TFTC: A Bitcoin Podcast - #312: The popping of the 100 year sovereign debt bubble with Luke Gromen

Episode Date: March 14, 2022

Join Marty as he sits down with Luke Gromen to discuss the global sovereign debt bubble that has been building for a century and why it may be beginning to pop. Follow Luke Gromen on Twitter Read more from Luke at: FFTT, LLC Shoutout to our sponsors: Unchained Capital Braiins HodlHodl Bitcoin 2022 - use the code TFTC for 10% off Fountain Podcasts

We're going to win, freaks. We're going to win. Situations. Valtile. Hairy. A bit scary. But we're going to win. We're going to get the industry.

Excuse me. We're going to get the energy industry to speculative attack the dollar. What, Uncle Marty? What? Just listen. Listen until the end of the episode. I just recorded with Luke Roman.

Extremely insightful. Extremely prescient. Luke is, he's been talking about the situations or the monetary situation that we find ourselves in for, for quite some time. And it seems like the things are happening. Things are happening. It was like, it might be a advantageous to produce stuff and not just dollars moving forward. If you are the U S but alas, we just had a whole conversation about it. I'll let You go listen to that. I'm not going to re-explain it for you here.

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lawyer you've had a dynamic where money's become freer than free when you talk about a fed just gone nuts all all the central banks going nuts so it's all acting like safe haven i believe that in a world where central bankers are tripping over themselves to devalue their currency bitcoin wins in the world of fiat currencies bitcoin is the victor i mean that's part of the bull case for bitcoin if you're not paying attention you probably should be probably should be how bad are things luke well it's uh you know what's what's what's normal for the spiders chaos for the fly so for me it's i try to not see it as good or bad and just see it as i want to be a spider not a fly and

and more importantly i want my clients to be spiders and not flies yes it is what it is and what we're talking about is what you describe as a hundred year global sovereign debt bubble beginning to pop what in your mind was the the pin that has the particular moment over the last few weeks or months years whatever it may be that is inciting this this bubble from popping excuse me i i think really it's um i think when we look back it will be uh seeing it covet was really i think the bubble that pricked it and and um ultimately you know the ensuing two years were were were trying to we're spent trying to pretend or paper over or flail against it uh you can see the steps taken by sovereigns to effectively try to inflate their way out of it in terms of the

fiscal spending and central bank monetized fiscal spending effectively. And the hope was that they could inflate their way out of it. And the challenge, of course, was that if they would have run what they did March of 2020 through June of 2021 with the massive stimulus, 8% inflation rates, 12% nominal GDP growth. If they had run that playbook in 08, in the aftermath of the great financial crisis, it would have worked. We would have inflated enough of the debt away that the GDP would have fallen precipitously instead of risen. And Fed could have then normalized policy. it would have been a reset in its own right. But we didn't do any of those things in any real way. We didn't get the inflation we needed. And then when COVID hit,

we tried to run a version of that playbook. And the challenge is that ultimately, the inflation became a political issue. And so because inflation became a political issue, um uh they're they're sort of out of they're sort of out of uh out of room uh and so i think ultimately that will be seen as the uh as the pin that that i think tricked the global sovereign debt bubble uh but i think this last two three weeks is is really i don't know it's it's a forcing function or a catalyst for, I think, really rapid changes, I think that ultimately get us set to move much more quickly, right? Because you can try to boil a frog and inflate the dead away. And they tried to do that after COVID for a year, year and a half, and it became

a political problem. And now I think we may see much more rapid changes take place as a result of the last several weeks. COVID specifically, you had the combination of the money printing and then shutting down the global supply chains in the last few weeks, confiscating reserves held outside of Russia, and even before that, Canada freezing people's bank accounts. I think the world is becoming very aware of two things. Number one, supply chains are very important. And number two, control of your money is not what you thought it was only a couple months ago. And that is going to have profound effects moving forward. And so in regards to supply chains, I saw you tweeting about this too. What we're seeing is a number of countries begin to ban exports because they're

realizing that they're not going to have the essential commodities needed to feed their properties. We're talking about grains here specifically. Yeah, I think that that's really where here in, I think amongst, I'm going to try to be diplomatic here, at least somewhat diplomatic. I have a tendency to not always be. I think amongst policymakers that came of age in the United States and in the West more broadly over the past 30 years, really, since the Berlin Wall came down effectively, these policymakers that are now in senior seats around Western governments and Western social democracies came of age at a time when the U.S. was a unipolar power and when they had never experienced anything in their lives that, at least as

adults, where they saw a separation of the value of fiat currency and actual underlying physical commodities, right? So I would say the gas lines of the 70s, you know, if you were, you know, if you were 30 in 1990, you probably were, you know, you maybe experienced it a little bit, I guess, but you sort of, it wasn't this, you know, this formative, wasn't as formative as, or maybe they didn't take the right lesson from it, right? I mean, they were operating under this view that was popular in 1990, that 1990 was the end of history, right? The Francis Fukuyama book after the USSR came down. And so where I'm going with this is that we've seen a series of policies implemented most recently in the last three weeks. But really, you could date this back to when we sanctioned Iran using the SWIFT system, where they've only looked at it from one side of the coin, which is we have the dollar, and so we can weaponize this. and they not looking at it from the other side of this, which is every time you do that and every

time you do it bigger and every time you do it more, you're basically, I mean, people will start to think of the currency in their pocket as a grenade that can go off at any time if they do the wrong thing, say the wrong thing, et cetera. And so I think there has been just this view that dollar equals oil dollar equals grains dollar equals whatever and we have the dollar so we have all this stuff and and i do think there is some strategic thinking that okay we have enough that we can produce here um in terms of the raw commodities but this we we have spent 30 years optimizing our supply chains for efficiency instead of resiliency and then you start messing with them, there's so little thought being given to second and third order derivatives that

