We Study Billionaires - The Investor’s Podcast Network - BTC045: Luke Gromen on China, Evergrande, Macro, & Bitcoin

Starting point is 00:00:00 You're listening to TIP. On today's show, I bring back by popular demand, Mr. Luke Groman. During the show, we talk about a lot of things that are happening around the world from a macro landscape. Although we do cover Bitcoin a little bit near the end of the conversation, much of the topics involve China's Evergrand situation, the idea that central banks are providing forward guidance that they're going to try to tighten market conditions, credit markets, and much more. As always, Luke brings fire. So I hope you guys enjoyed this conversation with Mr. Luke Groman. You're listening to Bitcoin Fundamentals by the Investors Podcast Network.

Starting point is 00:00:40 Now for your host, Preston Pish. Hey, everyone, welcome to the show. Like I said in the introduction, I'm here with Luke Gromon. Luke, welcome back to the show. I think this is your millionth time on the Investors podcast. So welcome. Thanks for me back. I'm very happy to be back.

Starting point is 00:01:07 So it's great to be here. So what's new, man? There's a lot going on. Everything's good here. Hopefully you and the family are well. There's certainly a lot going on macro-wise. Oh, my Lord. Macro-wise, it seems like we've just been on this trip,

Starting point is 00:01:22 like this rocket ship that has just kept going. And now all of a sudden, like, the engines are starting to sputter. And they're like, hey, maybe this is just a little too good to be true. Like, what's going on? So from your vantage point, what is that? I think it's a very good way of phrasing it. I think if we go back to, let's, you know, if you go back to probably mid-18, say, hey, we're Fed's going to taper and we've got this thing and we had the crisis and we did everything

Starting point is 00:01:50 we had to do and we told you we were going to normalize a balance sheet and we're normalizing the balance sheet and we told you we could sell these bonds. And then you had sort of the first rupture of FX hedge treasury yields going negative. And that was sort of, that was sort of fit and start one. And that rolled in the early 19 where you had interest on excess or Fed funds go over interest on excess reserves, which wasn't supposed to happen. That was fit start number two. Then you saw the economy slow, yield curve flattened.

Starting point is 00:02:17 You had the repo rate spike, which was effectively a supply demand problem in the treasury market made worse by regulatory problems. And so all of a sudden we went from, you know, look at me, mom, I can fly to, you know, that's not flying. That's falling with style to, to pair. phrase, toy story if you ever watched that one with your kids. And so we get to 3Q19. It's, it's not QE. So we're regrowing the balance sheet again, but it's not QE. And that was sort of, you know, quick, hit the boosters again, guys, you know, on your rocket ship metaphor. We, obviously,

Starting point is 00:02:50 I think the COVID thing in the first quarter of 2020 was, was a surprise. And I think they did what they had to do to basically stop what was a debt deflation, liquidation spiral, dollar super spike that would have happened. You cannot keep markets open and close down all the stores because everyone will just liquidate markets for cash and the dollar will go to infinity and everything else will go to zero and, you know, et cetera. And so that brings to the sort of the turbo charge, which was if you go back to 08, we're supposed to get all this inflation and Lynn Alden's done a tremendous job highlighting this. We've talked about it a bit where, and really, I would point to, I think really the grandfather for the grandmaster of this work was Professor

Starting point is 00:03:39 Richard Werner, Professor Richard Werner, highlighting basically that QE as the U.S. did it, basically kept all of the liquidity in the financial system. So we had asset inflation, but we didn't have broad inflation. And of course, this time around, it was a broad real economy problem. And they changed the formula. The U.S. government handed a bunch of money out to consumers and then they issued treasury bonds to the banks and then the Fed bought the money, bought the treasury bonds from the banks, put it on their balance sheet. And lo and behold, we got a ton of inflation. And I think with that as background, I think when we came into probably March, April of this year, I think the Fed had that feeling when you talk about the,

Starting point is 00:04:24 the opposite feeling of like, uh-oh, the rocket engines on the jetter stalling. But it's, It's almost like the, you know, the first time I ever went downhill skiing. So back in 2005, my wife and I, I decided I want to try a downhill skiing. I'm here in Cleveland. I might as well do something in the wintertime. So we're going to go to ski lessons. We go to the local Boston Mills, which is like, you know, your little bunny hill and a strap on the key, they get a couple lessons.

Starting point is 00:04:46 Woohoo. All right, honey, let's go skiing. I hear Jackson Hole is nice. So we go to Jackson Hole, which unbeknownst to me are the most vertical slopes in North America in the contiguous 48. and I take one day of lessons there, three hours worth, instructor goes, hey, you're ready to go onto the blues now. So, okay, I'll go on the blues.

Starting point is 00:05:04 And so I go on the blues. No one tells me to like get up there, that the blues and Jackson are like the blacks everywhere else in the country. And so I get up to the top, the sky's darker blue, like you're like leaving the atmosphere. You're so high up. Everything's waiting. And so I get going down the hill.

Starting point is 00:05:20 And the reason I tell the story is, is I think come March, April of this year, the Fed was having the experience that I had, in Jackson with a grand total of four hours of lessons on the blues going downhill, which is like, okay, I'm balanced, but I'm picking up speed. And I have no idea how to stop, right? And so what I did was I turned myself into a yard sale. It was as a phrase I learned by becoming one.

Starting point is 00:05:44 So I basically just luckily I told them put the bindings on lightly. I hit it and left sort of everything up the hill. I think the Fed sort of did a yard sale come May June with their, oh my God, Bitcoin's at 60,000. Home prices are rising at 25% a year. We're having shortages of everything. You're seeing lumber at $1,600 a board foot. Wow, we could generate inflation. And I think, quite frankly, they were shocked how much inflation they got for what they thought was just a little crank of the dial of, hey, let's just generate a little inflation. So I think I agree that we are now at this, uh-oh, it feels like the rocket engines are maybe giving out a bit. And I think four months,

Starting point is 00:06:26 ago, we were in the exact opposite, which was sort of like, oh, my God, we are picking up speed faster and faster. How do I get off this ride? And it kind of ties back to something we said is once you get debt to this high, they're not operating a dial anymore. They're operating a switch. And so our view is March, April, the switch was, here we go, inflation. And they're trying to pull it back.

