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It's always a real pleasure to get a chance to talk with Luke Grohman. You know him as the president and founder of FFTT. That's Forest for the Trees. You can find him at Luke Grohman. That's on X, Twitter. What I enjoy too, though, he's on YouTube where he answers questions on a weekly basis. I mean, he's got...
hundreds of thousands of people throwing stuff at them, companies and institutions too. But I always find that a great situation where other people say, this is what I'm not quite getting or what's this relationship, that kind of thing. So yeah, I would invite you to go to YouTube and just look up Luke Roman, all sorts of great stuff. Luke, let me start with this.
Obviously, the things that you've been writing and warning about have been very clear. You know, you're more popular than ever because, oh, that's that guy who warned us about this. And, you know, a lot of that, I mean, look at you, main recommendations. We talked to you a few years ago. He says, look, just had a section of your thing on gold, a section of your portfolio, have some Bitcoin in there, all from the same thing, declining currency value or purchasing power, all of that.
But I was thinking, I don't want to get to all of that, but I want to start by just simply asking you, do you think government's actually happy with inflation? Because I don't see how they do well if it's deflation. Yeah, I think they say they're unhappy with it. I think they get nervous if it gets too high. But as long as it is low enough so as not to cause social unrest, then I think they're very happy with it.
Yeah, I'm thinking also in terms of, I mean, we've got record debt, you know, around the world. I think it was the last number I counted, $91 trillion. I actually didn't count it. I saw it. $91 trillion. You know, I mean, Canada's got a huge deficit and the States has been sort of jaw dropping. You know, let's just throw another trillion on the pile.
Well, I don't see how they can afford a slow economy, how they can afford to have their own economic or their business and their individual tax receipts go down. I mean, that seems to be the kingpin in all of it. That's right. Ultimately, they need growth, GDP growth, to be...
well above interest rates, the interest rate to pay on the debt. And when you have debt to GDP in the United States of 122%, 7% deficits at near or at full employment, uh,
growth or G has to be above R or rates, or else you go into a debt spiral. And this is just sort of sixth grade math. It's really not very complicated. And so that's not to say we can't have slowdowns, recessions, but what it does mean is that if G, if growth, forget about recession, I actually don't think a recession is mathematically possible with deficits this big. But if growth just slows too far,
You're going to have a situation where you go into a debt spiral, where rates go up in a slowdown, which typically is not how things work in the U.S. and in other developed markets. But that's how they work all the time in over-indebted developing markets and have for decades in those developing emerging markets.
And so it's going to, and then you'll get a response, which is, or a choice, which is, do we let this debt spiral drive treasury market dysfunction, economic calamity, markets down, or do we simply inject more dollar liquidity under the auspices of treasury market functioning, et cetera? And the reality is, we've seen this four or five times since 2019, that when faced with a choice of,
let free markets set the interest rate of borrowing for the U.S. federal government or inject more dollar liquidity to make sure that growth is high enough to cover the interest rate. They always do the latter. They are four or five for four or five. And they're going to continue to be because the alternative is simply not politically, economically palatable, sustainable, etc.,
I think that's such an important point to make, though, is because if somebody says that now, you go, no, no, it's already happened. You know, you're late to the party. I mean, we made a big deal out of September 16th, 2019, when the Federal Reserve just intervened in the overnight markets, you know, and just said, oh, what the heck? And that sort of began. But we've seen it in Japan in a big time way, seen it in the UK with their pension crisis. I just think people have to get real and say that's the playbook.
And then we start talking about, well, what's the implication of the playbook? That's exactly it. And people, many, many investors and analysts want to comfort themselves or their clients by saying, well, you know, September 2019, the repo rate spike, that was just regulatory. And there's an element of truth to that. Some of it was regulatory. But in the end, repo rates went to 8% to 10% and the Fed faced a choice. Stand aside and let the entire yield curve reprice off overnight markets.
intervene, start injecting data liquidity again, start regrowing their balance sheet and get yields down and let the liquidity be the release valve. And they did that. And they did it again in March of 2020 when the off-the-run treasury market crashed at the lows in COVID. And they did it again in 3Q22. And they did it again in 1Q23. And they did it again in 3Q23. And so for me, I'm surprised
I'm both astonished and I'm also thankful that there's still so many investors insisting that this isn't what they're doing. I thank them because it gives me more time to make sure that
I can really get the message out to my clients. Hey, listen, you need to own some gold. You need to own some Bitcoin. You need to avoid long-term Western sovereign debt because it's fine on a nominal basis, but on a real basis, it has been and will continue to lose value against gold, Bitcoin, stocks, industrial stocks, et cetera. It has to. It's a mathematical formula that the GDP is as high as it is
So I remain, like I said, surprised but thankful for the dogmatism of a lot of analysts that just refuse to sort of, you know, if it quacks like a duck and it swims like a duck, it's not a regulatory problem. It's a duck. Yeah.
