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Hey everybody, Luke Grman, FFTT. Hope you are well. Hope you're having a great week. Going to lead in here with our audience applause. I love that that button there. Huge victory for the Cleveland Guardians last night over the Detroit Tigers. We are uh we're in first place now. We've we've overtaken them. Uh beat TK Scooble who is unbelievable to watch pitch in person. It was at the game. So uh he's he's really something. But we were able to uh guards ball him, small ball him out. So, uh, as always, thank you very much for, uh, your questions. Really enjoy these back and forth. In the interest of brevity, I'm going to jump right in.
First question is from Ken. Could you share what you see as key takeaways from Tobias Strawman's 1931? I've read the book and would like to hear your further elaboration and how it compares to today's situation. Uh just by way of context I uh wrote on X back in August that quote if you haven't read the book 1931 debt crisis and the rise of Hitler by Tobi by Tobias Strawman I would do it because it's like a road map for what is happening and likely going to happen. That's what I wrote back in August. So, uh h what grabbed me about it? Um 1931, uh Germany had lost a war that the population a big chunk of the population did not believe it had actually lost and and blamed its politicians for having lost it. Uh Germany's sovereign debt was unreayable on a real basis. Uh their industrial base had been hollowed out uh by post-war agreement and reparations. uh they owed uh war reparations that were impossibly large as a percent of their GDP u and that were inflation adjusting. They were owed in gold in no small part and therefore the more they printed the more the reparations went up. They had a government uh and this is highlighted in the book as well. They had a government that was trying to convince foreigners that it would repay its foreign debt and collect the reparations from the populace and pay the war reparations to foreigners while at the exact same time trying to convince their domestic audience that they would not repay the debt and they would not collect the reparations because they're extremely politically unpopular domestically. Because again, much of the domestic populace didn't believe they'd actually lost the war. And that led to rising domestic political instability, political tensions, political assassinations, shootings, violence.
Okay. How's it reply to today? Um, the United States lost the global war on terror. Uh, the United States lost the global trade war. Um, the populace doesn't believe it. If you don't believe me, they don't believe it. Tell somebody that in the street one day. Tell tell somebody in Wall Street, see how it goes. The the populace does not believe those things. Certainly not uniformly. Uh the United States has sovereign debt uh that is unreayable in real terms. That's why I keep saying the only way to make the math work, negative real rates. That's unrepable in real terms. Uh the industrial base in America has been significantly hollowed out by trade deals. uh the religion of neoliberal uh economic globalism uh has effectively done to the US defense industrial base what war did to a lot of countries after World War I after World War II. Uh entitlements are nothing more than inflation adjusting war reparations owed to uh American elderly. Uh we don't owe them dollars. We owe them in cost of living adjusted social security dollars. Uh and we owe them hips, knees, pharmaceuticals, doctor's time, things that uh are inflation adjusting. Uh and those inflation adjusting war reparations that we owe to boomers and silent generation are impossibly large as a percent of our GDP. Uh 400, 500, 600% or more of GDP. Uh we've got domestic politicians that are trying to convince um foreigners on some level, this has been less obvious, that they that they will cut reparations, right? Strong dollar Doge. Doge was an attempt to convince people that we were actually going to cut reparations while at the same time we've been trying to convince the domestic audience, our polit politicians, that we will never cut reparations, we'll never cut entitlements. So, um, all of this toxic mix is as then leading to political instability. We had the, uh, tragic assassination of Charlie Kirk. We've had a very polarized reaction to it. We had, I'm, as I'm recording this here today, Wednesday, September 24th. We had, uh, shooting at an ICE uh, facility in Dallas. Things are getting shippy uh, to say the least. I am not encouraged. So I think if you read this book it gives you a great road map because look people like to say it's never different this time but a lot of people don't seem to believe that uh by their actions. I like reading economic history because it's never different this time from the standpoint of human nature never changes. Fear greed you go back thousands of years humans fear greed and they react to the events. you can it it gives you some sense of where things could go. So I think it's a very useful road map. I'm not saying it is the road map. I'm not saying there is a Hitler coming something like that. All I'm saying is the setup is remarkably similar and at a time when we are sort of off the reservation in relative to the last 20 years, 30 years, 40 years, 50 years, 60 years, 70 years of economic history. Um, I'm not saying it's going to rhyme word for word, but boy, if it if it rhymes a little bit, it can be a huge advantage to investors uh to know what to look for. So, that's that's how I've thought of it.
