We Study Billionaires - The Investor’s Podcast Network - TIP301: Grant Williams & Luke Gromen Talk Global Macro Economics (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we have two huge guests. Mr. Grant Williams, the co-founder of Real Vision TV and the popular website, things that make you go, hmm. Not only do we have Grant, but we also have Mr. Luke Roman, who's the founder of the research firm, The Forest for the Trees. Both of these guys are two of the smartest macro thinkers I know, so get ready for an incredible episode as we cover all things happening in the global economy today.

Starting point is 00:00:30 You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Hey, everyone, welcome to The Investors podcast. I'm your host, Preston Pish, and is always I'm accompanied by my co-host, Stig Broderson. And like we said, in the intro, we've got Grant Williams here, Luke Roman, guys, man, it's awesome to have you here. Hey, this is, so this is what I've got in mind for this episode. Every time I have a conversation with folks like yourself, it seems like when we stop recording, all the best conversation and all the best questions for each other kind of comes out.

Starting point is 00:01:19 And since you guys have done a lot of interviews, I'm kind of curious if you've seen the same thing happen. Always. So what I want to do is just have a conversation like that where we can basically ask each other, whatever's on your mind, whatever's kind of up in the air right now. And so for me, the thing that I want to talk about to kind of kick this off, I want to hear Grant's thoughts on something that Luke had posted the other day. And Luke, you posted this thing about China offloading their debt and their dollar-denominated debt into the emerging market. Tell Grant a little bit about your

Starting point is 00:01:59 post and I want to capture Grant's thoughts on it. Is that the one that? They were talking about basically some sort of jubilee or forgiveness for some of the emerging market day. I just thought it was interesting. I thought it was a bit of a geopolitical contest going on with basically the U.S. and China, both trying to ply both honey and vinegar to the rest of the world to basically pick one side of the other. And so I just thought it was an interesting signpost. I don't know fully what to make of it. I'd love to hear your thoughts on it, Grant, because it was interesting to me.

Starting point is 00:02:30 I mean, the timing is amazing for me. I wrote a piece that I published yesterday called The Lung Telegram. There was a memorandum published by the US on May 20th. It was basically a memorandum from the US. It came out of the National Security Council, it came out under the presidential seal, and it would basically essentially declare war on China. And it's a fascinating, a fascinating piece.

Starting point is 00:02:55 And I'm going to read you the opening couple of paragraphs, right? It says, this is from the White House. Since the United States and the People's Republic of China established diplomatic relations in 1979, the United States policy toward the PRC was largely premised on a hope that deepening engagement would spur fundamental economic and political opening in the PRC and lead to its emergence as a constructive and responsible global stakeholder with a more open society. More than 40 years later, it's become evident that this approach underestimated the will of the Chinese Communist Party to constrain the scope of economic and political reform in China. Over the past two decades, reforms have slowed, stalled, reversed.

Starting point is 00:03:33 They say the CCP has chosen instead to exploit the free and open rules-based order and attempt to reshape the international system in its favor. Now, that's just the first two paragraphs. This thing goes on, and it's an extraordinary document, and people should absolutely look this up and read it, because, as I say, it's a de facto declaration of war against China. And when I wrote about this, I went back to the Cold War, There was a guy who worked in the embassy in the Soviet Union called George Kennan.

Starting point is 00:04:03 And he was a lifelong civil servant, and he wrote a telegram back to the State Department in Washington. He was asked for his opinions when the Russians were refusing to endorse the IMF. This was 1946. We're refusing to endorse the World Bank. And Stalin gets up and makes a speech, which, as I pointed out, was very much within the Soviet doctrine of the time. This shouldn't have caused anyone to even bat an eyelid. But he basically said capitalism and communism cannot coexist peacefully. and we are here to make sure that communism wins.

Starting point is 00:04:30 And so they asked Kenan what this meant, and his boss at the time, the ambassador said, answer as you see fit. And this guy wrote a five and a half thousand word telegram where he pulled no punches, and he basically called out the Soviets said, listen, this is war, we cannot do anything. The best we can do is contain them.

Starting point is 00:04:48 And it set the policy for the Cold War, essentially. And that's what we've just seen happen. And the amazing thing to me is, look, you posted what Pippa posted, coming so soon after this, this article was posted May 20th, and it was literally within a matter of days that the stuff in Hong Kong happened, right? With Beijing cramming through the security laws in Hong Kong,

Starting point is 00:05:07 if you think that's anything other than a tacit declaration, this is the way it's going to be, we're not going to hold back anymore. So I think, Luke, this idea of them trying to lead and talk about forgiving emerging market debt is a classic play, right? Let's get everybody on our side. And so I just think it's a really important article with the one you posted, and so is this telegram. So is this memorandum from the State Department. And I think we're entering a very difficult period that could be fraught with conflict and two

Starting point is 00:05:36 big superpowers very much at odds with each other. We wrote a report about it. And the thing that really grabbed me is, I think it was on the second page is the U.S. overtly stated that it is a new great power competition. And I thought, the same thing. I sent it to another good friend. of mine in the business, and his reply was, gosh, this this reads like a war scroll. I think there's some real eyebrows raised in terms of what that said and marked a real turn in terms of just, okay, if we're going to be in a great power competition, then I think the rule, a lot of the rules, the rules of geopolitics, which reflect maybe this debt forgiveness attempt by China and your point on Hong Kong grant, which I think is very well taken. And I think they start to reshape the

Starting point is 00:06:19 rules of finance in a way back to Cold War markets, great power competition, markets, and quite frankly, in my view, that there's a lot of market participants are using the post-Cold War lens to evaluate what is sort of new Cold War markets, or very, very early innings of new Cold War markets, which I think has some interesting implications. And if you think about the strategic side of Hong Kong itself and the financial data that's flowing in and out, it's just a treasure tro of not just data, but also networking effects for them strategically. And then you can add in the social unrest in the U.S., and some could see that as the opportunity.

Starting point is 00:06:54 It's exactly right. And if you look at some of the propaganda in China about the unrest in the US, I mean, they've gone full force with this stuff. There's a picture of, it's kind of a cartoon, but there's a statue of liberty kind of with a utopian chaos and out of the green shell is like a policeman kneeling on someone at the bottom of it. I mean, they're not pulling any punches. And the quotes that have come out from professors at various universities in China, obviously,

Starting point is 00:07:21 free speech. But what they're saying is clearly party directed and it's all about the hegemon. It's all about Cusiddy's trap being real. It's all about the US quote unquote manic behavior towards the people's Republic of China. You've got both sides kind of coming together. You've got harmony in the White House and amongst the Republican Party at point the finger at China. You're going to have the Democrats also are going to struggle to be pro-China. So this is all coming together. And nobody does a better job than Luke of paying attention to this stuff. His work around this is light years ahead of anybody, frankly. And what's happening over in that part of the world bears a lot of our attention because

Starting point is 00:08:00 things could get kind of very shaky, very fast over there, I think. So how does oil play into some of this moving forward? Because, I mean, I don't think anybody ever expected the negative price dump that we, I mean, that was insane. What's crazier? Negative price dump or hurts up 100% after declaring bankrupt. I mean, I don't know. I thought I'd seen it all and I saw the oil thing. No, it's crazy. I think I saw that post today on the Hertz thing.

Starting point is 00:08:32 And I had to go look like they declare bankruptcy and then the stock prices. I mean, it's just a total meltdown, but in every which direction you wouldn't expect. You know, as a little kid when you're in elementary school, somebody goes up to you and they say, oh, it's opposite day. That's truly what we're seeing right now. It's on a serious note. So I was reading, I forget where I saw the article, but they're saying the oil monsters coming back as far as the price drop, what are you guys thinking? Is this balance that we have seen just in the last couple weeks?

