The Derivative - A Macro take on Russia’s Gambit, Oil, Gold, Bitcoin and more with Luke Gromen

Episode Date: March 3, 2022

Oil prices spiking. Wheat at new highs. A bid in Bitcoin. Russia’s invasion on its neighbor, Ukraine, got the world's attention and moved all sorts of markets. While our human side rallies around the Ukrainian people, our financial minds turn to wondering what is going on and what impact this chaos will bring on? To get a clearer global picture, Luke Gormen, a research pro focused on the macro picture and CEO of Forest for the Trees (FFTT, LLC), joins us for a unique discussion of what he is seeing and the outlook for oil wheat, ruble, gold, treasuries, and more! We're getting into the trenches with Luke and talking what Putin’s grand gambit may be, including the danger to the U.S. dollar, new methods of financial warfare, who becomes the reserve currency in the end (the big $64,000 question), MMT, Gold, Oil, and Bitcoin. Stay tuned and discover where the delineation between the narrative and facts takes us! Chapters: 00:00-01:43 = Intro 01:44-09:12 = Putin's Gambit –   an Attack on the US Dollar? 09:13-25:26 = Financial Warfare, Peak Cheap Oil, MMT, Gold & Bitcoin 25:27-38:13 = Macro Research, Creative Freedom & Fiscal Spending 38:14-52:51 = The Mr. X Interviews, Sectors vs Asset Classes & Narrative vs Fact 52:52-01:05:47 = What Would You invest in? & Bitcoin Positions Follow along with Luke on Twitter @LukeGromen and visit fftt-llc.com for more information on The Forest for the Trees. Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. As Russia's invasion on Ukraine continues to capture the world's attention, our financial minds are left wondering, what's going on? Oil prices are spiking, wheat is hitting new highs, and there's been a bid in Bitcoin. Macro pro researcher and CEO of Force for the Trees, Luke Gorman joins us to provide a unique outlook, and we're getting into the trenches to talk things like what Putin's grand gambit may be, including the danger to the U.S. dollar, the new methods of financial warfare,

who becomes the reserve currency in the end, MMT, gold, oil, and more. Stay tuned and discover where the delineation between the narrative and the facts take us. This episode is brought to you by RCM's team of advisors that help investors research and access hundreds of professional managers in the alternative space. Check out everything that RCM does at www.rcmalts.com. And make sure to check out our newly released trend-following white paper while you're there. Just click the Education tab and then White Papers. Back to the U.S. weaponizing treasuries to fight Russia being like the Orient Express, which caught my eye.

Then it ended up on his website where I saw the nice plug from Grant Williams. So that was all good enough for me to say, let's get him on here and let's chat. So welcome, Luke. Thanks for having me on. It's great to be here, Jeff. I'm looking forward to talking to you. Yeah, pleasure to meet you. We were just chatting for a second there.

You're in the Cleveland area? Yes, sir. And are you in the forest or the trees today? Most days I'm in the trees. We have a little property out this way. So a few acres of woods, which is a nice respite of peace, given everything else that seems to be going on in the world these days. I hear you.

It is a unique, we'll get into it later, but a unique company name, Forest for the Trees. Thank you. So let's dive right in and talk Russia and Ukraine, and as you said, everything that's going on in the world here. Tell us what you're looking at, what you've been writing about oil, wheat, ruble, gold, treasuries, whichever one of those you want to start with, let you take it. Sure. I mean, to me, I think there is, I think there's a bigger game going on here. And I think that there's a lot of question, a lot of people asking, what's the grand strategy? What's Putin's grand strategy? And I think it's really a grand strategy between Putin and Xi in China.

And I think the grand strategy is effectively a giant, one big gambit. And I think the gambit is we're in a peak cheap energy world. In other words, we're not running out of oil and gas, but we're running out of cheap oil and gas. And you can see that pretty clearly in the data. And so effectively, I think the gambit that Putin is making is, one, if you subtract my oil and gas from the peak cheap energy world, the world will be drastically short oil and gas. That, in turn, will send the price of oil and gas to levels that will send the U.S. and the West broadly into a recession, possibly a severe one. And three, or I guess, you know, three, that a recession is not a policy option in the West, because of how high US sovereign debt is, because of how bad US deficits are, because of how high sovereign debt is in the

West, broadly speaking. Basically, the fiscal situation of the U.S. and the EU in particular are so bad as a result of the last 20 years that a recession will put a, it will force one of three or four choices. The U.S. can slash defense spending. The U.S. can slash spending on treasuryasuries. Basically, they can default on treasuries since they can't cut rates any further. They can cut entitlement pay goes. Not going to happen. Or they can have the Fed print more money. And so basically, I think it'll be door number three there. It's going to be the last dollar.

The Fed's going to have to print more money into an inflation spike. And so what I think the gambit is, is I don't think this is a, I think it is only nominally an attack on Ukraine. I think there are some near-term geopolitical objectives he is trying to achieve vis-a-vis NATO and border regions and things he's long complained about that we have not, in his eyes, heard him on. I think that's sort of the tactical game. I think that's the battle. I think the war is about the dollar. I think he has effectively launched an attack on the dollar with the bet that basically his energy cannot be subtracted without blowing up the financial system. And the last part of that gambit is as long as China stays on his side, and we've clearly seen signs, China's been asking for a new currency system since 2009. As long as China stays allied with him as a clearinghouse of spare energy, basically just buys enough energy from him to keep him from utterly collapsing, to be able to clear his minimum bills, if you will. I think the gambit might work. I think it actually might work. So the gambit you think may work, what does that look like? Years, months, decades?