I find myself astonished, quite frankly. It really is astonishing. Talk about the West, we can talk about energy policy here in the US. I think Germany is the shining example of the problems that come with ill-informed energy policy, decommission your reliable electricity generation sources for unreliable sources. And then you shift all the leverage to Russia is providing you with natural gas that runs your economy here in the United States. It seems like our leaders are keen on taking us down a similar path in regards to not allowing us to drill for as much oil and gas as we're going to need moving forward. And it, again, it's this hubris that that stems from this temporal anomaly of of the u.s dollar as a

reserve currency right and it's it's look going looking at the world right now particularly the in the world of energy and food and seeing russia ukraine and get into the situation that they're in now russia's like all right you're on our list we're not gonna we're not gonna send you these natural commodities. And I think that's one of the big memes that's been going around the last few weeks. Everybody's like, oh, who cares? Russia's only 2% of global GDP, but they don't

really understand how important they are in the commodities world. And this is something that's become extremely astonishing to me, is just how little people understand that at the end of the day, yes, the dollar has been the reserve currency, but you're going to want the hard assets

when push comes to shove and shit hits the fan. Yeah, it's a fundamental misconception that's just been brewed by, like you said, this dollar reserve currency since, if you were 30 in 1990, you were nine, you were 10 when Nixon went off the gold standard. You don't remember anything, certainly not as a professional in the way the world worked, right? So it's always been this system. It's always worked for you. But to your point. Russia is only 2% of global GDP. However, that's the price of Russia's GDP. The value of Russia's GDP is 10 million barrels a day of energy, 25,000 man hours per barrel on estimate,

right? So if you say a man hour is worth 20 bucks, the value of a barrel of oil to the economy is $500,000 times 10 million barrels. There's the real value of Russia to the global economy. You're going to take that out, then we can add natural gas onto that, then we can add grains onto that. We can add nickel onto that. We can add palladium onto that. And you quickly realize that what they have done is remove too big a piece. There's no, and I think ultimately this was Putin's gambit, particularly with Chinese backing is that, look, could we remove Russia from the global economy? Yes, but not without a severe recession. Well, if we had very low debt, like we did in, say, 1979, and I'm not talking about private debt, because private debt can

always go bankrupt, whatever. Get rid of it, like we saw in the recession of 79, 80. We were put into a recession to fight inflation, or Volcker put the economy into a recession to fight inflation. The issue is sovereign debt. The U.S. has sovereign debt that is so high, we cannot afford a recession without the solvency, the nominal solvency. And by that, I mean the U.S. will not have enough tax receipts to pay both its treasury spending and its entitlement obligations, let alone defense, and then everything else the government does without the Fed printing the difference. And so we have long said another fundamental misapprehension of sort of the way the world works has been policymakers in power today, in the West especially, say, well, debt doesn't matter. Sovereign debt doesn't matter. And they're right for very long stretches of time. They're 100% right. And then in brief stretches of time, they're all that matter.

It's all that matters. And those brief stretches of time tend to be around national emergencies when you could really use the fiscal capacity. Because if we had, you know, 10 percent debt to GDP, 25 percent debt to GDP like it was when Volcker took rates to 15 percent, we could cut Russia out. We could jack rates up to 10, 15 percent to choke off the inflation. Yeah, we would go through a nasty recession. Yeah, unemployment would go up. Yeah, rates would go up. But then we could do the fiscal stimulus then to sort of help people out to get through it.

and you could make it all work. Now, with debt-to-GDP at 130%, you take rates up 200 basis points, the whole thing's going to come unhinged. I mean, look at what we're watching now. We haven't even raised rates yet. So I think that's really another sort of fundamental misapprehension is just where we are in the long debt cycle, particularly as it relates to the sovereign debt side of the United States, but as a reserve currency issuer, but the West more broadly as well. Now, it seems like other players on the world stage are beginning to realize like, all right, maybe the dollar is not going to be what it has been. And you see these partnerships budding. Obviously, you have Russia and China. You had the UAE, Neg, Biden, when he reached out to them. You

You have Saudi Arabia and China partnering up now. And you have these power players, particularly in the oil markets, that are, it seems like they're posturing like they're going to begin hedging away from the U.S. dollar. What does this mean for the global monetary order moving forward as all these power players start shifting away from the U.S.? It seems to be happening. I think it's all out of self-interest, whether that self-interest is enlightened or raw self-interest. But I think ultimately, if a nation doesn't have enough energy, then it is going to suffer an economic and humanitarian and political catastrophe. And everything flows from that. And I would use energy broadly defined as not just energy, traditional oil and gas, nuclear, electric, coal, but I would also say things that are related to humans, right? Food, water. If you don't have enough of those things, you're in trouble.

And so there is a recognition, I think, amongst all these sovereigns at the senior levels that there is a fundamental mismatch between the current and likely future price of energy based on both policy and geology, peak cheap oil, as we've talked about, where these reserves are getting more and more expensive to find and replace as you use. And at the same time, you have a debt-based currency system that is fundamentally based on a ever-growing supply of cheap energy and the debt backing the systems down to 0% in terms of the rates, right? So you're at 0% basically everywhere close to it. And so I think they're just fundamentally looking at this going, all right, if it's going to get more and more expensive to produce energy from here. In the meantime, that tells me that debt is going to be increasingly negative real rate instrument. And so this old way of doing things has to end, has to break. I need to make alternative arrangements. It is no longer a good idea for me to just stockpile

dollars for my future energy needs, because that's going to be an ice cube that just melts and melts. And it's going to buy me less and less energy by definition because of peak cheap energy. And so I think what you're watching is the rest of the world facing this reality of like, look, we need energy. We don't need dollars. We need energy. We don't need dollars. We need food. We don't need energy or dollars. We need water. And that then has significant implications throughout the financial system. That's not to say people don't need any dollars, but if you used to stockpile $100,

now you'll stockpile $50 and you'll take the other 50 and you'll go buy an oil field or a copper mine or et cetera. Yeah, that description reminds me of stories I've heard when people have been on the show in the past, but on a more micro level, like going through hyperinflation, Argentina, they get paid and then run to the grocery store and buy goods as quickly as possible before. the pace of a devalue. So you're saying this is happening somewhat on the global scale?

