October 25, 2022

Preston Pysh interviews macroeconomist, Luke Gromen, about everything happening in the global economy in the 4th quarter of 2022.

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  • What is happening between the United States and China with chip manufacturing?
  • Is the FED being weaponized against Russia and China?
  • What should people expect in the energy sector moving forward?
  • Zoltan Pozsar’s quote about commodity-backed money.
  • Who’s actually buying UST right now?
  • What triggers the next big FED Pivot?
  • What’s currently happening the Japanese treasury market?
  • What happens in US Real Estate with 30 year loans currently at 7.22% fixed.
  • Luke’s thoughts on the 3 month and 10 year treasury being at parity.


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Preston Pysh (00:00:03):

Hey everyone, welcome to this Wednesday’s release of the Bitcoin Fundamentals Podcast. On today’s show, we have macro expert Luke Gromen 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 US chip manufacturing decision that prevents US 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 US treasury market, 7% 30-year fixed rate, mortgage interest rates, and what that might mean for the real estate market and much, much more. You will not want to miss this conversation. So without further delay, here’s my chat with Luke.

Intro (00:00:45):

You are listening to Bitcoin Fundamentals by The Investor’s Podcast Network. Now for your host, Preston Pysh.

Preston Pysh (00:01:04):

Hey everyone, welcome to the show. Like I said in the introduction, I’m back here with Luke Gromen. Luke, welcome back to the show.

Luke Gromen (00:01:10):

It’s great to be back, Preston. Thanks for having me back on.

Preston Pysh (00:01:13):

Yeah, such a pleasure man. I really look forward to these chats. I know we chat from time to time here and there, but oh, 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 or even aware of this. So give us the background and then give us your two cents on what’s going on.

Luke Gromen (00:01:51):

Yeah, so it caught me by surprise as well. Someone pointed it out to me and I apologize for forgetting who that was that pointed it out, but the second I wrote it, or the second I read it, excuse me, it immediately hit me as a really big deal. 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 has 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 sort of the nitty gritty of that.

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But the punchline is the thing that really made me drop my jaw when I read it. It is demanding, 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 and 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 apparently, it’s reportedly leading to a mass exodus of American brain power and talent, engineering talent out of the Chinese semiconductor industry at these mid and high 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 machines made by ASML some of the others away from China.


One article in the FT says, quoting an analyst, that it basically puts China back to the stone age.The Twitter thread that you reference refers to it 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 reminiscent in some ways of the United States embargoing Japanese oil industry or oil imports, excuse me in the summer of 1941 where I think it’s a very big deal. I think it’s an 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 is kind of how I’m thinking about it. I don’t know which it is, but either way, I think it’s a really big deal.

Preston Pysh (00:04:19):

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 literally the snap of a finger, “Hey, you got till next week to figure out what the heck you’re going to do.” Wow. So we’ll obviously keep an eye on that one.


One of the most questions that I got when I 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. Really kind of get into the granularity of what you’re hitting at here. 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.

Luke Gromen (00:05:27):

Sure. So back you go back in time to last year when the Fed started talking about raising rates and even going back before the election of 2020, we said, “Look, there’s sort of a grid of four outcomes. 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 are 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, 11% nominal GDP with 8% CPI. Everything goes up, everyone, “Party on, Wayne. Party on, Garth.”


If you’re in any of the other three areas, you’re going to get strong dollar, the US government is going to start crowding out global dollar markets. You’re going to 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 stop hiking rates by the end of 3Q ’22. So September 30th, 2022, at that point in time, that was far off on and out in terms of the reservation in terms of the Overtons window of discussion of when the Fed was going to stop. The reason we wrote that was tied back to a point, that grid of they’re now doing things that are going to start breaking stuff. 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, the GDP down. 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 disfunction that they were going to get pulled back in. I was looking at it strictly in an economic sense at that point. I would say all things considered, pretty accurate. I mean, the US Treasury secretary last week said she’s concerned about illiquidity in treasury market. We’ve seen that the gilt market have issues, et cetera.


So from a purely economic standpoint, not bad. However, if you would’ve 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’ve assigned a 5% chance to that maybe. So maybe that’s a tail risk.


What has proceeded with sort of each passing month and in particular after August where we saw inflation expectations roll over, where we saw oil roll over, where we saw in the treasury market, the gilt market, debt markets, the mortgage market, all these markets that the Fed has quickly jumped in to reverse themselves, the data get weaker. The Fed has quickly jumped in with almost Pavlovian in response to, with more liquidity in the post GFC era. Ever since ’08 they hop to it and they start fixing these things. I couldn’t help but notice they’re not jumping in to fix it. And people say, “Well, it’s a just 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 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 this is about weaponizing the dollar against oil and against Russia. Maybe it’s 10. No, 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, “Now we’re going to do under 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 against Russia, it would’ve gone maybe at that point it’s up to 10, 15%, 25% chance, I went 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 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 there’s a real shot that the pivot ain’t coming because yes, they did break things the way they did them. They broke on my time horizon, but what I thought was a 5% chance that they were being weaponized against Russia, it might be way higher.

