WBD261 Audio Transcription
Bitcoin: The Great Disruption with Luke Gromen
Interview date: Friday 18th September
Note: the following is a transcription of my interview with Luke Gromen. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this interview, I talk to macroeconomist and founder of FFTT, LLC Luke Gromen. We discuss the current macroeconomic climate, how the system that has been in place for the last 50 years is coming to an end and why we need Bitcoin.
“The system of the last 50 years is over, it hasn’t worked, it has broken down.”
— Luke Gromen
Interview Transcription
Peter McCormack: Luke, good afternoon, how are you? Well, it's afternoon for me because I'm in the UK; I don't know where you are, but afternoon anyway.
Luke Gromen: Thank you, Peter. I'm in Cleveland, Ohio, so it's still morning for me, so good morning to you.
Peter McCormack: You're in Ohio, so you're a Buckeye?
Luke Gromen: I am a Buckeye. Good on you that you know the Ohio State Buckeye's; that's excellent!
Peter McCormack: Well, this came up before, because I interviewed Hester Peirce from the SEC and I was dating a girl from Ohio at the time. So, she forced me to become a Buckeye and she threatened to take me to a game against Michigan, but we never actually got round to doing it, but she's like, "You've got to come to a Michigan game".
Luke Gromen: It's pretty incredible. It's one of those life experiences that is a cultural experience, I guess. Once you've been to an Ohio State Michigan game, I would say, bias being an Ohio guy, but you can say that you've really had a taste of Midwestern American life, I would say.
Peter McCormack: Well, I've also been to Cleveland.
Luke Gromen: Oh, have you really?
Peter McCormack: Yeah, I've been, I had a great time. Really, really good selection of Craft beer houses.
Luke Gromen: Very much so. You know, we had a pretty tough 1970s, 1980s and into the 1990s as a city, but it's really been sort of just building itself back up and become a much more localised economy, centred around healthcare, some innovation type work. But then, like you said, there has built up this great Craft brewing, I don't really want to call it "cottage industry", because we've got some really big, good ones here; but, there's no shortage of good beer, which is really nice for myself as a beer drinker to sample the local microbreweries.
Peter McCormack: Well listen, it's great to get you on. Sometimes I can go down the Bitcoin rabbit hole and spend all day talking to Bitcoin people and, you know, forget there's a world outside of it. But, somebody dropped me a DM the other day and they're like, "Look, you've got to talk to Luke. He's a macroeconomic guy, but he's also a bitcoiner, but he's a macroeconomic guy". But some people, they won't know you, and I don't usually do this with the regular guests in the Bitcoin world who everyone knows, but just for those who don't know you, Luke, could you just give us a bit of a background, who you are, what it is you do and this kind of secret Mr X?
Luke Gromen: Certainly. So, I am the Founder and President of FFTT, which is a macroeconomic and thematic research firm that I founded back in 2014, and what we do is aggregate a large amount of publicly available information from a disparate array of sources. And, we aggregate that data in a pretty unique manner, trying to identify developing economic bottlenecks, because prior to starting FFTT, I spent over 20 years on the sell-side in investment research, and then in institutional equity sales. And, what I found consistently in my career was that excess economic returns, or excess returns, accrue to those sectors that stand to benefit from, or if you short them, stand to be hurt by those areas that are in the way of or in the middle of economic bottlenecks as they develop.
So, started this firm going on seven years ago now and it had developed a knack for putting data points together in a unique manner. In my prior seats, a couple of different research and sales products I've put together, on the sell-side, for investment professionals; and so, I've been at this for like I said, seven years, and it's been a whole lot of fun. We do research products for institutional high net worth investors as well as a retail and registered investment adviser product we have as well.
Peter McCormack: And, pretty interesting times for you then, with this type of work?
Luke Gromen: Very much so. When I started the business back in 2014, we published weekly and there were weeks where it felt like it was hard to find something to write about. And, starting around mid-2015 or 2016, I started leaving so much on the cutting-room floor that we started having to add products to our product line, which was a Champagne problem to have. So, it's been a very, very fun time to be in the macro world, and particularly to own my own firm and to be able to have the creative control and to call them as I see them.
Peter McCormack: Right, great. So, before we get into some of the details, because I definitely want to pick your brain on what's going on on the macroeconomic side of things, is just tell me how much of a bitcoiner are you; how much do you know; what does it mean to you?
Luke Gromen: I like Bitcoin, I have probably got about 2% of my net worth in Bitcoin, and that's probably ranged in the last three years from very little up to probably 3%, so I'm so of middle of the range; I've been adding recently. And for me, Bitcoin is a neutral reserve asset for the people at a time when it seems crystal clear to me that interest rates, real interest rates are going to have to be significantly negative for a significant period of time.
So, I'm not the right guy to talk to when you're talking about some of the cash rates and mining costs and some of the real nitty-gritty things that I think are important and interesting; I can't get into those details. But for me, it's this ability for me to pick this up and buy Bitcoin with my excess earnings and store it there, where I'm going to get compensated on a real basis as real rates are kept negative by central bankers over what again, I think is going to be a long time to come.
Peter McCormack: Well, I'm also not the person to talk about those kind of deep technical things, related hash rates, so I wouldn't worry about that. But, it's very interesting what you did then with your phone, because my personal wealth is either in my property which I live in, my savings in my bank or Bitcoin; I have nothing else. But, I did recently go down the gold rabbit hole, because I felt like I didn't want to have all my non-monetary wealth stored in Bitcoin; I felt like I just wanted a small backup in gold. But, the process I actually had to go through to try and acquire it, because I wanted the physical gold, it was such a pain, man, so I just ended up buying more Bitcoin, because it's just so much easier to buy and then I can put it in my long-term cold storage and forget about it. But, all this process of getting gold was a bit of a pain.
