Bankless - 128 - Scariest Macro Setup In 20+ Years | Luke Gromen

Episode Date: July 18, 2022

✨ DEBRIEF ✨ | Ryan & David's Unfiltered Thoughts on the Episode: https://shows.banklesshq.com/p/128-luke-gromen-debrief  Luke Gromen is a macro analyst and founder of Forest for the Trees, a research company which helps investors find the signal. Luke is another one of our big macro brained guests in the same vein as Lyn Alden, Raoul Pal, and Jim Bianco. On this episode, Luke unpacks how macro got this bad, what the end game looks like, why this is the scariest macro setup Luke has seen in 20+ years, and how to prepare. The fog of what’s going on is thick, but we're on a quest to find out what in the world is going on. Knowing this is key to understanding the next steps crypto takes. Buckle up. ------ 📣Rhino.Fi | Massive Mystery Airdrop https://bit.ly/3o9trRE  ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  ------ BANKLESS SPONSOR TOOLS: 🌱 LENS | ACCESS CODE: WAGMI https://bankless.cc/Lens  🚀 ROCKET POOL | ETH STAKING https://bankless.cc/RocketPool  ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave  🌉 JUNO | BRIDGE FIAT TO LAYER 2 https://bankless.cc/Juno  ⚡️ ZKSYNC | THE LAYER 2 SCALING ENDGAME https://bankless.cc/zkSync  ------ Topics Covered: 0:00 Intro 6:08 Scariest Macro Setup In 20+ Years 14:15 Why This is the End 22:10 How’d We Get Here 26:45 Bursting Sovereign Debt Bubble 36:45 Fed Data Interpretation 42:42 How the End Game Plays Out 1:01:21 The Affect on The Average Person 1:07:35 U.S. Middle Class vs. Treasury Holders 1:14:58 The Future of Assets & Currencies 1:20:20 What Happens to Energy Commodities? 1:25:40 Equities, Gold, & Crypto 1:31:46 How to Prepare 1:36:50 Closing & Disclaimers ------ Resources: Luke Gromen https://twitter.com/LukeGromen  Forest Through the Trees https://fftt-treerings.com/  Luke’s Youtube Channel https://www.youtube.com/c/LukeGromenFFTTLLC  Lyn Alden https://youtu.be/XaHuwUDd1C8  Jim Bianco https://youtu.be/VMNmxFzKI64  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures 

Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Sean Adams, and I'm here with David Hoffman, and we're here to help you become more bankless. Guys, amazing podcast episode. I hope you've been enjoying our macro episodes, because here is yet another as we're trying to understand the landscape in front of us right now. Luke Groman is our podcast guest today. He calls where we are now, the scariest macro setup he's ever seen in his career. That's where we start.

A few things to take away from this episode. Number one, why is this the scariest macro environment Luke Gromman has ever seen in his career? Number two, what a bursting sovereign debt bubble does to the world, what it does to individuals. Why the choice for America is between bailing out the middle class or bailing out the treasury, the asset class. Number four, the future of all of the asset classes that are investable, including what he thinks about bonds and gold and equities and crypto and energy. And finally, number five, how we get ready. What is the ultimate portfolio to weather this storm? David, this was another fantastic episode. I'm just taking notes because I feel like I'm getting schooled in macro today with all of the

content coming our way in bank lists over the last few episodes. Yeah, this is definitely one of the perks of being a podcaster is that like it's not like I know the answers, but it's my job to go and discover them. And so when I'm in these podcasts with people like Linaldon and Luke, I'm just receiving the best information possible to answer my own questions. The way that you phrased this, started this, I hope you're enjoying these very dark podcasts about this future. But also at the same time, like Luke definitely presented one of the more optimistic outcomes, not guarantee, but definitely positive outcomes. You said there's a choice between bailing out the American middle class versus treasuries. And that was one of the

my big takeaways, I'm going to go back and listen to this podcast to go through that again. The American Middle Class versus Treasury holders. Those two entities are in a tug of war. And while, you know, there's certainly a way where both we can split the difference. One of these two sides, like definitely is going to win versus the other. And obviously, you will understand as a listener that we want the American middle class side to win because the other side of things turns us into the top-down, high-controlled nation-state surveillance state that we don't really want in this world. And so that was what really stuck out to me, where, like, if we can figure out a path out of this extremely chaotic, extremely volatile macro

environment that involves increasing wages for the United States middle class, that actually can be really bullish for America as a whole. I don't know how likely that is, but the fact that Luke sees a path towards that is a light in this very dark time. David, you and I have got to talk more about that during the debrief. And of course, a reminder, we do a debrief episode after the episode for every single podcast. And you can catch the debrief where David and I go over the podcast content, inject our thoughts, inject our comments on it after the episode by becoming a bankless premium member. We'll include a link in the show notes where you can go do that. All right, let's get right to the conversation with Luke Groman. But before we do, we want to tell you

about the fantastic sponsors that made this episode possible. Rocket Pool is your decentralized Ethereum staking protocol. You can stake your eth in Rocket Pool and get our ETH in return, allowing you to stake your ETH and use it in Defi at the same time. You can get 4% on your ETH by staking it with Rocket Pool, but you can get even more by running a node. Rocket Pool is the only staking provider that allows anyone to permissionlessly join their network of validating Ethereum nodes.

Setting up your Rocket Pool node is easier than running a node solo, and you only need 16Eth to get started. You get an extra 15% staking commission on the pooled ETH that uses your node to stake. You also get RPL token rewards on top. So if you're bullish e-staking, you can boost your yield by adding your node to the decentralized rocket pool network, which currently has over 1,000 independent node operators. It's yield farming, but with Ethereum notes. You can get started at rocket pool.net.

And you can also join the rocket pool community in their Discord. You can find me hanging out there sometimes in the chat, so I'll see you there. The brave browser is the user-first browser for the web through internet, with over 60 million monthly active users. And inside the brave browser, you'll find the brave wallet, the secure multi-chain crypto wallet built right into the browser. Web3 is freedom from big tech and Wall Street, more control and better privacy, but there's a weak point in Web3, your crypto wallet. And most crypto wallets are browser extensions, which can easily be spoofed. But the Brave wallet is different. No extensions are required, which gives Brave browser an extra level of security versus other

wallets. Brave wallet is your secure passport for the possibilities of Web3 and supports multiple chains, including Ethereum and Solana. You can even buy crypto directly, inside the wallet with ramp. And of course, you can store, send, and swap your crypto assets, manage your NFTs, and connect to other wallets in Defi apps. So whether you're new to crypto or you're a seasoned pro, it's time to ditch those risky extensions and it's time to switch to the Brave wallet. Download Brave at brave.com slash bankless and click the wallet icon to get started. Maker Dow is the OG Defi Protocol. The first Defy protocol to ever exist even before we called it Defy. MakerDAO produces dye, the industry's most battle tested and resilient

stablecoin. Using Maker, you don't need to sell your collateral if you need. liquidity. Instead, you can spin up a Maker vault and use your collateral to mint die directly. With Maker, the power to mince new money is in your hands. And there's something new in the Maker Dow ecosystem. Every time a new MakerDAO is opened, the owner can claim a POAP, which contributes funds to one tree planted, an organization with ongoing global reforestation efforts, creating a world where digital participation and the health of our environment can live side by side. Soon, Maker will be present on all chains and layer twos, bringing the biggest and best DeFi credit facility to everywhere there is defy. So follow the

maker on Twitter at MakerDAO and learn from the oldest and most resilient Dow in existence. Bankless Nation, we are super excited to introduce you to our next guest. Luke Groman is a macro analyst. He's the founder of Forest for the Trees, which is a research company that helps investors find a signal right now. And boy, do we need some signal in the midst of all of this mind. He has a big macro brain in the vein of some episodes we've done recently, Lynn Alden, Raoul Paul, Jim Bianco, that sort of individual.

And I think bankless listener, you can tell, we are really on a quest to figure out what in the world is going on with macro because this is the key to understanding what's going to happen next with crypto. So, Luke, thank you so much for helping us out with that agenda. Welcome to Bankless, my friend. Thank you for me on, right? It's great to be here. So, Luke, we're going to go through this, you know, as simply as we can, high-level questions. This is definitely a investor-engaged, macro-engaged, but primarily crypto-audience. So we're going to ask questions here. Like, and some of these might be dumb, you know, noob-type questions. But we want to go through.

what's going on in macro right now. First of all, how bad actually is it? Because it seems really bad right now. Then we want to touch on what's going to happen next. Maybe go through this asset by asset. And then is all of this fixable? And finally ending with, what do we do? You game for that?

Sure. Let's do it. All right. Let's talk about this. How bad is it? You called this the scariest macro setup in 20 plus years. Tell us about this. Why did you say that?

It is. We've written numerous times and have been, really writing a lot of warnings all year that basically culminating with that view that this, I think, is the scariest macro setup that I've seen in my 27 years in finance. And the reason I wrote that is really a confluence of factors that individually, either they haven't been seen in a very long time or they've never been seen. And when you put them all together, we've never seen something like this before, certainly in the scale at which it's happening.