Starting point is 00:09:06 Is that was the bottom in or are we going to see some more lows? I think it depends on, and this ties back to the point of the rules of geopolitical and economic competition being redefined in more Cold War, I think what is ultimately going to happen to oil beyond a bounce versus sort of sustained growth, I think is going to depend on really two things. Number one, the ongoing success of China's ability to price more of their commodity imports and in particular energy in their own currency. We had heard two different credible sources earlier this year that Saudi had begun selling at least some oil to China in Yuan. And so that would depend, I think that would be very critical in terms of determining the price of oil, right? Because,

Starting point is 00:09:53 you know, the CFO of one of the biggest commodity traders in the world told me on a roadshow 15 years ago back in a former life that in commodity markets, the marginal ton prices the whole. And so if the marginal ton of oil is being priced in yuan, then suddenly you begin to get more of an influence of the yuan dollar cross rate on the price of dollar oil with every marginal barrel that moves to yuan. I think a lot of people, when they hear me talk about you oil. Here, other people talk about Yuan oil in this contract and some of what China's been trying to do. I think they've been under the assumption that, well, it's not going to matter until half the world's oil is in yuan or a third of the world. But that's not the case because

Starting point is 00:10:29 it's a commodity market and the marginal ton prices of the whole. So I think when you look and when you think, the way I'm thinking about oil at least is, is okay, now we have this ramped up great power competition. You know, we can probably safely assume that China, who's been moving pretty rapidly or more rapidly of the last two, three years in terms of getting more of their commodity import bill in yuan as it is, you can only assume they're going to get more aggressive with that. And that ties into the point of, okay, well, how do we get more people to do that? Well, you need to win friends and influence others. Maybe you start forgiving debt, things like that, try to play sort of the long game on that front. And on the other side, what I think matters

Starting point is 00:11:08 for oil is then what does the dollar do? Because if the one dollar cross rate starts to be more important than the price of dollar oil than if you can get a weaker dollar like we've seen on the margin. I mean, it's not weak in a ton, but we've seen it marginally weak over the last two, three weeks. It's a tailwind for oil in that world. Now, the flip side is if the U.S. can clamp down on the spread of the pricing of oil and yuan, it all goes back to dollars and sort of build a very big dollar block around the world, sort of go back to the Kissingerian, I guess, if that's where the dollar's oil monopoly is at it and that's all. And then you're back to a world where I think we can see oil really go crazy on the upside. But I just don't think it can for as long as China's

Starting point is 00:11:47 still able to be sort of playing this game where they can start shifting more of their import bill into their own currency. I think you bring up a really good point, Luke. And if I can add to that, given the amount of US dollars that has been printed all the last couple of weeks, you might have expected that the dollar would have weakened. It's interesting. I mean, you would think that given what they've done so far and the fact that we know this is the beginning, end of this. You would have expected the dollar perhaps to be weaker than it. I think your point is exactly right. It's surprising to me that we haven't seen it come off materially harder than this. The Luke Grumman-Brent Johnson show rolls on on Twitter and there's various end dances

Starting point is 00:12:29 and balls being spiked left and right and backwards and forwards. It's always fun to watch. And it may just be that perhaps the euro, you know, there's still this question mark over the German constitutional court ruling hanging over it. So people aren't 100% sure how that's going to go. So they hedging their bets with that. Given what the Fed have done, what they are committed to do. And it's not often you get very carefully planted. Fed articles talking about how their balance sheet is unlimited. There's a reason that we're seeing those quotes out there. That's to tell people exactly what's going on here. And the flood of money that's going to get thrown at this thing as and when it's needed. I mean, I don't think they're going to wait at all. I mean, we've seen that. They've acted

Starting point is 00:13:10 so fast this time around. And what's happened, ironically, is going to embolden them, right? Because they have got this snapback bounce, which I don't think is purely down to Fed liquidity this time. But when you're a guy with a hammer, everything looks like a nail, right? And they've got a hammer. This looks great. They're going to go, well, hey, look, what happened when we threw two trillion at it? So maybe we have to throw three trillion next time, but we'll get 60% bounce. I mean, it's craziness to me, but we have to sit and watch this thing play out. And what's crazy is when you provide that much liquidity and it doesn't weaken the dollar at all, I mean, it's almost like giving more meth to a meth addict that, I mean, that's

Starting point is 00:13:50 where we're at. You're supplying all these dollars in the market, soaked them up instantaneously without any type of drop in the dollar. So when they have to print again, I mean, you're doubling down, you're quadrupling down on what you did last time just to keep this patient alive. This is insane. One thing I've watched on it, too, is on the flip side of it, is if we've watched what the Treasury General account has done, while the Fed's been pumping money in on one side, Treasury's been sucking it out with, in the same staggering rate, really, right? Where the biggest TGA balance like we've ever seen, I think it's been $400 or $420 billion. And it's sitting at $1.45 trillion now. And so historically when the TGA go, the TGA and the dollar,

Starting point is 00:14:35 the Dixie, have been very closely correlated as the, you know, the Treasury is pulling liquidity out. And so it's been surprising to me, I'm really on both sides, A, that all this liquidity and the interest rate differential collapse and the things that we were just talking about ever resulted in a weaker dollar. And then on the flip side, I've been watching this TGA going up and up and up. And at some point, that's going to reverse. When it reverses, presumably, you'd be, increasing the currency in circulation in the U.S. like a 60% annual rate or something crazy, right? And I wonder if it isn't just being sterilized for the moment by Treasury. And why Treasury is even doing that?

Starting point is 00:15:10 I mean, is it the Trump administration basically trying to hedge themselves against the Fed where they're saying, all right, well, maybe the Fed will try to make the economy bad and get us out of office? So we're going to stock up this war chest of a trillion and a half that we can spend in the economy to turbocharge it in the last three months before the election. But that's definitely been interesting, is that there's been the sterilization, really, that it should be dollar weakness on the come when that goes the other way, because the, you know, the correlator to that is when the TGA goes up, the dollar goes up, and vice versa. So I'm with you in that I don't fully understand exactly what I'm seeing in the dollar markets.

Starting point is 00:15:46 There's a great child I saw from Eric Pomboy this week, and he plotted the treasury net receipts the last four months against the Fed balance sheet. And as he said, for the first time ever, the amount printed by The Fed has exceeded the total tax receipts of the Treasury over the 12-month period. They took in $3.26 trillion, and they've printed $3.31 trillion. So that's it, right? But for guys like us to watch this stuff, this is, what a time to be alive, right? If you like charts, take one look at and go, wait, what?

Starting point is 00:16:18 Hold on a second. This doesn't make any sense. I mean, I see 15 a day now. It's extraordinary. And I think what's amazing is there's so many of these things that everyone's just saying, I just need to ignore this until we get something I can relate to again and I can take a look at this. Dave Rosenberg is all over this and he's putting some fantastic stuff out. Anyone's not following Dave on Twitter they should be.

Starting point is 00:16:40 And he's calling this stuff out. But when you look at these charts, the unemployment charts that we've seen, the initial claims, a continuing claims, I mean, when you talk about off the charts, they are literally off the charts. And people don't seem to be bothered by it because I just don't think they can get their head around it. So I don't know how this works itself out or what it takes for people to think, well, this isn't a V. This isn't going to go back to how it was. I just don't understand how that's even an option in people's minds. You know what I mean? It's clear that that's not going to happen.

Starting point is 00:17:15 So this is what I'm really struggling with at the moment. I put all the Robin Hood stuff aside because that's just crazy. And you look at what happened today, unless tomorrow is even crazier, today is going to be one for the record books with some of the stuff that went on, you know, Chesapeake today, you know, up 171% files for Chapter 11 after hours. I mean, it's extraordinary. What's happening? And their bond market is trading for, what was it? Five cents on the dollar, right?

Starting point is 00:17:38 Five cents on the dollar for their... Yeah, but this stuff is, it's all happening, and it's, it's so confusing for everybody right now, for almost more so for the people who spend all day looking at this stuff, because you just have no idea where up is anymore. Everything that's coming at you is completely miscarriage. representative of everything you've learned over your time in the business. I had a guy asked me, so what do you think about this V-shaped recovery in kind of a snarky way? And I said, I think it's an eye-shaped recovery.