But, the interesting thing there is, even if you don't know the technical details, you understand enough about it to consider putting some of your net worth into it, and a growing amount, so I think that's pretty cool.
Luke Gromen: Yeah, I think it's a very interesting -- I think it's a technological manifestation, I guess if you will, of gold. Gold, alternately, what is physical gold? Gold is just energy expended stored and portable, and that's effectively what Bitcoin is. If you look at it from a purely monetary aspect, that part to me has been apparent for a long time and continues to be apparent that they are, I think, sort of blood brothers I guess, if you will, but I'm in the monetary world.
Peter McCormack: Right. Well, I'm going to come back to the Bitcoin stuff. I'm especially interested in, you obviously provide certain products, advice, consultations to people; people talk to you, they come to you, and I would be interested to see, or hear from you, what kind of responses you get with regards to Bitcoin, how much you talk about that, but we'll come back to that. We're in very, very strange times at the moment, very, very strange times. I was actually doing an interview yesterday and this guy was saying, "Well, hindsight is 2020". He said, "Well, actually, we need a new term for that!" because of the year we're having.
But, like, what the hell is going on, man? Let's start with the US, because the US leads; kind of everyone looks to the US, it leads the world on a lot of issues. What is going on, man?
Luke Gromen: It seems like we're losing our minds a little bit, doesn't it?
Peter McCormack: Yeah.
Luke Gromen: You know, I think ultimately, if you look at it from a big picture standpoint, there's a great book called The Fourth Turning, written by Strauss and Howe, and I think we're waist deep and maybe chest deep in The Fourth Turning, and it's this generational theory where every four generations, you go through these great disruptions. And I think we're in the midst of a great disruption and I think there's a number of things driving these great disruptions. I think the pace at which technology is changing is very disconcerting. We, as humans, have 10,000 years of evolution and we're used to seeing things change in a linear manner, which means very little at all in our lifetimes.
And in the past 30 or 40 years, we've seen these changes governed by Moore's Law, which is just faster and faster and faster; and so, that is changing both things in a good way and a bad way, right. Again, we have this thing which would have been inconceivable 30 years ago, 20 years ago, 15 years ago, but it also at the same time changes the world in ways for large proportions of the population that are negative in terms of the jobs it places, the way it pushes down our wages, etc; and so I think that's part of it.
But I think, the big picture, I think what we're living through, partly technology driven, partly financial driven, is basically promises that were made are no longer able to be kept as a society, to broad stretches of our society, and this is something happening not just in the US, but around the world. And policymakers, I think, are trying to figure out the least disruptive way to break those promises. And, I think ultimately that leads to all sorts of cognitive dissonance, it leads to political strife, it leads to a lack of faith in the authorities because the way the world worked, the way we were brought up to believe the world worked, has been by virtue of a series of advances over the last, I would say, 15 to 19 years, if we dated it at 9/11.
The way we all understood the world worked on 10 September 2001 has been proven to not be true, or it's changed so fast as to almost be unrecognisable. So I think ultimately, it's these tensions, the core of these tensions that we're feeling, I think has a lot to do with trying to figure out how to restructure promises that are no longer able to be kept, and then the political implications of those. And so, that's probably how I would answer what's going on, and we can dig into from there, you know.
Peter McCormack: Yeah, what are all these promises?
Luke Gromen: I think some of them are them are as basic as the breakdown of the American Dream here in America, right? The American Dream is you go to school; you go to college; you come out of college; you get a job; a couple of years, you buy a house, you buy a car, you get married, you have some kids. And, that was sort of the way it all worked, and over the past 30 years in particular, when you look at some of the globalisation, trade deals, since we got China into the WTO, it has gone from being possible for a great portion of the population, to feeling impossible.
There was a great chart I saw the other day, and it showed that if you … it was measuring the cost of necessities. And so basically, it included education, which I think is necessary; healthcare, which I think is necessary; shelter; food; etc. And it showed that in 1985 in the United States, it took 20 weeks at the median wage in United States to be able to get these things, okay? 52 weeks in the year, that's 40% of your year; that's okay; that works; that is conducive to a functioning, happy society. Last year, or 2018, that was 53 weeks to get those same goods.
Peter McCormack: You need two jobs?
Luke Gromen: Yeah. The problem of course is that there's only 52 weeks in the year and so, when you need to work 53 weeks to get the stuff that you need to live when there's only 52 weeks in the year, you're now on borrowed time in terms of social cohesion. There's a problem and there's a whole bunch of reasons that happened. So, that's one problem, right? That's basically a manifestation of the breaking of the "American Dream". I think the demographics of --
Peter McCormack: Can I just ask you a question before you go into that?
Luke Gromen: Sure.
Peter McCormack: -- just related to that. Is that because things have got more expensive, or is this due to a long-term debasement of the currency?
Luke Gromen: I think it is a long-term … I think partly a debasement of the currency. I think ultimately, if you go back to what we did in 1971 in terms of closing the gold window and going to purely fiat standard, this was the path we got on. And so, when you look at the reasons for that happening, that it's now 53 weeks to get the cost of necessities, you look within what's raising those costs, the cost of healthcare has risen tremendously. Well, you can't outsource healthcare to China very easily; technology has had thus far a relatively limited impact on. There are elements of what I would call racketeering elements within the healthcare sector in the US, in terms of monopolies and they're protected to keep margins artificially high. Some of that is regulatory that has not been allowed to have healthcare costs come down. Education, the same thing where again, the productivity enhancements of technology have not been brought to bear to bring those costs down. So, you've seen sort of the true rate of monetary debasement in my view has showed up in things like healthcare and things like technology, or excuse me, education and healthcare.
