Speaker 1there's only one buyer. It's the Fed. Fed's going to have to print money and buy treasuries. And they will say, we're not monetizing the debt and we're not monetizing. And it'll all be bull
Speaker 2crap. That was Forest for the Trees founder, Luke Groman. I'm Eric Townsend, and this is Macro Voices, the free weekly podcast targeting professional finance and sophisticated private investors. Episode 556 was produced on October 29th, 2026. Luke Groman was ridiculed after his April 16th appearance on Macro Voices because many of our listeners thought his prediction that the Strait of Hormuz could remain closed as long as early July was outlandish. Now that the Strait has remained effectively closed for fully twice as long as Luke's outlandish prediction, we wanted to bring him back for an update. And don't worry, we'll start with why the predictions that both Luke and I made for how bad the economic effects of that closure could be have so far yet to be realized. And I'm Patrick Ceresna. Let's dive straight into this interview. Luke, it's great to get you back on the show. I want to cut to what I'm sure is already in everybody's mind, which is you were on this program on the 16th of April. Frankly, we got ridiculed when you said this situation in Iran could stretch out as long as the 4th of July. People thought it was crazy. What is Luke Groman smoking to think it could possibly go that long? Well, now it's gone twice as long as that. But the predictions that both you and I made in terms of what the consequences would be for global financial markets and the global economy if the Strait of Hormuz stayed closed for even half as long as it's been closed, they really haven't materialized in the way that we feared.
Speaker 1So what's going on? Yeah, thanks for having me back on, Eric. Yeah, the Strait is still closed. It's Schrodinger's closure. So it's closed by both the Iranians and the Americans. And depending on who you talk to, it is both closed and it is also fully open at the same time. According to President Trump. So what we got right was, yeah, the conflict is still going on. There are still constrictions to supply to some degree. What we got wrong was how quickly it would take to ripple through. And I think there's multiple reasons for that. Number one, underestimated the degree to which China would constrain its demand and run down its SPR reserves initially. And that was a big part of it. And then, the second part, and also other Western SPRs, the United States in particular and others, right? So there's been a coordinated effort. So that was more supply that came on and that mitigated things. And then I think the second thing as it relates to some of the food, et cetera, stuff, it's a slightly different version of the same thing that we're finding here, which is this is going to take a lot longer than expected. As we said initially, I think part of the food and fertilizer thing, you know, might be, and when I say might, I'm hearing that it's the case, at least in certain emerging markets, is fertilizer is just too expensive to order. So they're just not going to order it. And so paradoxically, the first stage of a real problem that will show up in food inflation around the world, it's not going to show up this year. It's going to show up in theory in lower yields next year if fertilizer isn't bought and applied and therefore yields are down. And so paradoxically, that might be some of what we're seeing. You know, it's not like we've lost, you know, 2 billion people. So in theory, you know, they're still eating. And so what I've, a little bit that I've read on it is that is on the margin demand for fertilizer is down because no one can afford it. You know, the marginal farmer around the world, particularly in lower income places, can't afford it. And so paradoxically, and something that's ultimately very, very bullish for prices, for crop prices, row crop prices, initially, it might be a little bit more expensive. And so paradoxically, it might be a little bit more actually be somewhat bearish. And that's been, I think, somewhat confusing to me. And maybe that's sort of, you know, first world privilege of like, hey, I know this is a problem. So I would stockpile. But that's, you know, as opposed to I just can't afford it. So I just don't buy it. The math doesn't make sense. I'm not going to plant whatever the case may be. But we'll see.
Speaker 2Luke, what I just cannot get my head around is when this first began, as you said, really what happened was there were massive SPR releases coordinated around the world. All the experts that I'm seeing in the oil market are saying, yeah, you know what? We've used up most of the available, you know, supply buffers. We've done all of those big releases. Now we're getting to the point where we don't really have a lot of strategic reserves left. Now, China still has plenty. They have been reducing their imports. That's, as you said, contributed tremendously. But the thing is, we're still seeing refineries, particularly Russian refineries being struck by Ukraine. But also in Saudi Arabia and in Iran, if we take refineries out and we reduce the global capacity for refining products, refineries take 10 years to build. So, yes, we're having a crack spread blowout, I suppose. But it doesn't seem to me that the news is really picking up on the fact that the damage we're doing to refining capacity could be permanent, not permanent, but persistent for many years after the war finally ends. Would you agree with that? And why isn't the market freaking out more than it is?
Speaker 1It's a great question. It's one of these things that as a tourist, I don't fully understand, right? Because on one hand, my president's telling me that the strait is nearly up and running. Okay. So there's more oil supply globally. Okay. And SPRs are being run down, as you know, to run the world. Okay. There's more supply. And the damage to refineries that you just listed off around the world. Would suggest that there's less demand for oil from those refineries, which in theory, when you sort of add that up, that's a lot of incremental crude now versus say six months ago, four months ago. And yet the price of crude is where it is higher, much higher than six months ago and certainly eight months ago. And, you know, you are seeing signs of strain. Obviously, diesel prices in certain parts of the world are approaching $200 a barrel. So, you are getting some of those numbers that, that some of the sort of, you know, quote unquote doomers thought we'd get to, but I don't fully understand something, you know, is it, is China taking it all down? And that's the missing point. And we've certainly seen data suggesting that China has, has increased its purchases in recent months off the lows and continues to increase them. And so, you know, that is a fact pattern that would, in theory, square the circle of SPRs run down. Refinery's not buying as much because a lot of them are, because a number of them are offline. Strait of Hormuz is seeing very good volumes and there's no problems there. Is China just buying it all? I don't know. That's something that makes sense, but I just don't know because like you, I'm a little bit scratch in my head based again, as a tourist, just watching sort of general flows of directions. It doesn't quite make sense to me, given the narratives that I'm being told as an American.
