“We all know what to do, we just don’t know how to get re-elected after we’ve done it.”
Jean-Claude Juncker, former president of the European Commission
Luke Gromen is the founder of FFTT, LLC (“Forest for the Trees”), a macro/thematic research firm catering to institutions and sophisticated individual investors.
Luke’s vision for FFTT was to create a firm that would address the opportunity he saw created by applying what customers and former colleagues consistently described as his “unique ability to put the big picture pieces together” during a time when they saw an increasing “silo-ing” of perspectives occurring on Wall Street and in corporate America.
Ronnie Stöferle and Nikolaus Jilch conducted the interview with Luke Gromen on April 20, 2022 via Zoom.
We are publishing the highlights of the interview below. The full version of the interview is available for download here.
The video of the entire interview, “Energy, War & Inflation”, can be viewed on YouTube here.
Ronnie Stöferle:
Luke! Thank you very much for taking the time! We featured you for the first time in our Q3/2017 Board meeting. Then we had an interview with you for the In Gold We Trust report 2018 which we called “The Dollar Appears to be in Zugzwang”. Then, in the In Gold We Trust report 2020 we did another interview, titled “A Deep Dive into the Geopolitics of Oil, Gold, and Money”. This is our fourth interview, we are truly looking forward to it, there are so many topics to talk about. I would like to start with a Tweet, it is something that you wrote recently in your FFTT Tree Rings. You wrote:
“We want to be very clear; the current setup may be the scariest setup we have seen in our 27-year career. For traders that mange a book on a monthly basis, we would recommend to be in maximum defensive position. Cash, short term US treasuries and maybe gold, until the Federal Reserve is forced to come to the rescue.”
Could you give us your view about all these topics that are currently unfolding and the “everything bubble” that might be crashing at the moment. What do you see happening over the next couple of weeks?
Luke Gromen:
We have an extremely difficult setup in terms of the macro view, where over the last 20 years we had started with an equity bubble, then kicked that up to the banking system via the housing bubble, then kicked that up to the sovereign level, where we now have the biggest sovereign debt bubble, the first global sovereign debt bubble, in 100 years, since the immediate aftermath of WW1.
This is also the first Western sovereign debt bubble since the end of WW2. This leads to a number of different things. Within this bubble you have an overlay of a commodities crisis of sorts, that we had already in terms of “peak cheap energy”. The marginal costs of producing energy are moving secularly higher due to geology. Now we also have geopolitical tensions on top of that, deglobalization, commodity interruptions from Russia, and from Ukraine.
We have this setup where the credit risk is at the sovereign level, and sovereigns cannot default. This is not really credit risk, it is duration risk. What duration risk is, is just inflation. The sovereigns, and particularly the Western sovereigns,are in a position where they need to try and manage themselves between inflating enough to inflate away the debt on a debt to GDP basis, in order to make the debt sustainable, while also not inflating so much that they spook the bond market. They are trying to fine-tune where that is. They were probably running at bout the correct rate, when we were at 8% CPI in the US, 11.5% nominal GDP growth, it probably needs to be 12%-15% nominal GDP growth in the US to get the debt/GDP to levels that are sustainable, from which the Federal Reserve can raise rates without blowing things up. We have been saying all along that they have not been doing enough, here they are, they are raising rates but they have not done enough in terms of deleveraging the balance sheet on a debt/GDP basis and now things are starting to blow up. It’s not surprising to me that things are starting to come unhinged.
We have been increasingly warning people in our reports over the last three to six months, that when the Federal Reserve first came out last June and started talking about being more hawkish, I initially thought it was just jawboning because I did not think that they could be that stupid. But they have positively surprised me as to how stupid they could be. I’m saying that tongue in cheek because it is political, inflation is now so high that it is now a political problem, now they are going to do the wrong thing to address the needs of domestic politics, and domestic politicians in the USA – and lots of other places – are wrong all the time, and that is where we are. They are triggering a crisis.
The “Putin price hike” is a perfect example of what I was talking about. I don’t know what is more disappointing, the fact that they try to pass that off or the fact that more than half of Americans actually believe it. It is what it is, I don’t even think it is good propaganda because it is so easily disprovable, but here we are. This thing was going on well before that and it is a convenient scapegoat for American politicians.
