Good, commonsense article. Thanks for posting Percy.
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Recession Is Inevitable. So Own These Assets | Luke Gromen
We need an economic or an energy productivity miracle.
Is there some sort of technology here that can be commercialized rapidly? Something that drives a productivity increase. There are other productivity increases, they're not pleasant. But if the baby boom generation passes on over the next five years and passes all their 65 trillion in wealth to their kids so that we get rid of the entitlement basically over a span of three to five years.
While the kids boom economic growth because it's like a lottery ticket when the wealth shows up in their inbox. That's a productivity miracle. There are ways out of this, but they're extremely unlikely.
Then your choice is inflation or collapse. You can't cut six points on the deficit without collapsing.
I frequently get asked what would you need to see that would make you change your view. That would be one of them. If you told me you know the Boomer population has gone from 70 million to 10 million over the next five years and their assets have passed down to their kids I'm gonna be wrong, the economy is gonna be booming because it's gonna flow to 40 year old people who are in like peak spending years.
You have to be objective as an analyst regardless, you can't be emotional about the inputs. People ask me what are the inputs that could make me wrong. That's an input that would make me wrong.
14:55 The importance of oil and real estate.
Jim Puplava said back when oil was up to 149 dollars a barrel, I think oil is the new fed funds rate.
It's really the thing that is going to dictate economic growth going forward and it's out of control of the FED. You can't print more oil as you've said many times in this discussion right and so it seems going forward the oil price is going to be much more important than whatever the FED decides to do because that's the real world which drives controls economic growth.
A commentator in the late 1990s said it's not well understood, but embedded in the price of every asset is a full and growing supply of cheap and cheaper oil.
What's the value of your house in an outer suburb California with no public transport.
It has one value at $1 gasoline and at $15 gasoline the value of your house 60 mile outside of LA is a lot lower. Now that predates work from home Zoom etc.
That cost of energy is embedded in everything.
https://www.youtube.com/watch?v=1gMPZJ7kwr4
Recession Is Inevitable. So Own These Assets | Luke Gromen
We talked a little bit earlier about the lag effect and how the recession's been pushed off. As you look out rest of this year into 2024 people are saying forget soft landing we're going to have no landing and we've avoided a recession. Are they going to be proven right or wrong in your opinion?
Wrong in my opinion.
Why you do you think recession's inevitable?
I think oil is going to get a lot higher and I think sooner or later commercial real estate is going to have to be dealt.
How big of a time bomb do you expect commercial real estate to be? It has the potential to be really, really big but for me it's just another metric where it's a switch. Does the FED want to let the banking system collapse or does the FED want to sacrifice the value of the dollar in inflation and the FED has particularly in the last several instances, the Spring banking strains, March 2020’s off the run treasury market crash, and the repo rate spike in 2019 in September, the FED has shown no ability or no willingness to stand aside and they've become increasingly proactive.
So, I think I look at the commercial real estate side as you're going to get one big crack and then that's going to force the FED to do something that's how I'm thinking of it and that makes it really tough to trade right and I don't know what that crack looks like. You've already had some gating but you get some sort of very headline commercial real estate entity say look we can't refinance however many billions here's the keys.
I live in Cleveland so people think don't worry this will turn around maybe but that's what they were saying in Cleveland in 1985.
Commercial real estate could be one very big additional shoe to drop. I still kind of put that into the lag effect category. I agree because these guys are coming up to refinance and they're just like oh my God my cost of debts like more than twice is what it was a year and a half ago. And by the way the banks are saying we need an extra 10 million dollars of equity, or 100 million dollars of equity.
Those guys don't have the equity. They're commercial developers most of these guys are running 10 times, 5 times levered.
I had friends you know they bought a place down in Florida I guess a year ago and their broker had told them the broker had not done a deal with a mortgage on it like eight months or something like it was just all cash all the time.
https://www.youtube.com/watch?v=1gMPZJ7kwr4
Recession Is Inevitable. So Own These Assets | Luke Gromen
22:04 The extent to which the housing market will crash.
Are you concerned about the extent to which housing could resolve downwards. Are we going to be seeing people losing all their equity or do you think it's going to be more mild than that?
No I think it's gonna be a lot more mild than that because I take a look at where the exposure is and to be clear I don't think housing will resolve downward because I think the government's going to break way sooner.
