Mar 9, 2022
In this episode of Bitcoin Magazine’s Fed Watch podcast, CK and I welcome a special guest, Luke Gromen. Luke is founder and President of Forest for the Trees (FFTT) LLC, where he provides clients with macro insights and investible analysis of the global financial system. In this wide ranging conversation we dive deeply into Russia, gold, oil, the shadow banking system, bonds, you name it, we probably talked about it on the episode.
Fed Watch is a podcast for people interested in central bank current events and how Bitcoin will integrate or replace aspects of the aging financial system. To understand how bitcoin will become global money, we must first understand what’s happening now.
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We start off the show (after an awkward intro by me that Christian rescues) with Gromen giving a summary of his model for viewing the current economic landscape. He points to two widely held misconceptions that have created the situation in which we find ourselves: 1) The value of the petrodollar is the dollar, instead of the petro; and 2) thinking debt doesn’t matter. These are things people believe, but are in reality the opposite.
I try to clarify the origins of these misconceptions, but do so badly. I believe that those misconceptions are due to the system in which they arose. In the long history of the post-WWII era, however, they were not misconceptions. The value was in the dollar of the petrodollar and US debt didn’t matter. They only became wrong as this era is ending. So, what I was wondering was did these misconceptions cause the end of the era or did the end of the era cause the misconceptions to become wrong.
In this part of the podcast, Luke dives deeper into the tweet that prompted this interview, about Russia perhaps weaponizing gold, and as a response, the US weaponizing bitcoin.
There is a fragile gold market out there of unallocated gold trading, centered on the LBMA and COMEX. Luke’s contention is that if Russia wanted to, they could simply declare that they will sell oil for gold and that could crash these markets and instantly transform gold’s market cap to a size able to handle the world's financial clearing.
According to Luke’s interesting thought experiment, this move toward a petro-gold standard would lead to fewer US securities being held in national reserves around the world and lead to a multi-currency trade network.
One of the things we could expect, if the theory about a multi-currency future was correct, is for the dollar index (DXY) to fall relative to other currencies. However, over the last couple of weeks, the dollar has exploded higher, reaching 99.4, the highest since May 2020. It is a level of strength the dollar has only achieved for a few months in the last 5 years, mainly during that brief period in early 2020.
It has been our position on Fed Watch for almost a year, that the Corona Financial Crisis will likely be followed by a second European debt crisis, just like what followed the Great Financial Crisis (GFC). It is predictable because of the way money, reserves and credit flow like a tide around the world. We’ve also said that Europe is the sick man of the world financially. It will be a wonder if the Euro and the EU survive the coming debt crisis. Now it seems they also have to survive a physical threat to their carefully crafted reasons for existence.
Anyway, it is our position that the Euro will face existential issues long before the dollar does. We asked Luke what his insight is into that dynamic. He has a very nuanced process of what the next steps are and does an excellent job detailing how the contagion in energy and commodities will spread to European banks and then to American banks. As the contagion spreads to stocks, which drive marginal spending and marginal tax receipts in the US, Luke says, we will ultimately see it spread to US sovereign debt.
As tax receipts drop and the US faces a government funding crisis, the US will turn to the Federal Reserve and insist they start QE again, because it is their only practical choice. Luke says this manifests itself with a return to central bank easing with still very high inflation.
Next, we cover the possibility (which I think is the most likely to happen), that Ukraine is wrapped up much sooner than everyone thinks and doesn’t result in a quagmire. In that case, energy would start flowing again from Russia but also the market has overreacted and brought more US, Venezuelan, Iranian and perhaps even OPEC production online. That could quickly flip the crisis from an oil shortage to an oil glut. We must remember to place this price spike in the context of 2 years ago, when oil futures went NEGATIVE. Just 23 months later, now we have multi-decade highs. What if it drops back to $50/bbl or lower very rapidly?
I point out the chart looks similar to 2008 and a parabolic blow off top, not like a sustained regime change to more expensive oil. Luke counters saying that this event is bigger than that. What we’ve seen is a “marked-to-market of relative global power levels”. This matches well with Luke’s position that cutting off Russia from SWIFT and seizing their foreign held reserves was a foundational shift in the global financial system.
Luke eloquently lays out the theme that the world is witnessing the end of, not only the post-WWII US hegemony, but also the dollar system as we know it.
Here, I ask him an interesting question, are bond prices more correct or is the oil price more correct? Both markets are extremely deep and sophisticated, but oil appears to be more in an unsustainable place on the chart, very similar to 2008, while bonds are remaining in their long term trend. I ask this because of the old adage that the bond market is always right.
Luke responds that he thinks oil is more correct, though he does caveat that there could be a short term correction due to a disappearance of the war premium we have right now. However, he brings it back to a fundamental aspect of his thesis, that the US sovereign debt is the difference this time around. The dollar is not in a position to continue easing like Japan did when they had a similar debt-to-GDP ratio, because the US dollar is the global reserve currency.
Christian brings us back to reality and the realm of bitcoin to wrap up the show. He asks Luke about trust in a future system and how that might manifest as a more local and regional world instead of one that is so global, with all the vulnerabilities associated with globalism.
We briefly discuss the shrinking of supply chains and the rise of more self-sufficient and regional trusted trade networks. Luke thinks this is a great scenario for bitcoin to but ultimately thinks gold will shine as the asset most trusted upon which to build the new system.
Surprisingly, we didn’t talk about inflation. With the utter catastrophe that the global supply chains are, and the massive amount of “printing” the Fed has done, it is shocking that CPI is only at 7% year-on-year? I think there is a huge oversight in much of the dedollarization narrative that we didn’t even cover, mainly that the Fed doesn’t print money. Hopefully, we can get Luke back on the show to discuss that one.
This episode was full of predictions and thought experiments. It was a fun conversation and a pleasure to meet Luke. We were trying to apply some rational assumptions to practical next steps in the global financial system. It was a little light on bitcoin, but before we can understand how bitcoin will become global money, we must understand the gravity of the recent events, which is what this episode was all about.
That does it for this week. Thanks to the watchers and listeners. If you enjoy this content please SUBSCRIBE, and REVIEW on iTunes, and SHARE!