2 December 2018

On today’s show, Preston and Stig talk to Luke Gromen about recent macro trends between the US and China.

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  • Why we’re not in a typical credit cycle.
  • The bull and bear case for commodities.
  • Why the bond market should have higher yields than it has today.
  • Which big tech stock to invest in and why.


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  0:02  

On today’s show, we bring back a guest by popular demand Mr. Luke Gromen. Luke is the founder of the research firm Forest for the Trees. It’s a macro research firm that caters to institutional and private investors. 

In our previous conversation with Luke at the beginning of 2018, we talked about China and its interactions in the oil market. On today’s show, we pick up on some of those ideas and much more. We talk stocks, we talk bonds, we talk currencies and commodities. I therefore think you’re really going to enjoy this big picture conversation and it’s all relevant to where the market is today. Without further delay, here’s our chat with Luke Gromen.

Intro  0:42  

You are listening to The Investor’s Podcast where we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected.

Preston Pysh  1:03  

Welcome to The Investor’s Podcast. I’m your host Preston Pysh. As always, I’m accompanied by my co-host, Stig Brodersen. 

Today, we are really excited to bring back Luke Gromen as you heard in the introduction. After our first interview with Luke, I just was thinking, when’s the next time we can bring Luke back on and how fast can we do it? So Luke, I’m really excited to have you back here on the show with us.

Luke Gromen  1:24  

Thanks for having me back. I’m excited to be back. 

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Preston Pysh  1:27  

Luke, the first thing I want to ask you, because we were exchanging a couple comments on Twitter that just kind of sparked. We just need to have a conversation here and stop tweeting at each other, and really kind of get into the crux of where the economy’s at right now… 

And so, my first question for you is what’s the narrative that you think the market is missing today? Because everyone’s got their position and everyone’s got their narrative that they’re spreading, but what is the narrative that you’re spreading? What’s the one that you think everyone in the markets is missing?

Luke Gromen  1:54  

I think it’s a terrific question. I think by far, the biggest narrative that people are missing are really the implications of something that happened in late September, which was that the way that FX swaps are priced meant that FX hedged Treasury yields went negative on a nominal basis.

These FX hedged Treasury yields that went negative in late September. Basically, what that means is that if you are a foreign investor and you want to buy Treasuries to pick up the spread difference that we know is that record wide, for certainly 30 to 35-year wides, transatlantic and etc. Typically, you will buy these on a hedged basis. 

You’ll sell local, you’ll buy a treasury bond, and then you’ll hedge out the currency risk with an FX swap. 

The problem is that late September the pricing of the swaps got to the point where you can no longer hedge in a positive carry and hedge out the FX risk. Quite frankly, it was a moment where I was talking about it with somebody, it felt like a punch in the gut in a manner that I hadn’t really felt since probably October of 2007, in terms of the importance of it. 

I don’t want to make too much of it, but I think it could be that big a deal. The United States needs to roll $7-8 trillion of Treasuries over the next 12 months. The narrative on the $7-8 trillion roll is the US is going to run a $1.3 trillion deficit or whatever the number is, and yes, that’s going to put stress on the Treasury market. You’ve seen yields rise, you’ve seen bid covers fall a little bit, but we’ll be able to cover that. I agree with that.

The thing that people are missing is that no one is thinking about the $7-8 trillion roll because it’s just taken as a given. It’s going to get rolled.

I’m not saying it’s not going to get rolled, but what this negative nominal yields on an FX hedged basis means that the insurers in Japan and pensions in Germany, all of a sudden, it’s not an automatic decision.

Before it was just buy the Treasury, hedge the FX, roll it. No problem. Now it’s, “Do I lock in a negative nominal yield for the next three months, six months, a year? Or do I go FX unhedged?” which we’ve heard some people doing. 

Though again, that works unless we have a year like 2017, and the dollar, in which case you lose four or five years a coupon and a move down in the dollar? Or do you just not roll the treasuries and buy local? For example, you buy JGBs, BooNs, or whatever the case may be, because in local terms, the yield is actually better. 

That is a huge problem because basically, it’s almost like a setup in 2007 to 2008, where we have these huge numbers in derivatives and it didn’t matter because it was all notional until one guy went bankrupt. Then notional started to become net. 

