Transcription
[music] [music] [music] Hello everybody, Luke Groman FFT. Hope you are well. Hope you are having a great weekend.
It is wildcard weekend here for the NFL in the US, which is one of the best sports weekends of the year, especially since we had a Thursday night and Friday night leadin with college football playoffs. So, I'm going to uh I hope everyone's enjoying that. I'm going to jump right in, try to keep this as tight as possible.
The first question from JL. You've said and written many times over the last few years that from 1900 to 1980 we had a bond bare market and from 1980 to 2020ish we had a bond bull market. Wouldn't that suggest that the charts from 1980 to 2020 should be looked at with some caution? I agree with you. But question the accuracy of charts everyone uses from the bond bull market being that I and being that and I believe you see this as a bare market now. Uh many I think are still looking at the charts of long-term bonds and and saying that uh they're looking at it in dollar terms and they're saying the bare market's over. And that might be true when you look at some of the technical charts on a long-term basis, but that's in dollar terms. That's in dollar terms. That is super important to understand as we go forward for the next few years, increasingly so it seems with every passing week.
The fact is is that US debt to GDP is still 120%. Uh deficits are still 6% of GDP. and US true interest expense. Our interest plus our entitlements plus veterans affairs obligations uh are over 100% of receipts that are near records and bolstered by record tariffs. Uh furthermore, we now know empirically Doge failed. Uh we saw that last year. There were articles about that in the New York Times recently. Doge did nothing. And uh we're now seeing I think as a result of all of these things, we're now at the beginning of the the bond bear market on a real basis. In other words, it's no longer a bond bear market on a dollar basis, but look at bonds priced in gold. They have begun collapsing. Collapsing. run TLT over GLD, long-term US Treasury ETF over gold ETF last year and we think that's likely to continue over time. We think bonds are going to continue collapsing in gold terms, but I think it's mostly going to happen visav higher gold, not lower bond prices. In other words, higher interest rates. I think it's a higher gold price um dynamic over rates that kind of don't do much uh from from here up or down a whole lot further.
From GM, absent a gold revaluation, is there any viable way for China to resolve a trillion dollar a year trade surplus without a disastrous impact on their economy? The math suggests the only other option is collapse. You know, I think the US just raised some very important questions around belt and road recycling of Chinese surpluses. Uh certainly as it relates to the Western Hemisphere. Basically, if you don't have a military there, you don't control it. Um and so that then results in theory in some other dynamics. Number one, they're probably going to buy more gold and drive gold prices higher. They're probably going to stockpile other raw materials around the world and and bring them home, store them in their own borders. Uh I also think you'll probably see them recycle dollar surpluses into more domestic projects into their own US military, maybe someday into stimulus if they need to. Uh but I think that that that surplus is is gives them more optionality than the US on this front.
Both China and the US have enormous levels of debt. Um the US is running trillion almost two trillion dollar deficits uh all in um on the or excuse me all in on the fiscal side um and China's running surpluses on the trade side right so on the US side we're still running deficit although it's shrinking it is that did just shrink um but ultimately I think gold's going to be the desired rebalancing metric I think it is de facto that's what we're starting to see which is neutral settlement asset at the central bank reserve level. Um these surpluses are being recycled into gold uh out of real politique necessity. Uh and for China that that improves their balance sheet, improves bank balance sheets, improves consumer balance sheets. And you know, at some point the the Chinese government's going to have to get people to spend a bit more money than they already are uh internally.
From SG, just read hard bifurcation at your request uh by Craig Tinddale. The parts I understood were eye opening. Unfortunately, I don't quite speak his version of the English language, so I missed some. If there's some way you could recap, that would be great. Uh, yeah, here's the recap. The US has spent the last 40 years pursuing control of US dollar printing and US dollar pipes, monetary pipes as a source of power. China and Russia realize that push comes to shove. The real value comes not from money printing. The real power comes not from money printing, but the ability to make and produce real things in the real world. Push is now coming to shove, which everybody sees. Yet, everyone's still in denial about the relative importance of the ability to print money relative to make real stuff. So, the US is now trying to reverse this mistake, this 40-year mistake, which we're seeing in real time. every time you see Trump nationalize something, uh, invest in something, uh, what have you, this is a move to try to reverse this mistake. But the paradox is the US needs to move a lot faster, but its debt load is so high that if it moves too fast to do this, it triggers inflation that blows up the bond market, which would then require the US West more broadly uh to do yield curve control, which would crush their currencies relative to China's currency, for example, relative to gold certainly. Uh, and so uh that's what he's saying is for a long time the paper world and the physical world were together and they're splitting. That's it.