And so to break each of those down, the first is that this is the first global sovereign debt bubble that we have had in a hundred years, really, I think, since the aftermath of World War I, particularly because it is centered in the developed markets, the advanced economies, not in the emerging markets. So a lot of what we're seeing in U.S., Japan, Europe has been seen from a sovereign debt perspective in emerging markets since 1980, but not in developed markets for much longer than that. And the reason for that is, is a We had a stock bubble in 2000. Policymakers decided rather than letting that play out in a austerity slash deflation type outcome, they kicked the problem upstairs to the banking system via the creation of a housing bubble. That burst, they kicked that problem upstairs to the sovereign level by virtue of effectively backstopping the banking system bailing out pretty much everything, which is an oversimplification. But that created a sovereign debt bubble. And the problem is once it's at the problems at the sovereign debt level, there's not. nowhere else to kick that problem upstairs to. I mean, unless you can find Martians willing to come down and sort of you can kick the problem to Mars, the release felt has to be the currency. They're going to have to

print money at some point. So you've got this bursting global sovereign debt bubble, I think, for the first time in 100 years. When you then overlay that with, I think, the second big issue, you have a resource problem. We've been writing about peak cheap energy for quite some time. And that's not to say we're running out of energy. The issue is, is that the margin, barrel of oil keeps getting more expensive to find. And if we didn't have all the debt we had, particularly the sovereign debt we had, this would be economically problematic, but it would not be economically catastrophic. The energy is ultimately the true discount rate. Nature's true discount rate of economic activity. And a simplified way to think about that is they're

implied in the value of every asset on the board, every asset, with the exception of the of, I think really two, physical gold and Bitcoin, there is implied a growing supply of cheap and affordable energy. And what I mean by that, think about it as you have a house in the suburbs. Your house in the suburbs is worth $400,000. The valuation of that $400,000 is based on gasoline being $2, $3, $4 a gallon. If gasoline goes to $10 or $20 a gallon, the $400,000 value of that house gets haircut significantly. And that's, you can do that to every asset. Some move up, some move down, but the price of all bonds, stocks, real estate, all of it implied within it, with the exception of gold and Bitcoin, is a cheap and growing supply of energy, a growing supply of cheap energy.

And supplies aren't really growing that much. And they're certainly not getting cheaper. They're getting more expensive to basically stay in one place. For energy to not grow enough is taking more and more expensive energy. And that then brings you to sort of the third leg of this, which is given peak cheap energy and some of these cheap resource scarcity issues, they are now leading to geopolitical tensions when overlaid with the debt. And you have seen that obviously in spades since February of this year. And that then also makes it very scary for macro, because you can see the Russians weaponizing energy, weaponizing commodities. You can see the Americans weaponizing the dollar. And everybody else in between is getting caught between that rock

and the hard place, particularly foreign creditors of the U.S. that are short energy. So that's EU, Japan, China, India, these major economies, they're short dollars and they're short energy. And if they're short dollars, a financial system collapses. If they're short energy, they have hundreds of millions of citizens starve to death and probably riot before they do. And we started to see symptoms of that in some smaller places around the world. It's likely going to get a lot worse over the next three to six months on that front. So when you overlay what's happening with the first thing global sovereign debt bubble in a hundred years, when you overlay what's happening with peak cheap resources, when you overlay the geopolitical tensions that are, I think,

amongst major powers at their highest in probably at least 30 years and probably closer to 40 or 50 years. And then you layer in some other factors such as the Western policymakers, U.S. in particular, they've allowed these system to evolve in a way that the U.S. absolutely needs asset prices to rise to keep the wheels on the cart. So you've created this pro-cyclical asset price inflation-driven economy. And now you overlay these three factors, global sovereign debt bubble bursting, geopolitical, and peak cheap energy that are making it difficult for that to happen. So when you blend all these together, that's why I say we haven't really seen any of these on their own, either in a very long time or ever. When you blend them all together, it is. It's the scariest macro

environment I've seen in my 27 years in finance. Wow. We recently did a podcast with Linaldon, and we titled this podcast, Is This the End? And what you said, where there is no place to kick this can down the road for, or at the end of the road to kick this can down the road, kind of sounds pretty similar. But as we go into the global markets contagion with energy prices, commodity and resources and all of this fallout, I really want to just emphasize the source of all of this contagion, these issues, which in my mind is the U.S. dollar. And perhaps like why we are at the end and why this is such a big thing to discuss is that the U.S. dollar connects absolutely everything. And this seems to be the focal point of this whole story. And so I'm wondering, Lou, can you just help ground us as to

what it means when there is nothing, there's no further road to kick the can down the road towards. And what is the current state of the, like, the U.S. economy, the Federal Reserve and the dollar. It's like, why is this seemingly like the end of the story of the dollar in its current phase? Can you just really just ground us here? So for me, I don't think anything's ever ending. I think it's always a case of, you know, what's normal for the spider is chaos for the ply. Right. So I agree that we are quickly getting to the end of the road in terms of where to kick this to.

You're really left with a very binary choice, which is you let the system as it is structured collapse into deflationary chaos. And that is going to be widespread sovereign defaults. That's going to be commodity price collapse. That's going to be the United States. I mean, when I say sovereign debt collapse, yeah, others will go first, like weeks first. And, you know, Europe defaults on sovereign debt. And people think there's going to be some big lag.

Oh, well, Europe will go. And then all the capital will flow to America and stock. no, there is no capital if it defaults there. The contagion will be measured in weeks, if not days. And that deflationary spiral, if the Fed and policymakers continue to stand aside, would be up to, and including the United States government defaulting on its entitlement promises to baby boomers. Hey, mom and dad, I know you were collecting a couple grand a month in Social Security. It's now 200 a month. And oops, you don't have enough to make ends meet. You don't have to by groceries. You can't make your house payment. Sorry. And it would possibly include once tax receipts

fell enough, which wouldn't take very long. It's already happening. The U.S. government defaulting on treasury bonds. Sorry, treasury bond holders. We're going to miss this quarter's coupon payment. We're not making it. And now, that's very down the line. I do not think that is going to happen. Right now, we are on that path. It is a nonlinear path. And if the Fed just continues to stand aside and do nothing, that is where this will go. That is a very, very bad outcome. The dollar goes to the moon in that scenario, but it would be somewhere between here and the moon for the dollar, something very weird would start to happen, which is already starting to happen if you pay attention, which is dollar is 200 on the DXY index, but there's no gasoline at the gas stations. Why are

U.S. gas stations running out of gas? Why are grocery stores running out of food? When the dollar is strong. Well, it would be strong against other currencies, other paper currencies, but the reality is the amount of economic dislocation that would take place would be a catastrophic breakdown of global supply chains and widespread shortages around the world. Would it be worse elsewhere? Absolutely. But you would have this strong dollar and widespread global shortages of stuff. So your physical commodities, I think, would be. The dollar would be weakening dramatically against physical commodities, even in that strong dollar scenario. So that is leg one of where do we go from here.

Leg two is something is very familiar to anyone. It's lived in an emerging market, is invested for long enough in emerging markets, which is the sovereign balance sheet of the West is so bad that ultimately, in a fiat currency system, policy makers, they talk tough, they're going to raise rates, they're going to let the dollar go, all of this sort of where I think the mind of the market

it really is at this point, maybe not quite fully there, but getting there. And then policymakers ultimately have to step back in and grow the balance sheet again to prevent. And this is, I think, the biggest thing that people are missing now versus when they talk about the 70s or the 40s or any other time. There has been no other time in hundreds of years where the sovereign solvency of the reserve currency issuer is at. risk. And so basically, leg two is, as the Fed comes in and begins growing their balance sheet again aggressively to prevent the sovereign insolvency of the United States, of the United States as allies, and in particular the EU and Japan. And I think we're getting very close to that moment. I think we're probably months away from the Fed having to print money to either buy,

you know, renew QE domestically or potentially print dollars in buying euro debt, buying Japanese debt as a way of fighting deflation. So when you say we're coming to the end of the road in terms of where we can kick the can to, I think there is an element of truth to that from the standpoint of sort of this linear path that people have gotten used to seeing. I think from here things get very nonlinear. And the question that is, do they get nonlinear inflationary? Do they get nonlinear deflationary? And ultimately, if you're a month to month trader, and this applies to crypto, this applies to Bitcoin, this is not a good out, you know, between now and when they have to print the money to keep sovereigns solvent, which I think they ultimately will do. They will be probably the, if not the only sovereign in history, one of the only sovereigns in history of the fiat currency that didn't print the money to keep the sovereign solvent by choice. They just, they never choose that, policy makers, that is. So it's a, I think, a very high odds. shot that the money gets printed to keep Western sovereigns solvent. And in particular, the sponsor of the

system, the center of the system, the U.S. and the U.S. dollar. The question is from here to there, this is where all the money is going to be made, I think, in the second half of this year, is how long is from here to there? And I've been surprised year to date that the Fed has, I think they made a policy mistake last year. I think they're, well, let me back up. I don't think they made a policy mistake last year. I think they did the right thing by inflating. I think they made a policy mistake by ending the inflation too soon. And so I think we are getting closer and closer to them having to revert back to inflating. But again, that's where all the money's going to be made. The longer they delay, it's not a good environment for basically anything except the dollar.