From NC. Balance of trade issues aside, I was surprised by the press report that China is looking to become a preferred destination for nation states to store their gold. Are they really that trustworthy? Uh, in my opinion, no. Now, with an asterisk, I I think once again people saw a headline and they didn't really read the story and, you know, basically half of Wall Street immediately took off to kind of bash China um and say, "Oh, well, no one's ever going to send it there." China is very good at what I would call strategic ambiguity. Uh, and I suspect in this case that what the Chinese actually said about what they're doing was misinterpreted by the uh, the Western media that wrote up the stories. What do I mean by that? Well, number one, they did note the Western stories did note that it is a Shanghai Gold Exchange International Board. So, it is it is the SGI which was established in 2014 to allow international gold in and out of China. Um, that is number one. So you can take this gold with you. Now uh if China ever doesn't let you take the gold with you, if you are a a creditor of China and they don't let you take the gold with you, that's the end of dalorization. That's the end of international internationalization of remn. That's a massive strategic loss for China. That isn't going to be allowed to happen. So while I might not trust my gold there, I do think that there will be trust uh in gold there simply because the strategic implications are so great. So that's number one, right? Number two would again is is probably should be one a or or or you know ahead of one which is you don't have to worry about this unless you run a surplus against China to start with. If you don't run a surplus with China, then you're going to be paying them more than they pay you. Now, if they pay you more than you pay them, which tends to be commodity and oil producers around the world, then you could end up with some yuan and you could buy gold and store it there. Okay, great. So, but here's where the strategic ambiguity in particular comes in. An SGI vault could also be located in Saudi Arabia in other oil nations. It could be part of the SGI vault system is my understanding. And if that's if my understanding is correct, then this gets right into the strategic ambiguity part. Where would Saudi more trust having its gold? in an SGI vault in Riad or in London where the Bank of England already took Venezuela's gold or in New York where the US has already been party to freezing Russian FX reserves in the last three years. I know what do I always say? If you don't hold it, you don't own it. I think what we're watching happen is the Chinese are setting up SGI vaults at major trading partners with whom they periodically run uh deficits and net settling in gold. That tends to be oil. That's oil for gold. There's a lot more oil than there is physical gold. And uh while nobody might trust having their gold in China, everybody's going to trust having their gold in a Chinese SGI vault in their own house in their own country more than they will trust the Brits and more than they will trust the Americans. That's what I think is happening here. And I don't think many people uh have grasped that yet, but they will soon. So that's I think um I think gold is sniffing it out somewhat. But um you know I continue to expect uh the gold to oil ratio as high as it's risen to end up this cycle much much higher than where it trades today.
Next question. Russ, what are the various ratios you use to value gold? US debt owned by foreigners divided by gold, China trade surplus to gold, etc. Thank you very much. Love your videos. Thank you very much for watching. Uh I I look at a number of different ways. Um first in a vacuum. Um the price if you just look at China's record trade surplus in 2024 of I believe $990 billion and you look at China's gold imports which I think were 1,384 tons in 2024. Um if you valued gold at $22,000 an ounce, it would have b balanced China's trade. So all these all these westerners whining about China's unbalanced trade, it's not a it's not a trade issue. They imported a bunch of gold to balance their trade. It's the West's fault. If they would value the gold properly, if they would value the dollar properly against gold, which was $22,000 in 2024, then China would have run balanced trade. Stop whining. Compete. Uh if you want to compete, you're going to have to value the dollar properly versus gold. Okay? So, that's one way. Uh, another way we've looked at a number of times, have certainly talked about on this program, if you will, has been uh, United States uh, foreign held uh, excuse me, the market value of US official gold. So, 8,100 tons times the market price of gold uh, as a percentage of foreign held treasuries outstanding. Uh, prior to 1989, uh, that was never less than 20%. So, US for official gold collateralized our foreign debt by 20 at 20%. Uh, the long-term average was 40%. Uh, when we had an honest to goodness dollar crisis in 1980, it went to 135%. Today, with as much as gold has moved, that number is 10%. 