We Study Billionaires - The Investor’s Podcast Network - BTC101: 4th Quarter Macro Overview w/ Luke Gromen (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. On today's show, we have macro expert Luke Groman back on the show to talk about his thoughts on the current global situation in the fourth quarter of 2022. Luke and I cover a whole host of topics like the recent U.S. chip manufacturing decision that prevents U.S. employees from working in China, the Fed potentially being weaponized against Russia and China, his thoughts on the energy sector, loss of liquidity in the U.S. Treasury, market, 7% 30-year fixed rate mortgage interest rates and what that might mean for the real estate

Starting point is 00:00:35 market and much, much more. You will not want to miss this conversation. So without further delay, here's my chat with Luke. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey everyone, welcome to the show. Like I said in the introduction, I'm back here with Luke Gromman. Welcome back to the show. That's great to be back, Preston. Thanks for having me back on. Yeah, such a pleasure, man.

Starting point is 00:01:14 I really look forward to these chats. I know we chat from time to time here and there, but to get a full hour of your time is exciting for me. Let's start off with chip manufacturing. So you wrote about this last week. This seems like a really big deal. The specific word that sticks out in my head is the word decapitation when describing this, I mean, this is as new as last week. So walk us through what this is. I bet you there's a lot of people that don't even, are even aware of this. So give us the background and then give us

Starting point is 00:01:49 your two cents on what's going on. Yeah, so it caught me by surprise as well. Someone pointed it out to me and I apologize for forgetting who that was, it pointed out. But the second I wrote it, or the second I read it, excuse me, it immediately hit me as a really big deal. And there was a thread on Twitter last week by I think a gentleman named John Schneider, perhaps. But the point of the sanctions are that the Biden administration is actually up the sanctions on Chinese semiconductor manufacturing the Chinese semiconductor industry. My understanding is it's the mid and higher level type stuff. And I'm not the right guy to talk to on that sort of the nitty gritty of that. But the punchline is the thing that really made me drop my jaw when I read it, it is demanding,

Starting point is 00:02:31 I believe as of Friday of this week, the 21st of October, if you are an American citizen and you are working in the Chinese semiconductor industry, I don't know if it is the entire industry, or just these mid-high-level chips, AI, et cetera, type-related stuff that can also be used in defense industries. If you're an American citizen and you're working in the Chinese semiconductor industry in these areas or abroad, I don't know, but you have a choice. You either continue working there, in which case you must give up your American citizenship, or you must resign, I believe, by this Friday. And so it's apparently reportedly leading to a mass exodus of American brainpower and talent, engineering talent, out of the Chinese semiconductor industry at these mid and high

Starting point is 00:03:17 level. There's a bunch of other sanctions. You can find stuff about it. CsIS has a really good article about it. It's working on redirecting some of the high-end chip manufacturer chip machines made by ASML and some of the others away from China. And it's the articles, one article in the FT says it quoting an analyst, it's it basically puts China back to the Stone Age. The Twitter thread that you reference refers to as a decapitation of effective immediately of the mid and high-end Chinese semiconductor industry. The bottom line is to me it's a really big deal. To me, it is, to me, it is reminiscent in some ways of the United States embargoing Japanese oil industry or oil imports in the summer of 1941 where it's a big, I think it's a very big deal. I think it's an

Starting point is 00:04:06 escalation. It's an escalation or it's a retaliation for something we don't know about yet, but we're about to find out. It's kind of how I'm thinking about it. And I don't know which it is, but either way, I think it's a really big deal. Yeah, the thread that I saw that you're alluding to was just like, this is a really big deal for people that are close to the matter and kind of understand it. It seems to be such a new event that I don't think people are really understanding the repercussions fully as to what it might mean. But I mean, what a snap decision. Typically something like that would have months of lead time for people to make decisions and whatnot. But this was like literally the snap of a finger, hey, you got until next week to figure out

Starting point is 00:04:49 what the heck you're going to do. And wow. we'll obviously keep an eye on that one. One of the most questions that I got when I, you know, threw it out on Twitter that I was going to be talking with you today, people really wanted to hear more about this idea that you recently alluded to that the Fed is potentially being weaponized against Russia, China, maybe even Saudi Arabia. Explain this idea for people, like really kind of get into the granularity of what you're hitting at here. And you seem to suggest that this is your base case at this point that it's being weaponized. So explain what you mean by this. Sure. So back, you go back in time to last year and when the Fed started talking about raising rates and,

Starting point is 00:05:36 you know, even going back to before the election of 2020, we said, look, there's sort of a grid of four outcomes. You know, Treasury spends enough. Treasury doesn't spend enough. Fed monetizes enough. Fed doesn't monetize enough. And as you ran through those four grids or outcomes, basically, unless you stayed in the grid of treasury spends enough, Fed monetizes enough, you're going to get a weak dollar and you're going to continue to get sort of economic growth. And you're going to get 2021, you know, 11% nominal GDP with 8% CPI. Everything goes up. Everyone, you know, party on Wayne, party on Garz. If you're in any of the other three areas, you're going to get strong dollar, the U.S. government is going to start crowding out global dollar markets. You're going to

Starting point is 00:06:19 see dollar up, rates up, everything break. And that's what we've seen. And so when we came into this year earlier this year, we started to see that happen. Back in April, I wrote a report, I think it was April 27th. The title of the report was why we think the Fed will pause with, we'll stop right, We think the Fed will stop hiking rates by the end of 3Q22. So September 30th, 2020, at that point in time, that was far off out in terms of the reservation, in terms of the, you know, Overton's window of discussion of when the Fed was going to stop. And the reason we wrote that was tied back to that point, that grid of they're now doing things that are going to start breaking stuff.

Starting point is 00:07:04 They needed to let inflation run hot for a lot longer than one year to get debt to GDP, down to 70 to 80% from 125%. And if they tried to tighten too soon, they were going to break things. So you were going to see this dollar up, rates up until things start falling apart. They started tightening. They had not gotten debt to GDP down.

Starting point is 00:07:25 And so our view was that you were going to see, my best guesstimate back in April was that by the end of September, we were going to be seeing enough treasury market dysfunction that they were going to get pulled back in. And I was looking at it strictly in an, economic sense at that point. And I would say all things considered pretty accurate. I mean, the U.S. Treasury Secretary last week said she's concerned about illiquity in

Starting point is 00:07:51 treasury market. We've seen the guilt market have issues, et cetera. So from a purely economic standpoint, not bad. However, if you would have asked me in April, Luke, what are the odds that what the Fed is doing is not purely about fighting inflation or if it is about fighting inflation, that's actually code for we need to break oil, we need to break Russia, we need to break the world, to break oil demand, to break Russia. I would have assigned a 5% chance to that maybe. Maybe that's a tail risk. What has proceeded with sort of each passing months, and in particular, after August,

Starting point is 00:08:29 where we saw inflation expectations roll over, where we saw oil rollover, where we saw the treasury market, the guilt market, debt markets, the mortgage market, all these markets that the Fed has quickly jumped in to reverse themselves, you know, the data get weaker. The Fed has quickly jumped in with almost have lovian response to, with more liquidity in the post-GFC era. Ever since 08, they hopped to it and they start fixing these things. And I couldn't help but notice they're not jumping in to fix it. And people say, well, it's just inflation. Well, inflation, well, inflation expectations are rolling. You can see the inflation data when you extend it out, and the comp start to get easier. The base effect goes away. You can have some idea what

Starting point is 00:09:16 their preferred metrics are going to be, and it's coming down fast. And so the more they didn't respond the way they had for the prior 14 years to these things starting to break in the way they are, the more in my own mind, I was thinking, well, maybe it's not a 5% chance there. This is about weaponizing the dollar against oil and against Russia. Maybe it's 10. Maybe it's 20. And then really post August where, again, you saw this rollover in inflation expectations. You saw this rollover in the data. You saw the rollover in oil. You sort of saw all these boxes that you could check to say, okay. And they said, no, we're going to do another 75. That's when it really, I would say, if there was a chart showing Luke's estimate of what the Fed is really doing is being weaponized

Starting point is 00:10:06 against Russia, it would have gone, you know, maybe at that point it's up to 10, 15%, 25% chance. I think what 30, 40, 50. And I think now we're really at this level where it is my base case. I think it's 50, 60, 70% shot. I think that that's what's going on here. because in my view, when you see things breaking the way they're breaking in foreign sovereigns, it's only a matter of time until it comes back. When you see the Treasury Market acting the way it is, these are things they would respond to in the past, and they simply haven't. And so that's why, to me, I think it's a, I think there's a real shot that the pivot

Starting point is 00:10:43 ain't common because, yes, they did break things the way they did. They broke on my time horizon. But what I thought was a 5% chance that they were being weaponized against Russia. that might be way higher. I don't know that the weaponization of it is how I particular see it. Let me kind of explain my vantage point. So I'm just looking at it. And the inflation prints that just keep coming in here in the U.S.

