Soft Landing or Hard Landing?

Hi, you're listening to Stephan Livera podcast, a show about Bitcoin and Austrian economics, brought to you by Swan Bitcoin. Today my guest is Luke Gromen, so he rejoins me on the show and we're talking about macro and his thoughts on various aspects like are we going into a soft landing or a hard landing, what is the current state of government debt? In the US and around the world, and what does that mean? What is happening with US interest rates and the chicken pivot? And we also talk a little bit about his de-dollarization ideas. Now, this show is brought to you by Swan Bitcoin, and Swan is making it easy for you to learn about Bitcoin and to buy Bitcoin. Swan is launching a new service, it's called Swan Premiums. Now, those of you interested in exclusive research reports, you will want this. There's a range of awesome content coming out from Swan, and so if you sign up as a Swan Premium member You'll get those research reports, you'll get educational content, there'll be discounts on Bitcoin products, and privileged access to many Swan events. As you know, Swan is hosting a range of events, such as the Swan Salon events, and of course, Pacific Bitcoin. So normally, Swan Premium will cost twenty dollars per month, but it is free for those of you who sign up before the end of January. So for those of you interested, go to swan dot com slash premium. When it comes to securing our Bitcoin, you've got to think about the hardware you're using, and coinkite dot That you can use. So most notably is the Coldcard. This is a hardware signing device, previously called a hardware wallet. You can use this to initialize your setup, and it will generate your twenty-four words or twelve words, and you can write those down. Now, I really like Coldcard because you can initialize the device, meaning set it up, without phoning home. Now, some of the competitor hardware devices, they require actually phoning home to the manufacturer before you can even do this, but with the Coldcard, you can just plug it into the wall and spin it up that way, and With wallets like Sparrow or Specter. So go to coinkite dot com and use code Livera for a discount on your cold cards. When you are doing your Bitcoin transactions, it's always good to check the fee rate, and you can do this over at mempool dot space. Mempool dot space shows you a comprehensive view of multiple layers of Bitcoin, so you can see the mempool, you can see the blockchain, you can see the Lightning Network. Mempool dot space is a really popular visualizer within the community, and you can even host it yourself using your own full node. So that's a great feature also. Now, if you are with an enterprise, MemPool.Space offers customized MemPool instances with your company's branding, increased API limits, and more over at MemPool.Space/enterprise. And now onto the show. Luke, welcome back to the show.

It's great to be here again, Stefan. looking forward to talking with you.

Yeah, I've seen you've had some interesting commentary, and I thought it'd be great to, have a chat a bit about what's going on around the world. I think an interesting point of discussion we're seeing now is people are saying, "Are we in a recession now? Are we heading for a soft landing or a hard landing?" I'm curious how you're seeing that. yeah, maybe if you could start by telling

us That probably depends for-- depending on who you ask. For me, a soft landing is the Fed is able to avoid, what will look very much like a balance of payments crisis in the US and as a result, the world. and I would say what we were seeing throughout much of last summer and into the end of September of last year is what that looks like, right? Where we get dollar up, risk assets down. Treasury yields up, UK gilt market breaking, all of these, you know, emerging markets under pressure, that is what a hard landing looks like, and that is if the Fed over tightens, what we will see. And so if you would have asked me, you know, soft landing, I think is anything short of that. If you would have asked me, Two weeks ago, I would've, I would've, maybe three weeks ago, I would've said there's probably zero chance, of the Fed being able to orchestrate a soft landing. I have upped those odds in my own mind for the next quarter, maybe two, based on a couple different factors that I think the Fed can maybe keep the balls in the air, but ultimately, in my view, the only way for the Fed to engineer a soft landing, in other words, to avoid this balance Payments crisis, US and global, is, is to resume dollar liquidity injections and, importantly, what the dollar has done since mid-October, which is suffer its biggest quarterly decline in decades, very quietly in fact, has, has bought time for the Fed, and I think there's some other things that could, some other levers that could be pulled, by the US government, and that's why I think we could see a soft landing type environment for the next quarter or two, and from there it starts to get a little bit trickier, but, but, but we'll let's watch and see.

Sure. And as you were commenting recently that the Fed had done a bit of a, a chicken pivot recently, and are you forecasting, or at least you're envisioning this idea that maybe towards the middle half of twenty twenty-three, that's when they start to genuinely pivot, is that what you're seeing?