You know, people want to talk about, hey, what's my percentage return? What's Scott Besson's percentage return on his investment into Argentina? In dollars or in commodities? Cuz look, the world we're in now, I can't eat percentages. I need food. I can't build a factory with percentage returns on dollar swap line investments in Argentina. I need metal. I need rare earths. I can't refine those rare earths without China. Even if you make a 100% on your dollar swap lines in dollar terms, who cares? You need a refinery. That's what that hard bifurcation is saying.
From SP much of your framework is west versus bricks. How much have recent events Donro doctrine changed your outlook and could the USA be squeezing oil sources with moves in Venezuela and possibly Iran and how much would that influence your outlook? Uh I would say my outlook is much my my framework is much more based on being the side of the US that got its head kicked in by China over the last 20 years based on the policies of the US government. Um as I said at a monetary conference in 2021, you all think China can't win. That's your first principle base case. I'm up here to tell you they can win because I watched it happen for 20 years and you guys are sleeping on them and they laughed. Guess what? They're not laughing now, are they? Uh, so to answer the question, can the US go to war without Chinese factories? No. Will they be able to anytime soon? No. Will the US using will the US use weapons? Right. We hear about this this weapon that was fascinating potentially this sonic weapon that uh uh may have been used in Venezuela. What happens if the US uses sonic weapons on Apple's factories in China? What happens to the value of the US stock market? What happens to the value of California real estate as those Apple shares crash if they take down a factory with these sonic weapons in China? What you have to look at both sides. As Charlie Munger said, invert. Always invert. Nobody's inverting with this. It's just one side of the ledger. And it's such an opportunity because the people that can look at both sides of the ledger are skating to where the puck's going over and over. I see it.
So, will Russia and China react to what has happened already? Another question, another inversion nobody's asking. Well, they reacted on Thursday night, didn't they? Russia did. A lot of people saying a week early, "Oh, Russia did nothing." They reacted on Thursday night. Those arnik strikes hit Kiev. Water's out, power's out. And Mayor Klitschko says, "Get out of town because we don't know when the power or the or the water's coming back on." Like, that's a humanitarian disaster. Will there be other reactions? You know, well, given mainstream US narrative about our radar superiority, missile superiority, why didn't US air defense missiles stop those arring? Invert. It's going to be so critical in 2026 for you to invert. To look at the other side of the ledger of anything you hear from anybody, you know what? What other leverage is there that China or Russia could exploit? We'll talk about that a bit more in a second. You know, just what I've seen on sort of the Donro doctrine. I think it makes sense strategically. Absolutely. And it reminds me so much of the first week or two after liberation day. All I heard was the chest thumping about how screwed China is and boy, we're really putting the screws to them. And then nine trading days later, the Treasury market threw up on itself and Trump tacoed. Trump chickened out. He had to. The bond market made him. And so the bottom line for me to all of the last week, 10 days, it's too soon to tell. You know, I I you know, the you it's way too soon to make the judgments I'm seeing so many people make about about what happened. And you know, look, I'm I'm old enough, and you know what? You all are old enough, too, to remember when the commerce secretary of the East United States got on 60 Minutes and said the Russians had been reduced to using semiconductor chips from washing machines in Ukraine. That was in 2022. How's that going? Did she lie to you? Yeah, you got to invert everything. And it's it's it's very when I say invert everything, ask about the dogs that didn't bark. Notice the dogs that didn't bark in everything from every side from PP.
In your recent appearance on the Shawn Newman podcast, it was great and very informative. Thank you very much. You talked of wealthy merchant Jacob Fuger in the 1500s and his way of maintaining wealth, which was 25% held in each of, gold, equities, and productive real estate. My question is in regard to the cash portion. How does this relate to our future next 5 to seven years if money printing is going to cause an accelerated inflation? Are we in danger of deflation happening? And if so, what causes it? Thank you.