Preston Pysh (00:10:55):

I don’t know that the weaponization of it is how I particularly 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 US, over in Europe, I mean it’s relentless. 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 put in on inflation. 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.


It would just be an unbelievable sell off of epic proportions 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? I do think that these central bankers have an appreciation for how close to the end game they are, if not in the end game, that they know 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 make the whole thing look like it was under control the whole time, right?


And so I don’t see any of that being “weaponized.” 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 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 buy that they’re doing it in a manner to battle Russia. I think they’re just in a battle to save their own relevance. You see all these headlines with Powell and he’s going to be the Volcker that’s going to save everything, right? It almost seems like it’s much simpler than that. Would you agree or do you think that I’m simplifying it and I don’t understand complexity?

Luke Gromen (00:13:27):

No. I mean 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. Is some of it could, I guess, just be the… I’m going to try to be gentle. When you come back to it and say, “All right, what’s driving the inflation in Europe?” It’s all energy. It’s all energy. It’s energy and money printing. And yeah, I think-

Preston Pysh (00:14:05):

Which at the heart of it, Luke is all fiscal related and just really bad strategic energy policies for decades, right? The fact 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 begging the central banks to just save them, save them from their decisions that brought them to this point. So if we’re looking at the core, that’s the core, right? Or is there something even further upstream than that do you think?

Luke Gromen (00:14:39):

Well, I think it’s core. The other thing I would say that has really changed my view toward 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 that now it’s 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 the wrong thing really. When you think about it from that point, they’re doing the wrong thing, where the US shale industry is interest rate sensitive. If you want to get oil prices down and fight Russia, the last thing you should be doing is raising interest rates. A little bit of a separate discussion.

Preston Pysh (00:15:24):

Not to even mention the capping of the prices, right? That’s a whole-

Luke Gromen (00:15:28):

Yes, oh it’s totally so. Totally so. But I think 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 Europe. 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 to me was a 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 are no longer an American citizen. I was like, “Whoa!” So I see that. 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 Congress people talking about passing the NOPEC Act, talking about changing the relationship between the US 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 in the… Because with what was happening in markets, yeah, the core CPI number’s still, but you can see where it’s… And maybe it’s just talking about dogma. Maybe they’re just idiots. It’s entirely possible. It’s pride. What’s the phrase? “Don’t ascribe to motive what you can ascribe as stupidity,” right?

Preston Pysh (00:17:20):

You just solved it. You just solved it. You just solved it.

Luke Gromen (00:17:22):

Right. But it’s these other things overlaid on top of it, these economic war and aspects that I think when I look at it… And then someone’s just a little bit of sort a feel of like, “Hey, we got to get oil down to beat Putin. He’s weaponizing oil, he’s weaponizing oil, he’s weaponizing oil. Well, what can we do?” You weaponize a dollar. Weaponize a dollar. Well, how do you weaponize a dollar? You raise rates.

Preston Pysh (00:17:48):

Weapon of choice.

Luke Gromen (00:17:50):

What’s that?

Preston Pysh (00:17:51):

It’s been the weapon of choice.

Luke Gromen (00:17:52):

It’s been the weapon of choice. And 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 hyper inflate the ruble.” They didn’t hyper inflate 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. Objectively, the oil market is where it was in February and the treasury market’s gotten hammered.


And so it hasn’t worked relative to expectations. 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 in 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. We’re getting overrun. Bomb inside the wire, weaponize it. Just keep going. Just keep going. Just keep going.” So that’s really the genesis of it, is just watching them not react to some of these sovereign markets combined with the economic warfare things that have happened in the last three weeks. So we’ll see.

Preston Pysh (00:19:11):

We’ve seen the gas prices come down, 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 aggressively going after the release of the SPR. It doesn’t seem like that’s necessarily controlling lever on diesel prices. 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 if [inaudible 00:20:17].

Luke Gromen (00:20:16):

Yeah, yeah, yeah. Sure. Sure. I think it is a refinery issue. I would defer to other people. I did see today the US is down I think to a 25 day supply of diesel, which is-

Preston Pysh (00:20:27):

That’s crazy.

Luke Gromen (00:20:28):

… if it’s me and I know that grocery stores take delivery from diesel fuel trucks and grocery stores only have three days of food, best case in good times at normal throughput rates, you’re not this scary yet but you can see scary from here in terms of the implications. 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 guests 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.


Putin says it’s energy and the west says it’s sovereign debt. The US in particular said treasuries, treasuries, treasuries. Putin six months ago had no leverage. I, 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 getting their ass kicked. And maybe they are on the battlefield, I don’t know. But I also know at USDs inventories 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 tell us what’s happening, if this is a battle between energy and Western sovereign debt, this Bretton Woods III concept that Zoltan Pozsar talked about that some people agree with, some people don’t. What’s the privacy? What’s the king? Is it king treasury or king oil? Is it king energy?


We did a chart that shows UK gilts, inverted UK gilt yields, inverted 10 year US treasury yields, just for effect. 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? We can talk who’s winning. The economic war, who’s winning? And the answer is, energy’s winning. Gilts have gotten killed, treasuries have gotten killed. Oils basically flat from the day they invaded. It’s up a little bit. And that’s what the US having run its SPR down to the lowest levels in 40 years. And that can’t be run down to zero. 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 of these giant solid caverns. It’s likely sludge of some description and probably unusable. No one knows how far up the sludge goes.