Yeah, there's so many implications obviously for individuals. I drill down to what it's like and we can see it already though that maybe you got lucky in your own assets, you know, and you got lucky and you, not lucky, you did choose Bitcoin or you did choose gold, you know, you chose to try and protect yourself there.
But I still find I'm really worried about this gap between the haves and the have-nots. Not everybody owns a home. Not everybody has the wherewithal to purchase, you know, an ounce of gold. In fact, I just gave one of my kids a recommendation. He's
doing well at work and just said, Hey, I just want you to set money aside, you know, every month, don't spend it all. But what I really want you to do is set it aside and look at Bitcoin and look at gold and, you know, looking to protect that purchasing power. So you don't wake up 10 years from now. You said, I've done all this saving and I can't buy anything. You
you know, it's a, was that the Greenspan line? He says, yeah, your pensions are secured. The bad news is you'll buy a cup of coffee with it. He said, we can guarantee you social security and Medicare, Medicaid out as long as, as much as you want, but we cannot guarantee the purchasing power of those, those, you know, under congressional testimony, he was under oath. And he said that. And, and,
It's kind of one of these things where people don't believe it. Number one, they don't believe it can happen. And then even when they believe it can happen, they believe that they'll have more time. And sometimes they do. But more often than not, in these types of situations, you know, it's little by little and then all at once.
Yeah, well, that's that old Hemingway line that I do love. How did you go bankrupt? Slowly than all of a sudden. What about the people who say, well, look, you know, we've been running these deficits for, you know, for how many years, whatever number we want to throw on that major U.S. deficits, as we were alluding to at the beginning here and Canada's followed suit. And they'll say, well, it hasn't made that big a difference to my life.
Help me with that one, because I think that's what's behind the devalued purchasing power. You know, I think it depends. It's, you know, you go to me and say, hey, what was the price of a house in Toronto when you started working? And what multiple of that of your earnings was it when you started? And what is it now? You know, Vancouver. What could you buy a house for in Vancouver in 1990, 1995, 2000? And what
Does the average house in Vancouver cost now? And my guess is it has an extra comma now versus what it did 20 years ago. And incomes don't have a second comma. So some of that has been due, you know, that's not all strictly due to inflation. Some of that has been
particularly here in the U.S., but through the dollar everywhere to a certain degree, the natural outcome of various policy decisions that were made around financialization and trade policy. So it wasn't all sort of balance sheet expansion, money supply growth, et cetera, but a good chunk of it was. And so for the people saying that,
It's sort of all fun and games. But again, you don't know when it starts to matter from a social aspect. So, I mean, I saw a chart a couple of weeks ago. I actually put on my Twitter feed. It was so startling to me. It was Canada showing Canada's population growth.
against Canada's real per capita GDP growth. And population growth is going up and to the right at a 45 degree angle and real per GD, real capita per GDP is going down and to the right. It's negative at like a 15 degree slope, negative 15 degrees. And, uh,
Like that's how every revolution in the world has ever started. Like cram more people in and then start taking away, start shrinking the size of the pie and then wait. Like, I don't know when, maybe it's five years, maybe it's 10 years, maybe it's 20 years, but I can almost guarantee you that if you wait long, if you run those two lines long enough, keep running population up and keep running, shrinking the pie down every year at that decline, you're
You're going to have severe political fallout. It's just a question of when. And of course, you know, no one's going to make the connection to the to the deficits to any of that. It will be, you know, because that's how things go. They point at that, you know, like what we're doing here in the US. Oh, it's those people are evil or those people are evil. It's the left. It's the right. It's, you know, and of course, you
It's like if you asked a fish to describe his environment, the very last thing the fish would describe would be the water. And in this case, the very last thing anyone's describing is the money. It's the money system. Well, and that, you know, of course you have a presidential election that's, uh,
Peculiar to say the least. But it doesn't matter who wins that presidential race. Neither of them are talking about the fiscal situation that you're referring to, the sovereign debt situation, the deficit situation. And especially because I think you make a case and you were the first to do it of how mathematically fair
compelling it is when you're now well above 100% for just military, you know, for entitlement and interest payments. Well, which one do you cut? As you've pointed out many times. Well, none of the above. Oh, that's a problem. Yeah. To me, people say, when's that going to matter for the U.S.? It started matter in 2022. You know, I mean, it started matter in 2019, arguably with repo, but it for sure matter in 2022 because that's when the gold market told us it mattered.
