Speaker 1This is the Commodity Culture Podcast, where we interview prominent investors, fund managers, analysts, and company CEOs to give you an edge when it comes to investing in the commodity space. Luke Groman, great to have you on Commodity Culture. I want to start off with the war in Iran that appears to be rapidly escalating. Before we dive into the implications for the global economy and financial markets, I think it's important to take a step back and ask the question, why do you think this war is happening in the first place? Because we've had so many different takes from Trump is being blackmailed by Israel or Israel is using AIPAC money to drive the decision-making in the Trump administration, cutting off China from energy flows, the U.S. attempting to establish its dominance as the global hegemony. What are your thoughts? What are your thoughts on why this conflict is occurring now that we're almost five months in and there's no signs of it slowing down?
Speaker 2Yeah, I think, you know, the five months is it's we're kind of getting the goals moving, moving the goalposts, right, was Trump's own words in March on March 1st was this will be four to six weeks. And so, you know, last week that migrated to Trump's words again, hey, we've only been here four months. You know, we were in Vietnam for 19 years, which is I'm not sure that the comparison that you're aiming for. So. Now that we're getting to five months, I think there's elements of all of the above. I would soften taking orders from Israel to taking advice from Israel, which he clearly, I think, takes seriously. And that's, you know, not my speculation. Rubio said that multiple different U.S. senators said that Israel had a significant influence in the decision with Trump. Iran is the third yuan oil seller to be. Attacked, right. Venezuela was selling oil on yuan. They get attacked. Iran selling oil on yuan. They get attacked. Russia has been selling oil on yuan for a long time. You know, they get a color revolution on their borders in Ukraine and attempts to put missiles in Ukraine, which is against their interests. So I think there's something to that dynamic of, hey, there is there is a defense of of dollar hegemony here. I would add that it's it's not really working. You won. You won payments through the CPS system hit all time highs in May due to the war. They did 14 trillion yuan, about two trillion dollars in yuan denominated payments alone in May, which is a huge number, particularly when it's largely goods related. You know, China, corporate profits during the war, up 20 percent. China export volumes up 27 percent in the most recent month. China's shift to EVs. We're adult. It resulted in a one point four million barrel per day reduction in oil use. So China's making some adjustments. So what the goal is was cutting off China, which it very well may be, at least partially. It's not working. So when I sort of boil down, I think my my view for my view for the reason for it is there's a blend of, you know, number one, Trump getting fooled into thinking that it'd be really easy, like Venezuela. In other words, he made a mistake. Number two, I think there are attempts to slow down China. And there are some things here that that could work, things like helium. And I think they were focused on energy. But helium in particular, because it's so important for some semiconductor supply chain. The United States is self-sufficient and the biggest exporter in the world. Qatar is second. And so and after that, it really drops off. Russia is a big producer as well, but nowhere near the scale of the U.S. and Qatar. So there may have been an element of, hey, let's mess up the Gulf and curtail. China's helium supply. Now, China's been working on growing their own supplies for a couple of years now. So that, again, is only going to be a temporary solution if that was part of the goal. And it's and and it's ultimately going to result like so much else we've done in the last 10 years. It's going to result in China being more self-sufficient, not less. I think part of, you know, number three, I think there is a portion of the U.S. establishment that sees an opportunity. To discredit U.S. neocons and reframe slash re recalibrate the Israel relationship via what I've termed a let the dog catch a car. Right. If you have a dog that won't stop chasing cars, how do you get it to stop? You let it catch a car and you let it deal with the fallout. Right. So what we are now looking at is a potential let the dog catch the car strategy. We're five months into a four week war. And we're starting from much weaker starting points. So I think from here, the let the dog catch the car strategy could start to become much more obvious in the next, you know, three to six months. And then I would say the final reason in my mind of all of this is is in the same way that cutting off helium to China incensed China to become more self-sufficient. This will incentivize the acceleration of domestic reshoring. And production as well. So for the U.S. So I think there's a combination of all of those. And I think some of those have been more more dominant or prevalent at times over the last five months than others. But I think with the benefit of the past five months of hindsight, I think those those as I'm thinking about it now are how the reasons why I think we're we're doing what we're doing.
