Transcription
The Fed is running its first quasi-fiscal deficit in its 110-year history. We have a big problem, as you said, and they're guaranteed to lose money to be liquidated. That 43% decline in outlays, if it was continued for another few months, would be catastrophic. We're at the end of a 150-year experiment/Ponzi scheme with Western social entitlements blowing up.
You escape one system into the next. It's not a trade. Really? You want to sell gold and Bitcoin for dollars? Why? That makes no sense to me. It's really good for stocks. It's really good for inflation. It's really good for gold. It's really good for Bitcoin.
Knowing all of this, how should people approach this market?
You know, I think, all right, Luke Groman, uh, thank you for taking the time to come back and talk to me today. I think it's been about a year and a half. Very excited to talk to you today.
Has it been that long? It doesn't seem like it. Time flies when you're having fun, I guess, huh?
I think the last time we sat down was in, uh, Bitcoin Nashville, which was, uh, last summer, a little over a year ago. A lot has changed in the world since then, and some stuff maybe not so much. You mentioned that Amazon just announced some big layoffs. So AI is taking jobs. We have, uh, critical infrastructure that needs to be built in the United States. We have, uh, the dollar Dutch disease that you talk about regularly. Give us a frame that we are looking at the world through right now from a macro perspective. We are in a sort of precarious point where things are, we've reached a stable equilibrium, I would say, but precariously so. Um, we've got, um, we've got the economy slowing a bit, uh, which I think would put, all else equal, pressure on the fiscal situation from the receipt side. Asset prices are pretty much at all-time highs, that's helping things, all else equal. Uh, we've got, you know, the geopolitical and trade situation, uh, in a state of flux. I think there is a dawning recognition. Um, I think we've moved from the denial stage of grief, if you will, regarding US and China relative, uh, trade leverage levels, and actually Russia and NATO relative leverage levels in Ukraine. And I think we've moved on from denial. Um, probably somewhere between the anger and bargaining stages. Uh, there seems to be this sort of bargaining stage of grief, and particularly as it relates to the China trade initiatives, that, you know, we've misallocated capital for 20 or 30 years, and we've redirected labor into finance instead of engineering and skilled trades for 20 or 30 years. And somehow, through hard work and magical thinking, uh, we're going to be able to sort of rebuild that and unwind those mistakes with a minimum of disruption and pain in one to two years. And I think that is, uh, overly optimistic, to put it, uh, mildly and kindly. Uh, and then you've got this AI overlay within all of this, which is a, uh, is fundamentally incompatible with our debt-based monetary system. Right? We just had, you know, last week we had a New York Times article, uh, that was an internal leaked Amazon document, but they weren't going to, they weren't going to hire 160,000 workers they would have otherwise hired because of robots. They think that number will be 600,000 by 2033. This is the second biggest private employer in the US. Arguably one of the most efficient companies in the US. Uh, arguably de facto subsidized by the US government through government Amazon Web Services contracts. And yet, this is what they're doing. And all of those people presumably have consumer loans outstanding as they get laid off. They all have mortgages of some description or are renting in apartments who will see vacancy rates rise, who landlords tend to be, uh, levered borrowers in commercial real estate. Uh, and so the, what is right now being still espoused as a productivity miracle in AI, uh, people are, in my opinion, right-tail translating or sort of smoothing over all of the productivity gains without giving really any thought or appropriate weight, at least, to the disruptiveness, uh, of that productivity. So, uh, it's a pretty tricky moment in time, um, where, like I said, I think we have a momentary equilibrium, uh, but a lot of things working to, uh, to destabilize that equilibrium.
So you mentioned that we have sort of a demographic problem. We have a situation in the US where we don't really have the skilled workforce that we've had in the past. But then you mentioned AI, which is then being more efficient and potentially disrupting the labor force. But couldn't that also help the labor force? Right? So we do have an aging demographic and we don't have as many skilled workers. And so how do we move forward in that environment? It could be dangerous. But can't AI come in and help with that efficiency?