So when you talk about the diesel thing, we talk about 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. The sovereign debt side is not winning. Energy is winning, number one, which suggests the policy response shouldn’t be Biden getting angry and talking about 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 bond holders. That’s not been the response.


The second derivative thought is, I feel bad for Europe because these European leaders, especially the Atlanticist 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 US running tight on diesel, we’ve already heard it floated out. “Well we’re not going to do the export band. We’re not going to do the export band.” Why do you think that’s being floated out? Has it dawned on Europe yet why that’s being floated out? It’s being floated out because that’s what we’re going to do this winter. Push comes to shove, look, go back, read the books about 1971. It’s our currency, it’s your problem. It’s our energy, 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, it has huge implications for markets. Because look, I mean, yeah, is it going to send the dollar up if we do that? Absolutely it is. Is that going to be good for markets? No. Is it 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 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, it’s 500 billion for semiconductors. And the Fed’s monetizing it all at 2% and it’s a trillion 5 for energy, infrastructure, EMP, all of it, and we’re printing it all.” Fed’s going to print it all. That’s what has to happen here or else.

Preston Pysh (00:25:45):

And then you’re not even talking about the lag of implementing all that cap-

Luke Gromen (00:25:49):

Oh, that takes a long time.

Preston Pysh (00:25:50):

Oh my God. It takes a long time.

Luke Gromen (00:25:51):

Yeah, this needed to happen five years ago. 10 years ago.

Preston Pysh (00:25:54):

Yes. I mean, your 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. This was from Credit Suisse Zoltan, “Instead of a Volcker moment, we got a Putin moment and we basically have war. Out of this war, something will also emerge. Out of this, I think Bretton Woods III that I started to kind of develop and run with is a world where we are again 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 nat, nat gas that’s not been liquified, oil, diesel, you name it.

Luke Gromen (00:26:44):

Well, it goes back to a point, Maya and Brent Johnson’s famous interactions on the dollar. I’m sure you can Google search and find me saying at some point in the last two years like, “Yeah, could the dollar go to 160 or 200? Absolutely. The ironic thing is there will be gas shortages. You will be waiting in your car in a gasoline shortage.” I remember people on Twitter going, “How could that be? And yet here we are with the DXY at 113 as we talk. We’re talking about the Northeast running out of natural gas and we’re talking about diesel down to 25 days. That’s what DXY 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 if the gas is delivered that day.

Preston Pysh (00:27:36):

Holy moly. So let’s go to the next. Number five, all I have listed is the most powerful buyers in US treasuries are bailing all at once. And that’s all I wrote. So take it away, Luke.

Luke Gromen (00:27:51):

Yeah, there was a great… 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, in particular since 2017, really has been US banks, foreign central banks, and the Fed. Foreign central banks, they left in 2014 by and large. Fed and US banks largely picked up the slack. 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, there are regulatory constraints to their balance sheet in terms of 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 seen in the recent months a big uptick in foreign private buying, which is encouraging, and I would put an asterisk next to it because it’s the… I think it was 170 billion in foreign buying. In August, 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 insurers and pension funds, they are marginally more price sensitive than central banks but still very long dated, et cetera, et cetera, by the time you get down to the hedge funds who are financing you, they are stickle 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 see the 10 year treasury, you’ll start to trade like hedge funds are trading it, which take a look back over the last… People saying treasury evolves up. Why is treasury evolving? Probably partly because a lot of hedge fund’s buying it.

Preston Pysh (00:30:25):

And you’ve had a whole year of just getting obliterated.

Luke Gromen (00:30:28):

You’re getting obliterated. Yeah, you can’t stand in. I mean, I saw last week that mark-to-market the Fed has lost 720 billion year to date on their bond portfolio. There’s no hedge fund… I don’t know the numbers, but I would suspect that’s probably close to as big as the entire hedge fund industry. They can’t take that, right? So they have shareholder or they have general partners, 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 not will they get bought at a price. The problem is that price, can the US government afford that price?

Preston Pysh (00:31:12):

Yeah, right.

Luke Gromen (00:31:13):

And the answer is no.

Preston Pysh (00:31:14):

The price correlates to a yield.

Luke Gromen (00:31:16):

Yeah, that’s exactly right.

Preston Pysh (00:31:18):

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 US treasury market or unemployment that catches the Fed’s attention that they have to do something?

Luke Gromen (00:31:31):

Oh, it’s the treasury market. It’s the treasury market. This is a weird cycle and 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 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 things we’ve talked about already, unless the Fed steps in with more QE.


But I say the thing that might be the weirdest thing about this cycle has been the contrary behavior of American boomers, right? If you ask almost any theoretician out there, academic old people, are they inflationary or deflationary? And the answer’s almost without fail, they’re deflationary. They’re past the peak in their spending. They’re peak spending’s in the 40, 45 and then they’re deflationary spending.


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 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 US government deficits were sterilized in asset markets by virtue of US government policies to defer compensation into asset markets, right?