Starting point is 00:06:49 They're trying to pretend like they still have a dial. But I think when you start talking about QE Taper and some of the things we've seen in in terms of the stimulus rolling off and not be replaced. All those things, I think we're watching in real time combined with Delta, combined with kind of slowdown that's been going on for the really last three or four months when you look at some of the China credit impulse things, I think those things have all come together. And now this Evergrand, I think, is just sort of the weakest link or where the pressures are manifesting. And so yeah, I think that's a very good metaphor is, hey, uh-oh, the engines on this rocket ship have gone from scaring us because

Starting point is 00:07:24 they're going so fast to scaring us because we're maybe starting to, you know, lose escape velocity. I like your analogy there as far as it being a switch. It's not a dial anymore. It's binary. It's either on or it's off. And like when you kick it on, it's like, oh, my God, if you're going to say what is causing the CPI gauge specifically to start demonstrating that Fiat units are being added into the system, because, I mean, they've been doing this since 2008, 2009. They've just been doing it through the bond market. So is it because of the triple P loans? Is it because so much of this debasement that has occurred since the March 2020 COVID shock? Is it because they're mailing checks out to people? Is it because of those factors that the UBI-like activities? Is that what's

Starting point is 00:08:12 causing the 5% prints that we're seeing? Or is there something else going on that we're missing? I think it's a combination of that. I think it's a combination of what we're seeing. with what's happening with supply chains related to COVID. And then I think, too, I'm still not convinced that there isn't some element where China isn't slow steaming stuff to us just to sort of stick it in our eye regarding what we've been doing to them with some of their national champions like Huawei and some of this trade war stuff for the last three years under Trump and now continuing under Biden. And so I touch on that more before you go on to your next point because are they shutting down

Starting point is 00:08:46 the ports because of quote unquote COVID reasons and then just totally messing up the supply chain on purpose or is there other things that you think that they might be doing? The short answer is I have no way of proving that. I've asked people in that chain. Here's what I know. I've talked with several different people in the supply chain in the international container shipping business. Those people are telling me in 20 plus years in the business they've never seen it like

Starting point is 00:09:14 this. They are seeing, and it's a perfect storm. The container shipping, the asset owners have been basically in perfect. Burgatory since 08. And unfortunately for them, what they did as we were moving into 08 and just after 08 was load up buying the biggest possible boats they could buy, because that's how you derive efficiencies of scale in that business, right? You trade in your 6,000 T.E.U boat. You buy a 12,000 T.E.U boat. And that way, now, the worst time to do that is right before your demand goes from 8,000 back to 5,000.

Starting point is 00:09:48 And so that's what they did. And so they've been burned and now they've been consolidating. They've been tightening up capacity. The gist of it is is that the boats are all full and there's no more boats come until 24 or 25 at the earliest, assuming no more delays to building. So capacity is not going to grow. Then when you look at what's happening with in Asia, in Southeast Asia, yeah, you've got problems with the ports to start with. You've got COVID cases. I think it was Ningbo a few weeks ago,

Starting point is 00:10:18 which is, I think, their fifth biggest port was shut down for, I think, two weeks for a single COVID case. One case. One case. And so one of my friends said, if it's one guy, why don't you just send them home? You could even lie that it was 100 people. And nobody's going to question that. You know, there's something going on there. So either the Chinese are lying and it's like a thousand people, it's everybody, which is possible. Or, and this is something I experienced when, so I used to work at a firm where we had this, we had this great ag analyst and she covered names like ADM and Bungi and Tyson and all these.

Starting point is 00:10:55 So she was, she was very tied in with grain shipments. And of course, China is a huge player in that. And something that Chinese would do from time to time in that business would be, oops, we ordered too much crap. We're heavy soybeans. We got to sort of run down the inventory. We've got no place to put the stuff. And so what they would do is they'd go, hey, that boat has GMO soybeans that are against our regulations,

Starting point is 00:11:23 send it back or go get it, inspect it, and come back to us. And of course they weren't GMO soybeans because you don't send a gigantic boat of soybeans to China without knowing what's on the darn thing. But what it was was just an inventory management is a way to kind of smooth things out. So is it beyond the realm of credulity to think the Chinese couldn't be going, all right, you're going to mess with Huawei. You're going to screw with us on some of this stuff. Watch this.

Starting point is 00:11:51 And so what they do is they shut down Ningbo for two weeks. And now between the capacity issues, there's things called blank sailings, which I had never heard of in this business before, but what a blank sailing is when the boat pulls up to the port and the boat's already full. So the boat just kind of looks at the port, looks at all the stuff on the port, and just keeps right on sailing by. and waits for them. It's like a bus being too full, right? You just, another one will be by in half an hour. And in the case of these things, they're by in, I guess, four to six more days. The net of it is,

Starting point is 00:12:17 is in the meantime, stuff keeps pouring into the port and you keep having. So I think there's this perfect storm of supply chain. If there is an element of the Chinese sort of slow steaming us to gougum up our supply chains, I think it's a minor part of the story. Like I said, I don't think it's beyond the realm of possibility. But to be clear, I don't think that's like a big, a huge part of what's going on. I think it could be sort of the cherry on top of what's happening here. How about the incentives to not work here in the U.S. and maybe other places. I'm not as familiar internationally if they're dealing with other, these social incentives to just stay at home. Are those contributing as well? I know Lynn has, you alluded to Lynn's piece on inflation.

Starting point is 00:13:03 We'll have a link to that in the show notes. It's incredible. when she gets into some of these ideas, but I'm kind of curious to hear your thoughts on it. Sure, yeah. So I think from the monetary side, like Lynn's talked about, if you go back to August of 2019, former Fed Vice Chair Stan Fisher wrote a white paper for the Black Rock Institute called Dealing with the Next Downturn, Philip Hildebrand, former head of the Swiss National Bank and Jean Boyvan, former Bank of Canada governor worked with him on that paper. It was incredible paper at the time because it was basically in the next crisis, We're out of room. What's going to happen is governments are going to spend a bunch of money,

Starting point is 00:13:39 and we're going to monetize it and pin yields to make sure that the fiscal stimulus does not drive interest rates up and offset the benefit of the fiscal stimulus, which was exactly what they did, to a T. And what's interesting, or there's a number of really interesting things about this paper, but as it relates to this discussion vis-a-vis inflation, one of the interesting things it said is Fisher, who's considered the godfather of central banker. He trained Bernanke. He trained Jell and he changed Draghi, right? He said the issue is not whether we can generate inflation. We know this will generate inflation. Governments hand out money. We buy the bonds. It's the very definition of helicopter money. You're just giving out money to the populace. This will generate

Starting point is 00:14:24 inflation. He said the challenge is that there are no examples in history of using this to generate just a little bit of fine-tuned inflation, which gets back to the whole, it's on or it's off. Like, this is not, you know, this is this is not sort of, yeah, this is not like, you know, a Navy SEAL sniper, you know, sort of trying to pick off a couple of Taliban over in Afghanistan. This is like, hey, get the B-52s over here. That valley, I want it all gone, right? And that's what they're doing. So they talked about it, they did it, they got their inflation.

Starting point is 00:15:00 And I think, quite frankly, it scared the heck out of them because I don't think they thought supply chains would break down as fast as they did about which they can do nothing. And I think that ties back to both the point before of some of the COVID stuff, some of the supply chain stuff, some of the China stuff. And to your point about the disincentives to work, I think that is certainly an element of it. I did see something interesting the other day that in the states that have pulled off the unemployment, benefits, they've not really seen any increase in employment, which I think is, there's a couple other things I think that are going on. I think one of them is, I mean, I see this in my own house where last several son, and you always got to be careful with your own example, but my son for last several summers has done landscaping

Starting point is 00:15:52 work. And all my buddies that are landscapes like, I can't find people. I'm paying 15 an hour, 17 an hour, 18 an hour. And my son, who did it for three straight years, I'm DoorDash. I'm making $30 an hour door dash. Wow. So, like, the clearing rate of pay for some of these entry-level jobs may have maybe particularly for dependent, because my kid is dependable.