Speaker 2We recorded this interview, on Tuesday afternoon, October 27th. So two days before our listeners will hear it and exactly one week before the US presidential election. So it seems like if I'm reading the tea leaves correctly, the escalation or re-escalation by the United States, if that's what is to happen, is probably been put off until after the election. Is that your read? And what do you expect both between now and the election and also after the election in terms of this conflict?
Speaker 1My view on the conflict has been pretty consistent the whole time, which is that Iran has more leverage than the Western narrative suggests because Iran doesn't have to beat the US. It just has to beat the bond market. And when I said that on February 27th, same thing, people laughed at me. Tenure yield was at 3.94%. A couple of weeks ago, we hit 5.3% on the tenure. Nobody was laughing anymore. And we've gotten a bit of a respite there. But I still think there is a level of hubris or non-understanding of what the Iranians need to do and are doing and will likely continue to do, which is the Iranians understand the production rate, the resupply rate of US air defense missiles. And they understand that resupplying those air defense missiles, can be done at, say, I don't know what the right number is. Let's just pick a number for easy math to make an example. They can replenish a hundred missiles a month. So let's say we can make a hundred air defense missiles a month. Assuming the Chinese keep sending us rare earths at the same pace they have been at times in the past, that's not necessarily true, but let's just set that aside for now. US can replenish a hundred missiles a month in our fictitious example here. The Iranians understand that, and they, they understand that all they need to do is keep lobbing drones and missiles at us in a manner that forces us to use 150 to 200 to 300 air defense missiles per month. And they understand that at that point, it's just not that complex a line theory calculation. The Americans burn 200 to 300 missiles a month. The Americans can only replace 100 missiles a month. The Americans are going to run out of air defense missiles on X date. And when they do, they're going to run out of then we can hit them with impunity. will pull resources from other strategic regions, which will make them look weak. And sooner or later, they will have to fold before us. That's been the calculus the whole time. And this is understood in the U.S. complex, the U.S. defense and intelligence complex. Whether the Trump administration wants to continue pretending it isn't true or not, I think is the $64,000 question. And, you know, we've seen in the last couple of weeks slash months, you know, more things that I was getting laughed at six months ago around, you know, I was hearing that U.S. military bases were taking very serious damage, that we were unable to provide air defense for them. And people are like, oh, you're crazy. And, you know, that has come out as the case. And here, too, the Iranians understand the Americans are not going to station troops in the Middle East at a base for which they cannot provide air defense. And the Americans cannot invade. There's all these talks. Well, let's put boots on the ground. America has not fought a war without air superiority, air dominance in 80 years. Americans don't know what that is. I mean, there's protocols for it, but they're messy. They're very messy, right? You don't just get to like do we did in 91, where you assemble, you know, a couple hundred thousand troops in the desert in tents and like nothing happens. That's not how that works. It looks more like, hey, here come the boats in the beginning of the war. So, like, I give all of this sort of background context rant again. I'm sure I'm screwing a few things up. This is how it's been explained to me in, again, very directional flow terms. But the point here is that if I'm the Iranians, why stop? Why would I stop this? Especially I'm getting resupplied by the Russians and or the Chinese, which is, you know, if I'm the Iranians, if you're the Russians and the Chinese, especially the Russians, the Russians have been being shot at by the Americans via the Ukrainians. I mean, let's be clear. We've been putting in the targeting and, you know, the the reconnaissance data in for the Ukrainians. We do everything for them except hit the fire button with missiles launching at Russian soil. And so if you're the Russians all day long, you're like, oh, great. We'll keep supplying you around. You just keep doing this. We'll keep helping you with satellite targeting around. Just keep doing this. Because you're because the open secret at that level is they know the Americans can't replenish missiles beyond whatever that rate is was 100 missiles a month, 120. And that number is going up slowly, but it's not going up nearly fast enough. And again, it really can't go up faster than the than the Iranians can force us to use what we already have. And so that's it's sort of I think it's when you say, what do I think is going to happen? I think it's going to continue dragging on because I think the Iranians are happy to have it. And I think it's going to continue have a drag on. I think the Russians are happy to have a drag on. I think the Chinese are happy to have a drag on. I don't think the Israelis mind it because we shoulder the burden for them. And then instead of, you know, those missiles will just be coming down on them. And in the meantime, you know, it makes the administration more and more and more unpopular. And it may, you know, it may be a key reason why if he loses next week, it's going to be a key reason why he loses.
Speaker 2Luke, the other thing that our listeners will have learned that we don't know yet is the outcome of this FOMC meeting. What's your outlook and what do you think about this backup in rates? You mentioned the 10-year earlier. Let's go a little deeper on that. Where do you think we're headed?