Just a clarifying question. Why are we in this pinch in the first place? We've talked about, like, you know, the contagion that's at risk and the paths forward. But I just really want to ground the listeners, like, how did we get here in the first place? What are the factors that have created this very unfavorable environment? Human nature and optimism, these cycles repeat over and over. So when you create a debt-backed system, right? So you go off the gold standard in 71, you create effectively a debt-backed system. And the problem is with a debt-backed system, you can't go through any extended period of deflation without creating a systemic risk. because if the debt starts to default, the debt is what backs demand for your currency.

So basically, if you let the debt defaults go too long, at first, it's good for your currency, and then it turns bad for your currency, right? There's demand for your currency because the debt's there. But if they default on the debt, then there's no more demand for the currency, currency collapses, right? So you have this debt-back system that requires, it's like the old metaphor, a shark has to keep swimming or it drown. Same thing.

They have to keep inflating the money supply or the system collapses. So that number one is, I think, sort of the overlay of the whole thing. But when I say human nature, look, FDR came out in the middle of depression and promised Social Security to everybody. And when you looked at it back then, I'm going to get the ages wrong. But basically it was like, hey, you can collect Social Security at 62 when the average lifespan was 55, right? So if you were lucky enough to live seven years past the average lifespan in 1938 or whatever,

then the government paid you for a few years. before you died. And they've modified it a bit. But in the meantime, the average life span has gone from 55 to whatever it is, 75 for men, 82 for women, something like that. At any rate, they've only modified it a bit. The baby boom generation, the retire generation, so you have the promises that were made, that we're going, you know, 70 million baby boomers were born from 46 to 64. It stood to reason that 70 million were born. 70 million are going to turn 65. day. You had 40, 50, 60 years where politicians, any sort of, you know, sixth grader with a calculator could say, hey, we owe this much money when they get that age. We know this

bolus of people are going to reach that age in these years. We should probably restructure these obligations at some point. But politics and why I say human nature, politics are politics. Entitlements are called a third rail for a reason. You can't touch them. So, hey, it'll happen. on somebody else's watch, well, that watch is here. Then, again, tied back to this debt back system, you keep bailing out mistakes rather than letting them work themselves out in a deflationary manner. So now we look back the threats of long-term capital, Russia default back in 98, needing to bail those players out, those are threats to the system, but they were almost adorably cute in terms of how small they were. And now it just, you keep getting bigger.

bigger, bigger bailouts. And now, because it's been kicked upstairs to the sovereign debt level, there's nowhere else to kick it up to. So it really becomes a case of this. It really is human nature where you set up the system. It makes a lot of sense up front, but there's very little planning, very little political incentive amongst either the political class or the voters that elect them to change anything until there's a crisis. And so that's when I say human nature, I think it's really, really just the human nature of everybody wants something for nothing. And something for nothing is great until the bill shows up. And the bill only shows up every three or four generations with some of the stuff. And unfortunately, here we are. We're in that part of it. And whether you want to call

that part of the fourth turning or whatever, that's effectively what we're dealing with. Well, what a time to be alive. We are definitely living in historic times here, Luke. And I guess the answer the question of how do we get here is kind of like what you're saying is well just one step at a time it's like one step at a time is the way we've got here i want to go back to sort of your framework of you know how bad is it and why it's bad and you said three things bursting sovereign debt bubble that's one big reason our world is also based on cheap energy all of our assumptions are based on that and that's a bad assumption it turns out in this new world that we've entered and then we've got geopolitical tensions and all of these things aren't related but let me go back to the bursting sovereign debt bubble

because I'm curious with the language in the terms you used. You said bursting. And earlier, you talked about default. And it's not clear to me. I think what you're saying is like, no, actually default is a possibility, but they probably won't default. But you did use this term bursting repeatedly. And when we were talking to Lynn Alden, and keep in mind, Luke, we are simple crypto people trying to understand the macro economy and like doing our best. But Lynn Alden kind of compared this current era that we've entered to an era that we've entered to an era that we had previously the 1940s. And that was an era of obviously increased government spending, fiscal spending in lots of big ways. And the way that decade kind of resolved was we had interest rates at like 0%. But then we had inflation that averaged about 6%. Some years went as high as 19%. So real returns on treasuries and bonds were negative, like very high in the negative territory. And it seemed like the 1940s and world governments at that time, at least the U.S. did, used inflation as kind of a pressure release valve on all of this. Rather than defaulting, rather than becoming insolvent at the nation state level, you use inflation as the release valve

and you let the air out of this balloon, you know, slowly rather than having it pop. But you were using the term bursting, which implies that the balloon is actually going to pop. Can you talk about that? Do you agree with Lynn's take or do you think inflation will be like, will there be a slow unwind and uninflating of this bubble or do you actually think we're headed for a burst here? And what does that look like? So to me, I mean, this goes back to my point, what's normal for the spider's chaos for the fly, right? If you are a treasury holder and you lose half of your money on a real basis over a three or four year span because inflation is allowed to run 600 to 2,000 basis points above interest rates, that's a burst in my view. That's a crash. You're going to lose half your money in the safest

asset on the board, in theory, in the span of a few years. So I think what Lynn's talking about is part and parcel to a bursting. Now, do I agree with her, I think there are elements of the 70s, of the 40s in the U.S. The 40s, I think, are helpful directionally in terms of the last time the United States had debt the GDP above 100%. It's the last time. It's the last time. It's the last time. foreigners were not buying enough treasuries because at that time, basically, the world was destroyed after World War II. So there are some similarities, and I think that lends itself to the, you're going to need an extended period of time of significantly negative real rates. And that's what I said earlier, White, I thought the Fed was making a mistake by tightening prematurely as it looked like

they were doing that playbook again last year of, hey, let's inflate away the debt. So that's what you meant by that when you said policy mistake ending inflation too soon. They really have to keep inflation up to deflate the balloon? Right. We did a calculation April of 21 that said the U.S. policymakers needed nominal GDP to run between 15 and 21 percent for five years to get U.S. debt to GDP down to a level from which they could tighten policy without blowing up the system. And so we said, look, that's what it's going to be. If they tighten too soon, they're going to blow things up. You're going to have a really bad year in the market that they try to tighten. Halfway through the year, they're trying to tighten. They are tightening. We have the worst

decline in stocks and bonds in 50 to 70 years. We've got emerging markets under pressure. We have the dollar skyrocketing. We have home price. You know, U.S. housing sector looks like it's rolling over broadly. So they tighten too soon. They think they're dealing with a dial. It's much more like a switch. The challenge in all of this in using, hey, it's the 40s framework. And really it ties back my point why it's a scariest macro environment in 27 years in my experience that is there's no really one good metaphor. There are elements of it that are like the 40s, but the challenge in is in the 40s, the U.S. was the only country left standing. We had all the factories. We had all the men. We had all the gold. We were the world's biggest oil producer. Everybody needed us.

There were really emerging geopolitical tensions with the Soviet Union, of course, that got much worse over the next ensuing 30 years. But it was a very different standpoint from that versus now where you know, U.S. just could run the factories full out because they needed to rebuild the world. I mean, U.S. factories and labor rebuilt the world from 46 to call it 65, maybe 60. That's not true. There's too much capacity everywhere, maybe with the exception of the U.S. So that element is not true. You've also got a very big difference in terms of supply chains, right? So after World War II, U.S. made everything. We were the biggest supplier of

everything that mattered to the world. Now the United States can't fight a war without China, which is really hard when they're being told that China might be who we fight the next war against. You know, we're seeing these supply chain problems. That's very different. And so I think that's the other thing that makes this a really challenging period of time where, I mean, quite frankly, there's elements of the 40s, but there's elements of the 80s in Latin America and the 90s in Latin America and 2000s in Latin America that looked very similar to the U.S. because in the U.S. in the 40s, 50, 60s, if you look at the wealth discrepancy in the U.S., for example, it was the lowest it had been. You had a very healthy middle and working classes, very low wealth inequality in the U.S.

And now you have a Latin American wealth inequality. You have deindustrialized the U.S. in a major way by trade policy. You've racked up the debt. And so there's actually what we have is a situation where the reserve currency issue of the world looks much more like Latin America from a financial, from a fiscal, from a sovereign debt perspective than it looks like America in the 40s and the 70s, right? The 70s, U.S. debt, the GDP was very low. You had this growing middle class. Boomers were young, productive, growing in families. And we were still very much not financialized. Now, the U.S. looks like

sort of a highly indebted Latin American republic with record wealth inequality and highly finance. It almost looks like a tax haven, like very financialized economy with a really big military, a big and great military, deindustrialized manufacturing sector. And that's when I sort of put all that together, it sort of runs together. But it runs together because it, I think the running together of it is a manifestation of how you can't just say, hey, it's like the 40s or like in the Wall Street Journal today, the Fed is talking about, well, it's like the 70s again.

The balance sheet and the financialization of the U.S. economy are so different than the 70s that if they're running that playbook and they appear to be, they're making a galactically stupid mistake, a galactically. I mean, it's like, well, we want to fly to L.A. Okay, well, fly east, southeast around Australia to get to L.A. We're like, well, no, you can just go west and be there in five hours. No, no, no, no, we're going to go 28 hours around the planet to get to L.A. And we don't have enough gasoline to even make it the friggin Africa.