The reason why I think that portfolio is so good for the average investor is because we are in unprecedented times. We're at the end of a 100red-year debt cycle. We're at the end of a 50-year monetary system. We are at the the acceleration of great power competition. Um we are at the acceleration of a thusidities type trap. Um we are at the acceleration of AI type deflation. Individual investors look I think is it's ex I let off by saying we're in NFL wildard weekend. Would the average person get out of the crowd and go try to play in one of these games? No, they would get killed. They would get very very hurt as an average investor in the context of the factors, these macro factors that are we're watching daytoday. Trying to trade around this stuff as an average investor is akin to going out and going to try to play in wildcard weekend. You're going to get hurt. Don't do it. And this Jacob Fuger portfolio is a nod to that. What we're trying to do is get from one side to the other. What this does is it takes away the tails that destroy you that break your investing neck, right? So two things, two things crush you uh in inflation. Hyperinflation or in investing hyperinflation where your currency dies, great depression. Those are your two tales at the opposite side of your investing bell curve of options, your normal distribution with fat tails, right? So let's assume not a base case. Let's pretend we have a hyperinflation. The currency collapses. Whatever currency it is, it doesn't matter. The cash, 25% cash, boom, that's gone. The 25% in gold, it's going to more than offset any losses in cash. Equities, they love hyperinflation. They're going up. Productive real estate, productive real estate is going to fall to cash value, right? Le real estate is a the marginal transaction. Real estate is still a very levered a very levered transaction and real estate um you know in hyperinflation nobody makes loans. You don't get a 30-year mortgage in a hyperinflationary environment. You got to pay cash for real estate. And so so real estate initially in hyperinflation falls to cash value. Then you would rebalance but you would survive. You would you would you would end up ahead on a net basis across your portfolio in one of the worst tail outcomes. hyperinflation. Okay, let's go to the other side. Great depression, massive sustained deflation. Your cash, awesome, is going to do great. You're going to be able to pick up, scoop up bargains on valuable cash generating assets with the cash. Gold, gold's going to do great. Gold's going to do great because sustained deflation is going to cause sustained default risk. governments, banks, municipalities, businesses. Gold is just a 0% yielding bond of infinite duration, finite issuance, and it's nobody else's liability. And so in sustained deflation, everybody else's liabilities trend towards zero, and your gold sits right there. Equities sustained deflation, they get way laid, destroyed. real estate s same thing sustained deflation great depression they get way late but here again the beauty the reason why I think the a fuger portfolio is so valuable for the average investor in the crazy times I think we're going to be in for the next few years is it takes away the two fat tail risks that that that crush you as an investor anything happens in between hyperinflation and and sustained inflation great depression you're going to be fine you're going to be fine so that's That's why I think it's so valuable.
Now, do I think we could have deflation? Absolutely. I think we could I think I think quite frankly we're about to have a period of it because of AI. I think AI is happening way faster than anybody but realizes. I think it's starting to show up in the jobs data when you look at job openings and when you look at unemployment amongst recently graduated uh um college uh college students. Uh the problem in all this is you can't have sustained deflation in a debt back currency like we have in a debt back currency system. The debt backs a currency. If you have deflation, eventually debt starts defaulting. Debt debt value starts shrinking. That's the denominator of the currency system. What happens if the currency to the currency system if its denominator starts shrinking because of deflation? You get high inflation and eventually if you don't do anything hyperinflation because everyone goes, "Oh gosh, the debt backing this money is no good. Get me out of my money into anything that is not backed by debt. gold, silver, you know, precious metals, equities, real estate. So that in my opinion, you know, when you think about that, gold works either way. And I think that's why gold is outperforming so much right now. You know, Bitcoin, I think eventually, sure, do great, but Bitcoin is still trading like a high beta tech stock. That's just a fact. And if we get some sort of AIdriven deflation, you know, unless Bitcoin starts trading like a reserve asset, then I think, you know, the the the more the faster AI goes, the more risk there is that Bitcoin does a COVID March 2020 type of thing. Look, it went from what 15,000 to 5,000, 17,000 to 5,000 pretty quickly. It could do that again. That's not my base case. Not to 5,000. I'm just saying that type of drop in deflation before the printing starts. The point here is not that I think Bitcoin's going there. The point here is that there's an order of operations that I think is important to mind. In other words, you know, ultimately, yes, I think I have high conviction that there's going to be uh liquidity added in very large amounts, but getting the path right is important for for people uh in my opinion. Uh particularly if you're overweight, um you know, assets that would be hurt between here and there.
