Forward Guidance: Warsh Must Choose The Dollar Or The Bond Market | Luke Gromen

Sourced by podcast-ingest on 2026-06-11. Auto-transcribed via AssemblyAI (universal-2, en). Speakers identified by AssemblyAI Speaker Identification using the per-podcast host/regulars hints; the resulting label→name mapping is in the frontmatter. Duration: 52m. Episode page: (not provided). Audio: https://traffic.megaphone.fm/BWG7554985690.mp3.

Show notes (from RSS)

A seemingly simple Fed transition is becoming a massive stress test of the entire financial system as rising debt, inflation, and global energy crisis collide.

Luke Gromen of Forest For The Trees joins to discuss Kevin Warsh’s looming challenge and why the Fed may soon face choices it can no longer avoid.

We explore the dollar versus bond market tradeoff, the impact of the Iran conflict and oil prices, China’s growing leverage, financial warfare, swap lines, and what it all means for stocks, gold, Bitcoin, and global markets. Enjoy!

TIMESTAMPS:

00:00 Intro

01:50 Warsh’s First Fed Test

04:54 Rethinking The Fed’s Role

11:35 Can Warsh Control The Committee?

14:07 Why The Dollar Looks Weak

17:19 Warsh’s Impossible Policy Mix

23:30 What's The Policy Plan?

27:31 China’s Strategic Waiting Game

34:16 Financial Warfare Going Global

40:22 Swap Lines And Petrogold

47:11 Risk Assets Face Repricing

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DISCLAIMER

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Transcript

Luke Gromen: He's going to have to show us our cards. And there's a consensus on Wall street that he's going to be hawkish. There's a possibility that he will try to ride two horses with one ass next week by rolling out this same fairy tale that we can have disinflationary growth. The debt is too high and there isn't enough balance sheet to finance it without the Fed's help. That's it. Everybody want to have an independent Fed. Nobody want to cut deficits. If you're going to spend three years, two and a half years shifting issuance to the front end because the back end is blow going out, you can't be stupid and start an inflationary war that sends a front end up. I think the physical world is going to start kicking the financial world in the head sometime in the next one to two months. That's not good for anything. It's just. It's bad for bonds, bad for stocks, it's bad for risk, it's bad for gold, it's bad for bitcoin. I think gold and bitcoin are telling us something wicked this way comes. It's a very simple choice. The dollar or the bond market, they're gonna have to sacrifice.

Jack Farley: 1 nothing said on 4 guidance is a recommendation to buy or sell any investments or products. This podcast is for informational purposes only and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks. Our hosts, guests and the Blockworks team may hold positions in the company's funds or projects discussed. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. All right, everybody, welcome back to another episode of Forward Guidance. And joining me this week is repeat guest Luke Roman, founder, president of Forest for the Trees. Luke, always great to have you on the show. No shortage of things to talk about once again compared to our last time that we got together, I think around eight months ago. So it's been wildly overdue. But good to have you back on the show, Luke.

Luke Gromen: Thanks for having me back on. It's great to be here, Felix.

Jack Farley: Yeah, yeah, likewise. Want to start the conversation with. We're recording June 10th. Today, we're one week out from the first Fed meeting led by Kevin Warsh. He's been nominated and he has been handed quite an interesting proposition of how to navigate the economy. We just had the CPI print today, obviously. Headline was above 4%, largely driven from what's been going on in the Iran war, which you've Been talking plenty about, but overall just seems like a very different mix of factors going into this meeting versus when he was first nominated to be Fed Chair a few months ago. Back then the curve was pricing in rate cuts, now we're pricing in rate hikes. Curious how you're thinking this is all going to pan out next week.

Luke Gromen: I think next week is going to be a big card flop, if you will, to use poker term, he's going to have to show us our cards. And there's a consensus on Wall street that he's going to be hawkish. And certainly when he was at The Fed in 10 and 11, what have you, he was very hawkish. What I find it's not as well known is that he, he co co authored an op ed in the Journal in December of 2018, essentially begging the Fed to stop hiking rates. People don't seem to remember that as much with the S and P down 10% off the highs and please stop hiking rates, now is not the time. So I think we're going to get a big card flop in terms of getting his view now that big card flop might be. He wrote another op ed in the Journal about the Fed last Friday fall that I think was kind of his job interview, so to speak, for Trump in which he said essentially one of the things he criticize the Fed, but from an economic policy standpoint, one of the things he said that I thought might be important as it relates to next week is essentially we can grow out of this in a disinflationary manner. And he basically said if we invest in AI and technology that will drive growth up and growth that will not, it will be disinflationary like the 1990s. And that way that's the way we can sort of square the circle between what otherwise seems to be a completely untenable need to either sacrifice the dollar inflation or the bond market higher rates. And so I think there's a possibility that he will try to ride two horses with one ass again as, as Powell did in a different manner next week by rolling out this same fairy tale that we can have disinflationary growth, that we can have higher growth, but that the higher growth won't necessarily drive higher rates. I think it's total bs. I think it's a fairy tale. So let's see what he does. One way or another we're gonna find, we're gonna find something out next week. And so I think they're gonna have to show us a bit. They're going to have to show us some cards next week. And I think that's. That makes it an important meeting and an important setup for the back half

Jack Farley: of the year, 100%. I want to also zoom out into how you're thinking about the role of the Fed in terms of what is even going to be their, their mandates moving forward, because there's been a lot of talk from both Kevin Warsh and Scott Besant about the role of the Fed, how much they've been overstepping over the past decade or so. There's been endless monetary interventions and just a huge balance sheet largess. And there's a headline just last week that came out of some of the couple of advisors that Warsh is naming to the Fed that will be helping him in driving this policy. And a couple of them were very integral to the Federal Reserve policy of, I believe it was like the Project 2025, which was the mandate for how the Republicans, their playbook basically for everything. So there's a lot of sections in there that were really related to just a complete reconstruction of just what is the Fed even here to do? So even before getting to the specific questions of their current dual mandate and rate targets, is. Yeah. Is it as big of a carte blanche as it kind of seems like it's going to be? How does that cointegrate with Congress and Treasury? Where is this all going to sit?