That's the game plan the Fed's effectively running. So, you know, good luck to them. That's why I say, I think, look, we have this period of time where they think they can do this. They can't, that they think they can. And they're trying to convince markets and markets are still somewhat convinced they can't. sometime in the next two to three to four months, the markets can go, oh shit, they can't do it. The plane's out of gas.

We're halfway over the Atlantic. We're not even to Africa, let alone the extra 25 hours of flying we have to do to get to Africa or to get to L.A. around the world. And now what? And that's when they're going to call the Fed, and the Fed's going to be sort of to continue the metaphor, the in-air tanker, the inflate tanker,

refuel the jet, and then they can make it. Well, that's going to be Fed balance sheet expansion. But between here and there, being a passenger on that jet, it's going to be pretty scary. Look, in a different show, you talked about how the Fed only pays attention to certain kind of metrics and it ignores other kinds of data, other kinds of metrics. Like, it's a backwards-looking institution. It doesn't really look forwards very much.

I'd love it if you could expand on the data that the Fed is interpreting and how that data is impacting its decision-making. And then also the data that the Fed is ignoring or just leaving on the table that we can take a look at and inform us for what the future of the U.S. economy might turn into. A mistake I have consistently made is given the Fed more credit than they deserve. And that is not to say they are stupid. I don't think they're stupid people individually, but I think they are a political institution. I think they're a political institution in a normal time. And when I say normal time, non-war time. So I'll put it in practical terms.

the playbook is very clear. The IMF wrote about it. When you get that the GDP as high as U.S. debt the GDP was after COVID, you need to inflate for years. That's it. You need to run significantly negative real interest rates for five to 10 years. That's what they did in the 40s.

They went from 110% to 50% over five years by negative real rates of 600 to 2,000 basis points like we talked about earlier. That's the playbook. That's it. That's what they need to do. The problem is that they are, and if they were an independent institution, that's what they would have done. That's absolutely what they would have done. That's what they had to do, but they're not an independent institution. That's one of the great myths that still held by some because you could see it. Inflation began applying political pressure

to the Biden administration. Nobody cared about all this. Hey, they were all in for the stimulus early on. You're growing money supply. How did you possibly think growing the money supply, 25, 30, 40 percent over a couple years wasn't going to lead to inflation? They're not stupid. So I think they went into the saying, we're hoping we can sort of inflate this away and no one will notice. And the problem is, is people started to notice. Republicans cynically made a big deal about it for the Biden administration. It became a political problem for the Biden administration. And all of a sudden, they care about inflation. So now they need to fight inflation, but it's the wrong playbook. And so I think the Fed is... Do you think they're pretending to fight inflation and not

actually doing it? Maybe they're actually like a lot smarter than we think. I think they would love to do that. I think that's what this whole transitory ruse was. I think that was a period of time where they were doing that. Now, if you look at what's happening credit markets, if you look at what's happening in housing, if you look what's happening stocks, you learn to me, Bitcoin, what's happened to Bitcoin is telling you they're no longer just pretending. It's happening. You know, you take Bitcoin from 70,000 to 20,000. To me, that's just the advanced, that's the last functioning smoke detector saying, guys, liquidity's gone. And people say, ah, you know, there's unfin to it, right? Oh, look, Bitcoin's down 70 to 20, you suckers. And without fail the last several years, every time that's

happened. Like, it's like, wait for it. Three, two, one. Oh, God, stocks down. Oh, God, bonds are down. Oh, save us, Fed, save us. Right. So there's, I think we are when you look at what's happening in credit markets, you know, when you look at what's happening in the treasury market, it's incredible what the treasury market has done year to date, even allowing for the inflation we had earlier on, how bad the treasury market has performed, given that we're heading into a recession. We're heading toward a recession. You know, are we in when, are we not? We're going to have two quarters that's negative real GDP growth, there's some argument. Whether we think we're in one or not, we're heading toward one. And yet treasuries are down. Worst treasury performance in 50, 60, 70 years.

It's really incredible. Now, they've bounced recently, but... But why is that incredible? Give the dumb crypto people some context. Oh, it's incredible because historically, the first thing you do in, you know, as the U.S. GDP starts to go negative is you buy long-dated treasuries. Because they're the safety asset. I get a fleet of safety. They're the safety asset. And so, yes, there's been inflation, but there's this balance of payments dynamic where foreigners own so many treasuries now. They're not buying enough of them. And in fact, the stronger the dollar gets, the more treasuries they will sell to get dollars to try to keep their heads above water.

And then just this dynamic of the structural size of U.S. deficits, right? of, you know, the Fed is, in theory, starting to sell treasuries. Foreigners, what the dollar word is, are selling treasuries. Treasury is selling treasuries. Who's the buyer? It's got to be mom and pop. Well, mom and pop don't have the balance sheet. The banks have been big buyers. They don't really have the balance sheet. Some of that's regulatory, but there's a supply demand imbalance that is fundamental there. There are some cyclical moves within that, like we've seen in the last call it two, three weeks where long-dated treasuries have been bid. They probably stay bid for a bit longer. But if the Fed stands aside, the supply side of the

treasury market will get so much bigger as the U.S. heads into a full-fledged, everyone agrees we're in a recession or a financial crisis. Then you're going to see treasury yields rise, in my view, in a recession, in a crash. And that's something we haven't seen in the U.S. in a long, long time. I don't know when the last time we saw that, but you see it all the time in places like Turkey and Argentina and Mexico in the 80s and 90s. And, you know, Southeast Asia in the 90s. It's a bounce of payments problem. So, Luke, we're going to take this asset by asset in just a second. But before we do, while we're on like the subject of how bad is it, right, can you just fast forward us to how

you think the end game will play out here? So you've indicated that this has elements of the 1940s, has elements of the 1970s, also has elements of Latin America in the 1980s. So I think you're making the case that the 2020s are going to be their own thing. You also said that you expect inflation for years once the Fed, maybe all of the other institutions that, you know, come to grips with reality. What we're going to have to do is inflate. Maybe for five to ten years is what you said. Can you just fast forward us to kind of the end game here? What is the end game? So like, what does this decade look like in the highest level macro perspective? Fast forward it and play it out. Yeah. So the end game is a Fed balance sheet that is exponentially bigger than

than it is today. And it's filled with not just U.S. treasuries and mortgage backs, but it's also going to be filled with, in my view, foreign sovereign debt, probably a lot of European debt, Japanese debt, because they're the sponsor of the system. If they want to prevent their allies from collapsing, they're going to have to do that. I think we're going to go through a span of significantly negative real interest rates. And there's some flexibility around that, maybe. the way to think about that is we can have a 10-year period of negative 6% real rates, and that would probably work, maybe. But again, the debt is so much higher than it was.

The U.S. economy is so much more financialized than it was. The problem with that playbook is you've got to convince somebody to be the sucker at the card table, somebody to be the idiot holding treasuries for 10 straight years of negative 6% real rates. And we had six months of negative 6% real rates. And you started to see problems, political problems with inflation. Treasury sell off because the problem for the Fed is the debt is so high. They can't sustain a rise of interest rates in response to that inflation. They have to keep real rates significantly negative.

So to me, the negative 6% for 10-year real rate playbook, that was a baseline base case. I think pre-COVID, maybe in the immediate episode. of COVID, that is now a Hail Mary. I don't think that that's more likely. I think where we're quickly going to get to is particularly given this Fed policy mistake of not continuing to just inflate, because they're trying to deflate for a bit, that makes it much more likely than what we instead see is a U.S. version of Israel in the early 80s. And this is not a well-known playbook or episode I found in macro. Israel is a very developed, highly educated nation. lots of high-tech products, et cetera, they had 100 to 400% inflation for three, four years in the early 80s.

And the sovereign debt problem was gone like that. After three, four years, Central Bank raises rates, up to whatever they raise up to. They stop inflating. They cut deficits. Boom. And you move on. And I think increasingly the odds of a 40s scenario where, hey, we're just going to keep real rates, negative 600 to negative 2,000 basis points for six years.

I think that was still on the menu of palatable or plausible, economically, mathematically possible options as of mid to late last year. The second the Fed started tightening and the dollar started rising, I think those are now off the table. I think the end game is going to be a whoosh down in risk assets for a few weeks. We've sort of had the bleed down year to day, but I think we'll get a whoosh down and then the Fed coming back. And then we're going to go through this period of time where I think you're going to have

extremely high inflation in the U.S. for two, three years. And at the end of that two, three year period of time of extremely high inflation, and when I say extremely high inflation, I think you could probably see it 30 to 100 percent inflation at the CPI level in the U.S. for two, three years. And I think the Fed will be saying, oh, it's only 10 to 12 and we're working on it. But at the end of it, U.S. debt to GDP will be 60, 70 percent. The Fed can take rates back to 10. They can cut fiscal deficits because tax receipts will be high enough. then they normalized policy and we move on. And, you know, treasury holders, thank you for your donation to restoring U.S. fiscal solvency after COVID. We appreciate it. You got paid every

dime you were owed, but you went from buying steak with it to buy in, you know, crickets with it. So, you know, congratulations. This is quite the picture you're painting. And of course, one difference between Israel in the 1980s and the U.S. now is Israel did not have the global reserve currency at the time. And that's exactly right. And that's part of why I say it's so scary is a U.S. is a way bigger economy. It's not the global reserve currency issue. So it touches to your point. It touches everything. And so that whoosh down, that's DXY to the moon that is everything else down, including treasuries, probably. I mean, like I said, you'll probably get a little bit of a treasury bid for an intervening period of time. But I think we're going to see a period like we saw in March 2020, where treasury's a bid, treasury's bid, and then all of a sudden, it got bad enough and treasures are sold. The layer two era is upon us. Ethereum's layer two ecosystem is growing every day, and we need layer two bridges to be fast and efficient. in order to live a layer two life. Across is the fastest, cheapest, and most secure cross-chain bridge.