The flipside of it is that the areas where technology has been brought to bear, or where these trade agreements have been brought to bear, where the regulatory situation has broken unions so that the bargaining power of labour across the United States has been significantly eroded, if not destroyed entirely, you've got on the other side wage pressure. You've basically thrown a big portion of the US populous into competition with these low-cost wage areas of the world. And so, they're getting it really on both sides. It's the currency debasement on the healthcare and the education in particular, and some other things; and then, it's the technology and the global wage arbitrage side on their wages; and it's just this advice from both sides that is just coming to a head. And so, that's what I think has caused it.
So, that's one area that I think is breaking down in terms of unpayable promises, right? There are broken promises; there's the "American Dream". US entitlements; you've got this 75 million-strong US baby-boomer generation that were born from 1946 to 1964. It was no surprise that they were eventually going to turn 65. Anybody with an actuary table knew this was coming, and yet we've lacked the political courage to reform these entitlements year after year after year after year. And the problem with pushing things off for the long term is that sooner or later, the long term arrives.
So, here to, and this is a problem again that's not unique to America. There are a number of different western social democracies in particular that have similar problems, but we now have these public pension fund promises that are unpayable in anything resembling real terms. They're imminently payable if we use the printing press, and that's my view, and that's part of the reason I like Bitcoin and gold, etc; but, trying to figure out how to pay unpayable promises is very tricky politically and again, adds to the tension, adds to this feeling of broken promises and that the way the world used to work isn't the way it works anymore.
Peter McCormack: How much of this also comes down to changes in the way banking works and the access to liquidity that banks have and the lending practices, because I did a thing; I looked into Mnuchin. I did a four-part for another podcast series I did and I was looking at his track record, and I was looking at after the 2008 financial crisis, what happened when he started One West Bank. And during the housing crisis, one of the things that was really interesting was I actually went back a step and looked where they neutered Glass-Steagall, if I've pronounced that correctly, which I think they tried to start under Reagan, came under Clinton.
But, what actually ended up happening was essentially, all these people lost their homes under the 2008 financial crisis. A lot of these homes were packaged up and bought by hedge funds like BlackRock. But, a lot of them were leant the money by One West to buy these homes, and they were buying, like, thousands of these homes at a time, you know. Tens and tens of thousands of homes ended up being owned by hedge funds as such. And that to me just seemed wrong. This seemed like the movement of money enabled very rich people to get a lot richer at the cost of, let's say, the American Dream. How much of that have you looked at?
Luke Gromen: I have not written about it a lot, but I have looked at it a lot. I've lived it, being from Cleveland, Ohio. Really, when you go back to 1971 when the US went off the gold standard, that was a political decision that was made ultimately. It was an economic decision, but a political decision. It was at that point, there were going to be winners and losers, and the winners were those people that were involved with what I have come to call, the Dollar Export Business, or the Treasury Export Business. As of 1971, after we went off the gold standard, the United States got out of the business, or began to get out of the business of making stuff, and started to get into the business in a big way of making and exporting dollars and treasury bonds to the world, and letting the world make the stuff for us.
And so, that hallowed out manufacturing across the Midwest, across the United States, it weighed on working-class wages, it weighed on middle-class wages, and so I think this dynamic that I think you are talking about was almost the cherry on top of a 40-year Sunday of this dynamic of success not being tied to a better product or a smarter solution, or manufacturer making something. Success became increasingly driven by how close you were to the dollar export business and as a result, you would have the lower cost of capital and whoever had lower cost of capital would win. And this was, I think, just sort of the endgame of that 40-year process.
And the reason I say it's the endgame is because I think, something that we have written about a lot, has been the United States' Defence department in particular, but other national security interests as well, saying that now that we have moved so much of our production offshore, it's become a national security risk, as highlighted by COVID, for example. COVID was really something that I think was the first time both sides of the political aisle in the United States were able to say, "Okay, I get why offshoring all our manufacturing, this unrestricted free trade, we're going to make dollars and everybody else will make stock for us and then we'll give them the dollars and then we'll recycle the dollars", why they finally understood that that was the problem, which was we needed equipment for COVID and we didn't have it and we couldn't make it and we needed to ask China, "Pretty please".
And then, they started looking around and said, "Wow, it's not just masks; we get 80% of our antibiotics, or ingredients in our antibiotics from China, who certain people in the United States are advocating an increasingly adversarial relationship". Well, it doesn't seem like a really good idea to start an adversarial relationship with someone who controls 80% of our antibiotics. So that's why I say I think a culmination of this 40-year process was what you describe in terms of, they had access to cheap capital when capital wasn't around and they had access to cheap capital because of political connections ultimately. It wasn't like they made the dollars better than somebody else. I mean, you and I could have made the same dollars, it's a couple of keystrokes on a computer; it was political connections.
And, this kind of ties in to that whole theme we started with of the way the world worked, the way everyone thought the world worked in 2000; 2008 was one of those big "aha" moments for a lot of people when they said, "Wait a second; this isn't what I was told about the American Dream". The American Dream wasn't, hey, you work hard and buy a house and then they blow up the economy because of some bad regulatory appeals under Clinton and Bush that you referenced, and then I can't afford my mortgage payment, because I get laid off because of the crisis; and now, a hedge fund that does have access to capital for political connections gets to buy my house, you know.