Luke Gromen: I think that's One of the $64,000 questions is, you know, there's a, there's a scene in a Kevin Hart comedy video where he and his, his, his crew are sort of getting ready, kind of hyped up before his show. And, you know, he screams, everybody want to be famous. And they all shout back, nobody want to do the work. Everybody want to be famous. Nobody want to do the work. Everybody want to have an independent Fed. Nobody want to cut deficits. Nobody want rates to go up. Nobody wanted. Right. So look, the Fed certainly, I would agree with Warsh's and Besson's point that the Fed ran pretty far afield in some certain areas, some of them around DEI and climate. 100% get rid of that. Now, is Kevin Warsh going to stand aside and let the treasury market dysfunction? Because if the answer is no, then he's not going to be that different. And I think the answer is absolutely no. And why is the treasury market repeatedly dysfunctioned since 2020? Amongst all the noise and all of the word salads from all these academics and economists, it's a very simple thing. The debt is too high and There isn't enough balance sheet to finance it without the Fed's help. That's it. That's it. At the end of the day, that's what it boils down to. And so the debt is still going to be too high. Right? We can start there. The deficits are going to be what they are, right? There's not. Neither Besant, you know, if anything Besant has been part of administration this year. That is, that is by virtue of this ill advised adventure into Iran going to increase the deficit pretty notably. You notice his three arrows has just gotten wadded up and thrown in the trash. So that's where I would start with that. Answering that question is, is what you know, we know the deficit is primarily three things. It's interest, where rates are going up because of this, this adventure in Iran. We know it's entitlements. There's 65 million boomers, whatever those politically untouchable. And there's defense, which the budget just went from a trillion to a trillion. Five is what Trump would like to do. So we're not cutting any of them. So that then leads you to one of two things. Either rates are going to go up a lot. And the problem with rates going up a lot in an economy with 122% debt to GDP and 6% deficits means that you're going to create bond market dysfunction very quickly again. And when that happens, what is Warsh going to do? Is he going to stand aside and watch the 10 year go from 4.6 to 4.8 to 5 to 5 and a half to 6 to 7 and just let stuff break and say, you know what, cut the fence, cut the boomers. Oh, we're going to pay interest and that's it. Our entire. But if I have to, I'm going to let rates go so that interest will be 100% of tax receipts. Everything else can get cut. And you and I both know the odds of that are zero. That's never going to happen. So then what we're really talking about in my opinion is where's, where's the warsh put on the bond market, right? Where's the, you know, where, where is he step and start buying bonds and do everything he said he would and Bess and I would throw in the same thing. Listen, Bessant was extremely vocal in 24 about Yellen and how stupid she was terming out the debt. And what did he do when he got in office and got to actually behind the scenes. And so holy crap, it's way Worse than I thought.

Jack Farley: It's different when you're sitting in the chair and you're like, oh my God,

Luke Gromen: what does he do? He doubles the rate of treasury buybacks

Jack Farley: that she was doing.

Luke Gromen: Doubles. Okay. So that like, that is all, you know, sort of the issue alongside, you know, my view is ultimately the Fed won't be independent. They'll be effectively more married with the Treasury. Maybe it'll be smoother because Wash and, and, and Bessant work together under, I don't know who, whether either Druck or Soros, I can't remember. You know, maybe there's going to be more coordination, particularly given where we are geopolitically. I could certainly see that. But that's inflationary, like 100%. That's inflationary. And so I think part of what Warsh's mandate will be will be to sort of the, you know, the good looking face with the good hair to get on TV and tell people, this isn't inflationary. We are going to grow out of this without inflation. This is disinflationary investments. And so I think that's part of going to be his role. It will be complete BS to be clear, it will be inflationary. But, you know, he doesn't have to sell too hard. 48% of this country is going to believe whatever comes out of his boss's mouth in Trump, and 48% of this country isn't going to believe what he says, what comes out of his boss's mouth, no matter what. You know, Trump could say the sky is blue and half of this country would disagree and call him a racist. So like that's, that's all he's got to do is swing that middle 4% and they can kind of hold it together.

Jack Farley: So.

Luke Gromen: Again, I think next week's gonna be really important because we're gonna get some semblance of where we are. Because to your point, this looked like a relatively easy job when he said yes. Now it is a flaming bag of dog poo that he's got to try to put out without getting his shoes dirty.

Jack Farley: Yeah, to say the least. And yeah, I'm with you, that he'll, he won't have much trouble convincing the public of, you know, there is no inflation. Look at what's a trimmed means. Inflation is his favorite one, which just so happens to also be the lowest one.