Speaker 1Let's dive into the financial implications, implications on the economy and markets of this conflict. The Strait of Hormuz effectively closed. To most vessels, we've seen some try to cross and get attacked by the Iranian regime. Now, the Strait of Bab al-Mandeb could also be closed by Iran and the Houthis. We, of course, saw oil initially go into the triple digits earlier in the war. It looks like it could be on its way there again if things continue along their current trajectory. Walk us through how you see this playing out for the global economy and how bad things could get in your view.
Speaker 2Yeah, when we obviously when the war started, we saw a spike in oil. We saw a spike in U.S. yields, which was interesting. Early in the war, there were a lot of people saying oil is not going to go up that much. It did. There were a lot of people saying 10-year treasury yields in the U.S. would go down. They didn't. They went from 3.95 percent to 4.65 percent in about five weeks, which is about what we would have thought. The move treasury volatility index got to near dysfunctional levels, about 118, I believe on March 27th. And then miraculously. Like MacGyver showed up with his bubble gum and duct tape, somebody came in and sold bond volatility and equity volatility very, very aggressively right after that 118 print on the move in early April. In fact, bond and equity volatility peaked within 12 hours of each other after Trump's April 1st speech or right around Trump's April 1st speech. Shortly thereafter, Trump paused the war. Markets thought it was all over. And that's where we've been, except it's not all over. And so now we're, I would argue, back to where we were like March, first week of March, where there's a high level of complacency. A lot of people saying, don't worry, oil is not going to spike because it fell down before and yields aren't going to spike because, well, I don't know why they think that because yields are near highs in the U.S. and around the world, everywhere except China. Um, we're, we, so now we're, we're starting from a point of higher yields, higher oil than we were on a March 1st, higher equity prices. And we were on March 1st, higher complacency, lower oil inventories, lower commodity inventories worldwide. And so if this persists, I think we, we get back to sort of the first four weeks of, of this war in terms of markets aren't going to like it. Uh, I don't, and then there's, and there's not much to like because. The physical world will ultimately dominate the paper trading world and we are starting from a much lower standpoint of a lot of these sort of inventories that were run down to manage this thing, uh, in, in the first month or two. So, you know, for me, it, it makes me more cautious that this is re that this is a re ex this war is reaccelerated.
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Speaker 2I think it's, there's two different sets of dynamics. So I think there is ultimately, there's the markets priced in dollars, and there's the markets priced in gold. And if you look at the markets priced in dollars, we're at all-time highs. If you look at the markets priced in gold, we're still down about 30% from the highs of late 21. And we're still down, like, I want to say 30%. You're 40% from January of 2000 in the US. So using gold as a way of saying how much of it is currency debasement versus how much of it's real growth, real productivity. And so with that framework, I think on the equities priced in dollars, I think the shape of the chart is going to be roughly the same. It's going to look like the old Nike symbol on your shoes, right? Which is, I think, and the war may be the catalyst for it. China AI competitive gains may be the catalyst for it. Who knows what the catalyst will be for? When your valuations are in la-la land, which equity valuations are in the US and in a lot of places, the catalyst doesn't really matter. There can be, nothing can go wrong. Nothing is allowed to go wrong. You're not allowed to have any issues, any questions with valuations that are this high on things like the Warren Buffett metric. Equity market cap is a percent of GDP, et cetera. And so I think we're going to get, something is going to be a catalyst and we're going to get sort of a Nike shaped market where you get a slight drop down. And I don't know what slight is. Maybe it's 10, 15, maybe it's 20%. I doubt it, but could be. And that will cause treasury market disruption, dysfunction, and that will be the catalyst for more dollar liquidity. And that'll send us right back to the highs. And that's been kind of the playbook for the past. You know, five, six, seven years. Now in gold terms, I think if you have an issue, gold probably goes down a bit initially. And we've seen that. And so that, I don't have a strong conviction in that. We've already seen gold well off the highs. And so maybe gold goes down a little bit in that initial risk off in the dollar denominated equity markets. But then ultimately gold soars. And as, as the decline in equity markets necessitates, you know, creates dysfunction in treasury markets again, and necessitates more dollar liquidity injected by either Fed or treasury again. And gold goes back to new all-time highs. And so on the dollar, on a dollar base, I think you get sort of the Nike shape in equities. And then on a, but on a, on a gold basis, I think you end up with the chart, you know, more of what we've seen since 2022, and since, you know, 2000 really, which is on a gold basis, equities, that's where the correction in equities has been and where I think it will continue. Let's talk about gold because it's been
Speaker 1following the same pattern since the war began selling off as it, as it started. It rises when it looks like peace might be on the table, then falls again when it seems like the war is full on. I've spoken to a few different people about this. Some people say that's normal during a conflict. That's just people looking for liquidity. I saw Turkey sell a large portion of its gold holdings. People speculate that was to purchase energy due to the issues in the Strait of Hormuz. What are your thoughts here on this pattern gold has been following? Because the other side says that, well, in a global conflict of this magnitude, we should, we should see gold's status as a safe haven kick in and then prices go much higher. I wonder how you're reading the situation.