No, way sooner, way sooner. Months, maybe at months is at the long end. It's either going to work or it's sooner. Months, maybe. Months is at the long end. It's either going to work or it's not. And in particular, the acceleration of the game over the weekend, right, where the U.S. and EU sanctioned Russia's central bank from their FX reserves, which was an unprecedented step. I think it really lit the fuse on something that could very quickly get out of control now, because that will force, I think, it's an act of financial

warfare that I think will force Putin in turn to re-escalate from that step. The gambit is really, can Europe survive without Russian energy? And the answer is they can't. They can't. You're already seeing, I mean, how long will bondholders hold Boone's yielding basically zero with German inflation at five and going higher? The bet, you know, there's some portion of global sovereign debt ownership, particularly here in the US that is regulatory, right? You have to own, The banks have to own some, money markets have to own some, you have to have some for collateral markets. It's a big chunk of the market, but there is also a part of the market that has actually made a discretionary

decision to hold bonds because they think that inflation is transitory. And based on what has happened over the last week, I just don't see how that is going to, that that's going to play out. So basically, the gambit is, with a system as highly levered as it is now, if Europe goes into a severe recession, Russia's already in a severe recession, then what? Those two will be enough to trigger, given the leverage in the system, in my opinion, they should be enough to trigger a global recession, a global financial crisis, probably pretty quickly. Now, the politics can change that still at this point, I think. And I don't know exactly what that looks. You'd have to have some sort of big de-escalation,

I suspect, from one side or the other, right? So if Putin backs off and goes home, I think that de-escalates. If the U.S. or Ukraine signs a peace deal, agrees to be neutral, and then they sort of work things out, I think that de-escalates. But if there's no de-escalation, I think things are going to get, I mean, we had a messy day today. You've had the ruble collapse against the dollar. You've had the dollar collapse against oil. Gold, Bitcoin are having very good weeks already. I think that's likely to continue.

And I think it's broadly good for commodities as well. And so it's really in the hands of the politicians at this point. If they stay on this path and don't de-escalate, I think we have weeks until things get incredibly messy. And back up for a second and just explain what you meant by the financial warfare and what exactly the U.S. did there, the world did against Russia to trigger some of these things. So, yeah, they eliminated Russia from, they kicked Russia out of SWIFT, but not their energy, right? They exempted energy and they used energy broadly defined. Even with them not kicking out energy, it is getting harder to move Russian energy because there is indecision or there is opaqueness regarding exactly what the sanctions will eventually do. And so basically, you have a bunch of traitors who don't want to go to jail

ex ante for moving Russian oil today if the rules change in a week. Are those traders, even if they do move the oil, can they actually pay for it? Can they get their payment into Russia? Or that's what we're saying. It was Swift was broken on purpose, except if it was payment for oil. The US, as of late last week, was saying they did not. They were specifically structuring these sanctions not to interfere with global energy markets. if it was payment for oil? The U.S. as of late last week was saying they did not, they were

specifically structuring these sanctions not to interfere with global energy markets, which in and of itself is a very powerful statement, right? That tells you who has the leverage there, right? It's not as much leverage as we were advertising, as much as consensus was saying. Now, it has since gotten a bit more difficult to move Russian energy. Wall Street Journal's had some articles about it. China is effectively waving some of it in, but the logistics of it make that difficult to take all of it. So the big thing, though, I think that what the U.S. and EU did over the weekend was sanction Russia's Russian Central Bank FX reserves. So basically, the dollars and the euros that the Russian Central Bank had, these are basically surpluses they had earned through trade over years, decades, were seized.

They were frozen by U.S. sanctions. And they converted a lot of that before they attacked. They had not can know they had not converted them. They, they had been sitting in those reserves. I mean, they have 130, $150 billion in gold. So the Russians have been building a big balance sheet of gold. But I don't know that they, the Russians were expecting this. This is unprecedented.

Historically, my understanding, per the Financial Times, is that FX reserves at the central bank level had historically enjoyed sovereign immunity. And so this is something new. And again, this is why it sort of touches off this fuse of the financial system is now, if FX reserves can be seized anytime you anger the Americans, there's really not a country on the planet who's not angered the Americans at some point. We've been at war with everybody at some point. Some it's been a lot longer than others, but basically over the last weekend, the central banks of the US and EU, the ECB, ran a gigantic advertisement for gold and Bitcoin. Yeah. And or your China or any of these countries are like, hey, let's talk about diversifying these reserves a little bit if they can just be seized that easily. But at the same time, it's not that easily to diversify it, right? We're still the world's

number one economy. We still have the money currently flows through, but that's what you're saying. That's the end gambit of stopping that flow. But what does that look like? Even if we're second place, third place, fourth place, or is it just a tipping point, right? Is your view that it will just tip the other way and then you'll be, and then what would the reserve currency be? Well, that's the $64,000 question. And I think sort of the consensus view is, is where else are they going to go? The markets aren't big enough for, there's no neutral, there's not enough EU sovereign debt. There's not enough Chinese sovereign debt. Now, it's not well understood that over the last two years, three years, 10 years, Chinese government bonds have outperformed treasuries. I learned that last

week, it blew me away. It's a fact. But that market's not liquid enough. However, gold can be made liquid enough. There's plenty of gold. And when it says there's not enough, I assure you, there's enough gold, if it's all done in physical in particular. And I think that's where this movie is going, which is, they'll say, fine, we'll just buy gold. We'll just put it all in gold. And you'll see gold rip. And that's basically, inadvertently, advertently, what the US and EU may have done over the weekend with that is force a change to the global financial system, whereby you've already been seeing central banks. I mean, since in our work, we've showed that over the last eight years, global central banks have bought three times more physical gold than they have US treasury bonds on net. So there's already been a slow shift into gold. This should turn that slow shift into an avalanche. And if it does that, as I expect that

it will over time, it's probably gonna be really good for the gold price. Because again, if you're a central bank, if you have $7 trillion, so the global FX reserve pool pile per the IMF is about $12 or $13 trillion, call it 65, 70% of that's in dollars. So say there's $7, $8 trillion in FX reserves globally. If you have $7 trillion in dollars and zero in gold, or zero in dollars and $7 trillion in gold, do you really care? Coupon's the same. They're both yielding zero, except the treasuries aren't going to do nearly as well in inflation as gold is going to do. And so I think we may have seen- In theory, but- Yeah, in theory.

In theory. But if you get $7 trillion bidding for gold, I mean, that's the size of the entire gold market. And then on Bitcoin, are you a Bitcoin bull? Where do you stand on Bitcoin? Are you just- I like Bitcoin. Yeah, I like Bitcoin a lot. I think it's a neutral reserve asset for the people, basically.