So when you think about the average baby boomer, when say they made whatever for 40 years, 35 years from 1980 to 2015, they made X dollars and the US government gave them an incentive where they could take 15% of those X dollars that they would’ve 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.” IRA, same thing, 403(b)s. It’s all been one giant exercise in sterilizing US government deficits in the asset markets.


And then we don’t count asset inflation as inflation, right? That was inflation. It was just deficits going, yeah? So these boomers, fast forward 40 years, these boomers have $35 trillion net assets and then you scare them. They’re going to die way sooner than they thought. So now you’ve got 35 trillion in assets and a generation 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 fix the house. Let’s fix the house again. 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.” So 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 trait.

Preston Pysh (00:34:39):

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 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-

Luke Gromen (00:35:10):

They were sitting on the assets, yeah. I had written a bit about this wealth effect dynamic throughout my writing going back eight years, but the first time I had a sense that the Fed had knew it was a problem was back in February this year when you had Zoltan 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 done.” It was like, “Ha-ha! They know.” They know that’s what’s causing it. And so I think that’s why it’s this weird cycle.


So the first question, is it treasury market problems or unemployment first? Well, that’s easy, that’s treasury market. But I think there’s an important corollary to this, which is there is a moment coming, there is an air pocket coming of employment, GDP, spending. I don’t know what month it’s coming, but it’s probably in the December or 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.” Not slow spending, Like, “Stop now.”


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 fall off in good sales and retail and this inventory build up and order cancellations. I think unless the Fed comes in and basically regooses this whole thing in the fourth quarter, which I don’t think is happening now. I think we’re going to get this air pocket in the first quarter of where it’s just like the world stops because boomers then go, “Oh God.

Preston Pysh (00:36:48):


Luke Gromen (00:36:48):

I’m not as afraid of dying. And at any rate, if I keep this up, I’m going to run out of money.

Preston Pysh (00:36:53):

Well, I think 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 for a lot of them that had no savings, they had a significant amount of money in the equity of that house, and were seeing that in refis. 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 at an unprecedented rate as far as some of these people refining their house.


And you would think that that wouldn’t be the case because the rates are higher. But it’s been a surprise and everyone’s like, “Huh, that doesn’t make any sense” but I think they’re seeing $100,000 there that they’ve never been able to save and they’re saying, “My God, I could go put on the new deck or I could go do whatever because I now have this equity in the house.”

Luke Gromen (00:38:00):

And the equity’s not there of course, but-

Preston Pysh (00:38:02):

Yeah, exactly.

Luke Gromen (00:38:03):

… now with rates having gone from two and three quarters to seven and a half. The equity’s not there mark-to-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…” It’s just going to stop.

Preston Pysh (00:38:24):

Yeah. We’re downgrading by… We’re getting half as much house.

Luke Gromen (00:38:28):

Yeah, for twice as much money or 25% more money. Yeah, yeah.

Preston Pysh (00:38:31):

Because we’re being forced to move for a new job or whatever, yeah. I think some of this stuff just takes time to just kind of set in.

Luke Gromen (00:38:40):

That’s the other part of the reason why I think partly the Fed is weaponizing, is they know this. You can go Google long and variable lags on monetary policy and you’ll find 16,000 things where it’s like, “Hey, yeah, monetary policy works on a lag.” They know this. So yeah, I do think it’s probably partly a little bit of an ego thing. I mean, Harald Malmgren had a great tweet earlier this year inferring that, like you said, that Powell didn’t want to be the next Arthur Burns, that he was embarrassed by how wrong he was and he’s going to be wrong again because his choices [inaudible 00:39:20].

Preston Pysh (00:39:20):

I can only imagine what the books are going to write on.

Luke Gromen (00:39:24):

Yeah, they’re not to be kind

Preston Pysh (00:39:24):

7.22% as of today for a 30-year fixed rate mortgage.

Luke Gromen (00:39:32):

like I put up a chart on Twitter yesterday, you look at yen dollar and the 10 year treasury yield and they’ve been very tight. It’s saying it’s going to five, the 10 years going to five. Like, the 7.22 is what the 10 year at four.

Preston Pysh (00:39:45):

Yeah. Yeah. Yeah.

Luke Gromen (00:39:47):

You start looking at situations in this country where we could be-

Preston Pysh (00:39:50):

Eight and a half.

Luke Gromen (00:39:52):

Eight and a half, 9% mortgages and 9% gasoline. There’s states that aren’t set up to work with those two combinations.

Preston Pysh (00:39:59):

And you’re not talking next year, you’re talking in short order based on the speed of the sell off that’s happening.

Luke Gromen (00:40:07):

The speed of the… I’m talking… Oh yeah. You could have mortgage rates at eight and a half in a month. 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.

Preston Pysh (00:40:25):

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 had a lot of people tell 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 is a really strong signal to the Fed that they have totally overdone it and it’s time to stop the hikes if the three month is exceeding the 10 year. Is this different? Is this situation different for them because inflation is so still gangbusters high relative to these yields that rules of thumb that don’t even apply?

Luke Gromen (00:41:23):

That’s a good question. I don’t know.

