can see in my telling of this some of the many similarities between the long 19th century and the 21st. But there were many differences as well. Of course, many points that are simply not comparable. I mean, and from an economic lens, the most prevalent being that the U.S. was functionally on a gold

standard at that time, and the major debate of the day was whether or not the U.S. should move to a bimetallic standard with silver. McKinley was very much opposed to that. He didn't want to, as he saw it, debase the U.S. currency by doing that. But going back to the topic of McKinley's tariffs, as I mentioned, he actually pushed Congress to pass those tariffs prior to when he was president. So he did this with what was called the Tariff Act of 1890, which was commonly referred to as the McKinley Terriff. But one thing that he did that was different from the discussion that you hear today is that rather than setting different tariff rates for different countries, which is what we're talking about today, he instead set different tariff rates for

different industries. So under the Tariff Act of 1890, the tariffs on imports, depending on which industry they were from ranged from a low of 38% to a high of 49.5%. There were also a few select industries that were exempt, including sugar, molasses, tea, and coffee. By contrast, there were a couple of industries that were subject to the maximum rate. So wool was one of those, wool and wool and goods. And the other is tin plates. you know when you wear a button, you know the thing on the back of the button that makes the button stick to your clothing, the pin and then the plate that that pin is attached to? That's an example of the type of manufacturing that got incentivized to stay in the U.S. as a result of the Tariff Act of 1890.

Now, there's a really interesting breakdown that the indicator by Planet Money did. I will link to that podcast episode in the show notes as well. in which they break down the effect of those tariffs on tin plate manufacturing. And spoiler alert, it did spur that manufacturing in the U.S. And it caused that sector to grow about 10 years earlier than it otherwise would have. And in other words, it gave domestic manufacturing for the tinplate sector about a 10-year head start. And so, yes, it did hasten the development of domestic tinplate production by about a decade. but the benefit to that industry also carried an overall cost to consumers, which goes back to our

earlier conversation about inflation. I should mention in this era, there were a lot of ordinary people, predominantly farmers, who were actually pro-inflation because they were heavily saddled with fixed-rate debt. And if you are a borrower that holds fixed-rate debt and the inflation rate exceeds that fixed-rate, then inflation is your friend because it means that you're paying back your debt at cheaper and cheaper rates, which is why, if you're a homeowner, fast forwarding to today, 2025, if you are already a homeowner and you have a locked in fixed rate mortgage from the ZERP era, so you have a low interest rate locked in mortgage, you're getting a double benefit because not only are you getting to pay back

your mortgage in cheaper and cheaper dollars over time, but also you're holding an asset, real estate, which is itself an inflation hedge. Anyway, I tell that story to illustrate some of the differences between that time period and now. Back then, there were some people who really felt as though they would benefit from inflation. And actually, that was part of the argument behind the bimetalism debate, because those same people hoped that moving to a bimetallic standard would also be inflationary. So there were people back then who were hoping for inflation. There are not people today.

pretty much nobody in the U.S. today who is hoping for inflation. So that is a key difference. Another key difference was the size of government. McKinley governed at a time when the federal government had 150,000 employees, total employees, 150,000. Whereas today, the executive branch directly employs 4.3 million people, 1.3 million of whom are service members and the other 3 million of whom are civilians. So even proportionate to the overall population, size of the country. There is, when you're making comparisons between these two eras, the key difference that government simply operated at a very different scale back then as compared to today. And so the reason I dig into this is because these first Friday episodes are dedicated to

understanding economics. As I mentioned earlier, in economics, what do we mean when we use the word expectations? Fundamentally, we mean yes. An expectation is a prediction about the future and those predictions are based upon what we have observed from the past, which is why economic history is such an important component of being able to contextualize any type of modern economic proposal. And again, insofar as history doesn't repeat, but it rhymes, I should note that there are elements of historical comparison that are apples to oranges because there are important pieces of context that are different. And and butterfly effect, if you change a few variables, you can have dramatically different outcomes.

So are there lessons that we can extrapolate from history? Absolutely. But should those lessons also be tempered by the knowledge that there are a number of variables that have changed? Yes, absolutely. Which means that everything we do is not only a reverberation of the past, it is also absolutely novel. Both sets of ideas are simultaneously true. Since we've been talking about the long 19th century, I want to draw your attention to something else that happened earlier in the 19th century, and that was the gold rush.