If it does so at exactly the right pace and in exactly the right areas, yes, it could be sort of a miracle solution. The challenge, you know, is that, um, in multiple ways, there's mismatches, right? So, um, we don't have the grid to do what we want to do in AI, per se, in certain areas. So, that's an issue, and we're short, or will be short, um, some of the skilled trades we need there. Um, in theory, robots can do some of that, some at some point, but then you get into the, as it does, as it displaces labor, if it does it too quickly, it starts to touch off a consumer credit and banking system problem where, you know, people who see their wages fall or lose their jobs because of this, you know, they don't pay their mortgages on time. They don't pay their car loans on time, etc. Uh, that creates a credit problem, and, you know, banks have reserved treasuries, uh, per regulatory mandate, uh, as their liquid capital, uh, to sell to paper over losses if this, you know, whenever this gets out of hand. And, you know, one of the things I've seen in the last month or so that's a little disconcerting on this front has been a Wall Street Journal article noting that unemployment rates amongst 20 to 24-year-olds with bachelor's degrees are up to 7%.
Um, they would be the first place you'd see this because, you know, AI is, you know, sort of a, that's who it displaces first, are your least experienced, uh, sort of accredited workers, right? Uh, degreed workers.
Right. And you're starting to see it. And if you apply a 7% unemployment rate to across this economy, like, kaboom, it doesn't work with that with those numbers, let alone 8%, 10%, or, you know, heaven forbid. You know, we had, we had a productivity miracle when China came into the WTO, and we lost a third of manufacturing workers in this country in about four or five years. Something like that happened across certain white-collar sectors. Um, you know, Katie bar the door, and that's why I say it's fundamentally incompatible if it arrives too quickly, and it appears to be arriving too quickly.
So, it's more of a displacement issue. When you look back through all the technological revolutions of the last couple hundred years, each one does get rid of a lot of jobs, but then it creates more jobs than have been lost. Things don't operate in a vacuum. So all of a sudden, it creates more demand in areas we didn't know about. But there's that bubble, that displacement bubble we have to get through. But it looks like something you've talked about quite extensively is what happened in the Rust Belt, right? So with China coming into the WTO and all the jobs going over there to China, that sort of hollowed out that industrial base, you know, in the Rust Belt in middle America. I would say like, one, I think that happened. Number two, though, we went from an industrial era to an information age, right? And so we went from assembly line to now working on IP, information systems, etc. Isn't it sort of part of like a society as it advances to sort of get rid of the lower-level tasks, picking cotton in the field, making textiles, for example, and then maybe even manufacturers to keep moving to the higher-level things? So was it more, I guess, was it both of those? To me, it sort of seems like it was technology that disrupted those middle workers, middle America workers, more than wanting to offshore them because of the dollar, you know, um, the need to offshore dollars. You've heard me talking about investing in layers and things like the reason you have to work so hard is because your money doesn't. Well, I want to invite you to a special event. I'm having a 3-day live event called the Wealth Operating System. It's an accelerator event where I'm going to teach you all the tools that the 1% use to have their money work harder than they do. Getting their money to do one job, two jobs, three, five jobs at once so it can work faster and harder than you. Over 3 days, we're going to go deep. I'm going to bring in guest speakers. It's workshop style. I got about 15 tools, and we're going to go through a methodical process so you can learn how to reclaim 10 to 15 hours of your time back per week, how to keep more of your money, how to invest it and multiply it faster than you've ever imagined. By the end of it, you'll have a 90-day plan of exactly what you need to do to go make 2026 the best year you've ever imagined. It's all going to be live. It's all going to be virtual. There's a link down below if you want to come check out. I'll put a QR code up on the screen. If you want to get your money working harder than you do to grow your wealth faster than you've ever imagined, like the 1%, check out the Wealth Operating System accelerator event. Check out the link down below.