I think when you look at it all, I think the two most important investment themes of today is we're in the first bursting global sovereign debt bubble in 100 years. And the US fiscal situation is really unprecedented for where we are in the first bursting global sovereign debt bubble in 100 years. And the US fiscal situation is really unprecedented for where we are in the cycle or period. And that is to say, what we call true interest expense, treasury spending plus entitlement pay goes. The United States is spending 65% of tax receipts alone on entitlement pay goes. So 2.7 trillion last year, just on social security and Medicare. When you add treasury spending on top of that, it takes that number to about 100% of tax receipts. So basically,

and that's with tax receipts at all time highs, benefiting from nominal GDP growth of almost 12% last year and inflation of seven and a half percent. So you've got almost like peak tax receipts, and we're still barely covering just the VIG on our true interest, which is the interest on the entitlements effectively and the interest on treasury spending in total. That's interest plus some of the stimulus stuff they're still doing. So that doesn't include defense. That doesn't include national parks, labor, education, veterans affairs, all of it then gets layered on top of that. I stand on MMT of like, who cares, let's just move some more zeros and keep paying for that stuff, right? I think that's what's going to happen. And I think that ultimately ties back to the initial point of Putin's gambit, right, Which is, who cares? You know who cares? If you're an oil producer with a finite amount of oil, you care a lot. You're sitting on a bunch of dollars. If

they're going to print $100 trillion to pay for all those boomers, I care a lot. Basically, you will have stolen my oil from me. So I want to change the system into one with a neutral reserve asset whose value will rise a lot with the money you're printing, something like gold, before you do that. So I think MMT, we ran it de facto last year. I think that's really the only politically palatable option. I think it's very inflationary over time. And I think that's what we're going to continue to move toward. I think we're ending up this period that started, call it second quarter last year, where the Fed jawboned tightening. We're going to raise rates, right? I mean, two weeks ago, the Fed was going to raise rates seven times or eight times this year. I think they're down to like one and a half times in two weeks. So obviously no one, a lot of people, myself included, did not forecast that Putin was actually going to go.

I did not think he would. But it speaks to this dynamic of the gambit, which is the yield curve inverts. We head into a recession and oil is 110. What's the Fed do? Yeah. Because they're not covering tax receipts. They're going to have to print the money. And what do you think of a just, we get together with the EU, throw in maybe Australia, somewhere else, and we just say

there's a sovereign debt reset, right? Like it would punish a lot of pensions, probably other things. But if we kind of made the investors, the non-government investors whole and just reset a bunch of that debt, I mean, we can just come up with it ever changing, right? Ifs upon ifs upon ifs of what they might do. But I think it's heading in that direction in some way. And ultimately, look, if we wake up, you know, in six months and gold's $10,000 an ounce, that's a reset of sorts, right? There's a mechanism by which they can do that. Sitting down with everybody to work it out is starting to look much less possible, given the interests of the party at the table, right? I mean, we might be able to get along with the EU, maybe.

Lines are being drawn, right? Lines are being drawn. The Chinese and the Russians probably aren't going to agree with a lot. Because, again, it's this decision that we went through in the aftermath of World War I, which is who loses on a real basis, bondholders or the debtors, right? You've either got to write down the debt. You've got to write down the debt one way or another, but you can write it down via restructuring or you can write it down via inflation, or you can try to implement austerity. But austerity, that ship has sort of sailed for any number of reasons, right? So it's

either the creditor pays with austerity, or the debtor pays via austerity, or the creditor pays via inflation or restructuring right then. And I think the austerity is no longer really a political option anymore. And it sounds like you're saying it doesn't even matter what necessarily what we decide, because oil rich nations might just say, hey, this is now $1,000 a barrel, right? If you're going to start to wipe that debt off over there, we're going to just keep raising this price until it reflects the value of this commodity. Well, and I think it's even away from them raising the price of that. I mean, they certainly could. We saw that in the 70s. But I think there's this fundamental supply demand issue, which is, you know, you were running into supply issues in 2007, 2008.

You saw the price go to 100, 150 dollars a barrel. U.S. but it remains poorly understood in sort of, I think, the general public and even the general investing public that the big four fields of the U.S. shale, so the Bakken, the Permian, the Niobrara out in Colorado, and then the, it's down in Texas. Something for a show. I can't think of the, at any rate. We'll look it up later. Yeah. At any rate, there's a fourth big base, but the gist of it is this, the existing production there is declining at a five to 6% per month rate. So you've got to increase production by 5% per month just to stay flat on a really big base of production. And they've really high graded a lot of their production.

So the point is, is that it's going to be pretty hard and require a much higher oil price over time to continue to grow that. And so you're in this resource area where that, okay, let's just print the money. Okay, we can. The problem is, is that that would require either printing or either finding a lot more oil supplies, which are getting very hard, or some sort of productivity gain so that you can use that energy more efficiently, have alternative sources of energy, so you can still print that. So you're in this very, very, I would argue it's an economic time that really has never, you've seen things like this before, but you've never seen a collection of things like we have in the scale that we have them when you talk about a sovereign debt bubble,

when you talk about declining energy return on invested energy, peak cheap energy, when you talk about the weaponry available, when you talk about just some of the technology and how fast, how technology involves information flow, weaponry, war, in every facet. There's just a combination of things that are very unique throughout history. What are your thoughts? A few of the podcasts I've listened to this week are like, oh, this is over. We've frozen the oligarch stuff. We're repossessing their yachts. They're right. Like the thought that these rich oligarchs are going to go back to Putin and be like, hey, knock this off. You know, they're messing with my house in St. Tropez. Right. It seems a little too cute to work to be true. But what are your thoughts on whether that can work?