Starting point is 00:18:07 I think the bid, you're seeing a bid up spread here that like gap so high up that it's going to hit an exclamation point on the top of, or dot the eye on this thing. Like Ohio, they're the dot in the eye in Ohio. That's an honor. Yeah, this is crazy. And, you know, it's funny because, Luke, you were on our show back in, I want to say March or something like that. And you said, unflinchingly, you said, oh, we're going to have a meltup, right? Like, this isn't even, this isn't even really a question. Like, we're going to see the market melt up. And we had the COVID. It got slammed. But then it just took off all of our momentum indicators initially on our site were flash and red, right? And then this bouts and some of them turned green. And then, all of them turn green. And sure enough, you were exactly right. I think you're starting to see a melt up here. Probably if I had one thing to me that was, I think, really important and really

Starting point is 00:19:09 underfollowed thus far has been what happened to the Treasury market from March 9th to March 18th during the sell-off. So February 19th, Equity's peak begins selling off. So between February 19th and March 9th, it was 12 trading days, total of 12 trading days. And we'd long been saying that the equity market is so important to the economy. And if it sells off too far, too fast, you're going to see a problem in the Treasury market. And that's what our research has sort of said, but it never really been tested. And then on March 9th, all of a sudden, the Treasury market started crashing right alongside the equity market. And it kept crashing. It fell almost tick for tick for. And I think this was a really big moment because I've said it, you know, jokingly,

Starting point is 00:19:51 But I think it's true is I think the Fed thought it was all fun and gains with risk off until the Treasury market lost an eye. And as soon as the Treasury market and the Fed in their minutes, they're meeting for March 15th, they actually said the Treasury market, the off-the-run Treasury market, cease to function effectively. And that to me, I think, is a really big sort of missing link to everything we've seen since. Because what we're really talking about here was the United States for the first time in our memory, probably since the 70s, but the first time in our country, careers in our memories was seeing its sovereign bond market, and its sovereign bonds underpin the whole shooting match, of course, they were trading like emerging market bonds with a fiscal problem, where the economy is shrinking, the stock market selling off, and the bonds yields are rising sharply. Off a massive lows, granted, but they were rising and bid-esque spreads in the

Starting point is 00:20:44 deepest most liquid market in the world blew out, you know, guys that have traded those bonds forever, Sam, they've never seen anything like it. And that's a lot. That's a lot of to me, I think is the real wild card in terms of answering your question of how long can this go on, how long will this go on. I think a lot of what we've seen the Fed do has been about basically bailing out the Treasury market, fixing the Treasury market. When you read the histories of some of the great hyperinflations, it's almost always a desire to basically make sovereign debt nominally money good no matter what. And to my eyes, that's what the Fed started having to do in March. And And so they haven't come to their head because do you want to be the guy who picks up the phone and calls the Marines and says, you know, after the U.S. guys, the U.S. government's presumably drafting up this, we are in a new great power competition document in March. Do you want to call up the DoD or the Pentagon and go, hey, guys, your funding costs just went up 200 basis points because the treasury market stopped functioning because the world's melting down. And the answer is that's not going to happen. And that then filters back into this view that I really think we are in.

Starting point is 00:21:51 you know, almost a Venezuelization of U.S. markets where they have to keep yields at politically expedient levels. And by virtue of our debt levels, that means negative real rates as far as the eye can see if we want to engage in and win a great power competition. And so I think it can go on a lot longer than people think. Now, it's not to say we can't have a pullback or anything like that, but it just that I just think that this great power competition means the U.S. government cannot afford positive real rates for a long, long time. And I think they have the means, motive, and opportunity to keep them at negative real rates for a long, long time, which is ultimately intellectually offensively, a good environment for gold, gold miners and stocks.

Starting point is 00:22:39 It looked like a window for me into the real world. I looked at it and said, that's what happens when the Fed are not in there, because it kind of called them off guard, right? And it's like, Oh, right, we need to get on top of this quick. And that to me was just confirmation that we're not going crazy, right? When the DSX Machiner is removed, markets do function the way we think they're going to function. And economic reality does weigh on sovereign bonds, even the mighty US treasury market. So that to me was, I agree that. I think it's incredibly important.

Starting point is 00:23:11 And I think they will be paying attention to that. And they will do everything they can to stop that happening because that window were it to open. leads exactly where you said it would lead. Yes, it was like the curtain just briefly opened up, and you can see all of these people just piling money into the system, like they were shuffling coal into the steam engine of a train. And then it closed again, and you were standing there thinking, holy moly, everything I thought but didn't know is real.

Starting point is 00:23:40 That's right. And to my eyes, the Fed then confirmed that they were concerned about it, not only in the meeting minutes, but if you go to mid-April, they put out sort of a quickly released day. They might have even been on a Friday, but the supplementary liquidity ratio metrics under either Dodd-Frank or Basel, I always get them too confused. But all these decade plus of banking regulations to make banks more safe

Starting point is 00:24:03 and to make liquidity or, you know, the banking ratios more tame. And they said, look, we're going to temporarily suspend the SLRs for treasuries so that the banks can basically buy as many treasuries that they want. want with effectively infinite leverage. It doesn't ding the liquidity ratios when the banks buy treasuries. And so you kind of look at this and go, okay, great power competition. They had a problem with treasuries and they're going to use the banking system to help soak up this liquidity. And to my eyes, the quid pro quo is, look, I would love to be a bank and basically have no capital surcharge to buy a treasury and I clip the coupon and away I go. That's, it's not bad.

Starting point is 00:24:43 You're making a positive spread, right? Until yields are negative. And I don't think they'll ever be negative for U.S. Treasury bonds, but as long as yields are nominally positive, it's almost free money to the banks, free nominal money. It's not free, you know, money on a real basis to these banks. 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 its 18th year

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Starting point is 00:29:13 Yeah. Do you remember back in 2007, there were about eight people in the world that knew what the TED spread was? Remember that, right? Now there's nine. Now there's nine. Yeah. And it was like, what's going on with this test spread? Oh, it's nothing, nothing to see here, right? And we saw those lips and the test spread. Everyone I knew that was involved in that market was like, dude, this is serious, right? This doesn't happen. This shouldn't happen. This can't happen. And I think the repo is the same thing, right? We had this crazy period and the fury with which everybody in a position to was saying this is nothing to worry about

Starting point is 00:29:44 it's perfectly normal. That tells you how big a problem it is and these things do. The test spread quieted down originally until it just went off the reservation. And I think the same with the repo market. The stresses are there. What's happened in the real world

Starting point is 00:29:58 away from equity markets, we're seeing that erosion of trust again that we saw in 08, right? The counterparties aren't sure what's going on and they want to hoard their cash and they want to only do business for people that they're convinced they can do business with. And the only person who's going to be able to step into this

Starting point is 00:30:16 is going to be the Fed, right? And they will, to what we've been saying all along in this conversation, they will buy anything, print anything, do anything, whatever they have to do. Because I think Luke's right. I think they realize now that the gun is to their head and every single chicken that they've hatched

Starting point is 00:30:33 is coming home to roost at the same time. And so if they don't step in now and do quote unquote whatever it takes, this thing falls over in a hurry. And I guess to their credit in some way, I think they realize this. And I think they understand how bad a situation they're in, which tells me they will come up with all kinds of crisis. Look, you've been talking a lot about yield curve control, right? Which, I mean, I'm sure has to happen at some point. And maybe served, right?

Starting point is 00:31:01 I think it's right. I think later this year you'll probably see that. I think it's dependent on recovery. I think it's dependent on, is there a second wave, a number of different things. But Grant, I thought your point earlier on just what's happened in the real economy, I thought was a really good one, which was, you know, you go back the 0708 crisis. It was sort of these esoteric security instruments that were, you know, we knew what was going on in housing and we could put the number on housing, right, which it was originally, it was

Starting point is 00:31:25 $60 billion. And then it was $80 billion. And then when someone got really crazy and made it $120 billion in losses or something, right, which by the end of the crisis was adorably in terms of the number, because we didn't know what was sort of behind the scenes with all this stuff, whereas now when you talk about the counterparty risk and what these banks have to be thinking, you know, you see headlines go by where, I think I saw something today where a quarter of commercial landlords, you know, got paid in full in the last month and a half or two months, right? So knowing that business, where

Starting point is 00:31:53 that's by nature, that's a, that's a business that runs at 10 turns of leverage, right? They put down 10% of equity. And so, you know, if you don't get paid 10% of year, you're breaking even. If you're not getting paid 20% of you're losing money. So there's just this great degree of uncertainty in the real economy right out in the open very easily easy to see. And that just, and then we're moving into a quarter end with repo anyway, which has sort of been a hot, you know, half point as sort of each quarter end as banks are window dressing or truing up books, however you want to phrase it. You know, that's a really good point, just this real world. You haven't had this ability. We'll look at the stock market, right? And the stock market.

