Luke Gromen: The US Fed and Treasury are at Odds
Tom welcomes back Luke Gromen of Forest for the Trees back to the show.
Luke discusses how Russia has proven to be far more resilient than the West expected. They are massively miscalculating Russia’s true GDP, which can be calculated based on the value of a barrel of oil. We’re now seeing the consequences as Europe and the U.K. both have an energy crisis. The U.S. has tried to mitigate the impact by dipping into the Strategic Reserve. He says, “If you want to understand the true value of oil, fill up your car, go for a long drive until you run out, and then push it back to where you started.”
We’ve had the worst year in treasury markets since 1798. Russia was successful in defending their currency since they required ‘less friendly’ buyers to pay with Rubles. The West wants to cap Russia’s energy prices, but that seems quite unrealistic. The U.S. is seeing shortages of distillates and high diesel prices, while inflation remains persistent.
There is a feedback mechanism between energy, inflation, and sovereign debt markets. Energy is required for everything, and cheap energy is necessary to maintain the system at current sovereign debt levels. We are starting to see debt sustainability issues. Energy eventually connects back in a feedback loop, as everything is inter-related. At some point, things break, as we’ve seen with the U.K. pensions.
Rising dollars create a bad situation for everyone. It weakens domestic corporations and ultimately turns everything into a balance sheet contest. There is an argument that running the dollar up will hurt the U.S. last, but what if the U.S. is wrong this time, and it doesn’t hurt Russia, China, and India that much.
Countries seem to be accumulating gold instead of dollars, and a recent buyer of 300 billion worth did not their identity. This is starting to look like a transition away from the dollar and into gold.
OPEC may have been making a strategic move with Saudi Arabia. They realize that if the West can choke out Russia, then they’re likely next. Also concerning is that the U.S. has demonstrated its willingness to steal FX reserves of other nations.
Gold is likely to be a politically managed metal until the day it is not.
The Treasury recently stated on Monday that the U.S. Federal deficit is expected to double next year. This throws pressure back on the Fed and certainly means that rates and the dollar will continue rising. It looks like the Fed and Treasury are fighting.
Once the U.S. fiscal situation gets acute enough, you’re going to see gold take off. When the Fed finally pivots, it should be good for both energy and metals markets. Currently, energy is looking excellent compared with treasuries. A Fed pivot is likely to happen sooner rather than later, but they have not budged so far. Larry Summers has stated that we are nearing a “doom loop”.
Time Stamp References:
0:00 – Introduction
0:37 – Global Signposts
8:32 – Treasuries & Energy
12:25 – Yields & a Rising Dollar
15:52 – Oil In Other Currencies
23:14 – Foreign Reserves & Gold
26:40 – Purpose of OPEC Cuts
28:52 – C.B. Gold Demand
32:43 – Basel & Derivatives
35:33 – MOVE Index & The Fed
36:52 – Treasury Borrowing 2X
41:36 – Energy Markets & Bonds
44:14 – Fed Pivot Effects
45:32 – Hikes & Sector Risks
52:14 – Fed & Inflation Targets
53:15 – Canada & China Divestment
57:06 – Wrap Up
Talking Points From This Episode
- The West’s miscalculation of the true value of energy.
- Treasury market risks and why the West needs cheap energy.
- The U.S. Fiscal deficit is set to double next year.
- Why the metals and energy are both likely to do well when the Fed pivots.
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 investible 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.