Yeah, I think that that kind of thing has happened and and it is, you know, when I look back to say, prior technology booms, right? So go back to the late 1800s, you know, we had railroads and we had, you know, cars and you had the discovery and commercialization of oil and fossil fuels. And then, you know, you come into 1914, and you have four major empires, and they, by 1918, three of the four are gone and dead, and one of them has basically ceded its reserve status to America in the aftermath of it. And so it's not to say this kind of thing hasn't happened before. It certainly has. And, you know, when you look at say, okay, you know, had this conversation with somebody the other day, and they said, look, you know, they called up Grock, hey Grock, what was, you know, sort of, you know, the boom associated with that? And I said, well, hey, I replied by saying, hey Grock, what percentage of the human population in the world in 1913 was killed in wars and political revolutions due to the fast pace of economic socioeconomic change from 1914 to 1945? And Grock said, about a 100 million people, and that was equivalent to roughly 5 to 6% of the population alive in 1913. And what I didn't then ask Grock is, say, "Hey, what percentage of that was of Eurasia, since most of those deaths were in Eurasia?" And it's probably closer to 10 to 12%. Right? So, it's one of these things where, yes, over time, these technological shifts, uh, inevitably move human progress, intelligence, etc., higher. Um, the challenge is, A, it's nonlinear, and B, we've never done it with debt to GDP at postwar levels. It's all, you know, we've always been at pre-war levels. So we're at postwar levels of debt to GDP. And the other thing we have is that we've, we're at the end of a 150-year, you know, 150-year experiment/Ponzi scheme with Western social entitlements blowing up, you know, right? It's, if you went and said to the average investor, and as you know, we wrote about this last week, was when you're in a Ponzi scheme and people start taking more money out than are putting money in, 100% of those Ponzi schemes have blown up. And that's what's happening in Western social entitlements and has been for 10 years. And there's like this magical thinking that, well, this won't blow up. Like, everyone knows it'll blow up, but everyone's sort of hoping it'll blow up on someone else's watch. And the reality is is that as fast as it's blowing up, AI is going to make it blow up way faster. Like it will, you know, they think it's going to run out in 2031 or 2032, one of the one of the funds. AI, what if AI makes it 2028, 2029? Then what? And to me, it's ultimately all about, well, the Fed's going to have to backstop it. They're going to have to more fully reserve all this debt because ultimately their mandate is to backstop the banks. And this will take the banks down. And when you talk about entitlements, you're talking about, um, Social Security, Medicare, Medicaid, uh, those types of things. And you've talked about that the government can't print healthcare, right? They have to pay for those services. That's money that's owed. So we have, that's it's a good frame to work from. So we have this situation where AI is disrupting. We have this aging workforce. We have, uh, debt to GDP, to your point, uh, extremely high, over, you know, World War II levels. And then what, what do we do about it? So we saw Elon Musk come in with Doge or he's going to change the world. He left saying, "Okay, there's no hope. We can't cut spending. We have to grow our way out of it." Scott Besson said we have to grow our way out of it. And now it looks like re-industrialization, drill baby drill, pro-energy, and grow our way out.
Yeah. I was going to say, and that doesn't happen without a bunch of government intervention and spending.
You've got, you've got to run it hot. You've got to, you've got to effectively have to either explicitly or implicitly do some form of yield curve control because otherwise interest rates are going to rise and more than offset any of your, your initiatives. Right? So, we've started to see the government appears to be cognizant of this, right? We've seen Besson say it, we've seen Trump say it, we've seen, uh, Musk say it. Um, and that sounds good, but they're still not saying the quiet part out loud, which is, who's the sucker at the card table that's going to hold the 10-year paper at 4% when we're growing the economy 10 or 12 nominally or 15 nominally with, you know, 5% real and 5 to 10% inflation? And there is no private sector sucker at the table that will do that. That will have to be regulated into. And we, Fed, we've, you know, we've been doing some form of that for going on 10 years in terms of regulating banks, regulating money funds, regulating pensions. You know, Trump's 2018 tax cuts provided for a tax incentive for US pensions to buy more Treasuries. So they've been doing these kinds of things. But by virtue of the fact that debt to GDP is still higher post-COVID, they haven't worked. It's not been enough. It's got to be more aggressive. And so, yeah, I mean, it's ultimately about significant financial repression. Right now, we're sort of still in this bargaining phase of grief about it, that, you know, we can grow our way out of it, and we can work really hard, and we don't need to crush bondholders, the real value of their bonds. And that's just a lie. Mathematically, it's impossible. So, uh, but the challenge is, like, the second they say that, the bond market's going to revolt. So they sort of need to try to boil the frog slowly while also moving more quickly because, you know, China's moving faster, and the debt continues growing, and AI is accelerating, putting more pressure on it. It's an unenviable situation in which they find themselves. And ultimately, I think it's, you know, we started to see more volatility in, in, in, you know, certainly gold markets, other markets in recent weeks. Um, I think it's a much more higher volatility sort of baseline. And I think it's ultimately, it's really good for stocks. It's really good for inflation. It's really good for gold. It's really good for Bitcoin. Uh, it'll probably continue to be good for, for, uh, certainly certain types of real estate, hard assets. And I think it'll be good for wage earners, but I'm not sure it'll be good for, for sort of white collar. Um, you know, I think we're might see a reversal of what we saw from 2001, you know, shoot, from 1982 to 2020. Uh, I think the next 40 years might be really good on a relative basis, certainly for wage earners, skilled trades, engineers, etc. You know, even if they're prompt engineers as it relates to, you know, to chat GPT and AI. So, you know, but running it hot and repressing bonds is the only way out.