Niko Jilch:
The conventional wisdom would be that if inflation is going up, whatever the reason is, we need to tighten and we need to raise rates. Do I understand you correctly that you think that is stupid and that the Federal Reserve should not be raising rates right now?
Luke Gromen:
Well, that depends on what they want to do. If they want to crash the system, then it’s the smart thing to do. If they don’t want to crash the system then they need to let inflation run. Last year about this time we published a report that estimated that if they wanted to normalize policy without crashing the system they needed to let inflation in the US run somewhere between 12% and 18% for 5 years. That is the level of negative real rates they would have to get to in order to get debt/GDP down from 130% to about 80% which is what we estimated where they could normalize policy without blowing up the system. They managed to get it down from 129% down to 122% with 12% nominal GDP growth and 8% CPI which tells up that our numbers probably were not that far off. But at 122% debt/GDP and 8% CPI they began panicking and now they are tightening and we are already starting to see debt/GDP go back up.
American politicians are worried about inflation, but they are always worried about the wrong thing. They are going to have an asset price problem and an economic problem right around election time if they don’t turn course soon.
Niko Jilch:
That is an extremely important point because this is very much political and it is US-centric politically. There are mid-term elections and the administration is trying to fight inflation, that is what it looks like. This seems to be a plan that came from before the war, now they are doing it. Are you saying that they will realize at some point that people don’t like it when their stocks go down?
Luke Gromen:
That is exactly what they are going to realize. Stocks and their houses etc.
Ronnie Stöferle:
But Luke, didn’t Bill Dudley write about this “reverse wealth effect” on Bloomberg? Dudley is not a nobody, he is very influential and he probably talked to his former Federal Reserve friends before publishing that piece. Do you think that is ahead fake or is it a strategy that the Federal Reserve might be persuing now when realizing that they will have to do something about this inequality? We know that central bankers all over the world now seem to have new mandates when it comes to climate change, which seems to be the most important thing for Ms. Lagarde these days. But also fighting inequality, which is something that Lael Brainard and also Jerome Powell refer to quite often. Do you think they have been pivoting into this “reverse wealth effect” and demand destruction, leading to a cooling effect on inflation without causing a recession? The hubris that they have to think that they are trying to fine-tune this thing like it’s a thermostat, it’s astounding. Do you believe that or is it just a story that they are making up?
Luke Gromen:
I think it is factoring into their thinking. That asset price inflation is driving CPI inflation and my view of this has been that there is USD 35trn in assets that the baby boomer generation owns and the US policymakers and the US media have spent the last two years scaring the US baby boomers to death: “You are going to die sooner than expected because of Covid”. Now they are spending their money sooner.
It’s a tricky thing and I think the Federal Reserve is seeing that when you really look at the problem, the reason that the boomers have USD 35trn in wealth is because of policy to sterilize inflation in the first place. When you look at how these boomers got all this money, in no small part it is deferred accounts. 401k plans, IRA plans, things where there was inflation happening and the US government gave tax breaks to take that inflation out of the real economy and put it into asset inflation instead and thereby defer it.
We have two things happening at once in terms of asset inflation. First, asset price inflation that was sterilizing CPI for 40 years is coming back into the economy. Secondly, this is driving velocity – and I don’t really care what the velocity numbers say, I think they are BS – but velocity is coming back, because boomers are long money and short time. The question then is: Ok, I do think this is happening and I do think the Federal Reserve is thinking about it this way. Is crashing the markets a way to deal with it? William Dudley is the same guy who, in August 2019 wrote an op-ed similar to the one he just wrote about crashing stocks to reduce inflation. He wrote in August of 2019 that the Federal Reserve should tighten rates to put pressure on Trump, to basically ensure that he lost the election in 2020. This was 3 weeks before the repo rate spiked, because liquidity was already that tight. The Federal Reserve was already loosening at that point, we were about to have a blowup, the Federal Reserve’s balance sheet was literally 3 weeks from beginning to grow again and it hasn’t stopped since, and this guy was talking about tightening rates to fight a politician.
This is just to illustrate how political and how mainstream groupthink in Washington is. I think this is part of their thought process and he is talking to all the same people, and they are thinking of it and it is going to be a disaster because they are not running a dial, it’s a switch.