It’s the same type of dynamic here where no one’s worried about the $7-8 trillion roll because it’ll just get rolled. Again, most of it will, but the real number we need to place this year isn’t 1.3 trillion. It’s 1.3 trillion plus some percentage of the foreign held portion of $7-8 trillion that doesn’t get rolled. 

That to me is a terrible setup for risk. Basically, it sets up a market where I’m sure you’ve heard the beatings will continue until morale improves. The risk beatings will continue until the dollar gets weakened. 

Stig Brodersen  5:14  

Luke, this is very fascinating. You are throwing out some really big numbers there and yu’re talking about trillions of dollars. Could you give some context to this here? 

Also, perhaps looking back in history, how much money are we talking about now? How much money have we talked about in the past?

Luke Gromen  5:31  

I’ve been talking about some of these fiscal issues for the US for a while. I was at a friend of mine, who’s a grizzled veteran. He was trading bonds in the 70s. He’s been around a long time and we’ve come to know each other.

He reached out to me, I don’t know probably about four months ago? He said, “Hey, have you seen what Treasury issuances this year on a gross basis? Take a guess how much it is.”  

I said, “I don’t know. $3 trillion?”

He said, “You’re not even close. It’s $10 trillion. I didn’t believe it myself. I just started looking at Barron’s and I was like, ‘Wow.'” 

They used to do a quarterly refunding and the new issues. He then said, “The quarterly refunding or now monthly refunding. I started totaling them up and consistently all year is 800 billion, 800 billion, 800 billion.”

Sure enough, I went and I looked at the Treasury borrowing advisory committee report from Q3 2018 and so, you get the three quarters of the year. There it was: the US government had issued on a gross basis through three quarters 7.1 trillion.

Of that 7.1 trillion, 5.5 of it is under 12 months duration. It’s a story that started getting a little press, but still no one’s really talking about it for what it is, which is in the United States is in a situation where we are rolling. The Central Bank stopped funding us on a net basis four years ago. 

We moved from central banks to the private sector globally. We’re moving from a less finicky creditor who really doesn’t care. They don’t mark the market and they have an infinite balance sheet in theory to somebody who does market-to-market and does not have an infinite balance sheet. So a more finicky creditor at shorter and shorter durations. 

So 70% of it in under 12 months, which means this problem is going to become basically a continuously rolling problem. 

Ironically, what this does is this will drive the dollar and rates higher and higher until left untouched. If authorities don’t do anything, you’re basically going to go back to September 2008, except that everyone stands aside and does nothing. Trade will break down. Credit lines will break down. I’m not saying that’s going to happen in the next month or the next two months. That’s the vortex that is now at work here. That is what a big deal this is. 

Preston Pysh  7:40  

I was just recently reading Ray Dalio’s new book, “The Big Debt Crisis.” One of the key words that he says in his write up about how credit cycles work is that once the credit cycle reaches its peak, and it starts to go the other way, and it is self-reinforcing, is the exact phrase that he uses. 

I think a lot of what you’re describing is why he says it’s self-reinforcing is because some of these things start compounding on themselves. Then as one company fails, and the assets and the liabilities on that balance sheet that was marked to market at a certain price, all of a sudden isn’t marked the same. That compounds and then you get the yields raising, and all these things that happened during this kind of period where we’re hitting a topping process. It’s a process that we’re going through.

I guess my question for you is this. When you look at this process and you look at all the things that you were describing, how much longer can the Fed keep raising the rate? Because typically, when you look back at all the other credit cycles that have happened, the Fed usually gets to a point where then they say, “We’re just going to hold pat where we’re at. We’re going to stop raising the federal funds rate.” 

The quantitative tightening, I would imagine they would stop doing that at the same time that they would stop raising the federal funds rate. 

How much more time, and I know this is the million dollar question… Heck, this is the billion dollar question. How much more time do you think that they have before they do this? I’m here in June. What are you hearing and what do you think is realistic?

Luke Gromen  9:12  

I would take the under on June. I would probably take you under in June by three months. 

The reason I say that is if you if we would have had this show six weeks ago, I would probably say, “Yes. June’s probably the right number. We were seeing some signs of slowing etc.”

I think October opened some eyes and even that is some of it is now spilled into November. Today notwithstanding, of course, but last week we had the worst week in eight months or what have you. 