It has been for 10 to 12 years. It's just being marked to market rapidly. I mean, it's been, I mean, you can go back in time. There's an article on Reuters from 2013, how China quietly took control of an OPEC nation's oil. And it's about Ecuador. And it showed that basically China had wrapped up like 80% of Ecuador's oil production for the foreseeable future by lending them money, building infrastructure, and instead of taking payment in currency, they were effectively taking payment in barrels of oil. And you saw this playbook run over and over and over. There was a gigantic, gigantic is probably too strong word, but it was a sizable oil refinery. There was a joint venture that was being planned at one point between the Chinese and the Saudis back in 2014.

And it was like, wake up. One petroleum engineer was talking about, wake up. Why do you think they're doing that? They're going to have these contracts that have right of first refusal. So the oils, they will be a partner in it. And then China will have right of first refusal to take the products, the refined oil and products if they want it. If not, they'll turn around and sell it. And so this has been going on.

China's been doing this for at least 10 to 15 years, this, hey, we don't want the dollar. We want the stuff. And I think they were simply looking out 10 to 15 years at the mathematical certainty that basically unless 70 million baby boomers in the US went away in a big hurry, in other has died, then the US was going to have to print tens of trillions of dollars. And as they did, China's energy and commodity bill was going to inflate. And it would create a balance of payments problem for China. And so ultimately, China just cut the dollar out. They just said, all right, fine. We have this pile of dollars that we've earned from trade with the United

States. And prior to 2008, almost all of it went, a lot of it went into treasuries and mortgage cashbacks and other financial assets. And increasingly after the great financial crisis, you see it began being diverted into production of real assets around the world, ports, oil fields, farmland, copper mines, gold mines. I mean, you just you Google China buys and just look at all the stuff they've been buying for 10 or 15 years. And so China's been doing this for a while. Russia's been swapping out treasuries for gold, in particular, for nine years now, even before the original Ukraine situation in 2014. So you can see some of these nations doing this. I think it's one of these things where now, I mean, when I would bring this up five years ago,

I was the crazy guy in Cleveland. That's King Dollar, hashtag America, what are you talking about. Now, after COVID, where it was, hey, we need some masks. OK, who makes them? China. Hey, China, can we have some masks? Wait, after we get them, then you can get them. And I think that was finally where a quorum of people that up until that point said, hey, the dollar is nothing but an exorbitant privilege for us, started saying, wait a second here. This is a two-edged sword, right? This is an exorbitant privilege, but it's becoming an exorbitant burden, too, echoing what the Defense Department's been saying for 10 or 15 years, which is, listen, you know, we'll borrow money from China to build weapons to face down China,

and we need to buy the stuff from China. Something's got to give here. So there's, I think, you know, we're watching this in real time, this marking to market in the Western mind, if you will of oh gosh uh you know look what they're doing yeah i mean triffin warned us it's uh it's happening and yeah none of these things i mean it's it's i mean again it's it's because we run our country on you know a two-year political cycle quite frankly that's become long term for us right we've gone from running in a two-year political cycle to running our country on you know what sort of the you know the virtue signaling crowd is offended about this month yeah and that's that's been weaponized against us right we can see that

oh nuclear is bad get rid of nuclear i mean right when you're when you're have when you have your energy policy being seriously influenced by 16 year old girls and rock musicians and don't get me wrong i love bono's music i don't think he should be advising energy policy it's probably not a good idea yeah i mean that's where i start to get frustrated angry even because it's like what are we doing sitting i'm 30 i've got a son i've got another child on the way i'm looking forward to their lives and looking at what's going on in washington and it's just like you just want to shake people the way the biden administration has come out and blamed all the inflation we're seeing on ukraine certainly going to contribute to it but to try to to pawn it off

as as solely a product of what's going on between russia and ukraine now completely neglecting the the multi-year build-up of of inflation post post-covid is 1984-esque and then on top of that and you have them doubling down on this asinine energy policy. And they're trying to demonize what the industry that we're going to desperately need to get us back on the right track. And that's like, I think here in the United States,

me personally, I would love to see grown up adults, strong men stand up and say enough is enough. We're not going to listen to the 16 year olds. We're not going to listen to Bono. we are in a a pretty precarious situation and we need to just begin acting seriously not even on the global stage we just need to look inward like everybody huddle up like we need a new game plan yeah and i i think there eventually will be and there are

there are very serious very smart people sort of behind the scenes um and the disconnect is ultimately, I think some of these people will go run this up the flagpole to the face of the government. And the face of the government, I think, are very beholden to what's popular, what are we offended about this month in terms of the polling. And in the short run, we're seeing the outcomes of that. But in the long run, I think this is going to spur a crisis that will so badly burn the politicians that have been listening to the virtue signaling crowd of what are we going to do that what are the polls telling me this month that they're going to be forced to turn around say okay this none of this has worked who do i talk to that actually knows

what they're talking about and you know those presentations but here's what we're here's what we need to do. And so I think it all goes back to the, in my mind, to the famous, if apocryphal, Winston Churchill quote, that the Americans always do the right thing after they've exhausted all the alternatives. And so we are, I think, in the last two, three weeks, I think this marking to market of what's been happening all along, I think is getting us much closer to the crisis where we're not going to have any alternatives. And, and I think the crisis will be worse in some places than others, uh, around the globe. Um, but it's, um, it has a chance of being pretty, pretty nasty. Uh, unfortunately. That's just what I was going to ask you. What does this

crisis look like in your mind if it does unfold? So in 2008, um, Hank Paulson reportedly got down on his knees and begged nancy pelosi for the bailout if you remember that right there will be no cash in the atms by wednesday no cash in the atms no cash tanks in the streets he was worried about credit markets breaking down and then supply chains breaking down after credit markets much of wall street is sitting there looking at credit markets going okay a little bit of strain but not too bad yet but the but the supply chains were broken starting before this thing you know They were the, but it was the, hey, the China stuff was broken, right? But there was not really, there were problems with the food supply chains, but there were

not problems with a capital P with the food supply chain. And now there is. And so I think we're seeing the crisis work in reverse, where this is not anything like the last 40 years anybody's ever seen. And so they're not thinking about it properly, which is you've broken the supply chains first. You're going to have a credit crisis because the supply chains broke first. It's not going to be we have a credit crisis. We have to stop and paper over before it spills into supply chain.