And again, if the hedge fund had the wherewithal to hold the money back and was sitting in cash waiting throughout the boom, that would be a different story. That person had had stewarded capital, certainly would have been taking a lot of heat about sitting in cash during the prior boom; but in a lot of cases, that wasn't the case. They got the bailout because they were politically connected, and then they took the bailout. And, I'm not talking hedge funds; hedge funds are probably not the best example, because most hedge funds actually were not systemic to the crisis. Most were in a very good position. But, there were banks, or some of these more politically connected entities we'll say, it's probably the right way to frame it, that did do that, and that's crony capitalism; that's not capitalism; that's not what the American Dream was based on.
Peter McCormack: Yeah, Elizabeth Warren, I think, rightly identified that. I think I saw, again, when I was doing my work on Mnuchin, and she spoke to the Senate, and she talked about how Goldman Sachs, or Wall Street, has become an extension of the White House, and the number of Goldman Sachs' alumni now working within the White House; to me, there seems something wrong there. There's something in there that just seems like, if you're meant to be working for the American people, how can you be getting your policy advice from people who are helping their friends?
Luke Gromen: Some of it is ultimately, you know, again, it's really a choice. So, there's oligarchs in most nations; there's centres of power in every nation, right? And, when you look back why, I think it's important to look back why Wall Street had so much influence within the White House and within the policy circles in Washington, and that was a function really again of this decision in 1971 where we got out of the business of making stuff, and got into the business of making dollars. And so, the relative -- if you look at the charts, I'm going to misquote it, but if you look back at say 1971 of 1975, the percentage of GDP coming from finance was 3% or 4%. And by 2007, 2008, it was like 18% or 19%; it was some huge number.
There's a number of problems with this; the first of which is that finance is, by definition, I won't say a predatory activity, but it's an activity that takes a cut on other economic activity. So, when you have something that's drawing, you know, 3% of your blood out of you every year, it's a parasitic activity ultimately. And, I don't mean to say that all finance people -- I work in finance, I love my clients, they are wonderful. That is not what I'm saying, but it's just strictly defined as what finance is. Finance ultimately takes a little cut each time; that's how they make their money. And that's fine when it's 3%, 4%, 5%.
When you get it to 20% of GDP nearly, and they're taking their cut, it leads to very distorted GDP outcomes; this wealth gap just blows apart. The dynamism of your economy begins to wane again, because it becomes much more lucrative for your brightest and most talented people. If you're an unbelievable engineer at MIT and you could come up with a cure for cancer, or you could go work at a hedge fund and make a lot more money, a lot faster, without the legal risk. And so, it leads to these distortions.
So, there's a great article written by a gentleman named Simon Johnson, who was the former Head of the IMF, in 2009, May 2009. It was called The Quiet Coup. And it looked at the United States crisis and he said, "Look, this is sadly very familiar to me as the former Chief Economist of the IMF. I've seen this over and over in all these other emerging market economies". And historically, when we've had these types of crises, the playbook is very straightforward. The IMF comes in; we demand political reforms; we demand economic reforms; we basically take the reigning oligarchy associated or tied in with the government and pull them out, that business oligarchy, separate them so that we can make the necessary reforms to the system. And, if they don't agree to those reforms, we leave and say, "Fine, we'll come back", because we know they're going to have another crisis. And then, we'll come back and see if they're serious the next time around.
And he said the US has an oligarchy; it's the financial/Wall Street oligarchy. And, if they don't do these reforms, they're going to have another crisis and it's going to be worse. Sure enough, we didn't do the reforms really. There was some talk, but they were more around the fringes, because a lot of them have been sort of defanged. And again, it's one of these very difficult things that is not black and white. There are shades of grey; they are difficult to implement; they involve paying the politically powerful interests; and so, they didn't happen. And so, I think we're now --
Peter McCormack: Sorry, was Dodd-Frank one of those reforms that was required?
Luke Gromen: I would lump that in with, yes, with reforms that were put in place, yes.
Peter McCormack: But, they didn't want it? Well, the minutiae didn't?
Luke Gromen: They're watered down, you know. And again, it's really even things like Dodd-Frank; some of those reforms are ultimately treating the systems and not the disease itself, and the disease itself is the structure of the currency system, sort of the original sin of 1971 and even arguably, the original sin of 1946 in terms of Bretton Woods and choosing the dollar over the Bancorp. They can tinker around a little bit around the edges, but until you address that original sin, you're going to keep having these same types of problems.
Peter McCormack: It's interesting you talk about 1971 a few times. Have you seen the website, the wtfhappenedin1971? So, I know the guys who did that. They've been on; I think it's a fantastic website. I find the whole topic fascinating, but I haven't heard anyone, during the process when I've talked about it before, mention what happened in 1946 with Bancorp. Can you explain what that was, what should have happened?
Luke Gromen: Sure. So, in 1944 obviously, there was the meeting of Bretton Woods where it was apparent the allies were going to win the war. We need to get together to start structuring what the global economic and monetary system looks like after the war, and there were two proposals. There was a proposal by John Maynard Keynes, ironically, and his proposal was the Bancorp which was a neutral settlement asset or currency that I believe was tied to a basket of commodities; and basically, his proposal was that any time your nation's surplus got too high, basically surpluses and deficits had to be settled in Bancorps effectively, so this neutral settlement asset that no one could print. And, that would prevent imbalances from building up over an extended period of time.
If you ran surpluses for a while, you would be receiving Bancorp and your current would strengthen relative to those paying the Bancorp; their currency would weaken; they would become more competitive vis-à-vis you; your economy would slow, theirs would accelerate; and it would be a much more self-correcting and stable system.
The other proposal was what the American proposal was, a gentleman named Harry Dexter White, and that was what we went with. It was the dollar is pegged to gold at $35 an ounce and then every other currency is tied to the dollar. And, the Bancorp solution, I think, was a better solution, but the Americans had all the industrial capacity, we were the world's biggest oil producer; we had all the gold; we had really the only economy that was left that was not destroyed or partially destroyed by the war. And so, we went with our solution.