October was sort of an awakening of, “Oh, my gosh This problem!” because you start to see it in equities. You’re starting to see it and credit spreads. 

This problem is just this vortex that is so big. It’s so fundamental and it is so, like you said, self-reinforcing. It’s the perfect word for it. It’s not going to be a linear deterioration. It is going to deteriorate nonlinearly for exactly the reasons you were laying out.

My expectation then, and we sort of tackled a more bullish position coming out of March and kind of held that through the end of August… We were starting to see some weakening in the economy and we thought we would see it. We’re starting to see itso we wanted to kind of stick with that process. Though frankly, we were too early in terms of turning negative again on the dollar and wanting to start to transition into some of the more beat down risk asset names. 

However, ultimately, I think we’re much closer than anybody thinks, simply because this vortex is so powerful and self-reinforcing. Some of its visibility is just… When we’re talking about what we’re talking about, what we’ve been saying to our customers and in our reports has been the metric to watch on the Fed or not the traditional metrics, because this is not a traditional credit cycle. 

We had a stock bubble. We kicked upstairs the banking system. We had a banking and housing bubble. We kicked it upstairs to the sovereign level.

The sovereign crisis and *inaudible* metrics are not the same. We’re looking at bids to covers and Treasury auctions, which have gotten very weak very quickly. You just need one or two really bad ones and the Fed will say, “Okay, that’s enough,” because they’re going to get a call. The bat phone’s going to ring. The Treasury or the White House will say, “Stop.”

Stig Brodersen  11:15  

When I go back to before the financial crisis, and when the Fed talked about holding the rate steady, I think the 10-Year Treasury went up to 5-5.5% of the time. Yhen the Fed said, “We’re done. We’re not going to raise any more rates.”

Then just quickly after that, all asset classes just went down. Will history repeat itself, if the Fed would come out and say something similar today?

Luke Gromen  11:40  

I think both from a trade perspective, I think that makes sense. I think from a bigger cycle perspective, it makes sense. Commodities are at 100 year lows relative to financial assets. You’re at levels now that you’ve only seen twice in the past 48 years. It was 1970 and 1999, after which we saw massive commodity outperformance in a relatively short period of time, like you were saying. 

It’s easy to look back and say, “Well, I’ll just get on late.” However, after commodities have doubled, and then you go, “Oh, I missed it.” Then they doubled two more times in the next 8, 12, or 14 months. That’s the type of moves that you saw in those instances. 

What really grabbed me about 1970 to 1999 were that they were both periods of time that were tied to major changes in the US dollar’s global role. 

In 1970, you had, of course, Bretton Woods ended the next year. Nixon closed the gold window. That was a chaotic period of time, but commodities did extraordinarily well, both near and for the ensuing intermediate term.

Then in 1999, it’s not remembered a lot, but the Euro was launched. That created a real viable European competitor on the reserve currency basis. It sort of created some dislocations. 

The bottom line is, particularly if I’m looking at a year out and it’s money I want to hold, like a two-year money. I love commodities. 

The one risk to me, again, is that point that we started with, which is if there is a political element to what the Fed is doing. In other words, and we can talk about this later that the Fed has effectively been weaponized in the trade war against China, etc. That’s the list of commodities that they are willing to really just keep doing what they’re doing. Bottom line, yes. I like commodities.

Stig Brodersen  13:25  

Alright, Luke, so let’s look into commodities here. Which type of commodities are especially undervalued?

Luke Gromen  13:32  

I’m a better buyer here of energy and oil. Those types of names I think, in particular, if you’re feeling very bold, that you think that dollars’ status could change or the dollar could be weakened… if you would buy Russian energy companies, whether it’s a *inaudible*, where, not only in theory you can get a higher price, oil, but you could pick up on the currency side as well, if the ruble goes from 65.70 to 55.60, That, to me, would be a high beta way to play it. 

I think I’m a better buyer of oil here. You saw the Dallas Fed today surprised on the downside? Well, if you look at the setup for energy, back in 1415, when we saw the sharp drop in the price of oil, the biggest field in the US was the Permian. It’s bigger now as a percentage of total and the decline rates then were one third of what they are now. 