Starting point is 00:16:16 Like, he tells you going to be there, he's going to be there, right? And he can pass any drug test you want. God love him. He better be able to know. I'm just kidding. I know. I know he can. And so the clear.

Starting point is 00:16:27 the clearing wage for, yeah, I think has moved in some areas where just this marginal supply of labor. So I think in some places you're seeing a supply demand mismatch, mismatch of labor, I think some of it's being driven by some nichey things like DoorDash and Uber Eats and some of these things where you can make pretty good money with not a lot of hours and, you know, quite frankly, it's a lot easier to DoorDash and it is to landscape all day. But I think the other thing that's been going on and I think is going to is getting worse and will continue to get worse is the reaction of certain workforces related to some of the mandates as it relates to and I don't want to blow up your show but you know the you know some of these these restrictions

Starting point is 00:17:10 that have been introduced recently. Exactly. And so you're seeing that all over. You've seen bus drivers quit. You're hearing nurses quit. You're seeing I mean, I saw something today where like hundreds of Navy SEALs are saying, we're done. I'm done. I'm not going to do it. And without getting into the politics of that, I think that dynamic is also, I mean, it's really interesting. We wrote about this in a report a couple weeks ago. One of our reports was that unsolicited, a friend of ours who's an RIA at a national firm, said they are getting so many inbound calls from people planning to quit their job or switch careers over these mandates that they've actually take into calling it the Great Resignation internally. And so they're getting so many inbound calls

Starting point is 00:17:54 of, hey, Mr. Financial Planner, Mrs. Financial Planner, can you help me set up my finances in a way? I'm going to quit my job because I don't want to do this and I'm just going to use this as an opportunity to change. I don't want to wear a mask for eight hours a day. People were just like, I got to find a different job that allows me to not have to do that. And I think the way a couple Pandora's boxes were open last year. I think one was sort of, I think, and I tweeted about this last week, that I'm getting this increasing sense that sort of the general populace out here in flyover country had its eyes open to how the money system actually works in this country as a result of how the Fed responded. And so I think there is a great deal of people that

Starting point is 00:18:40 never gave an ounce of thought to the banking and money and going, wait a second, they can just printed up out of thin air and hand it out. And like, that's it. Like, why am I paying taxes again? Why am I? And so I think that I think is part of. But I think the other part of it is this, this element of, hey, I worked from home. And it was, it was awesome. And I don't ever want to go back to an office. And I will, you know, I can be very productive. And I, and I think there is broadly speaking sort of a supply demand mismatch between, you know, talented people. and positions, and I think we're living through that. And I think that's then reverberating back into these supply issues, et cetera. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:23:24 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. When you're looking across the spectrum of where these things are impacted, I mean, it's just across the board. But the one that I think is just so obvious is in the builders, people building new homes, developers, and you're just seeing this split between pre-existing home prices and new builds.

Starting point is 00:23:56 And these people that are halfway in between having a house constructed right now and the cost of labor, the cost of materials is, and we're not talking like these 5% numbers that are getting reported, I'm sorry, but you're not seeing a 5% increase in the, And the cost of building a new house. I mean, the numbers are somewhat mind-blowing how high that differences. And so when I turn to China and I look at what's the company that's blowing up right now, this Evergrand, and what line of business are they in? And they're a real estate developer with 300 billion in liabilities.

Starting point is 00:24:33 And 200 of the 300 billion are in like halfway produced or constructed real estate. I'm thinking this isn't just the U.S. problem. Maybe this is a global problem that we're seeing everywhere. And more importantly, to question you, Luke, is this a Lehman type event? Is this really as big of a deal that everybody's making it to be? What are some of your thoughts around this Evergrand? I mean, we had so many questions in the comments about this particular issue. I don't know if it's another Lehman as it relates to the banking sector.

Starting point is 00:25:09 There are people that really understand them. The people understand the China banking sector that I've read don't seem to think so. Based on how the China system is structured and intuitively, to me, that makes sense because if you've got a state-owned company effectively that's borrowed a bunch of rem and B from state-owned banks and then defaults on those in the process of building assets in China, then you at least on that portion of the issue, there's no systemic connections to the outside world. There's no, and that's why I say purely a Lehman problem, there's no, as far as we know at this point, you know, it's not like somebody was buying credit default swaps on whatever.

Starting point is 00:26:02 There's no financial leverage multiplier within that. If it's all state-owned, it's almost like, you know, if a tree falls in the forest and there's no one there to hear, it doesn't make a sound, right? So if a state-owned company defaults to a state-owned bank in the state currency, it's like you move it from this side of the ledger to the other and no one's out. You know, it's a domestic political problem for China. But so that portion of it, I would say I don't know that it's a Lehman problem based on what I've read from the people that understand the Chinese banking system and how that works, which I, I, I'm not a Chinese banking system guy. Now, with that said, where you get contagion risks, where I do think there are contagion risks, and I think these are almost more like old-fashioned contagion, right? Like, we're all so scarred from Lima. It's like, oh, gosh, okay, it's got to work

Starting point is 00:26:52 through the banks. Well, when I came up in this business, my first, my first crisis was fall of 97. It was the Asian crisis. And it was one of these things where Asia Pacific was only 5% of Eaton's business, Parker Haniffin's business, Boeing's business. But it was like 30% of the growth of revenues. And, you know, so it was when you just looked at it, oh, it's only 5% of their business. I don't have to worry about Indonesia, Thailand, South Korea, all these things. And that's October of 97. ISM in the U.S. is at 55. Woohoo. Party on, party on, you know, party on, waiting, party on go. Five months later, ISMs at 47, the industrial sector is in a recession in the U.S. and these stocks have all been haircut 40, 60%. And so that is where I think if there's going to be

Starting point is 00:27:44 a contagion, I think it could be sort of an old-fashioned contagion, which is to say, when you talk about the inflation in building materials, construction materials, if you take, if this goes from just being an ever grand to being a, hey, China's just going to pause for a year for construction, then you get into a situation where, you know, Cat's orders, you know, Caterpillar's orders go from flat against all-time highs. They're down 30 percent. And the earnings numbers come down. And now there, we actually, that's, that to me is the potential transmission mechanism to the outside world. Somebody else made a really good point the other day of European luxury goods, right? Where if the Chinese, if there's enough Chinese financially harmed by this, that they just stopped buying

Starting point is 00:28:31 luxury goods for a bit. There's another transmission. So I think you have to look at these transmission mechanisms and see where they exist. And then once we understand if other transmission mechanisms exist, then we have the multiplicative effect, which is the system's too levered. It's too levered at the sovereign. It's too levered at the corporate. It's too levered at the household level. Then you're going to have problems because tax receipts fall, et cetera, et cetera, et cetera. And that's where I think, to me, based on how I've looked at it so far where I think the biggest risks are. But again, with a huge, take that with a huge block of salt because I just don't know the Chinese banking system well enough to make a statement that, you know, yes, it's a Lehman or no. But the people

Starting point is 00:29:14 that I've read that know it so far don't think it is. Yeah, I mean, I think your point is well taken. It's, I mean, it's not a free and open market for the most part. The, like, Chinese government's going to either step in or they're not going to step in. And if they're not going to step in, it's going to be for some type of strategic interest or it's going to be because of some policy that they're trying to de-risk the population because they own too much real estate. So one of the things that I hear is a policy or an initiative for the CCP is this idea of common prosperity, is the buzzword, where they want everybody, and this is why they were smushing Jack Maugh and other famous billionaires over there, is like, hey, we don't want these influencers of wealth

Starting point is 00:30:01 and capitalism to really kind of have a voice or have any type of influence within the population. And so when I'm looking at that idea and whether that would run, and then I'm also looking at just strategically, does China have an interest in kind of letting this thing go, you know, these people that were highly levered and everything else, just kind of letting them pay the price and letting them be kind of an example within their country, it wouldn't surprise me, I guess, is how I would respond. I'm curious how you see that particular piece. I think that makes a lot of sense. And it was interesting. I saw someone today saying that it's the common prosperity. Part of that is trying to keep housing affordable for everybody.