Even then, if you look at the incidents of crises from 1946 to 1971, they were much less during this more stable, defined monetary system. And, it's interesting when you look in early 2009, after the US did the big QE, if you will, where we went from just buying mortgage-backed securities to buying a trillion dollars in treasury bonds, the Chinese, the Head of the PBOC, Zhou, came out with a three-page white paper, published with the BIS, in which he said, "The world needs a new reserve currency, a new reserve asset". And he specifically cited Keynes's Bancorp and said, "We need something like the Bancorp and given how crisis prone the system we went with has been, that's probably a sign that that would have been the better solution anyway". So, it's interesting that it is still being talked about today by some of the creditor nations like China.
Peter McCormack: Sounds a little bit like something Bitcoin could do, a neutral currency, which no one can meddle with!
Okay, so just going back to the macroeconomic stuff, I've heard you talk about one of the biggest risks now is sovereign debt, and specifically I heard you recently talk about there's four possible outcomes. Can you talk through this with me, because this was really fascinating?
Luke Gromen: Sure. So, if you go back, in 2000, we had an equity bubble and the way the policymakers dealt with the equity bubble when it burst was they basically kicked the problem upstairs to the banking system via a housing bubble. Paul Krugman famously said, "We need a housing bubble to make up for the lack of loss of demand from the equity bubble". And so, that became a banking system bubble/housing bubble. And when that burst, they kicked the problem upstairs to the sovereign level. In other words, we all saw how the governments back-stopped the banking system.
So, the problem now sits at the sovereign debt level at the same time as demographically we have all of these entitlements going from off-balance sheet debt to on-balance sheet debt; in other words, we have to send the money to 70 million or 75 million baby-boomers in the US. So, we have a sovereign debt bubble. If you look at where these bonds are priced, where these bonds are rated, relatively underlying fundamentals of the bonds, it's in my view by far the biggest bubble out there.
Now ultimately, they're not going to default on the bonds. The central banks can make the bonds priced at whatever they want them priced at by printing money and buying the bonds to make sure rates are where they want them to be. And so ultimately, when you have a sovereign debt bubble, what you have is a currency bubble, a fiat currency bubble, because ultimately they will create currency to keep the pricing of those bonds at politically expedient levels.
So, there's a great white paper written by Carmen Reinhart and Belen Sbrancia from January 2005 and it's entitled The Liquidation of Government Debt and to me, it's a must read white paper because it lays out what they're going to do. And it looks at the history of these things, and that's where this comment I made, where there's only four outcomes, they have a great chart in there that looks at sovereign debt to GDP for both advanced economies and emerging economies going back, I think, 120 years, 150 years. And the point is that every time, and it doesn't matter if you're advanced or you're emerging; every time debt to GDP at the sovereign level has gotten to where we are now, there are only four outcomes, and that is: default or restructuring; inflation; financial repression, which is basically just a version of inflation; or, a few hyperinflations. And that's it; those are your outcomes.
This ties back to this point of policymakers are realising that the parameters they've made are unkeepable in real terms, and it's trying to really figure out, are we going to default; are we going to inflate; are we going to financial repress; or, are we going to hyperinflate? And they don't want to hyperinflate because that is a complete indictment of them. They can't really default for political reasons. And so we then, really since 2008, when that crisis combined with where we were in terms of debt, how we dealt with that crisis and then the demographic, since 2008 you've basically been trying to financially repress and inflate and really more financially repress, which is just we're going to keep rates low and understate inflation, and hopefully inflation will rise and we will grow our way nominally out of this debt burden.
And the implicit bet made there by these policymakers is that they'll be able to pull it out without political unrest; because ultimately, what financial repression does is it takes you from needing 20 weeks of work to buy essentials, to needing 53 weeks of work to buy essentials. And once you get to 53 weeks of work to buy essentials, your ability to financially repress is, you're done; you're going to start seeing social unrest; you're going to start seeing political populism. So, we started with four. They're not going to default, so we can take that one away.
Financial repression, they've tried for three years. We're going to take that one away -- for 12 years, and we've now hit the point of no return. We've got social unrest, political populism; that's not an option anymore. So, now we're left with the two: inflation or hyperinflation. And, they don't want to do hyperinflation. So to me, it's interesting within this context of again, these things laid out five years ago by the people writing whitepapers to the IMF. So, these are being passed around official policy circles. It's interesting to me now that they've said, "Hey, we're making this major shift; we're serious about inflation this time", to me I think is very interesting from a timing standpoint. I think they know restructuring default was never an option; financial repression was tried and failed; and we've got two left: inflation and hyperinflation.
Peter McCormack: Right. But, how do they prevent inflation becoming hyperinflation?
Luke Gromen: That is the rub.
Peter McCormack: Yeah, because I saw Jerome Powell's comments, which I thought was very telling, which was the trigger to me to consider having a little less cash in the bank and other assets. But, how much inflation do you think people will swallow?
Luke Gromen: I think it depends on where it shows up and so if it's more the same of what we've seen, which is asset-centred inflation, wealth inequality increases, the cost of living for everybody else gets more expensive; I don't think that's an option anymore politically, and I think they understand that. I think that's what Powell is saying between the lines.