Yeah, I would say it was, a chicken, or it was a chicken pivot that was engineered a bit more by Treasury than the Fed. We saw, y- and, and the Fed, I think, had, had a hand. You saw some sort of obscure liquidity, Facilities that were drawn on at the end of the year, not in large amounts, but you saw that in the fourth quarter, you saw the reverse repo balances draw down a little. More importantly, you saw the Treasury General Account not just draw down sharply enough to basically offset all of the QT the Fed was doing, but if we go back to October 31st, right? So this is pretty late in the year, October 31st, US Treasury comes out and says, "We want the TGA, the Treasury General Account." Account, our checking account at the Fed, if you will. our plan is to finish that at seven hundred billion dollars, by the end of the year. And, and when you looked at where that was, what that implied, the fact that they were upsizing fourth quarter Treasury issuance by thirty-seven percent versus what they thought just three months prior? All of this pointed to a massive tightening of liquidity in the fourth quarter as basically the US government's borrowings crowded out everybody else and the repo-- with both the borrowing and then the replenishment of the TGA on top of that. What ended up happening was the TGA finished the year, I believe, two hundred and sixty billion dollars short of their target so instead of seven hundred billion, the Treasury left an extra two hundred and sixty billion in, in basically in dollar liquidity out there. And what-- there, there's a couple possible reasons for that. Reason number one is they're looking to offset The, the liquidity draw that would have otherwise happened, or tax receipts are coming in way light, and, they are therefore not willing to draw that out. Either way, it pointed to this chicken pivot dynamic that I referred to, which effectively-- You can see it, you can see it in the most important metric, which is the dollar. DXY had its, from mid-October to date, it's basically a three-month period, and- It had its biggest drawdown, like I said, in decades in a single quarter, on the heels of its biggest run up, in a quarter in decades. So that's, anytime you increase dollar liquidity, dollar liquidity is fungible, and so whether it was the Fed growing its balance sheet, whether it was Treasury running it down, et cetera, didn't matter. You get the dollar down, you're gonna buy time for this hard landing, you're gonna push out this hard landing dynamic, and I think that's what has happened Happened, that's what has happened in recent months, and that, that, that amongst some other things buys some time,

right? And I, I think the other big-- and you've commented on this also, is just the Level of government debt out there is just incredible, like just breathtaking, the level of government debt that's out there. So what kind of constraints are you seeing that placing on what governments around the world can do?

That is, is the hard landing dynamic, and that's that balance of payments issue that we talked about just a, a couple of minutes ago. US govern-- US, US issues the global reserve currency, and that's why I spend most of my time on the US government's debt levels, because if we've got a problem, everybody's got a problem. And so one, I, I've looked at it a couple different ways. When you look at the absolute debt levels, where it starts to filter into, in my view, is through-- for me, it's less the absolute debt level and more the, the annual expenditure of floating that debt, right? So obviously we've had a big increase in interest rates. you've got an economy that is highly interest rate sensitive, and so- The metric I have spent a lot of time looking at is your true interest expense, which for the United States is not just what are we paying, what, what's Treasury paying to float the debt, and all in Treasury spending last year was, I think, a trillion two, when you look at the, the Tre-Treasury or the, TBAC, Treasury Borrowing Advisory Committee report. so Treasury, Treasury spending all in's a trillion two, and most people look at that number and say, "Oh, rate hikes, no problem." Well, in my view The way to look at that is to then say, "Well, that's just for the on balance sheet portion. That's just to float the on balance sheet portion of the US debt, that thirty-one trillion dollar number, plus some stimulus." The true interest expense that I think is more relevant for these purposes is to add in the entitlement paygos, which are what you're spending annually in entitlements, and which most people don't know what that number is, but that number according to the TBAC is two point nine trillion dollars last year, which is, about two thirds Of record tax receipts, record tax receipts inflated by a bubble, tax receipts that are now rolling over with the slowdown in the economy and the increase in interest rates. So when you add the two point nine plus the one point two, you get the four point one trillion dollars in effective annual interest expense against tax receipts that are, I think at record last year hit four point six trillion, maybe. I mean, and this is with sort of, you know, the, the gasoline on the economy pressed through the floor. This is, you're, you're gonna, if you have a recession And you're gonna see tax receipts in a modest recession down ten to twenty percent. If you have a crisis, they'll be down thirty or forty. And now all of a sudden you're back into the situation that we saw for a brief moment in time in the COVID crisis, where your effective interest expense is more than your tax receipts. And so that's where, to me, the debt filters in, because already you're talking about effective interest expense that is what, four point one trillion on four point six, you're at-- I mean, I guess it's what ninety, ninety percent, eighty-eight percent, and that's down from about a hundred, five hundred, ten at the peak in the COVID crisis. You have a recession that's going back over a hundred percent, and then it's a pretty basic, decision tree, which is either the Fed prints the difference or the Fed doesn't. And if the Fed doesn't print