Starting point is 00:30:45 Yeah, yeah. Which is ironic, right? Because right now, if I take a step back, And I look at it like put on my, I'm a two year old hat and go, the communists are trying to make housing more affordable and they're trying to let capital markets work and let somebody take a loss to learn a lesson. And the capitalists are doing whatever they can essentially plan the exact opposite. The exact opposite, right? We're trying to make housing as expensive as we can and build as much political fragmentation in the society as we can over it. So I think you could, that That makes sense to me. It's a bizarre world.

Starting point is 00:31:22 It really is. It really is. And if you look, the only thing the U.S. is trying that hard to cap are Bitcoin and gold, right? Like they have no problem with anyone who owns Bitcoin or gold getting taken out to the woodshed and getting beaten. But anything else, you know, the national team's got your back, right? You know, you can't lose in bonds, you can't lose in housing, you can't lose in stocks, you

Starting point is 00:31:46 know, but, yeah, assets that sort of, and you know, and you, you can't lose in bonds, you of, and you can see sort of, it's interesting from that, you can divine sort of the national interest, right? The national interest is King Dollar. We, you know, and Washington, D.C., sort of that, that, you know, the one percent and King Dollar is, is anything that moves us away from the dollar is bad. And I think in China, if that's what they're trying to do, you know, they're trying to sort of manage this, you know, sort of over debt-laden society with trying to keep social stability.

Starting point is 00:32:19 Continuing on the theme of Bizarro world, for me, this is the elephant in the room. It's just like so, I mean, it's just like a clown with the clown hair and the clown nose when I think about this right here. The 10-year treasury is at 1.32%. The CPI print for what? The last five months has been 5%. We'll just call it 5%. The last one last month was 5.3%.

Starting point is 00:32:45 I mean, that's just, it's total insanity. So as a fixed income investor or somebody who's looking at this, this spread of 400 basis points that is a negative 4% real return between those two. Like how long can something like that last, Luke? This is maddening. I think the people that have noted that people buying these bonds aren't buying them for the yield, I think are exactly right, right? I've had people say, and I think, you know, I think they're brilliant people.

Starting point is 00:33:22 I think they're very smart. I think they're right. They're being regulated into buying these bonds, right? These bonds are not an investment. They're pristine collateral, right? And it sounds a lot better when you say pristine collateral. As long as there's no other currencies that could come in and supplant the existing currencies. To plant the exact, exactly, right?

Starting point is 00:33:44 So it's, but then you have to, it's a chicken and the egg question. If why? So here's the sequence of events. 3Q14, Global Central's banks effectively stop buying treasuries. 3Q14, banks start being regulated into buying treasuries as high-quality liquid assets. The next year, money market funds get regulated into holding government bonds instead of corporate and private sector money market funds. You get all this regulation that says that you have to buy treasuries and you get the benefit, it's pristine collateral, you don't get a haircut against it.

Starting point is 00:34:16 it, you get the beneficial treatment of your banks, money market funds, etc. Why? No one asks why. And the answer is the U.S. has a supply demand problem in the treasury market. And this is how they're dealing with it. And we have the leeway to do this because we're the world's reserve currency issuer, we are the Saudi Arabia of money. But what we're doing is no different than what Argentina did in 2000, 2001. They ran out of foreign financing and they said, hey, banks, we are going to regulate you domestic banks into buying our Argentine debt, we will give you an attractive rate, we will give you an attractive capital haircut against it? It's pristine collateral. Now, that's not to say we're immediately in that type of problem, but this is directionally the same type of action.

Starting point is 00:35:02 And so the $64,000 question is, are we going to go right back, you know, the only way you can hold this bond as an investment, and the only way this game can go on forever is an investment is, you're going to get some sort of a version of the mean, right? That 5% CPI is going to go to, you know, negative 5 CP. Now, maybe that happens. The other way you keep this game going is, is if, and this is how it appears, is the treasury market is increasingly not being driven by investors, it's being driven by its demand as pristine collateral, right? Those aren't investing bonds. Those are, those are trading sardines. Those are, those are pristine collateral treasuries. Then as long as the market trends, preferably up, because that's where you need tax receipts,

Starting point is 00:35:44 need tax receipts up and you can't get tax receipts up if markets trend down, as long as markets keep going up without too many sharp falloffs, then you could in theory keep this Treasury funding because it's pristine collateral leveraging, you know, leveraged play asset prices on the upside going for as long as you can keep asset prices going up. Because it's all relative to the other sovereign debt that's out there and they're all nothing percent. Right. And, you know, the challenge in the, and where the problem I have with the, well, it makes sense because this 5% CPI is going to mean revert to negative 5% CPI as soon as the Fed's done.

Starting point is 00:36:24 The thing I find that that argument always leaves out is that at negative 5% CPI, right, at positive real rates, U.S. government defaults on entitlements or treasuries or defense or some combination of all the above. Once you get to 130% debt to GDP, negative 5 CPI prints are now. not possible. They're not sustainable for more than like a few weeks. And it's not accounting for the issues that we were talking about earlier that's really driving your CPI is all these supply chain impacts. You can't go out there and find anybody to work. And if you do, they want top dollar. The cost of commodities are blowing out because they just don't have the supply versus the demand of people that are getting checks in the mail that are

Starting point is 00:37:09 going out there and say, hey, you know what? I think I'm going to put a new bookcase. in my house or I'm going to put a new deck out there on the porch or whatever. Even last week, I don't know if you saw that they're talking about a 6% cost of living increase for Social Security next year. You think they got 6% more dollars sitting in a vault somewhere? Where do you think that's going to come from? They're going to print it and then they're going to hand it out. They're going to burn it out.