When you shut the Permian down… Right now, the decline rate in the Permian is about a quarter million barrels a day per month. Pretty much if you get oil down to another 10 or 12 bucks from here, you’re going to have to start shutting in production with those kinds of decline rates. 

You’re pretty much putting a top in US oil production, probably for at least another two, three years, and maybe longer than that. I think strategically, that’s not something Washington wants and my guess is those kinds of conversations are probably happening.

Preston Pysh  14:53  

Interesting. All right, last commodity question for you. I’m curious your thoughts on gold.

Luke Gromen  14:59  

I still like gold. Physical flows are still moving from west to east. 

I still think China is using gold to gain the ability to print yuan for oil. It’s working. 

You look to the the yuan oil contract in December, the first settlement month was September, the *inaudible* amount settled, I want to say around 600,000 barrels. It’s a bit awkward to settle, but it is settling physically.

Front month open interest volume in their first four or five months, they did as much share of the world, based on front month volume as the Brent contract did. Ot took the Brent contract 20 years to do the same amount. It’s been more successful than people thought. That was a low bar. 

Though looking forward, December’s open interest as of last week on the yuan oil contract was 42 million barrels. That’s a real number. 

I think the usage of gold to gain the ability to print yuan for oil is working. Ultimately, the reason I like gold as much as I do is the fix to everything regardless of when we get to that fix. Hopefully, it’s not after a catastrophe, but the world needs to move towards a neutral settlement. Hold could fulfill that role entirely, or in part.

However, if it’s any part of the solution, it can’t happen with gold prices priced anywhere near here. They will have to probably be multiples of what they are now. it’s probably not going to happen until there’s a political decision somewhere. 

We’ve been saying gold is the credit default swap of this cycle, I really think it’s going to go up an awful lot in a short period of time when it’s more fully moved back into the system.

Interestingly, more people are noticing that global central banks are buying gold. Just last month, the Hungarian Central Bank increased gold holdings tenfold now, from one tonne to 10 tonnes, but they said something really interesting. They said that part of the reason we’re doing this is hedging against changes in the global currency system. 

When you look back over the last five years, global central banks on the net have bought… They’ve sold about $30 billion worth of treasury bonds and they have bought about $130 billion worth of physical gold. The way out of this is a change in the structure of the dollars reserve status. 

Somebody I thought made a very astute observation. It’s already been changing, like global central banks are reserving gold and not treasuries. It’s being led by Eurasia whether that’s the Germans, the Dutch or the Austrians repatriating gold, the French auditing goal. You’ve got, of course, Russia buying lots and lots of gold. We talked about Hungary, Kazakhstan, and China. India, of course, their central bank just bought gold for the first time in a decade. 

You’re then looking at this Eurasian currency bloc, where gold is being reserved in lieu of treasuries. It started off with being one or two rogue nations. Now it’s sort of the rogue world island that is buying gold instead of treasuries. 

To me, I’m watching what the central banks are doing and what the physical flows are doing and understanding the structure of the gold market. Paper leverage keeps rising and rising so I understand that what we’re watching is basically a modern day London gold pool where physical is moving. Something’s happening.

The US is quickly heading towards a fiscal problem like it was in the late 60s. None of that mattered until it mattered. Then when it mattered, gold outperformed everything for 5 to 10 years. A lot of that move is happening very quickly. 

Preston Pysh  18:08  

When you look at Jeff Gundlach’s comments, he’s saying, and for people who don’t know Jeff Gundlach, he is a really famous bond trader. He’s also a billionaire level of net worth. 

One of the things that he keeps bringing up is that he thinks that the bond market should have much higher yields in it. It probably needs to sell off a lot more than where it’s at right now. 

Based on your comments, what you just said there, I kind of get the impression that you have the same opinion.

Luke Gromen  18:34  

I do and I think bond yields will continue backing up until they create a problem for fiscal solvency for sovereigns. Sovereigns can’t go broke, but what ends up happening is they’re going to have to do some version of the Bank of Japan, where the way I think this cycle goes is when we talk about that vortex that we lead off with, the yields are going to go up, dollar is going to go up and up.

At some point, I don’t know if it is 3.5%, 4% or 5% in the 10-Year. I don’t think it’s that high. Whatever that number is, something really big is going to break.