Luke Gromen: So imagine that. Wow.

Jack Farley: But, yeah, yeah, imagine that. But you know, it's easy to convince the public, but he also has to convince the rest of the committee, which is looking incredibly Divided right now. I'm curious, how do you think that's going to pan out with just getting everybody on the same side of it of, you know, obviously there's been a pretty hawkish pivot. You know, we've seen Governor Waller. He was, you know, one of the most, I would say, pragmatic doves on the committee. He's coming out pretty hawkish now. So, I mean, yes, I think he'll have a good, it'll be easy enough on the public, but to convince the committee to stay flat and not hike seems like a pretty tall order.

Luke Gromen: Yeah, you very much. You very well may be right. I'm, I'm not as well versed in all sort of the, the internal politics there. To me, my read of that is I, I think you're probably right. And if you're right, I would say that that means war shall just have to use. There's no atheists and foxholes approach, right. So, you know, as we sit here today, the Dow's down, you know, NASDAQ and S P are down a percent and a half, gold's down, huge, bonds are down and the dollar's flat. So we've got stocks down, bonds down, dollar not up, almost down. That's, that's, that's, that's the Fed's worst nightmare right there. What do you want to do? And the way you, you know, you can, the, the, the there's no atheists and foxholes approach is just like, fine, let it, you know, it was famously employed with the TARP vote. Right. Remember, they couldn't get the votes for tarp. Okay, fine, it failed. Now watch this show. And you know, the market crashed and then everyone came back after they got some religion and, and then it passed. And so I think it's, you know, to your point, you know, if it plays out that way, and I could, I think you raise a valid point to me, that just suggests near term you're going to get some pain in markets and all markets. Stocks down, bonds down, probably dollar not up that much. I'm surprised that dollar's not up more today. I'm shocked, actually. It's a very bad sign until they, until, you know, Waller et al come around. Right.

Jack Farley: Can you double click on that notion of the dollar? Because I'm surprised too because, you know, typically if you just see this energy supply shock like we've seen, that is way worse for the rest of the world compared to the U.S. i'm in agreement. I thought Dixie would have been way higher right now, but it's not how, like, how drastic is that underperformance relative to what should have happened over the last few months?

Luke Gromen: I think it makes perfect sense, but it's very troubling, which is there are a lot of people say, no, it's going to be super good for the dollar. I thought it'd be good for the dollar. But look, you can buy dollars or you can buy oil and you can't put oil. My wife's truck doesn't run on dollars, it runs on oil. And last week I put $158. So, you know, the, the issue is ultimately, you know, you need, you need energy and food. They're higher on Maslow's hierarchy of needs than you need Treasuries, US Dollar, stocks, etc and so market action of dollar down, bonds down, stocks down is capital flight. That's money leaving the dollar. Where's it going? Well, it's probably either, you know, buying commodities or, or, you know, paying down, basically paying down debt. I'm, I'm really surprised it's. Or alternatively, some of it might be, you know, if you look at the volumes of CIPs, China, China's international, International Payment System, Interbank Payment System. I can't remember what the I is. Anyway, I think it's interbank payment system. Point is, is the volumes in this war have exploded higher. In other words, to get around US Dollar sanctions, et cetera. There's a lot more volume going through that now. Is that enough to drive the dollar like down with, with risk off? As sharp as it is, boy, I'd be surprised. So it is, at the end of the day, capital flight, it's, it's capital flight, price action, dollar down, bonds down, stocks down. Again, we're flat on the dollar, so it's not quite there. But we saw this in Liberation Day. We saw capital flight, you know, dollar down, stocks down, bonds down, in liberation, post Liberation Day for a week or two. And then, you know, Trump, Trump was like, you know, had to come to Jesus from, you know, or the hey, I'm effort call as we used to talk about on the sales desk. You know, hey, I'm effort knock it off. And seven days later, he paused. But it, it, it is as it relates to Warsh, it makes his job infinitely harder because again, all there's all this noise, all this food or all this word salad, all this. It's a very simple choice. The dollar or the bond market. They have to make that choice. They're going to have to sacrifice one. And all of this really just brings it forward. It's not. It's, you know, it was, you know, three months ago before this silliness was, like you said, it's pricing cuts. Wash had some time to think about it. Now next week he's going to say something and it's going to be, you know, what do you want? You're going to, you're going to let rates rip? Are you going to let the dollar fall? What's going to happen.

Jack Farley: To that end? Obviously, there's a lot of different levers that can be pulled in different directions to weight either the dollar or the bonds. So just want to go through them and hear about how you're thinking which ones are more likely to be pulled versus set aside. Because initially, you know, back when, when Warsh was first nominated and we had cuts priced into the curve, to me it made a lot of sense that there's this, there's this premise of, okay, we have this productivity boom. Let's lead into it, we'll cut rates, and then at the same time we can let Warsh and Besson get their dream of, of, you know, bringing the balance sheet lower and getting the Fed out of that game. And the two things can almost balance each other out, plus deregulation. So using all those levers, it made sense to me. But now we're in this regime now where we have inflation re accelerating, we have the labor market that's looking like in a lot better shape than we thought six months ago when those, when those cuts are priced. Suddenly the balancing act of all those levers seems a lot more complicated to me. So I'm curious to think about. Yeah, like, which levers do you think are going to be prioritized? Is it the same as back then of trying to be hawkish on the balance sheet and balancing it with the lower fed funds and steepening the curve. What do you think?