Starting point is 00:32:34 market is supposed to reflect economic reality. What really you need to do right now is be out on the streets talking to business owners to get a real sense for how bad this is. But of course, we can't. They're all closed, right? You can't even go into the store and talk to these guys and say, hey, look, what's one of things like on the ground? We've got the PPP that will roll off at some point. I'm sure they're going to have to re-up with that because the effect that's going to have on the unemployment number. So that real economy is totally being masked by the stock market performance. and the disparity between the two is so extreme. I think the COVID thing basically got them there,

Starting point is 00:33:08 and I think the social unrest has gotten them there. We're basically into it. You know, it's no longer, I think for a long time in our career, central bank policy was seen as a dial, right? We can dial it up a little. We can dial it down. Stocks to the moon, the world's ending. This was sort of always going to be where it was going.

Starting point is 00:33:25 I just think that the degree, just how severe this slowdown was, basically probably pulled it forward a couple of years worth. Before this, going back a couple of years, every couple of months you'd see an article talking about how 50% of Americans didn't have 500 bucks for a surprise auto bill or the fragility in the system. How many people don't have any savings? How many companies, how many zombie companies there are in the S&P, and it's in the hundreds, which is crazy. We knew the system was fragile. We all knew that. And all the data is out there. it's been swelowing around for a couple of years. And now here we are, right, where all these

Starting point is 00:34:03 fragile businesses have lost a quarter of their years' revenue. People have lost jobs. There was a Deutsche Bank charter today that Torsten Slok put up. 50% of households have lost employment income in the US. And it doesn't matter which way you cut it. If you understand the fragility of the balance sheet of corporate America, household America and governmental America, if you understand the fragility and the numbers are all there, then what's happened in the last three months doesn't get repaired by what repaired 2008. It doesn't work. So you just have to kind of sit here and deal with the madness and kind of maintain your focus on the end game of this thing and look at, you know, the way you do look, look at what's out there and not in front of your face, because what's in front of your face is

Starting point is 00:34:51 very, very misleading. And it's a head fake that's going to catch a lot of people, I suspect. So given the ridiculous amount of printing that has happened this year, gold is only up by 11%. And the S&P 500 is trading gold by only 7%. Taking the circumstances into account, why is gold not taking off in this environment? The question with gold is always why, right? It's always why and then when. They're the two questions that everybody wants to ask about gold. And it's normally why is it not done X and when is it going to do why? And if you look back at material, to late February when the market cracked, you had this period at the beginning where the stocks were tumbling and gold was also falling and everyone sitting there saying, what the hell, gold supposed to be going up? Why is my gold not performing? But there was a period there in the first

Starting point is 00:35:37 couple of weeks where your one ounce of gold bought you 33% more in terms of units of the S&P, you know, 10 day, two week period. So it did what it was supposed to do. And I think a lot of people get kind of horn swoggled by fixating on the price of gold. And people talk about why is the price not gone up. And like you, I would have expected the price to go higher. But when I look at it, I look at all the other stuff that we've been talking about, all the levers that were being pushed. And, you know, now there's four or five guys pushing on this lever to stop it springing back. And gold always just sits there, right? It doesn't do anything. It's just an inert rock at the center of the financial system. And all the chaos goes on around it. And it's never really a case.

Starting point is 00:36:20 of gold rising, it's a case of things around it sinking. And right now, the stuff around it isn't sinking. Gold's kind of just sitting there and optically, risk assets are higher. Everybody's got the bit between their teeth again. And gold really hasn't done anything. I mean, I suspect what you'll see is when the bear market resumes, which is my base case, you will see gold optically start to look better. And you'll see people coming into, We've seen it a little bit in the miners already. We've seen some people starting to buy the mining shares and it really gave them a kick because it's such a small market. But yeah, normally, why hasn't gold gone up? I don't know, but it's really not something I spend an awful lot of time thinking about,

Starting point is 00:37:03 which may surprise people, but I don't. I mean, I'm not looking at the price of gold. I'm looking at what it buys me relative to other assets. As you said, it buys me 7% more S&P now than it did a few months ago. And that's even with all this. If you measure the S&P and gold ounces, it's where it was in 1994, right? So you could have had your money gold this whole time and not missed out on any of this stuff, right? You could buy the shares today, the same price you could have in 1994. I had no stress. So none of us really know. It's kind of a mystery, but then it'll do what it does in its own time to me. I know what you think, look. I've been a little surprised that hasn't done better as well. I think where this could go is,

Starting point is 00:37:40 you know, I thought the Dutch National Bank last fall said, look, if the system comes unhinged, we're going to need gold to rebuild the system. And so to me, I think, gold is sort of performing, yeah, it's probably been a little disappointing relative to the chaos, but I think ultimately where gold will really shine is if the system really does break down. And I think that's important too when you tie back to what we were talking about at the start of the show in terms of this great power competition, if there's really a new Cold War between the U.S. and China, like I think there is. I think you think there is as well.

Starting point is 00:38:13 Then all of a sudden it becomes a currency competition as well, which is interesting, right? So I have a chart, it looks at the U.S. Treasury's outstanding, the market value of the U.S. official gold divided by foreign-held Treasury's outstanding. So it's basically the amount by which the U.S.'s gold collateralizes all the foreign-held treasuries outstanding. And so what's really interesting about that chart is prior to 1989, when the Berlin Wall came down and USSR broke up, the U.S.'s foreign-held Treasury's outstanding were never less than 20 percent collateralized by the U.S.'s gold at market value.

Starting point is 00:38:49 And it was often 40%, it was really actually 40% more often. So say 20 to 40%, 1980, when there was a true dollar crisis, it got as high as 133%. So basically the U.S.'s official gold was more than 100% collateralizing all the foreign held treasury is outstanding, which is a true gold bubble. But that number is 5% today. So for me, where I really expect to see gold perform is, I think, one of two things. either it becomes crystal clear that we're going to get an asset hyperinflation, that basically the answer to when is the Fed stopping is never. They're going to bail out the Eurodollar market

Starting point is 00:39:25 and the balance sheet's going to $40 trillion over the next three years. And people are going to go, okay, and I think gold will perform really well in that scenario. I think the other way it performs is if we keep going down either this great geopolitical competition because the reality is, is the U.S. dollars way too strong for the U.S. to be able to really compete. And the other scenario, I think it does really well. And is if they lose control, this thing and we get a chaotic collapse of the system, then I think you see basically a write-off of sovereign debts, you know, or a big write-down, write-off. And the only thing on central bank balance used to collateralize or offset those write-downs is gold. And that's where I think

Starting point is 00:39:59 you could see a huge step up. But I think it's a much more systemic thing that we'd have to see or get further along on the systemic thing. Because I think what we just witnessed was systemic, but I think they nipped it in the bud fast enough is ultimately what gold is telling us at this point. How do you handicap those, Lou? If you've got to put odds on those three outcomes, how do you handicap? I think it most likely is a combination of the great power competition and basically the asset hyperinflation in the U.S. I think asset hyperinflation in the U.S. is really my base case at this point.

Starting point is 00:40:31 And part of that is because the great power competition reinforces that because you can't have a great power competition and have China finance the great power competition against China. That's going to have to finance it. The U.S. private sector doesn't have the balance sheet. Luke, when you look at the price action that we've seen just in the past week and a half, I think it completely confirms what you're saying. I mean, this market's moving out.

Starting point is 00:40:52 Like, there's nothing in front of it, at least the indexes that we're tracking. I mean, they're just getting bid. They're not even shaken during the day. I mean, it's just a straight bid at the open, straight to the close for the last 10 days that the market's been running. So if that trend continues, which it seems like it is into the coming weeks, the Fed's going to see what's happening. going to clearly understand that it's them that's causing this. I mean, there's no way they couldn't.