I understand what they are doing and I understand why they are doing it, but it is not going to work. They can get stocks down any time they want, but the flip side is – and this is the side nobody is talking about – the problem is at the sovereign level and the US government needs asset prices to rise to drive tax receipts. When asset prices fall, tax receipts fall and 120% of all-time record tax receipts, at this moment are entitlements, defense, and treasury spending. They are not even covering the basic spending with all-time record-high high tax receipts and with asset prices in an “everything bubble”.
If they want to take asset prices down to try and tame inflation, great, but within months, if not weeks, the Federal Reserve will be in a precarious position because there are no buyers for these treasuries. You can shift some money out of stocks and into treasuries, but as you do that you are also going to be increasing treasury issuance, because your receipts will be falling along with asset prices. There is this dynamic that nobody is talking about, the importance of asset price inflation driving treasury receipts, primarily through the consumption link which is 2/3 of GDP.
Niko Jilch:
Luke, we talked about “Putin’s price hike” and the funny thing is that here in Europe, where we are closely connected to what is happening, nobody is trying to sell the “inflation is Putin’s price hike” narrative. This tells me something positive about the Europeans, but my question is this: Under the new circumstances, because the war is driving inflation, it’s just that not all of the inflation is because of the war. Will it even be possible to get inflation down with the wage hikes like there are in play now?
Luke Gromen:
I think yes, but I question what the collateral damage will be. If you want to send unemployment in Europe high enough, we can get inflation down. If you send unemployment to 10% or even 20%, you can get inflation down. But if there is a shortage of food, those types of inflation levels will have political side effects. We saw Macron winning in France, that might put the side effects on the back burner for now. But if you take unemployment to 10% to fight inflation, Le Pens are going to pop up all over Europe. There is this very established historical president for that. This again gets back to the fiscal situation, Europe’s fiscal situation is not good either, what does that imply for budget cuts, or a deflationary spiral?
Taming inflation will have dire costs for Europe. Political populism and high unemployment, and the central bank will have to fund the government because they made all these entitlement promises and now we don’t have any tax receipts at all to fund them. Then they will have to re-do QE.
I think they can probably do it, but if you think how draconian the economic downturn needs to be, it needs to be much greater in order to tame inflation this time because of these structural factors. This will mean that you used to need to take GDP down 3% to get inflation down and now maybe it needs to be down 5% or 8% or maybe 10%, and those numbers are bigger than what we saw in the Covid-19 crisis, and that was enough to crash everything.
Can they do it? Sure. Can they do it without blowing their head off and blowing the economy’s head off? Probably not.
Ronnie Stöferle:
I agree, I am not aware of too many soft landings where things worked out well in practice. Luke, there are a great many topics to talk about. I would love to talk about Japan later on, but let’s talk about your main area of expertise, which is de-dollarization. You are the superstar when it comes to this topic and a few years ago it was a topic only for macro nerds in the gold community, but now it is becoming mainstream.
Lets’s talk about the Russia/Ukraine war and how it will impact our monetary system. Zoltan Pozsar wrote about the possibility of Bretton Woods III, we know that over the last couple of weeks there was so much going on that it is exciting but also exhausting to follow everything that is going on. From your point of view, what have been the most interesting and most under-researched topics that you have seen over the last couple of weeks?
Luke Gromen:
It has been interesting to see some of the evolution of this de-dollarization theme that you talked about. For me, there has always been a yin and a yang to it, where people want to say that it is an attack by the Chinese and the Russians and these people who are fighting the rules-based global order, and that is part of it. But it is also partly a defense by those same people against the dollar being weaponized against them.
It is literally a matter of acute and urgent national security for China and for Russia and for others to move away from pricing energy, in particular, and also commodities more broadly into dollars alone. There has been this movement, driven by both geopolitical aggression and geopolitical national defense for these countries to move away from pricing oil, in particular, in US dollars. When we first started talking about this in 2014 – 2017, people thought we were nuts, earlier this year you have on the front page of the Wall Street Journal: “Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales”. When you see things like that and you see India in the midst of this crisis with Russia and Ukraine, telling the US: “We will do what makes the most sense for us and that is to buy Russian oil in Rupees”. It is almost formulaic, a week later all of a sudden the US is concerned about human rights violations in India. It’s very, very cynical and I am to old to be naïve when I watch these things, you could have predicted it.