Preston Pysh (00:41:24):

Because I mean, when you think about it, for me personally, anytime I’m doing momentum, I’m looking at that volatility range of whatever I’m tracking. 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, 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, nothing is suggesting that there has been a reversal if you’re looking just at the inflation prints.

Luke Gromen (00:41:57):


Preston Pysh (00:41:58):

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.”

Luke Gromen (00:42:10):

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-

Preston Pysh (00:42:30):

I love how you said if.

Luke Gromen (00:42:36):

… and a 1% chance we don’t have a plain vanilla recession next year and that it actually does impact inflation across the economy, which I think it should, this is what I think the policy makers and what I think the bond markets especially at the long and 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, GDP’s down.” Then we go back up. This is not like the system’s collapsing in 2008, which are two of the last two recessions, 20% decline in receipts.

Preston Pysh (00:43:16):

So what is that in dollar terms just so people understand?

Luke Gromen (00:43:21):

Dollar terms, it’s $900 billion for round math from last year. So that’s the thing that nobody talks about. It’s like, “Oh, we had this bubble in, this bubble in.” Well guess what else you had a bubble in? You had a bubble in tax receipts. It’s unbelievable. They were up 40% because it’s all tied to asset prices. So not just the asset price capital gains, but incomes as stock options are all taxed in ordinary income. Okay, so 20%-

Preston Pysh (00:43:51):

It’s not going to be not 20%.

Luke Gromen (00:43:52):

It’s probably not. But let’s just to be conservative to make the point that this is the thing, I don’t think 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 they’re doing, I think it’s a 9% [inaudible 00:44:08].

Preston Pysh (00:44:08):

9%, yep.

Luke Gromen (00:44:09):

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 9 across entitlements, which is Social security and total entitlements and Health and Human Services. So I’m applying that to Social security, Medicare, Medicaid, Health and Human Services, 9% inflation. No enrollment growth, mind you. No enrollment growth with however many millions of boomers are going to enroll more.


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. Now, apply 5% terminal discount rate that everyone’s getting, “Oh, it’s 5, it’s 5.75, it’s 4.” 5%, 31 trillion in debt, proforma’s a trillion 5. Trillion 5 is on that 20% decline. Golly, it’s 40%. 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.


So now it’s 40% interest proforma and with no enrollment growth in plain vanilla recession, 85% entitlements. 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 dollar’s dying?” 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 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, 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 125 is going to go to 126, 128, 135.

Preston Pysh (00:46:20):

Yes, it’s a spiral.

Luke Gromen (00:46:21):

And at some point in that process, people are going to go, “The US is broke? 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’ve already seen it. GLD has been rising against TLT all year. Yeah, gold’s down and it sucks, but it’s been rising all year. It’s going to start going up nominally with rates going up big at some point in that process. And Bitcoin probably does really well too.

Preston Pysh (00:46:50):

This is why you 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… I mean I know that was real haphazard, but the numbers are real easy to kind of 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 here in the US.

Luke Gromen (00:47:19):

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. I just don’t know the sensitivities. I do know that their energy positions are way worse than ours and they don’t have the reserve currency. So I give 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, “Do I want to hold treasuries or do I want to freeze?”, it’s a very, very easy decision.

Preston Pysh (00:47:50):

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 fiat currency. It’s just making the dollar that much stronger.

Luke Gromen (00:48:04):

And this is why I said it’s like, “Yeah, the dollar go to 150 or 200, but you’re not going to waiting in line with a shotgun to fill up the gasoline station.” That’s what happens at that.


I mean, is the Northeast in United States going to be getting their share of natural gas for winter ’23, ’24 in that scenario where Europe and Japan? Or does it come down to who has the Navy to direct it? And if that’s the case, we’re not even in markets anymore. That’s where we are in this whole game. And to me, you go back, I’m sure we talked in either March or April and I just said, “I don’t think western policy makers understand what they got themselves into. They thought they had all the leverage and they didn’t.”

Preston Pysh (00:48:48):

They don’t. Yeah.

Luke Gromen (00:48:51):

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, right? Italy. So what? It’s like a moneyball thing, right? “Well that guy, he only hits 220.” Yeah, well he walks. He’s on base percentage is 500. He 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, 80 times of 10 million barrels a day times 365 days. Oh, Russia’s GDP, they’re just a gas station. John McCain, “It’s a gas station masquerading as a country.” No, no, no, no. 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 math. Every barrel of oil has a value of $500,000 per barrel and Russia produces 10 million barrels a day. These people thought they could strip 10 million barrels a day of 500,000 of value a barrel out and bad things wouldn’t happen?

Preston Pysh (00:50:00):

Explain what you mean by that number you just said, per barrel.

Luke Gromen (00:50:04):

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. The problem is that western policy makers, 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. If the oil will go to 120, 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, not the price, the value. And you picked a fight with that. You decided to fight that.

Preston Pysh (00:50:54):

It’s a classic-

Luke Gromen (00:50:54):

Bad idea.

Preston Pysh (00:50:55):

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. I recently interviewed Michael and he was talking about how when the money isn’t backed by energy, then it’s just a coupon. What you’re getting at is almost that exact idea with policy makers all around the world right now and they’re looking at it and they’re like, “Well, we’ll just print. We’ll create digital units on our ledgers and we’ll force them to accept these digital 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.”