Let's look across the big pools of capital who has fixed rates and who doesn't. Consumers have fixed rates, corporates have turned their debt out quite a bit, U.S government hasn't turned it out and the banks.
I'm making over two points between my mortgage and my money market, but that means there's a bank somewhere bleeding two points and practically speaking since it's a mortgage it's effectively the government bleeding and the government's just printing it right
So I don't think the housing market will result down because I think the US government is going to force the FED into printing money to finance the government well before the housing market breaks on the downside, because homeowners are locked in at fixed rates, because of the installed base of assets that the Boomers and the silent generation have to help smooth over for their kids in particular.
I personally am overweight cash, I'm overweight short-term treasuries, I am also overweight gold, I'm overweight Bitcoin, I'm overweight U.S electrical infrastructure equities, I own some energy, I own oil and some oil related equities. we're still bullish on electrical vehicle related metals and own a little silver.
So, it's sort of this barbell strategy because I think it's really critical to understand what's happening people say it's different this time and they say you should never say it's different this time but it actually is on some levels different this time by the by the scale and order of magnitude.
And if someone tells you they know exactly how things are going to go over the next 12 months, run in the other direction because I'm as you know as deep in all this.
Could we get a deflationary crash? Sure. Do I think it will last very long? It better not and that's why I want that cash in those short-term treasuries because I want to have some liquidity. I want to have some optionality.
https://www.youtube.com/watch?v=1gMPZJ7kwr4
Recession Is Inevitable. So Own These Assets | Luke Gromen
I have zero conviction in any sort of a very short term how it could play out.
I have extremely high conviction on how ultimately play out which is the Fed's gonna have to print the money to advance the government and it's going to be very inflationary for a sustained period of time. It will probably be explicit yield curve control in the United States and bondholders who have won no matter what for 40 straight years are going to lose no matter what on a real basis for probably 10 years.
People forget that the average real rate on bonds was negative from 1900 until 1981, and then it was positive, then it was massively negative 2022. It's negative again so I think for me long duration and in particular Western Sovereign bonds I had I don't know why you'd be involved.
What would change my mind if the US came out and said we're going to cut 40% - 60% entitlements and Defence tomorrow permanently.. Sorry Boomers you got enough money move on.
Why take 4.3% on 10 years when you can get five on short-term. Makes no sense.
I think gold is a derivative energy play because again it takes energy to get out of the ground.
If we're in Peak oil, as I think we are as the evidence increasingly suggests we are Treasuries can no longer be the primary Reserve asset and so the question is what's the next primary Reserve asset and all other candidates out there with the exception of gold either cannot be or do not want. So, the pound can't have it, the Yen can't have it, Euro and Yuan do not want the exorbitant privilege that turns into an exorbitant burden and you're left with gold and you can see Central Banks buying gold and they've been doing so for nine years.
Last post on Luke Gromen macro analysis
https://www.youtube.com/watch?v=1gMPZJ7kwr4
Recession Is Inevitable. So Own These Assets | Luke Gromen
29:04 Thoughts on a new BRICS currency priced in gold.
I don't think they're going to launch any sort of separate currency. I think what they're ultimately going to do is agree that gold buys more commodities in their block than it does in London and New York and then they'll just stand back and let free markets do the rest which is to say if Russia China and Iran all agree and announce gold buys 60 barrels of oil in the Brix Block in Shanghai and Moscow and it's only 30 barrels an ounce in the heavily paper Western markets, in the UK and in New York every hedge fund on the planet is going to say okay I'm going to short 30 barrels of oil in London or York. I'm going to take the cash proceeds I'm going to buy an ounce of gold, take the ounce of gold to the brics block, I'm gonna get 60 barrels of oil from the Russians and the Iranians and anyone else participating I will then sell 30 barrels cover my short. Risk-free arbitrage what could possibly go wrong.
And of course what can possibly go wrong is New York and London get cleaned out of gold inventories remarkably fast to clear Force Majeure and the brics will have just used their oil to devalue the dollar against gold by half and that's some version of that do I think that's coming. This week probably not. Do I think that's where the world is heading. Why do I think that? Because in 08 when Russia started buying gold for the reserves that gold bought eight barrels of oil, ten barrels of oil, now it's 30. That number has gone up and I think it will continue to go up over time.