We weren't even at a hundred percent. You'd get what we had then, which was dollar up, treasury yields up, bond yields up around the world, risk assets down around the world, until either the system collapses or the Fed pivots one way or another, more dollar liquidity, more dollar liquidity is injected one way or another. Another way I've looked at this same dynamic in terms of the importance of, of the debt and the size of the debt Is to look at the annual federal US deficit as a percent of projected global GDP growth, all in dollar terms. And we did a chart for our clients, about a month and a half ago and showed it a couple times since. But what it shows is If you go back to 1995, so going back 27 years, any time the US federal deficit, and again, it's relevant 'cause we are the global reserve currency issuer, we gotta get funded first anytime the US federal deficit is more than twenty percent of global GDP growth, the Fed has been in supplementing, helping finance that via QE, and that held a hundred percent of the time until twenty twenty-two. Twenty twenty-two was the first time that US deficit was more than, than twenty percent of global GDP growth, and it was thirty-two percent of global GDP growth based on the IMF preliminary GDP growth number. And you saw what we got, which is worst combined stock and bond market since 1871, and that's in the US. Dollar up, bonds down, stocks down, real estate down, Bitcoin down, everything down. I bring this up because that was thirty-two percent, it was US federal deficits at thirty-two percent of global GDP growth. Twenty twenty-three, we are looking at if you project the deficit of the US for four Q and one Q, as an annualized number Which I think is reasonable, it might even be low, but let's just go with it. And then you assume the IMF's GDP growth estimate for twenty twenty-three of two point seven percent, which I think might be high, but we'll see, China might be changing that. But let's just go with it. You end up with a US federal deficit at seventy-two percent of global GDP. Now, if, if you didn't like what happened in twenty twenty-two at thirty-two percent, we're really not gonna like what happens at seventy-two percent. So the point here is the debt- That is a problem. It's a problem now today. Last year was an indication or a warm-up of what it looks like if enough dollar liquidity hasn't been injected. We have gotten a respite via the, the, the biggest decline in a quarter in the dollar, in decades. and here we are, and to me it really comes down to then, okay, what's the Fed do? dependent on the Fed is, what's inflation do? And it's, the, the comps get easier, it should come down, will it come down fast enough? I think investors are underweighting the reality that the US government calculates inflation, and the US government desperately needs lower inflation prints for the next and, and so people, to me, investors are putting too much faith that they're actually gonna calculate the numbers in an honest and, and, and objective way, and this isn't, right? I mean, listen, I love America, but like we convinced our country to go to war for weapons of mass destruction that didn't exist, right? We, we said two weeks to flatten the curve. You really think that a government that needs lower inflation, need, like, desperately needs lower inflation? Wouldn't be tempted to sort of force the Fed's hand. I, I think they would. I, it's exactly what I would do if I, if I'm sitting in the Bureau of Labor Statistics and saying, "Listen, we need lower inflation." You really wanna be that guy who, who-- No, no, no, I wanna be honest about the number. Maybe, but the bottom line to it, I don't wanna sound too much like a crazy tin foil hat guy, so let's set that aside. The bottom line to it is, is these inflation numbers over the next three months

Dancing enough to ffs to sort of turn this. Ultimately, I think we're in a very secularly inflationary environment, but I, I think these next, I, my personal view is we will get softer than expected inflation over the next, even us, even softer than expectations of, that are on the street because the comps get a lot, or get a lot, you know, easier or a little harder, I should say, right at the base effect. I think they're gonna come in below that, and I think markets are gonna like that, and I think that buys time in the soft landing.

Okay, so if I'm understanding you, like, we're in this overall scenario where government debt is just absolutely massive, and as you were saying, when the government, US government debt is too high as a percentage of global GDP growth, that is where we see, you know, not fun times for most investors, and because as a result of that, it's, you're saying basically the US government really wants CPI inflation to go down They want that CPI number to be low so that they can have this credible story of why it's okay for them to not keep the rates this high, because as the rates keep going higher and higher, this government debt problem just becomes harder and harder and harder to, for them to deal with in an honest way. And so now with the sort of trying to maneuver things into a scenario where it looks okay for them to not have rates this high. And I guess in a similar sense, like obviously we're, we've been- We're talking about the government debt, and of course, there is, you know, the thirty-one trillion and the off-balance sheet stuff, but there's also the factor of how everyday people are living, right? Because what we're seeing is like, a person may have entered a mortgage a few years ago with the payment at a certain level, and now it's-- that payment level is so much higher because their mortgage payments are so much higher, but it's not like their earnings have gone up a lot. So I'm sure there's also going to be that stress factor on households and families, right