Starting point is 00:11:09 over in Europe, I mean, it's relentless. Like they haven't seen any type of move down that is showing any type of outside of the standard volatility that got us to where we're at, that a top has been. been put in on inflation. And I think when they're looking at all the factors that are at play, they know that if they reverse course without any type of indication that they've broken through that volatility range that brought us to where we're at, that if they step into the market and start more QE and start printing more, I just can't even imagine what that would do to the bond market. Like, it would just be an unbelievable sell-off of epic proportionate.

Starting point is 00:11:53 Because anybody sitting on a bond desk today would look at that and say, my God, we're at 8% or if you're over in Europe, we're at 10% plus inflation. And they just started printing more. Right. Like it's, and I think, I do think that these central bankers have an appreciation for how close to the endgame they are, if not in the end game, that they know this, this is it. They have to do something to break inflation to hopefully be able to go back to QE as it's kind of on its way down and kind of make the whole thing look like it was under control the whole time, right? And so I don't see any of that being quote unquote weaponized.

Starting point is 00:12:40 I see that as they're so desperate, insanely desperate to create some sort of deflation and tame these inflationary prints down so that they can. can get to the next thing, which is more QE, which we all know where that leads in the long run. But I just don't know if I, I just don't know if I buy that they're doing it in a manner to, to battle Russia. I think they're just in a, I think they're in a battle to, to save their own relevance. Like, you, you see all these headlines with Powell, right, and how he's, he's going to be the Volcker that's going to save everything, right? Like, it almost seems like it's much simpler than that. Would you agree or do you think that I'm simplifying? I don't understand the

Starting point is 00:13:28 complexity. You know, when you, to me, I think there is an element of defense of what I would call de-dollarization of global energy markets where you've seen China continue to buy Russian energy in their own currency. You continue to see India talk about buying oil in their own currency. some of it could I guess just be the, I'm going to try to be gentle. I really like when you come back to it and say, all right, well, we need to what's driving the inflation in Europe? It's all energy. It's energy and money printing.

Starting point is 00:14:04 And. Which at the heart of it, Luke, is all fiscal related and just really bad strategic energy policies for decades, right? Like the fact that they, that they have been consuming way in excess of the tax receipts and the fact that they had these idiotic policies as with respect to energy is what has put them there. And now they're they're begging the central banks to just, you know, save them, save them from their decisions that brought them to this point. So if we're like looking at the core, that's the core, right? Or is there something even further upstream than that, do you think?

Starting point is 00:14:39 Well, I think as core, the other thing I would say that has really changed my view toward the weaponization has been everything that has happened in the weaponization of the Fed and these rate hikes has been the escalations we've seen in what I would call economic war in the last two, three weeks, right? So Fed's doing what they're doing. They're fighting inflation. It's the wrong thing to do. If you want to get inflation down is driven by energy, you need to spend more. You need to incent more production. You need to do the exact opposite. So they're doing they're doing the wrong thing, really. When you think about it from that point, they're doing the wrong. thing. The U.S. shale industry is interest rate sensitive. If you want to get oil prices down

Starting point is 00:15:19 and fight Russia, the last thing you should be doing is raising interest rates. A little bit of a separate discussion. Not to even mention the capping of the of the prices, right? Yeah, so. It's totally so. But I think when I, the part of the evolution of this weaponization thought process, when I look at whoever blew up the Nord Stream pipelines, that sabotage. That caught my attention. That was a burning the boats moment for

Starting point is 00:15:49 Europe. And I can make a credible case that NATO aligned people did it. I can make a credible case that the Russians did it. I can make a credible case. The Ukrainians did it. In the end, it doesn't really matter who did it. It's a huge that there's, that to me was a

Starting point is 00:16:05 signal that there's a warfare component. That was signal number one. Signal number two was sanctioning the surprising aggressiveness of these Chinese sanctions. To your point, that was like a bomb and it was not messing around. You work for them. You were no longer an American citizen. I was like, whoa. So do I see that?

Starting point is 00:16:30 And then I see OPEC cut production the way they did. And then I see the American response the way they did. where you have high level national security congresspeople talking about passing the NOPEC Act, talking about changing the relationship between the U.S. and Saudi that has been in place for 80 years, that to me, when I put all those things together, when I layer that onto the rate, that's where I would say between the change and the, because with what was happening in markets, yeah, the core CPI number still, but you can see where it's, And maybe it's just dogma.

Starting point is 00:17:10 Maybe they're just idiots. It's entirely possible. It's, it's probably, you know, what's the phrase? You know, don't ascribe to motive, what you can ascribe to stupidity. You just solved it. You just solved it. Right. But it's these other things overlaid on top of it, these economic war and aspects that I

Starting point is 00:17:30 think when I look at it. And then someone's just a little bit of a sort of a, you know, a feel, right? of like, hey, we got to get oil down to beat Putin. We got to, you know, he's weaponizing oil. He's weaponizing oil. He's weaponizing oil. Well, what can we do? Weaponize a dollar.

Starting point is 00:17:45 Weaponize a dollar. Weaponize a dollar. How do you weaponize the dollar? You raise rates. We have a choice. What's that? It's been the weapon of choice. It's been the weapon of choice.

Starting point is 00:17:53 And, you know, the gambit was we're going to raise rates and we're going to knock down oil and we're going to break the world and everyone's going to buy treasuries. And we're going to hyperinflate the ruble. And, you know, They didn't hyperinflate the ruble. The ruble was defended effectively because Russians knew it was coming because we've done it over and over. And they had the ability to do that. And objectively, the oil market is where it was in February and the treasury market's gotten hammered.

Starting point is 00:18:21 And so, like, it hasn't worked relative to expectations. And I think that's part of it, too, where when you are an empire and you're used to running this playbook and you run it and it blows up your face, the oil market didn't blow up, the treasury market blew up. I think there is an element of, okay, well, we're in for a penny, we're in for a pound, right? We're getting overrun, bomb inside the wire, weaponize it. Like, like, just keep going. Just keep going. Just keep going. You know, so it's, that's, that's really the genesis of it. It's just watching them, watching them not react to some of the sovereign markets combined with the, you know, the economic warfare things that have happened in the last three weeks.

Starting point is 00:19:09 So we'll say it. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering a new year.

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Starting point is 00:23:24 We've seen the natural gas prices come down. But the one that's kind of interesting is the diesel prices. I was with my son driving in the car just the other day, and I looked out, and the disparity between gas prices and diesel prices are enormous here, at least where I live. It almost seems like there's a refinery bottleneck or something that's going on on the diesel side, and when we think about the cost of everything being super dependent on diesel, whether it's tractors, tractor trailers, any type of large industrial manufacturing type thing that requires diesel fuel. This seems like it's a big deal. And it doesn't seem like the SPR, I mean, they are

Starting point is 00:24:10 aggressively going after the release of the SPR. It doesn't seem like that's necessarily controlling lever on diesel prices. So I don't know if you're an expert in this, but what are some of your thoughts on that and also thoughts on the SPR. Strategic Petroleum Reserve. Yeah, yeah, yeah, sure, sure. So I think it is a refinery issue. I would defer to other people. I did see today the U.S. is down, I think, to a 25-day supply of diesel, which is, that's crazy. If it's me and I know that grocery stores take delivery from diesel-fueled trucks and grocery stores only have three days of food, best case in good times at normal throughput rates, you're not. You're just, you're You're not the scary yet, but you can see scary from here in terms of the implications.