Like you had so eloquently described when this entire war kicked off, I remember the conversation like it was yesterday, Luke, you went into nitty-gritty detail explaining exactly this idea, but I don’t think it was real to people until now. I think it’s starting to become very evident and very real as to what you mean by that exchange of physical goods for fake paper promises.

Luke Gromen (00:52:18):

That’s the scariest thing about what we’re in. 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. Putin actually 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’re devaluing. There’s seven and a half trillion in FX reserves that are devaluing by 8 to 10% per year. And that’s the whole fundamental argument of gold, Bitcoin, right? 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 “sided” with Russia as our government said, is 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 debt issuance, that’s the price of oil you are going to need. Oil’s going to have to rise by 8 to 10% per year for the foreseeable future because of peak cheap energy, right? 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 output, but they’re just better keeping the energy on the ground.


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. We’re watching it happen 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 in energy terms and it’s really an unstoppable object against an immovable force. I mean when this breaks, it isn’t going to be like a little move. I mean these are very tensed tectonic plates. When they slip, we’re starting to maybe see signs of that, but it’s not going to be like, “Oh, well inflation’s going to go up a little bit.” No, they print frigging money to pay for energy. Like, PPI in Germany is what? 40%?

Preston Pysh (00:54:57):

That’s insane. That’s insane.

Luke Gromen (00:55:02):

And now you burned the boats. Whoever did it, burned the boats. That’s why I say it could have been the Russians, right?

Preston Pysh (00:55:06):

Yeah. Yeah.

Luke Gromen (00:55:09):

That screws Europe and the Americans way more than it screws the Russians.

Preston Pysh (00:55:14):

Yeah. I think that’s the best-

Luke Gromen (00:55:15):

Could be the Chinese.

Preston Pysh (00:55:16):

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 wars end.” I’m assuming you agree with that.

Luke Gromen (00:55:30):

Yes. Yeah. I mean, yeah, war’s very inflationary.

Preston Pysh (00:55:34):

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 market was selling off and the yields were breaking out to levels that they hadn’t seen in years.


Right now, in 19 October, we’re seeing an all time high in the yields which means the selloff 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 what their play is? 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?

Luke Gromen (00:56:45):

I mean, I think they are in the same two horses, one has problem where they’ve got to save the bond market, they 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 JGB 10 year didn’t trade for three or four straight days, right?

Preston Pysh (00:57:05):

Yeah. Yeah.

Luke Gromen (00:57:06):

So if, I guess, it’s trading by appointment as it is, which is incredible because it’s the second biggest bond market in the world if I’m not mistaken, or at least it used to be.

Preston Pysh (00:57:18):

That’s correct.

Luke Gromen (00:57:18):

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 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 Asian nations and the Swiss have a lot of import cover, right? So the Japanese have 16 months of imports in reserves, so they can go a while playing this game. Treasury marketing ain’t going to like it. but-

Preston Pysh (00:57:58):

This is effectively retained earnings for a business. If you have a lot of retained-

Luke Gromen (00:58:03):

It’s a piggy bank. Yeah. It’s like this is a piggyback. Break the piggy bank, and you can… “I lose my job, I got 16 months of mortgage and food in the bank.” And that’s what this is. Europe has two, the Brits-

Preston Pysh (00:58:17):

Two months.

Luke Gromen (00:58:17):

… a little less than two months. And again, that’s why I say this can get really scary really fast and I don’t think people appreciate that you got two months. Okay, so then what do you do? You have three options. You print the money, which is kind of what they’re doing. 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 overindebted, which they all are. And because it’s austerity when you’re wildly overindebted is nominal default, bond market’s actually not going to like that almost as much as it doesn’t like printing. Or 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 print and starve or austerity and starve or call Russia and say, ‘Fine, we will buy energy in pounds. We’ll buy energy in Euros and we’ll sign a deal and we’ll encourage Ukrainians to do the same’.”

Preston Pysh (00:59:25):

But Russia’s not even accepting it in. They’re wanting it in ruble or gold or Bitcoin, right? Those are the three-

Luke Gromen (00:59:31):

They said this summer they said they would buy the currencies of friendly nations. And if they’re selling energy and buy in the currencies of friendly nations, that is functionally no different than selling oil and gas in those currencies. I think that’s what this whole thing is all about.

Preston Pysh (00:59:49):

Oh yeah. No doubt.

Luke Gromen (00:59:50):

The whole thing is about moving to a multilateral and basically multicurrency 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, is I think the core crux of this war is Russia is trying to do this and we’re trying to stop it.

Preston Pysh (01:00:08):

So do you think the US… Well, do you see Europe doing that based on the pressures that you know that they’re going to be receiving from the US?

Luke Gromen (01:00:18):


Preston Pysh (01:00:19):

They’re going to have to, right?

Luke Gromen (01:00:21):

They’re going to have to. 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, partly is out of, 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.

Preston Pysh (01:00:52):

Yeah, no, I think most people in Europe would agree with that.