Ultimately this all feeds back into the de-dollarization theme, which is: The whole world is realizing that they are going to have their turn in the spanking machine, no matter what, and the spanking machine is the dollar system and the US politicians running it. So they might as well do what is best for their interests. Within every country, there are both pro-dollar and pro-de-dollarization factions for different domestic self enlightened views. But you can see it moving quite steadily and ultimately this Russian situation has accelerated it, because now it is crystal clear that if you do something the US does not like, they are going to confiscate your reserves. The US has been threatening it, they did it to Afghanistan, they did it to the Iranians, but all of those were smaller nations, they were not the world’s biggest commodity and energy exporter, they were not the world’s biggest country by landmass, they were not a nuclear-armed nation, they were not a G7 nation.
It’s an entirely different situation and like I have said before, everybody has been a bad actor in the eyes of the US over the years. That’s not because America is bad or good, it’s just how international geopolitics go.
I don’t think people ever really loved this dollar system, I think they accepted it because it was less worse than getting invaded by the USSR, and as soon as the USSR broke up, since 1990 there has been this slow and steady acceleration back to a more decentralized system, primarily around energy.
I don’t think this de-dollarization is something that can be stopped. It’s going to keep moving in bits and starts and I think what Russia did accelerated things quite meaningfully. There is this quote from Frank Zappa:
„The illusion of freedom will continue as long as it’s profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way and you will see the brick wall at the back of the theater.“
I think that by implementing the Russian sanctions, the US was saying: “Ok, the curtains are gone, the set is gone, all of the props are gone, here is the hard brick wall”. If you do something we don’t like, we are going to grab your money.
Niko Jilch:
One of the main things in monetary politics for decades has been that the US dollar is a national currency and also an international currency, and that is a problem. We have known this since the introduction of the Bretton Woods system, then in the 1960s, Robert Triffin layed out the Triffin dilemma and one of the so-called “solutions” was the “special drawing rights” at the International Monetary Fund. A basket of currencies used as an international reserve asset. There have been numerous attempts over the years to reintroduce this. My question is this: When we are moving into a new monetary system, how high do you think the chances are that the IMF will try to set up something like a real Bretton Woods III? Could we see them arranging a conference where they establish new rules and potentially discuss something similar to Special Drawing Rights, because I see the IMF moving on this. If you look at the interview with IMF director Kristalina Georgieva, where she said:
“I think we are not paying sufficient attention to the law of unintended consequences. We make decisions with an objective in mind and rarely think through what may happen that is not our objective. And then we wrestle with the impact of it.”
“We act sometimes like eight years old playing soccer. Here is the ball, we are all at the ball. And we don’t cover the rest of the field.”
Her admitting thise things seem crazy. Then there was a report called: The Stealth Erosion of Dollar Dominance, written by Barry Eichengreen, who has been very vocal about the exorbitant privilege, etc. Do you see a possibility for a new monetary system built around the IMF, or is this just the IMF trying to stay relevant in changing times?
Luke Gromen:
I think it is one of those situations where they are just trying to stay relevant. I think they know what the problem is, it is as Jean-Claude Juncker famously said:
“We all know what to do; we just don’t know how to get re-elected after we’ve done it.”
I think it is the same issue for the IMF where they know what they need to do, Eichengreen’s paper (as mentioned above) highlights some of the issues. The challenges are that you have to get a whole lot of nations together and maybe that was possible 10 years ago, but that does not seem possible now.
At the IMF you will get a bunch of people together who don’t want to get together. The US is controlling a big part of the IMF and they have to agree, and they don’t want to agree, then there are the different factions in each of the minority voting members of the IMF to agree. I just don’t think they will ever make any progress.
Niko Jilch:
When you look at what China and Russia are doing behind the scenes, they are basically trying to build something like the Special Drawing Rights, something like a “common currency” that is denominated in their local currencies and also commodities. This would tie in with what you are saying and also with what Zoltan Pozsar is saying, then you have Janet Yellen talking about a bifurcated financial system. My question is: Is it possible that we will see two IMFs, an eastern IMF and a western IMF?