Speaker 1Yeah, the backup on the 10-year yield to me was really interesting and potentially notable from last week. So I guess I'll answer the Fed question first. I don't have a strong feeling. I think he's either going to hold tight or hold pat or he's going to raise rates 25 basis points. I don't know that it matters a whole lot right now. I think raising rates all L-SQL is the wrong thing. But I think this backup in rates last week, the 10-year, fell as much as 20 basis points intraday, which is, I mean, I've been in investment research for 31 years. I could probably count on one hand the number of days that the 10-year treasury yield fell 20 basis points in a day. And my guess is it's 9-11, Lehman, the handful of sort of catastrophes that have happened, you know, COVID in my career. And so on some random Thursday, and furthermore, it was a real disconnection from the existing market regime. And what I mean by that is, you know, I got down to my screens on Thursday morning and, you know, I sort of run through a list of prices just to check in on them and, you know, just see, gives me an idea of sort of what's happening, right? So now click up gold. Okay. Gold is down 50 bucks. Okay. Well, all right. If gold's down 50 bucks, then that means oil's up big. Call up oil. Oil's up 3%. Okay. That makes sense. Okay. Well, if gold's down big and oil's up big, that means Bitcoin, which is sort of a Texas, yes, or Texas hedge read on liquidity, what's happening. I bet you Bitcoin's down big. Sure enough, Bitcoin on Thursday last week down 3% or something, 4%. Okay. That all makes sense. Well, if those three things nailed that, I said, okay, so dollar's probably up DXY. And it was like, oh, it's up a little, but it's not up a ton, but okay, but it's up. And I said, and finally, all of that means that the 10-year treasury yield should be up big today. And I call up the 10-year treasury yield and it's like, oh, it's down big. That's different. That doesn't make sense. That's why. And, you know, is this a one-off or is this some sort of recognition around whether it's France, whether it's Mideast, whether it's Iran war, whether it's a recognition that, the Trump administration is going to lose and they're going to do something that ensures that markets really sell off as a result because, right? I mean, what Trump has said, I think six or seven different times in the last month that if the Democrats win, we will get a 1929 style depression. Besant has warned slash threatened that if the Democrats win, he will be forced to do his planned fiscal consolidation in the span of two months from November 4th through January 3rd, 2027. He's going to have to do all of that. He's going to do all of his fiscal cutting, which fits both gentlemen's personalities perfectly, which is right, which is, you know, if I can't win at monopoly, I'm going to just dump over the board. And that's what that would look like for markets. And if their internal polling was saying, hey, you're going to lose at least the house on next Tuesday. Look, we know from oil markets that they, that, um, somebody, I won't say they, cause I don't know that for a fact, it's very strong suspicions, but I don't know it for a fact, but somebody was giving somebody else very big heads up before Trump would tweet something as it related to the war in oil markets. And then we also know from two weeks ago, the, when the CFTC went to investigate who that was, they were told to stand down by the Trump administration, that investigation. Is it possible that part of what we saw last week in the 10 year breaking the correlation of everything else and falling in a way that is literally only has happened in 30 years on catastrophic days, was that somebody in markets getting a heads up from the administration that, Hey, we're going to lose at monopoly. And if they don't win at monopoly, we're going to lose. And when we lose, we're going to dump the board over, which is to say, we are going to try to implement a fiscal consolidation in two months. And when that happens, stocks are going to tank commodities are going to tank, and you're going to want to own bonds. That strikes me as very possible, uh, given what Trump and Besant have been warning, uh, Besant more eloquently than Trump, but they're basically saying the same thing. So that to me was super interesting. And I don't know quite what to make of it. You know, since then 10 year basically hasn't moved. I mean, we've been at 499, uh, since Thursday. Now this is Tuesday, right? So we're talking about a grand total of three trading days. So I don't want to play too much of five minute macro, but that Thursday move in 10 year yields to me was very noteworthy, peculiar, didn't fit. And those are the types of things that really get my spidey sense up.
Speaker 2Luke, let's turn to the equity market, which has been rallying really pretty briskly since the beginning of April, but we just broke a ascending wedge pattern to the market. And I think that's a really good thing. I think that's a downside, been a fair bit of turbulence in the last few weeks. And, you know, I'm, I'm looking at this and I'm saying, okay, markets hate uncertainty and we're headed in just next week to the midterm elections, as you just described. Is that what this is about? Or is this AI credit bubble and AI CapEx boom actually at risk of a bust, which everybody's been worried about for months and months and months? Is that finally coming to a head? I can't tell which it is. What are your thoughts? I can't either.