U.S. real rates, which is just the interest rate of on 10 year treasuries, 10 year real rate is just a 10 year treasury yield minus the rate of inflation. And if you turn that, if you invert that rate, so inverted 10 year real rates, that has always correlated very tightly with gold over virtually the entirety of my career. And I've been doing this 29, almost 30 years now. So the.
Those two things have always correlated, which makes sense, right? The lower, if you have negative real interest rates, gold should go higher. If you have positive real interest rates, you are being paid a positive return over and above inflation on a 10-year treasury yield that competes well with gold. Gold should go lower. And that always held until 2022, when all of a sudden those two things diverged. And that was a really critical moment that I still see many people in mainstream finance thinking,
They don't even pay any attention to it, let alone really highlight the message of it, which is that rates going up with debt to GDP and deficits to GDP this high increase
the fiscal risk, increase the default risk of the US government now because debt and deficits as a percentage of GDP are so high. Now, the US is never going to default. They can print the money, which is exactly why real rates, why gold is diverging from real rates, is the market is going, oh, they can't make this math work unless they print the money.
unless they slash defense or slash entitlements or slash interest rates. And we've done the math where people say, well, we just we're running a deficit of 7 percent of GDP at full employment. We just need to cut four points of GDP, you know, of deficit of four percent of GDP. And you go, OK, great. Let's let's let's run through that. The great financial crisis, U.S. GDP fell three percent and it was enough to bring down the whole system.
virtually. I mean, we were within weeks or days of the system collapsing. That was a 3% decline. We're talking about four points here. So you're going to take four points of GDP out. So your GDP is going to fall probably by quite a bit, given the leverage in the system. Even if we assume that GDP doesn't fall, which would actually leave debt to GDP higher, not lower from GDP cuts or from deficit cuts, paradoxically, you're still a 4% cut
a 4% of GDP cut to the deficit. Mathematically, if you're not going to cut rates, you're going to still fight inflation. Then really the only things big enough to cut are defense and entitlements. And that would require a 25% to 30% cut permanently, immediately to both. You're going to have a political revolution in this country. And that sets aside, like economically, you're probably going to have a depression. And critically, if you have a depression, you're going to have to stand aside as you have this fallout like you had
in 2008 when GDP fell three and you do nothing. Banks need to bail out, do nothing. Depositors lose all their money over $250,000 per account, do nothing. Layoffs occur as corporations lose their money over $250,000, do nothing. And
that's, of course, that's never going to happen. So it's the old Sherlock Holmes. Once you eliminate the improbable, no matter how, you know, once you eliminate the impossible, no matter how improbable, whatever remains must be the truth. And you kind of eliminate all that, whatever must remain is the truth, which is they're going to have to print the money. They're going to have to print the money. And that's what gold real rates divergence in 2022 began hedging and continues to hedge.
And I think of all the geopolitical fallout also. I mean, there's many fallouts. I mean, you're talking about the U.S. dollar in quotes, the reserve currency, the medium of exchange, you know, and trade. As a store of wealth, I think people are already starting to vote on that. Exchange, I think, gets more difficult. But I'm thinking of countries that have borrowed. You mentioned at least the U.S. borrowed in their own currency. What about the countries that did not borrow? And now you've got commodity prices going up.
to compensate. One of the pieces you did that I thought was terrific is going a little bit deeper and saying, well, where are you going to find copper that was cheap? It's not the so much copper is that you can't find anymore. You can't find oil. The extraction process has just got so much more expensive. So I just look at all this coming at me, you know, and saying, I'm a third world country. I got to sell my treasury bills because I need U.S. dollars to buy energy. You know, it's I'm just pointing out how interconnected it all is.