Speaker 2Yeah, I think, I think that's exactly what we've seen, which is there's been some resistance to the gold market. I think that's exactly what we've seen, which is there's been some resistance to the gold market. I think that's exactly what we've seen, which is there's been reserves selling for energy, for liquidity. No question about that. There's been selling alongside in treasury bonds as well for reserve selling slash liquidity. And I also agree with the point that if you get into a global, a real, not just because I don't think we're going to get a world war per se, it's possible, but I don't think that's what we're going to get. But if you just get what everyone's saying we're going to do, which is sort of an economic divorce between China and the US, then gold has to soar because China is not going to use the yuan and run deficits in yuan, even if they could, but they're not going to. They're going to, they're going to, they have set up offshore yuan clearing banks in every major gold hub in the world. So London, Switzerland, Dubai, Singapore, Hong Kong, and of course Shanghai where if you end up running surpluses against the Chinese or you have excess yuan by virtue of trade with the Chinese, you can recycle those yuan surpluses into gold at any of those places. And that's how China is going to internationalize the yuan. They've been very clear about this for 10 or 15 years and the West just continues to generally ignore this because they don't want to hear it because they don't have a Trump card for it. So to the extent this war continues doing what it's doing, I think it is initially negative for gold, but I think gold will, um, bottom. And then, and I think it's a really important relationship to watch, right? Because exactly what you just said is what everybody's watching for, which is okay, war on, gold down, war off, gold up. And I get that initially, but the longer it goes on, there is a day coming where we're going to say war on, gold up. And that's a really important day because that will be the day where people go, okay, fine. This is going to last for a while. I need to do some of my business in yuan. I need to do some of my business, all the business I do in yuan, I'm going to be buying gold for and for, uh, and, and, and shifting any surpluses in yuan that I earn into gold. And that will be a really big moment. And I think that is ultimately how this war ends up. Um, you know, it ends up backfiring on the U S in terms of if part of this was done to, to enforce dollar hegemony, all it's going to do in the long run
Speaker 1is accelerate its end. And are you watching the silver market here as well? Do you ascribe to the view that silver is basically just a junior version of gold, or do you think it's industrial and strategic attributes, put it in a separate category? Because obviously we saw the massive rise into triple digits at the start of the year, silver moved very far, very fast. It's now come, come off of those highs greatly. So I'm wondering how you see that market unfolding and how you view
Speaker 2silver versus gold. Yeah, I do watch it a little bit. I'm not, I'm not totally, uh, as deep in it as I am in the gold market. And I've, I have a small position, silver. I bought probably $18, maybe, I don't know, eight, 10 years ago. Uh, I, I do think silver is wildly mispriced as an industrial metal today. Um, and I also think it is, it is an Achilles heel of sorts of the, of the credit gold and credit silver system that does support the post 1971 dollar system. So it does have monetary elements. And when I mean credit gold, I mean, the unallocated, uh, silver and gold derivatives that basically when, when someone, when demand kicks up for something, there's two ways you can address it. And, and, and in particular, when there's demand for gold and silver that picks up, there's two ways you can address it. You can allow the price to rise and physical to move, or you can allow unallocated derivatives to expand and address that supply and let price stay still. And, and generally speaking over the last 50 years, uh, the, the latter has been how increases in demand for gold and silver have been addressed. Uh, I think physical holders of silver, uh, have been, have been, have been, have been able to build redundancies to the industrial base that China has built around the world. Us, Japan, Korea, uh, maybe the Europeans will really finally get their act together in certain energy stuff too. Who knows? But the point is, is that all of that stuff can't get built with paper silver. It's got to get built. There's there's silver is just used in so many different places, especially as, as it relates to, um, anything EV slash electric, uh, you know, solar panels, et cetera. So, uh, I think physical holders of silver will be rewarded over time, but I don't know if over time is two months, two years, two decades, I would guess it's probably within two years. Uh, but I don't