So it seems like that is the only option that they have, at least the only option that anybody's going to stomach or bear. Um, but at the same time, it seems like, well, you mentioned it when we started, that assets are basically at all-time highs. It seems like Bitcoin hasn't really been responding like most people think it would. Gold's kind of stealing the show. What's your take on that?
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I'm of a couple of different minds. I, I, my base case is that we've seen this pattern where, you know, sort of gold goes, and then Bitcoin goes, and then gold goes, and then Bitcoin goes in the last few years. And I think it's, maybe it's maybe that. I also think part of it is, uh, particularly amongst shorter-term traders, uh, Bitcoin has traded with NASDAQ increasingly in the short term, and, you know, the NASDAQ, for a number of different reasons, has kind of been range-bound through much of the summer. Um, and I think there are some secular, there's reasons to be potentially secularly concerned with the NASDAQ or certain high-flying parts of it. Right? You know, can China win in AI? Right. Right now, if you, someone showed me an AI leaderboard the other day, someone in that world, and, you know, they said, hey, for what it's worth, this is based on what are supposed to be objective metrics, you know, top 10 AI platforms, half of them are Chinese, half of them American. Right? So, like, you're spending hundreds of billions of dollars in capital in this country to build that out. What happens if China does to AI in the NASDAQ what it's done to sort of every other industry in the US that has attempted to do that? Do, you know, I suspect some concerns around that, some concerns around the capital intensity, etc., uh, are weighing on the NASDAQ. Um, you know, some of, uh, the trade war has as well. So, I, I think in the short run, some of what is holding Bitcoin back has just been that, you know, that short-term view that, well, Bitcoin is just NASDAQ, you know, a high-beta version of NASDAQ, up or down. And so, if NASDAQ's not ripping, there's no reason for me to get involved in Bitcoin. And, you know, there's something to that over time, of course. If you go back five years, 10 years, you know, they are still very, they rhyme, but Bitcoin has crushed NASDAQ, right? So, and I still think that'll be the case. But I think those are kind of, and I guess I would layer on one last one, which is, you know, we're to the end of the four-year cycle on Bitcoin, right? So, you know, four years ago was the end of '21, we sort of had that last little blip up into the $60,000 range, and then, you know, 2022 was sort of, you know, kicking the, kicking the crotch after kicking the crotch for Bitcoin holders. And 2017 into 2018, same thing. 2013, 2014, same thing. So, I think there's a lot of people that are very cognizant of that and are skeptical that it's different this time. And I think that's a reasonable, uh, you know, a reasonable view. So, I think sort of the combination of all those three things, um, are probably, you know, drivers to the reason why Bitcoin doesn't seem to be responding. Um, you know, let's see. I'm still seeing, you know, I would feel a lot worse about Bitcoin sort of being range-bound if I was seeing people telling me, you know, what I'm saying, which is like, they're going to have to repress this thing so much, you know, and, you know, there's no way they're going to be able to win against China without running this thing super hot. I'm not seeing that. I'm still seeing a lot of bargaining and wishful thinking and sort of, you know, idea machine, as one of my friends calls it, right? Right? It's like, well, we'll just, you know, we're going to, we're going to mine all our mines. It's like, okay, great. Where are you going to get the turbines? Um, we don't know. Well, the lead time in turbines is three years. Okay. Well, how about the permitting? Well, we're going to get that. You know, that's normally four to five years. Oh. Uh, well, okay. Well, we're going to build a rail yard into those mountains. Great. Where are we getting the steel? Where are we getting the welders? Where are we getting the engineers? Are we going to take them off the AI programs? Are we going to leave them on the AI program and bring in foreigners that you just closed the border on? Like, so there's a lot of like, the idea, how to do it, that part's easy. There's an execution side that is being sort of, you know, smoothed over by Washington and Wall Street that I would sort of summarize as, you know, "Other than that, how was the play, Mrs. Lincoln?" Right? Like,
You know, "Other than the fact your husband was assassinated at the play, how was it?" You know, that's the whole freaking thing, right? That's, you know, if you can't execute and put this order of operations together, you know, so let's see. Let's see how that plays out when it comes out. And I think it is a win when it comes out that this isn't going to get fixed in a year or two or three years or four years, that this is, "Hey, we're going to need to do 10 years of really aggressive investing in inflation." You know, look, if Bitcoin's down or doesn't do anything on that, that's probably going to force a rethink on my part and a lot of people's parts. But until I see people telling me that, you know, I, I, I remain bullish.