It's going to work the other way. And so I think actually you're seeing nations that are saying we're stopping exports of grains. These are the people that don't have any margin for error. I'm going to get thrown out of office, and that's the happy ending. In some places, I will get killed, literally, if there are food riots, et cetera, in my country. We're done here. We're not exporting as much. Either they slow exports or they put export taxes on it.

They do something to restrain the outflows of grains. And so everybody starts doing this. These are people that are acting with a large margin of error. They don't need to day trade and get every last point out of corn. They're just, boom, we need to make sure we have it. And so I think this is the leading indicator of this crisis, where as the recognition in credit markets dawns, you're going to have inflation continue to rise. And as you have inflation continue to rise, the supply chains break down, you're going

this reinforcing mechanism of my fiat currency doesn't buy me what I thought. My fiat inflation, you know, bonds, sell my bonds. And once that takes place, and I think it's starting to, central banks are going to have to, they're going to have to either stand aside and let this credit crisis evolve. And what's going to be really unique about this, in my view, is that in the West, it's going to look a lot like an emerging market credit crisis, where yields go up even stocks go down, asset prices go down, unless the central banks come in and cap yields and say, listen, all right, fine, 10-year treasury in the US isn't going over 2.5, isn't going over 3, whatever. We're doing QE. We're going to do some sort of yield curve control. And there's already

calls out there. It started last week for some sort of treasury liquidity facility from the Fed. It's not QE. It's a treasury liquidity facility. Same thing. because the Treasury market, the deepest, most liquid market in the world, not trading like the deepest, most liquid market in the world. You're already seeing these strains again, similar to what we saw in March of 2020, when the Treasury market, after 12 days of an equity downturn, crashed alongside stocks, which had never happened in 40 years. It was a huge, huge warning signal. It's flashing yellow again. And so I think what we're looking at is ultimately this crisis spreading from supply chains into credit markets. And then from there,

the central banks, the Fed are going to be forced to increase liquidity, increase balance sheets into an inflation spike. And that, I think, is going to be sort of the crisis that forces these politicians. First, I think midterms here, I think, are going to, I think the Democrats are going to all get thrown out. Anyone that can get thrown out of office, I think, is going to get thrown out of office at this midterms. And then you're going to bring in a new group of people, and will they get the message of like, hey, inflation's going crazy, what do we do? And Fed's going to go, look, treasury market's not functioning. We have to keep doing this unless you want rates to go up. In which case, OK, it has to come from policy. What's the policy

that's going to fix this? All right, somebody call the energy guys. What do we got to do to get gasoline back down from $7? Oh, we need to drill more? OK, let's do that, right? I mean, you get the right group of people in there, they'll be, as a friend of mine says, they'll be, they'll be drilling in, you know, Thomas Jefferson's nose on Mount Rushmore. But until then, you know, until, I mean, it's just the way our political system works until there's enough political pain to elicit a response. Here we are. Yeah. now i saw a troubling video over the weekend that is an anecdotal data point that proves that the supply chain crisis is going to lead to the credit crisis and a signal of the cascading

doom loop that that may be underway right now is a gentleman crying um because he didn't eat that day and he said he didn't eat because he couldn't afford gas to get to work to get cash to then buy food so you you have the breakdown where people like gas specifically is we live in a an economy here in the united states where most people need to drive to their job and people literally can't afford to drive to the place where they make money and that's when things get scary like i went today setting up this studio picking up this furniture like i had been at this furniture store three or four times over the last week and out of those three to four times the most people i saw working there were two people this morning there was one person working there like it's it's really eerie

right now what's going on just observing um in different areas of the economy yeah and we you know we had some uh we ordered some new what we didn't order any new furniture we went we had we needed to get some new furniture last fall and we walk in and they said all right first off you know most of this stuff it's going to take you at least six months to get if we ordered it today some of it will take up to a year and so my wife to her credit she goes listen i don't want to i don't want to look at any of that stuff take me to what you text me to the pieces that you have in the warehouse or the stuff we can buy here off the floor and and that's what we did and it was it was just what do you have you know the the couch in the hand is worth you know a year's

worth of the couch on order. And that was before we started seeing some new slowdowns out of China in terms of production. So it's a very unique and potentially very scary crisis because, like I said, we have optimized our entire supply chain and economy for efficiency based on a misapprehension. We would never experience peak cheap energy. We would never get into tensions with China. We would never, you know, Russia would forever be poor and weak. All of these things that were extremely short-sighted because of our two-year election cycle or our shorter virtue signaling. And now here we are. And there's sort of all the easy things have been done, all the easy, let's optimize a little more. And so now there's

nothing but hard choices left. There's no painless choices left. And so you just need to be prepared, I think, for, like I said, I think this is a supply chain crisis that moves in to exacerbate the inflation crisis. And then that's going to be the trigger for the popping of this, To really make it obvious, this first sovereign debt bubble in 100 years, I think it's starting to get a little bit more obvious, but if slash when the central banks, the Fed, have to increase liquidity into an inflation spike, that's going to be the either aha or oh shit moment for a lot of investors, where I think there's this belief that they can still run, they can still tighten to fight inflation. There is not enough appreciation or there's virtually no attention being paid to the U.S. sovereign balance sheet on Wall Street. They're just not looking at it because everybody knows it doesn't matter. Just like they knew the home prices could never fall nationally because they hadn't ever, except, of course, they had. It was just when they had the last time, everybody that experienced it was dead.

right it happened in the 30s so everybody that lived through the national that last national home price drop in 2005 through 8 was that they were they had died already same thing where the last you know the u.s balance sheet has mattered numerous times um numerous times the united states effectively defaulted in 1971 and in 1933 on its obligations as they were as they were stated right we owed we owed gold they defaulted on domestic gold obligations in 1933 and they did They defaulted on foreign gold obligations in 1971. And so these types of restructurings happen all the time. They'll never call it a default.