Luke Gromen: Yeah, I think some of this is partly why Warsh got the job is. I think some of what is, you know, shrink the balance sheet, I think is a very cynical BS narrative. It's gaslighting. And the reason I say that and look, the reason he's gaslighting, it's not he's a bad guy or mean guy or anything. It's just they're cornered. They are absolutely cornered. And so they're trying to sort of not have to go black or white of the bond market or the dollar. Okay, well, what's sort of, you know, how can you split the baby, so to speak? Well, you could get a guy like washing there who Comes in and says, listen, I'm going to, we, we've got disinflationary growth, which by the way, show me a data center that's cheaper today than it was a year ago, two years ago to build.

Jack Farley: Right.

Luke Gromen: So that's total bs. It will eventually be disinflationary, but that will probably be in five years or 10 years time. So again, it is cynical. Best case, worst case, it is overt misleading. But again, they need to do that because this they can't. They really don't want to have to choose the dollar or the, the bonds, which they're going to have to eventually. So if I'm warsh, I say, okay, there's going to be disinflationary growth based on AI and so I can cut the front end. Great. And the Fed's, you know, been naughty and they've been buying all these bonds and you know, running a field of their, running far afield of their mandate, which is also BS because they've been doing it to finance the US government and to prevent the bond market from collapsing. Whatever. Only uncouth guys from Cleveland say that, even though lots of people know it to be true. So I'm going to shrink the balance sheet. Okay, well that all else equal, puts upward pressure at the long end. Okay. Okay. So now I'm steepening the curve. Great. Now I'm going to go to the banks and say, hey, I'm going to deregulate you banks under the auspices of hey, Main street, not Wall Street. And there is an element of that that that's true. That's 100% an element that's true, that deregulation. What does that deregulation mean in again uncouth Cleveland guy terms? It means the banks can now basically load up on close to infinite leverage on Treasuries, which they will absolutely do because the yield curve is so they can borrow if the yield curve steepens. And then you take all the regulations off. Now the banks don't care about real returns. They just care about a spread. So now the banks are going to step in and buy the Treasuries that the Fed's selling. Now the banks are just the regulatory purview of the Fed. So it's just QE done by the banks. We saw this in the second quarter of 2020 during COVID when they temporarily suspended SLR for a year so that the banks would buy more trade. It's just QE through the banks. That's it. Which is again, it's fine, I get it. But don't peed on my back and tell me that it's, it's raining. That's, you know, just be honest with me. Now the nice thing about the deregulation in theory is not only does so you steepen the curve for them, then you take the regulations off so that they can buy a lot more the Treasuries that you're selling if you're Kevin Warship. But those regulations also remove the leverage requirements. Now the banks are no longer constrained to some amount by I can lend money to the US government by Treasuries or I can lend money to Main Street. Now they can do both. So I think that's what his whole plan is or at least was before this silly war started, which is I'm going to cut rates, I'm going to sell the long end, I'm going to have the banks backfill it with regulatory removal and then they can still into Main street and I'm going to get on the horn and tell them if you don't land more to Main Street, I'm going to have a regulator up your rear end looking for stuff until you do start lending to Main Street. And in that world with AI overlaid that is pretty close to a sellable package of like disinflationary growth. Looked at in isolation, it's ultimately still going to drive higher rates because of the context in which it's occurring, which is to say debt, the gdp, US net international investment position, foreign borrowing of dollars. Rates are going higher no matter what he chooses. But at least this is sort of good. So I could see all that now. They started this war.

Jack Farley: Yeah.

Luke Gromen: Look, Pro tip, if you're in the administration, you're listening to Pro tip. If you're going to spend three years, two and a half years shifting issuance to the front end because the back end is blowing out, you can't be stupid and start an inflationary war that sends a front end up. Yeah, that's like giving yourself a root canal with a shotgun. Very effective, but fatal. Like duh, who was, who was. Anyway, I'm, I'm getting all worked up now because it's just, it's so galactically stupid. And now we're, you know, it makes it, it makes everything that sort of nice package that war sort of had. It just like beats it over the head like a baby seal. Like, like. Now what do you do?

Jack Farley: I, I mean, yeah, I got fired up about it too because I was so. I'm in the same camp. I, I saw that package and I was like, okay, I see the vision. I thought people were, were too overweight, the hawkish balance sheet side, without understanding the premises of deregulation and, and cutting the, the short end. But yeah, now we're in this moment where, okay, we have the complete opposite situation and I'm just trying to figure out what the hell the plan is.

Luke Gromen: Like, like when you know, when you find out, why don't you call me because I would love to know.