Starting point is 00:41:20 So then what's the tool that they have to slow it down after they pumped all that liquidity into the system? How do they, is there anything? I think some of what we're seeing in the last 10 days you refer to, I think is some capitulation, right? I mean, you've seen legends like Druck and Miller saying, look, I got my lunche eat, right? And he's not the only guy. I think there are a lot of people that really negative and I've had to cover. I think there's some element of that that's driving that. But to your broader question of what are they going to be able to do? And that's, you can't shrink your balance sheet, right? I mean, technically I guess you could shrink your balance sheet if you can get the banks to buy it. So during World War II, and that's where

Starting point is 00:41:57 I think we'll ultimately, if we're in a great power competition where foreigners are not buying nearly enough treasuries, basically the U.S. domestic private sector and the Fed are going to have to finance everything we want to do in this great power competition. In World War II, the percentage of total U.S. banking system assets that were in Treasury exceeded 50%. That number is 5% today. So I think the first thing it's going to happen that the Fed does have some wiggle room is I think they are going to turn the U.S. banking system into treasury foie gras. They are going to stick a hose down the throat of the banking system and they are just

Starting point is 00:42:30 going to pump their belly full of treasuries. And it's not a terrible deal nominally for the banks, like we said before, right? There's basically no cost to carry, no cost of capital against those treasuries. but the government cannot win the great power competition unless real rates are negative. So they're going to be losing money over time on a real basis, but making money nominally in the near term. So they have some wiggle room the Fed could maneuver there. But ultimately, they can't let rates rise. And if they implement yield curve control, then you have to pick your rates, you know, your levels pretty carefully, right?

Starting point is 00:43:02 Because if you pick too low a level, you're going to have to buy a lot more to hold those levels versus if you pick them high, then you can be lesser than you can buy less, but if you pick them too high, then it becomes hard to finance the great power competition given debt low so that they're painted into a corner. That's a really interesting idea that you're saying that they're going to pump the banks full of treasuries. And I think that they would have, because the other big challenge that they've got, they've got to keep the slope of the yield curve positive because if it starts inverting, these banks, I mean, they go boom as soon as that thing inverts on them. So if they're controlling the amount of treasuries that are sitting on their balance sheets, they then can also control the shape of

Starting point is 00:43:40 that curve a whole lot better, but are they going to be able to soak up that liquidity in a manner by doing that? I'm trying to wrap my head around that idea. Preston, let me ask you a question because we're talking about, okay, what do they do if this thing runs away? But we may be at the point now where why would they think like that? Why would they try and stop this thing running away? Because at the end of the day, they realize now if it stops going up and starts coming down, they're on the hook. Right? They're going to have to spend an unlimited amount of money, which they've said they're willing to do. I can't believe they want to do it because they realize that they're going to need all these bullets at some point.

Starting point is 00:44:18 So maybe this is like, okay, well, we've already shown that we don't take the punch bowl away. Why don't we go and put another fifth of Jack Daniels into this thing? Right? I mean, it's what possible reason do they have to try and stop. this running away now. Well, you know, what's fascinating, when you look at this stock market in Venezuela, Argentina, and you look at it in nominal terms, it's fascinating the shape that it has at a very similar point where we're at here in the U.S. It gets really violent. The moves, and I would argue we've seen two violent moves so far. The first one wasn't nearly as as

Starting point is 00:44:58 violent as the one that we just saw, but my expectation moving forward is that we're going to continue to see these violent waves, they definitely don't go anywhere in real terms. But as far as a nominal terms, they kind of go up, but they're really violent. So I guess my expectation is that we're going to see a new all-time high. And then that's where the Fed's going to say, oh, my God, we're putting too much in the system. Let's just ease off this a little bit. And then you're going to get the cataclysmic whipsaw to the downside, only for them to add the next unprecedented amount of liquidity into the system. That's a really good. great point, Preston, because I think it was Chris Cole recently, I think I read maybe where,

Starting point is 00:45:37 and again, it's, I hesitate to use it, but it's just the easiest example, and it was the one he used. If you look at the Weimar Republic, what happened to stocks in nominal terms, the average person, and myself included, I made this mistake when I first look. I said, oh, well, the easy trade is you borrow a bunch of marks and you buy stocks and you own them Germany for free. And he said, but you have to really look is these violent reversals that you talked about, the reality was the only way to get from point A to point B and gain wealth was to be unlevered, actually. Because if you were levered, either way, those swings cleaned you out in between. So I thought that's a really interesting point. Again, I don't think the U.S. is going by Mar to be clear. But I do think there are, you know,

Starting point is 00:46:17 when you look at the fiscal side, when you look at the wealth inequality side, when you look at the social unrest side, when you look at what happened with the Treasury market in March, I think we're moving towards sort of a Venezuelization of the U.S. market. So you say we're not in a Weimar situation. I guess I do think we're in that situation. And maybe through tinfoil hat here, why do you think that we're not? The reason I think we're not, and I think there are certainly some things that are very similar. I mean, maybe the biggest is that we have war reparations due that are inflation adjusting and impossibly large as a percent of GDP in the form of our entitlements, right? I mean, the U.S. government can print dollars, but they can't print health care

Starting point is 00:46:59 services, which is what they owe the baby boomers. But there's two things I think in particular that are different. And the first is the political situation, which while it has continued to get worse, you know, when you read the history books, it's not, you know, if we start having open gunfights between Antifa and, you know, the Southern boys or whatever they are in major cities around the country and the cops stand aside and you have local guys running beer hall push and taking, you know, basically LA seceding from, that would almost be more parallel to what Germany was suffering at that time, but it's not that bad yet. And the other thing that is, I think, critical is that the U.S. still has the ability to produce virtually everything it needs at the right price. So,

Starting point is 00:47:43 for a perfect example, shale, right? As the dollar collapsed 90% against oil going from $12 to $120 or $150 bucks over how many years. And what we got out of that was an incremental eight or 10 million barrels a day of oil. And there's a lot else that the U.S. could do where ultimately that's what would stop the hyperinflation from being completely currency destroying, like a Vimar in my view. It's not to say it couldn't get very inflationary, but I just don't think it can destroy their currency in the same manner. Interesting arguments. Grant? For me, the outcome is uncertain, but what I'm just listening to are two very smart, very knowledgeable guys discussing whether the U.S. is Venezuela or

Starting point is 00:48:25 why am I Germany, right? But that's the important thing for me, right? Because you're both saying it with a straight face and they're both possible outcomes. That's a really, really important thing for people to understand. 10, 15 years ago, A, we wouldn't have been having this conversation. And B, if you had it done, it wasn't a possible outcome. It was kind of some fantasy that you were thinking about, well, let's just game this out just for fun, right? But when guys like you, arm wrestling over those two outcomes, it tells you that we're in a place that is on a path that potentially leads to one of those things, and how far down that path we are is to be decided. But with what's going on, and, you know, look, when you talk about what was going on in Germany back during the

Starting point is 00:49:16 Weimar Republic, we've seen flashes of that in the last few days. You know, we've seen social media posts from people outside their window in New York, I was talking to someone this today, that I'm looking at this thing and it's like a scene from a Batman movie, a dark night or something, right? It's just chaos in the streets of New York, just utter lawlessness. And there were so many of those, those kind of posts. And you look around, you think, how do we get here? So we can go from things are kind of screwed up right now to how do we get here in a matter of three or four days. That's what people have to understand is that outcomes like Venezuela and outcomes like the Weimar Republic are crazy until you're three days away from them. It's all fun in games until you go to

Starting point is 00:50:00 the store and there's nothing there. And that's where the moment you go, my money's not good for. Pippa Malgram made a great point to be a bit. This one I spoke to a couple of weeks ago. She's talking about people's willingness to bear inflation now, having been locked down, everybody has a recent memory of going to the grocery store and not being able to buy what you want. So you go back in a weeks and a loaf of bread's five bucks instead of 250, people are probably going to go, yeah, well, it's better than having no bread like we had a month ago. So, yeah, I'll pay the five bucks for the bread. And it's that willingness to accept the higher prices that is the kind of turning the key to this thing. And if we get inflation, we haven't talked about that yet, but if we get

Starting point is 00:50:40 inflation on top of all this stuff, I was going to say, is that, you know, when you point about, you know, two serious people talking with a straight face about these outcomes. Another piece of evidence of that is we're talking about empty food shells in America. I remember going to the grocery store with my wife a few weeks ago. And on one level, I understand this situation. But on another level, once you understand that it was, as Nicholas Nassim Thalib talks about, the system was not anti-fragile. We went from, in the name of efficiency from having, whatever, 30, 40, 60 processing plants

Starting point is 00:51:11 around the country. If anyone plant has, it gets COVID, you shut it down, you read. And now we've got like five plants that make the process all the protein. And so if any one of those go down, you are by definition going to have shortages in parts of the country. But it was just something, it was very, very weird to be in America and go to the grocery store and see empty shelves. I'd never seen it in my life. I didn't want to put too much into it, but there it was. So let's continue talking about some of those prices that we are seeing in grocery stores. We see the price of, for instance, meat go up dramatically and so many other products. What is driving those price trends right now?