Starting point is 00:24:55 So when you, and like I said, I think it's a refinery issue, but I'm not the right person to talk to on all those logistics. When you marry that with the SPR, when you marry that with an article from two days ago that I think was in the journal, that New England is looking at possible shortages of natural gas this winter, so they'll have to shut down. It starts setting up for very interesting and very contra-narrative. outcome, right? If we're looking at what has transpired this year, it is ultimately a battle between energy and Western sovereign debt, which is the real value here. And Putin says it's energy and the

Starting point is 00:25:35 West says it's sovereign debt, the U.S. in particular, the treasuries, treasuries, treasures. Putin, six months ago, had no leverage. Everyone told me had no leverage. Even today, I can't get on any Twitter mainstream website. And all I get is how bad Russia is get. their ass kicked. And maybe they are on the battlefield. I don't know. Yeah. But I also know at U.S. diesel limitatories are at all-time lows. I know one of the most populous regions of the United States are looking at much more expensive gas because they need to compete with the Europeans for natural gas on global LNG markets, and they might not be able to get enough. And I can see this SPR. We did a chart, I may have sent it to you, in terms of just if we think about markets

Starting point is 00:26:21 tell us what's happening, right? If this is a battle between energy and Western sovereign debt, right? This Bretton Woods three concept that Zoltan Pozar talked about, does some people agree with? Some people don't. This, what's the primacy? What's the, what's the king? Is it king treasury or king oil?

Starting point is 00:26:40 Is it king energy? And we did a chart that shows UK guilt, you know, inverted UK guilt yields, inverted 10-year U.S. treasury yields, just for effect, not, you know, you could do the price, but it's just for effect. The US SPR inventories and the price of oil. And that's our scoreboard. Who's winning, right? You can, we can talk of who's winning.

Starting point is 00:27:01 Who's winning? And the answer is energy's winning. Guilts have gotten killed. Treasuries have gotten killed. Oil is basically flat from the day they invaded. It's up a little bit. And that's what the U.S. having run its SPR down to the lowest levels in 40, 40 years. And that can't be run down to zero.

Starting point is 00:27:21 I don't know how much further it can be run down, but it can't be run down to zero because no one knows at the bottom is at the bottom of these giant salt caverns. It's likely sludge of some description and probably unusable. And no one knows how far up the sludge goes. So when you talk about the diesel thing, we talk with the natural gas thing, I look at it from two things. Number one, again, setting the battlefield stuff aside, the economic stuff is not going well. We're not winning. that the sovereign debt side is not winning. Energy is winning, number one, which suggests the policy response shouldn't be, you know,

Starting point is 00:27:56 Biden getting angry and talking about, you know, the refiners cutting prices. It should be industrial policy, fed funded, print the money, and build the infrastructure and screw inflation. Let it go. Who cares? Screw the bondholders. That's not been the response. The second derivative thought is, I feel bad for you.

Starting point is 00:28:17 Europe because these European leaders, especially the Atlantis' ones, I kind of shake my head. And I think they must have never read American history because how do they think this is going to go? Do they really think that with the Northeast running tight on LNG and with the U.S. running tight on diesel, we've already heard it floated out. Well, we're not going to do the export ban. We're not going to do the export ban. Why do you think that's being floated out? Has it dawned on Europe yet?

Starting point is 00:28:45 Why that's being floated out? Let's be foot up because that's what we're going to do this winter. Yeah. Push comes to shove. Like, go back, read the books about 1971. It's our currency. It's your problem. It's our energy.

Starting point is 00:28:55 It's your problem. You're cold? Sorry, you made a bad choice. And that's harsh. And to me, it has huge implications for the euro. It has huge implications for the pound. Has huge implications for markets. Because, look, I mean, yeah, is it going to send the dollar up if we do that?

Starting point is 00:29:11 Absolutely it is. Is that going to be good for markets? No. Is it going to be good for the treasury market? No. Is it going to be good for energy? Yes. And so we're sort of, until we get some adults in the room and say, listen, if we want sovereign debt to win against energy, we need to kill sovereign debt, period, paradoxically. We need an adult to come out and say, all right, we're going to print $2 trillion this year. And yeah, we're going to do the $50. It's not $50 billion for semiconductors.

Starting point is 00:29:39 It's $500 billion for semiconductors. And the Fed's monetizing it all at 2%. And it's a trillion and five for energy, infrastructure, E&P, all of it, and we're printing it all. Fed's going to print it all. That's what has to happen here. And then you're not even talking about the lag of implementing all that. It takes a long time. Oh, my gosh.

Starting point is 00:30:01 This needed to happen five years ago. Yeah. 10 years ago. Yes. Yeah. I mean, you're years from that even becoming operable. You got a quote that you recently posted in your newsletter that I found really helpful to what you were just talking about.

Starting point is 00:30:17 This was from Credit Swiss, Zoltan, instead of a Volker moment, we got a Putin moment, and we basically have war, and out of this war, something will also emerge. Out of this, I think Bretton Woods 3, that I started to kind of develop and run with, is a world where we are, again,

Starting point is 00:30:33 going to go back to a commodity-backed money, where gold, once again, is going to play a big role, and not just gold, but I think all forms of commodities. And so you're making the strong case, for energy, whether it's LNG, whether it's just net gas that's not been liquefied, oil, diesel, you name it. Well, it goes back to a point, you know, we've, you know, my, my and Brent Johns is,

Starting point is 00:31:01 Brent Johnson's famous interactions on the dollar. And I'm sure you can Google search and find me saying at some point in last two years, like, yeah, could the dollar go to 160 or 200? Absolutely. And the ironic thing is, is there will be gas shortages. You will be waiting in your car in a gasoline shortage. And I remember people on Twitter going, how could that be? And yet here we are with the DXY at 113 as we talk.

Starting point is 00:31:24 And we're talking about the Northeast running out of natural gas. And we're talking about diesel down to 25 days. And that's with Dixie at 113. At 150? Are you kidding me? I don't think people have thought through what that implies. Like, yeah, the dollar's going to be strong. And you're going to need a shotgun to sit in your car with you while you pump your gas

Starting point is 00:31:43 if the gas is delivered that day. Holy moly. So let's go to the next number five. All I have listed is the most powerful buyers in U.S. Treasuries are bailing all at once. And that's all I wrote. So take it away, Luke. Yeah, there was a great, it was a, you know, it's something we've been talking about for a while, which has been three biggest marginal buyers of treasuries over the last, I guess really eight years in different sequencing has been, in particular since 2017, really, has been U.S. banks, foreign central banks, and the Fed. And foreign central banks, like they left in 2014 by and large. Fed and U.S. banks largely picked up the slack.

Starting point is 00:32:34 And when they don't, the dollar goes up a lot and something breaks and then they come back. And they're gone now. Between the Fed, obviously, for all the reasons everybody knows and banks, they're are regulatory constraints to their balance sheet in terms of what they can, how much, how many treasuries they can own because for regulatory purposes, a treasury counts as against that regulatory score. And again, I'm not the right guy to talk to about how to calculate that, et cetera, but suffice it to say there's a balance sheet constraint there. So they can't buy as many. And certainly they can't buy what is needed to, particularly with the Fed adding to the issuance. And so you have

Starting point is 00:33:14 seen in the recent months, a big uptick in private, foreign private buying, which is encouraging. And I would put an asterisk next to it because it's the two, I think it was 170 billion in foreign buying in August. And it was the two biggest buyers were the UK and the Cayman Islands, which is hedge funds and hedge funds. And so again, that's fine. But when you have gone from borrowing from foreign central banks who are very price insensitive and can take losses, do not mark to market. They buy for political reasons as much as anything. And then you move down to foreign private private insurers and pension funds. And they are marginally more price sensitive than central banks, but still very long dated, et cetera, et cetera. By the time you get down

Starting point is 00:34:06 to the hedge funds who are financing you, they are fickle creditors. And they are, very price sensitive and they don't like to lose money. So that sets you up in a situation where if your marginal creditors are too many hedge funds, then you know, you see the 10 year treasury you'll start to trade like hedge funds are trading it, which take a look back over the last, you know, people saying treasury vowels up, why is treasury valve? Probably partly because a lot of hedge funds buying it. Yeah. And you've had a whole year of just getting obliterated. You're getting obliterated. Yeah, you can't stand in. Like you don't, I mean, I so, I so. I'm last week that marked to market, the Fed would take $720 billion, has lost $720 billion year to date

Starting point is 00:34:52 on their bond portfolio. There's no hedge fund. Like, like, that is like, I don't, I don't know the numbers, but I would suspect that's probably close to as big as the entire hedge fund industry. Like, they can't take that, right? So they, they have shareable or they have, they have general partners. They, they have to make money. So, yeah, you've got this situation where, will the treasuries get bought? Of course they'll get bought at a price. Of course. The problem is, is not will they get bought at a price? The problem is that price, can the U.S. a government afford that price? And the answer is no. Price correlates to a yield.