Well, to your point about it sort of trading with NASDAQ and looking at it as sort of like the speculative play. I mean, JP Morgan came out a few weeks ago and called it the debasement trade, talking about gold and Bitcoin being at the, this the safe haven from debasement. So rather than sort of people looking at it more speculatively, it seems like mainstream or traditional is coming around to it being more of that safe haven asset.
Yeah, I think that's right. And, you know, I, I think it's an important sort of signpost, as I like to call them, along the way of, you know, we've gone from from traditional finance saying it's, you know, whatever, rat poison, and then, you know, whatever they want to call it, uh, a Ponzi, what have you. Now it's part of the debasement trade. I, I think that's a huge, that's a huge step. Um, I don't think it's far enough because I think ultimately where we are, there's no debasement trade. This is a debasement trend. We are into fiscal dominance. The Fed is running its first quasi-fiscal deficit, which is just a fancy way of saying operating loss in its 110-year history. Once Brazil started running quasi-fiscal deficits, once Argentina started running quasi-fiscal deficits, gold and Bitcoin went from sell the rip, you know, debasement trades to buy the dips, debasement trends. And I think that's sort of, uh, where we are, where there's still this view is like, okay, well, I'm going to have to get out at some point and, you know, sell Bitcoin, sell gold for dollars. And yeah, for a trade, sure, but like, really, you want to sell gold and Bitcoin for dollars as we're talking, like, into this setup? Like, why? Like, it makes no sense to me. And so I think that's still on the come. People will come to that.
I think of the book "When Money Dies," and they talk about how people sold all their assets for dollars because they were at all-time highs, and at the end, they burned the money in the fireplace that was worth less than the wood was. And so it's like you escape one system into the next. It's not a trade. It's like you're leaving one for the next. Um, but you mentioned that the only real way out is through financial repression. Stealing from bondholders. The, I think the largest market in the world is fixed income, over $300 trillion, about $145 trillion that it's fixed or securitized, tradable on fixed income. You have the demographic. So we have this aging population that needs that income. How much have you looked into what Michael Saylor is doing with the preferred strike, stride, and now specifically stretch by taking Bitcoin and stripping the volatility off of it and offering that digital credit, that yield off of the digital asset?
I've not looked into it a lot. Um, you know, I should. That kind of thing would make a lot of sense if you can sort of, you know, engineer that into, um, an instrument, and that would be very good for Bitcoin demand, uh, obviously, and would help people in that position, right? Where, you know, because, yeah, you've got retirees who own a disproportionate percentage of those $300 billion or $300 trillion, excuse me, or whatever bonds. And, you know, the other side of that is, is, you know, here in the US alone, they're the ones owed $120 trillion in Social Security, Medicare, Medicaid, right? So, it is, you're making the, you know, repressing them is making the people who owe the money, and yes, they've paid into it, but they haven't paid in enough for what they're taking out, otherwise it wouldn't be blown up. You know, it's basically a tax increase on the people who are, you know, who are using the goods. The challenge is that, you know, if they have to start selling stocks to pay for that, you know, the stocks de facto back the treasury market through the government receipt and the consumer spending. So, like, you can't have them sell down stocks to help fund that. You've got to keep all assets up, or else the whole thing comes unwound. But yeah, in theory, something like that would help. I just haven't dug into it, uh, as much.
Yeah. I mean, we have a big problem, as you said, and they're guaranteed to lose money to be liquidated. And so they're going to have to find an alternative. Um, so anyway, it's worth it's worth doing some digging into that. I think it's pretty interesting. So, knowing all of this, the inevitability of this, how should people approach this market? Maybe kind of break it down, you know, maybe by age, demographic, or time frame, but like, what should they be paying attention to, um, and kind of positioning for?