I don't have a great feel for the internal. Political dynamics between Putin and those guys. And in particular, how much pain they're willing to take. And so I think it could possibly work, but I just don't know enough to say with any degree of conviction that that's going to break this. Because to me, the key is how much solidarity was there between Putin and those guys when this started? And what is the real reason? If this is all just about him losing his mind and he wants Ukraine back and he wants to be Peter the Great and he wants some neutral territory there, then I think something like that probably is very, very effective. Yeah. probably is very, very effective. If this is what I think it is, which is they understand the Americans are about to print $100 trillion for entitlements

and basically, by virtue of doing, really relegate Russia's relative power, basically sort of inflate away some of their historic asset values, right? Or if they truly feel threatened by what we're doing around their country and what the currency system will ultimately do to them, the dollar system will ultimately do to them or allow us to do that to them, then the solidarity might be much stronger. And they may be willing to take that pain. I just don't know. They might be in on it. Yeah, they might be totally down and go,

listen, we're in, we've burned the boats, let's go, right? I just don't know. And I'm not the right guy to talk to on that. But I do think it's a very savvy, a very elegant strategy on the part of the West and the U.S. to do that. Let's shift gears from it. We missed your background. We jumped right into it. So give us a quick, quick little bit on your background, how you got into this game and all that good stuff. Sure. Yeah. So I started off in investment research, moved to institutional equity sales with a regional brokerage firm, regional investment research firm here in Cleveland, known for doing real bottoms up fundamental research. I was one of the founding editors of a weekly piece that connected the most interesting dots

that we found or most interesting information pieces we found in our fundamental bottoms up work and married that with the top down and thematic work I was doing on my own. And it ended up being a very popular piece that was read by a lot of the clients of the firm, both there and at the next firm, where I was a partner at both places. So I did that for 15 years or so. Now, I guess more than that, almost 20 years. And it was helpful to clients into the great financial crisis, uh, in the aftermath of the great financial crisis, it was increasingly apparent to me that it was a much more macro and central bank driven world.

I was spending more of my time doing that, uh, went to my partners at the time in 2013 and said, I'd love to do macro thematic full time. And they said, that'd be great. I said, I want caveat. I want to have complete creative control to write whatever I want to write, because I feel like it'll be really important to have that creative freedom. And from a marketing merchandising standpoint, we kind of had a hard time figuring out how to place that because they're known for very deep in the weeds, bottom-up fundamental research. So we parted ways amicably, I made friends with them and I hung up my own shingle in 2014. So ever since 2014, it has definitely been good to be able to have the complete creative control to write whatever I want to write.

Because as crazy as I thought things had a chance of getting, they've pretty consistently been crazier than I would have thought. So that's the nickel tour of my background. And what are your thoughts on even since 2014, right? The landscape's totally changed and there's AI that can go grab and analyze research and do the data pull. And the age of like discretionary macro traders seems like it's going away and it's more systematic guys these days. So kind of, do you feel that's still that need for that macro research? Absolutely. Absolutely. I think data has become more and more commoditized, but the ability to interpret and put that data together, I think, has become the value add. The ability to aggregate that data in a unique manner and make it usable, make it actionable remains very valuable, particularly

given the increasingly geopolitical nature of it. There's a lot of game theory to it. Game theory, you kind of lay those things out. And so I think it's, not even I think, I know just based on, you know, our client base, the growth of our business, there's still a lot of interest in it. And do they take it as sort of like, okay, this is something I need to be thinking about, right? Do they kind of do their own game theory with the research of like, got to understand that this is a risk or this is a possible reward.

And then I'm going to work that into my model versus like, oh, he thinks this is this gambit. We're going short, right? We're doing a massive trade just based on this. It tends to be more the former of a very consultational relationship with clients of, listen, here's the thought process. And we, in our writing style, in my writing style, we share the whole range of outcomes, right? It's like, here's what's happening. Here's point A, B, C, D. Here's when we put these together, what we think the range of potential outcomes is. Here's my base case. Here's where else it could go. Here's how we would position for it. But like I said, with our client base, it tends to be very consultational in nature.

And then a lot of these research folks have gotten a bad rap since 2009, right? Of like, we printed way too much money. This is going to be a next leg down. How are we going to pay for all this? Right? And had the massive, one of the best rallies in the history of the U.S. market. So how do you kind of weigh those two factors of when the research doesn't match up with the reality, so to speak? Not that you weren't calling for that back in the day.

No, no. That's been one of our successes is i think ben you know there's there's there's a uh you know it's a great quote i think by arthur schopenhauer along lines of it's you know the trick is not to see what no one else has yet seen the trick is to think what no one else has yet thought about that, which everybody sees. So we're all seeing. Yeah. We're seeing. Yeah. We're seeing. To me, it's been really watching through the United States through this balance of payments lens, through this effectively, the US government has a fiscal problem. And for reasons that have been very different now versus any other time in the last 40 years, 50 years, 100 years. And it's been very

clear to me for this entire, most of this eight years, that that's the case. And there have been very distinct signposts along that way of, they're just going to have to keep printing more money, right? The United States is going through a process that most emerging market investors would be very familiar with, which is, uh-oh, the government's running a twin deficit. They don't have enough external financing. What do they do first? Okay, well, they make their domestic banking system buy the sovereign debt. The U.S. has done that. Then they make the domestic pension funds do that.

We've done that with money market funds. We've done that. Then when that happens, they try to do some austerity or tax hikes. We've done that. Obamacare was effectively an austerity, a tax hike to basically push government spending out of the American people. Then when that causes the economy to slow, they try to raise rates and defend the currency. But if I did that, then eventually what ends up happening is. The central bank comes in and prints a difference, and we've been seeing that ever since. And so it's been this dynamic of understanding that it's, it's not different this time.

You know, it's worked. That's my, that's my, it's worked, right? It's like, it all looks terrible. It all has looked terrible for 10 years, but it's worked. Oh, it's absolutely, oh, it's absolutely worked. And so the key is for me, it's a, listen, I want to be, I want to be, I want to own equities. I don't want to own treasuries, right? It's not that I wouldn't short treasuries. But since 2008, the US S&P is up 5 or 6x against treasury bonds. If you shorted treasuries and bought S&P, you're up 5 or 6x, right? Gold has worked.