But again, this moment, I think the aha moment, just like the, oh, God, Nixon just closed the gold window, is going to be, oh, God, the Fed is loosening into an inflation spike. Why are they doing it? And the answer is because the debt. They have to. They don't have a choice. it'll be you know you can either default nominally on treasuries or on your entitlements or that has to print more so what do you think this means for like gold bitcoin do you think we

the world wakes up and we get to transition away from these granularly controlled and micromanage monetary systems that introduce a lot of moral hazard? Do you think the world sovereigns begin to give Bitcoin and gold a chance? Do you think they're forced to? Do you think the world is waking up to the view that,

okay, maybe we should have more free market monetary systems that aren't as greatly controlled? I think the world's need for energy, for a system that doesn't destroy their economies, is forcing that. I think they would rather not have a system that is, most of them like the dollar system, until it began threatening them.

And by threatening them, I mean this, oil is only priced in dollars, and the Americans print $70 trillion, $80 trillion, $100 trillion for entitlements over some span of time. And their energy bill inflates, and they run out of dollars, and then they have a currency crisis. And so that, I think, has been on everybody's mind since 2008. And so, yeah, I think it's really good for neutral reserve assets, gold, Bitcoin. You've seen, obviously, what the Russians have done with gold. Gold's coming out of this crisis looking really really good um you know given uh the freezing of fx reserves i think ultimately bitcoin is a neutral reserve asset for the people i think it's coming out of this

this crisis looking good too i mean i just saw something earlier today that um the european move to sort of try to ban it on on the mining the proof of work mining Yeah, the proof-of-work mining, I think, yeah, that's a really good sign. And actually shows maybe the Europeans are learning something. It was like, hey, let's get rid of all our nukes. Yay. Oh, hey, let's get rid of all the proof-of-work Bitcoin mining. Yay.

Right. So that, to me, is encouraging, I think. So I think gold's coming out of the second wall. I think Bitcoin is, I think, a neutral reserve asset for the people. Could it be, in the game theory of how everything could play out, if the United States adopted Bitcoin as a reserve asset or if other major nations did, I think it would be tremendously good for the system, tremendously good for the US. There'd be vicious sector rotation within the US, I think, away from finance and sort

of dollar export, the dollar export, bond export business that we've been in for the last 40, 50 years, towards making things again. I think that wouldn't be very good for the dollar, but I think it would be, within the game theory, could be very positive. Do I think that's about to happen? No. Is it being talked about in small circles in the government? Yes. The center, I think, of the rational discussion around the monetary system, ironically, is not taking place at the Fed. It's not taking place at the Treasury. It's not taking place on wall street it's taking place at the department of defense which actually makes perfect sense when you think about it because what's defense what's what's war fighting at the end of the day

war fighting is logistics it's supply chain logistics and these guys are looking at their supply chains and logistics are going this is a freaking disaster we need to borrow money from china to build weapons using components from china to face china okay how do we fix this why why aren't we making anything? And they look back and they go, the dollar system. The dollar system, we literally incents us not to make things. We have to run deficits. Well, if we have to run deficits, we have to get rid of our manufacturing. And that's what's happened over the last 50 years. We produce dollars. Everybody else produces stuff. And so really, when you look at the center of rational thinking, I think, that's going on in Washington around this currency system changeover,

It is paradoxically, ironically, not being done in Treasury, Fed or Wall Street. It's being done. The most of it's being done in the Defense Department, you know, maybe in some of the intelligence centers as well. So we'll see how that develops. But I think, you know, what does it mean? The time being, until we get de-escalation, I think you want to own gold. I think you want to own Bitcoin.

I think you want to own dollars. And I think commodities are going to do well. I think they're going to continue to be volatile, but there's just so little visibility in terms of just seeing how this could go. And there are ways it could go really, really pear-shaped that I just think it pays to be cautious and sort of own those, I think, de-risked neutral reserve assets and dollars, which is something that's been a safe haven currency for a long time. Yeah. I've got a couple of things I want to touch on. First, what is going on with metals markets? We saw LME, nickel obviously went up to like 100 grand. Last week, people were short squeezing at that Chinese tycoon. And then the LME came back and was like, actually, we're going to ignore all those trades between $50,000 to $100,000. And then I heard rumors

in the gold markets between LME and COMEX, there was similar activity that could have potentially broken out people were buying gold and silver well over spot and which seemed to be a a worried rush to to cover some some short positions as well what it would what's your view on the the plumbing of the precious metal markets specifically right now so i i don't have any specific insight into the plumbing of them as they stand now what i can tell you is when you get these types of, um, you know, crises, right. This, uh, political crisis, geopolitical crisis that we've had, um, you're going to get a lot of, of retail physical buying, right. So buying a bars and coins, and that's going to blow spreads out. Sometimes you'll see

coin spreads really blow out. And sometimes that's a metal issue more often in my experience, It's been either a refiner or minting issue, capacity issue. So I tend to be cautious about getting too worked up about seeing the premiums blow out there. But bigger picture, I do think it's important that at the supranational level, or at the giant level of physical metals, because the other thing I think it's important, too, gold has a stock to flow ratio of, I don't know, 60, right? And nickel probably has a stock to flow ratio of, I don't know, I'm going to guess two, which means like you can chew through the inventory

and if it's still being used in the economy, you're going to run out. And now there's this sort of real short squeeze dynamic. Same thing with oil, right? Like when oil inventories are really high, the stock to flow ratio is probably 1.5. When they're really low, they're probably 1.2. And so you get the 1.2 and oil price just starts going vertical. And if they get the 1.6, it's going straight down. Gold stock to flow ratio at 60 and silver's at, I don't know, 30, whatever it is, because silver does have some industrial uses, or certainly much more than gold. Gold has a little bit. But a big stock to flow ratio can be interpreted as how far you can separate physical fundamentals from paper fundamentals before you start running

into shortages and so you can't do go for very long and things like food oil a little bit longer and things like nickel palladium things like that where you're using them in industrial uses it's assuming normal economic activity and so that's how you've been able to sort of you know you create all these paper gold derivatives and nobody ever actually wants the gold and so you can sort of keep this whole game going um in terms of the amount of paper claims out broadly speaking broadly defined on actual underlying physical gold to a lesser extent silver. Where it starts to get sort of interesting is when you kick a Russia out of the system and you say the FX reserves are no good, now you are getting perilously close to forcing Russia to connect