The California gold rush began in January of 1848, when gold was discovered at Sutter's Mill in Coloma, California, and the gold rush lasted for seven years from 1848 to 1855. Then, fast-forwarding again back to McKinley's presidency, see, there was the Klondike gold rush, which began in August of 1896, when gold was discovered near the Klondike River in Canada's Yukon territory, and lasted through 1898. The Klondike gold rush ended in the middle of McKinley's first term. The reason I bring up the gold rush, and you might have a couple of guesses, is it because we mentioned precious metals earlier as one of, along with

real estate, one of the hedges against inflation? Good guess, but no. Is it because we discussed by metalism? Good guess, but no. It's actually because we have another analog to the gold rush that's happening right now, and it's called the Cold Rush. So we'll take one final pause to hear from the sponsors who make this show possible, and when we return, let's talk about the modern day cold rush and the effects that it has on our markets. By the way, before we take this break, there's one other thing that I want to say,

which is we teach a course. on how to invest in rental properties. It is a cohort-based course, meaning we take a group of students, and we all go through the material together so that you have peers, you have accountability, you have a combination of 24-7 on-demand material, lessons that you can watch at any time, as well as an engaging and interactive live component. So we have weekly study halls, we have bi-weekly active investor mastermind calls. We have monthly office hours with me where you can just get on a Zoom call with me and ask me any questions that you have. And we have a huge variety of students within our community. So we have some people who are what we call the sideline sitters. You've been

thinking about buying real estate for years. You've been sitting on the sidelines. Should I, shouldn't I? I don't know? Maybe. Maybe not. And then meanwhile, as the years have gone on, the prices have just gotten more and more expensive. And now you're like, man, I've been sitting on the sidelines for the last five years, is it too late? The answer is no, it's not. Just like it's not too late to buy index funds, even though they're a lot more expensive than they were five years ago. And the key to buying investment real estate is knowing where to search, knowing how to search, understanding, knowing, first, knowing enough to know what you don't know. So knowing enough to know what questions to ask, and then knowing how to find the answers to those questions. And so we

take our students through all of that, through the lessons, the spreadsheets, the checklists, the worksheets. We have word-for-word scripts for when you're sending emails or making calls. We really create a proven, tested, structured system to move you from being a sideline sitter to being an action taker. So that's one type of student that we have there. We also have people who just feel priced out. I call them the priced out professional where, you know, you're like, man, forget about buying a rental property. I don't even have a primary residence. I'm totally priced out of the market. What do I do? And so we have a lot of those students and we work with them on figuring out, you know, do you want to house hack into your own primary residence or do you want to continue

to rent your primary residence but then add real estate to your portfolio by investing long distance? We have those students. We also have accidental landlords, the people who are like, hey, I never intended to be a landlord, but I have this fixed rate mortgage that I don't want to give up, but I have to move. So I guess I'm an accidental landlord now. What should I do? What should I know? How do I manage these tenants? So if you see yourself in any of those descriptions, you know, and that's just a sampling of the many types of students that we have in the course, I think you'll get a lot of value out of the camaraderie, the accountability. So enrollment opens on Monday, February 10. and if you want to learn more, go to affordanithing.com slash enroll. That's afforda anything.com slash enroll. All right. Thank you for listening. We'll take one final break to hear from our sponsors.

And when we return, we'll talk about the cold rush. And we'll also talk about a possible global tax war. Welcome back. So the long 19th century included both the California and Klondite gold rush. The 21st century, by contrast, features the cold rush. stated simply, the Arctic ice shelf is melting, and that is going to remake global trade routes. This has already begun, and it will only intensify. We'll start with the basics.

The Arctic is warming four times faster than the world at large, causing the ice to shrink by an area the size of Austria every year. The volume of ice in the Arctic has fallen by more than 70% since the 1980s. the first ice-free day in the Arctic may occur before 2030. This means three things. Number one, melting ice will create shipping shortcuts. In a moment, we're going to talk about three of those shipping routes. Now, these shipping routes are important for not only keeping prices down, because the cheaper shipping is, the cheaper the final price of goods are,

but also for broadly protecting our supply. chains, which has huge national security implications. So from both an economic perspective as well as from a national security perspective, it matters, it deeply matters, who will dominate these new shipping routes. So that's number one. And we're going to talk more about that, those specific routes, in just a moment. So hold on to your hats. Number two, the Arctic has an enormous amount of minerals.