Speaker 1I think it's going to be a lot of money. I think there's probably elements of both. And it's weird because in theory, based on what the Washington hands that I've read, cause it's not my ballywick based on people whose ballywick it is. They've said that if you get some sort of big blue win, it's actually really good for liquidity because nothing will get done and everything. It'll be a horse trading of you spend your money the way you want. And you give me to spend money. I want, and nothing gets cut. And that in theory would be good for bad for the dollar, good for gold, good for stocks. But if there's uncertainty around the election or if Trump contests the election, as I've seen serious people talking about in certain areas and it drags out, that wouldn't be good for risk. I wouldn't think so. I think that uncertainty point around the election, I think that's very well taken. Then I do think the credit side of what we're seeing on AI and then the secondary credit side, which I think is still very early days, right? We're other hyperscaler credit default swaps doing, and where's this deal priced and some of the circular and concerns and all those things. And I get those things. And there's a second derivative credit concern that I'm still seeing basically nobody talked about. I've posted on X a couple times about it. I've been writing about it for clients for several months now. But it is the dynamic that there is $19 trillion in consumer debt outstanding. Mortgages, credit cards, auto loans primarily. And that means so five percent of that number is call it a trillion dollars for easy math. So if you assume that AI is going to really displace a lot of white collar jobs. And I think there's been a pretty robust debate around that. I think it's foolish to think they won't. But there's been a robust debate about it. But I think in the last literally two weeks. So the side saying that they're that AI is going to create a lot of white collar job loss has started to strike some serious body blows to the side that everything is going to be fine for white collar jobs. You had Kroger layoff talk about laying off, I think, 37 percent of their corporate workforce. Kroger's business model hasn't changed in a long time. They sell food. Right. So this is AI related. American Express last week came out and said we are firing five percent of workers because of AI. Barclays came out last week, said we're firing five percent of workers because of AI. And then, of course, yesterday, Microsoft is buying out 27 percent of their workforce. Yikes. And the reason I bring up these numbers and this is the credit side that people just the second derivative credit side that no one is talking about. And I think they're not talking about it because there's nothing to say. There's nothing to say, which is all of these people getting laid off. They're not going to find another job. Not easily and probably not at the same wage. Because the AI is hitting everybody all at the same time in in finance and tech in particular, but white collar more broadly. And if you just kind of play that out over several quarters, that 19 trillion dollars in consumer loans, let's pretend five percent of those default as a result of AI just sometime in the next two years, three years, five percent. It's roughly a trillion dollars. So by way of comparison, the entire equity capital base of the United States banking system, according to the Fed, is two point six trillion dollars. So every five percent default rate increase on consumer debt as a result of AI unemployment or deflation in wages is equal to 40 percent, four zero percent of the total equity base of the United States banking system. You see the problem here? And that's the side that no one's talking about yet. And I think they need to be if 40 percent of the equity capital base. So what are banks? Going to do if AI starts to create this this joblessness, they can stop making loans. They can, you know, again, take this as a grain of salt. I'm a tourist, but they can stop making loans. They can sell treasuries that they're holding for as high quality liquid asset to raise capital. But oops, now you're going to have another seller of treasuries to go alongside foreigners, to go alongside Scott Besson, et cetera. They can issue equity, which the market isn't going to love if banks start issuing trillions of dollars of equity because, oh, they're going to issue capital alongside Scott Besson, alongside AI. And now the banks, that's not good for risk. Or you slow the economy down a whole bunch. But none of those are good out. That doesn't work for our debt position. We have to grow out of our debt. When we slow down, we don't grow out of our debt. And so I think it's almost like to me the last two weeks, particularly around this Microsoft news, this Microsoft news, I think was like we're going to need a bigger boat moment. For the employment argument around AI. And I think that's, I think some of what we're seeing with the toppiness of the market that you're describing and the fact that bank stocks have rolled over and consumer credit has rolled over and Blackstone has rolled over and Blue Owl has rolled over American Express, Capital One, all these stocks, they've massively underperformed the S&P over the last three to six months. Why? If AI works, why would I want to own any of this stuff? Makes no sense. That to me is the more troubling. And it's the more, I wonder if that isn't starting to factor into the mind of the market that of just this gigantic credit problem that we haven't even started discussing really publicly yet in a major way. We're still very focused on sort of the narrow tranche of, Hey, can they keep blowing through a trillion dollars or $600 billion, whatever the ridiculous number is a year in capital. And as the rates go up, because, you know, and we haven't even gotten to the consumer side of this, like, Hey, if this is going to work, we're going to have to do something about it. If this actually works, we're going to have a credit default cycle in consumer that makes a weight look like pretty tame. So that it's kind of a ramble there. It's a thought stream, but that to me, I think is starting to get, I know it factors into my mind when I'm managing my own money. I'm sitting in 30% of my liquid net worth in cash and T-bills. Cause I look at this and I just go like, I don't like shorting stocks in a rig market where, you know, liquidity is provided to supply when it's needed because we're in fiscal dominance. And, and, you know, so anytime the treasury market acts, they're going to step in and do something, but yikes, I don't know how this is going to play out, but that's the fact that this isn't being talked about yet. While some of these names are not acting great, makes me cautious.
Speaker 2I'm trying to get my head around the policy response and particularly whether, and to what extent it would matter or make a difference. If we don't, I don't know what I'm going to do with it. I don't know what I'm going to do with it, but I don't know what I'm going to do with it. I don't know what I'm going to do with it. But I think it's going to be interesting to see how these AI capex boom start to fall apart because the Trump administration has been incredibly vocal saying dominance in AI and energy is kind of the, you know, the, that's the whole thing for them. That's their priority. You look at David Sachs in his role, basically telling Anthropic to pound sand when they wanted to slow things down or regulate AI. We're not going to regulate anything. It's full steam ahead. Okay. So let's imagine that we do this capex boom starting to, you know, his rates back up, it runs out of steam and the ability of private credit to finance that continued AI capex spend starts to dry up. Do we get a Trump administration policy response, which is all of a sudden there's a bunch of government money to bail out AI in order to keep it going in the name of national security? I mean, I could certainly see David Sachs advocating for that. What do you think? Is that, you know, if they wanted to push something like that, they'd probably need to do it before any change of power in the Congress. You know, after the midterm elections, we've still got a lame duck period until January. You know, what could happen between now and January?