oil and gold. If they connect oil and gold, gold stock to flow ratio is effectively going to collapse down towards oil, right? So now you're going to be having, you know, globally, there are $2 trillion a year in oil dollars, right? It's just 100 million barrels a day times $100 times. And actually, it's a lot more than 2 trillion. Actually, it's more like she more like three, three and a half trillion at 100 bucks anyway. and the gold market globally in dollar terms annual production is like 200 billion right so the the oil market's some 15 to 20 times the size of the gold market so it's not going to take a lot of oil if you force the russians to start settling in gold they're not going to settle in paper gold

because you just took their paper reserves they're going to want physical and that's where what happens starts to get interesting in terms of possibly causing a squeeze in things like gold into a lesser extent silver with these big stock-to-flow ratios that have historically been squeeze-proof. Or if they start to get squeezed, you get somebody who decides they want to sell $3 billion of gold at 2.15 AM on a Sunday night in New York, which is clearly a currency intervention by some central bank or collateral agent somewhere in the system. It's not a market-based agent. These types, if you force the Russians to connect oil and gold, oil is so much bigger than gold. And so you can smash it down, and all that's going to happen is just go right back up.

And so it is interesting to me. One thing I observed last week, a good buddy of mine pointed it out, and it surprised me, is the CME increased margins on gold by 9%. Now, historically, that is like the kiss of death for for gold futures right it's like okay cme raises margins everybody's got to sort of true that up and what do they do they sell gold and then you get someone come in and pound gold on top of that gold goes down 30 50 points in a waterfall and that sort of gets it back under a key technical level and away we go and that's sort of how they manage it and they did the nine percent come out cme raise knocks it down 15 points like that and then just right back up to brand new highs, right? And so I don't want to make too much of a single day,

but we saw that several times last week. Down big, right? Like it usually is at 8.30 in the morning in New York, and then just run it. And so that's the type of action you would expect to see if you were going to start seeing gold used as a reserve asset for Russian oil, oil more broadly, commodities more broadly. There's a real commodity underpinning real economic activity with a much lower stock-to-flow ratio that is going to be basically bidding for that physical gold. And those markets are so much bigger than the physical markets that you could sell all the paper you want. All that's going to happen is they're just going to take it all and say, what else you got? What else you got? And so you'd have to move back to defend a higher level

in gold prices. I'm not saying that is what's happening. What I'm saying is on a very small sample size and based on a market behaving very differently than it has with the CME with this raising margins on gold than it has in the past, having watched gold for a decade plus, it might be happening. We'll see if that continues to develop and if things continue to not de-escalate in Ukraine with Russia, et cetera. But I don't know that we have that short squeeze there yet, but i think we have all the ingredients for that kind of a short squeeze in place i guess is what i'm saying yeah gosh this is extremely intriguing because yeah and like what is happening with the is are things de-escalating or in complete chaos like over the weekend i think iran

bombed the u.s consulate in iraq like it seems like it does the current reaction by the united states and the west toward what's going on ukraine is that emboldening other quote-unquote pariah states to to lash out as well and then if that happens what does that do to the the cascading feedback loop and it is insane that we have a mentally defective person as the president of the united states right now too which is not to get personal but it's just mind-blowing. How are we being led through this crisis by this gentleman and a vice president who can't do anything but laugh in a very awkward way anytime she's

put in a situation where she actually has to answer situations or answer questions about particular situations. It's mind-blowing. Clown world. We live in a clown world. I'm reminded, I wrote about this actually last week. There's a book called Wealth, War, and Wisdom by Barton Biggs, a famous Wall Street strategist. And it talks about, I think it's all about World War II, but certainly part of it is. And the punchline is this, is that the Japanese government was telling its people that it was beating the United States all the way through World War II. They finally admitted that

they were losing to the United States four days after the second bomb was dropped at Nagasaki, When the emperor came on the radio, the first time a lot of them had ever heard the emperor's voice and said, war is not going necessarily to our advantage and we're surrendering. But up until that point, we're winning, we're winning, we're winning, we're winning, we're winning. And so you had to pay attention to various narratives. And the point of Biggs' story is to say the Nomura family, which ended up being one of the wealthiest families in Japan and obviously a Nomura securities firm, they were connected at the time. They were wealthy, but not as wealthy as they eventually became. And part of what got them there is they paid attention, right? So they were connected. The official story was they beat us at Midway. They beat us at the Battle of Coral Sea. But they also knew the families whose sons were the captains of a number of the ships involved. And they never came home. They went to the funerals. A number of the captains had geishas and they never came home. They were paying attention to the bars being taken down in the Imperial Parks or off the Imperial Palace to be melted down for iron.

Why are we doing that if we're winning? Right. So as there's and I'm not saying one side or the other, that this applies to U.S., Russia, Ukraine. I don't know. I to me, the most fascinating thing in trying to gauge this is the level of information warfare that we're getting injected to in real time to me has been absolutely fascinating from both sides, from all sides. and i think quite frankly the west is is i think hands down killing russia in the informational warfare game um and so it's it i just don't know what to make of it but i'm spending my time trying to find things that that don't make sense right things that really stick out right so um bio labs what's that bio labs we're not worried that that one's you know even that one i don't know but like Us going down to Venezuela to basically panhandle for oil.

If shale can come right back real quickly, why? The fact that we go to Iran and to Venezuela, two regimes we have been basically trying to tip over for 20 to 40 years, and we're down there, what does that tell us about the state of the relationship between the U.S. and Saudi? I think we're finding that out. But what does that say about the potential that – what if Saudi can't produce any more, period? What if Matt Simmons 15 years ago in Twilight in the Desert was right, that Gawar was going to roll over at some point? It's 5 million barrels a day, and once it does, like, it's a huge deal. I don't know. All these things, like, I have more questions than I have answers.

but i think for me what i'm trying to do is just watch for watch for the really big things that ask really uncomfortable questions of the consensus right so why are things like why are we panhandling for oil in venezuela why are we so happy to give anti-tank missiles to the ukrainians why will we not fly our planes over in that airspace like why like these types of and i don't basically look at it as like a child, right? I'm just saying these are things that don't make sense to me. We put a no-fly zone up in Serbia in 1995. We put a no-fly

zone up in Iraq in the late 90s and again in 2000. We put a number of no-fly zones up. We won't put it up over Ukraine? Why? I don't know the answer, but I don't think the... I'm not sure there are people that are willing to give that answer out for a reason.