Bitcoin's worked. Commodities have worked. Houses have worked. It's sort of, to me, the question of, do I want to own the dollar against the euro or the dollar against the yuan? It's a lot less interesting than this slow moving, but rapidly accelerating, now rapidly accelerating at least, US fiscal problem, because it's never different this time. They either default, restructure, or print. And now there are, it's important you have to adjust. This is, you know, the U.S. is not some small little country. It's a very diversified economy. And it issues the reserve currency. And it has this

euro dollar market, this offshore dollar market that also messes with things and tends to actually make the results exactly opposite, right? So when foreigners stop buying enough treasury, you go, oh, God, it's terrible for the dollar. No, it's actually great for the dollar. Well, if it's great for the dollar, it's great for stocks. No, it's actually terrible for stocks and vice versa, right? And terrible is too strong. But the longer this goes on and the factors are all shifting, right? The higher the debt goes, the less high the dollar can go before something breaks. The higher the debt goes, the higher the deficit goes, the less leeway there is. So it's been basically evaluating

the US through a balance of payments lens with making adjustments for the Eurodollar market, the reserve currency status, has been, it's been a very good indicator for shifts in liquidity intra-year while still acknowledging and honoring this, you know, basically this post 2008, 2009 that, listen, every time when push comes to shove, they're going to print the money. They don't have a choice. And once you start there, then it's just about managing your chips. Do you think we'll get off the, my pet theory is once we started with the COVID stimulus checks, like that's game over, right? There's going to be a temper tantrum in Congress every time the people need more money and we're just going to keep annually sending out these checks. Got any thoughts on whether it be fiscal or policy driven or fiscal or stimulus? Yeah. Yeah. I mean, there is arguably not enough fiscal. That was the debate, right? Is that the fiscal has gotten held up. You need the crisis. We might

have the crisis now to do more fiscal. We'll see. If push comes to shove, will they do the fiscal? Absolutely. They'll start sending money again. I think they absolutely will. They're not going to have a choice because again, the other alternatives is, hey, you're going to have to slash defense. You're going to have slash entitlements. You're going to have to take rates below zero, which you really can't because it's the reserve currency, or you're going to have to print the money. And so I think they will continue to do that. But I also think it's underappreciated. And that's something we've written about for a long time is there was a $100 trillion fiscal stimulus package passed by FDR in 1937 called Social Security. Let's call it 50 trillion. And another $50 trillion stimulus package

passed by Lyndon Johnson in 1968 called Medicare Medicaid, that they're going to spend $2.7 trillion this year alone on those that is literally handing money to baby boomers. And those programs have been growing when you pair them together. They've been growing like between 6% and 9% CAGR nominally for years and years and years. Well, when your GDP is growing for- The liabilities or the assets? No, I'm talking about the liability. I'm talking about the- Not even the liability.

The pay-as-you-go, right? Just the present liability, the current liability, not even the full future liability. The check they have to write. That's exactly right. The annual check just keeps growing by 6% to 9% CAGR. That's a lot of fiscal, right? I mean, because that is the very definition. Ben Bernanke called it helicopter money, right? It's fiscal spending monetized by the central bank. Well, if the Fed does whatever, 1.5 trillion in QE, and we spent 2.7 trillion in entitlements, that's basically the Fed printing 1.5 trillion and handing it out to the US people through Social Security and Medicare. That's all it is.

So the question is, of course, marginal, what's on the margin, what's on the margin. And that's where you can see moves in that. And that's something we watch. But that's a risk. But I think ultimately, to your question, they're going to have to, every time things get soft, they're going to have to keep doing more, where I think we've crossed the Rubicon. And do you think they've gotten the thing now of, hey, we need to give it to the young people that are going to spend the money and juice the economy, not just to the retirees and the boomers in the form of Social Security? I mean, they certainly did that with UBI effectively. I think they will eventually

maybe have to do it via UBI. I don't know. There's different ways you can sort of get that to them. I mean, certainly when you look at who owns the student loans, it's generally, it's mostly the federal government. I mean, that's literally just a pen stroke. That is certainly one way you could do that conceivably. But again, that's literally just a pen stroke. That is certainly one way you could do that conceivably. But again, it's another one of these things where you're opening a Pandora's box of sanctity of debt contracts, et cetera, that I think they'll probably eventually get there, but I think it will require more of a crisis. Well, the larger that pool of people that owe college debt, the greater the incentive for some presidential candidate to be like,

let's wipe that out. I've got, I've got 10 million votes right there. Yeah. Biden talked about it, but he hasn't done it right. So tell me about over your left shoulder, the Mr.

X interviews. You wrote two books, the Mr. X interviews. You wrote two books there? Yeah, two books. They started out as a series of reports we did that basically a client, one of my best relationships on Wall Street, said you should put your thoughts together in a Socratic method, question and answer of using a fictional sovereign creditor of the US. And so it's me interviewing a fictional sovereign creditor of the US, that's Mr. X, just about events. Going back, the first series was early 2016. The second book starts, I want to

say, in early 2018, maybe late 2017. So I've got to work on number three, it goes through 2019. But it's been, they've been, they've been fairly, I would say they've been more right than wrong, in terms of predicting where things would go. So we'll see, we'll see from here. But yeah, they're, they're available on Amazon. And that's that's the background on them. I've got the third book for you. You just throw an eye on the end. So interviewing Mr. Xi of China and have it be all China focused. And right. Because really, was that the mindset you're in of just thinking of China as our largest creditor? It was a blend between China, oil, Middle East creditors. I would say it was a blend between sort of Europe, energy, China,

in terms of how they think about the world. And it's helpful when you put yourselves in those set of shoes. You look at the world very, very differently, right? It's, it's, you know, when you say, well, we'll just print the money, it starts to sound very, very different, right? It's then, then when you're the American saying, Oh, we'll just print the money. Right. Really? Wait, Whoa, Whoa, Whoa. And talk to a little bit about your process before you're sending out your research. You mentioned talking with some people on Wall Street. Are you going down into the trenches and talking with people to get info?