Speaker 1Yeah. The Overton window's wide open. Yeah. I mean, Sachs said, hey, we don't want any regulation, blah, blah, blah. And then his administration turned around and banned DeepSeek from any government programs and from any companies that sell into government programs. So, and that's, look, I'm not, I'm not naive as to why they did that. And that's a regulation. That's a moat that they helped try to put up around the economics of opening AI and anthropic. So Sachs, you know, whether Sachs had any say in that policy or not, I don't know. But the fact is he's a part of the administration and the administration put that in. And so the administration at the very least made him a hypocrite because they did intervene to put a moat up under auspices of, hey, we need to keep the Chinese out of here, which might be the right thing to do, but that's a moat. Yeah. AI is now too big to fail. So, you know, if, and I hear credible rumblings that subject was broached in Washington over a year ago. What happens if something happens? How are we going to step in? Will we step in? That was a subject that, you know, they began discussing contingency plans for, I hear. So if the credit mania bursts, then yeah, there's going to be massive losses. You're going to have a recession because it's, you know, at least it's a big chunk of marginal growth in this country. Unemployment rise, blah, blah. And so they're going to have to step up and do something because, you know, we're even with this mania, U.S. interest plus the entitlements and plus veterans affairs is running at 105% of receipts. And so if that mania bursts, receipts are going to fall pretty sharply. And, you know, the offset might be a marginal respite for interest rates for a bit, right? Because now all of a sudden, maybe they wouldn't be competing with Besson to raise debt. That Besson was going to need to raise would need to go up by 400, $500 billion. So nearly the entire amount that they're raising, because if we had a recession, the deficit rises in this country, last three deficits gone up by 600 basis points, 800 basis points, and a thousand basis points of GDP, uh, 600 basis points, at least you 600, 800 throughout the extreme case of COVID 600, 800 basis points of GDP is a 1.8 to a $2.4 trillion. So that's how much more of the deficit's going to go up in a recession. So we're running $2 trillion deficits today in a recession caused by a bursting of the AI mania. You very easily could add another $2 trillion deficit. So now you've got a $4 trillion deficit. You've got to finance that extra $2 trillion. So I've seen people say, well, Hey, if AI slows down, yields will really come down at the long end and Besson can issue there. It was like, I think they'll come down for a second on sentiment. And trade that narrative for a second. And then Besant will give his first QRA, his quarterly refunding announcement and go, Hey, guys, we thought we were going to have to issue $2 trillion a year. It's actually closer to $3.5 trillion. And the long end will go, bleh. And that'll be that. That, to me, is, I don't know what to make of it other than, like, I would fade the bond rally all day long. Because one way or another, someone's going to borrow that money, and the market's been demanding a higher rate. So, you know, the one way I would not fade is if the Fed was involved or if Treasury was doing buybacks or they shifted a bunch to the short end, whatever. But I don't know what the policy response would be because a recession is just not a policy option at all. Because, oh, by the way, right, we just said in a recession, you could easily add $2 trillion to our $2 trillion deficit. So we would have $4 trillion a year in issuance. That's bad enough. But now in a recession, remember what I just said about credit losses for the banks? What are they going to sell to offset credit losses? Treasuries. Okay, so now they're joining Besson. So whatever the, $4 trillion from Besson, we'll probably add $200, $300 billion a year from the banks in Treasury selling. Now we're at $4.3 trillion. Dollar's going to rise in a recession, as it always does. Dollar was up this year. Foreign central banks are on pace to sell almost $600 billion since February in Treasuries. Foreign central banks. Throw another $600 billion on top of that, we're up to almost $5 trillion in effective deficits. Now let's factor in the Fed. Let's factor in the fact that 8% of the Treasury market is owned by hedge funds out of the Caymans. They're not going to be grossing up into a recession. They're going to be de-grossing everything, including Treasury. So let's say they sell another, I don't know, $200 billion worth of Treasury. We're at $5.1, $5.2 trillion worth of Treasury supply. And who's the buyer? Mom and pop? As they're losing their jobs? Pensions? As they're paying out early withdrawals, who are also a big owner? No, there's only one buyer. It's the Fed. And they will say, we're not monetizing the debt, and we're not monetizing. That's okay. But that can't happen. That policy response we talk about, that can't happen until you have a crisis. Because otherwise, it's just handouts for the banks. You got to scare people first.