Starting point is 00:35:26 Yeah, that's exactly right. Okay, so this one's going to be fun. Which one of these two do you think is going to happen first? Loss of liquidity in the U.S. treasury market or unemployment that catches the Fed's attention that they have to do something. Oh, it's a treasury market. It's a treasury market. This is a weird cycle. And it's, it's something I had thought about ahead of it. And again, it's one of these things where it's like, okay, yeah, I think this is really happening. I think it's the treasury market already has an issue. And it's going to keep getting worse. And it's going to keep getting worse almost without fail for a number of the things

Starting point is 00:36:01 we've talked about already, unless the Fed steps in with more QE. But I say, well, the thing that might be the weirdest thing about this cycle has been the contrary behavior of American boomers. If you ask almost any theoretician out there, academic, old people, are they inflationary or deflationary? And the answer is almost without fail. They're deflationary. They're past the peak in their spending. Their peak spending is in the 40, 45, and then they just, they're deflationary spending, you know. And the difference is that the boomers are extraordinarily inflationary. And the reason they're extraordinarily inflationary is sort of a historically unique reason, which is if you go back, as of last summer, the boomers, according to the Wall Street Journal,

Starting point is 00:36:46 had $35 trillion in net assets. And how they acquired those net assets was in no small part policy that really began being implemented in the 70s and definitely in the 80s was, U.S. government deficits were sterilized in asset markets by virtue of U.S. government policies to defer compensation into asset markets, right? So when you think about the average baby boomer, you know, say they made whatever, for 40 years, 35 years from 1980 to 2015, they made X dollars, and the U.S. government gave them an incentive where they could take 15,

Starting point is 00:37:28 percent of those X dollars that they would have made in cash comp and spent into the economy generating CPI inflation and instead put it into the asset markets. We'll give you a tax break. You can take it off your taxes. It will grow tax free and then we'll tax you at the back end. IRAs, same thing, four or three Bs. It's all been one giant exercise in sterilizing U.S. government deficits in the asset markets. And then we don't count asset inflation. as inflation, right? That was inflation. It was just deficit going to the end.

Starting point is 00:38:02 So these boomers, fast forward 40 years, these boomers have $35 trillion net assets. And then you scared them. They're going to die, like way sooner than they thought. So now you've got $35 trillion in assets. And a generation that,

Starting point is 00:38:19 like, that is putting on the biggest Yolo trade in the history of the world. They're like, I might die in two years. Let's get on a plane. Let's go to a restaurant. Let's order a steak. Let's go, you know, fix the house. Let's fix the house again.

Starting point is 00:38:32 I don't like that deck. Rip it down. My kids need a house. Let's get them a house. Let's get that kid a house. And so this, when you hear, oh, well, it's services inflation. Well, there's $35 trillion trying to cram itself out of the asset markets into the real economy by virtue of this YOLO trade. I think a little bit of it, too, is when you look at the surge that we had in asset prices following COVID, the pace at which.

Starting point is 00:38:57 pace at which that took place is the equivalent of somebody finding $100 on the street. And they're like, all right, well, I didn't have this $100. So now I can go do whatever and I'm going to go spend it. I think you have a little bit of that still taking place because it was such a windfall in such a short amount of time. And they were the ones sitting on all the assets. It definitely wasn't the money. Yeah.

Starting point is 00:39:20 And the first time I got to, like I had written a bit about this, this wealth effect dynamic throughout my writing, going back eight years. But the first time I had a sense that the Fed knew it was a problem was back in February this year when you had Zoltan and then at Credit Suisse, and then you had Bill Dudley, the former New York Fed president, both say we need to crash stocks to get inflation down. It was like, they know. They know that's what's causing it. And so I think that's why it's this weird cycle. So, you know, the first question is in treasury market problems or unemployment first. Well, that's easy. It's treasury market. But I think it's an important corollary to this, which is there is a moment coming. There is an air pocket coming

Starting point is 00:40:02 of employment, GDP, spending. And I don't know what month it's coming, but it's probably in the December or, you know, third week of January, boomers are going to spend more money on Christmas. We're all going to spend money on Christmas. And if this fourth quarter goes the way I think it will, if the Fed doesn't step in with QE, they're all going to get their statements and go, stop spending. Like not slow spending, like stop now. And I think we're seeing a little bit of it. I think people are comforting themselves that it's been a transition from goods to services. And we've had this huge falloff in goods sales and retail and this inventory buildup and order cancellations.

Starting point is 00:40:43 And I think it's going to, I think unless the Fed comes in and basically regooses this whole thing in the fourth go, which I don't think's happening now. I think we're going to get this air puck in the first quarter of where it's just like the world stops because boomers and go, oh, God. Yeah. I'm not as afraid of dying. And at any rate, if I keep this up, like, you know, I'm going to run out of money. You've also seen a little bit where the housing market had gone up so much in such a short amount of time that even if people didn't have any type of equity in the house prior to that move, as soon as that move happened, they had for a lot of them that had no savings. They had a significant amount of money in the equity of that house. And we're seeing that in refis.

Starting point is 00:41:29 You're seeing the number of refis and people tapping into the equity of their house, even though they're taking on higher rates. They're tapping into that buying power of the house and tapping into the equity from what I think I remember seeing on Twitter through some different charts, like at an unprecedented rate as far as some of these people refying their house. house. And you would think that that wouldn't be the case because the rates are higher, that it's been a surprise. And everyone's like, huh, that doesn't make any sense. But I think it's, they're seeing $100,000 there that they've never been able to save. And they're saying, my God,

Starting point is 00:42:05 I could go put on the new deck or I could go do whatever because I now have this equity in the house. And the equity's not there, of course, but yeah, exactly. Not with rates having done, but, you know, gone from two and three quarters to seven and a half. The equity is not there, I've marked the market. But hey, which again speaks to this whole like, okay, I'm going to put the deck on. And then it's like, hey, let's move. And then they're going to go, okay, well, we're going to lose all that money on this. And we're going to get a small, like, it's just going to stop.

Starting point is 00:42:34 Yeah. We're downgrading by like, we're getting half as much house. Yeah, for twice as much money or 25% more money. Because we're being forced to move for a new job or whatever. Yeah. Yeah. Yeah. I think some of this stuff just takes time, just kind of said.

Starting point is 00:42:49 in. And that's the other part of the reason why I think partly the Fed is weaponizing is, is they know this. Like they, you can go, you know, Google, you know, long and variable lags on monetary policy and you'll find, you know, 16,000 things where it's like, you know, hey, yeah, monetary policy works on a leg. Like, they know this. Yeah. And so, yeah, I do think it's probably partly a little bit of an ego thing. I mean, Harold Malmgren had a great tweet earlier this year where inferring that, you know, like you said, like that Powell didn't want to be the next Arthur Burns, that he was. He was, and, you know, he's going to be wrong again. Oh, wait, I can only imagine what the books are going to write on.

Starting point is 00:43:33 Yeah, they're not going to be kind. 7.22% as of today for a 30-year fixed-rate mortgage. And you look at what the yen, like, I put up a shirt on Twitter yesterday. You look at yen dollar and the 10-year treasury yield. And they've been very tight. Like, it's saying it's going to five. 10 years going to five. Yeah.