Luke Gromen:
Yeah, it is. The challenge would be to get all the right people in your club, because if you don’t have enough energy in your club, or you don’t have enough manufacturing in your club and the other club has more manufacturing and energy, or is more efficient than you are, then your club is going to die over time. You’re going to lose.
If the factory of the world, which is China, is married with Russia, who has all these metals and energy, etc., and a quorum of the Middle East participates in that, then the US is left with shale gas, which isn’t ramping up. The oil price has been up for 8 weeks and there has been no increase in US shale production and no increase in US oil production, and then you have European manufacturing.
It would be workable, but you will have two competing systems and these competing systems will force the system to be kept more honest. What that looks like is: The US is going to have to either see much higher inflation or really draconian measures to fight inflation and takedown asset prices, which is going to feed itself in the wrong direction on the fiscal side. So, it’s possible, but I don’t think it’s a happy path from here to there.
Ronnie Stöferle:
If we come back to the topic of gold, this decision by the western world to say that: “Your FX reserves are worthless”. Isn’t that the best case there could be for owning physical gold over the long term for central banks?
My question now leads to a topic that has been going on for a while already. What Kenneth Rogoff said in a piece published by Project Syndicate, where he recommended emerging market countries buy physical gold to hedge their US dollar exposure. Do you see this as a big driver going forward on the demand side for gold and, if yes, wouldn’t that also be some sort of threat to the paper market for gold?
Luke Gromen:
Yes, absolutely. I think it’s going to continue to drive a steady gold bid from foreign central banks over time. Importantly, the manner in which we are going after Russia’s gold, anything that is held offshore is subject to sanction or seizure. That speaks to the market being physically driven.
We will look back in 5 years and say: “Wow, that was really positive for physical gold”. Now, does that blow up the paper market? I think at some point it does, but that is an entirely political construct. It’s not going to matter and then suddenly we wake up a week later and suddenly it matters, and there are any number of geopolitical or market-driven reasons that you could see that happen. A certain set of political circumstances has to be in place gold to have significant price movements. We are moving in the right direction in terms of the gold market being more physically driven. What has happened in regards to these sanctions are likely to be a positive catalyst for that, but when will it really matter? It’s hard to know.
Ronnie Stöferle:
Luke, a topic that I wanted to talk about, because it’s the leitmotif of this year’s In Gold We Trust report, is the topic of stagflation. What are the main differences between the stagflation we saw in the 1970s and the current setup?
Luke Gromen:
I think the main difference is by far the most important difference, which is the global sovereign debt bubble, and in particular the western sovereign debt bubble. USD as the global reserve currency, they are currently the center of the system. In the 1970s, US debt/GDP was 30%, now it’s 125% and moving higher. The point is that in the 1970s there was a lot of leeway for the US to allow the interest rate to rise and fight the inflation/stagflation. When we eventually managed to crack down on it, yes it caused a severe economic contraction and a recession, yes it caused a lot of private-sector bankruptcies, however, there were no risks to the sovereign solvency of the US, the European Union, or Japan. Right now, fractions of the type of rate hikes that we saw in the 1970s will mathematically cause threats to the solvency of the US, European Union, and Japan.
Let’s look back in history and see how many times nations with a purely fiat currency has gone bankrupt instead of printing money, it’s a really, really short list. They always print money; they don’t go bankrupt. That’s where we are right now, where there is this collective delusion that we are watching central bankers and governments engage in, and markets are believing them. Like the “Putin price hike”, markets actually believe that governments will let themselves go bankrupt. It’s crazy, there is no chance. We have to be cognizant to play that game and understand that in our position, short run, that markets actually believe that central banks will let their sovereigns go bankrupt, there is no chance that’s going to happen. It’s really just a question of when circumstances get dire enough to force the central banks to finance these deficits and prevent that insolvency. That’s the big difference.