Starting point is 00:51:46 And do you guys expect that to accelerate? I got three teen boys. I'm the worst judge in the world, man. You're like, please be vegetarian. Just come over and tell me you're a vegetarian. I'm sorry, go ahead, Grant. No, I was just going to say the inflation thing, it's all about expectations, right? It's all about people's expectations.

Starting point is 00:52:07 And if expectations rise, then that's really often all it takes. And we're seeing that. People's expectations based on what's happened are increasing. And that's a very dangerous place to be. I mean, the bond market is screaming deflation. And the price action would suggest that even if we do inflation, we're going to have to go through another deflationary shock of some sort before we get there. But people's willingness to bear higher costs and people's expectations and people's feelings. You have a more intense feeling about inflation when you lose your job because suddenly everything seems more expensive to you, right? Because you don't have any income. And it's just this mindset that people are in believing that prices are going to go up. That's what it takes for

Starting point is 00:52:50 people to start go out and try and get in front of that. And the data that we're seeing suggests that we're not quite there, but we're approaching a tipping point where people do start to worry about a job and start hoarding and seeing the price of meat go up and things. well, I'm going to fill the freezer. I bought a new freezer because of COVID, so I may as well fill it with meat now. We're close to that. Again, it's like a lot of these things, we keep coming back to this in this conversation. We're close, we're close, we're close to all these crazy outcomes. And for 40 odd years, inflation's been a crazy outcome, right? It's just another example of something that we have a generation of people for whom has not been an issue or a problem

Starting point is 00:53:28 or a likely outcome. And so it's been just discounted and put on the shelf as something from in history books. And we could go, yeah, Ronnie Sterfler put out a fantastic chart of inflationary surprises. So in 1915, inflation, this is US CPI, was 1%. In 1917, two years later, it was 20%. In 1945, it was 1%. Two years later, it was 19%. In 72, it was 3%. Two years later, it was 12%. And so that's how quickly these things happen when they happen. And we've built up a hell of a lot of complacency in all component parts of this financial system that we operate in. And inflation is a big part of that. And the complacency around inflation saying it's just not something you have to worry about is just another dangerous thing to take for granted, I think. Let's take a quick break

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Starting point is 00:57:42 And I think, too, when you look at it structurally, even away from food, when we go back to we're in this new great power competition, boy, the globalization has been remarkably disinflationary for labor, for stuff, for consumer goods. And another way we can read that document, that great power competition document, is globalization's dead. And now we're going to go back to relocalizing. And that by definition is going to bring back inflation. It's going to be more expensive to make elsewhere because, look, seven of the 10 biggest container ports in the world are in China. And even if you start moving the stuff elsewhere, it's going to take a lot of costs jammed very quickly to get it done. And so to me, I think that the amount of complacency around, you know,

Starting point is 00:58:32 a lot of people are paying attention to the U.S. China tensions and to de-globalization. But I don't think, to me, the bond market is extraordinarily complacent about the real implications of what this is, which is we're hearing the policy guys all saying, we are divorcing China much faster. We're going to reshore much faster and the bond market's going, eh, and it sets up for exactly what you just described grant, where you go from 1% to 20% in a couple years, right? And it's interesting because each of those times when that happened, 15 to 17, is it, you know, wartime, a new supply change, you're building stuff up, and then 72, right? End of a war, end of a currency system. These types of things, they just, they happen. And this is the end of a 30, 40 year period, 50 year period of globalization and this,

Starting point is 00:59:15 you know, sort of sequence of the U.S. moving. its supply chain from one nation to another nation to another nation each cheaper each time. And where are we going to put this stuff? It sounds like someone's going to come back in more expensive areas. When you look at how Ray Dalio talks about inserting liquidity when you're in these types of environments, and he talks about the use of quantitative easing where you're buying up bonds, you're basically inserting it into the top of the economy, and then you have to balance that with liquidity insertions into the masses through universal, we call it universal basic income.

Starting point is 00:59:47 now. So my question is, and I think it's kind of surprising that we've been exercising that insertion point of quantitative easing straight into the top of the economy for more than 10 years straight, without hesitation, without implementing the other access point, which is to the masses through universal basic income, because politically it's been really unpopular. Now all the sudden, the first payment has gone out. And, you know, we were talking about this being like a drug earlier. And I think politically, after they do this and they see the feedback that they're receiving for, hey, that was awesome. Give us another shot of that. My expectation, my impression moving forward is that we haven't even hit the tip of the iceberg with universal basic income.

Starting point is 01:00:33 Curious to hear your thoughts. I agree. I think it's crossing the Rubicon, right? It's, you know, Lacey Hunt has talked about, hey, the Fed can lend, but it can't spend. And I understand what he's saying, but I think it's semantics, say once you get to a UBI, because if the government spends and then grant to your point, the Fed is buying up the bonds in a greater amount than the entire tax receipts, they're sort of, you know, two sides of the same coin. And I agree that once you cross that Rubicon, particularly in this social unrest environment, and particularly in a setup where, as we discussed before, where monetary policy has gone from a dial to on off, I think it's going to be real hard to turn off.

Starting point is 01:01:15 Well, they say there's nothing more permanent than a temporary government program. And one that gives money to people. Once you give people money, try taking it away from it, right? Particularly, as Luke pointed out, in an environment like this where people have, you know, you come home and by the front door, you've got your protest outfit. It's like, I'm home from work, honey, I'm going to put my black mask on

Starting point is 01:01:36 in my ninja suit. I got to pick up the banner, which banner are we taken out today? People are in that mood. And so they're getting checks from the government. They're also reading all kinds of articles about the fat cats who are becoming even richer and wealthy in them. And $1,200 is great when it comes through the door, but you realize it doesn't really make the difference you need it to make. And so you want more. And there are plenty of things you can hang your hat on saying how Wall Street got bailed out.

Starting point is 01:02:04 And Starbucks took 10 million PPP loans and all these Chipotle. We're going to boycott them. We're going to do this. And so once this thing begins, there's no way the guys who are going to write these checks and sign them don't understand this. Once this begins, as I said, you're not going to be able to take this money away from people, A, because they're going to need it, and B, because if you try, they're going to get pissed. And we're in an election year.

Starting point is 01:02:29 And what you don't want are pissed people. So we've crossed the Rubicon, but we've leapt over the Rubicon. We didn't even wade through it. We've just leapt to the other bank, and we're running. And I dread to think what this will turn into, this experiment in UBI because the hands are out. And from what you said, Preston is absolutely right, right? Wall Street has been bailed out to an unconscionable degree. And Main Street deserves their bailout.

Starting point is 01:02:53 There's no two ways about it, right? But it's tough to see how they bail out Main Street and keep the system together, whatever that means. Because they either bail both out or they choose a politically expedient, route, which is bailing out Main Street, and let the system go to hell, which they can't do. So bailing out just Wall Street is no longer an option because the people are wise to that now. So I just think that takes us full circle to where we started this with this unlimited amount of printing that's going to have to happen because now you've got to bail everybody at. You don't have a choice.

Starting point is 01:03:28 And the thing we know, you consider how they've been able to do QE for so long benefiting they have their haves and not do UBI benefiting they have nots. In order to do QE, the process is simply much easier. You don't have to run by Congress, for instance. And not just that, something as political charts as UBI would be almost impossible to get through Congress under most circumstances. But because of COVID-19 and to grant's point about it being an election year, now the standards for prudent fiscal policy have just changed.