Jack Farley: All right, so nobody knows, but I don't know. So, okay, it's pretty much impossible to figure out what the plan is because maybe the plan is that there is no plan. And we thought this would be a quick little side trip just like Venezuela, and we'd get a week of high oil prices and then it would come lower and then just in time for Kevin Warsh to come in and cut rates, just in time for everybody to be happy again in time for midterms. But yeah, now it's mid June and it's, it's not really panning out that way. So I guess the, the best thing we can do is try to figure out what's likely to happen since we know that there isn't. The plan isn't really going to plan, it seems like. So I'm curious, like, yeah, like what do you think actually happens from here based on just the game theory as it's set right now,

Luke Gromen: what do I think actually happens? I think the Iranians see this clear as day. I think Hormuz stays closed through fall. I think sometime between now and Labor Day, people start to hit tank bottoms and oil charts start to do this. And once that happens, then they're really hosed because now what do you do? You got to raise rates to fight inflation. Inflation's been rippling through the system. And by the way, it won't just be inflate, it won't just be oil, it'll be fertilizer. It will be, you know, crop planting expectations. It will be everything. And that's a problem because you, his debt to GDP is 122% and the deficit's 6% on its way. Oh, you've shifted the front end. So when rates do this at the front end, guess what the deficit's going to do? It doesn't go from six to six and a half. It's going to go from six to eight to ten. And oh, by the way, as that happens, the dollar's probably going to rise a bit, which is a problem because foreigners own 13 to 14 trillion dollars in dollar denominated. Assets, but they're long 27 trillion dollars net in dollar or sorry, 13 to 14 trillion dollars in dollar borrowings, but 27 trillion dollars net in dollar assets, including nine and a half trillion dollars in Treasuries. What do you think they're going to sell to raise dollars to buy oil that's doing this and to buy the dollar that's doing this. As rates spike due to oil doing this, they're going to sell Treasuries and you're going to go into a debt spiral. And that's why I've not understood this whole war is somebody didn't somebody, you know, if everyone's thinking alike, somebody isn't thinking, you know, Patton said one time, George, George Patton, General Patton. Nobody advised, I mean Bessant wasn't consulted. I mean I don't like on the, on, on this, on this war and it like, because there's he, he has to understand this and he's putting on a, you know, he's putting lipstick on a pig and trying to, you know, talk tough and everything. But like, you know, so what do I think's gonna happen? That's what I think is gonna happen. I think the physical world is going to start kicking the financial world in the head sometime in the next one to two months. And look, I was early on, early and wrong on how quickly this would happen, but I was dead right. That horror moose would still be closed much longer than people thought. So that's still, I think the overriding factor is the physical world will still get its say. And then what does worsh do? I, I, I, I don't know.

Jack Farley: Yeah, yeah, yeah. It seems like there's obviously been some attempts at off ramps. Specifically there was this China summit the other week. Xi Jinping and Trump got together. Trump brought all the CEOs of America over and at, at the, at the time it seemed, you know, quite interesting. You know, they, there was speculation whether Nvidia CEO would come over there and all this fanfare and the like and all at the time of the same time that there's this back channeling with Iran to try to figure out some sort of deal or ceasefire. And you know, people are putting two and two together that perhaps Xi Jinping will be the mediator there and China to try to get some sort of resolution to occur here because, you know, if there's a US blockade, I assume there's no oil going to China from Iran. So it's just pretty much like bad for everybody right now. We're probably Incentivized to try to figure this out. But the summit came and went and I haven't heard a single mention about it since, and there's really been no outcomes from it. So I'm curious, like, how do you think about the impact of that summit and just China in general within the construct of this situation?

Luke Gromen: You know, I go back, I try to go back to first principles and everything, right? So like first print one first principle. If even the slightest bit of good news came from that thing, first principle about Donald Trump is what? He is going to pimp that thing like it is the greatest deal since the Magna Carta or the signing of the Declaration of Independence. So if you know, as you said correctly, since then, it's just faded away to nothing. What's this tell us about how that meeting went? Not great. Not great. The next data point that we can point to factually, China's imports of oil are collapsing. They're down like 4 or 5 million barrels a day. So like the, you know, all of this stuff about we can get around it, we can get around it. The number one driver to making the, the reason why the oil markets have not done this already has been China's ability to drop its imports by a staggering 4 to 5 million barrels a day and not economically collapse. You know, if you'd have told someone, hey, China's, China's going to drop oil imports by 4 to 5 million barrels a day. What's their GDP do? If you just said that 3, 3, 3 months ago, they'd been like, oh my God, China's gonna have a severe recession. I just read something from Jeff Curry earlier today that I believe the amount of charging, I don't know if it's charging stops or wattage used or what it was, I'd have to go reread it. But the bottom line is up 55% year over year in China. So basically, they've got the grid, they've got the EVs, they've got the infrastructure. And so like, meh, we'll just drive electric, we don't care.

Jack Farley: And they've been stockpiling like crazy.

Luke Gromen: They've been stockpiling like crazy. So I think that's part of it too, that they probably had more. You know, I think they had a billion eight barrels in an spr, billion four barrels in an spr, which is way more than anybody. But they may have had more than that even. But we can, we can see what they've imported. We can see they're not collapsing. We can see you know, the, the adjustments they've made in terms of what they're driving. But I don't think people have thought hard enough about the potential implications of that is particularly in the context of China screwed more than anybody, which was overwhelming consensus three months ago. Overwhelming consensus, which is China wants this thing to last longer. China's fine. China's playing a strategic game here rather than sort of some sort of tactical game, which is leave it closed. Leave it closed. We know what's about to happen to the US bond market, to the British bond market, to the EU bond market. It's all about to blow up. Leave it closed. Great. Now would that explain why they sat down and nothing came out of it after from Donald Trump? Oh, I bet it might. So to me, these are both huge, non secret tours. Right. The fact that Trump didn't say anything about it, brag anything about it ongoing, so we know that it was not a great meeting for Trump. And this drop in Chinese imports without China collapsing tells us a, they have more flexibility than even I would have thought, but certainly more than everyone that said that China was screwed three months ago by the US actions vis a vis this blockade. And that they might be happy letting it go on. I would add a third one sort of in the context of that blockade that you're mentioning, which is they think that I believe it was the F. Second F15 might have been shot down by a shoulder fired missile, Chinese shoulder fired missile, which was another non secret tour. Right. What do we hear when this started? Oh, Chinese weapons are crap and the Chinese didn't do anything to help the Iranians. Well, that F15 didn't kill itself.