I think in, in places, you know, like Australia, UK, where these reset, these, these mortgages reset more quickly, I think Canada might be in that group too, but here in America, most people have a thirty-year fixed, so, there's no reset, and quite frankly, it is a huge-- it's a way that the US can engineer a, a debt jubilee for the masses, right? If you own a house and have a fixed mortgage on it, and inflation runs ten, and your wages run eight, and you- Your mortgage is three, and who holds them? Who's the sucker at the table holding the mortgage? Well, it's the Fed. Then what you're seeing is effectively a debt jubilee for the home owning class in, in the-- so that's your middle and working class in America, which is, it's not a terrible outcome on net, right? You're basically getting your house from the government for free, you know, or, or for a discounted rate over time. Now, the problem of course is that- This dynamic has been in play one way or another, for fifteen years now. So home prices here, there, everywhere have exploded higher. And so, you know, it-- the more you run this game, the more inflation you need to keep this game going, and that's the tricky part. And, and last year, we saw what happens when you try to stop the game for a second. It, it's now, it-- the longer you go, the more painful and binary the- Choices get with each, each increase in debt, and once debt hits certain lin- and that's really where, when you talk about the absolute debt levels, why they're so big, is high levels of debt reduce your optionality. You, you're, you know, you get levels high enough and it's Collapse or hyperinflate, that's it. And that's-- I don't know that we're quite there yet, but, I think we're at the point where the options are sort of, you know, big, big economic crisis or sustained double digit inflation for five years, three years. those are, those are our choices now.

And that's not going to be fun as well, especially for those people who are trying to get into the housing market, and it's been bid to this incredible level. Although, I, I, I'm curious what- Where you balance that out with the demographics aspect as, let's say, baby boomers are retiring or maybe the older boomers are dying and passing it on to the lower generations, to the younger generations rather, how do you sort of balance that out? Like, where does that, what does that look like for housing affordability and this idea of everyone using their house as their savings account instead of savings accounts?

That, that gets into an interesting dynamic, right? Because if the housing market-- when you look at how- House prices and asset wealth overall, you end up with this air pocket be-- you know, between bid, you know, offer prices and, and bid prices in terms of the ability to pay these prices. And in the case of generational change, right? The wealthy boomer generation dies generation below them less capacity to float those assets, right? I mean, if you, from the tax standpoint, et cetera, this is where I wonder is ultimately I think it's really good for growth because you end up with sort of a windfall, right? And un-unencumbered assets flowing to an, an indebted generation. They pay off their debt, they are much more, the propensity to consume is much higher than, in theory, a seventy-year-old, although, as I've talked in the past, it's-- I'm not convinced that those, those theories about the boomers' marginal propensity to consume at age seventy is, I don't think that model's holding up well the last couple years especially. But there also, it Individual assets within that, right, at times, right, where, look, you know, if, if your parents die and you don't need the house, you don't wanna rent the house, you're gonna sell the house, and your interest in sort of maximizing every last penny out of that, you know, it's like, okay, if there is any bid ask spread at that point, whether that's generated by supply because a lot of boomers are dying, or whether that's generated by a change in interest rates, so the price that it was carried at is now,

you know, the av Do you really wanna sit there, right? If it's, you know, my, my parents' house and they have, have, you know, it has a, a monthly tax bill on it, eight hundred bucks a month on a, a, a, a three hundred thousand dollar house, then do I wanna pay that eight hundred or do I just wanna bring and market down, you know, twenty percent and move it? And so you end up with these, I think there might be shifts within asset markets around that where, hey, maybe housing, maybe housing comes in, but other assets go Because you're ultimately having sort of this generational wealth transfer, I, I don't know that it's a plain black and white dynamic. It depends on how it goes. I, I don't have a sort of concrete answer to that. I think it would depend how it would develop, I guess.

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Half way or later half of the year, what does that spell out for other things like stocks, gold, Bitcoin, like where are you, where are you sort of seeing that going?

Yeah, I think if you do Get the Fed to pivot, then, you know, into the soft landing, I think it's really good for all of the above, right? I think, and I think this also kind of where it ties into it'd be really convenient for the government now, for the Fed later, for the government to understate inflation, right? And, and, and I bring this up because we have, we have two or three different CPI methodology changes here in the United States that go live in February. I forgot to mention that before. So it's not just me saying, "Oh, what if they change this Changing it, and so, you know, my guess is, is, you know, if they're changing the methodology anyway, they're probably gonna change it on the, you know, there's a lot of incentive for the government to get it lower, put it that way. If they can do that, then that frees up, you know, we, we, we've heard this phrase, the Fed is a one mandate central bank. They have to get inflation down. Well, they get inflation down, reported inflation, however they do it, if they do it in sort of a genuine way and it actually comes down, and to be clear, inflation is softening meaningfully sequentially, and if they stay too tight, it will fall very sharply for at least a bit. But ultimately, it ties back, and we talk about a Fed pivot, to me, one of the One of the biggest factors that isn't getting nearly enough attention is this reality that the debt and the deficit position of the United States of the West more broadly Require inflation. We will have, if you get inflation down too much, let alone deflation, we will have that hard landing we talked about before as tax receipts go below just your effective interest expense, let alone the nine hundred billion in defense and education and labor and and and So that to me is really critical when you think about a Fed pivot. This isn't just about, "Oh, we want to gas stocks and bonds," or, you know, stocks and bonds will probably benefit too, but Bitcoin, gold, real estate. It's not about bailing out the investor class. It's about bailing out the government. It's about bailing out social security. It's about bailing out defense. It's about all of this. Is we are just at the period of the long cycle dictated by our bad choices in the past And compounding interest, the Fed's job is to keep Treasury solvent. At the end of the day, that's their job. And if they are too good at, at getting inflation down, they are going to have to be very, very explicit about bailing out Treasury again, and that is a bad look. So there is, they're really trying to thread a needle here. I think, yeah, end of a, end of, end of a couple quarters, they are gonna have to pivot, I think, more explicitly. And yeah, I think it's really good for I think it's really good for assets broadly. I think it's great for Bitcoin, I think it's great for gold, I think it's great for commodities, I think it's great for stocks. it's probably good for bonds, although it's, that's a suboptimal way to play the trade because your bonds are gonna be falling against sort of all those other assets. That's, that, you know, that I think is, is, and, and to tie the loop, to get the Fed from here to there, it's really nice to have lower reported inflation. That helps Inflation, oh god, inflation's too low. You know, we, we know what happens when they go too far 'cause we were starting to see that in July, August, September of last year.