Or you're just reading the tea leaves, looking at prices? And how do you kind of get to where you want to be there? Yeah, you know, I've always equated it to being like a giant catfish sitting down at the bottom of the river waiting for stuff to kind of float down. I spend, I don't know how many hours a week. I probably spend, I think I have the best job in the world. I probably read five or six hours a day, maybe more, most days. Books, online, government data reports, Fed data reports. And I don't know what I'm looking for. I don't

necessarily read with an agenda. I have a starting point of here's what I think is happening. And I think the way my mind works is I'm looking for things that confirm and I'm looking for things that deny. And so I'm looking for, and so I always think about where I am, where consensus is. And sometimes I'm right on top of consensus. Sometimes I'm not. And then within that, I'm looking for pieces of data that supplement, confirm, deny, totally deny. And where I get really excited, and I just aggregate these.

I send these data points. I reconstruct what I call a cutting room of information. Then when it's time to write my reports, we publish a report every Thursday, every Friday. I look at what I have. I look and see what's... Because a lot of times, I'll send myself stuff. It might not even be relevant. Here's where I am. Here's where consensus is. It might just be, I don't know why I think this is interesting, but this is interesting to me. I grab it and I put it in the cutting room. And it's so interesting how many times when I do that, it's like, oh, wow,

this actually fits in. This is really important. I didn't know it at the time why I thought it was interesting, but it's really almost intuitive in a way of just trusting that intuition, the gut feel of like, that's important. I don't know why it might be important, but it might be important. And it could be something as weird as like Apple had said sales or something, right? It could be anything like that. Exactly. I mean, it can be bottoms up data like that. It can be, currency movements, right? So like, the PBOC is loosening policy. The Fed is tightening policy. The yuan's rising against the dollar every day. Why? Shouldn't happen. Shouldn't be happening. But it is, right? So there's, okay, why? And then,

right, so these are the types of things I'm looking for in terms of just putting pieces together. You know, somebody can be, yeah, hey, Apple sales, you know, Apple sales here are great. You know, well, you know, you know, we don't don't do individual stock recommendations. It's all sector and thematic. It's really just trying to divine what's happening and then where that could go from there. And we publish those reports every Thursday, every Friday, a couple of different types of reports for our clients. And how do you view, I read on the site there, you view sectors way more important than individual stocks. As you said, to me, I'm much more interested one level up in the asset allocation. So maybe that's what you mean by thematic, right? But you may not want to be in bonds at all. So it doesn't really matter what sector, corporate or international or US if you don't even want to be in that asset class at all. So how do you bridge that gap between recommending the different sectors and recommending the asset classes overall? Yeah, I go between those worlds. I would almost lump them two together as I use them. I mean,

I know that's not the right thing to do technically, but that's how I use them, right. In terms of, you know, for me, I think there's value in niche bonds, niche, particularly sovereign bonds. There's niche areas that I think are interesting. But broadly speaking, we're in a part of the cycle and a part of geopolitical history where they don't make a lot of sense to me. Because we had a bubble in 2000, we kicked it upstairs. It burst, we kicked it upstairs to the banking system by creating a housing bubble. It burst, we kicked it upstairs to the sovereign level. So we've created a sovereign debt bubble. The only place to kick a sovereign debt bubble upstairs to, you know, unless we're going to kick it to Mars or something. Yeah, I was going to say space. Right. Is the currency, right? The currency has to be devalued. And so when you're at the part

of the cycle where the currency has to be devalued, these are very political things. So I don't know when it's going to happen. But everyone's playing the same game, right? So they all want to devalue it. They all want to devalue it. Exactly all want to devalue it. Exactly. That's where it gets into this whole point before of, okay, if everyone devalues it, then it's my job as an analyst to say, okay, where's the right sector? Is it about making a call on the dollar versus the euro? There are times we do that and it's interesting.

Where it's really interesting is, look, they're all in the same boat. They all have to devalue. And, okay, I want to own stocks. I want to own commodities. I want to own real estate. I want to own gold. I want to own Bitcoin. I want to own things that are going to do well where I don't have to make a wager.

I don't have to take a position on who's going to devalue faster. I don't really care. They're all going to devalue. And from time to time, it gets really out of whack. And it's like, okay, that's, you know, the dollar gets too strong, things are falling apart. All right, they're going to have to, Fed's going to have to do more. But ultimately, to me, the biggest investment story, the biggest macro theme is this, it's the first bursting sovereign debt bubble in 100 years. And the reserve currency issuing nation can't cover its true interest expense without help from the central bank.

I mean, it is such a monumental thing that we're living through. It's fascinating. And it was fascinating before the last week with what's happened with the geopolitics. Now we layer this on top of that. It was a highly unstable system to start. You layer a war on top of an already highly unstable system and sanctions on the world's biggest energy exporter and Europe, which is one of the biggest economies in the world running into energy spikes, followed by us. It's incredibly destabilizing, but it makes for, sadly, it makes for a lot of things to write about and for investors to be aware of and to possibly position for and benefit from. Have you ever, just popped in my head, but you ever had the siren song to be like, hey, I've made all these great calls. I should be managing the money and start a hedge fund and

make all these calls earn two and 20. You ever get the urge? You know, I manage my own money broadly in sector stuff. I've had a few offers to start managing some pools of money or be associated with an investment manager based on some of what we're doing. And I've evaluated them closely and obviously extremely flattering. In the end, I've chosen not to do that simply because, for me at least, it's two different parts of my brain. And so this part of sort of coming up with these unique analyses and what to do is very different for me, at least, and it might be for everybody, I don't know, than the part of your brain that

you have to be when you're running that money, because you have to be much more mindful and overweight, risk-managed, you know, the risk management side of it, right, is, okay, what are my daily limits and what's the ball doing and what's, and all these things. And, and these two things in my brain, at least are not conducive to doing either one well. So basically like, I love doing this. I feel like I'm good at this. I feel like I help my clients doing this. If I overlay this, I feel like I'm going to be sort of at best mediocre at both. I think if I did only this, maybe I could, maybe I wouldn't, I don't know. But that's sort of been my thought process on it is, is just basically,

you know, stay with, stay with what I'm, stay with what I'm doing well and where I'm helping my clients. So I'd never say never, but you know, it's, it's I'm really having a lot of fun now. I love it. And then you remind me a lot of, we've had Ben Hunt on the podcast a couple of times, right? And some of your stuff, you might say, none of that matters, right? It's all the narrative about what people think is happening. What are your thoughts on that delineation between the narrative and the facts, so to speak?