Starting point is 00:43:53 Like, 7-2-2 is with a 10-year-ed four. Yeah, yeah, yeah. Like, you start looking at like situations in this country where we could be, you know. Eight and a half. Eight and a half, nine percent mortgages and nine percent gasoline. Like, yeah. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:47:40 I'm talking, oh yeah. Like you could have mortgage rates at eight and a half in a month. Yeah. I mean, and I think that's ultimately where this is going. I think we're going to see the 10-year treasury go from four to six in three weeks, four weeks at some point this fall or this fourth quarter. The three-month, I'm looking at the chart right now. The three-month yield is at 4% right now. The 30 year is at 4.1. That is crazy. I'm curious what your thoughts are. So I've had a lot of people tell them. me that when the three month exceeds the 10 year, which the 10 years at 4.14, it's slightly better than the 30 year. I mean, this whole thing is jacked. But you're only 13 basis points of the three month exceeding the yield on the 10 year. And I've had a lot of people tell me that that's a, that is a really strong signal to the Fed that they have totally overdone it.

Starting point is 00:48:38 and it's time to stop the hikes if the three month is exceeding the tenure. Is this different, is this situation different for them because inflation is so still gangbusters high relative to these yields that like rules of thumb like that don't even apply? It's a good question. I don't know. Because I mean, when you think about it, if they're still, for me personally, like anytime I'm doing momentum, I'm looking at that volatility range of whatever I'm tracking.

Starting point is 00:49:07 So if I'm looking at the 10 year and I'm looking at the volatility of the selloff or the bid, I'm saying, hey, this is not, the market is not telling me that there's a change if I'm not seeing a breakout of that volatility range that it's in. And when we look at inflation, like, nothing is suggesting that there has been a reversal. If you're looking just at the inflation prints. Now, if you look at all these other leading indicators, I think a lot of people would tell you like, this thing is grossly. transitioning to a recession or worse? So I don't know, when I say I don't know if the yield curve conversation changes with the higher inflation, I don't think so. But what I feel very strongly is that if we have a recession next year, let's say we just have a plain vanilla recession. I love how you said if. the 1% chance we don't have a plain vanilla recession next year

Starting point is 00:50:13 and that it actually does impact inflation across the economy which I think I think it should this is what I think the policymakers and what I think the bond markets especially at the long end may be hinting at that most people I think still don't get plain vanilla recession historically has been 20% decline in tax receipts that's just like plain vanilla yawn oops GDPs down then we go back up this is not like the system's collapsing like in 20 or 2008 which are the last two of the last two recessions 20% decline in receipts so what is that in dollar terms for just so people uh dollar terms right so so it's 900 billion dollars for round math

Starting point is 00:51:00 from last year. So that's the thing that nobody talks about. It's like, oh, we had this bubble. We had this bubble. Well, guess what else you had a bubble in? You had a bubble in tax receipts. It's unbelievable. They were up 40%. Yeah. Because it's all tied to asset prices. Yeah. So not just the asset price capital gains, but but incomes, right? As stock options are all taxed to ordinary income. Okay. So 20%. It's not going to be no 20%. It's probably not. But let's just, just to be conservative to make the point that this is the thing. I don't, think bond market, most people in the bond market are still paying attention to and most investors. Plain vanilla recession, 20% decline in tax receipts. Social Security just came out and said,

Starting point is 00:51:39 they're doing a, I think it's a 9% call up. Okay. Let's apply that 9% to Medicare, Medicaid, health and human services, because that's actually not far off. That number chugs ahead at 6% to 9% almost every year. So let's just say it's nine across entitlements, which is Social Security and in total entitlements in health and human services. So I'm applying that to Social Security, Medicare, Medicaid, health, and human services is 9% inflation. No enrollment growth, mind you. No enrollment growth with however many millions of boomers are going to enroll more.

Starting point is 00:52:10 So again, conservative. 20% decline of receipts, 9% COLA across. You're looking at just entitlements in the United States being around 85 to 90% of tax receipts next year. Yeah. Now, apply the 5% terminal discount rate that everyone's getting, oh, it's 5, it's 5 in a quarter, it's 4. 5%, 3,1 trillion in debt, pro forma is a trillion 5.

Starting point is 00:52:38 Trillion 5 is on that 20% decline. Golly, it's 40% of tax receipts. Do you know what 40% of tax of just the interest is? That's an emerging market. That's like banana republic territory. Yeah. So now it's 40% interest pro forma. And with no enrollment growth in plain vanilla recession, 85% entitlements.

Starting point is 00:53:02 You're done. Now, because we're the reserve currency, because you have the Euro dollar system, because people say, oh, you're saying that dollars die. No, I'm saying that it's going to be 125% of tax receipts or interest like obligations. Whether the dollar dies or not, falls or not, because again, I don't put, want to be hyperbolic. Whether the dollar falls or not is dependent entirely on if the Fed finances that or not. It goes back to that original grid. 125% of tax receipts on interest expense like items in a recession,

Starting point is 00:53:31 a plain vanilla recession. If the Fed does not print the money, if you liked the last three months, dollar up, treasury yields up every frigging day, you're going to love next year because the dollar's just going to keep going up and treasury yields are going to find where the buyer is. And the higher they go, the more that that 125 is going to go to 127.

Starting point is 00:53:52 128, 13, 135. And at some point in that process, people are going to go, the U.S. is broke.

Starting point is 00:54:00 Yeah. I need to own gold. And not like the paper stuff. I need to own physical now. And you're going to see a separation where you're already seen it. GLD has been rising against TLT all year. Yeah,

Starting point is 00:54:10 gold's down and it sucks. But it's been rising against it all year. It's going to start going up nominally with rates going up big at some point in that process. And Bitcoin probably doesn't, really well too. And this is why you've got to have yield curve control because you've got to stop that bleeding of the interest expense. I'm curious, have you ever done, you know, I mean, I know that

Starting point is 00:54:33 was real haphazard, but the numbers are real easy to kind of like demonstrate how out of control and how much of a spiral you're in. Have you done that for the UK? Have you done that for other nation states over in the EU? I'm assuming they're in the exact same scenario as what you just described in the U.S. I've looked at it, but not nearly the depth. And the short answer is, yeah, the Western social democracies, broadly speaking, are in roughly the same positions. And I just don't know the sensitivities. I do know that their energy positions are way worse than ours. Yeah. And they don't have the reserve currency. So like, I give it, they're going to do the same thing. And that's part of why you're going to see yields go up and up and up. Because when it comes to,

Starting point is 00:55:18 do I want to hold treasuries or do I want to freeze? It's a very, very easy decision. And if they're doing, and if they are doing that because they're not the reserve currency and they're debasing their currencies, they're just making the dollar because it's all in relative terms when you're talking about fia currency. It's just making the dollar that much stronger. And this is why I said is like, yeah, the dollar go to 150 or 200, but you're not going to like waiting in line with a shotgun to fill up the gasoline station. That's what's happened. that's what happens at that. I mean, is the northeast of the United States going to be getting their share of natural gas for winter 23, 24 in that scenario where Europe and Japan,

Starting point is 00:55:57 or does it come down to who has the Navy to direct it? And if that's the case, like, like, we're not even in markets anymore. Like it, we're now like, yeah, that's where we are in this whole game. Like, it is, and to me, you know, you go back, I'm sure we talk to either, you know, March or April and I just said, I don't think. Western policymakers understand what they got themselves into. They thought they had all the leverage and they didn't. They don't. Yeah. And they and and and it's the, the, the fundamental error that they all made was they looked at GDP and they said, oh, Russia's only the size of Indiana, Ohio, whatever that is,

Starting point is 00:56:36 right? Italy. So what? It's like a money ball thing, right? Well, that guy, you know, he only hits 220. Yeah, well, he walks, you know, his on base percentage is 500, walks as good as a hit. same thing here. Russia produces whatever it is 10 million barrels of oil a day. Okay. The value of an oil, the value, everyone did it on price of oil.

Starting point is 00:56:57 80 times 10 million barrels a day times 365 days. Oh, Russia's GDP. They're just a gas station. John McCain. It's a country masquerading or gas station masquerading as a country. No, no, no.