There are hydrothermal fields. There are diamond deposits. There's cobalt, copper, graphite, lithium, nickel, aluminum, zinc, rare earths. And these are getting easier to extract due to the melting of the Arctic ice. And then number three, there's fishing. Fish that tend to live in warmer waters are already starting to proliferate in the Arctic. A prime example of this is Atlantic Cod. That's a species of fish that typically tends to live in more temperate waters

and is now starting to move into portions of the Arctic Circle, specifically the Bering Sea between Alaska and Russia and the Barents Sea off the coast of Scandinavia. Meanwhile, the fishing season is getting longer, and melting ice opens up new areas for fish. Macrole, for example, macro typically live in temperate and warmer coastal waters. Macrole wasn't found off of Greenland until 2011, but within three years, by 2014, macro grew to represent 23% of Greenland's total export earnings.

I'm going to say that again just for emphasis. It wasn't even caught off the coast of Greenland until 2011, and three years later, it was 23% of its exports. That is skyrocketing growth in a very short amount of time. Those are the three major economic opportunities that many investors and countries are seeing when they look at the Arctic. And that means there's enormous competitive pressure to be the first mover and get there before other investors and other countries do. I mentioned earlier that I would elaborate on those three shipping routes. So one of them is called the Northern Sea Route.

And it pretty much hugs the coastline of Russia and then connects through the Barents Sea to Europe and the UK. There's also the transpolar sea route. This is the one that cuts closest to the pole itself, the North Pole, stretching from Scandinavia, up over the globe, through the North Pole. pole or close to it until it gets to Alaska. So you can think of the transpolar sea route as the Santa Claus route.

And then finally, there's the northwest passage. And it's sort of, you know, the northern sea route is the Russia route. The northwest passage is the Canada route. It follows the North American coastline. I'm going to link in the show notes to a map that was printed in The Economist with data from not only the Economist, but also the Arctic Institute and the Geological Survey of Norway. and this map shows the three shipping routes that I just named as well as metal deposits. So again, that link is in the show notes.

If you want to take a look at these routes yourself, it kind of brings it to life when you see it on a map. But these routes will dramatically shorten travel time between Asia, North America, and Europe. Which means for shipping that you're cutting costs, you're cutting fuel costs, you're cutting labor costs, you're speeding up delivery times, and you're not. not overly reliant on either the Panama Canal or the Suez Canal. Do you remember, by the way, when that ship got stuck in the Suez Canal? The ship's name was the ever-given and it was a container ship that got wedged in the Suez Canal in March of 2021. Remember how one ship got stuck and it caused these massive disruptions to global trade?

So there's enormous benefit to not being overly reliant on the Panama Canal and the Suez Canal when it comes to shipping. and besides which both of those are located in vastly different areas than where we're talking about. So geographically, just having more routes open, and particularly having routes open that border wealthy nations, including the UK, many nations across Europe, Russia, the U.S. through Alaska and Canada, it will dramatically remake the relationships, the trade relationships, between these countries that are major global. players. Now, it is perhaps because of everything that I've just outlined that China has been extremely proactive and very aggressive about having a strong presence in both Iceland and Greenland. So the data that I'm going to relay next comes from research that was done by, and I apologize, I'm going to mispronounce this, but the Klingandale Institute. I know I'm mispronouncing it. My apologies to anyone who speaks Dutch. The Klingan-Gandale Institute. The Klingan-Dale Institute. I know. I know. I'm mispronouncing it.

Institute is a Dutch think tank and academy on international relations. And if you want to follow the money, 75% of the funding for this institute comes from the government of the Netherlands, primarily the Ministry of Foreign Affairs and the Ministry of Defense. In 2020, the Klingendell Institute issued a report on China's Arctic Strategy in Iceland and Greenland. Now, this report came, again, it was published in 2020, and it came on the heels of China publishing, its own Arctic strategy in 2018, when they, China itself, published that they are, quote, a near Arctic state. And so the Klingendell Institute initiated a study on China's geostrategic presence in the Arctic, looking at what are the long-term drivers, how is China currently shaping Arctic relations, and how should Europe and the Netherlands engage? I will link also in the show notes to this report,

but I will give a brief synopsis of the timeline, which notes that in 2012, China's Minister of Land and Resources visited Greenland. And two years later in 2014, the China metal industry's foreign engineering and construction company, the NFC, formed a first memorandum of understanding with Greenland minerals and energy. And then a year after that, China State Construction Engineering and China Harbor Engineering entered into talks with, Greenland's Prime Minister about airport, port, hydroelectric, and mining infrastructure development. In 2016, a major Chinese firm took a one-eighth interest in Greenland minerals and energy stocks. In 2017, Greenland's Prime Minister visited China. And then the following year, the China Communications Construction Company made a bid to build airports in Greenland. So that's just a sampling of the many, many items that are written on this timeline.