Oh, I love Ben's stuff. I think he's brilliant. And I agree with him. To me, where we've had the most, really, I think fundamentally what I do is find what the narrative is. And then where I get super excited is when the narrative is here. And I have high conviction that the exact opposite is going to happen, right? I mean, there have been cases like that where, you know, the narrative was, hey, that, you know, I remember this in late 2014, early 2015, perfect example. The narrative was that the Fed was going, or excuse me, we were going to have a, the consumer was going to boom because there was a gas savings, right? Gas prices had collapsed. And so you wanted to, you know, sell long dated treasuries because growth was going to accelerate.

GDP was going to accelerate. You want to own consumer names and I'm picking up all this data from the healthcare side. I'm just, again, it's all out in the open. It's right there. You know, the stories are right there. Obamacare premiums up 40, 50, 60, 70%. Yeah. And I'm looking at this. So I started just did an analysis again, using government data. It's like, if you take the average consumer's income statement,

which is available median income state where they spend their money on, and you take gasoline down 40% and you take healthcare up 40%, what you found is the consumers were like way behind, right? They weren't going to spend more. They were going to spend way less. And so you wanted to do the exact opposite of what the narrative was. And so we wrote a lot about that at the time. That's the kind of thing we get really excited about. 2019 was another example of it where late 2018, early 2019, consensus Fed's going to keep raising rates, et cetera. And we're like, they're going

to have to cut soon. They're going to have to start growing their balance sheet again soon. And again, it was one of these things where we would help our clients position for when they do that, you're going to have a melt-up in 4Q19. In summer 19, we were heading towards a recession and we were saying, listen, you might get a 10% down, but then you're going to get a melt up and you don't want to miss that. And that's what happened. And so we, a long-winded way of saying, I pay very close attention to the narratives. I think the narratives are very, very important, very, very powerful, and particularly constantly balancing the narrative against the reality.

And there are different reality factors that are more powerful than, you know, than others, right? Right now, the narrative is the Ukrainians are winning. They might be. What if they don't? Right? That when that reality, if that becomes a reality, they didn't. What are the implications of that, right?

You know, The narrative right now is the United States is absolutely crushing Russia on the currency war. I think that's fair at this moment. What happens if oil goes to 150, 180, the Dow goes down 30%, treasury markets start, yields start going up, not down in a stock market crash. Then what? Which I think is actually, something like that directionally could happen, right? But those are the types of things where we look at the factors driving these things and these narratives. It's like, okay, here's the narrative. Is it right? Sometimes the narrative is just right, in my view. Sometimes when I find out like, yeah, I agree with that. Like, hey, great. And sometimes that's good for trends.

Sometimes it's whatever. But where I get most excited to share with my clients, it's, yeah, I agree with that. Like, Hey, great. Um, and, and sometimes that's good for trends. Sometimes it's whatever. Uh, but where I get most excited, uh, to share with my clients, it's, Hey, here's the narrative. And like, there's no freaking way that the narrative is totally wrong. And here's why it's wrong. And here's when it's going to be wrong. That's when you have the, you know, it's wrong. Here's why it's wrong. And here's when it's going to be wrong. That's the holy grail of a piece of research to help clients. And that's when I get most excited, as you can probably tell it, I'm getting quite animated about it. I'll finish it up with new segment this year. What would you invest in? So I'm going to ask you 10K, 100K K 1 million, 10 million, and then you can weave in. I never asked you like,

how do you position yourself for this gambit and everything? So you can weave that in if you'd like, but so what would you invest in? 10 K. 10 K. Yeah. That's all you got. That's your investable capital. 10,000 bucks. If I had 10,000 bucks, I would do, um, I do, um, and what's, what's my time horizon. This is, I, uh, in terms of, you know, is this like you as you exist here today? Yeah. As I exist here today, 10 K I would do, I would do

balding 22 year old. Yeah. Bless you. And balding for sure. That's okay. 22. I'd be 22 again. I would do 20% gold. I would do probably 10% Bitcoin. I'd probably do 10% gold miners. I'd probably do, let's see, that gets me to 40. I would do probably 20% cash. So that gets me to 60. And then I would probably do probably another 20% in sort of industrial and commodity related equities, primarily here in the U S. And I don't know what I would do. That's 80. I don't know what I would do with the other 20. I'd probably do some sort of, I don't know. So I put you on the spot. Yeah. Yeah. You only got four, three more of them.

So how would that change? How's your brand changed now? You go to 100K. Same allocation? Are you starting to add other pieces? I probably keep, especially this week, I probably keep that allocation. I probably bump the gold up 5% maybe, or maybe I bump the gold miners up 5%. I bump the cash up probably 10 or 15% just to maintain that optionality. Because again, to me, so that works out. I would probably have 20% gold, probably 30% cash, probably 10%, maybe 15% Bitcoin.

Even though your thesis is that cash is going to get debatted. Even though I can't, absolutely. Because really, when you look at currency system transitions, there's this great chart by my friend Dan Oliver at Mermican Capital, brilliant guy. And it shows the price of gold overall, and then the month over month moves in the price of gold in Weimar, Germany, in German Reichsmarks from 1918 to 1923. So this is one of the great hyperinflations of all time. Currency goes to zero. Gold goes to a trillion Reichsmarks in a little over three years, really. Now, you would think that the right trade is borrow as much as you can and buy gold. And that's what the overall chart. Now, for a while, I actually

thought that, but then this chart from Dan was so enlightening because you look at it, the volatility was so face-peeling. You would have lost all, if you're levered gold in one of the great hyperinflations of all time, you got wiped out four or five or six times because it's such a political thing of, you know, hey, the Fed's going to QT. Oh, oops, not. No, the Fed's going to keep, you know, the underlying trend is very clear. But this political dynamic of, you know, there were five or six times where people dumped gold to buy Reichsmarks in Germany as the currency was dying, literally dying. Now, I'm not saying that the dollar is going to be the German Reichsmark. I don't think we're hyper

inflated. Extremes inform the means. I'm simply saying, for me, pigs get fat, hogs get slaughtered, right? I have no visibility on this political process. There is a way where they deescalate and gold goes down, Bitcoin goes down. I still think there's some structural stuff where commodities are going to be probably a really good place to be. That gives me some, some optionality. I, I, I'm not, I don't trade my own stuff a lot. You know, I, I would, if I did, I would consider probably having a tail piece. Maybe I would take 3% of that, 2% of that and, and, and sort of rolling, maybe not even that much one to 2% and just rolling calls on like equity volatility or things like that as my hedge. Now you're talking my language.