With a cross, you don't have to worry about high fees or long-weight times. Assets are bridged and available for use almost instantaneously. Across's bridges are powered by Uma's optimistic Oracle to securely transfer tokens between Layer 2's and Ethereum. Across's critical ecosystem infrastructure and Across V2 has just launched. Their new version focuses on higher capital efficiency, layer 2 to layer 2 transfers, and a brand new chain with Polygon, all while prioritizing high security and low fees. You can be a part of Across's story by joining their Discord and using Across for all of your layer 2 transferring needs.

So go to across.tto to quickly and securely bridge your assets between Ethereum, Optimism, Polygon, Arbitrum, or Boba networks. Arbitrum is an Ethereum layer 2 scaling solution that is going to completely change how we use DFI and NFTs. Some of the coolest new NFT collections have chosen Arbitrum as their home, while DFI protocols continue to see increased liquidity and usage. You can now bridge straight into Arbitrum for more than 10 different exchanges, including finance, FTF, who will be in crypto.com. Once on Arbitrum, you'll enjoy fast transactions with cheap fees, allowing you to explore new frontiers of the crypto universe. New to Arbitrum, for a limited time, you can get Arbitrum NFTs designed by the famous artist Ratwell and Sugoi for joining the Arbitrum Odyssey. The Odyssey is an eight-week-long event, where you can play on-chain activities and receive a free

NFT as a reward. Find out more by visiting the Discord at discord.g.g.orgorgorg. You can also bridge your assets to Arbitrum at bridge.arbitrum.io and access all of Arbitrum's apps at portal.arbitrum.1 in order to experience defy and NFTs, the way it was always meant to be, fast, cheap, secure, and fiction-free. There is a brand-new staking feature in the Ledger Live app today.

We all like staking the assets that were bullish on, and now you can stake seven different coins inside the Ledger Live app. Cosmos, Pocod, Tron, Algarians, Tezos, Solana, and of course, Ethereum. With Ledger Live, you can take money from your bank account, buy your most bullish crypto asset,

and stake that asset to its network, all inside the Ledger Live app. Through a partnership with Figment, Ledger also lets you choose which validator you want to stake your assets with. And Ledger is running its own validating notes, offering a convenient way to participate in network validation, and it even comes with slashing insurance.

Ledger Live is truly becoming the battle station for the bankless world. So go download Ledger Live. If you have a ledger already, you probably already have it and get started securely staking your crypto assets. The other piece here is, like, you were talking about finding the sucker to buy treasuries, right?

And so when the U.S. realizes that that will be the new problem, I wonder how jealous it gets. And you start to recall kind of FDR's executive orders from the 1930s banning U.S. citizens from purchasing gold, right? And that is a similar kind of energy of like, hey, we need you to buy bonds and we need you to buy treasuries to support your national economy. You can't have these other store of value assets. Do you think, is that part of your endgame scenario that you're modeling out that the U.S. gets kind of desperate and maybe some of these, what we would now think of as authoritarian, totalitarian measures come down the pike? That's the incredible thing about it is if there's this phrase, and I wish I knew who quoted it, but it's wisdom is seeing things for what they are, right? So wisdom is seeing things for what they are. In 2014, the SEC passed a rule for money market funds.

It provided for money market funds to be gated in times of crisis, which means you can't get your money, right? If there's a crisis and they're going to break the buck, you can't get your money. But it exempted something called government money market funds. So basically, by regulation, the U.S. government began shifting dollars that were in the money market fund sector, which are enormous. They're measured in the trillions out of private dollar assets, which, finance corporations and it finances foreign government. I mean, anyone that was issuing a commercial paper in the money market sector saw their interest rates rise, LIBOR rose. And instead, you saw this shift of funds out of private dollar assets into U.S. Treasury, T-Bill,

money market funds, government money market funds. And that's, so that is a FDR, when I say wisdom is seeing things for what they are, that was a regulatory. measure designed to shift demand away from private dollar assets to U.S. government dollar assets. That is a polite version of what FDR did. It's very similar to what Argentina did, the early 2000s. They were incenting the private pensions and banks to buy government debt because they had a problem. Similarly, 2014, high-quality liquid asset regulations for the U.S. banking sector incented them to hold greater amounts of U.S. Treasury bonds as regulatory capital gave them a break. Same dynamic. It's sort of a classic emerging market balance of payments problem.

It's a version of what FDR did vis-a-vis gold, which was a monetary asset at the time. It's private property now. So my point is that this has been happening in slow motion, if you watch. The draconian version of this, I think, is less seizing gold. I mean, I think you certainly could see, you've seen some regulatory threats, I think, on Bitcoin. So regulatory threat on Bitcoin, Luke. So could it be something like you can't, actually hold Bitcoin in your own self-custodied wallet. You have to hold it on an exchange if you want Bitcoin. Do you think it would go this far? I think they would do more the on and off ramps, right? Is this say, hey, we want to, you know, we can see the on and off ramps out of, you know,

from your bank to Coinbase and we know what you have and we're going to take whatever. We're going to tax it at 40, 50 percent and put in treasuries or something like that. Or there's some good ways that can happen too, right? If they actually mandate, hey, any funds, you know, stable coins all have to own 100% U.S. T bills. That's another way you could do it. But, you know, it's like when they ask Willie Sutton, why do you rob banks? That's where the money is, right? He said that's where the money is. So the same thing you could do is, look, there's, whatever, $30 trillion in U.S. retirement assets. Why confiscate gold or Bitcoin, which in aggregate or what in the U.S.? A trillion? Two trillion? You could literally get $3 trillion right off the bat by saying in order to maintain the tax deferred status of U.S. retirement accounts, it must own $12. 20% U.S. Treasury bonds. There's $6 trillion right there. Boom. And that's where I think you could see that go. But here's the catch. They're probably thinking in these terms already. The problem is, remember what I said before, they need stocks to rise just to make the ends meet on the fiscal

situation, right? So Alan Greenspan said in 2015, capital gains tax, is this widely? It's not just capital gains. It's so net capital gains plus taxable IRA distribution. alone are 200% of the annual growth in personal consumption expenditures of the United States, which PCE is about two-thirds of GDP. So that's basically U.S. consumer spending mathematically cannot grow unless stocks are rising. And if consumer spending is not growing at two-thirds to 70% of GDP, GDP is not really growing. So the problem with diverting money out of stocks into Treasury, in these retirement accounts to try to, you know, is you're going to take $6 trillion out of stocks,

put it in treasuries. Well, great. Now you're going to have mandated selling in stocks. As stocks come down, you thought you needed $6 trillion. The deficits are going to rise as stocks fall. You can see that clear as day that correlation in the government data because the U.S. economy is going to head into recession. Deficits always rise in recessions on the countercyclical payments.

So you can try to force. Americans to pay more for their own stuff, to pay more for their own deficits. But if you do it by getting them to sell stocks, whatever deficit level you thought you needed to fund, it's going to be in order to magnitude higher deficit because the economy weakens. So you saw this play out in real time with Obamacare. Right. So Obamacare, it's funny, is in 2014, the Wall Street Journal said part of what they're doing Obamacare for is to raise health care costs to force Americans to pay more for their own care to lower U.S. deficits. And then that was like the only time it was ever about a deficit issue. This was right at the same time that we talked about the money market fund

example. We talked about the bank example of, hey, U.S. money funds, banks, they need to buy more treasuries to help the deficit. Well, U.S. consumer's contribution to that deficit reduction exercise was Obamacare. Hey, your Obamacare premiums go up huge. Wall Street Journal says it's partly about deficit reduction. And it worked. 14, 15. You see. saw deficits come down, the problem is as U.S. consumer spending came down too. Because all of a sudden they're paying more for their care, right? Something they were getting for free, they now had to pay for. And that consumer dollar that was going to a car or a boat or plastic crap at Target or Walmart wasn't getting bought. And what ended up happening in 2016 is

U.S. deficits as a percent of GDP in response to these deficit reduction in financing exercises actually started going up. That was what you meant. One of my goals in this conversation Franciski, what you meant by the U.S. stock market effectively is the U.S. economy. You tweeted that out recently. The stock market is the U.S. economy. That's what I mean. And critically, like that net capital gain plus taxable IRA being 200% of the annual growth in PCE, that's just net cap gain and taxable IRA distributions. That does not include any of the stock comp, right? So you go out to the West Coast and everyone's buying all these big houses because they're either selling options and buying the house or they're using it as collateral. Like stock comp, executive

stock comp is taxes ordinary income. And it's not broken out really anywhere cleanly, how big a deal that is. But you can play bigger than a breadbasket of how big a deal it is when you look at the percentage of taxes paid by individual by tax bracket. So if you say the top 5 percent, the IRS data shows that top 5 percent of U.S. taxpayers pay 60, 60 percent of the individual income taxes. That's 30 percent of total U.S. income taxes. Now, top five percent of taxpayers in the U.S. are making, I want to say, I don't know what, it's a couple hundred thousand dollars a year. And particularly the higher up you go, the top one percent, these are people that are, they're not working hourly. It's not like these are people that are making $20,000 an hour expressly

in wages. They're making their, you know, a couple hundred grand in cash comp, and then the rest of it is coming as incentive comp. And all that incentive comp is subject to the stock market and the stock market year over year. And their marginal consumption is a function in part of that wealth effect. The wealth effect probably declines as you get further out there. You're worth $2 billion. It's not like you care if you're only worth a billion and a half. But you're worth $10 million and you're only worth $5 to $7 million.