Again, I'll link to this in the show notes. And I do want to emphasize that this report is not only about Greenland. I'm talking about this area because it's in the news, but the report also covers Iceland. And more broadly, takes a look at China's strategy when it comes to both infrastructure and natural resources. The report also concludes the Greenland portion by talking about how the greater accessibility of mineral deposits in Greenland has turned it into a major focal point for China. Now, the big news actually came out in December, just two months ago, in which China set a world record by unveiling what they refer to as a polar-ready cargo ship. Now, this is a cargo ship that has capacity for over 58,000 metric tons of cargo. China classifies this vessel as polar-ready, making it the first in the world of its kind.

I tell you all of this to give you some context, some economic context around, why we are hearing so much talk about the Arctic Circle and why if you zoom out and you look at the year 2025 through the eyes of a future historian. If you think about a person in the year 2200 who is looking back on this era, what I am hoping to do is give you context around how we are living through our own 21st century version of a gold rush. The major difference, of course, being that the California and Klondike Gold Rush were individuals who were rushing to try to make a personal fortune, whereas the Cold Rush is taking place between geopolitical interests, who are racing to develop the type of cargo ships that would be able to hit an iceberg without sinking.

What I do on these First Friday episodes, on all First Friday episodes, is, never take a position on anything, but simply lay out a bigger picture than the one that you are hearing in the headlines of mainstream media. A more complex, more nuanced, more multifaceted picture that looks through an economic lens and through a market's lens at what's going on around us today. My hope is that through these segments, you will be able to develop more nuanced and complex takes and you will be able to practice critical thinking from a rooting in first principles, a grounding in first principles. So much of what we see in the mainstream media is outrage bait. We see stories that are designed to get us riled up because those are the stories that we are typically compelled to share and to comment on and to engage with. And that's how the money machine work.

And what do I do? I talk about the growth of mackerel exports. I talk about how Greenland is exporting more temperate water oily fish than it did three years prior. That's not the type of story that you share. It's not a compelling headline. It's not going to generate clicks. That's why no one else talks about it. But this is the context that gives you an actual deeper, nuanced,

complex understanding of what the heck is going on. And why do we suddenly care about Greenland so much? Where did it come from? All right. Well, this, I hope, answers that question. And also sheds light on the fact that it's actually not sudden. China's been doing this since 2012. The stuff that we're hearing about today has been brewing under the surface for a very long time. And that, if you want to understand the economy, if you want to understand the markets, if you want to understand where things are going. That's what I hope these monthly First Friday episodes help create.

Okay, final topic of today, global taxes. In 2021, a group of 136 countries agreed to establish a global minimum corporate tax. Now, this is called the OECD Global Tax Deal, the Organization for Economic Cooperation and Development. And here's what it includes. So first of all, the plan was broken into two pillars. pillar one is focused on changing where companies pay taxes, and pillar two establishes a global minimum tax. So pillar one reallocates taxing rights in order to make sure that big companies

pay taxes where their customers are located. So pillar one is all about the where. Pillar two is all about the what, and that what is a global minimum tax. It's a 15% minimum tax on corporate profits. And so what this does is it makes sure that big companies pay at least this 15% minimum, regardless of where they operate. And it allows other countries to charge what's called a top-up tax on large corporations that aren't paying at least 15% in their home countries. Now, when I say large corporations or big companies, how big do I mean? Well, this applies to companies that do more than 750 million euro in revenue, which at the time that the time that this was passed was the equivalent of $991.9 million U.S. dollars. Currently, by the way, I ran the

conversion this morning. Currently, 750 million euros equals 77.7.7 million U.S. dollars. So that's the size of company that it affects. The whole point of this deal was to crack down on tax havens, to not allow there to be countries that impose minimal taxes in order to attract corporations to come there because if there are tax havens, it creates this race to the bottom where countries just lower and lower and lower their tax rates in order to attract businesses. So if a large enough group of countries could get together, and remember this is 136 countries, that can create enough power to discourage tax havens from forming. Now, why are we talking about this?

Well, a new executive order that went into effect in January took aim at pillar two, which is, as you recall, the pillar that wants to ensure the 15% global minimum. Now, the order has two main elements. The first is that any policy promises that were made by treasury officials under the Biden administration will have no effect except insofar as Congress passes laws that back them up. And the second is that the U.S. may retaliate against any extraterritorial taxes. Now, it's important to note here for context that the U.S. under current law already has tax rates that exceed the global minimum tax. So we have a domestic rate of 21 percent and a scheduled increase in the effective tax rate on international income to 16.4 percent, effective 2026. So the U.S. is already exceeding the OECD's minimum 15%. And both of those tax rates date back to 2017, which was before Pillar 2 went into effect. In fact, it was actually before negotiations even began on Pillar 2.