10. That's how much the debt's gone up and the foreign held portion of it in particular. So uh that to answer your question uh you know I I think it could go 40,000 you know that gives you some frame right uh two times four times 13 in a real crisis which I'm not calling for but I think I think two times to four times is sort of still you know I think that's that's that's probably open field running still from this point unless something really changed which brings me to the next point right when I I started this answer I said in a vacuum these are in a vacuum answers Now we don't live in a vacuum. Uh is multipolarity expanding or contracting? It's expanding. Expanding notably. Uh post 1985 you saw the USSR starting to falter. Post 1989 it broke apart. Multipolarity that was bipolarity. It gone. Now we were in a unipolar moment. What did gold do? It went from 40% collateralized to 20% in 1989 when the Berlin Wall came down and kept going down. I think it bottomed at 5% maybe 2008 2010 um and has been rising slowly. It sort of bottomed along there for about 5 years in the 5 to 7% range and is now rising. It's up to 10%. So uh you've got to watch for I think multipolarity why it's so important to watch is ultimately there are no other reserve assets to compete with the dollar. People are right when they say that gold competes with the dollar. Gold competes with treasuries in reserve assets. And so as multi-polarity rises, central bank gold buying is going to keep going up. If something happens where multi-polarity starts to recede, then gold buying is going to go down by central banks, dollar buying will go up and and and so I I think that's a really important context and why I started why with uh you know in a vacuum from Sconey.
At what price of gold do bonds start looking attractive to you? um along the lines of that same um answer, right? I just said US foreign held uh treasuries uh collateralized by the market value of US official gold. Long-term average was 40%, 1989 is 20%, dollar prices was 135% in 1980. Today it's 10%. Look, unless you get without any draconian austerity, in which case I think gold's still going to outperform, but it's going to go down. But I think it'll outperform everything else. But unless you get draconian austerity or some sort of productivity miracle that also doesn't lead to massive unemployment, which I think is an impossibility, but setting aside those caveats, then I would start to think about looking at selling gold to buy long-term bonds. uh when foreign held debt uh foreign held treasuries uh is 50 to 70% collateralized by US official gold um and so gold up 5 to 7x from here I would start thinking about selling some gold for long-term treasuries assuming no further rise in foreign debt. Now, this isn't all going to happen by next week, everybody, but I'm just saying this is the long-term cycle we are in. And we just turned off of 5 to 7%, we're at 10%. That number gets to 50, 60, 70%. They'll start thinking about letting some go to buy long-term treasuries.
Next question. What do you make of Trump's pivot on the Russia Ukraine situation today? Uh, for those of you who missed it on Truth, he basically did a 180 on sort of everything he's been saying for 7 months on Ukraine. Uh my take on it is that it was it was a nothing burger. It was noise. Um in my view he said essentially uh that he wants the EU to pay for the ongoing war NATO as well. uh in my opinion is really a sign of ongoing desperation or increasing desperation on his part because I think there's a whole lot of things that he thought he had when he came in uh in January and one by one they have all not fared well uh in terms of Doge in terms of his leverage in the trade war in terms of how the Treasury market did in terms of you know I mean they've they've they've they've come up with an acronym taco Trump always tacos Trump always chickens out uh as a result of of the backtracking and I I can't imagine that that makes him very happy, but it is what it is. Uh when you go into a card game and and you don't have cards and you try to play like you've got a royal flush, you end up tackling quite a bit. And so I think ultimately um this seeming pivot on Ukraine by him is I think it's just I think it's just noise.
From PP. Your September 19th and September 26th tree rings reports knocked my socks off. Increased my level of wor worry about what's coming down the pike. I'm ready to do a chicken little with everyone I know. Don't do that. With my jaw still on the floor after rereading, I'm trying to re I'm trying to formulate an articulated question. Powell came out today suggesting equities were fairly highly valued, quote unquote, i.e. overvalued, so the market dropped a bit. Does it still make sense staying invested in blue chip stocks when the nominal value will likely increase but the dollar will devalue? How best does one navigate our financial future? I understand precious metals are a great asset to hold, but do stocks still make sense? Thank you.