Starting point is 01:04:00 So perhaps you are right whenever you say that nothing is more permanent than a temporary government program. I think the beauty, if you like, of QE was that it was just arcane enough for people to not really understand it. Everybody that you trust from a political standpoint and, you know, the Paulsons and Bonankees, all these trustworthy guys are standing up and saying, we're going to save you, right? This is what we're going to do. It's basically a variation on the theme of the old joke about what's the difference between

Starting point is 01:04:32 a recession and a depression, right? Recession is when your neighbor loses his job. the depressions when you lose yours. And that's kind of where we're at now in that before we had this sharp spike in 08 and a lot of people's lives got turned upside down. Now it's, you know, a third of the working population. And so suddenly this problem is everybody's problem. And everybody is either, well, there's Tawson's chart today, right? 50% of households have lost employment income. So that's, you know, 50% of everybody that everybody is, knows has lost a job, which is why we're seeing the consumer spending numbers fall off a cliff

Starting point is 01:05:09 and people, the savings rate going through the roof. So this is where we're at. And so now you don't have an option to bail out the banks because pick a number of how many millions of people need that extra unemployment check. So QE was great when they did it first because no one really understood what was going on. Now people still don't understand it, but they feel bilked because there's been enough ink spill talking about how Wall Street was bailed out and not Main Street. So even if they don't know what that means, they can grab onto that. And it's a cause to rally behind to demand to be made whole by the government. And I don't see anyone out there that's going to be able to say no to this. So how much longer until we see municipalities start failing

Starting point is 01:05:52 and needing bailouts along with everybody else? Is it tomorrow yet? No. Oh, yeah. I was about to look at my watch. You saw in Illinois looking to tap the Fed already. They're in a tough spot. I mean, they were in a tough spot before this unrest. And now it might be much more structural. You know, there's probably a lot of conversations going on at a lot of the very expensive houses in very nice cities in America.

Starting point is 01:06:21 Honey, do we really want to be here? Where is this going to go? If they ban the police, do I want to live in a major metro area? You know, I saw Bernard Carrick on Twitter today saying there's 600 New York. are cops. He knows that they're going to resign. What do these cities start to look like? I mean, the New York, we've all, you know, come to know and love in the last 30 years is great. My understanding is it wasn't that nice a place in the 70s in terms of the crime levels and the finances, et cetera. I don't know. I think the COVID thing was one thing, but now I think

Starting point is 01:06:48 the social unrest and I think the change in perception of the potential relative safety of American cities going forward, you know, combined with the work from home shift where you make a case that commercial real estate has a structural problem. You're seeing corporations say, hey, we'll let you work from home. And then Amazon, of course, which has been documented over and over what Amazon's done to storefronts. And it's now even hitting the Fifth Avenues of the world, Madison Avenue's of the world. But, you know, I think there's a lot of cities and a lot of trouble. And that then comes down to the question of we're about to see how different the U.S. is versus Europe with Greece, right?

Starting point is 01:07:23 Where, you know, are they going to put these cities through the ringer? Are we going to default on cop's pensions and teachers' pensions after we bailed out Wall Street, 12, 15 years ago, and maybe we will. But again, there's going to be a political cost to that on the other side that I think will be further supportive of things like UBI and larger and larger amounts of what have you. We've seen the trial balloon, right? We've already seen that trial. I forget who it was. It was a very prominent Republican politician. I can't remember which one it was now. But a couple of weeks ago talked about how he thought that municipality should be allowed to declare bankruptcy. And immediately, everybody kind of jumped all over it. I mean, it

Starting point is 01:07:59 became a big thing for a couple of days and they hushed it up pretty quick. But that felt like a trial balloon to me. I mean, you know, we had, during the Great Depression, people forget that Arkansas went bust, right? The state went bust. So there is precedent for this stuff. Again, we're in a modern world where this stuff hasn't happened and it's not entertained. But at this point, everything is on the table. And anybody who's trying to structure a portfolio, trying to manager portfolio who isn't entertaining the most extreme outcomes in terms of how they're thinking about protecting themselves from possible tail risks is missing a trick because they should be listening to guys like you talking about these outcomes because you have to have a plan for a wire more

Starting point is 01:08:44 outcome. You have to have a plan for municipalities declaring bankruptcy. You have to have a plan for these things now because they're all in play, every single one of them. Yeah, they're high probability event, opposed to being these one-off, one-and-a-hundred kind of, yeah. Okay, last question. And Grant, I'm going to get back to the smirk. All right. So you guys know, I'm a Bitcoin bull. I think that it's going to have a major role playing forward.

Starting point is 01:09:13 I get the impression that you guys are less bullish or somewhat skeptical of that. So I'm kind of curious to hear your skepticism. I'm going to give you my very succinct Bitcoin answer because I asked about Bitcoin a lot and I don't try and avoid the answer, but my answer is always the same. I'm bullish on Bitcoin. I think everybody should own some Bitcoin because it's a great option on an uncertain future and it could potentially be a game change for a lot of people. But my understanding of it and the depth of my knowledge on it is so far below the people

Starting point is 01:09:45 that immerse themselves in this thing that I don't see how my opinion is of any constructive use to them whatsoever because the people who understand Bitcoin understand it way better than I do. And the golf, in my experience, when you don't immerse yourself in Bitcoin, it's such a fast-changing technology, it's such a fast-changing world that I think you either have to make a commitment to be deep, deep, deep into blockchain and really understand it, which means you have to give up a lot of time trying to understand a lot of other things. Or you have to find a lot of smart friends that really understand it and ask them questions about it and get the dummies guide, which is the route I've chosen to go. So, you know, my opinion is everyone should own some, but people

Starting point is 01:10:27 asking me, for my opinion on Bitcoin, there are way better people than me to ask. You be one of them. You know, I've taught my girls, I said, you know, the hallmark of somebody who is very intelligent as somebody who says, I don't know, or why don't you tell me what you think, or those kind of things. And I just, I love that response. See, now, Billy Connolly said the definition of an intelligent person is someone who can hear the William Tell Overture and not think of the Lone Ranger. I think that's a way better barometer who's smart. Luke, let's hear it, man.

Starting point is 01:11:05 I echo a lot of grant sentiments. I own Bitcoin. It's a sort of a tail position for me. I've always looked at it. I'm in sort of the same boat as him as there's a lot of people to understand it a lot better than I do that I would defer to. I think of it in a very sort of simplistic way of it being almost as a neutral reserve asset with no counterparty risk for the millennial group, if you will. It's easier. It's sort of a digital goal. My one hang-up on it is, a relative to gold, at least, is that ultimately it's not on central bank balance sheets. And so in a world where central banks continue to exist, I think Bitcoin will do really well, but I think gold will also do really well. And I feel like I understand gold better

Starting point is 01:11:50 and that if central banks are going to have to basically, if we're in a sovereign debt, global sovereign debt bubble, the outcome of that is that global sovereign debt is going to have to be written down significantly, possibly up to 100 percent if it was like certain nations in the 20s against the only other asset on central bank balance sheets that able to do that, which is gold. And so I think gold is going to really outperform sovereign debt. I think Bitcoin will do well alongside that has always been my thought on it. So I want to play a hypothetical here for you because I think the speed at which something progresses in value could have a important impact on how things transpire here moving

Starting point is 01:12:29 forward. And I'm of the opinion that in the coming six months to a year, we're about to see some aggressive price movement on Bitcoin due to various things that have been happening with the protocol. So today the price of Bitcoin is close to 10,000, and we're recording this in June of 2020. Let's say the price of Bitcoin runs to aggressively runs to 20,000 by Christmas or like January timeframe of 2021, where it's literally doubled. And in the backdrop, we have all of this chaos that we've just described that seems like

Starting point is 01:13:04 it's pretty much the very high probability of an outcome playing out. Does that create a situation that just becomes a self-fulfilling prophecy just because of the sheer fact that it starts to look like a gold chart in 1920 Germany? It's possible. I mean, for me, what I've wanted to see from Bitcoin is how it performs in a crisis. We kind of nearly got a look at that a couple of months ago, and it didn't do great, which is understandable that all risk assets got sold off. So I definitely want to see what it does in a crisis. If it goes to 20,000, we've kind of seen that before. We saw that back in 2017, and the 2017, we saw that run up to 19 or 1,000 where it got to.