That might start to change some of the marginal consumption patterns and on down. So that's when I say, hey, the stock market is the economy. It's not about when you lack at it in the absolute. it's a relatively small percent, but so many economists, analysts, writers make this mistake. It's all about what happens on the margin when you are highly indebted. If we were running an equity-based low-debt system like we had in the 70s, so what? Stocks go down, so what? But because the leverage is so high, on the margin, stocks go down, consumption goes down, consumption goes down when you're as levered as the entire system is, system unwinds, fast and nonlinearly. And that's why I say the stock market

is the economy. It's the economy on the margin, and on the margin is all that matters in highly indebted systems. So what is this era going to mean for the average worker in the United States economy? The WTO worker, 40,000 to $100,000 yearly income, we're going to have a period of, you've already said, like five to 10 years of sustained inflation. That seems crazy to me. I'm sure crazy to most people, no one in the United States has lived through that. And then also when we have this depressed stock market, which we just talked about, which is a part of so much of people's consumption, well, if that's depressed, that's also going to impact the economy. So, but how would you illustrate the next five to 10 years for just like the average worker with like their

grocery bills, their rent prices, their ability to produce an income? Like, can you paint that picture for us? Yeah, I increasingly think it's one of two outcomes, depending on which faction in Washington and more broadly globally wins. The happy ending is basically we go through this span of high inflation. There is a recognition of the extreme national security vulnerability of the United States as it relates to producing our own stuff vis-a-vis China in particular, but others as well. And we go through a massive period of reinvestment in U.S. industrial infrastructure, or reshoring broadly.

Basically, the United States says, okay, we're going to implement a version of Chinese industrial policy with U.S. characteristics. And in that case, inflation goes crazy. Real rates are massively negative. The working in middle classes win huge because wages, you're just basically,

wages are going to go up and up and up until you find basically, you know, the offer side, right? So until you start having, you know, Wall Street salesmen saying, and I'm hanging it up because I can make more money, you know, being a plumber. That's what happens there. The U.S. comes out way ahead because of the natural endowment that we have. And that's a really good outcome.

That's a very weak dollar, really bad for bonds. That's really good for risk assets broadly, home prices, gold, Bitcoin. It's very inflationary. That's the happy ending. The unhappy ending is sort of the, I'm going to be, try to be diplomatic here. You can kind of tell which side I'm rooting for, I guess. Sort of those that think, hey, we need a strong dollar and the treasury market must be preserved in real terms at all costs. That is a really good outcome for, you know, basically, hey, we must crash the U.S. economy to make sure treasury holders are kept whole on a real basis to preserve the dollar's role in the global financial system and to preserve the treasury's role as primary reserve asset.

And you can see this from people like William Dudley and his opeds at the New York Fed from Larry Summers, some of these series of actors that have been in Washington for the last 40, 50 years, sort of the Rubin, Robert Rubin, Clinton-type financial people. In that world, Washington wins huge. U.S. military industrial complex probably does okay. China ultimately quickly surpasses the United States and economic importance and geopolitical power. Europe probably comes unhinged. Japan probably comes unhinged. The U.S. middle and working classes probably suffer greatly and end up with some permanent version of universal basic income, which starts to veer into issues of control. Hey, if you don't do this or do that, then we'll haircut your UBI payment for you that month. And that's just

not a great, you know, as a father, that's not a great sort of outcome. That's not something I get excited a world I get excited about for my kids to live in as opposed to the former. So I think those are your two sort of, it's basically really, again, to your point, Ryan, earlier, the dollar connecting to everything, what do we want to be? The first scenario, we go back to, we go back to be in America, basically. In the second scenario, we go back to sort of America with the asterisk, which is we're going be we're going to be in the business of exporting dollars and exporting treasuries. And then, you know, we're basically going to be sort of a giant tax haven a la, you know, Panama with a lot more,

you know, corn and soybeans and a bigger military. And I just, you know, I think I'd rather be America than America asterisk. But I think those are your two, I think those are your two sort of options or most, those are the two, you know, polar ends of where this goes. I wouldn't say that There's only one or the other. I think that you can probably blend shades of the two. But I think that's sort of your range of outcomes based again on what do we want to do. Do we want to preserve American exceptionalism, American power, by investing in America, or do we just want to keep the dollar treasury system as is or try to?

I don't know that it'll work in the long, but I think those are sort of where we're going. After talking with Linaldon and also you thus far in this conversation, it's surprising to hear that there's actually like a positive outcome for like the U.S. middle class that involves a definationalization of a very over-financialized economy, that's us, and allowing for strong wage growth in like real terms to be a possible future. So that's cool if that is on the table. It seems to be like it's the United States middle class versus treasury holders. Like that seems to be the correct tug of war. Is that a good way to put this? It's absolutely the right tug of war, the white rate of frame it. It's something we wrote about a couple years ago now where I said for basically, as soon as Paul Volcker got

to office, when he did what he did, he began subjugating the U.S. middle and working classes in deference to the U.S. treasury holders. And that was great for Wall Street. It was great for Washington. It was not great for the U.S. middle and working classes. When you look at trade deals like NAFTA, when you look at trade deals like the WTO, those were basically just extensions of what Volker did in terms of subjugating the U.S. middle and working classes in deference to U.S. treasury holders. And for the U.S. to really win, it needs to do the opposite. It needs to subjugate treasury holders in real terms to the U.S. middle and working classes. And I think ultimately, you know, in real terms for U.S. wages, you know, I think wages will

probably not quite keep up with inflation over time in that period. When you look at the history's inflation, right, at first wages exceeded and then they, you know, then they don't. The evening out that people typically leave out is, is you've got a whole lot of fixed rate debt, right? The average American worker has a lot of fixed rate debt. And that's why I say, I think ultimately this is going to be very inflationary very quickly, is no one's going to want to hold a mortgage paper. No one's going to hold mortgage paper yielding four if inflation's 15 to 20. That's terrible for the mortgage holder. It's great for the mortgage owner. You know, if your food bill is going up 20 and your wages are going up 12 to 15, it sort of stinks,

except if you've got a 4% mortgage, you're picking up 800 basis points a year, right? If your wages are up 12 and your mortgage is a 4% coupon, you're picking up 800 basis points in real terms against your mortgage every year, even as you're losing 300 to 800 basis points against your food bill and your gasoline bill. And so I think to the extent that, again, it allows a de-levering sovereign, and household balance sheets, there's this fixed debt component that people tend to leave out because they don't think about it in terms of, you know, again, they always go back to the 70s if you the United States and, oh, it just killed us in inflation. Well, U.S. debt to GDP was 25, 30 percent. People didn't, you know, the average mortgage in the 70s was way lower than it was now.

So there's this, I think when you think about real wage gains for middle and working class under that scenario, yes, It probably is maybe a little bit of a gain early on, a push, and then eventually they're behind. But there's this cushion in terms of the fixed rate debt that I think tends to not be considered. Now, it goes back to a question. Who is the sucker at the car table holding that debt as you're inflating it away? And the answer is going to be the Fed's balance sheet. And that's why I say I think where this goes, where this end game is, is the Fed's balance sheet is an order of magnitude larger than where it sits today. And the question is, what's the path between here and there?

To keep going on this whole tug-of-war, the American middle class versus treasury holders, you stated like two possible outcomes. You know, we revitalize America or it's America with an asterisk. My mind, when you said that, went to, well, that sounds like China, where you have this, like, behavior-dependent UBI that comes from like a highly surveilled state where there's a lot of top-down control and, like, less freedoms in forcing, funneling, you know, the capital of the United States into these treasuries so that the treasury side can come out okay versus, you know, reinvigorating like the American dream, strong middle class, like high production, high

manufacturing. And obviously like when you said that obviously it's obvious which one you're rooting for, I'm also rooting for the same one, I'm pretty damn sure. How strong are the political forces to have the America with the asterisk? Like how strong is that side of the fight? That's the status quo, so it's pretty strong. Now, with that said, it was a lot stronger pre-COVID. And the reason I say that is, I've been talking about these issues for a long time. And pre-COVID, I sort of got a lot of, yeah, yeah, yeah, yeah.