Uh yes, yes, that stocks do make still sense still make sense to hold in my opinion. But be yes, you want to be diversified. Maybe own a little bit of some Chinese stocks, uh maybe some Japanese stocks, some Korean stocks. Uh, I agree stocks are fairly highly valued, but I think it is so so critical for investors, for the average investor to understand, not get swayed by guys like Powell saying stocks are fairly highly valued. He's not wrong. He's just leaving out important context. And he's and it's it's disingenuous on his part because he knows better, but he can't say it. Uh, stocks are fairly highly valued, but they're not as highly valued as the treasury market. Think about that. Treasury market is a risk-free asset underpinning everything else out there. We have debt, you know, we the United States all-time high record receipts $5.5 trillion. Okay? We have debt of seven times record receipts. We haven't run a surplus, a profit. We haven't run a surplus in 24 years. And we've got off-balance sheet liabilities that are I don't know what four times four times GDP 20 times all-time record revenues 20 times revenues off balance sheet liabilities Medicare Medicaid social security and we went to war in the Middle East dropped $8 trillion to achieve nothing and what we did get is the equivalent of an asbestous liability right an asbestous liability is something you have to pay no matter what and it rises fast. Our Veterans Affairs bill is now $400 billion and it's rising 10% a year. Our overall deficit when we went into Iraq in 2003 was 200 billion for the whole government for the whole deficit. So this is why I say, you know, are stocks highly valued? Of course they are. Of course they are. But they're not as highly valued as the Treasury market. The biggest bubble by far is the long-term treasury market relative to stocks and and stocks under the treasury market is your risk-free rate hurdle rate for all those stocks. And paradoxically, then it's critical to remember that that's a reflexive relationship. What do I mean by that? Thanks to the lagged impact of policy decisions made over the last 30 years, equity markets de facto back the treasury market through the marginal impact on tax receipts, consumer spending, uh, and government receipts. So Powell can say whatever he wants about the valuation of the stock market, but unless he wants to stand aside and let the treasury market dysfunction, stocks have to rise 105% a year every year forever or else the Treasury market has a problem. And we've seen this repeatedly uh empirically uh in recent three, four, five, six years. So uh sorry I get a little exercised here about this, but I just think it's really disingenuous on Powell's part. I mean again he can't say it. I guess I should be thankful because he can't say it. I do get to say it. It's right and we can help clients by saying it and he can't say it because look at the end of the day he's a politician. He has to be a politician. So u just keep that in mind. I think it's important to stay diversified. Um I think stocks will be fine. Uh I just think long-term bonds are just avoid.
And then uh question from Ethan Russell Napier says no bonds, yes gold, yes value stocks. He doesn't recommend the S&P 500 because of sell-off risk due to capital controls or repatriation. You stated that stocks must go up 10% per uh forever to avoid a debt spiral. Is the S&P 500 okay or to be avoided? Look, I think repatriation uh is a real concern for sort of short-term downside for equities at any given point in time. We saw a brief glimpse of that post liberation day. Recall dollar down, stocks down, bonds down, yields up. Uh and and I agree would agree. You know, let me just say I'm a huge fan of Russell Napier. I think he's brilliant. Um and I agree value stocks would mitigate that risk um relative to the S&P because they are more cheaply valued. And so I I wouldn't argue with that statement um at all uh by him. I think that's that's probably right. Uh with that said, you know, it's it would only mit mitigate downside risk. It wouldn't eliminate it entirely. So that's important. Uh capital controls I agree are a potential risk of some description. Um but I think it's also really important if if there's if there's draconian capital controls um that's the end of the dollar's reserve status as structured post 71 certainly. So I'm not counting on that to happen. Uh, I don't think it'll happen, but if it did, uh, I I I think Bitcoin is arguably perhaps the most, uh, perfectly created asset to avoid capital controls in the history of mankind. And I also think gold will do really well in that case, too. And so, you would have offsets, but I think it's really important to not try to be perfect through what's happening here, right? What we're living through is like a trick pool shot where you're like trying to go off of six different balls and put the eight ball in in the side pocket. And what we're really just trying to do is like not poke our eye out with the Q stick, right? We want to put one ball in the corner and let's not, you know, let's not rip the felt. Let's not poke our eye out. So, uh, what do I mean by that? You know, overweight gold, overweight Bitcoin is going to mitigate some of those other risks. Um, but I think it's also important to own assets to that that that will do well as as they say with the meme, right? Nothing ever happens. If nothing ever happens and the system just stays fine and kind of muddles along, you want to own assets um that that do well like the S&P 500. And so I think it's really a waiting issue. It's a diversifying issue. Um I don't think you ever want to be like totally out of the system totally trying to like you know because when I say what's the six ball shot off the side into the side pot. What is that? That's like going all in bitcoin all in gold all in bonds all in all in anything. We are not in the part of the cycle where you want to be going all in anything. You you want to there are lots of different things that can happen. we are off the reservation in terms of potential opportunities or or risks um financial geopolitical domestic political they you want to stay low on your skis in terms of your diversification. So that's how I would answer that. I think Napier's got a great point. Uh I wouldn't necessarily argue with that. I I I I you know I think it's more a waiting issue than an outright avoid of something like the S&P.