The sovereign balance sheets are just night and day different (from the 1970s); they are reminiscent of post-WW1 Europe. In post WW1 you have the six big industrial powers. The Austro-Hungarian empire, the UK, Germany, France, Russia, Japan, and the USA. Austro-Hungary hyperinflated, Russia hyperinflated, Japan depreciated, I think 80% vs gold, the French devalued at least twice, the UK was amongst the last to go, in 1931 they devalued massively vs gold and the USA went last in 1933 when we devalued 75% against gold. Sovereign debt amongst all these participants in real terms just collapsed. I think that is much more apropos.
I think we are seeing a blend of the 1970s, the immediate aftermath of WW2 and the immediate aftermath of WW1. This is some sort of toxic mix of all those situations. The most important thing is the sovereign balance sheets globally and in the west in particular. There is just no ability to fight inflation the way that they did in the 1970’s.
Niko Jilch:
And we don’t want to. Nobody actually wants to fight inflation. The Bank for International Settlements said that we are going to see a new age of inflation. Even if you hike rates and cause the stock market to go down, that is what you need to do before you can print even more money. You need a new narrative; you need a new crash in order to print more money to “save the world”.
Luke Gromen:
I think that is probably what they are working on right now. This new narrative, the full macroeconomic narrative of “Putin’s price hike”. The narrative will be “Oh, the system crashed, we need to print more money, we need to save you all again, so we central bankers can be heroes again”. That is what we are watching in real time.
Ronnie Stöferle:
One example that I think is worth following is what is going on in Japan. The Japanese did many many rounds of quantitative easing, but so far it has not been extremely successful. Now they are also doing “QQE”, that’s quantitative and qualitative easing, so they are also buying REITs and ETFs and other things.
I have to admit that I thought that when the 10-year bond yield reaches 2%, that would be the level where the Federal Reserve would get very nervous and start talking about yield curve control. Going forward, do you think this would be a measure taken by the Federal Reserve? Will they at some point start buying equities or other assets? Probably not Bitcoin, yet. What is the next tool that the Federal Reserve has in its toolbox?
Luke Gromen:
One thing that they can do is that the Federal Reserve can, by their mandate, buy the sovereign debt of other nations. A very likely step if we continue to see a disorderly decline in the yen, for the reasons you just discussed, is that we could see either the Federal Reserve or the United States Exchange Stabilization Fund, the ESF, which is under Treasury, and can do whatever it wants to maintain orderly markets. I think we could see them buy Japanese Government Bonds, for the Bank of Japan.
You would see the USA selling dollars and buying yen effectively, to try to stabilize the yen and weaken the dollar, which would help Japan, but also the US because as the dollar weakens against the yen it improves Japanese purchasing power to buy treasuries. The US has a demand problem for treasuries which will get a lot worse if the yen keeps weakening. I think that would be the first step, the Federal Reserve wants to avoid yield curve control at all costs and certainly explicit yield curve control.
If they can get Japan’s current account deficit back into a current account surplus by getting energy prices down, then they can stabilize the yen and the JGB market, if you can do that then you will get a weaker dollar and a stronger yen and more treasury purchases from Japan again. I think you will see, within the next 18 to 24 months, either the Federal Reserve or the US Exchange Stabilization Fund intervening in the yen, by buying JGBs.
Niko Jilch:
Can we try to get some long-term positive outlook on this whole global situation that we are in right now? Let me give you a few examples: On 22 April we saw Israel adding the renminbi to their currency reserves. Somebody there decided that it is time to buy some yuan. In the middle of April, we saw Kuwait and Saudi Arabia indict Iran to talk about a gas field that all three of them claim and exploit together. Can you talk about what is going on from the long-term perspective globally? Especially, where will Europe be standing?
Luke Gromen:
I think the Middle East desperately wants stability, in particular Saudi Arabia. They want USD 90 oil and stability, that is what they are after. But they have seen nothing but instability for the last 25 years in the Middle East. The Chinese also desperately need stability in the Middle East.
If it comes down to what is a happy version of the outcome, you get some sort of détente between Eurasia and non-Eurasia has no choice but to go along, out of commercial interests, and the world prospers, all together. There would have to be some relative wealth influence shift that would take place.
I think ultimately that is what will happen. Basically, you will have Russia as a connector between China and Europe. In Europe right now, the Federal Reserve is trying to ride two horses with one ass in regards to inflation. They need to convince the bond market that they are not going to inflate away their debt while doing that.