Jack Farley: Right.

Luke Gromen: It didn't shoot itself down. Pentagon officials again citing NBC, NBC citing Pentagon officials saying it was a Chinese shoulder fire missile and that the Chinese had provided high end radars, long range radars that were detecting U.S. stealth technology. That was at the bottom of the article. And then we layer in things like, hey, the Russians are shipping stuff into Iran, the French, the Caspian and that the Chinese are doing it via the rails. And again, the Caspian volumes, the rail volumes, they're not nearly enough to overcome the entire blockade. But this is all a relative game. It's a pain contest. And those are essentially morphine shots to Iran in a pain contest with the U.S. and so, you know, I look at that China meeting in the context of all of that. I think they talked about some things, but I don't think, I don't think it necessarily achieved what the US Was hoping that it would. And I think what we've seen since is, I think the, the, the Chinese basically said, listen, you made your bed now sitting it, you know, you, you, you're now lying it. You, you want that straight, close, keep it closed. Great, let's see what happens first.

Jack Farley: I think to that point about who's being hurt the most too is that yes, everybody thought to be China, but it actually seems to be more so countries like Japan who are just being steamrolled and you know, they've been, they've been at odds pretty tersely with China in the lead up to this thing with their, with their new Prime Minister. So it's quite interesting, you know, you bring that into the fold and I am curious about how prominent you think these ideas of like financial warfare are. Whether it's Iran looking at the, what they can press in terms of how long to keep this on and, and you know, basically making the Fed have to hike rates a bunch. And at the same time what's going on with, you know, soon we start talking about Japan, he has started talking about yen and how it's just this ground zero of any sort of potential financial implosion. So I am curious about, how do you, how do you underrate that idea of using these, these financial warfare mechanisms knowing that one of the most susceptible is actually turned out to be Japan?

Luke Gromen: Yeah, I'm of two minds about that and I can't decide which is which. So let me start. I absolutely agree with you. There's a financial warfare going on amongst all sides. No question, completely agree with that. As it relates to Japan and, and Korea and China. I'm of, I'm of two minds. Something we've been highlighting for clients all year has been that Japan and more recently Korea are trade have been trading like emerging markets since late last year. Which is to say if you take the 10 year treasury yield, yield, excuse me, minus 10 year JGB yield and then compare that to the dollar yen cross rate. Higher relative yields in Japan are driving a weaker yen. Higher relative yields on the same metrics in Korea are driving a weaker Korean one. That's emerging market price action. That's a market saying the higher your yields go, the closer you are to a debt crisis that you're gonna have to print your currency into oblivion. That started like last year and shortly after, shortly after the US and China met in Busan, Korea in October. And so I look at that and go, ugh, like that is the US's two biggest Asian trading partners heading since last October toward a debt crisis which will pull down everything else in the world and certainly in the west, but China's gonna be hurt by that too. And it just keeps getting. And then you layer the oil situation on top of it, which is worst for Japan, certainly way more than China. And then the Chinese don't like what's coming out of the Japanese in terms of the more sort of military militaristic rhetoric. And so they're cutting off rare earths. They are doing some other things that, that put upward pressure on inflation in Japan as well. And that's where I come to the part about being of two minds about it is this is, this is, is, you know, Occam's razor is Japan and Korea are heading towards debt crises that are going to sort of. It's not good for anything except maybe the dollar in the short run and ultimately really, really good for gold. Or was there some sort of deal agreed to. Was. Was sort of the, you know, the divorce papers between the US and the Chinese manufacturing base sort of put in front of both parties in Busan in October and general framework around the divorce. And then the US went to Japan and Korea and said, listen, we're talking about reshoring, but there's no freaking way we can reshore to America. It's all bullshit. You know, we're going to do some stuff here, but we can't. We can't reshore that much here. We don't have the labor, we don't have the infrastructure, we don't have the grid, we don't have, you know, we don't have any of it. So we don't the engineers, we don't have the welders. We don't. So we're gonna do what we can, but the lion's share of American reshoring is actually going to be, you know, make Japan great again and make Korea great again. But, but Japan and Korea. If we switch manufacturing from China to Japan and China to Korea, our costs go like this. So we can't without blowing up our bond market. Unless we do a deal with you, Japan and Korea, which is you guys kill your currencies. Kill them, and in return we will give you, sweetheart, no bid deals for factories here in the US preferential market access, etc. And that is sort of financial warfare in the other direction. Right? That's, hey, we're going to cut China out of the mix everywhere we can. We're going to move it to Japan and Kore Korea. And the only way that works is if they kill their currencies. So you know, the cost pickup isn't like this. It's, you know, here, maybe, maybe, I mean, that's, that's at the very high level. There's still practical things, supply chain things that make that highly challenging at best and certainly anytime soon. So I, I, that's how I think about the other. Financial warfare is absolutely happening, whether it's U. S. Sanctions here, there and everywhere, whether it's China sort of, you know, doing what it does. I, you know, they've weaponized gold three years ago to defend the yuan, in my opinion. You can see them still buying in. There's another sign China is buying just more and more gold as gold goes down, which is again, 100, 180 degrees opposite of what everyone said was going to happen three months ago. Oh, China's screwed. They're gonna, they're to sell their gold. Well, they're just buying more and more. So you're wrong about something. The same way I was wrong about, you know, the fact that hormones being closed for three, I was right about hormones being closed for much longer. I was wrong that how quickly it would break. I'm certainly right about that, but I was wrong about that, to be clear. So, yeah, anyway, that's, it's not an answer, but it's a framework of sort of how I'm thinking about it because I don't know that there is an answer yet. Yes, there's warfare going on.