Starting point is 00:57:06 The value of oil is there's 25,000 man hours of work contained in one barrel of oil. The value of a man hour work is 20 bucks an hour just for easy meth. Every barrel of oil has a value of $500,000 per barrel. And Russia produces 10 million barrels a day. And these people thought they could strip 10 million barrels a day, 500,000 of value, a barrel out.

Starting point is 00:57:32 And bad things wouldn't happen? Explain what you mean by that number you just said per barrel. So if you look at the amount of work, the amount of energy contained in a barrel, it has been estimated at 25,000 man hours of work. And the problem is, is that Western policymakers, when they decided to pick this fight, to get involved in this fight, they said, oh, well, it's not that bad. Run the GDP. They're 10 million barrels a day times $80 a barrel. Okay, well, it'll hurt a little bit, but it'll be fine. The oil will go to 120 and that'll have, it'll impact GDP in Europe by 1.2% and output will fall 0.6%. And it will hurt, but it'll be good. No, no, no. You started from a wrong first principle. The first principle is, 25,000 man hours per barrel, $20 per value per man hour, $500,000 per barrel is the value of oil. That's the price of the value.

Starting point is 00:58:23 And you picked a fight with that. You decided to fight that. It's a classic idea. You know, Luke, it really kind of goes to a lot of the stuff we talk about in Bitcoin when we talk about first principles. And I recently interviewed Michael and he was talking about how when the money isn't backed by energy, then it's just a coupon. on. And what you're getting at is almost that exact idea with policymakers all around the world right now. And they're looking at it and are like, well, we'll just, we'll just print. We'll just create digital, we'll create digital units on our ledgers and we'll force them to accept these, these digital

Starting point is 00:59:03 nothings for the actual work that somebody had to perform to extract that out of the ground. And that person who's extracting it out of the ground or doing whatever in order to put that into your gas tank. All the work that's required to put that into your gas tank, we're just going to pay them with fake made up paper promises and coupons. And like you had so eloquently described when this entire war kicked off, I remember the conversation like it was yesterday, Luke. You went in the nitty-gritty detail explaining exactly this idea, but I don't think it was real to people until now I think it's becoming, it's starting to become very evident and very

Starting point is 00:59:44 real as to what you mean by that exchange of physical goods for fake paper promise. That's the scariest thing about what we're in. And I think people are starting to see the problem. But to me, why it's so scary is there is a fundamental mismatch. There's a fundamental disagreement. And Putin actually, he gave a speech in June. And it was not covered well here, of course. But he said something along the lines of they are printing, they are devaluing. There's seven and a half trillion NFX reserves that are devaluing by 8 to 10% per year. And that's the whole fundamental argument of gold, Bitcoin, right?

Starting point is 01:00:31 Basically, he is pointing out that you're asking me to sell my oil for paper that is going to fall. again, in oil terms by 8 to 10% per year. And he can't do that because his country will collapse. He will collapse, his country will collapse, his people will starve. That is a fundamental red line cannot do it. OPEC has the same problem, which is why they cited, quote unquote, sided with Russia, as our government said, is they, again, they cannot sell finite oil production for paper that is falling in oil terms at 8 to 10% per year as it has. And that's, you know, debt issuance, that's the price of oil you, you are going to need. Oil is going to have to rise by 8 to 10% per year for the foreseeable future because of peak cheap energy, right?

Starting point is 01:01:15 To develop the energy you need to sustain the debt, you're going to need prices to rise because we're out of the cheap stuff. We need to keep having oil. But you can't have oil producers. You can't pay them in paper that falls 8 to 10% per year against their energy out. But they're just better keeping the energy on the ground. Yeah. On the other side, the Western sovereigns are so indebted that they absolutely cannot survive if they don't trade paper that falls 8 to 10% in energy terms for energy. They blow up.

Starting point is 01:01:46 We're watching it happen in our very, before our very eyes empirically. So what's so scary is you have this nuclear armed energy power that cannot afford to take it. and this nuclear armed powers that can't afford to not do this deal, the negative real rates and energy terms. And it's really, you know, an unstoppable for an unstoppable object against an immovable force. I mean, you're really, when this breaks, it isn't going to be like a little move. I mean, these are very tense tectonic plates. When they slip, it's, we're starting to maybe see signs of that.

Starting point is 01:02:21 But it's not going to be like, oh, well, inflation's going to go up a little bit. No, the print friggin money to pay for energy. PPI in Germany is what, 40%. It's insane. That's insane. And now you burn the boats. Whoever did it burn the boats. As I say, it could have been the Russians. Yeah, yeah.

Starting point is 01:02:40 Like, you know, that screws Europe and the Americans way more than it screws the Russians. Yeah. I think that's the best way to describe it. Whoever did it, they were burning the boats. They wanted this to, yeah. So Michael Saylor recently tweeted something out and he just said the inflation won't end until the war, until the war's end. I'm assuming you agree with that. Yes. Yeah. I mean, yeah, war is very inflationary.

Starting point is 01:03:07 Let's quickly talk about Japan. When I'm looking at the treasury market over there, it looks like back in June, you could see that they were really struggling to keep their yield curve control under wraps. The yen has just been getting crushed. And as of recently, let's see here, September, you started seeing the yields kind of break out to the market was selling off. And the yields were breaking out to levels that they hadn't seen in years. Right now in October, 19 October, we're seeing an all-time high in the yields, which means the sell-off is most aggressive. it seems like their yield curve control is being adjusted so that the yields are higher, maybe to ease a little bit of the bleeding that's happening with the currency. Do you have any insights as to how they're playing this or kind of what their play is?

Starting point is 01:04:07 It seems like a lot of the concerns and the major stress points in the credit markets have really shifted over into Europe, where initially they seem to be showing up in Japan. So what's your take on this now, Luke? I mean, I think they are in the same, you know, two horses, one-ass problem where they can, they've got to save the bond market. They've got to save the currency. And maybe they're taking turns trying to save one and then not the other. I mean, I saw last week, I think that the, the, the, the, the JGB 10-year didn't trade for three or four straight days, right? Yeah, yeah.

Starting point is 01:04:39 If it's some, you know, I guess, you know, it's trading by appointment as it is. It's true. I do. Which is incredible, right? Because it's the second biggest bond market in the world, if I'm not mistaken, or at least you to be. The, I think the bigger thing is from this point, the bond markets and the currencies are breaking. And so I think what we're in the very early days of reverting to is I think currencies will start to trade increasingly on import reserve coverage, reserve import coverage, which is a,

Starting point is 01:05:08 how many months of imports do you have in FX reserves? Because once you're out, you are done with a capital D. And if you look at that, what's interesting is a lot of the the Asian nations, and the Swiss, have a lot of import cover. So the Chinese have 16 months of imports in reserves. So they can go a while playing this game. Treasury market ain't going to like it. This is effectively like retained earnings for a business. If you have a lot of routine.

Starting point is 01:05:35 It's like this is a piggyback. Yeah. Break the piggy bank and you can, you know, you can, you know, I lose my job. I got 16 months of mortgage and food in the bank, you know. And that's what this is. Europe has two. The months? Two months.

Starting point is 01:05:51 A little less than two months. Yeah. So like this movie, and again, that's why I say, this gets really, this can get really scary, really fast. And I don't think people appreciate that where you got two months. Okay. So then what do you do? You have three options.