And so, one of the things that grabbed me about Powell's comments was how labour market-focussed he was; how much it was all around, we're going to let the labour market do what it's got to do and we're going to let it run hot and we are not going to stop the party before it really gets going. Because then, for at least a while, that could be a really nice inflation for a lot of people. And the reason I say that is it can amount to a debt jubilee. If your wages start rising 10%, 15% annually, and your mortgage is capped at 2.5% by the same Fed and other monetary authorities, then suddenly your real cost of living, after adjusting for your house payment or your car payment, which are fixed, there's going to be a span of a few years where you can really pay down debt and nominal GDP can really grow.
And the US government can do the same thing, because as wages grow 10%, 15% for everybody, tax receipts start growing 10%, 15% while the bond rates are 65 basis points for 10 years. Then suddenly if you can do that for three, four, five years, you could wake up and find yourself instead of at 120% debt to GDP, you could be back at, I don't know, I've not run the maths; 80%, 75%; something eminently more sustainable. And I think that, to me, I just thought that portion of Powell focussing so much on the labour market, I think for that span of time, you can have a really positive inflationary experience.
Peter McCormack: Who's paying for it?
Luke Gromen: Bondholders; bondholders are paying for it. You hold bonds; thank you for your donation; you're going to get every dime you're promised and it's going to go from buying you, to paraphrase my friend, Raoul Pal, he said, "Look, buy bonds, wear diamonds". If you buy bonds and wear diamonds this year and then you buy bonds and wear cubic zirconia the next year and then you buy bonds and wear crackerjack on a string the year after that, you're going to get every coupon payment you're promised; it's just not going to buy you as much stuff, it's not going to buy you as much labour. Basically, they're the holders of the under-priced mortgage, of the under-couponed mortgage.
Peter McCormack: So, they're debasing the bonds?
Luke Gromen: They're debasing the currency and as a result, the bonds. That ultimately ties back to my original point of the promises of the system are unpayable; who's going to pay? And for the last 12 years, the debtors have paid. It's basically been, hey, the currency is generally sacrosanct; we're going to keep the value of the currency relatively constant to keep the bondholders close to whole in real terms, and that to me is the big question of, what did Powell really say; what is he really going to do?
Because to me, it seems very possible it's a change toward a political decision really he may have just made, which is we're no longer worried about keeping the bondholders whole on a real basis and we're going to let the currency fall enough that wages can rise and we can start to basically shift some economic wealth back to this labour and middle class that has been under pressure for 12 years, but really if you look back, 50 years.
Peter McCormack: Well, it's funny that you bring up Raoul Pal; I know Raoul; Raoul's been on my show a few times. So, he's going deep in Bitcoin.
Luke Gromen: I saw that.
Peter McCormack: Yeah, just on his Twitter. I was trying to remember, did he say 50% or something? I don't know. He put out a wild number and I was trying to remember what it was.
So, okay, these are interesting times and kind of scary times for a number of reasons, but another thing Raoul said to me actually another time, I was like, "Raoul, what do you do?" He said, "Listen, firstly you've got to hustle, because it's going to get competitive out there". And he said, "Hold some physical cash, because you never know when you might need it". And he said, "Hold scarce assets such as Bitcoin and gold". And I thought they were really good points.
But, a similar question to you, because people will listen to this who are maybe not economists; they're just going to work every day and they're just kind of hoping to protect their family, protect their assets. How do you think other people, normal people, should be preparing for these situations? What are the risks that normal families have right now?
Luke Gromen: I think the risks that normal families have are policy errors by central banks, I think is probably the biggest risk. And by that, I mean … I'm going to focus on the US, because that's where I spend most of my time, but it applies broadly across a lot of the developed, and even some of the emerging markets. The fiscal situation of these countries, of the US, was already critical; it was an incipient crisis heading into COVID, and COVID has blown an absolute gaping hole in the fiscal situation. It's turned it from an incipient crisis to an acute crisis.
And so when I say policy error, the longer the Fed goes while trying to, as I've equated it, ride two horses with one rear end, with the horses moving in opposite directions, the bigger the risk for the average family. And by that I mean they need to understand the system of the last 50 years is over. It hasn't worked; it has broken down for any number of reasons and they now face a choice. They can pretend that it hasn't and can try to keep bondholders relatively whole on a real basis; or, they can start implementing policies that hurt the value of bonds on a real basis, but help average families, whether that is the universal basic income stops until the economy gets back on its feet; different types of education, job retraining type stuff, subsidies. Those types of things need to happen and I'm optimistic, I'm hopeful.
Maybe I'm not fully optimistic yet, but I'm hopeful that the Fed's latest major "shift" is the beginning of an acknowledgement that that is a real shift in policy choice, because I think that that is the biggest risk, is that ultimately the political power in this country, which still is heavily around Wall Street, says, "You know what, we're just going to preserve the value of the dollar no matter what and we're not going to implement these programmes and we're just going to let it turn into, you know, a Lord of the Flies type situation, proverbially, for the middle class and the working classes". That's not a good outcome. It might make them feel good about the real value of their bonds in the short run, but now you're seeing it in the social unrest around this country. People are uncomfortable. There are promises that are not being able to be kept. And so far, the weight of where that rock of unkept promises has fallen, has fallen almost entirely on the backs of middle and working class, you know, basically the 90% of the 99%. And what you're seeing around the world, I think, is just the physical manifestation of they can't take anymore. There's no more blood to squeeze from that stone.
Jakob Fugger
So, I think that's the big risk. And for the average family, to me, something we wrote about for our clients earlier this year was a Jakob Fugger allocation. So, Jakob Fugger was the wealthiest man in history, and you can look him up. And at any rate, the punchline was he said, "You keep your wealth in four buckets: 25% cash, 25% gold, 25% equities and then 25% real estate, and be prepared to lose money on one of them all the time. And then, just renormalize, rebalance, as one wins and one loses". And, he was able to carry his fortune forward for a long time using this, you know, build it and then carry it forward, by using this allocation.