Particularly from people tied to Washington, right, or even people on Wall Street, yeah, yeah, yeah, yeah. But then when New York and when Washington couldn't get supplies, when the response to COVID is we need a bunch of masks, and China said, hey, yeah, hold on, we'll get you your masks after we have ours all taken care of. That, I think, hit Washington. in particular in a way where even the most dogmatic politician, hey, strong dollar good,

strong dollar good. What's good for the dollar is good for America. You know, in the same way that what's good for GM is good for America was once true. And what's good for U.S. Steel is good for America was once true. There was this huge contingent in Washington. Hey, what's good for the dollar is good for America. Well, you can have masks or you can have strong dollar. What do you want? And I think post-COVID, that pushed a notable contingent of people that had not really thought that hard about it beyond what's good for the dollar, is good for America, toward a little bit of a more nuanced position of understanding how vulnerable U.S. supply chains had become by virtue of this status quo system. So the status quo system is still very powerful, very well entrenched. They tend to be older, though, versus I think this growing recognition of, hey, we're vulnerable from a national security perspective. I mean, the Defense Department is very much on board with this and have been for years of, listen, borrowing money from China to build weapons to face down China is not a good idea.

It's not a sustainable strategy. So I think there's a lot in the defense and intelligence establishments in the United States that get this. And I think there's a lot of sort of your middle ground politicians either became. aware of the issue after COVID or switched over to sort of that DoD and intelligence side in the aftermath of COVID. But there's still a lot of institutional dogma, et cetera, around this. And so it is still very much a toss-up. And so, Luke, we talked about kind of the, how bad is it, and the end-game scenarios and the possibilities of fixing this. And also we talked about, like, what happens next. I want to zoom down into some assets and kind of

burn through these really quick. Sure. Like, so talk about like currencies, talk about a little bit more about bonds and equities and energy as well, even though we've touched on some of these. But let's drill down and give this an asset lens here. So in either of those two paths, maybe in the Treasury's path that the dollar retains its global reserve supremacy. But what do you think in these two paths, these two scenarios, what happens to the dollar in this environment? And then also just take us through really quickly other currencies, euro, yen, yuan, ruble, what happens to all of these currencies in the future we're headed towards. I think it depends on how quickly the Fed, you know, basically until the Fed relents and starts

putting the world on its balance sheet, you're going to have dollar up against, I think, everything except the ruble over time. And you may see the euro collapse. You may see the yen collapse, in which case the dollar goes towards infinity theoretically, because basically the DXY index is basically the dollar against the euro in the yen, right? So, you know, it's sort of ironic, hey, the dollar's up. It's so strong. This is so good for America. Well, or incomplete. It's getting less stupid. It's getting less stupid because you are finally seeing the energy shortages impact emerging markets as well. For February, March into April, it was a bit of a stupid index because it's basically, hey, your allies in Europe and Japan are collapsing. Yay, we're winning. Well, not really. You know, you're putting a bullet in your two most important allies. That's not good for America. But I think, you know, And you could see it, right? The Brazilian real was rising against the dollar. The ruble rising against a dollar. It was a little silly then. I don't think it's as silly now. Now you're seeing weakness. It's much more broad-based weakness. So I think it is giving us an idea, but I think it's the right direction increasingly now as it continues to strengthen. The challenge is that it's basically indicating an energy crisis, right? It's indicating what was really a global energy crisis. Europe is now in a twin deficit position. Japan's in a twin deficit position. All those sequels, those currencies and those nations will collapse unless either the Fed comes in and starts buying their debt for them, weakening the dollar, strengthening the other pairs.

Or they say, I'm sorry, USA, we're short energy. We have to take care of our people. People are going to starve. People are going to die. Pick up the phone. Yeah, hey, Vladimir, sorry, we need gas. Will you sell us gas in yen if you're Japan? That's where this is going.

And so when you think about this, okay, two pass. As long as the Fed stands aside, dollar's going to win and everything else is going to lose. I think the dollar will continue to fall against rubble, though, because Rubel is effectively gas back at this point. And the dollar's going to fall against gas, in my view. The dollar's going to fall against oil, in my view. That's the easy answer. And then the flip side, I think is also true. When the Fed is forced to finally sort of come in, come back to the markets, I think dollar loses against virtually everything.

I think there's probably, and we may be starting to be in it now, an intervening period of weeks, maybe a month or two, where the dollar also rises ants oil and gas and against the ruble and other commodities. I think we may be in that period right now. But ultimately, it can't last long because once oil gets low enough, biggest marginal producer of oil in the world is the U.S. and it's high-cost oil. And you get oil too low and the U.S. is going to start shutting down shale. Wells because they're very much on off depending on break-evens. And then you're seeding leverage right back to Putin. So it really is a very binary outlook as it relates to commodities. It's, you know, as long as the Fed is not buying enough treasuries to finance a sufficient amount of U.S. deficits, the dollar is going to go up against virtually everything, except for oil and gas.

And by virtue of that, I think, against the ruble. And vice versa. When they are, then I think the dollar weekends against virtually everything. And we saw this play out in the lead up to 2020, the immediate lead up, dollar was up, everything else basically down. Once the Fed started buying enough U.S. Treasuries from April 20 through May 21, the dollar fell against virtually everything. And then once the Fed started tightening again, the dollar has risen against virtually everything. So I think it's a very binary, this ties into my point of, hey, the Fed, it's not a dial. It's a switch. USA economy on, USA economy off. When USA economy is off, there's a dollar shortage, dollar's going to go up. And when a U.S. economy's on, then hey, party on weighing, party on guard.

Okay. So all of these currencies are now getting kind of reprised for this new reality. We already talked about what happens to bonds in this world. And your predictions, they absolutely die, right? Not going to do so well in this paradigm shift. They're like lose-lose, right? Yeah. I mean, we'll come back to equities in a minute, but you've been talking a lot about energy commodities.

And it seems like even for the ruble is basically like the ruble is being priced as if it's gas, as if it's an energy commodity. what happens to energy commodities, oil, natural gas in this environment? I think energy is in a secular uptrend, again, because of this peak cheap energy. You need higher energy prices to get the supplies, the incremental supplies, to continue to maintain the debt that is out there, right? I mean, you need to expend energy to generate economic activity to support the debt that exists. And if you don't have that energy, the debt is going to default. You're not going to

generate the economic surplus needed to pay, you know, just to keep floating the debt. And so you're in this weird period of time where when you look at it geologically, you need higher energy prices. If you don't get higher energy prices, you're going to have very big economic problems. And so for me, it speaks to two things depending on your view. If you don't get higher energy prices, you're going to have very big economic problems. And so for me, it speaks to two things depending on your view. If you're just sort of cash buy and hold investor, I think energy is going to be fine. If you're a trader, I think we're talking about a continuation of just mind-boggling volatility in energy markets. And we're starting to see that. When you see down 10% days in crude oil, I mean, crude oil is a $3 trillion a year commodity. Down 10% in a day, it's just mind-boggling

volatility. But that's what you're going to get in this combination of high debt, peak cheap energy world where once you start over tightening in terms of policy, you're going to be, okay, oh, God, I have to sell my oil. Once you sell it too far, now you're going to have oil shortages very quickly because, again, U.S. shale, world's biggest marginal producer in the four biggest basins in the U.S., the legacy well is declined 5% per month. So if you just stop producing in the U.S., U.S. oil production, the four big basins, is going to fall at least 30, 40%, in a year. So you're going to take 30, 40% of the biggest margin producer out of the market and maybe more if you get prices too low. So there's this, the energy market, like I said,

for the cash investor, I think remains very fundamentally driven. I think volatility is going to be very, very high in the intervening time based on those dynamics. Luke, you gave a quote that I really, really resonated with, and that was energy is nature's interest rate. And I'm wondering if you could explain what that means and connect that to all of the developing markets, emerging markets that are out there in the world. And kind of something that I'm a little bit fearful of is that all of this demand for energy, especially as Europe goes into a winter, gets sucked out of the market and leaves a lot of emerging markets hanging, not able to afford energy.

Can you just explain these dynamics that you see ahead of us? Yeah. I mean, there are pictures, it could be very catastrophic for emerging markets. Very catastrophic. It could be very catastrophic for Europe. We've been writing for last three, four months that the playbook Europe is running. is basically the same playbook Germany ran after World War I in Weimar, Germany, which was the French came in and seized Rur Valley coal stores as a part of the war reparations.

And then Germans said, oops, we don't know if energy, let's just print money. And you look at what's happening now. The Europeans are blindly saying, hell yeah, you know, bad Putin, we'll do without his gas. Or Putin's now saying, okay, fine, you want to take my FX reserves? Great. I'm going to make you pay in another currency or you're not going to get the gas. And what are they talking about doing? They're talking about printing money to keep peripheral spreads close to the center.

You print money without energy, you're going to hyperinflate the currency. And that's in Europe. That's in a developed market. That's a potentially pleasant outcome. You talk about places like Sri Lanka at the other far end of the sort of the very weakest of the weak emerging markets. Societal collapse, starvation, violent overthrows of governments. That's what happens when people don't have enough energy or food. And so if mismanaged, that's where this sort of could all go.