So we're already meeting and exceeding what's outlined, and we've been doing it since long before it was ever outlined. So you might ask, all right, then what's the problem? Well, the issue is that tax rates by themselves are not sufficient for compliance because tax bases also matter. And so the OECD has outlined very specific methods for calculating a tax rate, and it uses a different methodology when it defines terms like tax and terms like income. The result is that in a few areas, like in the way the U.S. handles tax treatment, for R&D. In a few specific areas like that, the U.S. operates differently than OECD specifications. Now, these tax provisions in which the U.S. diverges from OECD specifications are specified in laws that Congress

has already previously enacted. And so for the U.S. to change those tax provisions, Congress would have to take action. And so, President Trump views this as an encroachment on Congress. Congress's taxation powers because now the OECD is specifying the methodology and in instances in which their methodology conflicts with what Congress has passed, under this set of guidelines, the OECD would take precedent and that, of course, would be an encroachment on Congress's taxation powers and that's where the dispute comes in. So the issue is not actually that 15% global minimum. It's not the tax rate. It's the tax calculation method. That leads to the possibility of a potential global tax war because, as you recall, the day one

executive order stated that the U.S. can retaliate against extraterritorial taxes. Remember, the U.S. has a trade deficit. We import more than we export. So U.S. companies typically, generally, are not exporters. of products. We're not exporting made in the USA products all over the globe, which means that if other countries wanted to enact their own import tariffs

as a method of putting pressure on the U.S., well, because the U.S. is not a major exporter, that very fact protects many U.S. companies from targeted tariffs. Said another way, if another country, tax tariffs against the U.S., but we're not exporting a whole lot to that country anyway, then the damage to us is minimal.

But, and here's the clincher, even though we're not a big exporter, many U.S. companies have locations overseas. Apple, Nike, Coca-Cola, I mean, U.S.-based companies, even though we're not huge exporters, we have presences all over the globe. And that leaves many major U.S. companies vulnerable to taxation. So it's possible that if other countries did want to put pressure on us, the more effective way for them to do that would not be necessarily through tariffs, but through tax pressure.

Again, those would be taxes that would be levied on large corporations that have a footprint overseas. And so that, which is a story that I don't really hear discussed very often, that provides the basis for a potential global tax war. I will link in the show notes to an article from the Tax Foundation about the global minimum tax order. This article was published in late January, two days after the day one executive action, and talks at length about the Pillar 2 agreement. So you can take a look at that for further reading. And that is our episode for today.

If you are interested in learning about how to diversify your portfolio into my favorite inflation-resistant asset, which is real estate, then I would encourage you to learn more about the class that we offer. The class is called Your First Rental Property, and it's aimed at anyone who wants to diversify their portfolio by including some rental income. By the way, our course administrator, Suni, I want to say congratulations to her. On Friday of last week, so exactly a week ago today, she closed on an eight-unit building, which brings her total to 22 units. So congratulations to her on the brand new eight-unit building that she just closed on last week and on the portfolio of 22 units that she's built. It's absolutely incredible.

And so she's the course administrator for your first rental property and valued member of the Afford Anything team. She works full time here at Afford Anything and then has built this incredible real estate portfolio on the side, 22 units. So congratulations to her for closing on that deal last week. And my message to you, to all of you, is these are the people that you can learn from. these are the people inside of your first rental property. These are your peers. These are the members of the Afford Anything team. These are the TAs in the course.

The course administrator. These are the people that you will be surrounded by, people who have walked in these shoes and who have a few scars as any investor does, but who know how to build and sustain a portfolio in the long term. And particularly who know that they've built. an amazing inflation hedge. You know, real estate is an asset class that historically has had similar growth to equities, and also in inflationary periods, is an amazing store of value.

Because not only does the cost of the home rise with inflation, if not exceed inflation, but also rental prices increase with inflation as well. So, again, if you have... any interest in joining the course, I encourage you to read more about it. Affordanything.com slash enroll. That's affordanything.com slash enroll. Enrollment opens February 10th and enrollment will be open for the next two weeks. So get in while you can. Get in before we close our doors and I really hope to see you in class. One more time that URL is affordanything.com slash enroll. Thank you again for being part of this community. You are such an inspiration. I'm so thrilled.

that you are an afforder. My name is Paula Pant. This is the Afford Anything podcast, and I'll meet you in the next episode.