Starting point is 00:37:31 Yeah. They're going to burn it out. Hey, so one of the things that kind of has me scratching my head right now is you got Powell and the Federal Reserve talking about how they're going to tighten and how they're they're going to, you know, and I had a comment with a gentleman who's the big analyst over Fidelity. And I was asking him, like, hey, what do you think is going to happen here? Do you actually believe that they're going to tighten here? And he's like, yeah, I kind of think that they might. Like, they're going to stick to the course. Even with all this Evergrand and everything else that's

Starting point is 00:38:02 happening in China. So, like, this isn't going to air for another six days or whatever. But the fed's having a meeting on Wednesday. Are they going to come out and just play this this back and forth, like we're dovish today, we're going to tighten tomorrow, or are they going really kind of stick to that narrative that they're going to tighten at this point? I'm just kind of scratching my head thinking, there's no way. So I think there's two questions here. And we've written quite a bit about this over the last couple, couple, three months, which is nominally, yes, I think they're going to tighten. I think they're going to QE taper. And that's going to be the headlines, Fed QE taper. And that's what we're all going to see. And the markets might even

Starting point is 00:38:41 sell off a little bit, maybe the Dow goes down 300 points, people freak out. Now, what's been going on in sort of the fine print over here is, is Fed has already established FIMA swap lines with a number of different foreign creditors. Fed has the reverse repo set up, and we know that balance is going up and up and up and up and up. And Fed's been talking about establishing the standing repo facility for treasuries and mortgage backs, I think open for comments in October. I think they won it launched in November. So I gun to my head, I don't think they announced taper. this week, tomorrow, whenever they're talking, I think they talk that they're going to do it soon. And the point is, is that if you actually taper with this hand, the headlines, while you have a

Starting point is 00:39:25 standing repo facility open for domestic people here and the foreign swap lines for foreigners over here, you're taking away liquidity here in sort of big dollups on the headline numbers. And over here, you're sort of, you know, you're going from, you know, this is the more So the $120 billion a month, you're going to put it in the needle, shoot it in the vein, right? That's going to get whittled down. Maybe they'll only do 100 or maybe they'll not, whatever they, they would they whittle it down by. But over here, what the standing repo facility and the FIMA swap lines combined with the reverse repo program gives them, basically that has put an IV into markets vein. And that's on a drip. That's liquidity drip on sort of an as needed basis. So standing repo facility

Starting point is 00:40:08 sounds really fancy. Anything that is eligible for standing a repo is basically the Fed continuing to buy that on an ad and as needed basis. And so do I think they're going to taper? Yes, I do. Do I think they're actually going to withdraw liquidity? No, I don't. And I think to what end are they doing this? I think this goes back to our initial discussion of credibility. They have, it's on or it's off with debt and deficits and the situation we're in supply chains, they don't have a dial anymore. And so this goes back to my ongoing thing. They're trying to ride two horses with one ass, right? They want to convince the market they're going to flate the debt away, but they want the bond market to not think they're going to inflate the debt away. And they're stuck.

Starting point is 00:40:53 And I think they have credibility issues. And I think they know they have credibility issues. So how do you restore your credibility? You say you're going to taper. You start to actually taper, and everyone's going to pay attention to this headline number. Wow, they actually did it. And everyone that's saying they're going to taper and the market's going to implode is going to be wrong, in my view. And when the market doesn't implode, the Fed can say, see, we told you we could get out of that.

Starting point is 00:41:17 And in the meantime, the standing repo facility, reverse repo facility, and foreign swap lines are IV in whatever liquidity into the system as needed to keep the system. Where would that liquidity be hitting? Like what type of enterprise or what type of security would be? So standing repo domestically is going to be treasuries and mortgage back. So it's just going straight back into the bond market like we've been doing for the last decade. Yeah, because now instead of them, so the process, right, so look at the flows. So this is an oversimplification.

Starting point is 00:41:51 But Treasury spends money, issues bonds, banks buy some of those bonds, Fed prints money, buys those bonds from the banks that creates reserves in the banking, system, right? And that's fine. But then when you get too many reserves, the banks can't lend on that other side. So reverse repo actually sterilizes that process. So that takes reserves off of the bank's balance sheets and allows them to loan elsewhere that creates regulatory cap space. Okay. So reverse repo helps alleviate that. But that's the straight QE program. Standing repo is basically Treasury spends money, issues treasuries to banks. We're not going to buy as many of those. We're tapering QE.

Starting point is 00:42:33 But hey, oh, by the way, if you get tight, just come over here to our standing repo facility and we'll just give you the dollars and we'll repo them back and forth. What's the difference between repoing back and forth as needed over here versus the Fed showing up once a month or once a week and buying, you know, $120 billion a month of treasuries and more dollars are fungible? It doesn't really matter. So from a quantitative standpoint, the numbers all check out, what you're saying, right? From a qualitative standpoint, this is just more obliteration of the middle class that we've seen since the 2008-2009 crisis.

Starting point is 00:43:10 Like, this is not getting the liquidity into the hands of, I mean, you can drive through any town in this country right now. There are very few towns that you can drive through where it does not look like just. total chaos. You got people on the streets begging for money, you got 10 cities. I mean, you got stuff that if you would have showed it to me 10 years ago, I would have said there's no way this is the same country. In these policies, how can they not, I mean, I guess they have to know that these policies are doing this. I think the Fed is, I think they're doing the best they can. And I think ultimately, if you say, Luke, who's really, who's really to blame here? You can only lay this at the feed a one group of people. Who do you laid at the feed at? No question. I laid at the politicians.

Starting point is 00:43:57 I laid at Congress. The spending's driving them to make these things. It's just, yeah, these like the, the, the, the U.S. wrote, you know, if you go back, the issue was in 08, the banks made all these subprime loans and then they laid off all the risk on AIG, right? AIG wrote this policy had no possible way of covering. And the United States government with Medicare, with Medicaid, with Social Security with the Iraq war, with the veterans benefits that are, I mean, we're spending 200 billion a year in veterans benefits. And we should pay every time. But someone should have thought about this, right? That was, that's a premium. All of these things were the sovereign equivalent of AIG writing an insurance policy. It has no capital to cover. The only capital to cover is the

Starting point is 00:44:45 Fed's printing press. And so the political choice is, hey, you don't get your Social Security. You You don't get your veterans benefits and you don't get Medicare, Medicaid, in which case you have a political crisis in this country, or the Fed does all this and tries to sort of sleight of hand to, you know. And so to me, I lay it at the feet of the lack of adult leadership because this in Washington. It's short-term focus in interests that are driving decision-making, not long-term, 10, 20, 30, year. decision-making, right? Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do

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Starting point is 00:49:18 policy with no capital when Social Security, Medicare, Medicaid went upside down. And the 80s were a giant party. The 90s were a giant party. We had surpluses. The Berlin Wall came down. The USSR collapsed. We had this wonderful window. And the leaders that are running the joint now were in power then and they didn't do a thing.

Starting point is 00:49:38 So let's go back to your description of using the repo facilities and how they're going to try to taper. Let's say that the equity market sells off 20% from the top and maybe does it pretty quickly. Do you see them changing course and getting double it? Okay. So what kind of type of percent do you think that's going to take for them to change course and say, oh, well, now we're going to go back to easing again. What kind of correction are we talking here? It's probably in the 15 to 20 percent range.

Starting point is 00:50:11 Maybe it's 10 to 15. Doesn't that just totally demonstrate how insanely an F they are to actually manage any of this? They're screwed if they do it. They screwed if they don't. I think Jim Grant has the best quote about the Fed. What would you do? What was the first thing you would do if you were named Fed governor? He always answers resigned.