Jack Farley: Yeah.

Luke Gromen: What are the terms and conditions? And we can see signs in the markets. None of it's great for risk assets, in my opinion, but, you know, let's see.

Jack Farley: Yeah, no, no, the, the, the framework is super helpful and yeah, I do want to get your take on how that leads into risk assets in a minute. One last mechanism of this financial warfare I wanted to ask you about was actually just around the usage of swap lines and what's been going on with the UAE left OPEC and then like one week later, within that same time, there was talk of the US actually providing swap planes to the uae and I feel like that those headlines have gone somewhat understated in light of all this financial warfare we're talking about through these different mechanisms. Yeah, I'm just curious, how do you think about the, the potential carrot dangling of swap lines to these other countries fits into that framework.

Luke Gromen: I read the sequencing of that a little differently. The UAE situation, I thought it was really interesting that the UAE came out and said, listen, if you don't provide us swap lines, we're going to start pricing all of our stuff. And yuan or start pricing some product and you want not all of our stuff and like chop chop bessant etc got right to it and promised those swap lines would come and I, you know, and then they left. I believe the next step then after that was that they left opec.

Jack Farley: Yeah, right.

Luke Gromen: And so to me I When you why would they leave opec? They want to leave OPEC so they can run production harder. You know, they don't have to be abide by that. Now on one hand I think tactically, and this is probably most of it, you know, tactically just you know best and need to find oil supply anywhere he can because he knows this better than anybody. If oil doesn't get down, he is done with a capital D. So I think that was a very much a listen, we'll give you the swap lines so that you don't have to sell treasuries and sell dollar assets and start pricing prospective product in yuan. But you got to give us something, you got to ramp up production. Well, we got to leave OPEC to do that. Okay, we'll leave opec. Great. I think that's something like that happen now strategically and I didn't see this talked about a lot, I wrote about it for clients, but strategically and this isn't something that's like you know, today, tomorrow, next week, next month, next quarter that really matters. But you only need OPEC, a cartel to manage oil supplies when you're selling oil for paper, right. In other words, if you're selling oil for dollars, can only sell in dollars, then you need a cartel to manage supplies in order to maximize the value you get. So you restrict supply, maximize value of oil so that you can manage and make sure that your dollars, your dollar reserves maintain their value in oil terms. If you start to price oil outside the dollar in yuan and in particular settle it in gold, which is really what we're talking about here. What, what we're really talking about is a petro gold system through the yuan is what the Chinese have been pushing. In other words, buy in yuan exchange or yuan for gold at any. You know, China has set up an offshore yuan clearing bank at every major gold trading hub in the world. They've had that for years. That is not a mistake. That is if you run a surplus against us in yuan, you can exchange it for gold. If you start pricing oil and gold, you don't need a cartel at all. Your incentives change entirely. Because in that system the guy who maximizes production runs it full out, buys gold as cheap as it's ever going to be in oil terms. Right. Because the oil market's eight to 10 times the size of the gold market annual physical production terms. So the, the, the gain theory, if, if you can now buy oil and gold price oil, you know, if you're, now, if you can, your, your incentive as an oil producer is maximize production and get as much gold as you can at 20 barrels an ounce before it goes to 40 barrels an ounce, before it goes to 80 barrels an ounce, before it goes To 200 barrels an ounce before, without oil dropping that much in price. Right. So that's a more strategic dynamic, I think, of this UAE getting out of OPEC decision that no one's thought about yet. You know, let's watch and see. But to get back to the original, the original point of, I think Bessant was backed into it and got his pound of flesh in terms of them maximizing production. Tactically, this, I think is an important point in that it highlights the difference in negotiations when there's two people that will offer you swap lines. You know, for 30 years the US has been the only game in town, and now it's not anymore. Right. And so if, if you're trying to sell your house and there's only one buyer, the buyer's got all the power. If there's two buyers, you have all the power. And my point here is, is it's not well understood by American investors. I find that China has yuan swap lines set up with everyone in the world, basically, except the United States. I think it's 185 countries, plenty of volume and oh, by the way, all those, you know, if you take a dollar swap line, where are you buying your stuff from? You ain't buying it from the Americans, you're buying it from the Chinese. Right. It's a Chinese factory's making stuff with an American label on it. So it's semantics. And the point here is, is not, oh, it's all going to go to the Chinese swap lines. It's not all going to China. No. But the point is, is that the UAE of the world suddenly have leverage to stand up the Americans and go, you know what, you give me what I want or I'm going to take, I'm going to go see what the other buyer says, you know, as a home seller. And that's what just happened. And I think it has important implications for just sort of how the system unfolds from here. And you know, so when I think about these dollar swap lines. Sure. Are they a weapon? Yeah. Are they, the weapon. They were ten years ago. No, not even close. Because if Bessant says I'm not giving them to you, they're gonna pick up the phone. Yeah, hi, Beijing. Hey, yeah, the Americans just told me. No, Yeah, I buy all my. From you anyway. Yeah. Excuse me. Screw him. What will you give me? And then Besson will come back.