I see. And so, do you believe then that, I guess, let me put it this way, this is actually an interesting area. So you've been ch- chatting about this idea of de-dollarization around the world in different- countries, and I guess you could argue that maybe certain individuals or businesses have been dollarizing, but maybe you could also present the case that some of the countries and the commodity trades are de-dollarizing. So could you explain a little bit of that dynamic for us, like how we can see this weird almost dichotomy there?

Yeah, for me, de-dollarization is driven by multiple factors, but the most important of them is peak cheap energy. And what we're seeing is a world where, according to Enverus, ninety percent of the growth of global oil supply over the last ten years has come from US shale. US shale's peaking. You can see it in the data, you can see it. It is-- And at the very least, when I say it's peaking They could produce more, but producing more is going to require sustainably much higher oil prices. So peak cheap energy, peak cheap oil is a critical dynamic because, and this is why I think this, I, I focus D dollarizations about commodities is As long as oil is only priced in dollars, then peak cheap energy will mathematically collapse the post seventy-one dollar system without fail. It, it is, it is guaranteed. I should be careful with that word, it's gonna get me in trouble, but it is mathematically-- it's, it's a mathematical certainty, right? Because basically, global emerging markets need oil. They need more oil since they're growing, and so they need to import more oil, which means they need to have spent more dollars. So peak cheap energy means Not only do they use more oil, but the price of the oil in dollars goes up. So they're im-- they, they need to export more dollars, but they don't print the dollars. They have dollar reserves. So as soon as their dollar reserves get too low because the price of more oil is going up, not only are their imports going up, but the price is going up Soon as their dollar reserves get too low, you start to have currency crises. People start dumping their currency, and so now the price of oil in dollars from goes up even faster. So their oil consumption drops. So their oil consumption drops, their economy drops, their standard of living drops, their economy collapses And this will just happen over and over and over and over, and it will happen to China, it will happen everywhere. And in the meantime, the people that are benefiting from this, the oil producers, are gonna have a bunch of dollars, but they're not gonna be willing to lend it to these countries because there's no hope of repayment. They can't be repaid because their economy has collapsed. That's why I say it is a guarantee. Peak cheap energy will drive the collapse of the system. And so there's sort of a couple ways out of this. You can, like you said, you Burn your reserves of dollars down. That's a very dangerous short term fix. The other fix is you can find more oil, you can produce more oil, and China's certainly been doing that. They've been swapping dollars for oil all over the world, other resources all over the world for fifteen years, making dollar loans in return for commodities back. The, the final way you do this is you de-dollarize your, your oil flows, your commodity imports, which is to say you pay in your own currency And you offer settlement in goods you produce and/or, gold, that floats in neutral terms. And could this be Bitcoin someday? Absolutely, it could be. But that's what we're seeing de facto. For example, Ghana right now, it's gold. Russia effectively, it has been gold. China effectively, in some ways, it has been gold. So- The de-dollarization is really, it's, it's sort of paradoxical because what de-dollarization is ultimately about, yes, there is an aspect that is geopolitical in certain countries' cases. Systemically, it is absolutely critical to do this, because otherwise the system is going-- peak cheap energy means the, its system is going to collapse. And this would have started ten years ago, but again, US shale, biggest marginal producer, ninety percent of growth, kept a lid. But now shale is done keeping a lid on oil, and so I don't get the sense that this dynamic is, is that well understood, that this de-dollarization dynamic is being driven by- A desire to sort of keep this to avoid catastrophe. So that's the first paradoxical aspect. The second paradoxical aspect to it is initially, as you de-dollarize your commodity imports, you're emitting more of your local currency and there's less dollars while there's offshore, there's a big dollar demand and no demand for your, your local currency. So in the very short run, it actually strengthens the dollar against these other currencies paradoxically. For a bit, and then eventually it should weaken it because, you need-- you're basically freeing up dollar liquidity via your commodity bill, right? You can see it, Ghana talked about this last week. We import three billion dollars a year of oil. We also owe all this other dollars for debt, et cetera. We are now going to use gold for oil, and that's going to free up three billion dollars for us to address our other dollar needs, right? So you're, you're loosening dollar liquidity via the commodity market, which over time makes the situation more sustainable and ultimately, once you hit some sort of tipping point, and I don't know- Where that is or what percent of the market that is, then it becomes negative for the dollar, on the flip side of that, which is sort of this other paradox. But to me, like, I mean, it's interesting. Do I think individuals are still demanding dollars and EMS? Yeah, of course. I, I would suspect they would. I would do the same thing. But that's a little bit like, hey, you know- You know, my local coin shop is out of gold coins or silver coins. Like, okay, like it's interesting, but like wake me up when, you know, the LBMA declares force majeure, right? That's the, you know, the difference between individuals dollarizing and the global commodity markets de-dollarizing. It's akin to like, hey, my local coin shop is out of silver versus, hey, the LBMA just declared force majeure on silver. That's the order of magnitude difference, and just because- One is true doesn't mean the other isn't.