Essentially, if the Fed backs off, my guess is the long end of the curve actually takes off at that point, because that will be everyone and their mothers are going to go, “Oh my god, they’re done. I’ve got to get out of treasuries and I’ve got to get out a long to paper.”

However, at that point, you’re actually going to… that’s the policy rate for the US. So actually, the Fed stopping will put more pressure on housing, for example. 

The out for them, I think, is going to be what the BOJ has done. I think it was something that touched off this conversation with you and me, which is what the United States did the last time global central banks were not buying treasuries on the net. The debt was doing what it’s doing. Deficit was doing what it was doing during World War Two.

The Fed came out and said, “We will buy every 10-Year Treasury you offer at 2.5%, no questions asked.”

From 1942 to 1951, 10-Year Treasury holders put the 2.5% coupon and didn’t lose a dime. In fact, they probably made some money from where it had been bid up to, to get to that two and a half yield.

Now, that’s all nominal, because if you look at the S&P 500, it lost 85%. If you look against CPI, it lost 75%. 

I think some elements of that… We’re just describing financial repression writ large, or with extreme prejudice. I think some level of that has happened but it has not been that explicit, where you basically have the Central Bank doing what Japan did, which is we  letting go of control of the volume of money of the size of our balance sheet in order to control the price of money or the interest rate. I think that’s where we go by the end of this cycle. 

If I’m right, I believe Jeff Gundlach said positive things to say about gold. My guess is, that’s probably part of what he’s seeing is alright, I don’t know when that’s going to happen because to know when that’s gonna happen, I have to know what the magic number is under the 10-Year or the 30-Year that makes something important go boom. 

If you look at what’s happening, there are a lot of things now that are a little bit reminiscent of the late 90s, right? You’ve got emerging markets that have sold off. You’ve had a tech bubble that’s maybe starting to deflate to some degree. It’s been led by sort of a Nifty 50.

However, there’s some things that are very different back then we were running surpluses as a country. Our debt was much lower. We were much younger. 

In 1998, I bought my wife’s wedding or engagement ring, a very nice ring for dirt cheap, because the Russians were flooding the world market with diamonds to get hard currency and to get dollars. Basically, they were dumping commodities to get dollars. They sold their official gold to get dollars. 

This time, they are dumping dollars and buying gold. There was just an article two weeks ago in a defense magazine actually noting that starting in August, through the end of the year, China, which supplies 80% of the world’s rare earths, is starting to cut production of rare earths, whittle them down, such that basically they’re going to stop exploiting them. 

Now, for a country that, if you had 100 other guys on this show, probably 95 to 99 of them would tell you that there’s a dollar shortage, which I agree with, and that China is in dire trouble. AI think China’s kind of *inaudible*.

That said, when you’re in a dollar shortage and you’re feeling desperate, you don’t buy gold. You don’t cut production of exports of rare earths that you would be selling in dollars. You would be doing the exact opposite. 

There are some behaviors by people who are in theory, and by the sort of old roadmap, if you will, that work for the last 40 years, that are doing not just something a little different, they are doing the 180 degree different thing. That goes up to and including, like my Central Bank point from earlier, which is they haven’t bought a single Treasury on net in five years. They’re buying gold and repatriating gold.

Stig Brodersen  22:49  

Let’s shift gears here and talk about this trade war we have between the US and China that’s been going on for quite some time. How do you see the trade war right now and who has the upper hand?

Luke Gromen  23:01  

It’s going to get worse before it gets worse. The reason I think that is because it’s a matter of Chinese national security to gain the ability to price commodities in yuan. It’s a matter of US national security to not let China gain the ability to price commodities in yuan.

And so, if China succeeds in doing this in a meaningful way, it’s fascinating. Everyone’s focused on China’s balance of payments and what that could mean for the yuan. 

A number I saw a couple of weeks ago, I think a critically important number was from the IIF, they estimated China’s non-commodity goods trade surplus at $700 billion. 

If they can print yuan for commodities, they’re not going to have a balance of payments problem anytime soon. If they can grow that number, they’re going to give themselves and quite frankly, this drop in oil helps them tremendously. 

Oil is not priced in yuan. It’s probably not even half price in yuan yet so they still need dollars for it. Now they need fewer dollars for it. 