Luke Gromen (01:00:56):

And so it pains me because four months ago, five months ago, I mean, I wrote a report in April where I said, “Japan has upsized to what yield curve control into an inflation and energy spike. A major crisis will sue if the US doesn’t follow suit.” It was literally the title of the report. It was a long title. 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.” 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. “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. The reason I am somber about it is unfortunately I think the pain is going to get a lot worse in Europe. I mean, I saw… And who knows what you see online, right? I started seeing protests in Paris this week, right? There’s your first… You saw some of the farmer protests in whatever it was, I think Netherlands earlier this summer, whatever. I don’t know that that was particularly related to fuel or cost, I think that 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, either their leaders are going to have to or they’re going to turn their leaders over so fast-

Preston Pysh (01:02:30):

You saw it in Italy. You saw it in Italy.

Luke Gromen (01:02:31):

… that they make Italy’s PM look like Putin, right?

Preston Pysh (01:02:33):


Luke Gromen (01:02:34):

And they’ll find somebody that will do it. That’s where I think this is going. So what’s ironic is for all the talk about regime change in Russia, it’s not going to be a regime change in Russia. It doesn’t going to be regime change. It’s going to be 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 and I can’t blame them. So I think they’re going to have to do that. But again, I’m six, seven months into that recognition of 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 in your own currency, right? You’re going to price energy in your own currency, right?” And I’m like Princess-

Preston Pysh (01:03:15):

You’re talking to Anakin Skywalker, Natalie Portman one.

Luke Gromen (01:03:19):

Yeah. Yeah. I’m the princess, Natalie Portman, right? I’m like, “Guys. Guys.” And Europe’s like, “All right. Ugh.”

Preston Pysh (01:03:26):

I love that meme. Where does Credit Suisse fit into all this?

Luke Gromen (01:03:29):

I don’t know, I have no idea.

Preston Pysh (01:03:32):

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 and it’s going to come to a point where 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 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 backstop with quantitative easing for that market. So I mean, these aren’t just cracks, I mean, this is like-

Luke Gromen (01:04:35):

Oh no, this is what I expected to happen back in April when I said like, “Hey, they’re going to have to pivot.” I don’t know anything about Credit Suisse or any of the specifics. I really don’t know all the credit aspects of the European banking system. Here’s what 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, policy makers 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 asset, the tier one is treasuries.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 doge coin, well because 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. 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 gilt yields did that day. There’s no buyer except the Fed.

Preston Pysh (01:05:55):

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 it 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. 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. 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 this 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 every, it’s like everybody forgot in bond markets that the foundation, 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 at no inflation, 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.

Luke Gromen (01:07:34):

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, but it’s the same kind of dynamic. We both try to set it at the same time, which was like, they’re just going to have to fully reserve the debt. It’s all that’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 in three months.


Or there’s other ways you can do it. I mean, the treasury could instruct the Fed to revalue the US official gold to $31 trillion. I don’t know what that works out to pronounce, but it’s a lot. And by doing that, that creates a deposit into the treasury general account. This is in 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 US government will be debt free. Voila. Gold will probably have six figures, but then 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 this whole system was a giant [inaudible 01:08:58]. It was a giant bet that inflation would never come. And 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.

Preston Pysh (01:09:18):

So for them, when I look at the gold market and I look at-

Luke Gromen (01:09:24):

Can I make one other point? Sorry.

Preston Pysh (01:09:25):

Yeah, yeah, yeah. Go ahead. Go ahead.

Luke Gromen (01:09:28):

If they don’t get inflation down, they’re going to have to reserve the full debt. The problem is they they waited too long to do this and they let debt get so high after COVID and they’ve never reformed all these western entitlements, et cetera, that the actions they need to take to get inflation down presents credit risk to these sovereigns, nominal credit risk. You won’t get paid.

Preston Pysh (01:09:53):

Enormous, enormous credit risk.

Luke Gromen (01:09:54):

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. They’re going to have to fully reserve the debt. Sorry. I’m sorry, go ahead.

Preston Pysh (01:10:07):

Yeah, so then when you look at the gold playbook, which you’re saying is a published approach, how do they do it in an orderly kind of way? Sorry, I’m not trying to make-

Luke Gromen (01:10:25):

I’m not laughing at you. I’m laughing with you. I’m not laughing. You’re going to be laughing.

Preston Pysh (01:10:28):

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 take it seriously, how do they try to implement that by doing it to save the dollar and to save other fiat currencies 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 that nobody can control. When we look at the gold market and we look at how much of it is levered via paper and how much distrust, 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, okay? By sticking a bunch of metal into a vault and saying that 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 debate against that hunk of metal in the vault, right?

Luke Gromen (01:12:18):

Yeah. So I think the way it… Fix is a strong word, but right now, and this gets to Jeff Booth’s book, which is brilliant, which is the fundamental mismatch between the deflationary impacts of technology and the necessary inflationary forces you 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, inflate or die? It’s default or in inflate. If you inflate and 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-

Preston Pysh (01:13:15):

But the equity hasn’t been reset, right?

Luke Gromen (01:13:18):

It will after you do that, right? In theory, you wipe out the debt, [inaudible 01:13:23] throw you inflation.