I see, yeah. And so, I guess the other question people might be thinking is, what about just the aspect of what countries or governments, in this case, are holding as their savings, right? So it may well be that they're de-dollarizing in the commodities aspect, but if a lot of other contracts are still priced in dollars and a lot of other-- then maybe it forces them to keep some of their reserves or treasuries, in this case, in dollar-denominated assets or things. I'm curious how you weigh that up as well

Yeah. So you can see the data, right? So going back to 2014 when global FX reserves basically peaked, since then, global central banks have bought about four hundred billion dollars of gold, and they've sold about three hundred billion dollars of treasuries. So that, that in and of itself sort of shows you directionally where, where the shift is happening on the margin As far as holding other things, that's where it gets geopolitical, because ultimately it's not our choice. Y- we can have that power taken away from us if a big nuclear armed oil exporter starts changing the ratios in which it will transact. in other words, if Russia comes out and says, you know, Zoltan Pozsar wrote about this, instead of one barrel per gram Gram of gold, we'll do two. We will, we will sell you two barrels of Russian oil per gram of gold. Now Russia's in control of that gold to oil ratio, which I would argue is one of the most important ratios economically in the world, because that is most important commodity, energy commodity. The de facto backing of the dollar for fifty years in oil, over the competing reserve asset to treasuries and the reserve asset that backed the dollar for the forty years or whatever before that, thirty years before. If that happens, that changes behavior entirely through the oil market, because people may want dollars, may not want dollars, that can move around. They need oil And if they have dollars and need oil, we saw last year, outgo the dollars, outgo the dollar assets. That is, we know that for a fact. and we saw that in, and we, we know that for a fact 'cause we saw that last year. So that's why I say it ultimately Russia has a choice in that, Saudi has a choice in that, after that, you know You know, Iran, they're not nuclear armed, so that, that changes it as well. it's really it's Russia. And so if Russia says, "Look, a gram of gold is worth two barrels, not one, like it is in the paper markets in London and, and New York," then that changes everything, right? Because think about the arbitrage that sets up. You know, people say, "Well, so what?" Well, well, so what? Well, I can then, as a country, short, short oil at the, you know, in, in New York, take the dollars You know, I short a barrel of oil, I'll just, I'll just keep it at the base level. You short one barrel of oil in New York, you take the barrel, those dollars, you buy one ounce, one gram of gold in New York. You take physical delivery, you take that gram of gold to Russia, you give them the gram of gold, they give you two barrels. You take one barrel, put it in your stockpile, you take the other barrel, cover your short in New York, go buy another, go do it again, go do it again, go And it basically turns the whole thing into a contest of what will run out first, gold stocks in London and New York, or Russian oil. And I guarantee you Gold stocks in New York and London will run out way faster because it'll happen instantly, because it, it's an, it's a free arbitrage. The entire market will instantly reprice at two barrels an ounce because the market loves free money So that's why I say the reserve asset isn't entirely our choice. Now, this all goes back to that point before about peak cheap energy, where Russia is partly doing, you know, now there's been some-- Let me back up one more. Zoltan proposed this. This, this proposal was also quoted two weeks ago in the Russian language media and not reported anywhere in the US by,

Sergei Glaziev, who has been a close economic advisor to Putin for going on ten years. So, this is being discussed. will it happen? Who knows? But this isn't in markets at all, especially now that you're seeing Ghana do a version of this as we speak. The first oil tanker showed up in Ghana two weeks ago, three weeks ago. Guess where it was from? Russia. So, you know, let's-- or the, excuse me, it had stopped, its prior last stop had been in Russia at the end of December, it showed up last week in Ghana, full of oil. So my point here is that Russia is doing this partly to tweak us in theory, but partly they need to, they have to. Again, peak cheap energy is catastrophic for the debt backed system as it's been structured. That system can't work in peak cheap energy. You have to change the reserve asset to something. That, that is not negotiable. The geopolitics of it, as we are seeing, are trickier.