Europe, on the other hand, is trying to ride two horses with one ass with regards to geopolitics, which is: We are going to keep the Americans happy and thinking we are with them, when our economic future is really to our east and not our west. So, the happy version is Eurasia connects and there is this huge boom of economic growth as you bring together the east of Europe and the west of China, the Belt and Road fills out, out get economic trade, you get a virtuous cycle, US companies also benefit from this as well, etc., and everyone gets along. That is what I think when I think about those three headlines in sort of a happy scenario.
Niko Jilch:
And the Russian foreign minister, Sergey Lavrov, even during the war is still talking about having a Eurasian union from Lisbon to Vladivostok, when that landed in the European press, everybody thought it was crazy. The Russians wanted to go the euro route, they even used the euro in their dealings with China and India. But then Europe says that they can’t access their reserves. If we wanted to, how could we get out of this situation of conflict?
Luke Gromen:
My friend Louis Gave, said a couple of weeks ago that the Americans are prepared to fight the Russians down to the last European. As tongue-in-cheek and brutal as it is, is that what we are watching in real-time? The Europeans didn’t freeze US reserves when they invaded Iraq. The Europeans protested but no one did a thing. That is not to say that I am approving or necessarily even trying to equivocate what is happening in Russia and Ukraine with that, but I guess I am. I’m not sure if it is that different.
I don’t know where this goes from here, it’s almost like the US threw the ball back into the court of Europe and Russia, and China. China isn’t doing themselves any favors with their lockdowns. To the extent that that reverberates into US stagflation, maybe that is where we see this show up next, which is: US supply chains keep breaking down, US inflation keeps rising. But it’s getting tricky. We are quickly getting to a point where there is not going to be a way to get back.
Niko Jilch:
I have to ask this right now, the freezing of the currency reserves by Europe and especially the US, Kenneth Rogoff, whom Ronnie already quoted earlier, he called it a “break the glass” moment. You only do that once, and the Saudis are looking and the Chinese are looking at this, so from a structural system point of view, that was the west shutting the system down, basically?
Luke Gromen:
Yes. Someone said to me, “that round is downrange”, you can’t go back and get it. The question is: What does that mean and what is the next move? That ties back to my prior point, the ball is now back in Eurasia’s court, so are we going to see Putin de-escalate, or are we going to see Eurasia brokering peace, or are we going to see China broker peace, or will we see some sort of big sign where the three of them get together and say: This isn’t in any of our interests, let’s stop this. All we (Russia) want to do is sell energy to both of you, all you want to do is grow your economies. But we are now all focusing on one thing in this part of the world.
Niko Jilch:
I do have one more question on the topic of gold and what I call “the return of real stuff”. The report is called In Gold We Trust and we are not going to change the name, but is this a time to really trust in gold, something that is important not only for individuals and investors but also on the sovereign level?
Luke Gromen:
Yes, I think it is. It seems like globalization is breaking down, which has been very disinflationary, which would seem to be inflationary. You have peak cheap energy; you need a reserve asset that has the ability to rise in price with the rise in the prices of energy and commodities and other inputs. We were just talking about how the sovereign debt positions of the west, and particularly, the globe more broadly, are such that interest rates cannot be allowed to rise that far to compensate and offset that inflation. That is why you need a reserve asset like gold and at least hold some of it on the sovereign level and on the individual level to preserve your purchasing power. Because circumstances from geopolitical and commercial globalization and commodity standpoint all point to structural inflation and away from short-term economic hiccups that may be as a result of Federal Reserve policy error, that I think they are now well underway of making.
I think gold is one of the few reserve assets. But then you see things like the Swiss National Bank buying US equities etc. Things that are more finite that have the ability to better hedge structural inflation over time, those are the things you want to own.
Ronnie Stöferle:
Luke, I think we should come to an end, I want to thank you very much for taking the time so early and for being a friend and supporter of us. You can follow Luke on Twitter; he is very active and it’s always new information. Also have a look at his website, Forest for the Trees, or his book, The Mr. X Interviews, on Amazon.
These were the highlights of our interview with Luke Gromen. The full version is available for download here.
The video of the entire interview, “Energy, War & Inflation”, can be viewed on YouTube here.
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