The Greenland Rug Pull: Nuking the Markets for a Glacier

If the administration actually gets to a place where Greenland is up for purchase, how do you all think the markets will react?

1) They will have to finance this thing somehow. Obviously, they can't just issue pure US debt given the political liability around the debt quantum. Bessent has signaled they could go the path of using a Sovereign Wealth Fund to finance the transaction, likely by stuffing student loans, federal land rights, or other assets and securitizing them out to investors via "Greenland bonds."

2) Those bonds will have to trade higher than standard US debt given the risk premium and novelty of the structuring (not to mention the depth of the market). Selling, say, $1-2T of these new instruments would flood the market with higher rate debt, driving prices of existing, lower-rate bond portfolios down right off the bat. There goes the bond market.

3) The higher rates would lead to crowding out, as large institutional investors decide that holding high-rate bonds with a (basically) guaranteed return is worth more than holding equities with less certain returns. Institutional investors would sell off equities to buy larger bond portfolios (this would offset the impact of #2, but not on a 1:1 basis). Equity markets would fall as a result.

4) The fact that these new pseudo-government bonds would be issued at a higher rate effectively increases the 'risk-free,' i.e., discount rate of the overall economy. If you were evaluating an equity's fundamental value, this increased discount rate would result in the equity being worth less than before. This is a second factor that would push the equity markets down, combined with #3.

4.1) The Fed could step in here and perform QE to cap rates, but in any case, this is akin to the US printing money to fund the purchase of Greenland as opposed to financing it. This would just hyper-charge the next point as the Fed creates new money to buy the excess bonds.

5) Once the funds are raised and the government actually sends out the cash to Denmark/Greenland, it's effectively injected the global economy with $1-2T of debt, strongly raising the likelihood of inflation. Remember it's also pledged what were previously government cash flows to investors (student loans, land rights, etc.), which will create a cash flow hole for the US government that will need to be filled with either taxes, budget cuts, or everyone's favorite, more debt – i.e., more inflation, higher debt-to-GDP ratio, higher rates, and more equity (and likely bond market) depression.

5.1) A small, nuanced point, but the way the US will likely need to structure these bonds to make them marketable to investors will require them to retain an equity tranche in the securitization vehicle, which, if priced incorrectly would essentially 'create money,' also driving up money supply and possibly long-term inflation.

6) Higher rates, greater inflation, and depressed equity/bond markets leaves one trade left for investors, i.e. a debasement trade in hard assets like gold/silver. Of course, gold/silver might crash at first as investors flock to the dollar/sell off for cash (won't get into emerging market dynamics here, but you can guess), but eventually the inflationary effects will get priced in and drive demand for the assets.

Takeaway) This is highly speculative, and the future is anything but predictable. But the truth is that the US probably doesn't have the firepower to finance this thing, and the fact that any ROI on Greenland would take years to manifest implies there's no way out of buying the island without jacking up rates and inflation (which itself jacks up rates). I think the winning strategy here is all about timing a buy and sell, likely staying out of the capital markets until it becomes apparent that inflation is being priced in, at which point bond markets will have corrected and hard assets like gold/silver should begin to climb. High rates risk Fed action, and even if the Fed does bring rates down, any subsequent QE-induced inflation stands to depress bond/equity valuations in this type of environment.

Note 1) I do think a lot of this hinges on the ROI of buying Greenland. If it turns out that the Island can pay for the debt and generate excess returns in a timely manner, i.e., essentially immediately, then perhaps there is no excess inflation from the US printing debt to cap rates/covering cash-flow holes. I do think, though, regardless, the effect of issuing high-rate bonds to pull cash-flows forward and injecting the global economy with that capital has the capacity to trigger this general flow of events. Plus, and ROI from Greenland would take decades, well after the inflation has sunk in.

Note 2) There is the possibility that the political crisis this has/will cause a deterioration in trade between the EU and the US, which might limit the effects of a capital injection into the EU on the US economy – but their interlinkage is so strong, I doubt there can ever be a true wall keeping inflation east of the Atlantic.