I think there's a reason for it, is what I'm saying, right? And I'm not sure the reason jives with the consensus narrative right now at one way or another um so so we'll see um i i just it is fascinating it's fascinating time no i completely agree and it's the product of the digital age of the information age you know sovereign individual predicted it pretty presciently there's going to be so much noise so much data to try to filter it's it's it's going be extremely hard to find the signal and this ukraine situation is a perfect example of

information warfare it's just frankly befuddling trying to figure out what is actually going on but yeah going hand in hand to venezuela iran uh is very very odd and then again back to like the bio labs is like all right you're in newland and basically in front of marco rubio like we need to go protect these bio labs so that russians don't get any bio weapons and then they're like we weren't working on any bio weapons there it's like what that that doesn't make sense either it doesn't jive even newland being like hey i want to you know eight years ago with her famous you know fuck the eu comment i mean um you know we've sort of forgotten all that what did she mean by that what was the you know you can hear the context and they're trying to get their guy in there um

that has all sort of been sort of that doesn't get brushed up in any way right yeah right so okay that's why don't we want to talk about the fact that this woman who is now testifying all this stuff said these things what did she mean by these things and again these are things that these are why i would never get asked to any of these types of press conferences right is this you're just you'd get to go to one of them and you'd ask a few questions and they would ignore you and then you would never get another invitation and you'd get your security badge revoked and that would be the end of it right so you know and in a world of access journalism you are useless to a mainstream news agency if you do that so it like i said i don't have the answers i have some questions but

there's you just you know i i suspect a lot of it has to do with energy pipeline politics the dollar um relative power levels leverage um and i think we're seeing that right i think we're watching putin use his energy weapon um you know uh so i i don't know what i don't want to fully make of all of it yeah neither do i i just know i'm happy that i have some bitcoin then like going back to the uh department department of defense being ones to like highly like oh it's it's a it's a u.s dollar problem we're not building anything we should probably consider these alternatives and the fact that the academic economists who run the federal reserve and in the treasury are driving completely blind because their heads are so far in the sand

that i don't think they'd ever be able to admit to themselves that bitcoin or reverting to a sound money standard with a free market money is a good idea they'll never admit it so that's like that's the thing too like this is a golden opportunity if you're war gaming and there is the potential that russia china and others are beginning to turn away from the dollar maybe potentially bring in their own fiat currency regime that they want to control like what better move to make than to front run that like all right you're going to do that we're going to go to this distributed peer-to-peer free market money that nobody can control like yeah we had our reign with the dollar it's over it's obvious but now we're not going to let you control the money

we're going to get to this this apolitical monetary system that would be it would be a wise thing to do it would be a smart thing to do i think it would have to be spun is that we're doing it out of strength, not out of weakness or being forced by, but it would be a huge Trump card move, right? Because really, China's got a power problem. And China has a power problem because China has a water problem. And so if you move to a, what I would call a power, electric power linked currency or reserve asset, not even currency, but reserve asset like Bitcoin, right? The proof of work, you got to do the work, you got to generate the electricity. Then all of a sudden it's going to create a um it changes the terms of competition um and they've been very

slanted away from us it would slant it back to us where it's suddenly okay who's got plentiful water plentiful electricity we do and so that would give us sort of a jump start um towards something new conceivably um to that sort of like you said a a a a free or freer market free market currency system right rather than um you know people say we're free market capitalism well as long as you have a monopoly on the pricing of commodities uh as the dollars had that's not a free market system it's basically a company store right it's like you know you have to use the dollar for you know you have to use the dollar for this then that that's sort of a company store and And it's it's had winners and losers. And the problem is, is now the losers have gone from, you know, working class, middle class.

Now it's Washington Defense Department. The the the exorbitant privilege has become exorbitant burden. So we need to change to something. So it would be it would be a huge, in my view, you know, it'd be a real trump card to play. I don't think I don't think we're that close to it yet, but it would be within the game theory, a big move. hey let's be bold america i know we're worried about uh teaching our kids to hate themselves and all that shit but let's let's focus let's pull the trump card out let's win i mean i've seen it down here in texas the oil and gas industry is is getting very much into bitcoin like we have the capacity the intellect and the ability to to win and win bigly in terms of turning towards bitcoin and like people are ready to go too that's like the frustrating thing it's like you have

very integral players in the in the energy industry who are starting to get it they're like yeah let's let's sprint towards this maybe maybe that's how it happens maybe i don't even need the politicians to actually step in and be like all right we're gonna go this way you have it might be you have energy companies saying like no like this is good for our business this is good uh for our our operations like if you take this away from us you're already coming hat in hand uh well you're going hat in hand to iran and venezuela you should be coming hat in hand to us here in the permian and in the bakken um but like we're we're gonna do this because it makes sense for us there's nothing you do to stop it and does the energy industry have enough leverage

over the political class actually pulled off that's the question looming if the energy industry gets enough money it'll have enough leverage over the political class right and that's where it gets interesting is if the energy industry got together and just started saying all right we're going to keep just enough cash in our coffers to maintain our liquidity and our debt ratings etc and then we're not only going to use flaring and then you pair up with bitcoin you know to uh smooth out our operations from uh from flaring and and and but then we're also going to warehouse in our treasuries and we're just going to squeeze it higher and higher and higher and we're going to make our balance sheets get so big that we'll then conceivably with what we're

producing in energy um you could force your way right into that you could you you get a balance sheet bigger than jp morgan's uh you know with with you know then and i haven't done the math i'm being a bit hyperbolic here right but you in washington money's power money talks right so you could conceivably do that if you got enough of the energy industry to sort of go along with that of not just pairing with bitcoin in terms of the flaring um you know but adding it to your balance sheet manifest destiny like you can you can do that i'm i'm a big believer energy for energy why would you why would you do you know energy for bonds you the energy industry knows how much higher cost the reserves are going to be right they've already mined all the or a shape