Let's see. Vienn what would Felix Somy who's also known as the raven of Zurich say about today's geopolitical financial construct? If you don't know about that Felix Somy was a banker Swiss banker late 1800s early 1900s through uh both world wars. He he published a book after uh called the raven of Zurich which were basically his memoirs uh his notes from the time as we went through it. a very expensive hardcover book to get a hold of. You can find the PDF online. If you've not read it, I would get the PDF and I would print it out and I would read it soon. Um, it's like a road map for what we're going through. And what would I what do I think he would say? I think he would say, I cannot believe you did not learn anything from the last time all of this happened. either take steps to devalue the currency, have greater wealth flow to the bottom 50% and to the commodity producing nations, or we are going to get a world war and or a systemic collapse. Buy gold because your leadership globally does not appear to understand this. Eventually, you'll want to buy some Bitcoin, too. But between here and there, there's probably downside first.
And finally, from LM, since Japan had a head start in robotics compared to China of about 25 years, would it be safe to assume Japan will help their number one ally, the US, catch up? Love your work. Thanks for all you do. Thank you very much for the kind words. Uh, I think it's possible, if not probably, if not likely, Japan will will help us. Um, I think we're going to have to because we just don't have uh the depth of industrial base uh or knowledge base to do this. Um, with that said, I am and remain fascinated that a no one seems to be mentioning what would happen to Japanese inflation if the Americans show up with a several hundred billion dollar order to make robots and weapons and ships and stuff for us. And therefore, what would happen to JGB market yields which are already getting they're rising uncomfortably fast, shall we say. And once yields hit a certain point in JGB market, that's either going to create a debt crisis for them or it's going to force them back into yield curve control to control yields so that they can afford their debt. [snorts] And then the second thing I'm surprised nobody's asking about yet, and this is why I say invert, always invert. is another way. People are not inverting. They're not listening to Charlie Munger. Always invert. Nobody's inverting this. Nobody's asking, "hm, do you think the Chinese are watching the JGB market?" Do you think they're seeing the yield go D and see it as the weak spot? You know, when the Japanese government floats this idea, hey, maybe we want nuclear weapons a few weeks ago. How do you think China reacted to that? Well, let me give you a hint. They came out last week and said, "We're putting in export controls on dualuse goods that could be used by the Japanese military." Some sources say that could be up to 40% of the goods that China exports to Japan. Who is Japan's number one import? Da da da. China. Now, what happens if Chinese goods get cut off enough that inflation really starts to pick up and then the Americans show up with a severion order for goods? Inflation takes off. What happens to the JGB market if inflation takes off? What happens? The yields go up a bunch fast. Then you run a correlation of JGBs against US treasuries or UK guilts or, you know, German bo, whatever. It's all It's all the same chart. It's all the same chart just on various and slight timing differences. So invert weak spots the bond market. You think the Chinese aren't don't know that? You don't think they're already acting? Come on. You got to invert. If if if I can leave you with one thing, this in 2026, it is already to me crystal clear that it is absolutely critically important to invert everything. Look at the other side of the ledger. Look at the dog that didn't bark. Everything what everybody tells you. Otherwise, I think you know we're going to get whipsaw a lot if you're not doing that.
So, with that, as always, if you like these updates, check out fft-lc.com for more information about our Tree Rings product 10 most interesting things, brief synopsis about what grabbed our attention about each of them, and if it's either reinforcing or changing the way we'd previously been thinking about the world. As always everybody, have a great great rest of the week. Have a great a great rest of the year. Look forward to chat with you soon. Take care everyone.