Starting point is 01:06:07 You print the money, which is a kind of what they're doing. Doesn't, you know, you're going to inflate the currency. You go into austerity, which is basically. you start starving and freezing people. That's not going to be popular. And oh, by the way, you can do that when you're not wildly over indebted, which they all are. And because there's austerity when you're wildly over indebted is nominal default. Bond markets actually not going to like that, almost as much it doesn't like printing. Or you call, you start buying energy in your own currency. You leave the dollar system. You go, I can't take it. And if my choice is

Starting point is 01:06:42 print and starve or austerity and starve or call Russia and say, fine. we'll buy energy in pounds, we'll buy energy in euros and we'll let's sign a deal and we'll encourage the Ukrainians to do the same. But Russia's not even accepting it in you. They're wanting it in ruble or gold or Bitcoin, right? They said this summer, they said they would accept, they would buy the currencies of friendly nations. And if they're selling energy and buying the currencies of friendly nations, that is functionally no

Starting point is 01:07:16 different than selling oil and gas in those currencies. And I think that's what this whole thing is all about. Oh, yeah. No doubt. This whole thing is about moving to a multilateral and basically multi-currency settlement of energy. I think that's what this is all about. And that's what partly ties back to why I think this is partly why the Fed has been weaponized

Starting point is 01:07:36 is I think the core crux of this war is Russia is trying to do this and we're trying to stop it. So do you think the U.S.? Well, do you see Europe doing that based on the pressures that you know that they're going to be receiving from the U.S.? They're going to have to, right? They're going to have to the only question. I mean, and it pains me to say. I've been flip about a number of comments in this interview, and partly is out of frustration.

Starting point is 01:08:03 Partly is out of, you know, you're my buddy and we're having fun and it's a Wednesday night, right? but it pains me to see the lack of awareness. It's either a lack of awareness or the leadership of Europe has been compromised in some way that they are acting against the interests of Europe. Yeah, no, I think that I think most people in Europe would agree with that. Yeah, and so it pains me because like four months ago, five months ago, I mean, I wrote a report in April where I said, Japan has upsized QE or upsized at what yield curve control into an inflation and energy spike. A major crisis will ensue if the U.S. doesn't follow suit. There was literally the title of the report.

Starting point is 01:08:49 It was a long time. And so by April, I was like, duh, guys, hello. The only way out of this is you're going to call up Russia and buy energy in your own currency. You know, it's like, hello, Mcfly, hello, McFly. Hello, McFly. and they've just kept running the Weimar, Germany economic playbook, all of them. Hey, let's print money and buy energy when we're short energy. Dude, you know how that works out.

Starting point is 01:09:13 Well, no, no, it'll be fine. It'll be fine. Okay, good luck. And so we're still at the, okay, good luck stage of this. So the reason I am somber about is, is unfortunately, I think the pain is going to get a lot worse in Europe. I mean, I saw, you know, who knows what you see online, right? I started seeing protests in Paris this week. Right? There's your first, like, you know, you saw some of the farmer protests and whatever it was, I think Netherlands earlier this summer or whatever. I don't know that that was particularly related to fuel or cost. I think there was a separate issue. But I think we're going to see a winter of unrest and discontent in Europe and in the UK like we've never seen. And at some point, their leaders are going to have to, either their leaders are they going to turn their leaders over so fast that they made.

Starting point is 01:10:04 Italy's PM look like Putin, right? Like, and they'll find somebody that will do it. And that's where I think this is going. So it's ironic as for all the talk about regime change in Russia, it's not going to be regime change in Russia. It doesn't be regime change. There's not being regime change in France and in Germany and in UK and all these places. Because when push comes to shove, people don't like to be cold and they don't like to be hungry

Starting point is 01:10:29 and I can't blame them. So I think they're going to have to do that. But again, six, seven months into that recognition of like, they're going to have to do that. And it's like, guys, you're going to have to do that, right? It's like the meme, right? It's like, you're going to price energy your own currency, right? You're going to price energy and your own currency, right? And I'm like, you know, I'm like, you're talking the Anakin Skywalker, Natalie Portman one.

Starting point is 01:10:52 I'm the princess, Natalie Portman, right? I'm like, guys, like, guys. In Europe's like, right? I love that meme. Where does Credit Swiss fit into all this? I don't know. I have no idea. Or any other bank that might pop up, whether it's Deutsche Bank or whatever, it seems like a couple of these banks in Europe are just getting torched in their position with sovereigns.

Starting point is 01:11:21 And it's going to come to a point where, you know, one of these big banks, these two big to fail banks is going to expose the entire. disaster that is sitting on top of it, right? Because it's not really necessarily, I mean, the banks are totally screwed, but like the bigger issue is up at the next level. I mean, with this bailout that recently happened, we didn't even talk about it there in the UK. I mean, the one thing that I read said that their entire pension fund was literally going to zero for the entire UK if they didn't step in and perform the the backstop with quantitative easing for that market. So, I mean, these aren't just cracks. Like, I mean, oh, no. This is what I expected to happen, you know, back in April when I said, like, hey, they're going to have to pivot.

Starting point is 01:12:13 Yeah. The one thing, I don't know anything about credit suites or any of specifics. I really don't know all the credit aspects of the European banking system. Here's what I have. I have. I, I don't know. I have observed that I think is of interest as it relates to this conversation from just a mechanics perspective. And it's this. Coming out of the 08 crisis, policymakers regulated all these Western banks into buying more safe assets. So in the next crisis, they didn't have to bail them out. They would have these safe liquid assets to sell. And that way, they don't have to bail them out. So guess what the safe liquid asset is? So in America, the high quality liquid assets, the tier one, it's treasuries.

Starting point is 01:12:57 It's treasuries. So as this happens, if we do have a recession, if we do have a credit event, we just talked about how out of balance the treasury market is, how the treasury market is trading like Dogecoin. And it's the same problem that the British pensions had. They're going to have to turn seller to treasury. It's not liquid. The problem's at the sovereign level now.

Starting point is 01:13:20 So they're going to sell treasuries to raise funds into an illiquid market. It's going to be the same thing. Treasury yields are going to go just like the guilt yields did that day. There's no buyer. But everybody was operating, as they were doing all this, everybody was operating off of this idea that inflation was always going to be under 2% and they had all of it under control. And there wasn't this growing systemic risk being fueled into the markets by pushing everybody further out onto the risk curve.

Starting point is 01:13:47 And people who have been buying these bond instruments for 40 years. All they know is that inflation just keeps going down and getting more stable and yields just keep going down and we just sit around and we just make a bunch of money year over year. And then all of a sudden, the systemic risk that was always there, but finally manifested itself in this breakdown in global cooperation and just in time supply chains, presented the inflation. And it's like everybody forgot in bond markets that the fact that the fact that, the fact that, The keystone to valuation is you have to at least outpace and have a better yield than inflation, right? So if inflation starts ripping at 8% and all these things were priced for perfection

Starting point is 01:14:39 at nothing per se at no inflation, and that's where it all, that's how it all comes unglued. For people that are trying to piece this together and understand Luke's point, as he's saying that all these banks were safer because they were sitting on all these sovereigns, these were the underlying assumptions that were grossly miscalculated, is that inflation was never going to do what it's done. Right. And it reminds me of a conversation I had with our friend Jeff Booth, right? We were talking about his book and the fundamental mismatch, a different fundamental mismatch,

Starting point is 01:15:18 but it's the same kind of dynamic. And we both side of said it at the same time, which was like, they're just going to have to fully reserve the debt. So it's going to happen here. All we're sitting around doing is waiting for the trigger that forces them to fully reserve the debt. And when I say fully reserve the debt, what I mean is the Fed puts the Euro dollar market on its balance sheet. Like in three months. Or, you know, there's other ways you can do it.

Starting point is 01:15:45 I mean, the Fed could also, the Treasury could instruct the Fed to revalue gold. to the U.S. official gold to $31 trillion. I don't know what that works out to per ounce, but it's a lot. And by doing that, that creates a deposit into the Treasury General account. This isn't the Fed's operating matter. You can go find it. And then the Treasury can take the money and buy back all the debt. And the U.S. government will be debt-free.

Starting point is 01:16:13 Walla. Gold will probably have six figures, but you will be out of debt, right? I mean, you will get every dollar you're paid, I promise. It's going to buy you two eggs, but it's, you know, but they, this whole system was a giant, what option call it? It was a giant bet that inflation would never come. And once to your point, it's a critical point you made is once inflation came, they have to get it down or else they're going to have to reserve the whole system. They're going to have to reserve all the debt. They're going to have to buy it all. It will all get sold to them.

Starting point is 01:16:50 So for them to, when I look at the gold market and I look at... Can I make one other point? Yeah, yeah, yeah. So they're going to have to risk, if they don't get inflation down, they're going to have to reserve the full debt. The problem is, is they let debt, they waited too long to do this, and they let debt get so high after COVID, and they never reformed all these Western entitlements, et cetera, that the actions they need to take to get inflation down.