Starting point is 00:50:30 I mean, the system has been allowed to evolve to this point that one of the great stats I've heard has been something that Hirschman Capital wrote last summer. which is they look back 220 years. Since 1800, 52 countries have hit 130% debt to GDP. And of those 52 countries, 51, 98% defaulted, typically via high inflation or hyperinflation, if not outright restructure. One country out of the 52, Japan has not yet. And then look at the currency and how dominant

Starting point is 00:51:08 and how much of a network effect that fiat currency has in the global economy. It's massive. It's massive. But everybody says, well, we're Japan. So you've got 220 years. Everyone's like, well, it's never different this time. It's not different this time. We're Japan.

Starting point is 00:51:23 And to me, it's one of these incredible cognitive dissonance, hubrispy, you know, American exceptionalism. Like, no, no, if it's not different this time, you don't get 98% chances in markets very often. There's a 98% chance that we get high slash hyperinflation. of some version as our way out of this. And so, and that's the way you get out of sovereign debt crisis. You inflate the debt away.

Starting point is 00:51:50 But it's challenging because of this. The Fed is, the reason the Fed stuck is, is 98% of the time, you just inflated away. It's also this reserve currency. So it has all, they're trying to not inflate it away while knowing they need to inflate it away. It's trying to ride two horses with one ass. What Bitcoin price would have to happen for the world to start saying, oh, my God, what the hell is this? And especially in the fixed income kind of way where they'd be like, oh, my God,

Starting point is 00:52:19 is this becoming a global settlement layer? What price do you think that that's happening at? It's a great question. So I think the way I would answer at the framework in my mind is I think it would have to be a multiple of gold's market cap before the fixed income people. take it seriously. And so, right? So what's Bitcoin is call it a little less than a trillion now? Yeah. When it's at 50, I think it was like a 50 to 55,000, a coin, it was at about a trillion. Okay. So you're probably 800 billion, gold's whatever it is, 12 trillion. So let's say that 20 trillion number. Yeah. The 20 trillion market cap, so you're 166% of gold, assuming gold doesn't run anymore. What is a $20 trillion divided by $20 million? So you're like, yeah, you're 20x from

Starting point is 00:53:16 where you are now. So you'd be about a million dollars. About a million dollars Bitcoin. Yeah. I think that's probably about right. I would have guessed just saying, hey, it's probably fought, you know, because you've seen guys come out and say $300,000, $400,000 price targets. So I think that would get people going, oh, wow, you know, but I think to really get the bond market and sort of real clap. Because when I put that chart up of, it's a great chart by Dan Oliver at Mermican Capital, you and I've talked about it before. It shows the price of gold in Bimar, Germany, right?

Starting point is 00:53:46 Yeah, yeah, yeah, yeah. And I've commented multiple times that looks like the price of Bitcoin in dollars. Yeah. And sort of a lot of more mainstream practitioners laugh at me, right? Some of the bond guys on Twitter, I'm not going to know, but they've openly mocked me for saying that. So that to me tells you, you probably need. 10, 20 times.

Starting point is 00:54:06 And, you know, then they won't be laughing. And that's going to be too late for them. And it's what makes markets. Hey, so you have a quote. You posted this on Twitter. I love this. You said, economists routinely say debt is deflationary, but most fail to mention that virtually all of the great inflations in modern history have occurred when an insolvent

Starting point is 00:54:27 fiat currency issuing nation has attempted to maintain the nominal solvency of its sovereign debt. What are you getting at? here? So sovereign debt. Sovereign debt can't be allowed to default. I mean, it technically could, but it can't. Politically, the United States cannot default on its debt. And so when you look at a lot of the great high inflations throughout history, it's been when you have a sovereign with the ability to print domestic fiat currency to address its bond market to basically pretend that the bond market is that still, you know, it ties back to the point, the 10,

Starting point is 00:55:05 year treasuries of 1.3%. To pretend that that's actually a real rate, it's going to take more and more money created to pretend that's 1.3%. And we're seeing that with the Fed's balance sheet. So there was a person who responded to you and they said, when does the debt go from depressive to manic? And you said that you love this phrase. I love this phrase. Because what you're getting at is, is are we talking about like something right now today where we've got a 400 basis point spread that does not make any sense fundamentally to somebody that would be looking at this and holding it through the maturity date. When does it turn from like, hey, this is really strange to, oh my God, this is looking

Starting point is 00:55:50 a little scary to just total fear everybody running and screaming their heads off? I think we have a couple more iterations. And it might be as little as one more iteration. And one of the things I'm watching on that is it's an incredible number. And this speaks to why we have the inflation, the CPI inflation that we have and ties back to what we talked about before, which is, I want to make sure I quote the number right. U.S. government transfer payments as a percent of personal consumption expenditures or PCE. So PCE is a very broad category.

Starting point is 00:56:23 It's crap you buy at Walmart, boats, cars, healthcare services, etc. It's like a $16 trillion line item. It's two thirds of the economy. So, U.S. government, it's consumer spending, broad. U.S. government transfer payments, money, the U.S. government is just giving consumers as a percent of U.S. consumer spending, which is two thirds of GDP, recently was 33%. So one third of two thirds of the economy is being given to the consumer by the government. So some of that is countercyclical coming up. out of COVID, but a lot of it isn't.

Starting point is 00:56:59 It's Social Security. It's, it's, it's Medicare. It's right. And so the reason I say we might have another iteration or two is in theory, there's sort of three ways out of this and sort of happy way out of this is we get a big spate of economic productivity, some sort of revolutionary technology or something happens. We all go back to work, whatever. And you get economic productivity, increase.

Starting point is 00:57:27 is you get real GDP growth, a big bump up in real GDP growth. And that can make the numbers work. The debt the GDP falls and they can work down government transfer payments and the deficits as a percent of GDP as a percent of PCE. And that's sort of the happy ending. It's inflationary, but that's sort of good inflationary. You know, it's, that's good. If we don't do that, then the other two options are option number one is sort of, I think, they try to work down, you know, they try to work down government transfer payments as a percent of PCE. The economy promptly goes into a recession if we don't get that pickup in productivity. Economy goes into recession with debt this high, then either you get a collapse in assets

Starting point is 00:58:13 with a rise in treasury yields like we saw start to happen in March of 2020. That's a fiscal crisis and we spiral, you know, either the Fed steps up and buys, whatever they have to buy, or we see asset prices, you know, you see. a balance of payments crisis in the United States. Asset prices falling toward zero yields rising sharply until the Fed stops that. And so my question is, is I think I'm still not seeing the productivity enhancement that drives real GDP growth. So if we set aside that doesn't happen, to answer your question, when do we get the holy

Starting point is 00:58:49 crap moment of, oh, God, this is never stopping is I think it's probably the next time they try to pull back the stimulus, and then the fed's got to go from whatever, $8 trillion to $16 or $20 trillion on the balance sheet to sort of restabilize things. And if it's not then, then I think it's highly likely the next iteration after that. So I think they have at most two iterations and maybe as few as one iteration. But I don't think it's a broad psychological phenomenon. I think there's a growing recognition that something's not right. But I don't think that it's going to be like, yeah, it'll be quick. What induces that, Luke?