Speaker 1have a strong feeling on that. There's a lot of hyperbole about the end of the fiat currency system coming up ahead. A lot of people have talked about it on this show. It does feel like they're reaching a breaking point of some sort as the debt and deficits become completely untenable around the world. The cost of living crisis. accelerating. You know, I hear all sorts of opinions from, you know, we can keep kicking this can down the road far longer than people realize to the U.S. dollar is going to hyper inflate at some point in the near future. We'll be forced back onto a gold standard. And of course, everything in between. I'm wondering what your take is on the potential end of the fiat currency system and the return of gold to the monetary system. Does one have to happen for the other to happen or could could both potentially could fiat currency still maintain its status as a monetary asset and gold be reintroduced into the monetary system in some form or another alongside
Speaker 2it? It's a it's a great point that you just made there because people like to make it black and white and be very hyperbolic about it. But but like most things in this life, it's shades of gray. So gold has begun its return into the system as a neutral reserve asset. We're at least 12 years into that shift, at least. And you guys are going to see that. And I think that's going to be a you look at global FX reserves, dollar reserves have not really moved in 12 years. Treasury bond reserves have been flat for 12 years and gold reserves have risen meaningfully. So central banks have been growing holdings of gold and not growing holdings of treasuries, while treasury supplies have been growing exponentially for at least 12 years. So this is this is already 12 years underway. And I've been very clear that I think the post 1971 structure, you know, of the dollar system is ending, but the dollar is not ending. And I don't think it will in my lifetime or really even my kids or grandkids, not that I even have grandkids lifetimes. It's changing. It's changing to a neutral reserve asset gold that floats in all currencies. And everybody wants this. The PBOC came out in 2009 and said, we want to move to a non credit based commodity related non currency issued not by any single country. It's gold. The I and then they started buying gold a few years later, much more aggressively. And you can see declassified documents about from from US State Department that China's buying gold because they see it as a way to kill two birds with one stone and build their own resilience. The IMF came out in 2011 said we should think about moving away from dollar monopoly of oil and instead move it to something like an IMF SDR and price gold and oil. In IMF SDR is not dollars. Say you think what you will of it, the the Dominic Strauss con who was in charge of the IMF when that was proposed, ran into a sex scandal and was removed from office three months later. Moving on World Bank, former Treasury official Robert Zellick 2010. We need to move to a system where you have the goal or excuse me of euro, yuan, or euro, yen, pound and dollar and a yuan that starts to open up. It's capital account. And we should also use gold as a reference point for inflation expectations, growth, etc. And then most recently, and perhaps most importantly, because we are the incumbent in control of the past system, the US has been talking about Hamiltonian economics. Besant gave a speech at the New York Economic Club four weeks ago. He same day posted a Wall Street Journal op ed on the same topic that Hamiltonian economics, back Trump's economic statecraft. The Hamiltonian economics theme echoes what US Trade Representative Jameson Greer said in January at Davos saying we're done with the old system. We're the United States is moving to a Hamiltonian economic system. Vance and Trump have alluded to it as well. And so the key here is that you can't do a Hamiltonian economic system with the post 1971 structure of the dollar. You just can't full stop. And so the key here is that you can't do a Hamiltonian economic system because Hamiltonian economics is we're going to put up tariffs and we are going to implement industrial policy. And when you do those things, you don't emit the dollars needed for the system to run. So the world goes to gold. That's what's that's. So to me, what Besant said, I mean, four weeks ago, everyone on Wall Street virtually is like Besant is the adult in the room, et cetera, et cetera, et cetera. Besant's telling you we are going the gold's coming back in the system. That's what he said. He's telling you we are going the gold's coming back in the system. He's telling us when he says Hamiltonian economics are based on our backing, our Trump's economic statecraft. That's what's happening here. So now what does that imply? That implies much higher gold prices. That implies a much lower trade value of the dollar against the creditor currencies like the yuan, the yen, to a lesser extent, the euro. And that would be a system that would lead to perhaps the greatest economic boom in the world. And that would be a system that would lead to worldwide since since, you know, since the end of World War Two. At the moment, it really does feel