Preston Pysh (01:13:23):

Yeah, but as far as the ownership of the equity, you’re not wiping that out at all.

Luke Gromen (01:13:26):

No. No.

Preston Pysh (01:13:27):

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.

Luke Gromen (01:13:47):

It depends. In theory, you would think that this inflationary would move power from those people to those closer to the oil well and the crap and the making of things. 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. So yeah, your point is well taken.

Preston Pysh (01:14:15):

Are they playing Tennessee? Are they playing Tennessee?

Luke Gromen (01:14:17):

Yeah, they’re playing Tennessee. The officials might be able to help model a little.

Preston Pysh (01:14:22):

I’m sorry.

Luke Gromen (01:14:23):

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, not a Volcker moment.” And so power is shifting from paper to stuff as we speak, to energy.

Preston Pysh (01:14:44):

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 Saylor would describe it as a pristine commodity that actually has absolute scarcity.

Luke Gromen (01:15:00):

It’s an energy [inaudible 01:15:01]. Yeah.

Preston Pysh (01:15:01):

It has absolute scarcity 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 on a global scale you have this competitive store of value unit that everybody’s trying to decide what they trust the most to not be the based or to be manipulated against. Gold is going to have paper units stood up on top of it always because of the limitations of physical gold and the visibility of it.

Luke Gromen (01:15:39):

I think it’ll come back to the energy though. 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-

Preston Pysh (01:15:49):

Big time.

Luke Gromen (01:15:50):

… “Well, the euros down, the euros down, they’ve gotten more competitive.” No, they haven’t. Their energy costs are so high that their industry’s shutting down. And so when you think about it that way-

Preston Pysh (01:16:02):

So dense.

Luke Gromen (01:16:03):

… again, it speaks to energy being the primacy, not debt.

Preston Pysh (01:16:06):

Thank you.

Luke Gromen (01:16:06):

Not the 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.

Preston Pysh (01:16:27):


Luke Gromen (01:16:27):

And how do you have the cheapest energy? Two things, strong currency and productivity. What does Bitcoin do? It incentivizes, productivity increases. Our deflationary reserve asset incentivizes, productivity increases. And gold, yeah, they can stack paper on it, but at the end of the day, if once a quarter or once a month the oil supplier says, “Uh-uh. I want physical and I want physical at this rate,” that’s going to be your price. And the US used to fly a plane, I think it was monthly to Riyadh full of bullion. It can be done, right? People was like, “Oh, that’s a lot of shipping.” 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. They’re sillier things.

Preston Pysh (01:17:11):

Meanwhile, we got Nobel laureates out there saying, “Debt is money we owe ourselves.” Professor Fax Machine has the quote on that one.

Luke Gromen (01:17:19):

Did he say it tonight?’.

Preston Pysh (01:17:20):


Luke Gromen (01:17:22):

“Debt is money we’ve owed.” Yeah, I took issue with something he said a couple weeks ago about they did the Great Britain can’t have a currency crisis. They owe debt in their own currency. It’s like, yes, technically that’s true, but they’re short energy, dude, I assure you they can have a currency crisis.

Preston Pysh (01:17:38):

It’s amazing how people that just spend their life in an academic setting that have not participated in real functioning markets can 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 imaginary units and just funnel them into somebody’s digital web browser and all a sudden that means that they should have physical, real, quantifiable, energy intensive things in their lives. Boy, oh boy.

Luke Gromen (01:18:16):

Yeah, we’re watching that play out as we speak.

Preston Pysh (01:18:18):

It’s crazy.

Luke Gromen (01:18:18):

It’s like, hey, I think that’s where the crux of the Ukraine conflict is, “Hey, we want to pay you in… Currency is going to fall 8 to 10% per year against your oil. That’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. “No wait. Okay.”

Preston Pysh (01:18:31):

Then I’m not sending it to you.

Luke Gromen (01:18:33):

Yeah, yeah. Yeah, exactly. I’ll leave it in the ground. Well, you can’t do that either. Now what? All right, well here we are. I mean it’s-

Preston Pysh (01:18:41):

It’s currency.

Luke Gromen (01:18:42):

… [Inaudible 01:18:42] politics by another means, right?

Preston Pysh (01:18:43):

Luke, tell people about your newsletter. It’s beyond phenomenal. Both your books, which are there behind you. Give people a handoff to some of your stuff, because I mean, it’s top notch.

Luke Gromen (01:18:55):

Thank you. Yeah, you can find out more about, we have institutional and mass market products at You can find out more about it there. I’ve got a active Twitter feed @LukeGromen, L-U-K-E-G-R-O-M-E-N.

Preston Pysh (01:19:10):

Luke, always a pleasure. I really look forward to these. I just pray that you keep saying yes whenever I reach out.

Luke Gromen (01:19:17):

You’re too kind of. I really enjoy our conversations. It’s always fun. So thanks again for having me out again.

Preston Pysh (01:19:23):

Likewise, sir. All right, have a great night.

Luke Gromen (01:19:26):

Thanks. You too, my friend.

Preston Pysh (01:19:27):

If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for, We Study Billionaires. The Bitcoin specific shows come out every Wednesday and I’d love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. 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.

Outro (01:20:00):

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