Speaker 2See, the thing is, I think there is a very realistic setup for a crisis. And the analogy I would use is the 2000 dot-com bust. And look, the bet that we're going to make is going to be the 2000 dot-com bust. What was being made there was a correct bet. Everybody thought the internet was going to be a really big deal. And they were right in that call. But the thing is, the market got ahead of itself. And we just had too much malinvestment in all the wrong dot-coms. What you've got now is this massive credit-driven spend-out on AI. And it is giving the U.S. frontier labs the lead. But as Matt Berry has pointed out on this program, only a lead by six months or so. China is not going to be able to do that. China is not very far behind. And that means if we had a credit bust in AI, it would legitimately risk China taking over and basically becoming the dominant power in AI globally. And that really is a genuine national security risk, in my opinion. Okay, you know what Besant is going to say to that. The answer is no. From a policy standpoint, we will not allow that to happen on my watch. He's probably willing. It's not like Besant is a guy who's sheepish about taking bold policy moves. So, I mean, there could be almost any policy response to stop an AI bubble from bursting. Okay, how is that going to be received politically as we get into what could be a lame duck session where maybe even both houses of Congress have been taken by the Democrats, but they haven't taken office yet, and Besant's trying to move policy actions through Congress before the lame duck session ends. And then, meanwhile, on top of all this, now, Luke, I don't usually, I'm not one of these guys who picks through S-1 statements trying to, you know, find little risks where they have to disclose, you know, we're Citibank, and if, you know, if there's going to be a new online form of credit, maybe it poses a risk to our business. But here's a direct quote from Anthropix S-1 just filed for their IPO. Concerns have been raised. Both within our organization and by other researchers, regulators, policy makers, and industry participants that sufficiently advanced AI systems could, if not developed, deployed, and operated with an appropriate safeguards, oversight, and security measures, pose catastrophic or extensional risks to humanity. Okay, I'm pretty sure there's never been an S-1 statement filed with the SEC before that says, oh, by the way, in terms of just minor things that could go wrong that you might want to look at in terms of reviewing our IPO, our stuff could end humanity. I don't think anybody ever said that in an S-1 before. So if you were trying, if you're thinking about how a setup could come together for a really strong left versus right, Democrat versus Republican, you got Scott Besant and David Sachs probably saying, we can not allow the AI boom to stop. It is a matter of national security. It must be supported no matter what. Who could possibly give the Democrats better ammunition than this S-1 statement? This is, oh, by the way, it risks humanity, the existential threat to humanity. That's bigger than Besant's claim of, you know, a massive economic crash. How does that get litigated between the midterms and the actual handing over of power? January 21st. What is the forest for the trees outlook on that one?
Speaker 1Reminds me of that cartoon. There's a cartoon that's like, you know, three people sitting around a fire in rags saying, you know, we ended up destroying the earth. But for a moment there, we really created some shareholder value. And I don't know how it gets litigated between election day and when people are sworn into their new seats. The thing that keeps sticking out in my head, or the splinter in my brain about all of this, or one of the splinters in my brain about all this, is that even if Besant and Sachs say we're not going to let that happen and they stop it, I wonder if it's a booby prize, which is to say, by luck of the draw or whatever, China's one-child policy means they have a catastrophic demographic problem. Ask any China hawk, any China, any China bear about it. China is screwed because their demographics are shrinking. And yet, if AI actually does what it says it's going to do, and Besant and Sachs et al. won't let it fail, even if it would collapse under its own weight, and America, unlike China, does not have a catastrophic demographic issue in the traditional sense of the word, we have a growing population, very heterogeneous, population that can barely get along as we speak today. And now you're going to start whacking people's jobs in 5 and 10 and in Microsoft's point, 27% chunks. In the meantime, over in China and Japan and Korea, with their catastrophic demographics, they're still going to get hurt by AI taking jobs so fast, but they're homogenous cultures with rapidly shrinking populations. And I look at this and go, I know what happens to cultures with very heterogeneous growing populations and not enough jobs. Google France, Google Middle East, right? You can see how this is going to go. And so that's why I say, even if Sachs and Besant say this isn't going to be allowed to happen and they succeed, which they very well, they probably are saying that and they very well probably will succeed. What? What will they win? Show them what they won, Bob. Here's the next five years of social unrest in the United States. And maybe that's what all the flock cameras are for. Maybe that's what Palantir's for. Maybe that's what all this is. And now we start to get to a really kind of dark place, but that's why I look at this and kind of go, I really wish there were more second and third derivative thinkers around this administration rather than sort of like the obvious move that's right in front of you. And some of that's a nature of our politics and some of it's a nature of our culture, but it is what it is. And that's, I look at this and go, when will this be litigated? I don't know if it'll be litigated between November and January, but if AI does what I think it's going to do, I think it's going to start getting litigated in 2027. And how do I think it's going to get litigated? I think it's going to get litigated with Molotov cocktails in city centers around the United States, just like it's getting litigated in France right now, just like it's been getting litigated in the Middle East for decades. And it's an unpleasant thought. And, you know, I'm sure I'll get plenty of, oh, you're such a doomer Luke, but this is just critical thinking. I'm sorry. If you're going to start importing lots and lots of people to have a growing population and it's heterogeneous culture, and then you start whacking the good jobs out, you would have to be a moron who doesn't read history to understand how that's going to go. Pick up Peter Turchin's book, the end, uh, end times elite overproduction plus massive wealth inequality. It always ends the same way always. So, I, that's when I think it'll get litigated. It'll start to get litigated in 2027 in exchange for, accelerating political instability in the West and in the United States as AI does all of this.
Speaker 2Well, and I certainly think there's room to expect a pretty interesting presidential debate in 2028, but we don't want to jump ahead of ourselves too much. Luke, as always, I can't thank you enough for another terrific interview. I always really enjoy our talks. But before I let you go, please tell our listeners what you do at forestforthetrees.com and what people can expect to find when they visit fftt-llc.com.
Speaker 1Yeah, thanks, Eric. We aggregate a large amount of publicly available data in a unique manner trying to identify developing economic bottlenecks to help our clients make money. And if they want to learn more about how we do that, et cetera, they can go to fftt-llc.com for more information or check us out at x at Luke Grohman.