Now, for today, I would say, "Okay, I like the cash, I like the gold". I think gold, Bitcoin, you can talk about those allocations. That's, to me, very similar asset classes. Real estate, equities, I think again are inflation hedges. Within your 25% cash, if you want to have some sovereign bonds or some high grade; me, I don't like sovereign, I want to own high-grade corporate bonds. You can count that within your cash. So, I wouldn't say it as black and white concrete; 25% cash, 25% … but I think having that type of allocation for the average person is really important, particularly when you look at where we are, right?
We went through the where we are big picture, and how this has worked out. There's four ways it works out and we've tried two of them. One was never going to happen; the second way has been tried and failed. And so, we're left with inflation or hyperinflation. I don't think hyperinflation's going to happen, particularly in the United States, for a number of different reasons: politically, economically, how broad, diverse and big our country is; it would be really, really hard to have happen. So, I don't think it's a risk you need to actively hedge, but it's a far, far tail risk. I mean, at any rate, even if that never happens, which I don't think it will, you still have, to me, it is I think becoming a political impetus for inflation. That's the only way out at this point.
Some people say they can't make it happen; I strongly disagree. Something we wrote about for clients recently was, Arthur Burns, the former Fed Chairman before Volcker, gave a speech in 1979 in which he said, "Look, for the last 15 years, we could have stopped this inflation any time we wanted; it was just a political decision". We were so scared of -- the prior transformative experience of that era of policy makers was the Great Depression, this deflation they just couldn't stop. And so, they were consistently erring on the side of inflation. "We could have stopped them any time we wanted".
Well, we fast-forward 40 years from there, the transformative experience of this generation of policymakers was the 1970s. Inflation, we can't stop it, we don't want to do that again. And so, they have consistently erred on the side of deflation. Have we just had that transformational change? Maybe, but it can happen very quickly; it doesn't take much. Again, it's a political decision; it's not the economy has to do certain things. A small number of people can get in a room and can make it start to happen, and that was the lesson of the 1970s.
Peter McCormack: How much is the election playing into this at the moment, because I imagine four months before, or three to four months before an election, your policies will be very different post-election, because your goal is to win, right? I mean, one of the most important things for Donald Trump is to keep the stock market high, because that's one of his calling cards, right? He's lived off that. Are you imagining the policies are going to reflect the fact there is an election coming and therefore, the things that are happening in the short term are going to be the things that are going to support Donald Trump's re-election?
Luke Gromen: The short answer's yes. And personally, something I think we're watching real time is this debate over the renewal of the COVID stimulus, where you've got the Republicans seemingly -- not seemingly; they are advocating for a "stimulus light", I think is what they're calling it, or a programme relative to what the Democrats want. And so, it's almost to my eyes like they're trying to maintain their fiscal discipline credentials ahead of this election, because I think they know in their home states, in some cases, if they just say, "Yeah, what the heck, let's just do another $2 trillion or $3 trillion", they run the risk of being voted out of office by these fiscal conservatives.
So, I think we're seeing some elements of that. I agree with you that Trump, I would think, would want the stock market to stay high. Once we get on the other side of the election, to me it's fascinating, because on the one hand we have Trump, who is the king of debt, who I've been told is "Trump on the leash", and that if he gets re-elected, you'll see "Trump off the leash", which your listeners around the world are going, "Oh, my God!" Yeah, that's what I've been told. So, that to me is interesting.
And then on the other hand, you've got Biden, who a couple of weeks ago in the New Yorker, Obama said, "Policies are not that different from Bernie Sanders". So people said to me, "Why did Sanders need to run?" Trump began implementing his policies in terms of some of the stuff and Biden's picking up the mantle. So, a long-winded way of saying, I think in the short run, it's a little hard to see what the ultimate policies will be, both from the political side, from the fiscal side; but also, what the Fed really meant.
And so to me, it's going to be really interesting, what I'm really watching for, I guess, in addition to the potential for an air pocket here before the election because of this feigned fiscal discipline by certain parties, is on the other side of this, after whoever's been re-elected or new elected, what does that look like from the fiscal side? Because, the Fed is saying, "Listen, we're just going to keep supplying liquor to the party", and that to me is where things could start to change pretty quickly, in terms of the narrative and the consensus views, the inflationary readings, the rate of negative real rates, which to me speaks very positively for things like gold and Bitcoin.
Peter McCormack: Yeah. All right, well listen, we should close out on a little more of Bitcoin. And, I'm especially interested in your work; how much you discuss Bitcoin with your clients; what the general kind of feedback is. Because personally, when you talk about those percentages, I'm probably like, I don't know, what do I say? I'm probably 20% property, 0% equity, 5-10% cash, the rest is Bitcoin. Now, that's part because of the price I bought Bitcoin; it's gone up. But also, at the same time, I'm just nervous holding cash. But also, I'm not talking about 60% of my company treasury, which is a very small little podcast, but it's six figures, is now also Bitcoin because I'm nervous holding too much cash.
What's the kind of general -- well, how much does Bitcoin come up and what are the general kind of things you're hearing about it? I know that's a broad question.
Luke Gromen: No, it's a great question. So, the Bitcoin has started to come up, I think, a lot more. Not even I think; I know it has come up a lot more in institutional conversations over the past probably 12-18 months and it is just really questions more Bitcoin-curious, we'll say, and just in terms of when we lay out what's happening at the sovereign level and why that points to the need for a neutral reserve asset; and the signs that this transition to a system with a neutral reserve asset is already well under way, it leads to these questions of, "Okay, well what does that mean for Bitcoin? I get that you like gold, Luke; what does it mean for Bitcoin and how can Bitcoin be a solution to that problem?"