And then the final question, how does wealth inequality resolve itself without a massive bare market in the S&P 500? Well, I'm going to answer it really quickly and then I'm going to describe it a little bit just so that uh I don't get a whole bunch of hate mail from one constituency or another. uh if you have a two to threeyear period of significant dollar devaluation and significant inflation paired with extremely tight immigration controls paired with yield curve control, I think you would get um something that resembled uh a significant decline in wealth inequality um without a real massive bare market. I think actually a bull market in the S&P um significant dollar deval devaluation is going to trick trick off a lot of liquidity. It's going to uh kick off a lot of inflation. Uh but if you have very strictly controlled immigration, uh then I think you're going to end up with a bit of a wage spiral um and a wage spiral that benefits the very people that have been most hurt by the economic system of the last 40 years. The working class, the middle class, right? So think about it this way. Boomers have 70 trillion in assets. The boomers and silent generation have 70 trillion in assets. they control 65 to 70% of uh the wealth in this country. If there's nobody coming in that'll do the work for them cheaply, then they're going to have to pay for the work and you'll actually be able to uh as a as a workingclass guy have a house and a family u and you'll have a house because yield curve control mortgages will be cheap. Um the Fed will be buying them all. Uh your wages, yeah, will there be inflation? Of course. uh and people in those trades, the industrial trades will stand to benefit from that. Um investment will stand to benefit from that because of course corporations are also going to be looking to automate to get rid of a wage wage employees inflation because the inflation everyone has an incentive to actually um you know reduce wealth inequality and and so I think that's a way it could be done. Um, look, my my friends and and clients that are elderly and and uh boomers and silent generation, it is what it is. Uh, this is how this has to go. You know, you guys have 65% of the wealth and you are collecting 70% plus of all-time record high tax receipts and a economic system where they can never let stocks fall to stop that from happening because it blows up the US government. they can't make their entitlement payments to you unless equities go up 10 to 15% a year. So, the trade-off has to be, you know, you're going to need to pay a lot more for services around the yard on to get the roof fixed, to cut the lawn, all those things. And then, you know, those, you know, to to to have the deck built out back, to get the new pool, all those things, skilled trades guy, trades people, uh, skilled trades people, they have to do those things. Uh, laborers have to do those things. And you're going to have to pay for it. And then they're going to turn around and they're going to start a family, buy a house, build buy a car, and that starts feeding on itself uh in a in a virtuous cycle to the detriment of bond holders. That's it. This is this is where we are in the cycle. Bond holders have to lose on a real basis for America to win. And I'm a big fan of America winning. So, uh, with that, I'm going to finish up for the night. Thank you for joining me. As always, if you like these updates, check out fft-lc.com for more information about our TreeRings product. 10 most interesting things, brief synopsis about each point, what grabbed our attention, whether it changed a way we'd been thinking about the world or reinforced a way we'd been thinking about things. Thank you guys very much for joining me. Go Guardians. Hopefully, we can keep it going and uh and and make the playoffs this year, which would be a very nice surprise. So, everybody have a great rest of your week. Be safe out there. Take care. We'll talk with you soon.
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