Speaker 2L-U-K-E-G-R-O-M-E-N. And now it's time to bring Patrick and Masil in for our Macro Voices Market Desk. Patrick, where's the trade?
Speaker 3Well, thanks, Eric. Luke's argument raises a credit risk that extends beyond the company's financing the AI boom. If AI displaces workers and reduces their earning power, then the outstanding debt still need to be serviced. Productivity gains for businesses could therefore come with deteriorating credit quality for consumer lenders. Capital One's exposure to credit cards and auto lending makes it a candidate for expressing that concern. The technical backdrop adds to the case. The stock peaked back in January and has spent much of the year under pressure. Following earnings, it's pivoting at its 50-day moving average. A failure around this level would reinforce the bearish structure and leave the stock vulnerable for another leg lower. With Capital One, symbol C-O-F, trading around $204, I'm looking at the January 15, 2027, 200 by 175 bear put spread, trading around $5.96 net debit. The $25 spread offers a maximum profit of $19.04 per share against that $5.96 commitment, giving it approximately a 3-to-1 risk-reward ratio. Now, with the implied volatility on Capital One, near the bottom of its one-year range, owning even the January 200 put outright for $7.95 is also a reasonable alternative for seeking greater downside participation. We're expressing a specific vulnerability in consumer credit through a stock already showing technical weakness, with a defined capital commitment and more than $3 of profit potential for every $1 risked. That's where's the trade.
Speaker 2Patrick analyzes and trades the markets, every day over at Big Picture Trading. Macro Voices listeners can sign up for a free two-week trial at bigpicturetrading.com. Now, back to Patrick and Masseel.
Speaker 4All right, Patrick, we've had the Fed announce no rate hike yesterday, and there's a huge round of big tech earnings this week, but what stood out to you the most?
Speaker 3Let's start off with talking about the mixed earnings reaction. Microsoft higher, Alphabet sharply lower, and no convincing bullish impulse across the market. The AI spending cash flow is now under a lot of pressure. The AI spending cash flow is now under scrutiny. Microsoft's quarterly free cash flow is like $18 billion versus Alphabet minus $9 billion, growing distinction between funding the build-out versus delivering returns. Now, particularly with Microsoft, we want to really see whether it can follow through. That's going to be the big test. It's now approaching its previous high. Will it retreat and will the big money sell into the strength, or will there be genuine follow-through? It's going to be a really big test. We're going to see. At the same time, Google, with this gap down, has really solidified a very clear downtrend, and it will be pretty hard for it to recover immediately. Now, the NASDAQ is now below its 50-day moving average in what is essentially a bear flag, and we were looking to see whether any of these MAG-7s could meaningfully turn the entire NASDAQ trend back bullishly. There's no sign of that yet. Now, the S&P 500 continues to trade above the critical levels around 76 to 7,700, where there's a number of systematic sell zones where we would see CTAs and vol targeting funds and other things potentially start to unwind their strong bullish positioning. Now, overall, even though the market's breadth has been improving, this really does continue to be a MAG-7 story. They remain a 35% weighting in the S&P 500 and have been the core part of the market that has been able to maintain this bull trend. With the MAG-7 basket now trading at its 50-day moving average, the big question here is that did Google somehow take the wind out of the sails of this MAG-7 basket, and are we seeing the beginning of a little bit of distribution here? I think it's going to play a critical component as to whether the S&P is going to be able to hold above those key levels. Okay, but what did you take from the Fed's message yesterday? Well, the market was expecting a hawkish hold, and they got it. It was a bit of a softer press conference in terms of the tone, but overall, when you look at the actual reactions of the market to the FOMC, then pretty much the market got what they were expecting because there was no real big surprise or move in the repricing of any of the assets. Now, what was interesting, well, Warsh did acknowledge some tightening of financial conditions, but fell short of calling it actually right, and no declaration that the bond markets have already done enough tightening. And so, what is the overall response? Well, surprisingly, the SOFR and short-term treasury bond yields are relatively unchanged in the reaction, and even the longer duration bonds like the 10 and 30-year have stayed within the range of the previous week. So, from a response, the Fed basically gave the market what they priced in, and there are no changes. So, I think it's going to be a immediate reaction. I think other parts of the macro space, like what oil does next, are now going to play a much more pivotal role in the week to come. And now, when looking at the dollar, did the Fed change anything meaningful? Well, really, the dollar trend would have reversed if there was a dovish pivot, and there wasn't. So, at this moment, the prevailing bull trend in the dollar remains intact, but the one currency pair to completely focus on is the euro. While we've seen the Canadian dollar and the Aussie all have bounced and retraced a lot of their weakness, the euro remains along its 52-week lows. And if this 111 level gives out, the euro may be starting another leg down. And because the euro is such a huge weighting in the dollar index, that alone may drive dollar strength, even without the dollar rising on funding stresses. And so, certainly a set-up here. Overall, the US dollar bull trend remains intact, but increasingly, it really is the euro that we just have to watch.