racked all the a lot of the a locations right so they're in the b and c locations and then after that they're actually going to have to find new locations right so the cost the marginal cost is going up. Why would you store reserves in your balance sheet in debt or fiat currency? You're better off leaving the oil in the ground and not drilling it, unless you put an asset on your balance sheet that's going to rise with the cost of energy, like Bitcoin or gold. Unless you do those things, this is effectively what Putin's doing. He just has the ability to do it because he's a strong man and it's state owned and it's, you know, um, you know, he's, he, he's buddy, buddy with the, with the guys that run the oil companies there. They're, they're all his, all

his, all his pals. And, but it's the same concept is he's better off, you know, he's better off leaving it in the ground and pumping it out and selling it to us for treasury bonds are going to fall eight to 10% a year against oil. Yeah. You know, it's nonsense. It's nonsense. It makes no sense. Leave it in the ground, leave it in the ground. Call me when you're ready, you know, Call me when you're ready to be serious We can win The only reason you need to Yeah the only reason you need to is you have debt right

So if you're a highly indebted shale guy But once the energy industry pays off his debt You know The low debted guys would be like Putin right He can do this because he has no debt I mean this is a balance sheet contest At the end of the day what he's doing is a balance sheet contest My balance sheet is better than the balance sheet of the United States

And he's right He's right He's calling our bluff the US energy industry could do the same the less levered one yeah and they could speculative attack even if you are an over indebted energy player you could

speculative attack that debt by stacking Bitcoin like if the energy industry were to get together like we're going to pay it off I don't know why you wouldn't hey execs in the oil industry I hope you're listening to this because this is the way this is the way you save the country you don't need the politicians you can

that's the crazy beautiful variable that that bitcoin brings to the mix you don't need to wait for these politicians to to finally get it and pull out the trump card you can have industry pull out the trump card by doing it just it's just will individual will at the at the corporate level do you have it i mean and the and the commodity industry is the perfect one to do it again because once you've covered your dollar financing costs, right, to float the debt, why on God's green earth, bonds have to be, with the US sovereign in this position, bonds have to be negative real rate for the wheels to not come off the cart in Washington. And so if you know that's going to be negative real rate debt, and you know, peak cheap energy means the cost of your reserve,

the cost of your production is going to rise over time. It's insane. It's literally completely irrational to store your... I mean, it makes sense to do one of two things. Buy back your own stock or put gold or Bitcoin on your balance sheet. Or leave it in the ground. That's it. You're not going to this Empower

conference at the end of the month here in Houston, are you, by chance? I'm not. I think you should. I'm going to reach out. I mean, March 30th and 31st in Houston. I think you need to get this message to that particular conference. It's being held by the digital wildcatters

and it's a meeting of the minds between the Bitcoin mining industry and the oil and gas industry, energy industry in general. There'll be other players there as well. But I think this message needs to begin permeating throughout the energy sector.

You guys can shift the leverage in your favor and help save this country in the process by sort of forcing the issue by just simply putting Bitcoin in your balance sheet, mining it,

keeping a portion of it and speculative attacking your debt and giving yourself more power. I think that, imagine if we were able to do that over the next five years. I think it's... It's interesting, right?

It's possible, too. Absolutely. As long as your balance sheets aren't too levered to start with, right? The only reason you need dollars is to pay the dollar debt. And so to the extent you're covering your coupon, plenty of comfort,

keeping the rating agencies happy and all that stuff, That's, you know, that's the real world practical stuff you have to look at if you're a CFO or a CEO, but, um, beyond once you cover those, I mean, it literally makes no sense to be putting your money into cash T-bills, you know, above and above and beyond liquidity needs. If you're an energy producer, you should be stockpiling something that's going to hold its value in energy. we're gonna clip that we're gonna clip the whole the whole the whole end of this conversation because we're trying to get it as far and wide as possible luke i've taken up a lot of your time on this monday uh it's always a pleasure we gotta do this more often it's it's actually i love um i mean because the first time we chatted it had to be like a year and a half two years ago probably

almost now at this point um it's like in the beginning of the pandemic i believe and And I think you were Bitcoin curious, but it seems now that you've done your research. I mean, I know we've talked off the record too about Bitcoin and energy. And I'm just very excited to see somebody of your caliber coming and bringing very good pro-Bitcoin arguments

to your audience. So thank you for that. Thank you. We're going to win. We just can't depend on the politicians. I think that's why we just got to get that out there. They're not, they're going to move too slow.

They're worried about primary or the two year election cycle. We need to get back to our roots as America and like industry capitalism leading the way. Let's not, let's not, we just look at what's going on. We can't wait for these people to lead. We need to lead ourselves.

Maybe that's, you can say like an industry individuals have gotten complacent and become so cucked to the political class that they just worry about everything they do affecting their ability to operate. Just ignore them. Start stacking Bitcoin. Get all the leverage and say, hey, if you want to be energy independent, if you want a thriving energy industry in the United States, you're going to need to allow us to mine Bitcoin and do what we want with our with our reserves i'm sorry for that that ending right there luke where uh where can we uh where can we send the freaks is there any any

yeah they can check out check out our website luke or excuse me fftt-llc.com and i'm on twitter uh at luke groman l-u-k-e-g-r-o-m-e-n if you're not following luke you should be i mean i think i saw nick carter tweet out earlier this week who who's who's the most vindicated analyst uh in in the world and you're like who are the top five and you're in this top five like you've been preaching this stuff for for quite a while and um it it's it's all seems to be happening right now so you've you've been uh you've been preaching this and it's turning out to be true so um thank you that's good we've been more right than wrong which is what you call all you can hope for as an analyst so it's uh you know but uh you just have to keep grinding because you know it's it's a it's

a humbling business so uh you can't you can't get too high can't get too low so we'll we'll every if everything evolves with time so we'll see but yeah it's been uh um you know it's it's been it's been fun and it's been i think helpful for our clients which makes me uh very happy yeah well keep crushing it thanks man we'll do this again soon that sounds great peace and love freaks