Speaker 1like the political class in the U.S. is in a loot the system mode. We're seeing blatant insider trading or at least what appears to be allegedly. We saw the president launches crypto scam shortly after taking office. There's nothing else you can call it, in my opinion. And then he had his wife launch her own crypto scam scam. And that's what's happening. And that's what's happening. And they rug pulled everybody, which is completely insane to me that that's kind of a footnote right now. You know, we've got these new Trump based financial products. We see nepotism, corruption and just the feeling that an organized crime ring is running the country. And I have to know this is on both sides of the political aisle. I'm only mentioning the Trump administration because they're the ones currently in power. I don't think the Democrats are any better. But is this all standard for an empire in decline, in your view? And is there any way out of this? Aside from a full on revolution or a total collapse of the system?
Speaker 2Yeah, I mean, look, it does feel that way at times. And I think it's I think it's part of the long cycle, right? Everybody wants to talk about the fourth turning and we're heading into a fourth turning. And then, you know, sort of part and parcel to fourth turnings is is, you know, faith in institutions, you know, collapses. And, you know, what what people tend to leave out is why faith in institutions collapses? Well, because, you know, we're in a time where we're in a time you get stuff like this. And I agree with you. It's both sides of the aisle. And it's it's it's it's been frustrating as an American to watch. Now, I would say it's encouraging the U.S. has been designed to survive being run through periods like this. And I'm hoping that will continue to be the case. But I think part of it, you know, is a recognition by elites of this sort of, you know, get yours while you can mentality that has really been enforced by events. So the last 30 years and in particular, let's call it 25 years, you know, Iraq, War Two, the GFC bailouts and then COVID, where a lot of people made a lot of money on shady, if not illegal actions, and there were no repercussions. And so if you can get rich and there's no repercussions, guess what you're going to get? You're getting a lot more illegal actions. And that's what we've seen. So I think it's, you know, you what's Charlie? What did Charlie Munger always say? You show me an incentive. I'll show you the outcome. You know, if you get a bunch of, you know, a small number of people getting rich on illegal actions and no repercussions, then you're going to get more people doing more illegal stuff and shady actions. And they're going to push it as far as they can go until, you know, look, I think ultimately, I don't know if you get a full-on revolution or total collapse. That's not where I think it'll go. I think you'll get, I think we're getting the warning signs of our system as it's been designed to function, right? When you get a professed socialist, borderline Marxist in charge of, of the center of capitalism in New York city, that's a warning. Uh, when you get Charlie Kirk's of the world getting shot, that's a warning. Charlie Kirk was just having a conversation. Uh, when you get, you know, the Brian Thompson's of the world, uh, the former head of United healthcare, you know, president of the United healthcare gets assassinated on the streets of Manhattan. Uh, these are warning signs. And when you read about these periods in time, you know, somebody who's studied this a lot is Peter Turchin. And he, he, he, he said, there's two things to watch for it's wealth inequality and elite overproduction is what he calls it. When you've got more elites than you know what to do with. And then when you have a wealth inequality gets really, then you get these really extreme tail outcomes in terms of political, uh, outcomes. And what I'll say about all of this sort of corruption and shadiness and some of that outright outright illegality is this is where we're heading. And when you, and what Turchin says is, um, it's the United States as he measures, it is on the worst is at the highest levels of the combination of wealth inequality and elite overproduction that we have seen as a country since the late 1850s. And of course, from 1861 through 65, the United States fought the civil war. And it's fascinating because I'm reading a book of his called, uh, um, oh gosh, something demons, um, you know, unleashing the demons or something like that about sort of the three or four or six month run up to the civil war getting kicked off in, in Charleston Bay. There's a lot of stuff that's rhyming. So, you know, look, I hope we can avoid that kind of an outcome, but history would tell you in the, in sort of the, the people studying the history would tell you that, you know, we're not on a good path right now. We're not seeing a lot of people, um, from either side of the aisle. trial, making a real attempt to step up and stop it. And by the way, there are a few that are