Starting point is 01:17:20 presents credit risk to these sovereigns. Nominal credit risk. You won't get paid. Enormous credit. And so they're done either way. The only option is right now they're feigning that they're going to let credit risk happen to sovereign. It's not going to happen. They can't do austerity.

Starting point is 01:17:37 They're going to have to fully reserve the debt. Sorry. So I'm sorry. Go ahead. Yeah. So then when you look at the gold playbook, what you're saying is a published approach, how do they do this without just? just how do they do it in an orderly kind of way?

Starting point is 01:17:55 And, and, sorry, I'm not trying to make quick. I'm laughing at you. I'm laughing with you. I'm not laughing. You're going to be laughing. How do they do it in an orderly way? And then I think the thing that especially people out of traditional finance, that maybe look at the whole Bitcoin thing and just roll their eyes and don't, don't take it seriously, how do they, how do they try to implement that with saving by by doing it save the dollar than to save other fiat currencies that would that would attempt something similar when you have this elephant in the room called bitcoin that is already backed i mean the whole thing is that it's backed by encrypted energy and that you're literally turning energy into monetary units

Starting point is 01:18:39 that nobody can control and when we look at the gold market and we look at how much of it is levered via paper and how much distrust the especially for millennials and younger generations have for that particular market, myself included. I just don't see them buying this. So, okay, so you put a bunch of metal into a vault, and you're saying that the ratio is now this to the number of ounces that are there. And you're not actually solving, and I think this is really key to the argument here, Luke. they're not solving the fundamental issue, which is you're not allowing the deflationary forces that actually happen from all this technology growth to actually manifest itself into the market.

Starting point is 01:19:27 By sticking a bunch of metal into a vault and saying the ratio to paper to this metal sitting in this vault is now this, it's three to one instead of one to one, or whatever ratio you want to throw out there. it doesn't solve the fundamental issue of allowing the deflationary effects of technology to enter the market. So you're still going to have to debase against that hunk of metal in the vault, right? So I think the way it fixes us a strong word, but right now, and this gets to Jeff Booth's book, which is brilliant, right, which is the fundamental mismatch between the deflationary impacts of technology and the necessary inflationary forces you,

Starting point is 01:20:10 need to keep the debt sustainable. And so this at least fully reserves the debt, because the deflationary impacts of technology are making this debt unpayable, right? So then you're back to the discussion, you know, inflate or die. It's default or inflate. If you inflate, then buy back all that debt, right? Now there's no debt. You're from an equity position, you can then let those deflationary forces run their natural course. from this higher price level without running the risk of bankrupting the system. But the equity hasn't been reset, right? It will be.

Starting point is 01:20:52 It will after you do that, right? In theory, you wipe out the debt. Yeah, but as far as the ownership of the equity, you're not wiping that out at all. And those are still the same people that are going to go out and they're going to play the Wall Street game of levering up under this new monetary system, the same way that they just lever it up before because you're dealing with the same entities controlling that equity that are acting irresponsible and just levering their relationship and their close proximity to the printer in the first place. It depends. In theory, you would think that this inflationary would move power from

Starting point is 01:21:27 those people to those closer to the oil well and the crop and the making of things. And that, I think we're seeing that. That goes back to the point of, hey, this is the sovereign. debt boys against the energy boys and the energy boys are winning it going away. It's like Bama against St. Mary's School of the Blind right now. Are they playing Tennessee? Are they playing Tennessee? Yeah, they play in Tennessee. Officials might be able to help model.

Starting point is 01:21:56 No, that's the key, right? Your point's exactly right. But I think the process of doing that, I think we're watching in real time. It goes back to the Zoltan quote of, we've had a Putin moment. and not a Volcker moment. And so power is shifting from paper to stuff as we speak. I like how he phrased this. He said, not just gold, but I think all forms of commodities. And so for like me, I'm a hardcore bitcoiner. I see that as, you know, Sailor would describe it as a pristine commodity that actually has absolute scarcity, has absolute scarcity,

Starting point is 01:22:35 unlike a commodity. And so let's just say that the gold, what you're describing plays out. I think what you then get yourself into is this competitive, on a global scale, you have this competitive store of value unit that everybody's trying to decide what they trust the most

Starting point is 01:22:59 to not be debased or to be manipulated against. You know, gold is going to have paper, units stood up on top of it always because of the limitations of physical gold and, you know, the divisibility. I think it'll come back to the energy, though. I think that's, I think what's really important is that it'll come back to the energy of, and this is something a lot of classical economists are still missing, right? Is big time.

Starting point is 01:23:23 Well, the euro's down. The euros down. They've gotten more competitive. No, they haven't. Their energy costs are so high that their industry is shutting down. Yeah. And so when you think about it that way, again, it speaks to energy being the primacy, not debt. Thank you.

Starting point is 01:23:40 Not a fiat currency. And so on the other side of however this all plays out, I think you're going to see the incentives based on experience, which was the experience of mankind going back millennia, which is whoever has the cheapest energy wins. And how do you have the cheapest energy? Two things, strong currency and productivity. What does Bitcoin do? It increases, it incentivizes productivity increases. A deflationary currency or deflationary reserve asset incentivizes productivity increases. And, you know, gold, yeah, they can stack paper on it.

Starting point is 01:24:20 But at the end of the day, if once a quarter or once a month, the oil supplier says, I want physical and I want physical at this rate, that's going to be your price. And the U.S. used to fly a plane, I think it was monthly to Riyadh. full of bullion. It can be done. Like, you know, people's like, oh, there's a lot of shipping. You know, we ship a lot of water everywhere on trucks, too. We only got 25 days of diesel left, and we're still shipping frigging water on trucks. Go, you know, they're sillier things.

Starting point is 01:24:45 Meanwhile, we got Nobel laureates out there saying, dead is money we owe ourselves. Professor Fax Machine is the quote on that. Did he say it tonight? No. Dead is money we owed it. Yeah, it's, I took issue with something he said a couple weeks ago about the great, Britain can't have a currency crisis. They owe debt in their own currency.

Starting point is 01:25:05 It's like, yes, technically it's true. But they're short energy, dude. I assure you they can have a currency crisis. It's amazing how people that just spend their life in an academic setting that have not participated in real functioning markets can kind of just get totally, they can dupe themselves into thinking that this is a real economy. And boy, oh boy, it's going to be a shell shock for a lot around the world. thinking that they can just take these,

Starting point is 01:25:33 these imaginary units and just funnel them into somebody's digital, you know, web browser and all of a sudden like that means that they should have physical, real quantifiable, energy intensive things in their lives. And boy, oh boy. Yeah, we're watching that play out as we speak. It's like, hey,

Starting point is 01:25:52 I think that's the crux of the Ukraine conflict is, hey, we want to pay you in currency. It's going to fall 8 to 10% per year against your oil. It's fine. I'll take it. And then I'm going to put it in gold. Like, no, no, you're not allowed to do that.

Starting point is 01:26:03 No way. You know, then I'm not sending it to you. Yeah, yeah. So it's, you know, exactly. I'll leave it in the ground. Well, you can't do that either. Now what? All right.

Starting point is 01:26:13 Well, here we are. I mean, it's, you know, it's great. It's great. Tell people about your newsletter. It's beyond phenomenal. Both of your books, which are there behind you. Give people a hand off to some of your stuff because, I mean, it's just, it's top notch.

Starting point is 01:26:28 Thank you. Yeah. You can find out more about, we have institutional and mass market products at FFTT-L-L-C.com. You can find out more about it there. And I've got a active Twitter feed at Luke Gromon, L-U-K-E-G-R-O-M-E-N. Luke, always a pleasure. I really look forward to these. I just pray that you keep saying yes whenever I reach out. You're too kind. I really enjoy our conversations. It's always fun. So thanks again, thanks again for having me on again. Likewise, sir. All right. Have a great night. Thanks, you too, my friend.

Starting point is 01:27:02 If you 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 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.

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We Study Billionaires - The Investor’s Podcast Network - BTC101: 4th Quarter Macro Overview w/ Luke Gromen (Bitcoin Podcast)

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