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I think one of the, the, the wiser allocations I've seen, it was something inspired by a man named Jacob Fuger, F-U-G-E-R. I think he was Dutch, uh, way back in sometime in the Middle Ages, who was a merchant, uh, and by share of the economy, he was one of, if not the wealthiest man in history. And what he advocated was 25% gold, 25% cash, 25% real estate, productive real estate, which, you know, farms, timberland, etc., and then 25%, I think he said government bonds. Technically, I would put that not in government bonds, but I would put that in high-dividend, you know, dividend-paying, blue-chip equities. And then rebalance when you need to rebalance. And I would say of the 25% in gold, you know, I would, I would balance, I would split that with Bitcoin depending on your age. If you're younger, I would probably, and have more of a tolerance for higher volatility, I would probably have, you know, more than half of that in Bitcoin and smaller in gold. And if you're older and closer to retirement and less of a stomach for volatility, I would have that more in gold and a bit less in Bitcoin, just maybe just a sliver in Bitcoin to capture and participate some of that upside. And if I was older and close to retirement, I would probably put, you know, some of the 25% that are in equities and put them into, you know, some portion I would put into high-grade corporate bonds. You know, I wouldn't put them in long-term government bonds. I just think I would much rather have, you know, I think I think at some point in this cycle, you will see high-grade US corporate bonds trade, you know, trade through, as they would say, similar tenor government bonds. You know, I'd rather own a Microsoft bond than a US Treasury. They're both going to get paid. I just think it's, you know, I think that's how they're going to trade. So, that's what I would do. And, you know, Ray Dalio's All Weather Portfolio was inspired by Fuger's allocation. But I think the key is really having balance, uh, because we are just off the reservation in a number of different directions. I mean, this could break severely deflationary. It could break severely inflationary. It could not break. It could muddle through. It could, there's, there's, if anybody tells you they know how this is going to go, like, run in the other direction. Certainly me, like, I don't know how it's going to go. I want to have sort of balance across that. So that's, that informs some of how I'm positioned, and I think that's, I think it's a wise allocation for the world as it is today.
How could it break deflationary?
For deflation? I don't know.
To deflationary. I don't know if there's any precedence ever that I've ever seen where a government says, "Well, it was a good run. Pack it up, boys. Let's just stop." Right? I've never seen that. Every nation takes it until it doesn't work anymore. Right? Diminishing returns. So what would it look like for it to break deflationary?
For it to really break deflationary? To your point, it has been the most rarest of things and it's only been temporary. Uh, when you control the currency, when you print the currency, they never choose deflation. It would have to be some sort of, you know, pandemic die-off, probably, right? Where, you know, there just isn't the demand, but there isn't a productivity driver to accelerate relative to that. Right? Um, I'm trying to think through this on the fly, but if you have population decline, but productivity advances faster, then you can still, you can, you can, in theory, improve, maybe improve living standards, but I'm not even sure that's the case. You, I'm thinking back to like the Great Plague, right? A quarter of the population in Europe, or 30% died. Yes, you were probably on some sort of gold standard. I'm not that familiar with it, or metallic standard. At any rate, you end up with a deflationary scenario where, you know, but even then, certain things, right? It was deflationary for the landlords and their properties and houses and rental rates, but it was very inflationary for labor, right? Labor all of a sudden had power. It was margin compressed. Couldn't,
To your point, it's very difficult unless the government just stands aside and just says, "Yeah, we're defaulting and have a good day." But even then, that's only going to be for a bit because the debt backs a currency. So it's only going to be for a little bit, and then you're going to have hyperinflation. So when we're thinking about long-term, we're trying to gauge the percentage of probabilities, and the probability of that happening is extremely low, and really would be a policy choice because right now, in financial, you know, fiscal dominance, the government running big deficits, they're essentially pushing the economy. They'd have to have a policy choice to stop that. And we'd see that coming. We'd see the appetite wane. Uh, we'd see lawmakers fighting. Uh, and we'd kind of see that happening.
Yeah, I think that's right. You know, it's it's interesting when you bring it up that way. Um, the US government spent 43% less in September than it did on average the prior 11 months, right? So, it spent $346 billion versus an average of $63 billion a month of outlays the prior 11 months of fiscal 2025. And of course, Scott Besson got on X and bragged about his $198 billion surplus, um, which was aided by a $107 billion negative outlay, which I think was a reversal of an education, a student loan accrual. Uh, but I would love to pay my taxes with a negative outlay. That would be fun. Like, I'll just send you guys a negative outlay and don't touch my bank account, non-cash.
