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Luke Gromen: The Growing Recognition of Negative Bond Yields

Tom welcomes Luke Gromen of Forest for the Trees back to the show.

Luke is concerned about the United States debt to GDP ratio. Once a certain threshold of debt is reached countries normally enter a period of stagnancy. Today, there is a binary aspect to Fed policies as they are expected to do either too much or not enough.

The U.S. Bond markets today have around seventy trillion in assets and there is a slow move from bonds to other assets including crypto. Investors are looking for anything that protects purchasing power.

Luke outlines the future obligations of the United States and why these are enormous issues. The debt ceiling is just a political football and it would be shocking if they didn’t raise it. The government today is two wings of the same bird. Both parties spend ridiculous amounts and they both believe that deficits don’t matter. This is certainly a bad sign and an indication of problems to come.

He expects the Fed to taper but it will be in appearance only. Like a drug user hiding an addiction, the Fed will begin injecting liquidity into other areas while ‘tapering’. This will improve the Fed’s credibility however the reality will be that nothing much will have changed. It will all be sleight of hand.

Luke discusses different scenarios for how the United States could get out of the debt crisis. All of which would require massive growth on the order of 15-20% GDP annually for an extended period.

China appears to be dealing with debt problems by restructuring, firing management, and allowing shareholders to be wiped out. Ironically, this is what we should have done back in 2008 but instead, we have been centrally planning everything.

He feels the world is passing peak cheap oil and that prices will shift higher from here. Fracking and shale oil may become more feasible as prices rise. However, the cheap capital that used to be available for that industry is far less today.

Physical gold is an asset that is no one else’s liability. No one else should have a claim to it. Today, the value of everything is tied in some way to energy. Gold doesn’t carry that risk because the energy has already been expended.

Time Stamp References:
0:00 – Introduction
0:47 – Inflation
4:30 – Bond Market Size
8:00 – Interest & Obligations
13:37 – Debt Ceiling
15:40 – Heroin Addiction
18:35 – QE & Bank Reserves
21:43 – Finding a Way Out?
26:04 – Transition Mechanisms
28:00 – China Defaults?
30:20 – Energy & Peak Oil
34:23 – Shale & EROI
36:40 – Bitcoin & China
43:17 – Gold & Energy
46:50 – Bitcoin & Energy
50:03 – Signposts
52:16 – Wrap Up

Talking Points From This Episode

  • Inflation and sovereign debt risks.
  • Future obligations and the debt ceiling.
  • Why the next taper will be sleight of hand.
  • China’s policies, the outlook for bitcoin, and energy.

Guest Links:

Luke Gromen began his career in the mid-1990s in Research at Midwest Research before moving over to institutional equity sales and becoming a partner. While in sales, Luke was a founding editor of Midwest’s widely-read weekly summary (“Heard in the Midwest”) for the firm’s clients. He aggregated and combined proprietary research from Midwest with inputs from other sources.

In 2006, Luke left FTN Midwest to become a founding partner of Cleveland Research Company. At CRC, Luke continued to work in sales and edit CRC’s flagship weekly research summary piece (“Straight from the Source”) for the firm’s customers.

In 2014, Luke left Cleveland Research to found FFTT, LLC (“Forest for the Trees”), a macro/thematic research firm catering to institutions and individuals that aggregates a wide variety of macroeconomic, thematic, and sector trends in an unconventional manner to identify investable developing economic bottlenecks.

Luke also provides strategic consulting services for corporate executives. He is a graduate of the University of Cincinnati and received his MBA from Case Western Reserve University and earned the CFA designation in 2003.

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