If they gain the ability to price our commodities in yuan and print yuan for what they need, they’re not going to have a balance of payments problem. They’re going to be running a $700 billion goods surplus… their service deficit because of tourism will net against that, but they’re going to be in good shape. 

In contrast, the US will have a huge problem because suddenly multicurrency oil pricing means you don’t need to hold dollar reserves. Quite frankly, if you look at what global actors are doing, I think in the near term, I think China is probably taking the worst of it.

Preston Pysh  24:30  

Let’s play devil’s advocate. Let’s say that, China understands this. They need a little bit of time to stand that up in order to grow that market to then be able to control their destiny by putting a global currency on the stage or at least trying to get to something that’s at parity with the US. So why not just do some deal to appease the US to kind of bridge that gap instead of trying to stand all that up?

Luke Gromen  24:55  

I think they’re probably trying to do that, but I think ultimately this is a little bit like trying to be half pregnant, like you’re either pregnant or you’re not. There’s either going to be a monopoly for the dollar and commodities or there’s not. 

I think, ultimately, it really comes down to one or the other of these countries is going to have a balance of payments problem soon. Depending on how the other gets their way. I suspect some of what the US is trying to do is say,”All right, well, let’s just mess up the global trading system with tariffs and they’ll break first.”

I don’t necessarily think it’s a terrible strategy. I think there are some elements that make a lot of sense, because I think the Chinese strategy has just stopped buying treasuries. The combination of rising deficits and rising interest rates will do what no military could ever do to the US. 

This is something that the Chairman of the Joint Chiefs of Staff for the United States said seven or eight years ago, Admiral Mike Mullen. He said, “We are borrowing money from China to build weapons to face down China. This is not sustainable, that our biggest threat is not ISIS. It’s not weapons of mass destruction. It’s not climate change. It’s our own federal debt, because it’s not too far from now it’s going to start removing our ability to do things.”

This year, you saw interest expense surpass the defense budget for the first time in a very, very long time.  

China’s strategy is like, “Let’s just play a short game or a long game. We don’t have to be bad guys. We just don’t have to buy treasuries. We will trade treasury or dollars for commodities all around the world. Re-denominate them.” 

However, that said, China has recently moved towards a current account deficit. That too, has instituted an element of urgency for China. 

To me, I think the history books are going to look back on, probably pretty unfavorably as the US has moved to use the Swiss system against Iran back in 2012. You could make the case, in 2008… the US really cemented the dollar’s reserve status after we went off the gold standard by what Volcker did.

Volcker came in and just said, “Listen, we’re raising rates. We’re going to stamp out inflation.”

“Stamp out inflation” was just code for stopping an incipient dollar hyperinflation. We are going to manage the dollar for the good of the world and to the detriment of the domestic US economy. 

By doing that, he put us in the catbird seat for 35 years.

Then 2008 happened. You can make the case, okay, it was out of nowhere. We were really at the center of that crisis, as opposed to the periphery as we’d been in the past. 

However, I think most people in the world can understand that this stuff happens. I think some people didn’t like the way we handled that, where historically, if this happened in other places, the IMF would come in. Austerity breakup monopolies reform, political party, etc. 

We didn’t do those things. Whatever. You’re the Americans. We get it. 

In 2021, we come in and we cut off Iran from the Swiss system. We hyper inflate their economy, essentially, overnight, we’re starving them basically. I think what we did was swift, open people’s eyes elsewhere in the world, especially potential adversaries like China and Russia, “Oh, my gosh, they’ve already got the best military. We know what they could do there, but they wouldn’t even need to use it. They can use the Swiss system and the dollar to choke us off in a week.”

That’s why I say I think ultimately, we look back… I think that was a very Pennywise pound foolish strategy. I think that really started this. Less than 18 months later, China came out and said that it’s no longer in our interest to stockpile treasuries. You’ve basically seen the Central Bank stop buying treasuries ever since. 

Things then are coming to a head pretty quickly, because China’s current account deficit, or close to a deficit for the first time in 20 years, means they’ve got to get that import bill down. We got to get more prices in yuan. 

Our fiscal situation is quickly getting uglier by the minute so we need to basically get people to buy dollars and treasuries as much as we can.