Speaker 1trying and they are getting thrown out of office. You've spoken before about the debt doom loop that the U.S. finds itself in. How does this debt and deficits, not to mention the entitlement spending, ever get resolved? Because obviously this is a debt that's essentially by design not going to ever be paid off. Is there some way that they can sweep this under the rug? You know, we've heard all sorts of theories from they'll introduce a central bank digital currency and somehow they'll be able to manipulate the numbers and get things working in their favor again under a new financial system. They'll just keep inflating the debt away, you know, they're in an inflate or die situation. But you've pointed out, as of many other people on this show, that there's really no way out of this issue for the United States government at present. How do you see things as they currently stand today when it comes to debt and deficits? And how do you see it playing out? Can this can keep getting kicked down the road indefinitely? There appears to be a game.
Speaker 2So ultimately, it's just a currency issue, right? You know, the currency weakens enough and in particular against gold, the U.S. can can pay off its debt overnight, right? Whatever. I don't know what the number is. It's probably 23. Well, it's a lot more than 20,000 an ounce, but some big number in the U.S. can, you know, the Treasury Secretary can instruct the Fed to revalue the gold. Boom, we pay it all off with devalued dollars and debt holders lose and the government wins, right? So that it can always be, it can always be dealt with. It can always be floated. It's a political question. When do the, you know, when does the sort of, you know, the preferred game plan for 40, 50 years has been slow financial repression, right? So, you know, the debt grows 8% and 8% since 2008. We say inflation is three and we pay zero to 2% on the rates and we try to earn our way out of it. And that's, that is the preferred way of doing it. The problem is, is that was supposed, you have to have some level of austerity on the back end. If you just keep spending 8% more money every year, you're never going to catch up. The other problem with that is you had a finite time horizon for that because ultimately one of the great, uh, lies, uh, uh, has been, you know, the entitlements are not debt and they're not technically until they come, go from off balance sheet to on balance sheet. And them going on balance sheet is just a function of, uh, boomers turning 65 and 70 million boomers were born from 46 to 64 stands to reason most of them are going to reach age 65. This is not a surprise. And so they have, uh, and those, you know, so that, that's the reason why they, the debt growth hasn't slowed down is because the off balance sheet liabilities came on balance sheet. So really it's just a political question. The preferred method is just financially repressed, but then you can do that until the politics start to get weird. And that ties back to my prior point. We're now years into the politics getting weird. If financial repression wasn't happening, Donald Trump never gets elected. If financial repression wasn't happening, Obama probably, doesn't get elected. Um, and if this isn't happening, so, you know, Trump, what I would mark as the first, like, okay, we have a political issue that the financial repression playbook is beginning to drive political issues. That was kind of the, the, the starting point of that. Um, and the acceleration of that are things like Charlie Kirk's assassination and, uh, the reaction to COVID and, uh, Brian Thompson's assassination and, and Trump's three election all of these things are warning people that the slow financial repression isn't going to work. And so now the playbook appears to be, as you look around the world, look what everyone's doing. Everyone is basically doing defense spending stimmy. The Americans, the Germans, the Germans are like, wait, so we want this in writing. You want us to build a bunch of weapons and point them at Poland, right? Point them Eastward at Russia. That's we have your permission. We want that in writing. Uh, the Japanese are doing it. The Brits are doing it, right? So everyone's borrowing money they don't have and increasing defense spending meaningfully, which starts to just look like debt fueled stimmy, uh, of COVID and the hope perhaps being that, Hey, if we do it all together, no one will notice that all our currencies are dropping at the same time. So the dollar will be stable. The pound will be stable. The yen will be stable. The Euro will be stable against each other, but their bond markets will sell off check. The inflation will pick up check. And now you're just, you know, the, basically the bet is that this will earn our way out of debt before we have to start printing money to cap bond yields. I think it's a bad bet. I think they're going to print money to cap bond yields at some point in some form, you know, that can be via regulatory action or other things. Uh, but that then gets us right back to my initial point, which is ultimately it's just devalue the currency. That's all. And, and against what against gold.