Starting point is 01:13:47 So I think that will give people confidence again. But I think to get the juices flowing like we're seeing in some of these Robin Hoodstocks at the moment, it's going to have to do something really crazy, right? Which it could conceivably do. But it won't be more, as Luke said, than a tail position for me, until I see an event. And I see, do people run to it or away from it? Because I know in an event, people will run towards gold because they always have done. Yeah, you may get the initial margin called selling, but people will want to own gold. Do they want to own Bitcoin or do they want to cash out their Bitcoin because they're not sure?

Starting point is 01:14:24 I don't know the answers. And I'm fascinated to watch it. Luke, could you talk more about the difference between the Bitcoin market and the gold market? And I also know he has some thoughts on the role of the Bitcoin exchanges. I do think Bitcoin is still a pure market than gold is. And by that, I mean, there's fewer paper derivatives attached. For me, I would get really excited. You know, it's interesting to me last year, technically Bitcoin was moving up.

Starting point is 01:14:50 And I forget what some of the key technical levels was, whether it was 4,000 or 5,000 when it broke about. But it was interesting in April or May last year, one of the Bitcoin futures exchanges shut down. And it was interesting to watch how Bitcoin reacted. As soon as that happened, it took off. And so for me, following gold as long as I have and the way that I have, have one of the most bullish things for me for Bitcoin would be to see that futures exchange

Starting point is 01:15:12 shut down and have it be a true market again. You can find my tweets from it at the time in late 17. One of my big regrets of 1718 was not selling the Bitcoin ahead, but not maybe even trying to sell some futures. The margin requirements were just crazy high. But anyway, the point was as those futures were being rolled out, a lot of the Bitcoin community said this is a sign of acceptance. And I was saying, this is going to be a freaking disaster for Bitcoin because

Starting point is 01:15:37 this is how they control gold. Just the financialization, I do the futures market, right? When you have a cash settled futures market on a monetary asset, like a gold or like a Bitcoin, what it does is it begins to shift price discovery from the physical supply demand fundamentals to whoever has the biggest balance sheet, right? It's almost like going to a casino and playing no limits poker with Warren Buffett, right, where you might have a royal flush, but, you know, he's got $100 billion, and he'll take your house and everything else. And so you have to fold. And that's sort of what the

Starting point is 01:16:11 futures markets as they develop around these monetary assets. And monetary asset, I define as something with a very high stock to flow ratio, right? It's basically something that isn't, it's a monetary asset. It's money. It's not used for anything else. It's not a commodity. So I would love to see the futures market go away or be severely impaired for Bitcoin. Because I think you'd see Bitcoin take off again. When you say that, I think a big component of that, especially in the gold market, market is to physically settle, there's expenses, there's friction to do that easily. In Bitcoin, there are physically settled Bitcoin markets where you can take possession of the coins literally at the snap of a finger. So all of that frictional administrative piece of providing

Starting point is 01:16:55 physical delivery is gone. And as long as you have some market that you can go to, that conducts that physical exchange. Maybe that makes that argument mute. So I participated in a derivatives market with Bitcoin, where I can buy long-dated call options, like just recently purchased one for December of 2021. And guess what? In order for the person to write the other side of that contract, they had to cough up one full Bitcoin, 100% equity into escrow in order to write that contract. And I guess I'm looking at it from the other perspective is now that These derivative markets, particularly in Bitcoin, are requiring 100% upfront escrow of the underlying. That Bitcoin's locked up.

Starting point is 01:17:40 It can't be traded. It can't be sold anymore. I think that's really bullish for the market long term that you're seeing this lockup of 100% equity. I think it's a little crazy. Guys, I don't want to take any more of your time. This was amazing. I really, really want to do this again if you guys are up for it. Anytime.

Starting point is 01:17:58 I can't go you. I'm not allowed out of the house. So I'm just glad of the company. Thank you both. Give people a hand off to your handles where they can learn more about you, follow you. I'm at Luke Gromman on Twitter

Starting point is 01:18:12 and FFTT-LC.com for more information about our research products. And I am at TTMYGH, and that's the acronym for Things That May You Go Home and the website is the same, TTMYGH.com. Gentlemen, thank you for your time. Great seeing you too, guys.

Starting point is 01:18:30 So at this part and time, the show, we'll play a question from the audience, and this question comes from AJ. Here we go. Hi, Preston and Stig. Investing has a simple rule of buying low and selling high. Responsible allocators will often buy back their own shares of companies when they think their stock price is low or undervalued. On the other hand, why don't companies issue new shares when the market is hitting all-time highs where they feel their stock is overvalued? Well, I don't think companies should day trade their own stock. Wouldn't this be a good strategy for companies to buy back when share prices are low and

Starting point is 01:19:09 reissue them at higher prices? Fantastic question and a very insightful question that really shows that you truly think as a capital allocator. Now, one reason that comes to mind is the book Outsiders, and you might remember that we covered that here on the podcast, and we'll make sure to link to that in the show notes. It was episode 180. It's a book that is both endorsed by Warren Buffett and Charlie Munger. And what really stands out in that book is that the best CEOs are also the best capital

Starting point is 01:19:38 educators, and they're doing exactly what you are saying. They're using their own stock as currency, and they have the deepest respect for their valuation, so they sell it whenever the stock is very expensive, and they buy it back whenever it's out of favor in the market. So you might be thinking, well, if it's that simple, CEOs across corporate America must be the best capital allocators. But that is actually not the case. COs being great capital educators are very often an exception to the rule. Now, it's not that they're not skilled, but whether often excel is as salespeople or politicians, which is why they became CEOs in the first place.

Starting point is 01:20:17 Really few people in corporate America rose to the top because they made better decisions of when to issue and buy back stocks at the right time. And even if they did, which unfortunately if they don't. It's also very tricky to have a good timing. Even the best capital educators might think that the stock is trading at a very high level and issue of stock, or there might be one to buy back shares when everything looks cheap. But if the market has a vastly different opinion, it might in hindsight look like the CEO does know the value of his or her own company, while the real reason is that the market just acted very rational. And then a final reason why the timing is off is actually that the CEO might be acting rational.

Starting point is 01:20:57 And what I mean by that is that whenever a stock is trading an all-time high, very often it's because the company is also spinning off a lot of cash. So even at what looks to be an attractive stock price to issue shares, there's really no reason to dilute the stocks since you have enough cash to pursue your best projects. And the extra cash you generate from issuing stocks, you could only invest them in the second best projects, which by definition would give you a worse return. So, AJ, I don't have really anything else to add other than what Stig had covered. And I would tell you to go back, listen to our episode when we cover the book Outsiders.

Starting point is 01:21:35 I would tell you to read the book Outsiders. This book is by William Thorndyke. And it covers eight unconventional CEOs. And really what all eight of them are doing is exactly what you're describing is they're just incredible capital allocators. They're not only great at running the operational side of the business, but they're also really good. at allocating all their retained earnings and investing them into businesses, non-operational subsidiaries that then give them a higher return as a company

Starting point is 01:22:06 because they're able to employ those retained earnings in a manner that many, many CEOs are not able to do. So I would tell you to check out that book. So, AJ, for asking such a great question, we're going to give you a one-year subscription to our TIP finance tool. This helps you do the things that the folks in the book, the outsiders, or what we're talking about here, which is allocating capital by finding undervalued companies using all those metrics to read through the financial statements.

Starting point is 01:22:34 And we have it all on our website in a very easy to understand way so that you can conduct intrinsic value calculations on the fly, quick, easy and simple. For anybody else out there, if you want to get your question played on the show, go to Asktheinvestors.com and just record it. If your question gets played on the show like AJ's, you'll get a free one-year subscription to our TIP finance tool. If people want to check out TIP finance, just go into Google and type in TIP finance or go to our website, Theinvestterspodcast.com, and just click on the finance tab, and you can find it all there. So, AJ, thanks for asking such a great question. All right, guys,

Starting point is 01:23:11 Preston, I really hope you enjoyed this episode of The Investors Podcast. We will see each other again next week. Thank you for listening to TIP. To access our show notes, courses or forums, go to theinvestorspodcast. 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 re-broadcasting.

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