And that's what, you know, this all filters into why I think it's, you know, one of the scariest environments we've seen in 27 years. Everything in this type of environment goes back down on Maslow's hierarchy of needs, and people are just talking about like food, food, shelter, and energy, right? And that's kind of what you need at the base level. Let's just finish this up with the asset lens. Equities, where do they go over this decade? I mean, they're traditionally risk-on assets, aren't they? What do you think they'll do in this kind of environment?

Over this decade, I think they go way higher. Because ultimately, I think the decade of the 20s, when you look back, it's going to be about Western sovereign governments. solvency being maintained nominally by their respective central banks. In plain English, Western governments are broke. They're pretending for the moment like they're solvent. They're not. Central banks are going to print the money to keep them solvent, and that's going to be really good for equities over the course of this decade. Now, anytime they come out like they are over the last six to nine months, 12 months, and say, oh, we're going to tighten, it's not going to be good for

equities. And we're seeing that. But unless central banks in the West, unless the U.S. Fed is willing to stand aside and let, you know, the Fed, the ECB, the BOJ, stand aside and let the U.S., Europe, and Japan default on their debt, which I don't think is going to happen. Then I think they're going to print the money. And as they print that money, it's going to be really good for equities from beginning to end of the 20s. Gold now, another different store value commodity, let's call it.

This is a tweet you put out recently, Luke, which I liked. If gold was a useless pet rock, Western G7 policymakers wouldn't be putting capital controls on it. Is this kind of the emperor with no clothes? Gold is actually a store value asset. Where does gold go? And then lastly, we'll get to crypto, but first, gold. Gold for me is the once in future neutral reserve asset. It's been moving back into the system as a neutral reserve asset, led by the quote-unquote

Rogues Gallery of China and Russia, primarily those two. The Europeans have always liked gold. They continue to like gold. So I think ultimately gold has been given. gaining share slowly from treasuries as a primary reserve asset. I think by the end of the 2020s, gold regains a lot of share from treasuries as a primary reserve asset. And when you look at the relative sizes of those markets, it implies gold being multiples higher over the course of this decade so that it can be big enough to serve as a reserve asset again. And so I think, you know,

I think gold is probably a double or triple from here over the next 10 years. Okay, so how about crypto now? So you could group crypto in that store of value asset category like gold. Others group it and seems like the market is recently into kind of the risk asset category. And you'd expect, with all of the nominal issuance, money printing, inflation going on, you'd expect something like Bitcoin to perform better than it has recently. I'm wondering if you think that could turn around. There's also this quote, I think many have attributed to you, Luke, which I really like is crypto is the last functioning fire alarm. Talk about that, too, if you would. What's the story on crypto this decade? For me, I really focus just on Bitcoin. So for me, Bitcoin is the last functioning smoke

alarm. And the reason I like Bitcoin so much is that proof of work dynamic versus proof of stake, because to me, proof of stake is effectively just a fiat system. And proof of work is much more gold-like. It's a tie to energy, right? I look at Bitcoin and I look at gold as energy proxies. It takes a lot of energy to mine and store gold. It takes a lot of energy to mine and cold store Bitcoin, right? There's an energy component to that. And so I think ultimately, Bitcoin will trade more like an energy proxy, store of value, neutral reserve asset for the people. I agree it has not. It has not traded as a store of value, neutral reserve asset for the people relative to treasury bonds, gold, stocks, et cetera, on the way down here. It has, I think, traded as a neutral

reserve asset relative to everything else in crypto on the way down here, which has been somewhat typical right when in down cycles in crypto of the last several years, Bitcoin outperforms on the way down and has underperformed on the way up. It'll be interesting this time to see, given some of what's happened, have there been people converted to Bitcoin only from some of these others by this down cycle? Who knows? But to me, Bitcoin is basically the last functioning smoke detector in terms of liquidity metrics and I think will come to be seen as a neutral reserve asset, which is ultimately neutral reserve asset is just an energy proxy. You know, it ties back to we've talked about before of negative real interest rates,

energy scarcity. You need a neutral reserve asset that preserves your purchasing power and energy or else you're screwed. You're screwed like Europe. You're screwed like Japan. You're screwed like Sri Lanka. You need energy. and for a long time, dollars equaled energy,

saw U.S. Treasury's equaled energy. And that's part of this sovereign debt bubble bursting, is this belief that sovereign debt will hold its purchasing power in real terms. I think that has begun being, that's when I say it's bursting. The bursting is ultimately this unwavering belief that sovereign debt and in particular treasuries are good stores of value on a real basis. They have been for a long time. They can't be anymore if governments are not going to nominally default on the debt.

So, Luke, how should we position our portfolios going into what seems to be a very thick fog of war, very uncertain decade with a lot of volatility, keeping in mind that listeners of this podcast are likely 50% or greater of their portfolios or all in crypto assets? So what are the general rules of thumb that we should consider when we construct our portfolios to finish off this decade? I think it may be the most instructive chart to answer that question. There's a chart that I've highlighted a number of times in our work. It was put together by a friend of mine, Dan Oliver at Murmican Capital. And it's tremendous chart. What it shows is the price of gold in Weimar German marks and then the month over month performance of gold in Weimar German marks. And so from, call it, 1918 and 1923, literally the currency hyperinflates to zero against gold. Gold, gold, gold is from whatever, 20 marks. to 20 Reichs marks to a trillion Reichs marks over five years span. However, and a lot of people would say, oh, I want to borrow as much money as I can and own gold. The challenge that I think a year ago, people didn't appreciate it. I think today they appreciate a lot more in the crypto world is

that chart showed that four or five or six different times in that span of that hyperinflation, one of the great ones of all time, you lost all of your money if you were levered long gold. marks because inexplicably people actually believed the equivalent of, well, the Reichs Mark's going to do QT. They're actually going to go into austerity. They're going to, and people multiple times sold gold to buy Reichs marks as the currency was going to zero. I think the key is to be unlevered. If you're levered, this whole process is so political. I can't tell you whether the Fed can come out tomorrow and grow the balance sheet. Something could break. Fed will be out growing tomorrow. And then it's going to be, or they could be weaponizing this against Russia.

There may have been a decision made behind closed doors is we want oil at 40 and we don't care if the Dow goes to 10,000. We don't care if NASDAQ crashes. We don't care if Bitcoin goes to zero. You know, it goes back to 20 bucks. Oil has to be 40. Anything else that breaks, it doesn't matter. I don't think they can do that.

But if they try that and you're levered, you're going to lose everything. You are going to get carried out on your shield. And I think, like I said, a year ago, people like, no. Now, I think people see it. If you were levered long crypto over the last six to 12 months, your capital's gone. And so I think rule number one is stay unlevered or very low leverage. And then for me, I like holding a lot of cash. You know, we've been talking about building cash with our clients.

If you're a high risk month-to-month guy, we've been talking about being mostly in cash, you know, for several months because it's just such a political dynamic. So to me, my portfolio, you know, I like to call it the Jacob Fugger, portfolio. Richest man in history, 25% cash, 25% gold, 25% stocks, 25% real estate. And then you just adjust based on what moves. The cash gives the optionality. To me, when I think about gold, I lump Bitcoin in there with gold. And then it's a personal situation of, hey, you want 25% Bitcoin, great. You want 5% Bitcoin of that 25. You want one. It depends on your situation, your comfort with understanding it. And then you adjust based on what happens. But I think

having the cash fractionality, but most important is being unlevered because this is such a political process, number one, and number two, the debt is so high. The volatility has been high. It's going to keep being high in my view. I'm reminded of this fund that lost all of their money, completely blew up by shorting Luna into the ground, which is a lesson in volatility. You can be right over the long term, but the volatility will chew you up on leverage in whatever time frame that you're in. Luke, one last perspective I want to give from you. The gist that I've gotten is that over the 10 plus year time horizon, we're super bullish. We can be bullish on perhaps equities and crypto and gold.

But it's this next one to three to five years of just like volatility and chop that we need to get through. Would that be a fair assessment? Yeah, I think it's a very fair assessment. I think it's a lot shorter than two to five years at chop. But yeah, I think we've got chop over the next six. to 12 months, and then I think we're going to know for sure. But it's that you've got to live through that chop. Otherwise, you're not going to have anything to invest on the other side if you're too levered. Cool. Luke, thank you so much for joining us. Absolutely. And helping us

think through these tumultuous times, see through the fog of war. As David mentioned earlier, we really appreciate it. Thanks for having me on. It's great being here. Bankless Nation, a few follow-ups, of course. Go listen to those thoughts from Luke at the end. No leverage. Holding cash, which is somewhat ironic because we just spent most of the podcast disparaging the dollar. But that is wise in these economic times. Action items for you, we will include a link to the chart that Luke mentioned. We'll make sure to get that link from him post show. Also, make sure you subscribe to Forest Through the Trees, the newsletter. We will include a link in the show notes there.

Luke also has his own YouTube channel. So if you are on YouTube watching this right now, go ahead on over to Luke's YouTube channel and click subscribe as well, some fantastic content there. And as always, last action item for you, we've got a lot of macro stuff. coming your way and a lot in the archives recently with Lynn Alden, Jim Bianco, and others will include links to some of the key shows there. As always, none of this has been financial advice. Crypto is risky, but wait, the entire world is risky now. You can definitely lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.