Stig Brodersen  28:50  

Continuing here on the more negative news, you’ve seen the big tech stocks out there: the Amazon, Google, Apple, Facebook, you name it. They’re all taking a serious beating these days. A lot of that has to do with the way that the public is starting to react against them, using the data that they have about us. First it was Facebook. Recently it has been Google also. I’m curious to hear how you see the future of these big tech stocks.

Luke Gromen  29:21  

I almost have two minds on them. To the positive side of it, if you said, “Luke, I want you to buy me a portfolio of names that is a reasonable proxy for owning the CIA and the US, ‘deep state’ in a public manner.” 

I would buy you Facebook. I would buy you Google. I would buy you Amazon. I don’t say that necessarily in a derogatory or conspiratorial way. I just think it sort of is what it is. I think they’re doing fascinating work. I have no doubt they’re partnering with people like DARPA and things like that, in terms of AI. 

Google in particular, I suspect are going to be at the front of AI and some of these types of things that we’re going to need to develop as a country to compete globally. I really like those names from that perspective.

The flip side is, the current setup does remind me a bit of 99 a bit, right? Where you’ve got sort of this Nifty 50, it’s a new economy. We’re not going to need commodities anymore, because we’re going to have all this digital and that’s the “information is the new oil” and “data is the new oil.”

At the same time, you can’t sort of give away the commodity names or emerging markets then you’d have a potential systemic catalyst. 

In 1970, it was the Bretton Woods. In 99, it was Euro. Now, you’ve got this oil contract, where I think is a very potential huge systemic currency system shift. 

I look at it and say alright, particularly the more expensive names in FAANGS still, if we get a weaker dollar or a systemic change, I think there’s an easier place to make money, particularly like we talked about before. Then if we don’t get a change to the dollar centric system, that vortex is going to pull everything down. As long as that vortex is running, you’re going to want to own cash and maybe some gold than like nothing else.

Preston Pysh  31:06  

I want to tell you, I just read this book, “AI Superpowers: China’s Silicon Valley and the New World Order.” This is by Kai-Fu Lee. This was exceptional. 

One of the things that he talks about in this book is he’s one of these guys who thinks that the companies that have a big leading start on AI are going to be very difficult to uproot as time continues to march on, simply because all the network effects that basically compound, the AI algorithms that they’re using, and that they’re using all that data for, it’s going to be very hard to uproot that. 

I find that interesting because in your narrative there that you were saying, you kind of feel like maybe these companies aren’t something you want to throw away, but maybe you might want to look at a better market timing or credit cycle timing in order to maybe enter the position. Am I describing that correctly?

Luke Gromen  32:02  

I would rather own Amazon and Google within that. Then throw Apple in there too, but probably go Google one, Amazon two, Apple three. 

However, to your point, if you’re a leader in AI now, you’re probably never going to catch it just by virtue of the nature of that business.

Preston Pysh  32:23  

All right. Well, Luke, if people want to learn more about you, where can they find you?? I know you got an active Twitter account. Give people hand off to your website and other things.

Luke Gromen  32:32  

Absolutely. I am active on Twitter @LukeGromen. Go to our website, which is fftt-llc.com, which is Forest for the Trees, fftt-llc.com. A couple different projects and institutional products. We have a new product called Tree Rings, which is sort of a top 10 list. I

I would have articles that I thought were interesting over the course of a week then I would send that to this sort of small group of people every week. At any rate earlier this year, I also have a book actually coming out soon.

If you go on our website, there’s a free report called “An interview with Mr. X”, which is a fictional foreign creditor of the United States. It’s an interview conducted in Socratic method, and it kind of helps talk through a number of different issues. It was a report we issued. 

At any rate, it was so popular with our customers that we decided to do a whole book series of interviews. And so volume one of the Mr. X interviews is coming out soon. There will be more information about that on our website as well. Check out fftt-llc.com. 

Stig Brodersen  33:44  

That sounds amazing, Luke. Thank you so much for coming here on The Investor’s Podcast. We’ll definitely link to all the resources you just mentioned in the show notes.

Luke Gromen  33:54  

Absolutely. Thanks for having me on again. It was great catching up as always.

Stig Brodersen  33:58  

All right, guys. That was all that Preston and I had for this week’s episode of The Investor’s Podcast. We’ll see each other again next week.

Outro 34:05  

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