Speaker 4All right, Patrick, we have to turn to oil right now because we keep seeing flows coming in and buyers keep coming in to hold the asset. What are you specifically watching here? Well,
Speaker 3the key observation to make is that every piece headline we get, there's only a modest price response, and almost always, oil regains itself back to its previous highs in any reasonable period. And so, I think that's a good thing. I think that's a good thing. So, we continue to have an environment where oil is trending higher and very likely anticipating a re-escalation of the situation in the post-midterm period. At this moment, crude oil remains in a decisive bull trend, and it would take some sort of a geopolitical disruption at this point to disrupt this trend. And so, at this stage, a technical upside is back to the $120 highs on WTI. And Brent could certainly clear the previous highs if that was underway.
Speaker 4All right. Now, when we turn to gold, it's trading at a key psychological level right at $4,000. What would it need for the asset to trade higher or break lower?
Speaker 3Well, gold really needed a dovish pivot from the Fed and some sort of a change in the macro backdrop. And that just didn't happen. At this moment, gold is trading along its $4,000 support line, where were the lows of the summer. And there is simply no accumulation happening whatsoever. It's a distributive chart, and there's no sign of buyers anywhere. At this moment, the prevailing downtrend is the one that's the path of least resistance. And without an immediate catalyst, gold remains at a risk of a breakdown because a key technical breakdown like this would leave room for even a 5% to 10% further drawdown. Overall, I remain very bullish gold long-term. But on the short term, there is clearly a distribution cycle underway driven by macro catalysts. And it's just a matter now of waiting out to see how the dust settles and when the actual inflection point or turn point in the gold trend materializes.
Speaker 4All right. Let's turn to copper right now because we keep seeing distributive price action and topping formation. But what are you seeing in the charts?
Speaker 3Going back a month or more, copper was the most bullish commodity out there in terms of positioning based on commitment of trader report. Everyone was decisively bullish, and there was a fundamental reason behind it. But what's interesting is that over the last three months, copper has failed to break to a high. high and reward that bullish positioning. Now we've seen some deterioration in the price and just now bouncing back to the 670 level near its 50-day moving average. This is an important moment where we're going to find out whether or not the bulls can neutralize this weakness and get this back up to the 52-week highs to set up a breakout. But right now, with the way the price action is deteriorating, any breakdown below 650 could squeeze out the very crowded trade. At this moment, I would remain relatively neutral copper until we see some sort of technical price action showing some meaningful accumulation.
Speaker 4All right. When looking at the bigger spectrum of equities, stocks, commodities, was there anything else on your screens worth
Speaker 3highlighting? Well, I want to highlight the uranium disconnect because the U308 is trading around $91.30 a pound, holding well above $90. But at the same time, the U308 is trading around $91.30 a pound, holding well above $90. But at the same time, equities remain in a decisive downtrend and continue to be hurt considerably. Clearly, those uranium equities have been dragged down with a lot of the AI selling that has been going on. It will be interesting to see when these uranium equities finally can start banging out short-term lows and whether that ends up being a critical buying opportunity. Also worth noting is what's been happening in Brazil. Clearly, there was a huge shocker. Everyone was expecting Bolsonaro to win, and that was being priced into this market. At this moment, we saw a huge gap in the 20% to 30% level on the downside in reaction to the election results. And the question now is, was this one big buying opportunity, or is there still further weakness to come? Overall, we've seen price stability over the last couple of days. Will we have a full recovery back to the $37 or $38 level on the EWZ? which is the Brazil ETF, certainly one of the more lively markets in this environment. All right. And what are the key things to watch from here? To me, it remains about earnings. Not only do we have Amazon coming up and Apple next week, but with this asking questions like, will Microsoft hold these gains or will we find it giving them all back in the next couple of trading sessions? Will Alphabet find support? There's so many big questions, but the MAG-7 remain the focal point. Can the MAG-7, bullishly resolve themselves in the post-earnings period because they are that important to the indices? And what happens next in the S&P and the NASDAQ are really hinging on this. And clearly, the other thing to watch is those November 3rd midterms. And more importantly, a lot of the geopolitical developments that might happen prior to them. Will the administration be able to sort out some sort of a short-term peace deal with Iran? Will they be able to work out a deal with Canada? A lot of different things are in play and the midterms become an inflection point for this. And so the week leading into this midterms is going to be pretty interesting to watch.
Speaker 4All right, Patrick, let's turn to this week's positioning pulse. What stands out the most in this week's cot report? Well, Masil, we definitely have to talk
Speaker 3about corn because the USDA corn production forecast was raised to 234 million bushels. It's a higher yield, less support of the bullish scarcity story. This is happening after just a few weeks ago, we saw some of the highest positioning scores for large speculators in terms of being bullishly positioned on corn. So we saw roughly 166,000 net contracts sold over the last two weeks, both long liquidation and fresh shorting. So we are clearly seeing traders being shaken out of this trade. It's very evident the way that the price is dropping. This went from a very bullish environment for these ag stories to now aggressively being washed out. This is certainly one that continue to watch us in the weeks to come. Well, that's what we're going to wrap up this week's Trading Desk. I'm Patrick Ceresna. And I'm Masil Begna and see you next week. Have a great trading day.
Speaker 2And a reminder, as a Macro Voices listener, you're entitled to a two-week free trial of Big Picture Trading, where you can watch Patrick analyze and trade the markets live every single day at BigPictureTrading.com. No credit card is required to sign up and there's nothing to cancel. I'm Eric Townsend, and this is Macro Voices. We'll see you next week.
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