Yeah, and it does have a geopolitical angle, right? Because Japan needs to sell as oil prices go up and the yen goes down. They need to sell treasuries to buy dollars or to raise dollars to buy oil. China doesn't. China can print yuan for oil through gold and is doing so. And so there is this view, well, let's just strengthen the dollar and we will blow up the world and we will be the last man standing. The problem is we won't this time.
At least we will be the last man standing relative to our allies, Japan and Europe, Russia and China. They'll take some pain, but they're not going to blow up like our allies. And so it's almost akin to like this weaponizing the dollar is a little bit akin to like a strategy of the U.S. going and bombing Europe and bombing London in the summer of 1940 to soften it up for Hitler. Like, yeah, what a stupid idea. Like we would never do that. Well, that's essentially what we're doing here.
As long as China can buy oil and other critical commodities in their own currency through gold and through their own production, right there, who wants you on? Nobody wants you on. Well, the Russians are taking you on and then they're recycling it into Chinese goods and into gold on net.
Everybody wants gold. Everybody wants Chinese goods. For as much as you talk to any American senator, politician, consumer, executive, they can spend all day bad-mouthing China. And then you can ask them, how much did you buy from China last year? And they're not going to answer that question because they know the answer is they bought a lot. And so everybody hates China. China's uninvestable.
go great go three months without buying anything from china tell me how your business is doing at the end of it so there's a geopolitical angle to it that is um it is a western policymakers certain western policymakers at least laboring under a misapprehension which is like let's weaponize the dollar like we did in the 80s and the whole world will burn down and we'll be the last man standing and we can buy up the world on the cheap and de facto we're watching some places yes or tell you worse than others but we're we're
We're going to take down our allies first. Our allies, Europe and Japan in particular, UK, are going to go down way before the Chinese do. We've already seen it. American banks have gone down before the Chinese have gone down. Why? Because they can print dollars for energy. That has never happened before. None of us alive have seen a cycle, certainly as investing professionals, where another country, another major...
and oh, by the way, the world's biggest oil importer, can print their own currency for it. It was always only dollars, and that's not true anymore. The marginal barrel of oil globally is now priced in yuan, not dollars. You know, there's so many things, and that's what I mean. It's a complex subject that you guys do great at, you know, Forest for the Trees. A couple of things just jump out, and one is pretty straightforward. I know you get asked this all the time, but I'm not looking for a crystal ball. I'm looking for a direction. So, for example, in Canada,
2015, it took $1,500 Canadian dollars to buy an ounce of gold. We're now at about the $3,300 mark. As an example, we, of course, get chronicled every day on what's going on in the U.S., in U.S. dollar terms. But are you looking for a big monster move in gold over, say, five years or so? I mean, again, I'm throwing a time frame at you. You can use your own. Just to give people a sense of it. I think about gold to me is one of these things where
So you have to be there. You have to buy a ticket on the ride to go on the ride kind of a thing. And we've seen that even this year where nothing, nothing, nothing, nothing. All of a sudden it moves 30% in three months in dollar terms. And what is so crystal clear to me is that gold is coming back into the system as a neutral reserve asset.
That's when you see the headlines that central banks bought record amounts of gold in 2022, 2023. They're looking at even more in 2024, including some developed world markets by central bank, developed markets, central banks buying gold up.
I look at gold as it's coming back in as a neutral reserve asset for a very simple reason, which is America told the world in 2022, if you do something we don't like politically, we will take your treasuries with the Russians. Yeah.
I think ultimately it's actually probably a really brilliant strategic move by the U.S. because ultimately for the U.S. to reshore and to rebuild its defense industrial base, it needs to discredit treasuries as the primary global reserve asset. And this says de facto has done that. I think gold is coming back into the system as a neutral reserve asset for commodities, which is to say when China, nobody wants you on, nobody trusts you on. But
they will take yuan because those yuan are good for Chinese goods. And to the extent there are certain yuan surpluses left over, they can buy gold with them. And the price of gold and yuan is going up. Uh, and so holding gold increases your yuan purchasing power terms, which increases the amount of stuff you can buy from China, which is good for your quality of living, uh, your standard of living. Uh, it's a virtuous cycle. So I think when you talk about the price of gold, I think about it in terms of it, uh,
relative to commodities, specifically to oil. A, oil is the biggest commodity. B, it's just easier to quote. In 2008, gold bought you eight to nine barrels of oil. Yes, eight to nine barrels of oil. In today, it buys you about 30.