Yeah. Uh, but the point here is, is that that 43% decline in outlays, if it was continued for another few months, would be catastrophic. It would be catastrophically deflationary. What's really interesting in this is the 10-year Treasury with that amount of a quarterly or, excuse me, a monthly decline in outlays, that it only went from four and a quarter to 3.95 or 3.97. Like, that's really something. That's actually very troubling. Like, if I owned, if I owned long-term Treasuries and they could cut spending for a month by 43% and all I got out of it were 30 freaking basis points on the downside, that's not really encouraging. I mean, that really speaks to your point on fiscal dominance. So, look, maybe if they kept doing it for another month or two, maybe they could get the yields down a bit more. Maybe it'd be, it would definitely be deflationary. But then again, because the federal government is 23% of GDP, the federal outlays divided by GDP is 23%. So, you cut that by 40% for a few months, you're going to be running GDP down 9 to 10% on a run rate basis. By way of comparison, the full year GFC was down three or four. By way of comparison, shutting down the economy for COVID, it was down like eight and a half. So, you would be like, literally tanking the economy. So, you could do that for a second until, you know, you would run into what we've run into, which is the Treasury market dysfunction. Yields just start going up in a recessionary environment, and then they're in a debt death spiral. And then, to your point, like, what do you want to do? You want to stand aside and just let this thing go into the ground at 500 miles an hour? Okay. But that's never how it works out. They come in and, you know, they print the money one way or another.
So they have to print the money. The debt keeps growing faster and faster. The rates are making it unsustainable. I want to, I want to probably try to wrap this up. Let me ask you to make a prediction for me. Not, not a price prediction. Trump has said he wants rates to be 1%. I believe he thinks that's where they should be. Trump seems to
2%.
I thought he said 1%.
1%. Okay. Yeah. Yeah.
I think Trump said he wants rates
He typically kind of gets what he wants. He's going to replace Jerome Powell next year.
Where do you think rates are? Maybe at the end of next year or the end of his term?
If he gets rates. Let's, and he's talking about Fed funds rates. If he gets Fed funds at 1%, he could get that. I wouldn't be surprised if he got that. Uh, to me, the $64,000 question then is, where's DXY? Where's gold? Where's a 10-year? If he has rates at 1% by the end of his term, I think DXY is low 80s, high 70s. And I think the 10-year, I think gold is probably $7,000 to $10,000 an ounce.
Wow. I think Besson has revalued it from 42 to whatever that number is and put multiple trillions of dollars into, um, you know, one and a half to two trillion dollars, maybe up to $2.5 trillion into the Treasury General Account and significantly curtailed long-term Treasury issuance. So, I think the 10-year, if Trump gets his 1%, I think DXY is, you know, 75 to 85, and I think gold's 7 to $10,000. And I think the 10-year yield is at where is it today? Four. I bet you the 10-year is at two and a half, three because ultimately I think they're just going to curtail issuance so greatly, and there's like this mindless bid for duration of whatever it is, $400 billion a year, $500 billion a year from duration matching. I, I could see that. And that's actually, that's essentially de facto yield curve control. With the dollar weakening that much, it's going to be massively stimulative. Nominal GDP is probably pretty good. Uh, how they reinvest depends, how our foreign partners reinvest, it depends. I could see that. That's, that's if, if he gets his 1%. Yeah, that's what I would say. I'd say 1% Fed funds, I'd say, what I say, two and a half to two and a half to three 10-year, and, you know, $7 to $10,000 gold and 75 to 85 DXY.
All right, you heard it from Luke. I nailed him on a prediction. Uh, no, I think that's great. I, I, I think he gets what he wants. It's going to be interesting to see how that plays out. Uh, I'm gonna, I'm gonna use that as a good time to break this thing off, Luke. Uh, I appreciate your time today. As I said, his one of the main newsletters I read every single week, Forest for the Trees. I'm going to make sure to link it down below. Everybody should read it, if you want this amazing, amazing research. Anything else you want to point to, Luke, that people should pay attention to?
No, I think I think that covers it. I appreciate the shout-out and, uh, always enjoy chatting with you and, uh, you know, I think it's going to be a fun, hopefully a fun, but certainly an interesting end of the year. So, you know, let's watch.
Yeah. Good. All right. We're gonna end it with that. Thanks so much.
Thanks, Mark.