Yeah. And then my last one is at $100 million. We'll jump up to $100 million. So where does your mind change at $100 million? Yeah, that changes a bit. Then I think you have, once you start getting these really big numbers, then I think you have to start thinking about politically acceptable inflation hedges and politically unacceptable inflation hedges. What do you mean by that? I think you want to own – if I have $100 million, I probably put 10 to 15 million, maybe 20 million still in physical bullion. But I geographically, I have some here, I have some in Singapore. I probably also still have

10% in Bitcoin. But then I have to start thinking about, those are, I would call gold and Bitcoin, I would call those politically unacceptable inflation hedges. Those are things central bankers hate, policymakers hate, they make them look bad, right? These are assets that they don't like to see go up. And there are things you could see. There's possible you would see state attacks against them in de facto or outright. And so then you think about things at that level of wealth of what are politically acceptable inflation hedges, right? It's the house in San Tropez, you know, houses and things. Unless you're Russian, that's the problem. If you're Russian, you know, or if you're a Canadian trucker, right? Like, you know,

sorry, you know, you went off sides, we're taking your house. Right, exactly. And that's what I mean about sort of political, you know, it's right, it's champagne problems, uptown problems of trying to figure out how you structure yourself that way to avoid that. But realist, I think you'd probably have, you know, 20 million gold, 10 million Bitcoin. I got 70 million left. I probably have 10 million in, in, in I probably have a, so 30, 70 million left. I probably would have 40. I would have 30. I would have 20 percent cash, though. I would still have that 20 percent cash. So now I'm at 50 mil.

I would take probably the remaining 30 or 35 mil and I would have them in some sort of diversified array of industrial commodity and probably some big cap cartel-like names, right? And Facebook, Google, Amazon, that type of stuff. And then I would take the balance and I would have sort of these, what I would call Bitcoin or gold-like real estates, real estate properties, right? Where they're irreplaceable, unique, finite, lake houses, oceanfront houses, real estate centric things where there is a pretty good liquid market for me to sell, right? In politically safe domicile. And 25 feet above sea level

so you don't get washed out. So you don't get washed out. Exactly, right? So Vail, London, you know, maybe Miami. Maybe Miami. The Homestead Act is a nice thing to have

in Florida, right? These are, again, uptown problems you have to think of when you've got $100 million in the bank. And then on the Bitcoin piece, just to finish off, what are your thoughts here? We're basically saying, hey, you've got to turn over the Russians, and the exchanges are pushing back a little. I didn't see what news came out of that today, but do you think that breaks Bitcoin or that's good? What's the end result there in your mind?

I'm waiting to see them do that. I think they probably will. Ultimately, I think U.S. authorities have to be very, very careful with this because there's really nothing they can do about Bitcoin. They can shut the on and off ramps. They absolutely can do that. And so I think for the Bitcoin, that's why the scale of it, 10% for me at that size, especially is more than enough to hedge catastrophe.

And if gold doesn't work, what Bitcoin does, that kind of a thing, right? Okay. But it's also not so big. I think you have to scale Bitcoin positions now based on the world as it exists now versus even two, three weeks ago of the authorities could say, that's it. We're not letting you have Bitcoin. We're shutting the on and off ramps. We're not going to chase you it. We're not letting you have Bitcoin. We're shutting the on and off ramps. We're not going to chase you down. We're not going to track addresses, but you just, you know, you need to be comfortable with that amount of money. Ain't going to move for 10 years, 20 years. You know, like they did with gold, right? It was

illegal for American citizens to own gold from 33 to 74. So I think they could do something like that again. But when I say they have to be careful, once Erdogan in Turkey started going after dollars, started going after gold, that's a sign. That's like a starting gun. That's admitting you have a problem. So it's this fine line between we want to fight anim on any money laundering know your know your client you know the aml kyc stuff they got to do that i understand that i respect that there's a fine line between that and between trying to defend your currency and tipping you know yelling which which can be like yelling fire in a crowded theater, right? Of, hey, you know, Bitcoin's bad. And look, the other thing too is the dollar's the global reserve currency.

The dollar's job is to have an open capital account. You start shutting capital accounts to trillion dollar assets, you're going to find some other reserve currency. And that's why I think it's important to maintain that diversification of gold, Bitcoin, politically acceptable inflation hedges, and then to keep your leverage low, per my point. At this point, especially post-COVID, especially now with this war, I think the end game is increasingly clear. It's increasingly upon us. They're going to have to inflate. You want to be there. You just got to get there. You have to manage your chips in a way without too much leverage to make sure that, look, if we have a crash, you don't want to get wiped out because you're levered. You just want to be able because they're going to have to come support it unless they're going to be willing to

default on sovereign debt, in which case half of your assets can go away. The gold and the Bitcoin are going to more than offset anything you lose in things like equities, et cetera. Love it. We came full circle to the end game. Back to Grant William. Well, that was fun, Luke. Any last thoughts? Tell everyone where they can get the book. You already said Amazon, the website where they can sign up for your stuff. Absolutely. Books are on Amazon and you can find us at fftt-llc.com, frankfranktomtom-llc.com. Updates on what we're up to, different research product offerings at the institutional and mass market level. And I've got an active Twitter feed, as you alluded to before, at Luke Groman, L-U-K-E-G-R-O-M-E-N.

Awesome. We'll put that all in the show notes for everybody. And I appreciate it. That was fun, Luke. Absolutely. Thanks for having me on. It was great talking to you, Jeff. I appreciate it.

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