Jack Farley: Hey, yeah, just kidding.

Luke Gromen: So, yeah, yeah, I, I think there's, they're, they are part of a toolkit.

Jack Farley: Yeah.

Luke Gromen: But they're a toolkit whose values, you know, has been drastically reduced by real politic of, of China having swap lines with everybody except the Americans.

Jack Farley: Yeah, that's a fascinating point. I, I, to be honest. Yeah. I didn't know how prevalent the swap lines were from China. That's.

Luke Gromen: Oh, it's everybody's. It is, yeah, it's on the PBLC's website. It is everybody.

Jack Farley: Okay. Okay. All right, so last little bit here, want to tie this whole framework, everything we've talked about, into your perspective on markets for the next little bit here. Sounds like secularly, you know, over the next couple years, all the, all their arrows are still pointing in the direction of monetizing debt and print and et cetera, et cetera, that are beneficial to assets like gold and bitcoin and risk assets. But I know you're much more cautious on the shorter term, so I'm just curious, how do you think about the, yeah, this, the short to medium term versus those longer term tailwinds which sound still intact.

Luke Gromen: Yeah, I'm very cautious. Just because you're seeing bond yields break out everywhere except China. And you know, I try not to make the same mistake twice. And so, you know, I was, I was probably slower to react than I'm, than I should have been in, in 22. Right. So first I was like, oh my God, the Fed is not going to hike. That would be stupid. I was like, oh my God, they're gonna be stupid. They're gonna hike. And you know, February and March, like, well, they still have a chance. And then April, you started to see a long term US 10 year yield, like, started breaking out for the first time in forever. And like, okay. And I got very, very cautious then, you know, through most of the end of 20, 20, 22. But it, I should have just said, all right, well, you can see where this is going. Same thing now again, you're seeing global bond yields. You know, we sort of had the big, the, the pickup Botta 22 and 23. They've backed off. They backed off a bit in the last couple years, and now they're all breaking out again. And that's not good for anything. It's just, it's bad for bonds, bad for stocks, it's bad for risk, it's bad for gold, it's bad for bitcoin. I, I think gold and bitcoin are telling us something wicked. This way comes for risk assets. And so near term, I just, you know, especially, oh, by the way, you know, into valuations that are in complete and total la la land in America. I mean, just they're, they're silly. Silly season. And what do I mean by valuations in silly season is there's something called the Warren Buffett metric, right, which is total equity market cap over GDP. And that's been in silly season for eight years, forever. That was in 2018. It hit the same level as 1Q 2000. And a lot of people said, hey, sell stocks, because we're back to where we were 1Q 2000 at the time. We said, no, no, don't sell stocks because we're now in the QE era. We are now. You have to. So what we did was we, we made what we call the adjusted Warren Buffett metric, which we said, total equity market cap minus US Federal debt. That whole identity divided by gdp. The reason we adjusted it by subtracting out federal debt is we said, look back to the first point we made in the podcast. Fed will buy every bond they have to to maintain treasury functioning. Do not kid yourself. They'll monetize it all if they have to. Which means we need to take away the debt to get really a true sense of where we are in the valuation of the equity. So slice. Okay, in 2018, the adjusted Warren Buffett metric said, no, don't sell stocks. You still have 60 to 70% upside in the indices.

Jack Farley: Boom.

Luke Gromen: Work like a charm. 4Q21, you're up about 65%. And you know, Mayor Culpable, I should have just, I should have been again, much quicker to be like, hey, this isn't good when they try to raise rates. Fast forward to today. The adjusted Warren Buffett metric is now higher than it was in 1Q 2000. It's higher than it was in 4Q21. It's the only time in 65 years it's higher than it's been in 65 years. And the only time it's been close is 1Q 2000 and 4Q21. Both of which time were terrible times to own stocks, you know. And so not only do you have valuations in la la land. But you've got yields rising rapidly due to a war that was very ill advised, that has gone on way longer than people think and in which Iran still has way more control over how it plays out than people think. And to me, it's just a terrible risk reward setup. You know, I'm happy to sit here and be patient. And I think that's when people say, why are gold down bitcoin every day? Or why golden and bitcoin down every day? Like they're just telling you where equities are going to be if they don't start injecting mass quantities of liquidity like really soon. And gun in my head, I don't think they're going to start doing that yet. I think, you know, to your point, you know, they got to have everybody have the, you know, the no atheists and foxholes moment. They got to get some real pain going. Mm.

Jack Farley: Makes sense. All right, look, always great to have you on the show. That was a great tour of how all these different interplays work together. So I appreciate it a lot. You coming on. Where can folks go if they want to see more of your work and what you do?

Luke Gromen: Sure, sure. Thank you. No fftt-llc.com for more information about our institutional and mass market products. And Uke Groman on X is where you can find me there.

Jack Farley: Amazing. All right, well, thanks again for joining, Luke. That was great.

Luke Gromen: Thanks for having me on, Bob.