So, there's definitely been a lot more interest in it at the institutional level, and I think we're starting to see some of that in terms of some of the recent press releases where, I think it was Fidelity launched a Bitcoin fund. There are real players that are interested in being in the space. So, I think that when you see headlines like that, you should take that as a read on the level of interest that I've been seeing and being asked about over the past 12-18 months in particular.
Peter McCormack: What's putting people off though? Is it just that they don't understand it; are they worried about regulation; do people worry about volatility?
Luke Gromen: You know, I think it's less the volatility and it's more -- and I think this comes down to really understanding, and it's an area where I admittedly still struggle, is when you start hearing sovereigns say central bank digital currency, and they start to get nervous about basically Bitcoin is a truly libertarian asset; nobody controls it. And I think ultimately, that is probably the biggest stumbling block, even for people like myself, of will they really allow a truly libertarian reserve asset to just completely overtake their ability to manage the system?
And that breeds a whole bunch of questions, but I think that's the fundamental concern and for me, personally, it's reflected as well in, okay, if we have to have some sort of systemic reset, if we assume central banks are still involved at that point, which I do, then I look at central bank balance sheets and I see that they have gold on their balance sheet and they do not have Bitcoin on their balance sheet; in which case, if there's some sort of systemic debt reset, you could see clear to gold getting written up to a really big number on central bank balance sheets. I think Bitcoin would participate in that, at least side by side, and maybe even more. But I think that's a hold-up.
If you look at within the current central bank structure, there is I think an implicit concern that as events happen, you basically have to gauge a view of will a libertarian asset get big enough where it can simply overwhelm the central banks and the entire current "operating system" of the currency system; or, will the central banks maintain some level of control, use gold, whatever. To me, that is I think probably the biggest hold-up, but probably something that can be resolved with an ETSO again. Or I fall down of, "No, listen, you have to understand, if you look at the technology and the cryptology, etc, it simply can't be done". And, I've read some of those arguments and I've just not been a) fully smart enough, and b) devoted the time to get myself comfortable fully with the, there's just absolutely no way the authorities can stop this libertarian neutral reserve asset from doing what it's going to do.
Peter McCormack: I mean, they can't shut it down, but they can legislate and make it difficult. I do think, though, there's a bit of a moat being built around it by the size of the Bitcoin economy itself. And, you've got these companies, like MicroStrategy just recently put, I think it was 50% of their treasury in; I mean, $250 million.
Luke Gromen: Incredible.
Peter McCormack: Yeah, amazing. I think the more companies that do that, the bigger moat that builds around Bitcoin. And I think it will be very difficult then for the government to, as I say, ban it; let us say the most extreme level. It would be therefore interesting to see. I mean, I think the most interesting thing is when a government adopts Bitcoin; that will be the most interesting time and whether we will see that.
Luke Gromen: It will be. And if I'm not mistaken, I saw one of the Swiss cantons, a couple of weeks ago, said they would start accepting tax payments in, I think, Bitcoin and maybe Ethereum too, I'm not sure. But, that is ultimately really your stamp of approval, right, where if you can pay your tax bills … And if I'm not mistaken, the State of Ohio here, I can pay in Bitcoin?
Peter McCormack: Yes.
Luke Gromen: And, that's what I use it for, quite frankly. I take money, every week. If I have a surplus, you know, what's revenues; what are my expenses; what do I have left? Set some aside for prospective taxes and then I hide some into Bitcoin. And, if I get to the end of a quarter and I own a bit, then … And partly I do that because I already have got a full gold position and have had a full gold position.
So it's sort of, to your point, gold is a pain in the butt to move in and out. Like, if you own physical, I've got to go to the vault and I've got to meet with the people there, etc. On the one hand, it's a pain; on the other hand, it's the discipline of, "I'm just not going to touch that". Whereas, the Bitcoin has sort of the same types of stored energy over time, moving through time for me, but it's much easier to move around cash flows with.
Peter McCormack: Wow. Well, I'm glad you're in Bitcoin, man, and I think it's a real vote of confidence when people like yourself are, and especially with the type of work you do. Just for those people who are interesting, this is just an opportunity for you, just how do they find you; and, who are the type of people that would most benefit from working with your company, the kind of people that you would want to hear from?
Luke Gromen: Sure, so you can find out more about us at our website, fftt-llc.com, and I also have a very active Twitter feed, @LukeGromen. You go on the website, you can see our different research offerings and like I said, we do high net worth individual, institutional product offerings, and then we also have a retail and RIA product that has proven very popular.
What we've found from our clients is that basically, anybody that is interested in unique views on the world at a time when data has increasingly become commoditised, and the ability to frame and analyse that data in a unique manner has become the real bottleneck, the real valuable commodity, those people tend to be our clients, is the feedback we get back in. So, if you're interested, I'd encourage you to take a look at it, whether you're institution, high net worth or retail, we have a number of different product offerings that would be suitable for each.
Peter McCormack: Fantastic. Well, listen; fascinating! You've made me more bullish on Bitcoin, but just fascinating to hear your kind of perspective on what's happening, and thanks for coming on; I really appreciate it. I'll probably ping you in about six months and say, "Are you still at 2% or 3% or are you a bit higher; are you at maybe 5%?" I'll do that. But listen, look, good luck with everything you do, stay in touch, and if I can ever do anything for you, please reach out and yeah, really appreciated this, Luke.
Luke Gromen: Thanks for having me on. It's been an excellent chat; I really enjoy speaking with you. So, yeah, I'd be happy to follow up again in six months or so. So, thank you very much.