Speaker 1How do you see China's role playing out in all of this? You spoke earlier about the CIPS yuan based system. Uh, it launched in 2015. You mentioned it hit all time highs in terms of payments processed in May of this year, which I did not know. Um, you know, we, we hear a lot of different opinions on China because obviously they have a real focus on gold. Um, and they seem to understand it more as a monetary asset than the West. We're seeing these export restrictions come on for rare earths and other critical minerals. You've got people like Peter Zaihan, who's predicting indefinitely that China's going to collapse. Any day now, many point to their real estate issues, um, demographic issues as proof that despite appearances on the surface, they are actually in dire straits. And then on the other side, we see all of this technological progress and innovation BYD, obviously the top EV company in the world. Um, the robotics are apparently very advanced. So there seems to be two distinct camps when, when it comes to China. Is this another situation of shades of gray? Like you
Speaker 2know, the investors like to quote Warren Buffett, at least us investors like to quote Warren Buffett and say, it's been a bad idea to bet against America for 250 years. And, and I agree. Um, it's funny though. A lot of these investors are generally seemingly not self-aware enough to realize that in 1850, it had been a bad idea to bet against China for like 1500 years. Uh, and yet China did enough dumb things to have a century of humiliation, uh, from 1850 or 1860 through 1900. Uh, and yet China did enough dumb things to have a century of humiliation, 1960, 1980, really. So, you know, America, you know, has a housing affordability crisis. We talked about China has enough housing pricing crisis, right? That housing's getting too cheap. Neither one's really an ideal outcome. You know, America's affordability crisis is pushing youth towards Marxism. We're seeing that. China's is, in theory, should incent young people to get married more and have more kids. If you can afford a house, you have a family. If you can't, you don't. You know, which is the smarter move long-term for political stability? I would say, you know, is a smarter move for political stability to let home prices be affordable and let gold rise in yuan and let stocks rise in yuan? Or is a smarter move politically to let your old people outbid young people out of shelter and not let gold rise to maintain the hegemony of the dollar? And let stocks rise? I would argue in the short run, the latter is smarter. In the long run, the former is smarter. I think China's doing the smarter thing in the long run, in the short run. And the problem is we're running out of the short run, right? Because Mamdani's getting elected. And they're, you know, Bill Maher's openly talking about how disturbing the shift of the youth to the left is towards Marxism. And Maher's been pretty lefty. So the, you know, regarding Zion and his democracy, he's been pretty lefty. He's been pretty lefty. He's been pretty lefty. He's been he's been harping on this for years. And I think he's, I think he's wrong. I mean, to me, demographics are very conditional. You tell me what AI and robotics are going to do, and I'll tell you how demographics, the demographics alarm he's been raising for years works out. Look, if AI and robotics do what are discounted into the AI and robotics stocks in Western markets, then nations... Nations that have a growing heterogeneous population like the United States, to a lesser extent, like the UK and EU, they are going to be more politically unstable than nations with falling homogenous aging populations like China, Japan, Korea. If AI and robotics do what everyone thinks they're going to do, Asia is going to be a lot more politically stable, in my opinion, than the US, EU, UK, and the broader West. So... So, you know, that's, to me, that to me is, is, is how I think about it. You know, we're in a, we're in a competition. And, you know, look, you'll never bet against America. I agree. And how many times do we need to see China outperform expectations? Oh, China 2025, back in 2015, they'll never do anything. Well, here we are. Oh, God, we need to do something. China 2025 is really good. You know, oh, the Chinese will never be able to compete with the larger language models, not till mid to late 2020. Oh, China 2025, they'll never do anything. Oh, the Chinese will never be able to compete with the larger language models, not till mid to late 2027. Oh, my God, they're doing it now. Like, it is, it's a fascinating... cognitive distance. You would think after the sixth time of shorting the Chinese ability to compete, they would learn the lesson, but nope, they just double right down. So we'll see.