Yeah. Also curious on your thoughts around payment systems, right? But we are starting to see other countries try to create or promote alternative payment systems. So does that play into any of this analysis? Does it change any of the analysis?

Yes, it plays into it enormously. it might be changing. the short version is, is, and, and there are a lot of other guys that are better to talk to on the plumbing, pi- Pipes, than me. they're dollar pipes is the short version of it. And so as long as they are dollar pipes, they can do this around the de-dollarization, et cetera, around the fringes, they can affect some change in, balance of payments on the margin, some ba- they can manage, relative currency cross rates on the margin, but it gets difficult to do wholesale changes through dollar pipes unless it's dollar approved, you know, dollar, dollar system approved. And There are some signs that some dollar people want, approve of this, that's a separate discussion. The key then is, is how do you change the pipes? And that's where I think it's getting very interesting, again, something I was unaware of, a month, month and a half ago. Pozar wrote about this MCBDC, this M-bridge project at the BIS, and it's centered on, you know, the Hong Kong Monetary Authority, China, UAE, I think India's in there too, but I, I could be mis The point here is, you have a global central, central bankers' central bank, the BIS, facilitating non-dollar pipes. They-- this is up and running, it's being tested in the hundreds of millions of dollars, it's-- so it's still a rounding error, but that's the thing about technology. Once you get it going, it's not constrained, it's very uncapacity constrained, and that's why I think it is So interesting because I think if you look at sort of traditional dollar pipes, you're years, decades away, even if there weren't geopolitical and political frictions trying to stop that. Now We all know the speed at which tech moves, right? I mean, you can be Blockbuster Video and laughing at Netflix sending DVDs in the mail and refusing to buy Netflix 'cause why would you do that? We have five thousand stores, and like two years later, you're, you're done because the technology moves that fast. And, and to me, and that's all credit to that, a metaphor goes to Jeff Booth, obviously, listeners will, will know exactly what I'm referring to, his brilliant book, The Price of Tomorrow. And so I think there's a metaphor in So to potentially to this, this BIS Mbridge MCBDC project where if you have monetary authorities facilitating the extra dollar outside the dollar pipe Settlement of trade, then things can start to move really, really fast, and you can get Netflixed or blockbusted really fast. You can see those types of changes. Again, it's-- and I don't think there's an appreciation of how fast that could happen. Now What's the US gonna do? Like, are we gonna go bomb the BIS in, in, in Basel, Switzerland? Like, pro-probably not, right? That's, that's probably not what we're gonna do. So there's, there's some things Obviously we could do sanction this or that, but again, are you gonna sanction the BIS? You-- 'cause oh by the way, once these pipes are open, the more you sanction, the more it's gonna get adopted. At that point, it becomes you know, all you can do is, is accelerate the use. So I think the plumbing is extremely important. I don't think the plumbing is there to make massive wholesale changes yet, but I think markets are possibly underestimating the speed at which the pipes could be there, because we as humans, we just all-- it's, we always underestimate the exponential function. We've done it with technology, we've seen it with technology for, for our entire careers.

Coming back to the question around Governments wanting that CPI number to come down. I'm curious your thought on if they aren't able to do this, right? Like, what happens in that other scenario where, let's say, they, they can't really get that number down? Or, or do you just kind of rate it like, basically they're gonna get the CPI number down?

I think they're just gonna get the CPI number down, and then I think that buys us time as a soft landing for a quarter or two, and then let's see what happens if they don't, right? Is where I was I would say two weeks ago, it's a relatively recent change in terms of my viewpoint, which is the balance sheet and the debt is such there isn't enough balance sheet either more dollar liquidity is supplied or we have a balance of payments crisis globally, which looks like twenty twenty-two on steroids. Those are our choices. Now, the dollar liquidity has been supplied with the Fed still tightening by virtue of what the dollar has done since October, which again, i-i-it's hard to measure, but when you have a dollar fall that much, that quickly, it supplies a lot of dollar liquidity globally. It just frees up breathing room. We've seen that over and over over the last couple decades. Those were my two options as of two, two, three weeks ago. Now, there's a third option, which is just change the math. It's just change the rules, right? And what I've, what I've highlighted for my clients is When I heard about these CPI rule changes that start in February, I had been unaware of these, and so I started sending feelers out to friends, clients, et cetera, saying, "Hey, did, did, did you know about this?" And everybody goes, "No, it's the first I've heard of it." So I was like, "Okay, well, that's kind of interesting." So that's not to say nobody knew, but like if you're not a CPI junkie, you didn't know. Okay. So that's number one. So number two, I think it's underappreciated how desperate the situation is getting vis-a-vis the effective interest relative to tax receipts, right? We're seeing tax receipts roll over, the fiscal situation is what it is, it's getting desperate. When I heard of the CPI rule changes, my mind went back to two discrete moments in time in my career that I don't think people are there yet, which is number one, April two thousand nine, Wall Street Journal, FASB, Financial Accounting Standards Board Suspends mark to market. And at the time, it's like, "Oh, what does that mean? Like, and, and, and the wrong thing to do at that moment was say, 'Oh, well, what does that mean for bank earnings? And what do-- what is their charge-offs? And how many more loans are they gonna make? And what's that mean for--'" But that was the wrong thing to do. The right thing to do was like, "Holy crap, the US government just said they're changing the rules, extend and pretend as official government policy, buy everything