And I think that number over time is going to 100 to 200 barrels per ounce. I think that's where this is going. Could that happen in a quarter? Yes. Could that happen in 10 years? Yes. Ultimately, I don't really care because the increase in that for the average investor shouldn't care about it either. We're talking about preserving and growing standards of living. And all that matters for your standard of living is energy. That's the key.
And if you don't believe that, like fly commercial and then fly on a Gulfstream 5. You know, who lives the higher standard? The guy on the Gulfstream 5 private jet or the guy flying, you know, commercial on Southwest? So gold...
I think will continue to rise versus oil. By virtue of that, I think it will rise versus virtually all currencies. You can make cases about which ones it goes up more or less than. I think Bitcoin probably does this at least as well as gold. But that's how I think about gold is this as it comes back into the system because the dollar, the treasury bond is not trusted as much anymore as a reserve asset.
for both economic and geopolitical reasons. And there's no one else that's either trusted or big enough or even wants it. Like even if the Chinese could, they don't really want this. The Japanese can't, the British can't, the Europeans probably could once upon a time, but not anymore. And those are the other SDR currencies. Other than that, there's nobody else big enough to do this. So it has to be gold. And that's what we're seeing. And it's still very early days.
Yeah, it's interesting to think as you're saying that. I just gave the example of $1,500 Canadian and $215 now buys, you know, it now takes $3,200, $3,300 for gold. Very similar with oil. It was $56 Canadian, $56.50 generally around the beginning of $215. Now it's about $110. So in gold terms...
You know, it hasn't moved, but it's doubled your cost in dollar terms, which is the point you're making. It's just fascinating to see. You put up a couple of charts very recently on Twitter. And again, you just go to at Luke Groman on Twitter, just showing how, you know, how stable the price of oil has been if you were measuring in gold terms.
And that's, again, the point is protecting your purchasing power as we go through. Let me just finish one last thing. Just, again, just that people are concerned, obviously, about interest rates.
One of the things that occurs to me is that the U.S. Federal Reserve doesn't control interest rates maybe as much as people think. Because as I say, if some other country starts dumping their long-term treasuries, of course, that means the price goes down and the yield goes up. It just feels like a more volatile situation than generally, I think, appreciated. I think it depends on...
It depends on the currency, right? So the Fed could buy every piece of paper Treasury issuances or issues. Good point. And in extremists, they could, and I think they eventually will for a bit. The higher the debt goes, the more the higher the debt and deficits go, the more likely that outcome becomes. And we saw that in World War II.
You know, people say that all the time. It's like, well, that the GDP was 110% after World War II we got out of it. Sure we did. Inflation was 13%. The Fed bought every bond that Treasury issued. They bought the front end at three ace. That's where most of it was issued. They bought the long end at two and a half. And bondholders lost a lot of money on a real basis. Have a good day. Thank you for your donation to the war effort. And that's how it's going to go again in some way, shape or form. So
In a vacuum, the Fed has less control over the yield curve than I think is often said. The more indebted you get, the more you get into a fiscal dominance type of situation. To me, it is not true that the Fed can't control it. They absolutely can. But the higher the debt and deficits go, the more extreme the inflationary outcome will have to be for them to maintain control. Because
you know the dirty little secret in all this is that you know treasuries are the collateral underpinning everything else so if you do get some sort of bond market calamity that's the collateral underpinning everything else everything else goes down but the everything else stocks etc etc
drive the marginal receipts in the United States. So stocks go down and stay down in the United States. You're going to see receipts go down and stay down. We saw this in 2022, 2023, your deficit's going to blow out. So your issuance of treasuries is going to go up, which means the rates would go up more, which means the stocks would go down more, which means the issue, the receipts would go down. You go into this debt spiral. And so it's, it, the, the barring a productivity miracle, the path is very clear. There's, there's, there's,
Will they stand aside and let a debt spiral happen or won't they? And if they won't, then the Fed at some point will, barring that productivity miracle, have to buy enough issuance to create probably pretty high rates of inflation, significantly negative real interest rates.
And again, I think you've described beautifully what the situation is and then how do we protect ourselves. But that's why it's on an ongoing basis. And Luke, I really recommend people go to at Luke Grohman, go to FFTT, go to, and as I say, tune into YouTube, check out what Luke's doing. The Q&A from the public and his subscribers is excellent. And we really appreciate you finding time. Great job as usual. Thank you very much for having me on, Mike. It was great catching up again.