Starting point is 00:59:25 Is it going to be just them trying to tighten or do something and they just kind of get behind the power curve of trying to do too much and it just turns into contagion? So like, for example, let's say they're going to try to tighten here in the coming months. They just let it kind of get too far out of hand. It's down 20 percent. And the next morning it wakes up and it's down almost like a 1980s scenario where it was down 40 percent in a day. And if that plays out, I mean, they're coming to the table and they're coming to the

Starting point is 00:59:53 but probably double whatever they did during the COVID drop, right? I think that's right. I think it's ultimately just that mismanagement. And then to me, it's within that. And then it probably also has to be a broader recognition amongst professionals exactly how far gone the fiscal situation has been left post-COVID. So, you know, when I tell people, look, if you look at the U.S. government's true, what I would call their true interest expense, which is just treasury spending,

Starting point is 01:00:27 which is like interest and then whatever they're doing with COVID and stuff still, which blew up treasury spending, which I include because if you take it away, GDP is going to fall and that creates problem, right? So treasury spending plus entitlements, just to pay as you go portion of entitlements, which is just the sort of annual interest, if you will, to float the $100 trillion plus in entitlements. Those two numbers in the latest Treasury borrowing advisory committee report, are 111% of tax receipts with tax receipts at all time highs, with an everything silly, ludicrous bubble in everything. And it's totally nuts.

Starting point is 01:01:04 And it's totally nuts. It's totally irrecoverable, right? You're in the sort of the goose and Maverick flat spin. Like, it's not. And it's just not the U.S., right? I mean, you're seeing a similar dynamic playing out. You name it country. This is the same scenario for every other country in the world, right?

Starting point is 01:01:20 It is to varying degrees. It depends. Nobody else needs as much foreign capital as we do because we were the sponsors of the system, right? We ran deficits. And so everybody else has the same, particularly in the West, the entitlement problems. They don't have as bad a capital importing problem as we do. Now, paradoxically, the Fed has stepped up and filled that gap. That's what they're doing is basically, you know, foreign creditors, I've either. stopped because they don't want to or because they can't because they have some of their own problem in the same way, they need to keep that capital home. The Fed has filled that gap. If the Fed stops filling that gap to tie in with our earlier discussion, paradoxically, what's going to happen is the dollar's not going to collapse, is the dollar's going to skyrocket because now the U.S. government's going to steal. That's sort of the milkshake. The U.S. will steal dollar liquidity from the rest of the world. The rest of the world will collapse and then we'll collapse after them. But it's, I think to answer the original question, I get the,

Starting point is 01:02:20 a distinct sense still that amongst policymakers, this flat spin is recoverable. And the only way it is recoverable is with sort of like the equivalent of like a rollout of something, some revolutionary productivity enhancing technology in line with like nuclear fusion, portable in our backyard like in within a year, two years, right? Like it's you need something. It's like a leap forward in productivity. So maybe they're working on it. I'm fingers. crossed, but... So we need magic. We need magic.

Starting point is 01:02:56 And if we don't get magic, I think really, that's the thing you can't measure. Like, I think the thing you can say, okay, when is there a greater recognition that they're never getting out of this without that productivity enhancer? It could be an event, right? Of, hey, they tried to pull back. It didn't work. The balance sheet went from $8 trillion to $20 trillion for the Fed in nine months. That could be part of it.

Starting point is 01:03:17 But there's also, I think, and this is the... the scarier part of it or the more unknowable part is when sort of the hundredth monkey in and sort of, you know, realizes this is an irrecoverable flat spin. When you look at the finances of the U.S., of the West more broadly, they're not getting out of this. They're not different than the other 98% of people that have been in this position over the last 220 years. That's when it can happen like that.

Starting point is 01:03:45 When you talk to people like Simon McIlovich, right? It's just, it's like a thief in the night. Boom. that you wake up and all of a sudden, you know, it's, it's the common knowledge game, right? Epsilon theory, Ben Hunt does so well, right? It was like everybody in Hollywood knew about Harvey Weinstein and no one did a damn thing. And then all of a sudden, one day everyone woke up and everyone was like, oh, he's bad. And it's same kind of thing here. It's like, well, everyone's going to know. And one day we're all going to wake up and that's going to be that.

Starting point is 01:04:13 How did we live through such a crazy time? What are your thoughts? on Gary Ginsler and all the things that he's talking about with respect to digital assets. I had a tweet up today, and I actually took it out. I don't delete a lot of tweets. I deleted one after about two minutes simply because I read the article, and I thought he was including Bitcoin in there, and Plan B pointed out that he is not lumping Bitcoin in with sort of everything else. So I wanted to give him the benefit of the doubt, him being Gensler. Were you taking a shot at Bitcoin, Luke? No, I didn't see this. No, I was thinking of No, the tweet that I had up was something that basically, you know, I was lumping, I was assuming he was taking a shot at Bitcoin. And so I was saying, you know, and you know what they say happens when you assume. So that was, I was assuming he was taking a shot at Bitcoin. And my tweet was just that, listen, he's, he's coming down on Bitcoin. And the Chinese Communist Party has come down on Bitcoin. And if it doesn't make sense to you that the head of the SEC and the Chinese Communist Party are aligned on Bitcoin, you're not the only

Starting point is 01:05:17 want, right? Like, someone explained that to me. His big thing is on the stable coins. He's actually, I think he has a Bitcoin position. I think he's had a Bitcoin position ever since he was teaching it at MIT. Yeah, and Plan B said that, that not so much being had that position, but that he has, he's on the record as saying that it is a store of value asset or what have you. So that, that, that makes more sense. And so, yeah, that's why I took that down. So it's, I, I would defer to Caitlin long on the stable coin stuff. I think she would tell you that he's probably on to something with some of these stable coins in terms of...

Starting point is 01:05:54 I think he's looking at organizations like hers where she's trying to stand up Avanti. She wants to have a stable coin. And it's mostly for clearing reasons so that she can immediately clear and keep pace with the new digital age and the store of value that Bitcoin provides. And so I think from Gensler's point of view, he's looking at all of this. I mean, how many, there's 10,000 tokens or whatever listed on various exchanges on coin market cap or whatever. And I think Gensler is looking at it and he's just like, this is insane.

Starting point is 01:06:29 And this needs to be, this needs to be controlled. And I'm not saying my opinion, this is, as far as I'm concerned, let it be a free and open market. If people go in there and they get hosed, well, I guess they're going to learn a lesson, right? That's kind of, I'm, I'm like free markets through and through, like stop the manipulation. That's why we're where we're at right now. But anyway, I think Ginsler's point of view is that the stable coins, because they're going to be touching the U.S. Fed and all these other fiat currencies, needs to be regulated, especially some of these ones that are 50 billion in market cap or whatever they are.

Starting point is 01:07:04 He's looking at that and saying, this is crazy that there's really no regulatory body overseeing these things. And I think that's where he's coming from, especially when you get into. Caitlin does such a great job talking about the clearing side of things where some of these banks, they might have these things and the way that they're having to capitalize themselves. They're doing, they basically adjust the books at the end of every day. And they're dealing with this thing that's clearing in some cases on a minute-to-minute basis. And so if you're a bank and you're thinking that you're meeting certain capital requirements

Starting point is 01:07:38 by having enough capital and reserves, and you're not expecting to adjudicate that until the end of the day. And meanwhile, you have these tokens that are swapping in and out and all over the place. What should the capital requirements be for something that can be exchanged that fast, especially when you have all these other things on your books that are clearing so much slower? And I think that's where Ginsler is looking at and saying, if we don't do something about this soon, because this market's exploding in size. this stable coin space.