A weekend on zero hedge, Dallas Fed quietly suspends mark-to-market for shale on contagion fears. Even setting aside the source, even setting aside the official denials that occurred at the time, but then later on were shown to be directionally accurate, the wrong thing to do was, okay, what is the earnings impact for oil and for these energy related banks and for the stock market? And then the right thing to do was, like, holy crap, extend and pretend is official policy again, buy everything. And so these are the two point where you come out and you hear- Right, because importantly, these CPI rule changes, they were noticed in A- in August, two thousand twenty-one. So in August twenty twenty-one, let's go back there. Inflation's transitory, blah, blah, blah. Well, we've noticed 'cause of COVID, there's these- Inaccuracies. Now you, we're, we're gonna go with the other way still. Now you fast forward to September twenty twenty-two, hey, we're changing the method. Really? And by the way, they announced it in May of twenty twenty-two, two weeks after Biden gave a speech in which he said his number one, his number one fight is inflation. Okay, so now the BLS in May of twenty twenty-two says, "Hey, guys, the, the, the method that we noticed we're creating some inaccuracies a year ago when the, all the, you know, the Well, now our boss says it's his number one thing, so we're gonna change the metric. So how are they gonna change that? I don't know, but my brain didn't go to like, okay, what's the earnings impact and what's it gonna be. My brain went to, okay, they're goal seeking inflation. Alright, if I'm them, how am I gonna goal seek inflation? It ain't, it ain't either gonna goal seek it or gonna goal seek it lower. So that's why I think we're-- It's intellectually offensive, it's conspiracy theory The exact wrong thing to do is to, you know, as I joke with my boys, to grow a brain and try to calculate. And I tried to grow a brain and calculate, and I mucked it up twice, to be clear. Like, it was a disaster. You know, they-- if you wanna, if you wanna really see how easy it is to game the numbers, like, spend an hour in, you know, going down the rabbit hole of how CPI is calculated, and it's like- Holy cow, like there, there's so many ways they can just move the-- I think the number's gonna come in low, and if I'm right, then you get sort of this Goldilocks soft landing. Oh, by the way, it puts pressure on the Fed to stop tightening because they're a one-mandate central bank fighting inflation. So let's see, but that's the sort of the thought process and how that evolved and why I think that that's gonna happen.

I'm with you there on that they have this incentive to have CPI low, right? The incentive from their point of view is have actually like monetary inflation is high, but CPI low. They want CPI low because that's what they want, so it's not that crazy to think that that's what they're gonna try to get. I think one other interesting comment you had was on, our friend Jamie Dimon, talking about fossil fuels. So you were saying, Dimon's comments about fossil fuels, quote unquote, gonna need them for the next fifty years, we're not investing in oil and oil and gas to keep it low, and Bitcoin, it's going to low, it's going to zero, are fundamentally incongruent. So, I think maybe you, you were alluding to some of this in our earlier commentary, but, do you mind just elaborating on that comment?

Yeah, look, unless Jamie Dimon knows a way of mining Bitcoin with nuclear fusion, so the energy cost is zero, then I don't see how he gets there. There's an energy cost attached to mining and running the network, and if he thinks energy costs are going higher, I don't see how he gets to Bitcoin going to zero. I mean, maybe he knows something regulatory that I don't. Again, if, if the Chinese can't ban Bitcoin, good, good luck to Jamie Dimon and the American government. I, I don't think they're gonna be able to do that, but who knows? Maybe they know something I don't. But on the face of it, that's why I say that those are fundamentally incongruent positions. There is an energy cost to mining and maintaining the network, unless energy goes to zero. I don't, I don't get where his point.

Well, I think that's probably a good spot to finish up there then. Luke, where can people find you online?

Absolutely. So I am, our website, f f t t dash l l c dot com. you can also find me at, at luke gromen, l u k e g r o m e n on Twitter, and, that's, those are the two best places to find me.

Fantastic. Well, Luke, thank you for sharing your insights with us today. So thank you for joining me.

Yep

Show notes are available over at stephanlivera dot com slash four five three. Thanks for listening, and I'll see you in the citadels.