Speaker 1Given everything we've discussed today, how would you approach portfolio construction at this moment in time? Where are you seeing opportunity as an investor? Are there areas of the market you would be avoiding? And would you have more dry powder on the sidelines than would normally be the case, given what many are seeing is a huge overvaluation in the broad market? And of course, if that takes a hit, as you mentioned, we could see gold and potentially other quality businesses take a
Speaker 2hit in the aftermath as well. Yeah. It always depends on events. For me, we are absolutely in la-la land on equities in the US, on the equity markets. And I use that, the Warren Buffett metric, which is total equity market cap divided by GDP. We're a super la-la land, but I've always used it, Warren Buffett metric, adjusted for US federal. Because my view has been, and it's been validated, that the US will always print money and buy the debt. They'll always monetize the debt if they need to. And so you need to subtract that out of the equity valuation. And that's kept me out of trouble. In 2018, the Warren Buffett metric was back to January 2000 highs. And a lot of people said, oh, get out of equity. I said, no, no, no. It's got at least another 60% upside until it hits January 2000 levels when you adjust it for the federal debt. And humbly, I was right. But now- Now, when you adjust for federal debt, we are beyond where we were in January 2000. So we are in complete la-la land. And that's fine. Valuation doesn't matter until fundamentals change. And when your valuations are in la-la land, you can have no issues. They can't even be little issues. And we've got big issues. We've got a war that's restarting that's going to boost oil. We've got Chinese competition we didn't think we were going to have in the bubble assets. And so, yeah, I early 2000s type period where industrials and commodities, they initially sold off with tech, but then they bottomed way sooner and did great while tech suffered for a decade as those valuations were normalized. Gold did great. Gold miners did great. I think there's other areas of opportunity. I still love electrical infrastructure in the US. I think Japan is likely to continue benefiting because- If we're moving away from China, or at least trying, most of what the US says they want to reshore, the US can't reshore, not without somebody, not some foreigner's help. And that foreigner is Japan. To a lesser extent, Korea. Korea is a bit of a weird market now, just given it's like three stocks and they're trading like Dogecoin. And to your point or to your question, I think having high cash and T-bills is very wise. I've got 20% to 22% of my liquid net worth in cash and T-bills. And I have for- For pretty much, not pretty much, for this entire year. Because coming into the year, I didn't like the setup. And I didn't like the setup during the war. I still don't love the setup of risk relative to reward. I've got a high level of gold and I have a high level electrical infrastructure equities. And so those are where I see interesting opportunities.
Speaker 1Tell us about Forest for the Trees and anywhere else people who want to follow your work can go online.
Speaker 2Yeah, thank you. If you're interested in hearing more about our institutional and mass market products, fftt-llc.com. And you can find me on X at Luke Grohman, L-U-K-E-G-R-O-M-E-N.
Speaker 1Great. Those will be in the description below. Luke, fantastic conversation. Thank you so much for sharing your insights today.
Speaker 2Thanks for having me on, Jesse. It was great being here.
Speaker 1Thank you for joining us today on Commodity Culture. Earn up to a 4% annual yield on your physical gold paid in gold. Gold ounces through monetary metals. Go to monetary-metals.com slash commodity to find out how to put your gold to work for you. Link is in the show notes below.
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