Starting point is 01:08:10 We need to do something about this now. And it's just, it's wild. And then I'm sure you saw the whole Coinbase thing with where Coinbase is trying to work with the SEC and the SEC's like, no, we're just going to, we're just going to sue you and we're not going to provide guidance as to what

Starting point is 01:08:25 we're looking for. I saw some headlines that I didn't have a chance to really, you know, it's like, yeah, it's wild. Hey, um,

Starting point is 01:08:32 so when we look at all this stuff that's happening, the thing that most people are thinking is, okay, so Luke, Where do I position myself? Obviously, you like Bitcoin, you like gold, but like what other sectors or what other things are you looking at right now based on the insanity that a person can position themselves in their portfolio that you would recommend? Another theme that we've been writing a lot about over the last really, you know, almost a

Starting point is 01:08:58 year now has been, I think peak cheap oil has returned as a theme. And peak cheap oil is not to say that we're running out of oil, but we're running out of cheap oil. We've run out of cheap oil. And if you look at, for example, X. US shale, world has really not grown global oil production in almost 10, 12 years in any real way while demand has risen a bunch. And that's relevant because when you look at what shale has done, they've effectively high-graded a lot of their reserves, which is to say they did what any smart price private business, capital, you know, capitalistic business was due, which is because of the unique

Starting point is 01:09:43 aspects of that business has very high depletion rates. You produce a bunch up front in the first three months and then it tails off very fast and then has a long, flat tail on it. But the point is that they produced all their best locations first, all their A locations, they went to, they drilled it. And those of all, they, they knew where a lot of this stuff was. And they went to it and they did. And then they went to the B locations, C locations. And some of that, the high grading had to do with the cyclicality of the business who went to these vicious cycles in 14 and again in in 20, excuse me, 15, 16 and then in 20. And some of it's just the geology of it. The point is, is that between the geology and how they high graded this because of the business cycle,

Starting point is 01:10:22 there doesn't look like there's a lot of more, you know, there's not another 15 million barrels a day of shale coming online, like there has been over the last 10, 15 years. And so maybe there is elsewhere, but there's going to need to be a price impulse there to drive it. And at the same time, something I've noticed that has been really, really interesting to me has been this sudden desire by global automakers. Audi, GM, Mercedes-Benz, I think Nissan, among others. Audi was the one that really first caught our attention by saying we want to have, I think they're saying, all-electric by 2026. And Mercedes is going to be mostly electric by then. The GM's going to have 30 electric cars by, I think, 2025 or 2028.

Starting point is 01:11:10 And this struck me as odd because these auto companies tend to be very big political, slow-moving organizations. And no disrespect, they have brilliant engineers and they put out great product. I drive some of their products. I love them. With that set, they tend to be slow-moving, big political organizations. They have supply chains that stretch around the world to support internal combustion engines. My understanding is that the electric vehicle market is basically an entirely different supply chain than internal combustion engines.

Starting point is 01:11:39 It's not just sort of like, hey, you know, send the trucks here instead of here that day and it's in an anyway, no, it's totally different. Where I'm going with this is companies like this that tend have historically been big and slow moving that have made in the case of GM all their money or most of their money in big gas guzzling trucks, deciding to make what is a monumental shift of their supply chains in a very compressed period of time. We're talking about five years to a completely new supply chain. And why are they doing this? And so to me, there's two most reasonable explanations. Option number one is these executives have decided to basically wager 100 plus year old companies, literally wager the company on a virtue signaling exercise around climate change, now just out of the blue. Or option number two is that these are nationally tied in companies.

Starting point is 01:12:39 Audi's owned by Volkswagen. They're the biggest corporation in Germany. They are the biggest employer in Germany. And the German military in 2010 said, peak oil will probably be here by 2013 and it will begin to impact the economy by about 2026, which happens to be the same year that Audi and Mercedes, another big German automaker, are both set as their target date to basically go all electric. So option number one is these big gigantic global automakers have decided to wager 100-year-old companies in supply chains on a virtue signal exercise.

Starting point is 01:13:12 And option number two is these big global national companies have been tapped on the shoulders by their national security apparatus, as in Tolla said, there is an acute fossil fuel supply demand imbalance coming circa 2025, 2025, 2026, 2027, and you need to move your supply chains fast. Go. And to me, the virtue signaling exercise doesn't hold water. Yeah, I'm with you. Do you have friends that kind of buy into the second narrative there?

Starting point is 01:13:44 I'm with you 100%. Yes. Yeah, they absolutely buy into. the narrative. And I've talked to people in the energy business, manufacturing business. I've not said anybody that said, no, Luke, it's just a virtue signaling exercise. I think it's, it's been unanimous that there's a fossil fuel supply demand issue. You can go back to Matt Simmons' work in 05 with Twilight in the Desert and some of the things he wrote about. You can look at the, you know, the the the Perito principle, the 80-20 rule holding for global oil supplies, where if you

Starting point is 01:14:15 look, it's stunning when you really start digging into it. Like 100 fields produce like 30 or 40% of the world's oil and like they're all 50 years older, right? So it all sort of adds up. And at any rate, where I go with all this by way of background in terms of a theme is twofold. Number one, the peak cheap oil thing I let off with. But then number two, anything electric vehicle supply chain from a commodity standpoint, metal standpoint, I think that sector, I think probably has a very powerful tailwinds coming as matters of national security for multiple countries for probably at least the next several years. Luke, we could talk all night. This is how these conversations always end. We could talk all night. But thanks for coming on the show. I want to highlight your book,

Starting point is 01:15:03 you got two of them with the Mr. X interviews are fantastic. If you're listening to Luke and you're saying, how does this guy know so much breadth? I would tell you, having read his books, I just had a much deeper appreciation, and it helped me understand Luke himself and kind of the way he processes information from a macro standpoint through those books. So I can't promote the books highly enough. I love those, the books that you put out there, Luke. And give people a handoff if they want to learn more about you. Give them a handoff where they're a handoff where they can learn more. Absolutely. Yeah, they can check us out. Our website's F F-F-T-T-L-C.com. You can noodle around on there, find out what we're up to. Also, our different product offerings,

Starting point is 01:15:50 retail and institutional investors. And then I have a pretty active Twitter feed at at Luke Grom and L-U-K-E-G-R-O-M-E-N. I think I spelled my name right. It's all one word on Twitter. And he's always deleting tweets whenever I'm up there. Just kidding. Just kidding. Luke, thank you so much for coming on the show. It's always a pleasure to have you. Thanks, I'm pressing. I always enjoy talking. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires. The Bitcoin-specific shows come out every Wednesday, and I'd love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can

Starting point is 01:16:34 leave a review, we would really appreciate that. And it's something that helps others find the interview in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening. And I'll catch you again next week. Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - BTC045: Luke Gromen on China, Evergrande, Macro, & Bitcoin

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